On July 1, 2017, Kraft Foods Group, Inc. forecasts that it will purchase 500,000 pounds of Arabica coffee in three months. To hedge against rising prices, when the cur- rent spot price is \($2.35/lb,\) Kraft invests in call options expiring October 1, 2017, for 500,000 pounds of coffee. The options have a strike price of \($2.30/1b,\) and cost \($225,000.\) The intrinsic value of the options is designated as the hedging instrument, and the option investment qualifies as a cash flow hedge of the forecasted purchase. On September 1, 2017, the spot price of the coffee is \($2.45,\) and Kraft sells the op- tions for \($135,000.\) On October 1, 2017, Kraft buys 500,000 pounds of Arabica coffee in the spot market for \($2.50/lb.\) It sells products containing the coffee the following month. Required

a. Prepare the journal entries to record the events of July 1, September 1, and October 1, 2017.

b. When Kraft sells products containing the coffee, what amount does it include as the cost of the coffee, in cost of goods sold? Prepare the journal entry to record the cost of the coffee included in products sold.

c. Repeat the requirements of part b, assuming Kraft did not hedge the forecasted purchase of coffee.