How would the accounting be affected if the original costs

Reference no: EM13618810

1) A Gunsmith company has an inventory of 100,000 ounces of gold originally purchased for $4.00 per ounce. On September 30, 2003, gold is selling for $5.00 per ounce in the spot market, and the company decides to hedge its gold inventory by going short in exchange-traded March 2004 gold futures at a price of $5.15. The exchange requires that a margin deposit of $825.00 be maintained for each 5,000 ounce futures contract. At December 1, 2003, the spot price of gold is $4.70, and March 2004gold futures are $4.80. By March 31, 2004 gold has dropped to $4.20 in the spot market.

a) Describe the documentation that the company must prepare to account for the silver futures as a fair value hedge.

b) Evaluate hedge effectiveness at (1) December 1, 2003, and (2) March 31, 2004. Use Futures Price

c) Prepare the journal entries required at (1) September 30, 2003, (2) December 1, 2003, and (3) March 31, 2004.

d) How would the accounting be affected if the original costs of the silver were $5.00, considering the lower-of-cost or market rule for inventory?

Reference no: EM13618810

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