Question
Question 1 (Hedge accounting - futures): The mining company produces 25,000 pounds of copper each month in its mining operations. To eliminate the price risk
Question 1 (Hedge accounting - futures): The mining company produces 25,000 pounds of copper each month in its mining operations. To eliminate the price risk associated with copper sales, on December 1, 20X1, the mining company entered into a futures contract to sell 25,000 pounds of copper on January 1, 20X2. The futures price is $0.87 per pound. The futures contract is managed through an exchange, so the mining company does not know the party on the other side of the contract. As with most derivative contracts, this futures contract will be settled by an exchange of cash on January 1, 20X2, based on the price of copper on that date.
Required: Prepare all necessary journal entries on the mining companys book at December 1, 20X1, December 31, 20X1, and January 1, 20X2, assuming that the price of copper per pound on January 1, 20X2 is (a) $0.62, and (b) $0.89.
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