Question

Cash Flow Hedge: Long in Commodity Futures The Hershey Company uses futures to lock in the cost of cocoa products it needs to produce its products. Hershey forecasts that it will need 500 tons of cocoa beans in 90 days to manufacture its products. On February 10, 2020, it purchases 500 tons of cocoa bean futures at $2,000/ton for delivery on May 10, 2020, and makes a $5,000 margin deposit. The long futures position qualifies as a cash flow hedge of the forecasted purchase of cocoa beans, and is considered highly effective. On May 10, the spot price of cocoa beans is $2,050/ton, Hershey closes the contract and purchases 500 tons of cocoa beans on the spot market. Later in the year, products containing the cocoa are sold to retailers.

Required: Prepare the entries necessary to record the above events, including the cost of cocoa reported in cost of goods sold when products containing the cocoa are sold. Hershey is a calendar-year company.

Answer 1

Above question is about future contact and we have record all the journal entries for above events. Refer below image for detailed solution.