*P17-17 (Cash Flow Hedge) LEW Jewelry Co. uses gold in the manufacture of its products. LEW anticipates that it will need to purchase 500 ounces of gold in October 2006, for jewelry that will be shipped for the holiday shopping season. However, if the price of gold increases, LEW's cost to produce its jewelry will increase, which would reduce its profit margins. To hedge the risk of increased gold prices, on April 1, 2006, 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 500 ounces, and the terms of the contract give LEW the option to purchase gold at a price of $300 per ounce. The price will be good until the contract expires on October 31, 2006. Assume the following data with respect to the price of the call options and the gold inventory purchase.

Instructions

Prepare the journal entries for the following transactions during 2006.

a. April 1, Inception of the futures contract, no premium paid.

b. June 30, LEW Co. prepares financial statements.

c. September 30, LEW Co. prepares financial statements.

d. October 10, LEW Co. purchases 500 ounces of gold at $315 per ounce and settles the futures contract.

e. December 20, 2006LEW sells jewelry containing gold purchased in October 2006 for $350,000. The cost of the finished goods inventory is $200,000.

f. Indicate the amount(s) reported on the balance sheet and income statement related to the futures contract on June 30, 2006.

g. Indicate the amount(s) reported in the income statement related to the futures contract and the inventory transactions on December 31, 2006.

Partial Balance Sheets and Income Statements for June 30, Sep 30, Oct 10, and Dec 20,

Date Spot Price for October Delivery April 1, 2006 $300 per ounce June 30, 2006 310 per ounce September 30, 2006 315 per ounce