As of January, our company plans to purchase 120,000 lbs. of copper on May 31 at the prevailing spot rate. To hedge this forecasted transaction, we purchase May futures contracts in January for 120,000 lbs. of copper at the futures price of $1.57/lb. On May 31, we close out our futures contracts by entering into an offsetting contract in which we agree to buy 120,000 lbs. of May copper futures contracts at $1.83/lb., the spot rate on that date. We also purchase 120,000 lbs. of copper at $1.83/lb. on that date. Finally, we sell the inventory in June for $2.05/lb. Our company operates on a calendar year and issues financial statements quarterly. Following are futures and spot prices for the relevant dates: Following are futures and spot prices for the relevant dates:
Date Spot Futures
January $1.44 $1.58
March 31 $1.52 $1.67
May 1 $1.84 n/a
Required:
Prepare the journal entries to record the following:
a. Purchase of copper futures contract in January.
b. Adjusting entry at March 31.
c. Sale of copper on June 1.