Q14P Question: (Free-Standing Derivat... [FREE SOLUTION]

Chapter 13: Q14P (page 658)

Question: (Free-Standing Derivative) Warren Co. purchased a put option on Echo common shares on January 7, 2017,
for $360. The put option is for 400 shares, and the strike price is $85 (which equals the price of an Echo share on the purchase
date). The option expires on July 31, 2017. The following data are available with respect to the put option.
Date Market Price of Echo Shares Time Value of Put Option
March 31, 2017 $80 per share $200
June 30, 2017, 82 per share 90
July 6, 2017, 77 per share 25
Instructions
Prepare the journal entries for Warren Co. for the following dates.
(a) January 7, 2017鈥擨nvestment in a put option on Echo shares.
(b) March 31, 2017鈥擶arren prepares financial statements.
(c) June 30, 2017鈥擶arren prepares financial statements.
(d) July 6, 2017鈥擶arren settles the put option on the Echo shares.

Short Answer

Expert verified

Answer:

Gain on the sale of a put option is $3,175. Put option debited by $360 and cash credited by $360. Put option debited by $2,000 and unrealized holding gain or loss income credited by $2,000. Unrealized Holding Gain or loss- income debited by $160 and put option credited by $160.

Step by step solution

Entry for the purchase of put option

Date	Particulars	Debit	Credit
January 7, 2017	Put Option	$360
	Cash		$360
	(Being entry for the purchase of put option)

Entry for the preparation of the financial statement

Date	Particulars	Debit	Credit
March 31, 2017	Put Option	$2,000
	Unrealized Holding Gain or loss- income		$2,000
	(Being entry for the preparation of financial statement)

March 31, 2017	Unrealized Holding Gain or loss- income	$160
	Put Option		$160
	(Being entry for the time value of the option)

Step 3: Entry for the preparation of a financial statement

Date	Particulars	Debit	Credit
June 30, 2017	Unrealized Holding Gain or loss- income	$1,200
	Put Option		$1,200
	(Being entry for the preparation of financial statement)

June 30, 2017	Unrealized Holding Gain or loss- income	$110
	Put Option		$110
	(Being entry for the time value of the option)

Entry for the settlement of the put option

Date	Particulars	Debit	Credit
July 6, 2017	Unrealized Holding Gain or loss- income	$65
	Put Option		$65
	(Being entry for the unrealized gain or loss)

July 6, 2017	Cash	$3,200
	Gain on Sale of Put Option		$3,175
	Put Option		$25
	(Being entry for the settlement of put option

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Short Answer

Step by step solution

Entry for the purchase of put option

Entry for the preparation of the financial statement

Step 3: Entry for the preparation of a financial statement

Entry for the settlement of the put option

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