Reference no: EM13792533
Problem M-5 (LO 8) Prepare entries to account for a cash flow hedge involving an option. Industrial Plating Corporation coats manufactured parts with a variety of coatings such as Te?on, gold, and silver. The company intends to purchase 100,000 troy ounces of silver in September. The purchase is highly probable, and the company has become concerned that the prices of silver may increase, and, therefore, the forecasted purchase will become even more expensive. In order to reduce the exposure to rising silver prices, on July 10 the company purchased 20 September call (buy) options on silver. Each option is for 5,000 troy ounces and has a strike price of $5.00 per troy ounce. The company excludes from hedge effectiveness changes in the time value of the option. Spot prices and option value per troy ounce of silver are as follows:
July 10 July31 August 31 September 10
Spot price . . . . . . . . . . . . . . . . . . . $5.10 $5.14 $5.35 $5.32
Option value . . . . . . . . . . . . . . . . . 0.20 0.23 0.37 0.33
On September 10, the company settled the option and on September 15 purchased
100,000 troy ounces of silver on account at $5.33 per ounce. The silver was used in the company’s production process over the next three months. In September and October, plating services were provided as follows:
September October
Units of silver used. . . . . . . . . . . . . . 15,000 50,000
Other costs. . . . . . . . . . . . . . . . . . . . $105,000 $350,000
Plating revenues . . . . . . . . . . . . . . . $225,000 $750,000
Prepare all necessary entries to account for the above activities through October. Assume that the hedge satisfies all necessary criteria for special hedge accounting.
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