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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

01

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)

02

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)

03

 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)

04

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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Most popular questions from this chapter

How is present value related to the concept of a liability?

Komissarov Company has a debt investments in the bonds issued by Keune Inc. The bonds were purchased at par

for \(400,000 and, at the end of 2017, have a remaining life of 3 years with annual interest payments at 10%, paid at the end of each year. This debt investment is classified as held-for-collection. Keune is facing a tough economical environment and informs all of its investors that it will be unable to make all payments according to the contractul terms. The controller of Komissarov has prepared the following revised expected cash flow forecast for this bond investment.

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