Recall the Rombaurer Metals example in the chapter On

October
Recall the Rombaurer Metals example in the chapter On October

Recall the Rombaurer Metals example in the chapter: On October 1, 2017, Rombaurer has
10 million pounds of copper inventory on hand at an average cost of $0.65 a pound. The spot
price for copper is $0.90 a pound. Instead of selling copper now, Rombaurer decides to hold the
inventory until February 2018 when management believes the price will return to a normal level
of $0.95 a pound. To hedge its position, Rombaurer sells futures contracts at $0.95 for February
delivery. Spot and futures prices over the next several months are as follows:

On February 26, 2018, Rombaurer sells its copper on the spot market for $0.94 a pound and
cancels the futures contracts.
The chapter described how "hedge accounting" rules are used when Rombaurer hedges its
entire 10 million pounds of copper inventory.
Required:
1. Suppose that Rombaurer sells futures contracts for only 5 million pounds of copper.
(Management had decided that it is prudent to hedge only half of the company's economic
exposure.) Because the futures contracts are now "ineffective" in hedging the company's entire
fair value exposure to copper price fluctuations, Rombaurer cannot use hedge accounting.
Prepare all journal entries needed to account for the futures contracts and sale of copper from
October 1, 2017, through February 26, 2018.
2. Now assume that Rombaurer designates these futures contracts as a "fully effective" hedge
of its risk exposure for 5 million pounds of copper inventory. (The remaining 5 million pounds of
inventory is not being hedged.) Rombaurer can now use hedge accounting for the futures
contracts. Prepare all journal entries needed to account for the futures contracts and sale of
copper from October 1, 2017, through February 26, 2018.
3. What impact does changing the definition of the hedged item (10 million pounds of copper
inventory versus 5 million pounds) have on the company's financial statements for 2017 and
2018?

Recall the Rombaurer Metals example in the chapter On October

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