Use the Following Information to Answer Questions Bellow

Essay

Use the following information to answer questions bellow.
On February 1, 2020, a company holds an inventory of a commodity carried at a cost of $2,000,000. The commodity's current market value is $2,100,000. To guard against a potential decline in the value of that inventory, the company purchases put options with a total strike price of $2,100,000 exercisable in 2 months, paying a total of $5,000 for the options. The puts qualify as a fair value hedge of the inventory. All income effects of the inventory and the hedge are reported in cost of goods sold. On March 15, 2021, the commodity's market price is $1,980,000 and the company closes the hedge by selling the put options for $122,000. The company sells its inventory later in the year for $2,000,000. The company has a December 31 year-end.
-Now assume the company sells the inventory for $1,980,000 immediately after selling the put options.
Required
a. Calculate the gross margin on the sale of the commodity under each of these conditions:
i. The company did not hedge with the put options.
ii. The company did hedge with the put options.
b. Compare the gross margin achieved while hedging with the expected gross margin as of February 1, 2020. Is the expected gross margin maintained using the hedge? Explain any discrepancy.