Question 5: Hedge accounting (10 marks)
Stiggins Fitness Enterprises uses soybeans to make one of their nutritional supplement
products. Stiggins anticipates a need of 500,000 pounds of soybeans in January of 2019. On
November 1, 2018, Stiggins purchased a call option for 500,000 pounds of soybeans on January
1, 2019, at a price of $0.35 per pound, which is the market price on November 1. Stiggins paid
$2,000 for the call option and designated this option as a hedge against price fluctuations for
their January purchase of soybeans. On December 31, 2018, and January 1, 2019, the prevailing
market price for soybeans is $0.45 per pound. On January 1, 2019, Stiggins purchased 500,000
pounds of soybeans.
Required:
(1) Prepare all necessary journal entries on Stiggins' books at November 1, 2018. (2 marks)
(2) Prepare all necessary journal entries on Stiggins' books at December 31, 2018. (2 marks)
(3) Prepare all necessary journal entries on Stiggins' books at January 1, 2019. (6 marks)