Activity 4.

Direction: Provide what is asked.

Use the following information for the next four questions:

On December 1, 20x1, ABC Co. enters into a silver futures contract to purchase 4,000 ounces of silver on February 1, 20x2 for ₱200
per ounce. The broker requires an initial margin deposit of ₱80,000. The quoted prices per ounce of silver are as follows:
Dec. 1, 20x1 Dec. 31, 20x1 Feb. 1, 20x2
200 190 185

1. The entries on December 1, 20x1 include

a. debit to “deposit with broker” for ₱80,000
b. credit to cash for ₱80,000
c. a and b
d. none

2. How much is the derivative asset (liability) as of December 31, 20x1?

a. 0 b. (34,668) c. (40,000) d. 40,000

3. How much is the total net effect of the derivative on the 20x1 and 20x2 profit or loss? Gain (loss)
a. (60,000) b. 60,000 c. (40,000) d. 40,000

4. How much is the net settlement on February 1, 20x2? – Receipt (payment)

a. 20,000 b. (20,000) c. (60,000) d. 60,000

Use the following information for the next seven questions:

ABC Co. is a commodity trader. On December 1, 20x1, ABC Co. carries in its inventory 400 troy ounces of gold valued at ₱4,800,000
(or ₱12,000 per troy ounce). ABC Co. measures its inventory of gold at fair value less costs to sell through profit or loss.

To protect the fair value of its inventory against a potential decline in prices, ABC Co. enters into a “short” futures contract on
December 1, 20x1 to sell 400 troy ounces of gold at ₱12,100 per troy ounce on February 1, 20x2 (the expected date of sale of the
inventory). The futures contract requires an initial margin deposit of ₱384,000.

We will assume that the fair values shown below already reflect costs to sell.
Dec. 1, 20x1 Dec. 31, 20x1 Feb. 1, 20x2
Spot price 12,000 12,250 11,800
Futures price 12,100 12,300 11,800

5. The entries on December 1, 20x1 include

a. debit to “deposit with broker” for ₱384,000
b. credit to cash for ₱384,000
c. a and b
d. none

6. How much is the adjustment to the inventory account on December 31, 20x1? Increase (decrease)
a. 100,000 b. (100,000) c. 80,000 d. 0

7. How much is the derivative asset (liability) as of December 31, 20x1?

a. (100,000) b. 100,000 c. (80,000) d. 80,000

8. How much is the gain (loss) on the futures contract on February 1, 20x2?
a. 0 b. (80,000) c. (200,000) d. 200,000

9. How much is the net settlement on February 1, 20x2? – Receipt (payment)

a. 120,000 b. (120,000) c. 504,000 d. 504,000

10. How much is the total net cash receipt (payment) on the two contracts?
a. 4,840,000 b. (4,840,000) c. (504,000) d. 504,000

“The heart of the discerning acquires knowledge, for the ears of the wise seek it out.”
(Proverbs 18:15)