Exhibit 4
MarginOOPS Bank Case Journal Entries and Summary
of Results
(Students are required to fill in the
numbers shown in red.)
Instructions: Please fill in debits without dollar signs and credits in parentheses. If there is no entry for a given account, please leave it blank rather than entering a zero. Note that all accounts listed for a given date will not necessarily have entries on that date.
Update Warning: Since futures contracts are settled daily, a 0.0% discount rate should be used as illustrated in Example 7 of Appendix B in FAS 133. The illustration in Exhibit 4 of this case illustrates the discounting versus the non-discounting solutions. Professor Walter Teets sent me the following email message concerning his changing of the original answers in the Teet and Uhl case entitled "C.L. Smith and Sons: Accounting for Futures Hedging Commodity Purchases and Sales" at http://www.gonzaga.edu/faculty/teets/index0.html
| September 7, 2000 The error in our case is simply that the futures values (due to changes in either spot or futures prices) shouldn't be present valued, since there is daily settling up. But the (change in) values of the anticipated cash flows of the hedged item should be present valued, because there is usually no periodic settling of the cash flows associated with the hedged item. The change to the case is minor; the major point of the futures case is to show exclusion of the change in the difference between future and spot price from the determination of effectiveness. Present valuing the cash flow associated with the anticipated transaction, while not present valuing the futures (change in) value adds additional ineffectiveness to the hedging relation. Walter Teets at Gonzaga University |
|
Discounting at |
0.00 % APR |
Discounting at |
6.00% APR |
||
|
|
|
Debit |
|
Debit |
|
|
Date |
MarginOOPS
Bank Accounts |
(Credit) |
Balance |
(Credit) |
Balance |
|
1999 |
Assumed
FAS 133 discount rate = |
0.000000% |
0.000000% |
0.016438% |
0.016438% |
|
17-Jun |
Cash |
25,000,000
|
25,000,000
|
25,000,000
|
25,000,000
|
|
|
Notes
payable |
(25,000,000) |
(25,000,000) |
(25,000,000) |
(25,000,000) |
|
|
-To
record borrowing for one year |
|
|
|
|
|
|
|
|
|
|
|
|
17-Jun |
Cash |
(25,000,000) |
0
|
(25,000,000) |
0
|
|
|
Notes
receivable |
25,000,000
|
0
|
25,000,000
|
0
|
|
|
-To
record lending for one year |
|
|
|
|
|
|
|
|
|
|
|
|
17-Jun |
Cash |
(500) |
(500) |
(500) |
(500) |
|
|
Futures
margin account |
500
|
500
|
500
|
500
|
|
|
-To
record margin account |
|
|
|
|
|
|
|
|
06/30/99 |
|
06/30/1999 |
|
30-Jun |
Cash |
(7,500) |
(8,000) |
(7,500) |
(8,000) |
|
|
Futures
margin account |
0
|
500
|
0
|
500
|
|
|
Other
comprehensive income (OCI) |
3,750
|
3,750
|
3,647
|
3,647
|
|
|
Interest
expense (revenue) |
3,750
|
3,750
|
3,647
|
3,647
|
|
|
- To
adjust futures contracts to fair value. |
|
|
|
|
|
|
|
|
07/31/99 |
|
07/31/1999 |
|
31-Jul |
Cash |
(12,500) |
(20,500) |
(12,500) |
(20,500) |
|
|
Futures
