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Chapter 13: 27E (page 658)

(Call Option) On August 15, 2016, Outkast Co. invested idle cash by purchasing a call option on Counting

Crows Inc. common shares for \(360. The notional value of the call option is 400 shares, and the option price is \)40. The option

expired on January 31, 2017. The following data are available concerning the call option.

Market Price of Counting Time Value of Call

Date Crows Shares Option

September 30, 2016 \(48 per share \)180

December 31, 2016, 46 per share 65

January 15, 2017, 47 per share 30

Instructions

Prepare the journal entries for Outkast for the following dates.

(a) Investment in a call option on Counting Crows shares on August 15, 2016.

(b) September 30, 2016鈥擮utkast prepares financial statements.

(c) December 31, 2016鈥擮utkast prepares financial statements.

(d) January 15, 2017鈥擮utkast settles the call option on the Counting Crows shares.

Short Answer

Expert verified

Profit on the settlement of call option is $2,470. Call option debited by $360 and cash credited by $360.

Step by step solution

01

Entry of purchase of call option

Date

Particulars

Debit

Credit

August 15, 2016

Call Option

$360

Cash

$360

(Being purchase of call option)

02

Entry related to financial statement

Date

Particulars

Debit

Credit

September 30, 2016

Call Option

$3,200

Unrealized holding income

$3,200

(Being entry of unrealized income)

September 30, 2016

Unrealized holding income

$180

Call option

$180

(Being entry of time value change)

03

Entry related to financial statement

Date

Particulars

Debit

Credit

December 31, 2016

Unrealized holding income

$800

Call option

$800

(Being entry of unrealized income)

December 31, 2016

Unrealized holding income

$115

Call option

$115

(Being entry of unrealized income)

04

Entry related to the settlement of call option

Date

Particulars

Debit

Credit

January 15, 2017

Call Option

$400

Unrealized holding income

$400

(Being entry of unrealized income)

January 15, 2017

Unrealized holding income

$35

Call option

$35

(Being entry of time value changed)

January 15, 2017

Cash

$2,830

Unrealized holding income

$2,470

Call Option

$2,830

Profit on settlement of call option

$2,470

(Being settlement of the profit)

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