[Anonymous]

The following question comes from a simulation taken out of the Becker Review Course.

On November 1, Year 1, XYZ Company forecasts production of 10,000 barrels of oil in January of Year 2. Oil is currently selling for $85 per barrel. To hedge the risk that the price of oil will decrease before the oil is sold, XYZ takes a short position in a forward contract for 10,000 barrels of oil at $85 per barrel to be settled on January 31, Year 2. The forward contract requires net settlement, rather than the actual delivery of oil. The oil is sold on February 1 for $71 per barrel. XYZ classifies the hedge as a cash flow hedge of the anticipated change in cash flows from the forecasted oil sales. Relevant forward contract prices are as follows:

Oil/Barrel Forward

November 1, Year 1

$85.00

December 31, Year 1

$79.00

January 31, Year 2

$71.00

The question asks for the appropriate journal entries at the various dates listed above. Provided answers are as follows:

November 1, Year 1

No Entry Required

December 31, Year 1

Dr. Cash Flow Hedge 60,000

Cr. Other Comprehensive Income 60,000

January 31, Year 2

Dr. Cash Flow Hedge 80,000

Cr. Other Comprehensive Income 80,000

Dr. Cash 140,000

Cr. Cash Flow Hedge 140,000

February 1, Year 2

Dr. Accounts Receivable 710,000

Cr. Sales Revenue 710,000

Dr. Other Comprehensive Income 140,000

Cr. Gain on Cash Flow Hedge 140,000

My question, oddly enough, has nothing to do with the hedging activities but rather with the debit to Accounts Receivable. There is nothing in the question that implies the sale was made on account. Would it be wrong to debit Cash instead of Accounts Receivable? I have come across other questions with similar fact patterns that debit the Cash account instead of AR. Overall, there seems to be a lack of consistency. Anyone have any insight into this?

Thanks in advance.

[Anonymous]

Unless the question specifies cash, you assume that sales and purchases are made on credit. I don't have a clue why it's like this, but it just is.

[NikkiSkupnjak]

I had the exact same thought when I came across this. I think that it should clarify if it was cash or on account. I don't think you will need to worry about it, from what I remember on the exam, everything was very clear. Sometimes you have a question and on the exam if you go back and read the information it provides everything you need to answer the question 🙂

FAR 92
AUD 99
REG 94
BEC

Becker Self-Study, Wiley Test Bank

[NikkiSkupnjak]

I had the exact same thought when I came across this. I think that it should clarify if it was cash or on account. I don't think you will need to worry about it, from what I remember on the exam, everything was very clear. Sometimes you have a question and on the exam if you go back and read the information it provides everything you need to answer the question 🙂

FAR 92
AUD 99
REG 94
BEC

Becker Self-Study, Wiley Test Bank

[NikkiSkupnjak]

I had the exact same thought when I came across this. I think that it should clarify if it was cash or on account. I don't think you will need to worry about it, from what I remember on the exam, everything was very clear. Sometimes you have a question and on the exam if you go back and read the information it provides everything you need to answer the question 🙂

FAR 92
AUD 99
REG 94
BEC

Becker Self-Study, Wiley Test Bank

[NikkiSkupnjak]

I had the exact same thought when I came across this. I think that it should clarify if it was cash or on account. I don't think you will need to worry about it, from what I remember on the exam, everything was very clear. Sometimes you have a question and on the exam if you go back and read the information it provides everything you need to answer the question 🙂

FAR 92
AUD 99
REG 94
BEC

Becker Self-Study, Wiley Test Bank

[Author]

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