margin account |
0
|
500
|
0
|
500
|
|
|
Other
comprehensive income (OCI) |
11,250
|
15,000
|
11,016
|
14,663
|
|
|
Interest
expense (revenue) |
1,250
|
5,000
|
1,231
|
4,878
|
|
|
- To
adjust futures contracts to fair value. |
|
|
|
|
|
|
|
|
08/31/99 |
|
08/31/1999 |
|
31-Aug |
Cash |
(16,875) |
(37,375) |
(16,875) |
(37,375) |
|
|
Futures
margin account |
0
|
500
|
0
|
500
|
|
|
Other
comprehensive income (OCI) |
15,000
|
30,000
|
14,812
|
29,475
|
|
|
Interest
expense (revenue) |
1,875
|
6,875
|
1,877
|
6,755
|
|
|
- To
adjust futures contracts to fair value. |
|
|
|
|
|
|
|
|
09/17/99 |
|
09/17/1999 |
|
17-Sep |
Cash |
(5,000) |
(42,375) |
(5,000) |
(42,375) |
|
|
Futures
margin account |
0
|
500
|
0
|
500
|
|
|
Other
comprehensive income (OCI) |
(8,750) |
21,250
|
(8,698) |
20,777
|
|
|
Interest
expense (revenue) |
13,750
|
20,625
|
14,343
|
21,098
|
|
|
- To
adjust futures contracts to fair value. |
|
|
|
|
|
|
|
|
|
|
|
|
17-Sep |
Cash |
500,000
|
457,625
|
500,000
|
457,625
|
|
|
Interest
expense (revenue) |
(500,000) |
(479,375) |
(500,000) |
(479,375) |
|
|
-To
record interest on note receivable |
|
|
|
|
|
|
|
|
|
|
|
|
17-Sep |
Cash |
(339,986) |
117,639
|
(339,986) |
117,639
|
|
|
Interest
expense (revenue) |
339,986
|
(139,389) |
339,986
|
(139,389) |
|
|
-To
record interest on note payable |
|
|
|
|
|
|
|
|
09/30/1999 |
|
09/30/1999 |
|
30-Sep |
Cash |
0
|
117,639
|
0
|
117,639
|
|
|
Futures
margin account |
4,375
|
4,875
|
4,375
|
4,875
|
|
|
Other
comprehensive income (OCI) |
(35,000) |
(13,750) |
(34,250) |
(13,473) |
|
|
Interest
expense (revenue) |
(129,389) |
(108,764) |
(130,139) |
(109,041) |
|
|
- To
adjust futures contracts to fair value. |
|
|
|
|
|
|
|
|
10/31/1999 |
|
10/31/1999 |
|
31-Oct |
Cash |
0
|
117,639
|
0
|
117,639
|
|
|
Futures
margin account |
16,875
|
21,750
|
16,875
|
21,750
|
|
|
Other
comprehensive income (OCI) |
(13,750) |
(27,500) |
(13,610) |
(27,083) |
|
|
Interest
expense (revenue) |
(3,125) |
(111,889) |
(3,265) |
(112,306) |
|
|
- To
adjust futures contracts to fair value. |
|
|
|
|
|
|
|
|
11/30/1999 |
|
11/30/1999 |
|
30-Nov |
Cash |
0
|
117,639
|
0
|
117,639
|
|
|
Futures
margin account |
14,375
|
36,125
|
14,375
|
36,125
|
|
|
Other
comprehensive income (OCI) |
(20,000) |
(47,500) |
(19,929) |
(47,012) |
|
|
Interest
expense (revenue) |
5,625
|
(106,264) |
5,554
|
(106,752) |
|
|
- To
adjust futures contracts to fair value. |
|
|
|
|
|
|
|
|
12/17/1999 |
` |
12/17/1999 |
|
17-Dec |
Cash |
0
|
117,639
|
0
|
117,639
|
|
|
Futures
margin account |
9,375
|
45,500
|
9,375
|
45,500
|
|
|
Other
comprehensive income (OCI) |
11,875
|
(35,625) |
11,922
|
(35,090) |
|
|
Interest
expense (revenue) |
(21,250) |
(127,514) |
(21,297) |
(128,049) |
|
|
- To
adjust futures contracts to fair value. |
|
|
|
|
|
|
|
|
|
|
|
|
17-Dec |
Cash |
500,000
|
617,639
|
500,000
|
617,639
|
|
|
Interest
expense (revenue) |
(500,000) |
(627,514) |
(500,000) |
(627,514) |
|
|
-To
record interest on note receivable |
