A Company Expects to Sell 1,000,000 Lbs

Essay

A company expects to sell 1,000,000 lbs. of a commodity in 90 days. To guard against potential declines in the price of this commodity, the company sells 1,000,000 lbs. of the commodity for delivery in 90 days at $4.00/lb., paying a margin deposit of $8,000 on the futures contract. The hedge qualifies as a hedge of the forecasted sale. At the company's year-end, 30 days later, the 60-day futures price is $4.02/lb. and the company pays cash to the broker to maintain its investment account at $8,000. 60 days later, the futures price converges to the spot price of $3.97/lb. and the company closes out its short futures position. The company sells 1,000,000 lbs. of the commodity on the spot market. All income effects of the commodity sale and the hedge are reported in sales revenue.
Required
Prepare the journal entries necessary to record the above events, including year-end adjusting entries.