Problem - Gallagher jewelers use silver in a manufacturing of a large number of its creations. Because of turbulence in the silver markets, Gallagher enters into a cash flow hedge to protect its self from wid= fluctuation in silver prices. Accordingly, Gallagher and National Bank enter into a contract on June 30, 2015 that gives Gallagher the right to purchases 1000 ounces at $150 per ounce. The contract expires February 1, 2016. Gallagher does not bay anything to enter into a contract.
The spot (market) price for silver in December 31, 2015 is $200 per ounce. On January 31, 2016, Gallagher buys 1000 ounces of silver at the market price of $200 per ounce and then settles its contract with National Bank.
Prepare any necessary adjusting entry for when Gallagher closes its books December 31, 2015.
Prepare any necessary accounting entries to reflect Gallagher's purchase of silver and settlement of its contract on January 31, 2016.