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ACC - Problem M-5 (LO 8) Industrial Plating Corporation




Question;Problem M-5 (LO 8) Prepare entries to account for a cash?ow 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 10Spot price................... $5.10 $5.14 $5.35 $5.32Option value................. 0.20 0.23 0.37 0.33On 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 OctoberUnits of silver used.............. 15,000 50,000Other costs.................... $105,000 $350,000Plating revenues............... $225,000 $750,000Prepare all necessary entries to account for the above activities through October. Assume that the hedge satis?es all necessary criteria for special hedge accounting.PROBLEM M-5July 10 July 31 August 31 September 10Notional amount in troy ounces. 100,000 ? ? ?Strike price $5.00 $? $? $?Spot price $5.10 $? $? $?Intrinsic value (if strike is < spot) $10,000 $? $? $?Time value $10,000 $? $? $?Total value $20,000 $? $? $?Journal entries: The following are the accounts to use:CashInvestment in Call OptionUnrealized Loss on HedgeOther Comprehensive IncomeInventory of SilverAccounts PayableAccounts ReceivablePlating RevenuesCost of SalesOther Inventoriable CostsAccounts ReceivableJuly 10 Investment in Call Option 20,000Cash 20,000To record payment of option premium(100,000 ? $0.20).31 Investment in Call Option 3,000Unrealized Loss on Hedge ($10,000 ? $9,000) 1,000Other Comprehensive Income ($10,000 ? $14,000) 4,000To record change in value of the option. Thechange in time value is excluded from assessmentof hedge effectiveness.Aug. 31 Sept. 10 15 Sept. (a) Accounts Receivable 225,000Plating Revenues 225,000To record sales.(b)Sept. Oct. (a)(b)


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