What is the cost of purchases on July

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Reference no: EM132802033

Question - Amancio Company produces colorful 100% cotton shirts and the entity needs 30,000 kilos of raw materials in the production process. On December 1, 2020, the entity purchased a call option as a cash flow hedge to buy 30,000 kilos on July 1, 2021. The option strike price is Php120 per kilo. The entity paid Php36,000 for the call option.

This derivative option contract means that if the market price is higher than Php120, the entity can exercise the option and buy the asset at the strike price of Php120. If the market price is lower than Php120, the entity can throw away the option and buy the asset at the cheaper price. The market price per kilo is Php125 on December 31, 2020 and 130 on July 1, 2021.

Required - What is the cost of purchases on July 1, 2021?

a. Php3,636,000

b. Php4, 036,000

c. Php5,050,000

d. Php3,936,000

Reference no: EM132802033

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