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 AMDs journal entries to record the events of September 1 and November 1, 2021. AMDs accounting year ends December 31.

Date	Description		Debit	Credit
9/1/21	CashCost of goods soldCost of goods sold (gain in intrinsic value)Cost of goods sold (gain in time value)Cost of goods sold (loss in intrinsic value)Cost of goods sold (loss in time value)InventoryInvestment in optionsSales revenue
	CashCost of goods soldCost of goods sold (gain in intrinsic value)Cost of goods sold (gain in time value)Cost of goods sold (loss in intrinsic value)Cost of goods sold (loss in time value)InventoryInvestment in optionsSales revenue
	To record investment in put options.
11/1/21	Investment in options
	CashCost of goods soldCost of goods sold (gain in intrinsic value)Cost of goods sold (gain in time value)Cost of goods sold (loss in intrinsic value)Cost of goods sold (loss in time value)InventoryInvestment in optionsSales revenue
	CashCost of goods soldCost of goods sold (gain in intrinsic value)Cost of goods sold (gain in time value)Cost of goods sold (loss in intrinsic value)Cost of goods sold (loss in time value)InventoryInvestment in optionsSales revenue
	To record the change in value of the options.
	CashCost of goods soldCost of goods sold (gain in intrinsic value)Cost of goods sold (gain in time value)Cost of goods sold (loss in intrinsic value)Cost of goods sold (loss in time value)InventoryInvestment in optionsSales revenue
	CashCost of goods soldCost of goods sold (gain in intrinsic value)Cost of goods sold (gain in time value)Cost of goods sold (loss in intrinsic value)Cost of goods sold (loss in time value)InventoryInvestment in optionsSales revenue
	To record the hedged change in the value of the inventory.
	CashCost of goods soldCost of goods sold (gain in intrinsic value)Cost of goods sold (gain in time value)Cost of goods sold (loss in intrinsic value)Cost of goods sold (loss in time value)InventoryInvestment in optionsSales revenue
	CashCost of goods soldCost of goods sold (gain in intrinsic value)Cost of goods sold (gain in time value)Cost of goods sold (loss in intrinsic value)Cost of goods sold (loss in time value)InventoryInvestment in optionsSales revenue
	To record the sale of the options.
	CashCost of goods soldCost of goods sold (gain in intrinsic value)Cost of goods sold (gain in time value)Cost of goods sold (loss in intrinsic value)Cost of goods sold (loss in time value)InventoryInvestment in optionsSales revenue
	CashCost of goods soldCost of goods sold (gain in intrinsic value)Cost of goods sold (gain in time value)Cost of goods sold (loss in intrinsic value)Cost of goods sold (loss in time value)InventoryInvestment in optionsSales revenue
	To record sale of copper in the spot market.
	CashCost of goods soldCost of goods sold (gain in intrinsic value)Cost of goods sold (gain in time value)Cost of goods sold (loss in intrinsic value)Cost of goods sold (loss in time value)InventoryInvestment in optionsSales revenue
	CashCost of goods soldCost of goods sold (gain in intrinsic value)Cost of goods sold (gain in time value)Cost of goods sold (loss in intrinsic value)Cost of goods sold (loss in time value)InventoryInvestment in optionsSales revenue
	To record cost of copper sold.

b. Calculate the gross margin that is locked in with the put options.

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What is the actual reported gross margin? Why are the two amounts different?

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