July 1, 2013
NT Electronics anticipates purchasing 100 ounces of gold in mid-August 2013. NT plans to use the gold in the manufacture of electronic parts, and NT expects to sell the parts before the end of 2013. On July 1, NT purchases gold futures contracts (to be settled on August 15) for 100 ounces of gold. The futures contracts are to be settled net of $350 per ounce on August 15.
August 15, 2013
NT purchases 100 ounces of gold at the market price of $330 per ounce, and NT settles its gold futures contracts.
September 2013
NT uses the 100 ounces of gold to produce electronic parts. Production costs (excluding the gold) total $100,000.
November 12, 2013
NT sells the parts for $250,000.
Market Prices
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Date
|
Spot price of one ounce of gold
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Value of 8/15 Futures Contracts for 100 ounces of gold
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|
7/1
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$350
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$ 0
|
|
8/15
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$330
|
($2,000)
|
|
9/1 - 9/30
|
$320
|
|
|
11/12
|
$315
|
|
|
12/31
|
$305
|
|
Additional Assumptions
NT engages in no other transactions during 2013.
Ignore income taxes.
Problem DH2 continued
REQUIRED
Compute quarterly "earnings" (i.e., net income) and quarterly "other comprehensive income" if the investment in gold futures is not classified as a hedge and if the investment in gold futures is classified as a cash flow hedge.
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Investment in Gold Futures Are not Designated as a Hedge
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For quarter ending
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September 30
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December 31
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Net income (loss)
Ignore income taxes.
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Other Comprehensive income (loss)
Ignore income taxes.
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|
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Comprehensive income (loss)
Ignore income taxes.
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|
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Investment in Gold Futures Are Designated as a Hedge
|
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For quarter ending
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September 30
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December 31
|
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Net income (loss)
Ignore income taxes.
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|
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Other Comprehensive income (loss)
Ignore income taxes.
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Comprehensive income (loss)
Ignore income taxes.
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