Hedge of Firm Commitment: Short in Commodity Futures On May 1, 2021, Keister, Inc., sells 100,000 units...

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Accounting

Hedge of Firm Commitment: Short in CommodityFutures
On May 1, 2021, Keister, Inc., sells 100,000 units of commodityfutures at $5/unit for delivery in 120 days and makes an initialmargin deposit of $10,000. Spot and futures prices move in tandem.Keister will buy the commodity from a supplier in 90 days and,pursuant to a firm sale commitment, will sell it 30 days later atthe prevailing spot price. Keister designates the futures contractsto protect the proceeds to be received when the sale commitment isfulfilled and has a May 30 fiscal year-end.
Required
a. Prepare the journal entries made on May 1, on May 30 when thefutures are selling at $4.80 per unit, on July 29 when the futuresare selling for $4.75 per unit and the commodity is purchased at atotal cost of $460,000, and on August 28 when the short position isclosed out at $4.77 per unit. The futures position qualifies forhedge accounting. Keister records income effects of the hedge insales revenue.
Date Description Debit Credit
5/1/21 Answer
Answer Answer
Answer
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To record the initial margin depositpaid.
5/30/21 Answer
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Answer
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To mark the short futures position tomarket.
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Answer
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To recognize the gain or loss on thefirm sale commitment.
7/29/21 Answer
Answer Answer
Answer
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To mark the short futures position tomarket.
Answer
Answer Answer
Answer
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To recognize the gain or loss on thefirm sale commitment.
Answer
Answer Answer
Answer
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To record purchase of thecommodities.
8/28/21 Answer
Answer Answer
Answer
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To mark the futures contract tomarket.
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To recognize the gain or loss on thefirm sale commitment.
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To close out the short futuresposition.
b. Assume the commodity is sold at the spot rate on August 28.Record the sale and cost of goods sold.
Description Debit Credit
Cash Answer Answer
Answer
Answer Answer
Answer
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To record the sale and close the firmcommitment.
Answer
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To record the cost of sales.

Date	Description		Debit	Credit
5/1/21	Answer

Description		Debit	Credit
Cash		Answer	Answer
Answer

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Dear Student if you have any doubts then feel free to ask Part A Date Description Debit Credit 5121 Investment in futures 10000 Cash 10000 To record the initial margin deposit paid 53021 Investment in futures 5480100000 20000 Gain on hedging See Answer

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		Answer	Answer
	To record the initial margin depositpaid.
5/30/21	Answer

	Answer	Answer
To mark the short futures position tomarket.
Answer

		Answer	Answer
	To recognize the gain or loss on thefirm sale commitment.
7/29/21	Answer

		Answer	Answer
	To record purchase of thecommodities.
8/28/21	Answer

	Answer	Answer
To record the sale and close the firmcommitment.
Answer