Question
LEW Jewelry Co. uses gold in the manufacture of its products. LEW anticipates that it will need to purchase 650 ounces of gold in October
LEW Jewelry Co. uses gold in the manufacture of its products. LEW anticipates that it will need to purchase 650 ounces of gold in October 2014, for jewelry that will be shipped for the holiday shopping season. However, if the price of gold increases, LEWs cost to produce its jewelry will increase, which would reduce its profit margins. To hedge the risk of increased gold prices, on April 1, 2014, LEW enters into a gold futures contract and designates this futures contract as a cash flow hedge of the anticipated gold purchase. The notional amount of the contract is 650 ounces, and the terms of the contract give LEW the right and the obligation to purchase gold at a price of $350 per ounce. The price will be good until the contract expires on October 31, 2014. Assume the following data with respect to the price of the futures contract and the gold inventory purchase.
Date | Spot Price for October Delivery |
April 1, 2014 | $350 per ounce |
June 30, 2014 | $356 per ounce |
September 30, 2014 | $369 per ounce |
1.Prepare the journal entries for the following transactions.
a. April 1, 2014 - Inception of the futures contract, no premium paid.
b. June 30, 2014 - LEW Co. prepares financial statements
c. September 30,2014 - LEW Co. prepares financial statements
d. October 10,2014 - LEW Co. purchases 650 ounces of gold at $369 perounce and settles the futures contract.
e. December 20, 2014 - LEW sells jewelry containing gold purchased in October 2014 for $375,060. The cost of the finished goods inventory is $216,380.
2.Prepare the journal entries for the following transactions. (Partial Balance Sheet)
3.Indicate the amount(s) reported in the income statement related to the futures contract and the inventory transactions on December 31, 2014.
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