Question

FMC Co. uses gold in the manufacture of its jewelry products. FMC anticipates it will need to purchase 500 ounces of gold in October 2013 for jewelry it will ship during the holiday season. However, if the price of gold increases, FMC’s cost to produce its products will increase and reduce its profit margins.

         In order to hedge the risk of increased gold prices, on April 1, 2013, FMC enters into a gold futures contract and designates it as a cash flow hedge of the anticipated gold purchase (assume no premium paid.) The notional amount of the contract is 500 ounces, and the terms of the contract give FMC the option to purchase gold at $300 per ounce. The contract expires on October 31, 2013.

         Assume the following data with respect to the price of the gold:

Date	Spot Price for October Delivery
April 1, 2013	$300 per ounce
June 30, 2013	$310 per ounce
September 30, 2013	$315 per ounce

         REQUIRED:

               1.) Prepare the journal entries for the following transactions:

Increase in the spot price of gold on June 30 & September 30.

FMC’s purchase of 500 ounces of gold on October 10 at $315 and settlement of the futures contract on that date.

FMC’s sale of product for $350,000 on December 20. The cost of the finished goods inventory was $200,000.

2.) Indicate the amount(s) reported on the balance sheet related to the   futures contract on June 30, 2013 and the income statement for December 31, 2013.

Answer 1

Date	Particulars	Debit	Credit
30-Jun	Receivable from future broker	5000
	Gain on future		5000
	(Recognizing gain on future)
30-Sep	Receivable from future broker	2500
	Gain on future		2500
	(Recognizing gain on future)
10-Oct	Gold	150000
	Gain on future	7500
	Cash		157500
	(Recognizing purchases)
	Cash	7500
	Receivable from future broker		7500
	(Receiving gain on future)
20-Dec	Cash	350000
	Revenue on sale		350000
	(Recognizing sale)
	Revenue on sale	200000
	Cost of goods sold		200000
	(Charging cost of goods sold to revenue) 2. The amount to be reported in balance sheet on 30th June 2013 is receivable from future broker=$5000 The amount to be reported in income statement on 31st December is gain on future=$7500