Question

* P17-17 (Cash Flow Hedge) LEW Jewelry Co. uses gold in themanufacture of its products. LEW antici-pates that it will need topurchase 500 ounces of gold in October 2014, for jewelry that willbe shipped for the holiday shopping season. However, if the priceof gold increases, LEW’s cost to produce its jewelry will increase,which would reduce its profit margins.To hedge the risk ofincreased gold prices, on April 1, 2014, LEW enters into a goldfutures contract and designates this futures contract as a cashflow hedge of the anticipated gold purchase. The notional amount ofthe contract is 500 ounces, and the terms of the contract give LEWthe right and the obligation to purchase gold at a price of $300per ounce. The price will be good until the contract expires onOctober 31, 2014.Assume the following data with respect to theprice of the futures contract and the gold inventory purchase.Problems 1021 Date 6-Month LIBOR Rate Swap Fair Value Debt FairValueDecember 31, 2014 7.0% — $10,000,000June 30, 2015 7.5%(200,000) 9,800,000December 31, 2015 6.0% 60,000 10,060,000 DateSpot Price for October Delivery April 1, 2014 $300 per ounce June30, 2014 310 per ounce September 30, 2014 315 per ounce.

Prepare the journal entries for the following transactions. (a)April 1, 2014—Inception of the futures contract, no premium paid.(b) June 30, 2014—LEW Co. prepares financial statements. (c)September 30, 2014—LEW Co. prepares financial statements. (d)October 10, 2014—LEW Co. purchases 500 ounces of gold at $315 perounce and settles the futures contract. (e) December 20, 2014—LEWsells jewelry containing gold purchased in October 2014 for$350,000. The cost of the finished goods inventory is $200,000. (f)Indicate the amount(s) reported on the balance sheet and incomestatement related to the futures contract on June 30, 2014. (g)Indicate the amount(s) reported in the income statement related tothe futures contract and the in-ventory transactions on December31, 2014.