[indycpatobe]

Grayson Jewelers will purchase 10,000 ounces of gold on January 1, 20X2. To hedge the purchase, Grayson enters into a 6-month futures contract on July 1, 20X1, to purchase 10,000 ounces of gold for $400 an ounce. On December 31, 20X1, the price of gold has climbed to $420 an ounce. What adjusting entry does Grayson record on December 31, 20X1?

A. Option (Futures Contract) 200,000

Unrealized holding gain-equity 200,000

Incorrect B. Unrealized holding loss 200,000

Futures Contract 200,000

C. Futures Contract Expense 200,000

Unrealized holding gain-equity 200,000

D. No entry is made.

They have the correct answer being A, but I think it’s B because they are purchasing the gold and the purchase cost has gone up. What am I misunderstanding?!

[Missy]

They're still only going to pay the $400/oz because they entered into a 6 month contract at that price. There will not be a loss.

Old timer,  A71'er since 2010.

Finance manager/HR manager

 

 

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[nyli9]

Company has a contract to buy one ounce of gold for $400. Purchase price will always stay the same (this is what hedging does), it's the market price that will fluctuate. Because market price at December 31 is $420 and company will be able to buy this gold for only $400, you would book unrealized gain (since contract does not expire until January 1). Hope this helps.

AUD - Passed
BEC - Passed
REG - Passed
FAR - July 2nd, 2015

[indycpatobe]

That makes sense. Thanks, everyone!

[Author]

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