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Question - Treetoo Limited wishes to buy 10,000 shares of YCo, a publicly-traded company. Treetoo enters into a contract, through a broker, to buy the shares in 40 days' time, at a price of $3 per share, the current fair value. The broker requires a 10% margin to be maintained at all times. After 10 days, at the fiscal year-end, the price of the YCo shares is $4 per share, and is $4.50 per share at the end of 40 days. At that time, the shares are purchased and the contract is closed out.
Required:
Is this a forward contract or a futures contract? Explain.
What risk is the company hedging?
Prepare journal entries to record the inception of the contract, the change in its fair value at year-end and the additional margin payment, and its maturity.
Assume that management considers the stock to be available- for- sale securities. Prepare the journal entries required on each date given.
Why do options sell at prices higher than their exercise values?
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Amortization of excesses in periods subsequent to the purchase would affect which sections of a cash flow statement?
In this way we could combine the recording and posting process into one step and save ourselves a lot of time. What do you think?
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