Suzuki Jewelry Group uses gold in the manufacture of its products. Suzuki anticipates that it will need to purchase 500 ounces of gold in October 2019, for jewelry that will be shipped for the holiday shopping season. However, if the price of gold increases, Suzuki'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, 2019, Suzuki 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 Suzuki the right and the obligation to purchase gold at a price of ¥30,000 per ounce. The price will be good until the contract expires on October 31, 2019.
Assume the following data with respect to the price of the gold inventory purchase.
Date Spot Price for October Delivery
April 1, 2019.....................¥30,000 per ounce
June 30, 2019......................31,000 per ounce
September 30, 2019..............31,500 per ounce
Instructions
Prepare the journal entries for the following transactions.
a. April 1, 2019-Inception of the futures contract, no premium paid.
b. June 30, 2019-Suzuki prepares financial statements.
c. September 30, 2019-Suzuki prepares financial statements.
d. October 10, 2019-Suzuki purchases 500 ounces of gold at ¥31,500 per ounce and settles the futures contract.
e. December 20, 2019-Suzuki sells jewelry containing gold purchased in October 2019 for ¥35,000,000. The cost of the finished goods inventory is ¥20,000,000.
f. Indicate the amount(s) reported on the statement of financial position and income statement related to the futures contract on June 30, 2019.
g. Indicate the amount(s) reported in the income statement related to the futures contract and the inventory transactions on December 31, 2019.