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

Question

Exercise 17-27

On August 15, 2016, Splish Co. invested idle cash by purchasing a call option on Counting Crows Inc. common shares for $504. The notional value of the call option is 560 shares, and the option price is $56. 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
September 30, 2016 $67 per share $252
December 31, 2016 $64 per share 91
January 15, 2017 $66 per share 42

Prepare the journal entries for Splish for the following dates.

(a) Investment in call option on Counting Crows shares on August 15, 2016.
(b) September 30, 2016—Splish prepares financial statements.
(c) December 31, 2016—Splish prepares financial statements.
(d) January 15, 2017—Splish settles the call option on the Counting Crows shares.

(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)

Aug. 15, 2016
Sep. 30, 2016
Dec. 31, 2016
Jan. 15, 2017
(b)

Aug. 15, 2016
Sep. 30, 2016
Dec. 31, 2016
Jan. 15, 2017
(To record the change in intrinsic value.)
(To record the time value change.)
(c)

Aug. 15, 2016
Sep. 30, 2016
Dec. 31, 2016
Jan. 15, 2017
(To record the change in intrinsic value.)
(To record the time value change.)
(d)

Aug. 15, 2016
Sep. 30, 2016
Dec. 31, 2016
Jan. 15, 2017
(To record the time value change.)
(To record settlement of call option.)

Explanation / Answer

Date accounts titles and explanation debit credit August 15, 2016 call option 504 Cash 504 September 30, 2016 unrealised holding gain or loss- income (560*(67-56)) 6160 Call option 6160 (To record the change in intrinsic value) Unrealised holding gain or loss - income (504-252) 252 Call option 252 (The record the time value change) December 31, 2016 unrealised holding gain or loss-income (560*(67-64)) 1680 Call option 1680 (To record the change in intrinsic value) Unrealised holding gain or loss-income (252-91) 161 Call option 161 (To record the time value change) January 15, 2017 unrealised holding gain or lose-income (91-42) 49 Call option 49 (To record the time value change) Cash (560*(66-56)) 5600 Gain on settlement of call option 1027 Call option (504+6160)-(252+1680+161) 4571 (To record the settlement of call option)

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