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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