LEW Co. uses gold in the manufacture of its products. LEW anticipates that it will need to purchase 510 ounces of gold in October 2012, for jewelry that will be shipped for the holiday shopping season. However, if the price of gold increases, LEW’s cost to produce its jewelry will increase, which would reduce its profit margins. To hedge the risk of increased gold prices, on April 1, 2012, LEW enters into a gold futures contract and designates this futures contract as a cash flow hedge of the anticipated gold purchase. The notional amount of the contract is 510 ounces, and the terms of the contract give LEW the right and the obligation to purchase gold at a price of $390 per ounce. The price will be good until the contract expires on October 31, 2012.
Assume the following data with respect to the price of the call options and the gold inventory purchase. Date Spot Price for October Delivery
April 1, 2012 $390 per ounce
June 30, 2012 398 per ounce
September 30, 2012 410 per ounce
October 10, 2012—LEW Co. purchases 510 ounces of gold at $410 per ounce and settles the futures contract. December 20, 2012—LEW sells jewelry containing gold purchased in October 2012 for $372,900. The cost of the finished goods inventory is $227,260. June 30, 2012 LEW prepares financial statements.
What amount of unrealized gain or loss would it report on its financial statements?
a. 0 under shareholders’ equity on the balance sheet.
b. 4,080 under shareholders’ equity on the balance sheet.
c. 10,200 on the income statement.
d. 4,080 on the income statement.