E9.11 Cash Flow Hedge with Adjusting Entry: Call Options

On June 1, 2020, Capital Foods fore casts that it will purchase 5,000,000 bushels of oats in 3 months for use in the manufacture of its snack products. To hedge against rising costs, Capital Foods buys 5,000,000 September 2020 call options for oats, with a strike price of $2.50/bushel. The options cost $0.18/bushel. The spot price on June 1 is $2.60/ bushel. Management designates the intrinsic value of the options as the hedge, and the options qualify as a cash flow hedge of the forecasted purchase. Capital Foods records all income effects of the inventory and the hedge in cost of goods sold. On June 30, 2020, Capital Foods yearend, the spot price for oats is $2.54/bushel and the options are selling for $0.11/bushel. On September 1, 2020, the spot price for oats is $2.58/bushel and Capital Foods sells the options for their intrinsic value of $0.08/bushel. On September 4, 2020, Capital Foods purchases 5,000,000 bushels of oats at the spot price of $2.57/bushel. It sells products containing the oats on October 2, 2020.

Required

Prepare entries to record the above events, including the June 30, 2020, adjusting entry. Assume Capital Foods reports the change in option value directly in income.