Cash Flow Hedge: Long in Commodity Futures

The Hershey Company uses futures to lock in the cost of cocoa products it needs to produce its products. Hershey forecasts that it will need 800 tons of cocoa in 90 days to manufacture its products. On February 10, 2016, it purchases 800 tons of cocoa futures at $3,500/ton for delivery on May 10, 2016, and makes a $2,000 margin deposit. The long futures position qualifies as a cash flow hedge of the forecasted purchase of cocoa, and is considered highly effective. On May 10, the spot price of cocoa is $3,750/ton, Hershey closes the contract and purchases 800 tons of cocoa on the spot market. Later in the year, products containing the cocoa are sold to retailers.

Prepare the entries necessary to record the above events, including the cost of cocoa reported in cost of goods sold when products containing the cocoa are sold. Hershey is a calendar-year company.

General Journal
Date	Description	Debit	Credit
Feb. 10, 2016	AnswerInvestment in futuresOther comprehensive incomeCost of goods soldCashCommodity inventories	Answer	Answer
	AnswerInvestment in futuresOther comprehensive incomeCost of goods soldCashCommodity inventories	Answer	Answer
	To record theinitial margin deposit.
May 10, 2016	AnswerInvestment in futuresOther comprehensive incomeCost of goods soldCashCommodity inventories	Answer	Answer
	AnswerInvestment in futuresOther comprehensive incomeCost of goods soldCashCommodity inventories	Answer	Answer
	To record the gain on the long term position.
	AnswerInvestment in futuresOther comprehensive incomeCost of goods soldCashCommodity inventories	Answer	Answer
	AnswerInvestment in futuresOther comprehensive incomeCost of goods soldCashCommodity inventories	Answer	Answer
	To close the futures contract.
	AnswerInvestment in futuresOther comprehensive incomeCost of goods soldCashCommodity inventories	Answer	Answer
	AnswerInvestment in futuresOther comprehensive incomeCost of goods soldCashCommodity inventories	Answer	Answer
	To record the purchase of cocoa in the spot market.
At the time products containing cocoa are sold
	Cost of goods sold	Answer	Answer
	AnswerInvestment in futuresOther comprehensive incomeCost of goods soldCashCommodity inventories	Answer	Answer
	AnswerInvestment in futuresOther comprehensive incomeCost of goods soldCashCommodity inventories	Answer	Answer
	To record the cost of the cocoa in products sold.