Exercise 17-29

Teal Golf Co. uses titanium in the production of its specialty drivers. Teal anticipates that it will need to purchase 410 ounces of titanium in November 2020, for clubs that will be sold in advance of the spring and summer of 2021. 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, 2020, Teal 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 410 ounces, and the terms of the contract give Teal the right and obligation to purchase titanium at a price of $1,025 per ounce. The price will be good until the contract expires on November 30, 2020. Assume the following data with respect to the price of the futures contract and the titanium inventory purchase.

Date		Spot Price for November Delivery
May 1, 2020		$1,025 per ounce
June 30, 2020		1,066 per ounce
September 30, 2020		1,076 per ounce

Present the journal entries for the following dates/transactions.

(a)		May 1, 2020Inception of futures contract, no premium paid.
(b)		June 30, 2020Teal prepares financial statements.
(c)		September 30, 2020Teal prepares financial statements.
(d)		October 5, 2020Teal purchases 410 ounces of titanium at $1,076 per ounce and settles the futures contract.
(e)		December 15, 2020Teal sells clubs containing titanium purchased in October 2020 for $230,000. The cost of the finished goods inventory is $150,000.

(Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No.	Date	Account Titles and Explanation	Debit	Credit
(a)	May 1, 2020June 30, 2020Sep. 30, 2020Oct. 5, 2020Dec. 15, 2020
(b)	May 1, 2020June 30, 2020Sep. 30, 2020Oct. 5, 2020Dec. 15, 2020
(c)	May 1, 2020June 30, 2020Sep. 30, 2020Oct. 5, 2020Dec. 15, 2020
(d)	May 1, 2020June 30, 2020Sep. 30, 2020Oct. 5, 2020Dec. 15, 2020
		(To record purchase.)
		(To record settlement of futures contract.)
(e)	May 1, 2020June 30, 2020Sep. 30, 2020Oct. 5, 2020Dec. 15, 2020
		(To record sales.)
		(To record cost of goods sold.)
		(To record change in earnings.)

(f) Indicate the amount(s) reported in the income statement related to the futures contract and the inventory transactions on December 31, 2020.

TEAL GOLF CO. Partial Income Statement December 31, 2020For the Year Ended December 31, 2020For the Quarter Ended December 31, 2020
Sales revenue		$
Cost of goods sold
Gross profit		$