Setia Maju Bhd uses titanium in the production of its specialty drivers. Setia Maju Bhd anticipates that it will need to purchase 20,000 kilograms of titanium in October 2020, for clubs that will be shipped in the holiday shopping season. 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 l, 2020, Setia Maju Bhd 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 20,000 kilograms, and the terms of the contract give Setia Maju Bhd the right and the obligation to purchase titanium at a price of RM50 per kilogram. The price will be good until the contract expires on November 30, 2020. Assume the following data with respect to the price of the titanium inventory purchase. Spot Price for Date November Delivery May 1, 2020 RM50 per kilogram June 30, 2020 RM52 per kilogram September 30, 2020 RM53 per kilogram REQUIRED: (Ignore time value of money) Present the journal entries for the following dates/transactions. May l, 2020—1nception of futures contract, no premium paid. June 30, 2020—-Setia Maju Bhd prepares financial statements. September 30, 2020—Setia Maju Bhd prepares financial statements. October 5, 2020—Setia Maju Bhd. purchases 20,000 kilograms of titanium at RM53 per kilogram and settles the futures contract. December 15, 2020—Setia Maju Bhd sells clubs containing titanium purchased in October 5, 2020 for RM250,000. The cost of the finished goods inventory is RM140,000.
Setia Maju Bhd uses titanium in the production of its specialty drivers. Setia Maju
Bhd anticipates that it will need to purchase 20,000 kilograms of titanium in
October 2020, for clubs that will be shipped in the holiday shopping season.
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 l, 2020, Setia Maju
Bhd 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 20,000 kilograms, and the terms of the contract give Setia Maju
Bhd the right and the obligation to purchase titanium at a price of RM50 per
kilogram. The price will be good until the contract expires on November 30, 2020.
Assume the following data with respect to the price of the titanium inventory
purchase.
Spot Price for
Date
November Delivery
May 1, 2020
RM50 per kilogram
June 30, 2020
RM52 per kilogram
September 30, 2020
RM53 per kilogram
REQUIRED:
(Ignore time value of money)
Present the
- May l, 2020—1nception of futures contract, no premium paid.
- June 30, 2020—-Setia Maju Bhd prepares financial statements.
- September 30, 2020—Setia Maju Bhd prepares financial statements.
October 5, 2020—Setia Maju Bhd. purchases 20,000 kilograms of titanium at RM53
per kilogram and settles the futures contract.
December 15, 2020—Setia Maju Bhd sells clubs containing titanium purchased in
October 5, 2020 for RM250,000. The cost of the finished goods inventory is
RM140,000.
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