Question

On December 1, 2020, Metallic Wonders Corporation has an inventory of metals carried at a cost of$1,000,000. The company plans to sell the inventory in about 60 days, and wishes to guarantee the current60‑day futures price of $1,400,000. On December 1, 2020, it takes a $1,400,000 short position in metal futures for delivery in 60 days. No margin deposit is required. The futures position is a qualified fair value hedge of the inventory, and the company elects to use hedge accounting. The company closes its futures position on January 31, 2021, and sells the metals on the spot market on February 5, 2021. The company’s accounting year ends December 31.

Spot and futures prices for the inventory are:

Spot price

on January 31, 2021

  Spot price Futures price for delivery

on January 31, 2021

December 1, 2020 ......................... $1,340,000...………..$1,400,000

December 31, 2020 ........................ 1,245,000...………… 1,310,000

January 31, 2021 .......................... 1,200,000...………….. 1,200,000

February 5, 2021 .......................... 1,290,000...…………….... N/A

1. At what amount is the inventory reported on Metallic Wonders’ December 31, 2020, balance sheet?

a. $ 905,000

b. $ 910,000

c. $1,000,000

d. $1,250,000

Answer 1

The correct answer should be Option C - $1,000,000

Notes

Inventories are reported in the balance sheet at lower of cost or net realizable value. Since the cost at Dec 31, 2020 is $1,000,000 which is lower than the spot or future price of inventory, the inventory should be reported at cost of $1,000,000 by Metallic wonders'

Please comment in case of any issue and I will be happy to rectify it.