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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.
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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...Get Instant Access to Expert-Tailored Solutions
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