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Chapter 13: Q12P (page 658)

Question: EXCEL (Derivative Financial Instrument) The treasurer of Miller Co. has read on the Internet that the stock

price of Wade Inc. is about to take off. In order to profit from this potential development, Miller Co. purchased a call option on

Wade common shares on July 7, 2017, for \(240. The call option is for 200 shares (notional value), and the strike price is \)70. (The

market price of a share of Wade stock on that date is \(70.) The option expires on January 31, 2018. The following data are available

with respect to the call option.

Date Market Price of Wade Shares Time Value of Call Option

September 30, 2017 \)77 per share $180

December 31, 2017 75 per share 65

January 4, 2018 76 per share 30

Instructions

Prepare the journal entries for Miller Co. for the following dates.

(a) July 7, 2017鈥擨nvestment in call option on Wade shares.

(b) September 30, 2017鈥擬iller prepares financial statements.

(c) December 31, 2017鈥擬iller prepares financial statements.

(d) January 4, 2018鈥擬iller settles the call option on the Wade shares.

Short Answer

Expert verified

Answer:

Loss on the settlement of the call option is $65. Call option debited by $240 and cash credited by $240. Call option debited by $1,400 and unrealized Holding Gain or loss- income credited by $1,400.

Step by step solution

01

Entry for the purchase of call option

Date

Particulars

Debit

Credit

July 7, 2017

Call Option

$240

Cash

$240

(Being entry for the purchase of call option)

02

Entry for the preparation of the financial statement

Date

Particulars

Debit

Credit

September 30, 2017

Call Option

$1,400

Unrealized Holding Gain or loss- income

$1,400

(Being entry for the preparation of financial statement)

September 30, 2017

Unrealized Holding Gain or loss- income

$60

Call Option

$60

(Being entry for the time value of the option)

03

 Step 3: Entry for the preparation of a financial statement

Date

Particulars

Debit

Credit

December 31, 2017

Call Option

$400

Unrealized Holding Gain or loss- income

$400

(Being entry for the preparation of financial statement)

December 31, 2017

Unrealized Holding Gain or loss- income

$115

Call Option

$115

(Being entry for the time value of the option)

04

Entry for the settlement of the call option

Date

Particulars

Debit

Credit

January 4, 2018

Cash

$1,000

Loss on settlement of call option

$65

Call option

$1,065

(Being entry for the settlement of call option)

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Most popular questions from this chapter

Presented below are two different situations related to Mckee Corporation鈥檚 debt obligation. Mckee鈥檚 next financial reporting date is December 31, 2017. The financial statements are authorized for issuance on March 1, 2018.

  1. Mckee has a long-term obligation of \(400,000, which is maturing over 4 years in the amount of \)100,000 per year. The obligation is dated November 1, 2017, and the first maturity date is November 1, 2018.
  2. Mckee has a short-term obligation due February 15, 2018. Its lender agrees to extend the credit to the maturity date of this loan to February 15, 2018. The agreement for extension is signed on January 15, 2018.

Instructions

Indicate how each of these debt obligations is reported on McKee鈥檚 statement of financial position on December 31, 2017.

Question: At what amount should trading, available-for-sale, and held-to-maturity debt securities be reported on the balance sheet?

How does unearned revenue arise? Why can it be classified properly as a current liability? Give several examples of business activities that result in unearned revenues.

Journal Entries for Fair Value and Equity Methods) The following are two independent situations.

Situation 1: Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of Martinez Fashion at a total cost of \(13 per

share on March 18, 2017. On June 30, Martinez declared and paid \)75,000 cash dividends to all stockholders. On December 31,

Martinez reported net income of \(122,000 for the year. At December 31, the market price of Martinez Fashion was \)15 per share.

Situation 2: Monica, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles鈥檚 30,000 outstanding shares

of common stock at a total cost of \(9 per share on January 1, 2017. On June 15, Seles declared and paid cash dividends of \)36,000

to all stockholders. On December 31, Seles reported a net income of $85,000 for the year.

Instructions

Prepare all necessary journal entries in 2017 for both situations.

Greco Resort opened for business on June 1 with eight air-conditioned units. Its trial balance on August 31 is as follows.

GRECO RESORT

TRIAL BALANCE

AUGUST 31, 2017

Debit

Credit

Cash

\( 19,600

Prepaid Insurance

4,500

Supplies

2,600

Land

20,000

Buildings

120,000

Equipment

16,000

Accounts Payable

\) 4,500

Unearned Rent Revenue

4,600

Mortgage Payable

60,000

Common Stock

91,000

Retained Earnings

9,000

Dividends

5,000

Rent Revenue

76,200

Salaries and Wages Expense

44,800

Utilities Expenses

9,200

Maintenance and Repairs Expense

3,600

\(245,300

\)245,300

Other data:

  1. The balance in prepaid insurance is a one-year premium paid on June 1, 2017.
  2. An inventory count on August 31 shows \(450 of supplies on hand.
  3. Annual depreciation rates are buildings (4%) and equipment (10%). Salvage value is estimated to be 10% of cost.
  4. Unearned Rent Revenue of \)3,800 was earned prior to August 31.
  5. Salaries of \(375 were unpaid at August 31.
  6. Rentals of \)800 were due from tenants at August 31.
  7. The mortgage interest rate is 8% per year.

Instructions

(a) Journalize the adjusting entries on August 31 for the 3-month period June 1鈥揂ugust 31. (Omit explanations.)

(b) Prepare an adjusted trial balance on August 31.
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