|
|
|
|
|
|
|
|
|
|
|
|
17-Dec |
Cash |
(329,243) |
288,396
|
(329,243) |
288,396
|
|
|
Interest
expense (revenue) |
329,243
|
(298,271) |
329,243
|
(298,271) |
|
|
-To
record interest on note payable |
|
|
|
|
|
|
|
|
12/31/1999 |
` |
12/31/1999 |
|
31-Dec |
Cash |
0
|
288,396
|
0
|
288,396
|
|
|
Futures
margin account |
(1,250) |
44,250
|
(1,250) |
44,250
|
|
|
Other
comprehensive income (OCI) |
6,875
|
(28,750) |
6,706
|
(28,384) |
|
|
Interest
expense (revenue) |
(5,625) |
(303,896) |
(5,991) |
(304,262) |
|
|
- To
adjust futures contracts to fair value. |
|
|
|
|
|
|
|
|
01/31/2000 |
` |
01/31/2000 |
|
31-Jan |
Cash |
0
|
288,396
|
0
|
288,396
|
|
|
Futures
margin account |
(1,875) |
42,375
|
(1,875) |
42,375
|
|
|
Other
comprehensive income (OCI) |
(2,500) |
(31,250) |
(2,626) |
(31,010) |
|
|
Interest
expense (revenue) |
4,375
|
(299,521) |
4,501
|
(299,761) |
|
|
- To
adjust futures contracts to fair value. |
|
|
|
|
|
|
|
|
02/29/2000 |
` |
02/29/2000 |
|
29-Feb |
Cash |
0
|
288,396
|
0
|
288,396
|
|
|
Futures
margin account |
(8,125) |
34,250
|
(8,125) |
34,250
|
|
|
Other
comprehensive income (OCI) |
7,500
|
(23,750) |
7,330
|
(23,680) |
|
|
Interest
expense (revenue) |
625
|
(298,896) |
795
|
(298,966) |
|
|
- To
adjust futures contracts to fair value. |
|
|
|
|
|
|
|
|
03/17/2000 |
` |
03/17/2000 |
|
17-Mar |
Cash |
24,250
|
312,646
|
24,250
|
312,646
|
|
|
Futures
margin account |
(34,250) |
0
|
(34,250) |
0
|
|
|
Other
comprehensive income (OCI) |
23,750
|
0
|
23,750
|
0
|
|
|
Interest
expense (revenue) |
(13,750) |
(312,646) |
(13,750) |
(312,646) |
|
|
- To
adjust futures contracts to fair value. |
|
|
|
|
|
|
|
|
03/17/2000 |
` |
03/17/2000 |
|
17-Mar |
Cash |
500,000
|
812,646
|
500,000
|
812,646
|
|
|
Interest
expense (revenue) |
(500,000) |
(812,646) |
(500,000) |
(812,646) |
|
|
-To
record interest on note receivable |
|
|
|
|
|
|
|
|
03/17/2000 |
` |
03/17/2000 |
|
17-Mar |
Cash |
(376,007) |
436,639
|
(376,007) |
436,639
|
|
|
Interest
expense (revenue) |
376,007
|
(436,639) |
376,007
|
(436,639) |
|
|
-To
record interest on note payable |
|
|
|
|
|
|
|
|
03/31/2000 |
` |
03/31/2000 |
|
31-Mar |
Cash |
0
|
436,639
|
0
|
436,639
|
|
|
Futures
margin account |
0
|
0
|
0
|
0
|
|
|
Other
comprehensive income (OCI) |
0
|
0
|
0
|
0
|
|
|
Interest
expense (revenue) |
0
|
(436,639) |
0
|
(436,639) |
|
|
- To
adjust futures contracts to fair value. |
|
|
|
|
|
|
|
|
04/30/2000 |
` |
04/30/2000 |
|
30-Apr |
Cash |
0
|
436,639
|
0
|
436,639
|
|
|
Futures
margin account |
0
|
0
|
0
|
0
|
|
|
Other
comprehensive income (OCI) |
0
|
0
|
0
|
0
|
|
|
Interest
expense (revenue) |
0
|
(436,639) |
0
|
(436,639) |
|
|
- To
adjust futures contracts to fair value. |
|
|
|
|
|
|
|
|
05/31/2000 |
` |
05/31/2000 |
|
31-May |
Cash |
0
|
436,639
|
0
|
436,639
|
|
|
Futures
margin account |
0
|
0
|
0
|
0
|
|
|
Other
comprehensive income (OCI) |
0
|
0
|
0
|
0
|
|
|
Interest
expense (revenue) |
0
|
(436,639) |
0
|
(436,639) |
|
|
- To
