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Snackums, Incorporated, purchases wheat for use in its food manufacturing process. Snackums operates in a highly competitive Industry and is rarely able to Increase its
Snackums, Incorporated, purchases wheat for use in its food manufacturing process. Snackums operates in a highly competitive
Industry and is rarely able to Increase its sales price.
On January Snackums estimates that It only has enough wheat Inventory to meet Its manufacturing needs for the first
half of and forecasts the purchase of bushels of wheat on June from Its supplier, Trigo Farms.
Because Snackums is concerned that the price of wheat will Increase during the coming months it enters Into four June wheat
futures contracts on January to purchase wheat.
Each futures contract is based on the purchase of bushels of wheat at $ per bushel on June and will settle
In cash at maturity. For purposes of thls problem, the dally margin accounts with the clearinghouse are ignored.
The company must report changes in the falr value of Its hedging instruments each quarter. The falr value of the futures contract
at Inception is zero.
Snackums designates the futures contract as a hedge of the varlability of cash flows attrlbuted to changes in the spot price of
wheat for its forecasted purchase of wheat.
Since the critical terms of the forward contract and the forecasted purchase are exactly the same, Snackums concludes that the
hedging relationship Is expected to be effectlve. The spot and forward prices per bushel of wheat and the fair value of the
forward contract are as follows:
The spot and forward prices per bushel of wheat and the falr value of the forward contract are as follows:
Requlred:
Calculate the net cash settlement at June
Prepare the journal entrles for the perlod January to June to record the forecasted purchase transaction, necessary
adjustment for changes in the falr value of the futures contract, and settlement of the contract. Assume that Snackums purchases
the wheat Inventory from Trigo Farms on June as anticipated.
During the third quarter, Snackums uses all of the wheat It purchases in production and sells the related Inventory. What entry
would Snackums make during the quarter ended September related to the hedged transaction?
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During the third quarter, Snackums uses all of the wheat it purchases in production and sells the related inventory. What entry
would Snackums make during the quarter ended September related to the hedged transaction?
Note: If no entry is required for a transactionevent select No journal entry required" in the first account field.
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