Cassandra Boat Builders builds and sells powerboats with a hull constructed primarily of teak wood. The boat building season is during Spring and Summer. The company begins building each boat only after a firm commitment was made by a specific buyer. Since the price of teak wood tends to fluctuate, Cassandra purchases several future contracts with different due dates during the building season to hedge the risk of fluctuating wood prices. During the 20X1 boat building season, the price of teak wood increased and reduced the Company's gross margin by $250,000. However, due to the increases in the teak wood prices, Cassandra realized a $240,00 gain on the related future contracts. Cassandra designates the futures as a cash flow hedge of an anticipated transaction.
At the inception of the future contracts, Cassandra should recognize the purchase price as a(n):
a. Asset
b. Liability
c. Gain
d. Loss
Answers: 3
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