Question

On January 2, 2020, Carla Vista Corporation purchased a call option for $345 on Walter’s common shares. The call option gives Carla Vista the option to buy 1,110 shares of Walter at a strike price of $26 per share any time during the next six months. The market price of a Walter share was $26 on January 2, 2020 (the intrinsic value was therefore $0). On March 31, 2020, the market price for Walter stock was $39 per share, and the fair value of the option was $17,200.

QUESTIONS:

A) Prepare the journal entry to record the purchase of the call option on January 2, 2020.

B) Prepare the journal entry to recognize the change in the call option’s fair value as at March 31, 2020.

C) What was the effect on net income of entering into the derivative transaction for the period from January 2 to March 31, 2020?

The

select an option (gain/increases) OR (loss/decreases)

net income for the period January 2 to March 31, 2020 by

enter a dollar amount $ .

Answer 1

solution: Date Account title & explanation Debit(& credit (6) 345 Jan 2, 2020 345 - Call option al To cash (Being purchased of call option) B) 1 16855 16855 March 31, 2020 call option al To unrealised holding gain (17200-345) To record change in value of calloption) March 31,2020 14436 14430 call option alc TO Ummalised holding gach ((39-26 1110] To record the unrealised gain for intrinsic value of option) c) The Net income for the period Jan 2 to marchy31 increased by (16855+14430)- $31285, Note market price on march 31, 2020 - $99 pershape option price = $26 per share. Un realised gain at year end = 39-26= $13 per share.