Question

Stern Fitness Enterprises uses soybeans to make one of their nutritional supplement products. Stern anticipates a need of 700,000 pounds of soybeans in January of 2018. On November 1, 2017, Stern purchased a call option for 700,000 pounds of soybeans on January 1, 2018, at a price of $0.50 per pound, which is the market price on November 1. Stern paid $20,000 for the call option and designated this option as a hedge against price fluctuations for their January purchase of soybeans. On December 31, 2017, and January 1, 2018, the prevailing market price for soybeans is $0.55 per pound. On January 1, 2018, Stern purchased 700,000 pounds of soybeans.

Make the necessary entries on Stern's books at

a) November 1, 2018

b) December 31, 2017

c) January 1, 2018

(hint: 5 journal entries required)

Answer 1

Ans- Journal Entries:-

Date	Account Titles	Debit ($)	Credit ($)
a-Nov.1 2018	Soybean Call Option (Asset) A/c Dr.	20,000
	Cash A/c		20,000
	No entry is made on November 1 to record the forecasted purchase of soybeans to occur in January 2018
b- Dec.31,2017	Soybean Call Option (Asset) A/c Dr. ($35,000-$20,000)	15,000
	Other comprehensive income A/c		15,000
	With the prevalling market price of $0.55 per pound on december 31,2017, Stern can expect to receive a payment of $35,000([($0.55-$0.50)*700,000lbs.] on January 1 ,2018 to settle the option .Accordingle the option is worth $35,000 0n december 31,2017
c-Jan.1,2018	Soybean Inventory A/c Dr. (700,000lbs*$0.55)	385,000
	Cash A/c		385,000
	Cash A/c Dr.	35,000
	Soybean call option A/c		35,000
	Other Comprehensive Income A/c Dr.	15,000
	Gain on soybean call option A/c		15,000