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Accounting M-3 M-5

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Problem M-3 (LO 3, 4, 7, 8) Impact on earnings of various hedged relation-;ships. The chief?nancial of?cer (CFO) of Baxter International has employed the use of;hedges in a variety of contexts over the?rst quarter of the current calendar year as follows;Futures Contract ?The company hedged against a possible decline in the value of inventory;represented by commodity A. At the beginning of February, an April futures contract to sell;10,000 units of commodity A for $3.50 per unit was acquired. It is assumed that the terms of;the futures contract and the hedged assets match with respect to delivery location, quantity, and;quality. The fair value of the futures contract will be measured by changes in the futures prices;over time, and the time value component of the futures contract will be excluded from the;assessment of hedge effectiveness. Relevant values are as follows;February 28 March 31;Number of units per contract.............. 10,000 10,000;Spot price per unit...................... $3.45 $3.40;Futures price per unit.................... $3.50 $3.44;Forward Contract ?On January 15, the company committed to sell 5,000 units of inven-;tory for $90 per unit on March 15. Concerned that selling prices might increase over time, the;company entered into a March 15 forward contract to buy 5,000 units of identical inventory at;a forward rate of $92 per unit. Changes in the value of the commitment are measured based on;the changes in the forward rates over time discounted at 6%. On March 15, the inventory, with;a cost of $360,000, was sold, and the forward contract was settled. Relevant values are as shown;on page. 545;January 15 January 31 February 28 March 15;Number of units per contract........ 5,000 5,000 5,000 5,000;Spot price per unit................ $90.00 $90.20 $90.50 $90.60;Forward rate per unit.............. $92.00 $91.50 $91.20 $90.60;Option?In January, the company forecasted the purchase of 100,000 units of commodity;B with delivery in February. Upon receipt, the commodity was processed further and sold for;$12 per unit on March 17. On January 15, the company purchased a February 20 call option;for 100,000 units of commodity B at a strike price of $8 per unit. Changes in the time value of;the option are excluded from the assessment of hedge effectiveness. Relevant values are as fol-;lows;January 15 January 31 February 20 March 17;Number of units per option......... 100,000 100,000 100,000;Spot price per unit................ $8.05 $8.02 $7.95;Strike price per unit............... $8.00 $8.00 $8.00;Fair value of option............... $6,000 $2,400 $?;Processing costs per unit........... $1.10;For each of the above hedged events and the related hedging instruments, prepare a schedule to;re?ect the effect on earnings for each of the months of January through March of the current;year. Clearly identify each component account impacting earnings.;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 pur-;chased 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 com-;pany?s production process over the next three months. In September and October, plating ser-;vices 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 satis?es all necessary criteria for special hedge accounting.

 

Paper#74193 | Written in 18-Jul-2015

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