Metal Fabricators uses stainless steel as an input to its manufacturing processes. Stainless steel is approximately 10% chromium and 90% iron and other alloys. The price of stainless steel varies month by month based on the price of the inputs and the price of energy and Metal Fabricators expects an adjustment to the future price based on the price of chromium. Metal Fabricators expects to purchase 100 tons of stainless steel in May of 20X2 for the construction season. To protect against price fluctuations, Metal Fabricators enters into a derivative on November 1, 20X1 to buy 10 tons of chromium for delivery May 1, 20X2. Metal Fabricators enters into a contract to purchase stainless steel on March 31, 20X2 (the forecasted purchase) for delivery May 1, 20X2. The contract specifies that the price will be adjusted by the price of chromium on the delivery date and delivery costs. The hedge is 100% effective to that component. The price of stainless steel is 2,500 per ton on March 31st and $2,800 per ton at delivery. Using the following fair values, prepare journal entries for the derivative, including net settlement. Chromium futures Expected future cash flows 12/31/X1 $6,000 ($6,000) 3/31/X2 $4,000 ($4,000) 5/1/X2 $9,000 ($9,000)

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter10: Short-term Decision Making

Section: Chapter Questions

Problem 4EB: Dimitri Designs has capacity to produce 30,000 desk chairs per year and is currently selling all...

See similar textbooks

Related questions

Question

Metal Fabricators uses stainless steel as an input to its manufacturing processes. Stainless steel is approximately 10% chromium and 90% iron and other alloys. The price of stainless steel varies month by month based on the price of the inputs and the price of energy and Metal Fabricators expects an adjustment to the future price based on the price of chromium. Metal Fabricators expects to purchase 100 tons of stainless steel in May of 20X2 for the construction season. To protect against price fluctuations, Metal Fabricators enters into a derivative on November 1, 20X1 to buy 10 tons of chromium for delivery May 1, 20X2. Metal Fabricators enters into a contract to purchase stainless steel on March 31, 20X2 (the forecasted purchase) for delivery May 1, 20X2. The contract specifies that the price will be adjusted by the price of chromium on the delivery date and delivery costs. The hedge is 100% effective to that component. The price of stainless steel is 2,500 per ton on March 31^st and $2,800 per ton at delivery. Using the following fair values, prepare journal entries for the derivative, including net settlement.

Chromium futures Expected future cash flows

12/31/X1 $6,000 ($6,000)

3/31/X2 $4,000 ($4,000)

5/1/X2 $9,000 ($9,000)

Expert Solution

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.