Dauphinee DL Corp. plans to purchase 100,000 shares of Santos Technology Ltd., a publicly traded company. Dauphinee
Question:
Dauphinee DL Corp. plans to purchase 100,000 shares of Santos Technology Ltd., a publicly traded company. Dauphinee has signed a contract to acquire the shares from Holding Co. in 90 days, after certain approvals are obtained; these approvals are routine but time consuming. The agreed-upon price per share is $22.50, which is the fair value of the shares on the day the contract was signed. Santos shares have traded between $5 and $35 over the last year; the industry has been volatile. Sixty days after signing this agreement, it is Dauphinee’s year-end, and Santos shares are trading for $28. At the time the contract matured, and the shares are purchased; the shares are trading for $16.
Required:
1. Is this a forward contract or a futures contract? Explain.
2. What risk is the company hedging?
3. Prepare journal entries to record the inception of the contract, the change in its fair value at year-end, and its maturity.
Step by Step Answer:
Intermediate Accounting Volume 2
ISBN: 9781260881240
8th Edition
Authors: Thomas H. Beechy, Joan E. Conrod, Elizabeth Farrell, Ingrid McLeod-Dick, Kayla Tomulka, Romi-Lee Sevel