adjust futures contracts to fair value. |
|
|
|
|
|
|
|
|
06/17/2000 |
` |
06/17/2000 |
|
17-Jun |
Cash |
0
|
436,639
|
0
|
436,639
|
|
|
Futures
margin account |
0
|
0
|
0
|
0
|
|
|
Other
comprehensive income (OCI) |
0
|
0
|
0
|
0
|
|
|
Interest
expense (revenue) |
0
|
(436,639) |
0
|
(436,639) |
|
|
- To
adjust futures contracts to fair value. |
|
|
|
|
|
|
|
|
06/17/2000 |
` |
06/17/2000 |
|
17-Jun |
Cash |
500,000
|
936,639
|
500,000
|
936,639
|
|
|
Interest
expense (revenue) |
(500,000) |
(936,639) |
(500,000) |
(936,639) |
|
|
-To
record interest on note receivable |
|
|
0
|
0
|
|
|
|
|
06/17/2000 |
` |
06/17/2000 |
|
17-Jun |
Cash |
(340,618) |
596,021
|
(340,618) |
596,021
|
|
|
Interest
expense (revenue) |
340,618
|
(596,021) |
340,618
|
(596,021) |
|
|
-To
record interest on note payable |
|
|
|
|
|
|
|
|
06/17/2000 |
` |
06/17/2000 |
|
17-Jun |
Cash |
25,000,000
|
25,596,021
|
25,000,000
|
25,596,021
|
|
|
Notes
receivable |
(25,000,000) |
0
|
(25,000,000) |
0
|
|
|
-To
record the payoff of the note receivable |
|
|
|
|
|
|
|
|
06/17/2000 |
` |
06/17/2000 |
|
17-Jun |
Cash |
(25,000,000) |
596,021
|
(25,000,000) |
596,021
|
|
|
Notes
payable |
25,000,000
|
0
|
25,000,000
|
0
|
|
|
-To
record the payoff of the note payable |
|
|
|
|
|
|
|
|
|
|
|
|
31-Dec |
Interest
expense (revenue) |
596,021
|
0
|
596,021
|
0
|
|
|
Retained
earnings |
(596,021) |
(596,021) |
(596,021) |
(596,021) |
|
|
-To
close the books |
|
|
|
|
|
|
|
|
|
|
|
| Summary of MarginOOPS Bank Transactions | ||||
| Date | Dollars |
Dollars |
Percent |
|
| Interest revenue for the year | $2,000,000 |
8.0000% |
||
| Less interest expense if not hedged | 9/17/99 |
$339,986 |
||
12/17/99 |
$329.243 |
|||
3/17/00 |
$376,007 |
|||
6/17/00 |
$340,618 |
$1,385,854 |
-5.5434% |
|
| Net income if interest expense is not hedged | $614,146 |
2.4566% |
||
| Add (deduct) futures hedging gains and (losses) |
|
|
||
6/30/99 |
($ 7,500) |
|||
7/31/99 |
($12,500) |
|||
8/31/99 |
($16,875) |
|||
9/17/99 |
($5,000) |
|||
| 9/30/99 | $4,375 | |||
| 10/31/99 | $16,875 | |||
| 11/30/99 | $14,375 | |||
| 12/17/99 | $9,375 | |||
| 12/31/99 | ($1,250) | |||
01/31/00 |
($1,875) |
|||
02/29/00 |
($8,125) |
|||
| 03/17/00 | ($10,000) | ($18,125) | -0.0725% | |
| Net income if interest expense is hedged | $596,021 |
2.3841% |
||
Calculation Verification
Spread Spread Note that the multiplication factor is $62,500 = (25
contracts)($2,500 notional).
Futures prices are taken from Exhibit 3.
($14,375) = (5.21-5.44)($62,500) loss on the September 1999 futures contracts
$10,000 = (5.95-5.79)($62,500) gain on the December 1999 futures contracts
($13,750) = (5.65-5.87)($62,500) loss on the March 2000 futures contracts
($18,125) = net "loss" on the futures contracts (which locked the hedged cost of the $25 note payable)
Comment: Unlike option contract hedges that only lock in a net income floor or cap, the futures contract hedges in this case lock in a fixed net income of amount of $596,021.