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Great Lakes Distributors buys 100,000 bushels of soybean futures at $9.95 per bushel, to cover a...

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Accounting

Great Lakes Distributors buys 100,000 bushels of soybean futuresat $9.95 per bushel, to cover a commitment to deliver 100,000bushels of soybeans to a customer in 60 days at a price of $10.25per bushel. No margin deposit is required. Spot and futures pricesfor soybeans are equal and fluctuate between $9.50 and $10.40 perbushel. On the day of delivery to the customer, Great Lakes closesits futures position and buys soybeans in the spot market tofulfill its agreement with the customer.

a. Calculate the cost per bushel to Great Lakes if the spotprice at the time of purchase is $9.50. Calculate the cost perbushel if the spot price is $10.40.

b. Prepare the entries Great Lakes makes to record the aboveevents if the spot price is $10.20 per bushel on the day thefutures contract is closed, Great Lakes buys the soybeans on thespot market, and delivers them to the customer. The futuresposition qualifies as a fair value hedge of the firm commitment tosell soybeans to the customer. Great Lakes records income effectsof these transactions in cost of goods sold.

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