On September 1, 2017, American Metals Distribution (AMD) has an inventory of 5,000 pounds of copper that it plans to sell on the spot market in three months. The inventory is carried at cost and was purchased on the spot market at $3.25/lb. To hedge against a decline in market price, AMD invests input options on 5,000 pounds of copper, expiring November 1, at a strike price of $3.20/lb, which is the current spot price. AMD pays $800 for the options and designates the change in intrinsic value as the hedge. On November 1, 2017, 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 hedges in the cost of goods sold.

Required

a. Prepare AMD’s journal entries to record the events of September 1 and November 1, 2017. AMD’s accounting year ends December 31.

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

What is the actual reported gross margin?

Answer rating: 100% (QA)

a In the given question the company is buying a put option to protect against the fall in the price ... View the full answer