Hummel Company purchased a put option on Olney common shares on July 7, 2014, fo

Question

Hummel Company purchased a put option on Olney common shares on July 7, 2014, for $80. The put option is for 210 shares, and the strike price is $30. The option expires on January 31, 2015. The following data are available with respect to the put option:

Prepare the journal entries for Hummel Company for the following dates:

January 31, 2015Put option expires.

Date Market Price of Olney Shares Time Value of Put Option September 30, 2014 $32 per share $50 December 31, 2014 $31 per share 20 January 31, 2015 $33 per share 0

Explanation / Answer

Journal entries for Hummel Company for the following dates are recoded as under:

Date Particulars L.F Amount ($) Amount ($) 2014 a. Jul-07 Put option 80    Cash 80 (For investment in put option) b. Sep-30 Unrealized Holding gain or loss 30    Put option (80-50) 30 (For unrealized gain or loss recorded) c. Dec-31 Unrealized Holding gain or loss 30    Put option (50-20) 30 (For unrealized gain or loss recorded) 2015 d. Jan-31 Loss on settlement of put option 20    Put option (20-0) 20 (For put option expires)

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