Question

Riverbed Jewelry Co. uses gold in the manufacture of its products. Riverbed anticipates that it will need to purchase 530 ounces of gold in October 2020, for jewelry that will be shipped for the holiday shopping season. However, if the price of gold increases, Riverbed'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, 2020, Riverbed 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 530 ounces, and the terms of the contract give Riverbed the right and the obligation to purchase gold at a price of $300 per ounce. The price will be good until the contract expires on October 31, 2020. Assume the following data with respect to the price of the futures contract and the gold inventory purchase: Date Spot Price for October Delivery $300 per ounce April 1, 2020 June 30, 2020 309 per ounce 315 per ounce September 30, 2020 Prepare the journal entries for the following transactions. (a) April 1, 2020-Inception of the futures contract, no premium paid. (b) June 30, 2020-Riverbed Co. prepares financial statements. (c) September 30, 2020-Riverbed Co. prepares financial statements. (d) October 10, 2020-Riverbed Co. purchases 530 ounces of gold at $315 per ounce and settles the futures contract. (e) December 20, 2020-Riverbed sells jewelry containing gold purchased in October 2020 for $371,000. The cost of the finished goods inventory is $190,900

Answer 1

1.

No	Date	Account Titles	Debit	Credit
a	Apr 1 ,2020	No entry
b	June 30 ,2020	Future contract	4770
		Unrealised holding gain or loss - equity		4770
		[(309 -300)*530 ounces]
c	Sep 30 ,2020	Future contract	3180
		Unrealised holding gain or loss - equity		3180
		[(315 -309)*530 ounces]
d	Oct 10 ,2020	Inventory [530*315]	166950
		Cash		166950
		Cash	7950
		Future contract		7950
		[4770+3180]
e	Dec 20,2020	Cash	371000
		Sales revenue		371000
		Cost of goods sold	190900
		Inventory		190900
		Unrealised holding gain or loss - equity	7950
		Cost of goods sold		7950

2.

Partial Balance sheet
As at June 30,2020
Current assets
Future contract	4770
Stockholders equity
Accumulated other comprehensive income	4770

Income Statement
As at June 30,2020
No entry

3.

Income Statement
For the quarter ended December 31, 2020
Sales revenue	371000
Cost of goods sold [190,900-7950]	182950
Gross Profit	188050