Question

On December 1, 2020, Legoria Co. decided to hedge against potential fluctuations in the price of wheat [this wheat is a special type Wheat for PoBoy loaves] for its forecasted purchases in January of 2021 and bought a futures contract entitling and obliging Legoria Co. to purchase 1,000 bushels of wheat on January 2, 2021 for $4.00 per bushel. Since the market price on this date is also $4.00 per bushel, the intrinsic value is zero. Required:

1) Prepare appropriate the appropriate journal entry on December 1, 2020 to record the purchase of this futures contract by Legoria Co.

2). On December 31, 2020 [the Balance sheet date], the actual price of wheat is $4.50 per bushel. Prepare any entry(s) required to account for the futures contract on this date.

3). On January 2, 2021, Legoria Co. acquires 1,000 bushels of wheat at $4.50 per bushel. Prepare any entry(s) required to account for this purchase and the futures contract on this date.

4). On January 31, 2021, Legoria Co. sells $10,000 worth of PoBoy Loaves. The COGS related to this sell is $6,000. Prepare the journal entry(s) to account for this sale and the futures contract on this date.

Answer 1

Solution:

a.)

No entry

2.)

12/31/2020	Futures Contract	$500
	Unrealized Gain_Equity (OCI)		$500

3.)

1/2/2021	Inventory - Wheat	$4500
	Cash		$4500
	Cash	$500
	Futures Contract		$500

4.)

1/31/2021	Cash	$10,000
	Sales Revenue		$10,000
	COGS	$6,000
	Inventory		$6,000
	Unrealized Loss_Equity (OCI)	$500
	COGS		$500