Answer and Explanation:
a. The Journal entry is shown below:-
1. Hedge charges Dr, $150
To Cash Account $150
(Being bank charges is recorded)
2. Hedge Instrument - Financial Asset Dr, $600
To Profit and Loss A/c $600
(Being financial assets is recorded)
3. Profit and Loss A/c Dr, $600
To Inventory Account - Copper $600
(Being profit and loss account is recorded)
4. Bank A/c Dr, $22,400
To Sales $22,400
(Being bank account is recorded)
2. The computation of the gross margin and locked with the put option and actual reported gross margin is shown below:-
Particulars Rate Pounds Amount Gross Margin Gross Margin
Cost Price $2.15 10,000 $21,500
Strike Price $2.3 10,000 $23,000 $1,500 6.98%
Cost after hedge
loss of $0.6 2.09 10,000 $20,900
Selling Rate $2.24 10,000 $22,400 $1,500 7.18%
Gross margin locked with the put option: 6.98%
Actual reported gross margin: 7.18%
The two amounts are different, since the carrying value of the inventory has changed and the same has been reduced. As a result the total gross margin of 1,500 yielded another percentage as the base value (inventory carrying value) was adjusted.
