On January 3, 2017, McBride Co. purchased a call option for $300 on Xavier commo

Question

On January 3, 2017, McBride Co. purchased a call option for $300 on Xavier common stock.  The call option gives McBride the option to buy 1,000 shares of Xavier at a strike price of $50 per share. The market price of a Xavier share is $50 on January 3, 2017 (which makes the intrinsic value equal to $0). On March 31, 2017, the market price of the Xavier stock is $53 per share, and the time value of the option is $200. The adjusting entry(ies) at March 31, 2017, will include which of the following?

Debit to Call Option of $100.

Debit to Cash of $3,000.

Credit to Unrealized Holding Gain—Income of $3,000.

Credit to Call Option of $200.

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Explanation / Answer

Solution:

Market price of Xavier stock on March 31, 2017 = $53

Strike price = $50

Intrinsic value of call option on 31 march 2017 = $3 * 1000 = $3,000

Intrinsic value of call option on Jan3, 2017 = 0

Increase in fair value of call option due to chane in intrinsic value = $3,000- 0 = $3,000

Therefore

adjusting entry(ies) at March 31, 2017, will include "Credit to Unrealized Holding Gain—Income of $3,000"

Hence 3rd option is correct.

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