(Derivative Transaction) 7 Instructions Prepare the journal entry to record the
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Question
(Derivative Transaction)
7
Instructions
Prepare the journal entry to record the purchase of the call option on January 2, 2014.
Prepare the journal entry(ies) to recognize the change in the fair value of the call option as of March 31, 2014.
What was the effect on net income of entering into the derivative transaction for the period January 2 to March 31, 2014?
E17-22.(Derivative Transaction)
7
On January 2, 2014, Jones Company purchases a call option for $300 on Merchant common stock. The call option gives Jones the option to buy 1,000 shares of Merchant at a strike price of $50 per share. The market price of a Merchant share is $50 on January 2, 2014 (the intrinsic value is therefore $0). On March 31, 2014, the market price for Merchant stock is $53 per share, and the time value of the option is $200.Instructions
(a)Prepare the journal entry to record the purchase of the call option on January 2, 2014.
(b)Prepare the journal entry(ies) to recognize the change in the fair value of the call option as of March 31, 2014.
(c)What was the effect on net income of entering into the derivative transaction for the period January 2 to March 31, 2014?
Explanation / Answer
Answer (a)
Date Particulars Debit Credit
01/02/2014 Derivative assets 300
To Cash 300
Answer (b)
Date Particulars Debit Credit
03/31/2014 Derivative assets 3000
To Derivative Gain 3000
( stock value increase $ 3 per stock and the lot of stock is 1000 shares = 1000*3)
Answer (c) Net effect of Income
Derivative Gain = 3000
Less Premium Paid = 300
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Net Income = 2700
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