Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Fair Value Hedge: Put Options On September 1, 2021, American Metals Distribution (AMD) has an inventory of 10,000 pounds of copper that it plans to
Fair Value Hedge: Put Options On September 1, 2021, American Metals Distribution (AMD) has an inventory of 10,000 pounds of copper that it plans to sell on the spot market in two months. The inventory is carried at cost, and was purchased on the spot market at $2.15/lb. To hedge against a decline in market price, AMD invests in put options on 10,000 pounds of copper, expiring November 1, at a strike price of $2.30/lb, which is the current spot price. AMD pays $150 for the options, and designates the change in intrinsic value as the hedge. On November 1, 2021, the spot price is $2.24/lb, AMD sells the options for their intrinsic value of $600, and AMD sells its inventory at the $2.24/lb spot price. AMD records all income effects of the inventory and hedge in cost of goods sold. Required a. Prepare AMD's journal entries to record the events of September 1 and November 1, 2021. AMD's accounting year ends December 31. Date Description Debit Credit 9/1/21 Answer Investment in options Answer 150 Answer 0 Answer Cash Answer 0 Answer 150 To record investment in put options. 11/1/21 Investment in options Answer 150 Answer 0 Answer Inventory
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started