Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Mellogs is a small company that produces corn-based breakfast foods. On November 1, 2020, the company obtains a contract to supply 2 million pounds of

Mellogs is a small company that produces corn-based breakfast foods. On November 1, 2020, the company obtains a contract to supply 2 million pounds of its corn-based breakfast product to a large customer based in Germany, with delivery to be made in May 2021. As a result, Mellogs will need to acquire 200,000 bushels of corn in March 2021, in order to fulfill this contract. The price of corn currently at $3.60 per bushel, could increase dramatically between November 1, 2020, and March 2021. As a result, Mellogs entered into a futures contract with Capitol Clearing House Inc. (CCH) to hedge the risk of market price changes of corn. The cost of the fair value hedge (futures contract) is zero. The futures contract provides that Mellogs Company purchases the corn needed at the date needed at market price, but CCH must pay Mellogs Company any differences above $3.60/bushel while Mellogs Company pays to CCH any differences below $3.60/bushel. Assume that the market price of corn is $3.80/bushel on December 31, 2020, and that Mellogs Company purchases the 200,000 bushels on March 3, 2021, for $3.50/bushel. 


Required Note:  


a. Prepare the journal entry required on November 1, 2020, (if any) related to the purchase of the futures contract. Account Debit Credit Date Nov. 1, 2020 To record purchase of futures contract 


b. Prepare the journal entry required on December 31, 2020, (if any) for the futures contract. Account Debit Credit Date Dec 31, 2020 To record adjustments to the futures contract 


c. Prepare the journal entry required on March 3, 2021, for the execution of the futures contract and purchase of the corn. Account Debit Credit Date March 3, 2021 To record purchase of corn March 3, 2021 To record payment to CCH 


d. Assuming that the 100,000 bushels of corn were utilized to fulfill the order in May 2021, at what amount is the cost of the corn included in the reported COGS on the sale?

Step by Step Solution

3.58 Rating (183 Votes )

There are 3 Steps involved in it

Step: 1

a Prepare the journal entry required on November 1 2020 if any related to the purchase of the futures contract Date Account Debit Credit Nov 1 2020 NA NA To record purchase of futures contract b Prepa... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Intermediate Accounting

Authors: J. David Spiceland, James Sepe, Mark Nelson, Wayne Thomas

9th Edition

125972266X, 9781259722660

More Books

Students also viewed these Accounting questions

Question

How is the price determined for a bond (or bond issue)?

Answered: 1 week ago

Question

Explain the term suboptimization.

Answered: 1 week ago