Legaspi Company produces colorful 100% cotton shirts and the entity needs 50,000 kilos of raw materials in the production process. On December 1, 2021, the entity purchased a call option as a cash flow hedge to buy 50,000 kilos on July 1, 2022. The option strike price is P100 per kilo. The entity paid P50,000 for the call option. The derivative option contract means that if the market price is higher than P100, the entity can exercise the option and buy the asset at the strike option price of P100. If the market price
Legaspi Company produces colorful 100% cotton shirts and the entity needs 50,000 kilos of raw materials in the production process.
On December 1, 2021, the entity purchased a call option as a cash flow hedge to buy 50,000 kilos on July 1, 2022.
The option strike price is P100 per kilo. The entity paid P50,000 for the call option.
The derivative option contract means that if the market price is higher than P100, the entity can exercise the option and buy the asset at the strike option price of P100.
If the market price is lower than P100, the entity can throw away the option and buy the asset at the cheaper price.
The market price per kilo is P110 on December 31, 2021 and P115 on July 1, 2022.
1. What amount should be reported às derivative asset on December 31, 2021?
a. 500,000
b. 450,000
c. 750,000
d. 700,000
2. What amount should be reported as cash settlement from the speculator on July 1, 2022?
a. 750,000
b. 700,000
c. 500,000
d. 450,000
Step by step
Solved in 2 steps with 1 images
