Gallagher jewelers use silver in a manufacturing of a large number of its creations. Because of turbulence
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Question:
Gallagher jewelers use silver in a manufacturing of a large number of its creations. Because of turbulence in the silver markets, Gallagher enters into a cash flow hedge to protect its self from wid= fluctuation in silver prices. Accordingly, Gallagher and National Bank enter into a contract on June 30, 2015 that gives Gallagher the right to purchases 1000 ounces at $150 per ounce. The contract expires February 1, 2016. Gallagher does not bay anything to enter into a contract.
The spot (market) price for silver in December 31, 2015 is $200 per ounce. On January 31, 2016, Gallagher buys 1000 ounces of silver at the market price of $200 per ounce and then settles its contract with National Bank.
- Prepare any necessary adjusting entry for when Gallagher closes its books December 31, 2015.
- Prepare any necessary accounting entries to reflect Gallaghers purchase of silver and settlement of its contract on January 31, 2016.
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