Exercise 17-27 On August 15, 2016, Windsor Co. invested idle cash by purchasing

Question

Exercise 17-27

On August 15, 2016, Windsor Co. invested idle cash by purchasing a call option on Counting Crows Inc. common shares for $576. The notional value of the call option is 640 shares, and the option price is $64. The option expires on January 31, 2017. The following data are available with respect to the call option.

Date

Market Price of Counting
Crows Shares

Time Value of Call
Option

Prepare the journal entries for Windsor for the following dates.

(Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No.

Date

Account Titles and Explanation

Debit

Credit

(a)

(b)

(To record the change in intrinsic value.)

(To record the time value change.)

(c)

(To record the change in intrinsic value.)

(To record the time value change.)

(d)

(To record the time value change.)

(To record settlement of call option.)

Date

Market Price of Counting
Crows Shares

Time Value of Call
Option

September 30, 2016 $77 per share $288 December 31, 2016 $74 per share 104 January 15, 2017 $75 per share 48

Explanation / Answer

date

Account titles and explanation

Debtit

Credit

August 15, 2016

Call option

576

Cash

576

September 30, 2016

Call option (640*(77-64))

8320

Unrealized holding gain or loss - income

8320

(To record the change in intrinsic value.)

Unrealized holding gain or loss – income (576-288)

288

Call option

288

(To record the time value change.)

December 31, 2016

Unrealized holding gain or loss – income (640*(77-74))

1920

Call option

1920

(To record the time value change.)

Unrealized holding gain or loss – income (288-104)

184

Call option

184

(To record the time value change.)

January 15, 2017

Unrealized holding gain or loss – income (104-48)

56

Call option

56

(To record the time value change.)

Cash (640*(75-64))

7040

Gain on settlement of call option (7040-6448)

592

Call option (576+8320)-(288+1920+184+56)

6448

(To record settlement of call option.)

date

Account titles and explanation

Debtit

Credit

August 15, 2016

Call option

576

Cash

576

September 30, 2016

Call option (640*(77-64))

8320

Unrealized holding gain or loss - income

8320

(To record the change in intrinsic value.)

Unrealized holding gain or loss – income (576-288)

288

Call option

288

(To record the time value change.)

December 31, 2016

Unrealized holding gain or loss – income (640*(77-74))

1920

Call option

1920

(To record the time value change.)

Unrealized holding gain or loss – income (288-104)

184

Call option

184

(To record the time value change.)

January 15, 2017

Unrealized holding gain or loss – income (104-48)

56

Call option

56

(To record the time value change.)

Cash (640*(75-64))

7040

Gain on settlement of call option (7040-6448)

592

Call option (576+8320)-(288+1920+184+56)

6448

(To record settlement of call option.)

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