Firm D holds 20,000 gallons of chemicals in inventory on October 31,Year 1,that cost $225
per gallon.Firm D contemplates selling the chemicals on March 31,Year 2,when it completes
the processing.Uncertainty about the selling price of the chemical on March 31,Year 2,leads
Firm D to acquire a forward contract on the chemical.The forward contract does not require an initial investment of funds.Firm D designates the forward commodity contract as a cash flow hedge of an anticipated transaction.The forward price on October 31,Year 1,for delivery on March 31,Year 2,is $320 per gallon.
Required
a.Using the financial statement effects template,show the financial statement effects,
if any,that Firm D would have on October 31,Year 1,when it acquires the forward
commodity price contract.
b.On December 31,Year 1,the end of the accounting period for Firm D,the forward
price of the chemical for March 31,Year 2,delivery is $310 per gallon.Show the financial
statement effects of recording the change in the value of the forward commodity
price contract.Ignore the discounting of cash flows in this part and in the remainder
of the problem.
c.Show the financial statement effects of the December 31,Year 1,decline in value of
the chemical inventory.
d.On March 31,Year 2,the price of the chemical declines to $270 per gallon.Show the
financial statement effects of revaluing the forward contract.
e.Show the financial statement effects on March 31,Year 2,to reflect the decline in
value of the inventory.
f.Show the financial statement effects on March 31,Year 2,to settle the forward contract.
g.Assume that Firm D sells the chemical on March 31,Year 2,for $270 a gallon.Show
the financial statement effects of recording the sale and recognizing the cost of
goods sold.

Under the Percentage-Of-Completion Contract Method

Multiple Choice

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