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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

Question: Amsterdam Company uses a periodic inventory system. For April, when the company sold 600 units, the following information is available.

Units Unit Cost Total Cost

April 1 inventory 250 \(10 \) 2,500

April 15 purchase 400 12 4,800

April 23 purchase 350 13 4,550

1,000 $11,850

Compute the April 30 inventory and the April cost of goods sold using the average-cost method.

(Loss Contingencies: Entries and Essays) Polska Corporation, in preparation of its December 31, 2017, financial statements, is attempting to determine the proper accounting treatment for each of the following situations.

1. As a result of uninsured accidents during the year, personal injury suits for \(350,000 and \)60,000 have been filed against the company. It is the judgment of Polska鈥檚 legal counsel that an unfavorable outcome is unlikely in the \(60,000 case but that an unfavorable verdict approximating \)250,000 will probably result in the \(350,000 case.

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Instructions

(a) Prepare the journal entries that should be recorded as of December 31, 2017, to recognize each of the situations above.

(b) Indicate what should be reported relative to each situation in the financial statements and accompanying notes. Explain why.

Question: When should liabilities for each of the following items be recorded on the books of an ordinary business corporation?

  1. Acquisition of goods by purchase on credit.
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  3. Special bonus to employees.
  4. Dividends.
  5. Purchase commitments.

Dos Passos Company sells televisions at an average price of \(900 and also offers to each customer a separate 3-year warranty contract for \)90 that requires the company to perform periodic services and to replacedefective parts. During 2017, the company sold 300 televisions and 270 warranty contracts for cash. It estimates the 3-year warrantycosts as \(20 for parts and \)40 for labor, and accounts for warranties separately. Assume sales occurred on December 31,2017, and straight-line recognition of warranty revenues occurs.

Instructions

(a) Record any necessary journal entries in 2017.

(b) What liability relative to these transactions would appear on the December 31, 2017, balance sheet and how would it beclassified?

In 2018, Dos Passos Company incurred actual costs relative to 2017 television warranty sales of \(2,000 for parts and \)4,000 forlabor.

(c) Record any necessary journal entries in 2018 relative to 2017 television warranties.

(d) What amounts relative to the 2017 television warranties would appear on the December 31, 2018, balance sheet andhow would they be classified?

The payroll of Yellowcard Company for September 2016 is as follows. Total payroll was \(480,000, of which \)110,000 is exempt from Social Security tax because it represented amounts paid in excess of \(118,500 to certain employees. The amount paid to employees in excess of \)7,000 was \(400,000. Income taxes in the amount of \)80,000 were withheld, as was \(9,000 in union dues. The state unemployment tax is 3.5%, but Yellowcard Company is allowed a credit of 2.3% by the state for its unemployment experience. Also, assume that the current FICA tax is 7.65% on an employee鈥檚 wages to \)118,500 and 1.45% in excess of \(118,500. No employee for Yellowcard makes more than \)125,000. The federal unemployment tax rate is 0.8% after state credit.

Instructions

Prepare the necessary journal entries if the wages and salaries paid and the employer payroll taxes are recorded separately.
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