5. Accounting for Derivative Securities Cash Flow Hedge (12 points)

On 1 November 2021 The English Beat (TEB) projects the need to purchase 1,000 troy ounces of platinum on 18 March 2022. The spot price of platinum $905 per troy ounce, but TEB would like to hedge against future price increases in platinum and enters into a futures contract to buy 1,000 troy ounces of platinum on 18 March 2022 for $911/troy ounce. Assume the futures contract has no value at inception. The company's managers designate this as a cash flow hedge, and it is expected to be highly effective.

(a) On 31 December 2021 the futures price for 18 March 2022 delivery rises to $927/troy ounce. Since TEB is a calendar year-end firm, how would TEB reflect the change in value of the future contract in their financial statements? (2 pts)

(b) On 18 March 2022, TEB settles on the futures contract when the price for platinum is $914/troy ounce. Record the entry necessary to close the position. (5 pts)

(c) Also on 18 March 2022, TEB purchases 100,000 troy ounces of platinum for $914/troy ounce. Record the purchase of the platinum. (2 pts)

(d) On 1 June 2022, TEB sells the platinum purchased (1,000 troy ounces) in March via the internet to retail customers for $918/troy ounce. Record the journal entries for the sale. (5 pts)

5. Accounting for Derivative Securities - Cash Flow Hedge (12 points) On 1 November 2021 The English Beat (TEB) projects the need to purchase 1,000 troy ounces of platinum on 18 March 2022 . The spot price of platinum \$905 per troy ounce, but TEB would like to hedge against future price increases in platinum and enters into a futures contract to buy 1,000 troy ounces of platinum on 18 March 2022 for $911/ troy ounce. Assume the futures contract has no value at inception. The company's managers designate this as a cash flow hedge, and it is expected to be highly effective. (a) On 31 December 2021 the futures price for 18 March 2022 delivery rises to $927/ troy ounce. Since TEB is a calendar year-end firm, how would TEB reflect the change in value of the future contract in their financial statements? ( 2pts) (b) On 18 March 2022, TEB settles on the futures contract when the price for platinum is $914/ troy ounce. Record the entry necessary to close the position. (5 pts) (c) Also on 18 March 2022, TEB purchases 100,000 troy ounces of platinum for $914 /troy ounce. Record the purchase of the platinum. ( 2pts) (d) On 1 June 2022, TEB sells the platinum purchased (1,000 troy ounces) in March via the internet to retail customers for $918/ troy ounce. Record the journal entries for the sale. (5 pts)