(Cash Flow Hedge) Hart Golf Co. uses titanium in the production of its specialty drivers. Hart

(LO 11)

anticipates that it will need to purchase 200 ounces of titanium in November 2007, for clubs that will be shipped in the spring and summer of 2008. However, if the price of titanium increases, this will increase the cost to produce the clubs, which will result in lower profit margins.

To hedge the risk of increased titanium prices, on May 1, 2007, Hart enters into a titanium futures contract and designates this futures contract as a cash flow hedge of the anticipated titanium purchase. The notional amount of the contract is 200 ounces, and the terms of the contract give Hart the option to purchase titanium at a price of $500 per ounce. The price will be good until the contract expires on November 30, 2007.

Assume the following data with respect to the price of the call options and the titanium inventory purchase.

Instructions Present the journal entries for the following dates/transactions.

(a) May 1, 2007—Inception of futures contract, no premium paid.

(b) June 30, 2007—Hart prepares financial statements.

(c) September 30, 2007—Hart prepares financial statements.

(d) October 5, 2007—Hart purchases 200 ounces of titanium at $525 per ounce and settles the futures contract.

(e) December 15, 2007—Hart sells clubs containing titanium purchased in October 2006 for $250,000.
The cost of the finished goods inventory is $140,000.

(f) Indicate the amount(s) reported in the income statement related to the futures contract and the inventory transactions on December 31, 2007.

Transcribed Image Text:

Date May 1, 2007 June 30, 2007 Spot Price for November Delivery $500 per ounce 520 per ounce September 30, 2007 525 per ounce