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Chapter 13: Q13P (page 658)

Question: (Derivative Financial Instrument) Johnstone Co. purchased a put option on Ewing common shares on July 7,

2017, for \(240. The put option is for 200 shares, and the strike price is \)70. (The market price of a share of Ewing stock on that

date is \(70.) The option expires on January 31, 2018. The following data are available with respect to the put option.

Date Market Price of Ewing Shares Time Value of Put Option

September 30, 2017 \)77 per share $125

December 31, 2017 75 per share 50

January 31, 2018, 78 per share 0

Instructions

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

(a) July 7, 2017鈥擨nvestment in a put option on Ewing shares.

(b) September 30, 2017鈥擩ohnstone prepares financial statements.

(c) December 31, 2017鈥擩ohnstone prepares financial statements.

(d) January 31, 2018鈥擯ut option expires.

Short Answer

Expert verified

Answer:

Loss on the settlement of put option is $70. Put option is debited by $240 and cash credited by $240. Put option debited by $1,400 and unrealised holding gain or loss income credited by $1,400. Unrealized Holding Gain or loss- income debited by $115 and put option credited by $115.

Step by step solution

01

Entry for the purchase of put option

Date

Particulars

Debit

Credit

July 7, 2017

Put Option

$240

Cash

$240

(Being entry for the purchase of put option)

02

Entry for the preparation of the financial statement

Date

Particulars

Debit

Credit

September 30, 2017

Put 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

$115

Put Option

$115

(Being entry for the time value of the option)

03

Entry for the preparation of a financial statement

Date

Particulars

Debit

Credit

December 31, 2017

Put 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

$75

Put Option

$75

(Being entry for the time value of the option)

04

Entry for the settlement of the put option

Date

Particulars

Debit

Credit

January 4, 2018

Loss on settlement of call option

$50

Put option

$50

(Being entry for the settlement of Put option)

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Most popular questions from this chapter

(a) Assuming no Fair Value Adjustment account balance at the beginning of the year, prepare the adjusting entry at the end of the year if Laura Company鈥檚 available-for-sale debt securities have a fair value of \(60,000 below cost.

(b) Assume the same information as part (a), except that Laura Company has a debit balance in its Fair Value Adjustment account of \)10,000 at the beginning of the year. Prepare the adjusting entry at year-end.

(Equity Securities Entries) McElroy Company has the following portfolio of investment securities at September

30, 2017, its most recent reporting date.

Investment Securities Cost Fair Value

Horton, Inc. common (5,000 shares) \(215,000 \)200,000

Monty, Inc. preferred (3,500 shares) 133,000 140,000

Oakwood Corp. common (1,000 shares) 180,000 179,000

On October 10, 2017, the Horton shares were sold at a price of \(54 per share. In addition, 3,000 shares of Patriot common stock

were acquired at \)54.50 per share on November 2, 2017. December 31, 2017, fair values were Monty \(106,000, Patriot

\)132,000, and Oakwood $193,000.

Instructions

Prepare the journal entries to record the sale, purchase, and adjusting entries related to the equity securities in the last quarter of 2017

BE13-1 (L01) Roley Corporation uses a periodic inventory system and the gross method of accounting for purchase discounts. On July 1, Roley purchased \(60,000 of inventory, terms 2/10, n/30, FOB shipping point. Roley paid freight costs of \)1,200. On July 3, Roley returned damaged goods and received credit of $6,000. On July 10, Roley paid for the goods. Prepare all necessary journal entries for Roley.

(Gain on Sale of Investments and Comprehensive Income) On January 1, 2017, Acker Inc. had the followingbalance sheet.

The accumulated other comprehensive income related to unrealized holding gains on available-for-sale debt securities. The fairvalue of Acker Inc.鈥檚 available-for-sale debt securities at December 31, 2017, was \(190,000; its cost was \)140,000. No securities

were purchased during the year. Acker Inc.鈥檚 income statement for 2017 was as follows. (Ignore income taxes.)

ACKER INC.

BALANCE SHEET

AS OF JANUARY 1, 2017

Assets Equity

Cash \( 50,000 Common stock \)260,000

Debt investments (available-for-sale) 240,000 Accumulated other comprehensive income 30,000

Total \(290,000 Total \)290,000

ACKER INC.

INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2017

Dividend revenue \( 5,000

Gain on sale of investments 30,000

Net income \)35,000

Instructions

(Assume all transactions during the year were for cash.)

(a) Prepare the journal entry to record the sale of the available-for-sale debt securities in 2017.

(b) Prepare the journal entry to record the Unrealized Holding Gain or Loss for 2017.

(c) Prepare a statement of comprehensive income for 2017.

(d) Prepare a balance sheet as of December 31, 2017.

(Fair Value Measurement) Presented below is information related to the purchases of common stock by Lilly

Company during 2017.

Cost Fair Value

(at purchase date) (at December 31)

Investment in Arroyo Company stock \(100,000 \) 80,000

Investment in Lee Corporation stock 250,000 300,000

Investment in Woods Inc. stock 180,000 190,000

Total \(530,000 \)570,000

Instructions

(Assume a zero balance for any Fair Value Adjustment account.)

(a) What entry would Lilly make at December 31, 2017, to record the investment in Arroyo Company stock if it chooses to

report this security using the fair value option?

(b) What entry(ies) would Lilly make at December 31, 2017, to record the investments in the Lee and Woods corporations,

assuming that Lilly did not select the fair value option for these investments?
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