Hedge of Firm Commitment: Short in Commodity Futures

On May 1, 2021, Keister, Inc., sells 100,000 units of commodity futures at $5/unit for delivery in 120 days and makes an initial margin deposit of $10,000. Spot and futures prices move in tandem. Keister will buy the commodity from a supplier in 90 days and, pursuant to a firm sale commitment, will sell it 30 days later at the prevailing spot price. Keister designates the futures contracts to protect the proceeds to be received when the sale commitment is fulfilled and has a May 30 fiscal year-end.

Required

a. Prepare the journal entries made on May 1, on May 30 when the futures are selling at $4.80 per unit, on July 29 when the futures are selling for $4.75 per unit and the commodity is purchased at a total cost of $460,000, and on August 28 when the short position is closed out at $4.77 per unit. The futures position qualifies for hedge accounting. Keister records income effects of the hedge in sales revenue.

Date	Description		Debit	Credit
5/1/21	Answer

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	To record the initial margin deposit paid.
5/30/21	Answer

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	To mark the short futures position to market.
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	To recognize the gain or loss on the firm sale commitment.
7/29/21	Answer

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	To mark the short futures position to market.
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	To recognize the gain or loss on the firm sale commitment.
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	To record purchase of the commodities.
8/28/21	Answer

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	To mark the futures contract to market.
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	To recognize the gain or loss on the firm sale commitment.
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	To close out the short futures position.

b. Assume the commodity is sold at the spot rate on August 28. Record the sale and cost of goods sold.

Description		Debit	Credit
Cash		Answer	Answer
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To record the sale and close the firm commitment.
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To record the cost of sales.