What amount of unrealized gain or loss would it report

Assignment Help Financial Management

Reference no: EM131970290

LEW Co. uses gold in the manufacture of its products. LEW anticipates that it will need to purchase 510 ounces of gold in October 2012, for jewelry that will be shipped for the holiday shopping season. However, if the price of gold increases, LEW's cost to produce its jewelry will increase, which would reduce its profit margins.

To hedge the risk of increased gold prices, on April 1, 2012, LEW enters into a gold futures contract and designates this futures contract as a cash flow hedge of the anticipated gold purchase.

The notional amount of the contract is 510 ounces, and the terms of the contract give LEW the right and the obligation to purchase gold at a price of $390 per ounce. The price will be good until the contract expires on October 31, 2012.

Assume the following data with respect to the price of the call options and the gold inventory purchase. Date Spot Price for October Delivery

April 1, 2012 $390 per ounce

June 30, 2012 398 per ounce

September 30, 2012 410 per ounce

October 10, 2012-LEW Co. purchases 510 ounces of gold at $410 per ounce and settles the futures contract. December 20, 2012-LEW sells jewelry containing gold purchased in October 2012 for $372,900. The cost of the finished goods inventory is $227,260. June 30, 2012 LEW prepares financial statements.

What amount of unrealized gain or loss would it report on its financial statements?

a. 0 under shareholders' equity on the balance sheet.

b. 4,080 under shareholders' equity on the balance sheet.

c. 10,200 on the income statement.

d. 4,080 on the income statement.

Reference no: EM131970290

Questions Cloud

Confidence interval for the percentage of gamers : Construct a 99% confidence interval for the percentage of gamers who were over 40.

Probability that colors turn out to be all distinct : Suppose we color 7 boxes using a pallet of 61 colors. What is the probability that the colors turn out to be all distinct?

Evaluate the model using standart error and r2 : The aim was to explore their relationship in the hope of being able to predict capital value from rental value. Assume normal distribution for both variables.

What are the types of expenses : Examples should include direct costs items, indirect costs items, as well as variable costing. What are at least 5 types of expenses that are associated.

What amount of unrealized gain or loss would it report : Assume the following data with respect to the price of the call options and the gold inventory purchase. Date Spot Price for October Delivery

Expected-average payoff in game : If your chosen number is a hit, you win $3. Otherwise, you lose that $1. What is your expected/average payoff in this game?

What is the significance of the delisting of 21st century : Why is it that leveraged buy outs and management buy outs are best suited for low risk businesses with stable cashflows?

Generate a piece of data of acceleration measurements : Biomedical Signal Processing Lab Assignment. Stage 1 - Filter Design by Using Matlab. Generate a piece of data of acceleration measurements by using TA/IMU

What is leytons dso : What is Leyton's DSO, what would it be if all customers paid on time, and how much capital woul dbe released if Leyton could take action that led to on time pay

User Account

All Pages