1) A Gunsmith company has an inventory of 100000 ounces of gold originally purchased for $4.00 per ounce. On September 30 2003 gold is selling for
$5.00 per ounce in the spot market and the company decides to hedge its gold inventory by going short in exchange-traded March 2004 gold futures at a price of
$5.15. The exchange requires that a margin deposit of $825.00 be maintained for each 5000 ounce futures contract. At December 1 2003 the spot price of gold
is $4.70 and March 2004gold futures are $4.80. By March 31 2004 gold has dropped to $4.20 in the spot market.

a) Describe the documentation that the company must prepare to account for the silver futures as a fair value hedge.

b) Evaluate hedge effectiveness at (1) December 1 2003 and (2) March 31 2004. Use Futures Price

c) Prepare the journal entries required at (1) September 30 2003 (2) December 1 2003 and (3) March 31 2004.

d) How would the accounting be affected if the original costs of the silver were $5.00 considering the lower-of-cost or market rule for
inventory?

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