BCC Golf Co. uses titanium in the production of its specialty drivers.
BCC anticipates that it will need to purchase 200 ounces of titanium in November 2014, for clubs that will be shipped in the spring and summer of 2015. However, if the price of titanium increases, this will increase the cost to produce the clubs, which will result in lower profit margins. To hedge the risk of increased titanium prices, on May 1, 2014, BCC enters into a titanium futures contract and designates this futures contract as a cash flow hedge of the anticipated titanium purchase. The notional amount of the contract is 200 ounces, and the terms of the contract give BCC the option to purchase titanium at a price of $500 per ounce. The price will be good until the contract expires on November 30, 2014. Assume the following data with respect to the price of the call options and the titanium inventory purchase. Date Spot Price for November Delivery (Per Oz.) May 1, 2014 $500 June 30, 2014 $520 September 30, 2014 $525 Present the journal entries for the following dates/transactions.
(a) May 1, 2014-Inception of futures contract, no premium paid.
(b) June 30, 2014-BCC prepares financial statements.
(c) September 30, 201-4BCC prepares financial statements.
(d) October 5, 2014-BCC purchases 200 ounces of titanium at $525 per ounce and settles the futures contract.
(e) December 15, 2014-BCC sells clubs containing titanium purchased in October 2014 for $250,000. The cost of the finished goods inventory is $140,000.