On November 1, 2020, ABC Products Forecasts That It Will

Essay

On November 1, 2020, ABC Products forecasts that it will purchase 1,000,000 bushels of oats in 4 months for use in the manufacture of its cereal products. To hedge against rising costs, ABC Products buys 1,000,000 March 2021 call options for oats, with a strike price of $2.75/bushel. The options cost $0.10/bushel, and the spot price on November 1 is $2.72/bushel. Management designates the intrinsic value of the options as the hedge, and the options qualify as a cash flow hedge of the forecasted purchase. ABC Products records all income effects of the inventory and the hedge in cost of goods sold. On December 31, 2020, ABC Products' year-end, the spot price for oats is $2.77/bushel and the options are selling for $0.13/bushel. On March 1, 2021, the spot price for oats is $2.80/bushel and ABC Products sells the options for their intrinsic value of $0.05/bushel. On March 3, 2021, ABC Products purchases 1,000,000 bushels of oats at the spot price of $2.81/bushel. It sells products containing the oats on June 5, 2021.
Required
Prepare entries to record the above events, including the December 31, 2020 adjusting entry. Assume ABC Products reports the change in option time value directly in income.