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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

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.

Garison Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. Garison uses two sales promotion techniques鈥攚arranties and premiums鈥攖o attract customers.

Musical instruments and sound equipment are sold with a 1-year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales.

The premium is offered on the recorded and sheet music. Customers receive a coupon for each dollar spent on recorded music or sheet music. Customers may exchange 200 coupons and \(20 for an MP3 player. Garison pays \)32 for each player and estimates that 60% of the coupons given to customers will be redeemed.

Garison鈥檚 total sales for 2017 were \(7,200,000鈥擻)5,700,000 from musical instruments and sound reproduction equipmentand \(1,500,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled \)94,000 during 2017. A total of 6,500 players used in the premium program were purchased during the year and there were 1,200,000 coupons redeemed in 2017.

The balances in the accounts related to warranties and premiums on January 1, 2017, were as shown below.

Inventory of Premiums $ 37,600

Premium Liability 44,800

Warranty Liability 136,000

Instructions

Garison Music Emporium is preparing its financial statements for the year ended December 31, 2017. Determine the amounts that will be shown on the 2017 financial statements for the following.

(a) Warranty Expense. (d) Inventory of Premiums.

(b) Warranty Liability. (e) Premium Liability.

(c) Premium Expense

(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.

Should a liability be recorded for risk of loss due to lack of insurance coverage? Discuss.

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