The Davis Company grows soybeans and processes them into soybean meal for eventu

Question

The Davis Company grows soybeans and processes them into soybean meal for eventual sale to food companies. Davis currently owns 10,000 tons of soybean meal, carried in their inventory at a cost of $3,400,000. Soybean meal trades on the spot markets for $350 per ton; three-month futures are selling for $363 per ton. Davis expects to sell the 10,000 tons for 90 days. On August 1, 2017, Davis sells 10,000 tons of soybean meal futures to be delivered on October 30, 2017, at the $363 price. The price of Davis’ futures contracts has advanced to $367 and the spot price is $354 on September 30, when the books are closed for interim reporting purposes. Davis closes out its short position on October 28, 2017, when the future price is $361 per ton and the spot price is $348.

Required (evaluate each separately):

1. Assuming that Davis deposits $75,000 margin with the broker on August 1, prepare the journal entries it makes on August 1, September 1 and October 28. Davis is required to maintain a minimum brokerage account balance of $75,000.

Explanation / Answer

Aug 1 Inventory A/c. $ 3630000

To sells A/c. $ 3630000

Sept 1 . Loss A/c. $40000

To sells A/c . $40000

Oct 28 . Sells A/c. $20000

To profit A/c $20000

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