Martina’s Wholesale Tofu has a contract to buy 2,000 pounds of processed tofu at a price of $1 on December 31, 2015. On October 1st they sell futures contracts for 2,000 pounds of soybean meal at .95 per pound. The price is expected to be highly correlated but some ineffectiveness is likely due to the different commodities.
At October 31, the price of the futures has declined by 0.08 per pound and the expected price of tofu has declined by .09 cents per pound.
Martina’s makes delivery of 2,000 pounds of tofu.
1. journal entries for October 31, 2015
2. journal entries for December 31, 2015 to record the expiration of the future, net settled, and the purchase of tofu.
If someone could just explain fair value hedges and how to journal them that would be much appreciated. I do not understand this concept and would just like an explanation
At October 31, the price of the futures has declined by 0.08 per pound and the expected price of tofu has declined by .09 cents per pound.
Martina’s makes delivery of 2,000 pounds of tofu.
1. journal entries for October 31, 2015
2. journal entries for December 31, 2015 to record the expiration of the future, net settled, and the purchase of tofu.
If someone could just explain fair value hedges and how to journal them that would be much appreciated. I do not understand this concept and would just like an explanation