Pearson Industries Uses Platinum in Its Manufacturing Process On June 8, the Company Settled the Options and on Need

question 14

Essay

Pearson Industries uses platinum in its manufacturing process.The company will need 1,500 troy ounces of platinum for a production run in June.The company is concerned that platinum prices will rise over the next several months.On May 14, in order to hedge against rising prices, Pearson Industries purchases 30 June call options on platinum.Each option is for 50 troy ounces and has a strike price of $477 per troy ounce.The company excludes changes in the time value of the options from hedge effectiveness.Spot prices and option value per troy ounce of platinum are as follows:
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$$\begin{array} { l r r r } & \text { May 14 } & \text { May 31 } & \text { June 8 } \\\text { Spot price } & \$ 479 & \$ 486 & \$ 492 \\\text { Option value per oz. } & 9.60 & 14.38 & 16.34\end{array}$$ On June 8, the company settled the options and on June 9 purchased 3,250 troy ounces of platinum on account for $493 per ounce.The platinum was used in the production process through the end of September.Platinum used during June was 325 troy ounces.Assume that the hedge satisfies all necessary criteria for special hedge accounting.
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Required:
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Prepare all journal entries necessary to account for the above transactions and events.

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Definitions:

Investment Turnover

A financial ratio indicating how effectively a company is using its invested capital to generate sales or revenue.

Transfer Price

This refers to the price at which goods and services are traded between divisions within the same company.

Negotiated Price Approach

A pricing strategy where the final sell price of a product or service is determined through negotiation between the buyer and the seller.

Minimum Acceptable Return

The lowest return on investment that a person or entity is willing to accept, often used in capital budgeting and investment planning.