NGW, a consumer gas provider, estimates a rather cold winter. Asa result it decides...

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Accounting

NGW, a consumer gas provider, estimates a rather cold winter. Asa result it decides to enter into a futures contract on the NYMEXfor natural gas on November 2, 2016. The trading unit is 10,000millioin British thermal units (MMBtu). The three month futurescontract rate is $7.00 per MMBtu, so each contract will cost NGW$70,000. In addition, the exchange requires a $5,000 deposit oneach contract. NGW enters into 20 such contracts.
Why is the futures contract likely to be considered aneffective hedge and therefore qualified for hedge accounting?
Why would this transaction be accounted for as a cash flowhedge?
Assume the Dec 31, 2016, futures contract is $6.75 for deliveryon Feb 2, 2017, and the spot rate on Feb 2, 2017, is $6.85. Assumethat NGW sells all of the gas on Feb 3, 2017, for $8.00 per MMBtu.Prepare all the necessary journal entries from Nov 2, 2016, throughFeb 3, 2017, to account for this hedge situation.

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02112016 10000 Millions 3 Months Futures 7 One Future 70000 Deposit 5000 Total One future 75000 No of Contracts 20 Total Value 1500000 1 The futures are likely to be considered an See Answer

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In: AccountingNGW, a consumer gas provider, estimates a rather cold winter. Asa result it decides to...NGW, a consumer gas provider, estimates a rather cold winter. Asa result it decides to enter into a futures contract on the NYMEXfor natural gas on November 2, 2016. The trading unit is 10,000millioin British thermal units (MMBtu). The three month futurescontract rate is $7.00 per MMBtu, so each contract will cost NGW$70,000. In addition, the exchange requires a $5,000 deposit oneach contract. NGW enters into 20 such contracts.Why is the futures contract likely to be considered aneffective hedge and therefore qualified for hedge accounting?Why would this transaction be accounted for as a cash flowhedge?Assume the Dec 31, 2016, futures contract is $6.75 for deliveryon Feb 2, 2017, and the spot rate on Feb 2, 2017, is $6.85. Assumethat NGW sells all of the gas on Feb 3, 2017, for $8.00 per MMBtu.Prepare all the necessary journal entries from Nov 2, 2016, throughFeb 3, 2017, to account for this hedge situation.