Accounting for Futures
Accounting for Futures
Example 1
It is June 30. You have just purchased $1,000,000 of inventory.
Dr. Inventory 1,000,000
Cr. Cash 1,000,000
You will sell the inventory on Jan 1. The current selling price is 1,500,000, but you don’t know what the price will be six months from now. You enter into a futures contract (at no cost) to sell the inventory in six months at 1,500,000.
No entry
It is now Dec. 31. The current selling price of the inventory is 1,550,000, so you have lost 50,000 on your futures contract.
Dr. unrealized loss 50,000
Cr. futures contract 50,000
On Jan 1:
Dr. Cash 1,500,000
Dr. Futures contract 50,000
Cr. Revenue 1,550,000
Dr. Revenue 50,000
Cr. Unrealized loss 50,000
Dr. COGS 1,000,000
Cr. Inventory 1,000,000
Example 2
It is June 30. On Jan 1, you have a contract to sell 100,000 units of a highly perishable good at $10 each. You will have to purchase those goods on the same day, but are concerned that you will not know what the cost will be. You contract to buy the goods at $5 per unit.
No entry
On Dec 31, the current cost of the units is $5.10, so you have gained .10*100,000=10,000.
Dr. Futures contract 10,000
Cr. Deferred gain 10,000
On Jan 1:
Dr. inventory 510,000
Cr. Cash 500,000
Cr. Futures contract 10,000
Dr. Cash 1,000,000
Cr. Revenues 1,000,000
Dr. COGS 510,000
Cr. Inventory 510,000
Dr. Deferred gain 10,000
Cr. COGS 10,000
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