1. On August 15 th , 2015, ToolMaker, Inc. purchases equity securities costing $
ID: 2753983 • Letter: 1
Question
1. On August 15th, 2015, ToolMaker, Inc. purchases equity securities costing $3,000,000 and classifies them as available for sale securities (AFS). On September 30th, 2015, the value of the equity securities falls to $2,800,000, and ToolMaker purchases $100,000 of March, 2016 put options with a strike price of $3,000,000, as a fair value hedge of its equity investments. The intrinsic value of the options is designated as the hedging instrument. On December 31st, 2015 (accounting year end), the options have a fair value of $76,000, and the securities have a fair value of $2,950,000. ToolMaker sells the options on March 1st, 2016 for $160,000, when the fair value of the securities is $2,850,000, and sells the securities for $2,875,000 on March 31st, 2016.
Prepare the journal entries made by ToolMaker on the following dates:
August 15th, 2015:
September 30th, 2015
December 31st, 2015:
March 1st, 2016:
March 31st, 2016:
Explanation / Answer
Journal Entries : Date Particulars Dr Cr 15-Aug Investment A/c 3000000 To Bank/Cash A/c 3000000 (Being the securities purchase for sales ) 30-Sep Decrease in securities value (P&L) 200000 To Investment A/c 200000 Being the value of securities reduced and recorded at fair value 30-Sep Investment in options 100000 To Bank/Cash A/c 100000 (Being the options purchase for sales ) 31-Dec Investment A/c 150000 To Increase in securities value(income) 150000 Being the value of securities increased and recorded at fair value 31-Dec Decrease in option value (P&L) 24000 To Investment A/c 24000 Being the value of securities reduced and recorded at fair value 1-Mar Bank/Cash A/c 160000 To Investment A/c 76000 To change in value of options (Income) 84000 (Being the options sold ) 31-Mar change in value of Securities (P & L) 75000 Bank/Cash A/c 2875000 To Investment A/c 2950000 (Being the securities sold )
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