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.