Question

Cash Flow Hedge: Call Options On March 1, 2020, Prairie Farms forecasts that it will purchase E9.8 1,000,000 units of a commodity in six months. To hedge against rising prices, Prairie Farms invests in 1,000,000 September 2020 call options for the commodity. The call options have a strike price of $3.30 per unit, and cost $0.65 each. The current market price of the commodity is $3.25 per unit. The intrinsic value of the options is designated as the hedging instrument, and the option investment qualifies as a cash flow hedge of the forecasted purchase. Changes in option time value are reported directly in income. On June 30, 2020, the market price of the commodity is $3.40 per unit, the options have a market price of $0.50 per unit, and Prairie Farms sells the options. Required Prepare the journal entry to record the sale of the options

Answer 1

Journal Entries in the books of Prairie Farms
Date	Particulars		Debit	Credit
01-03-2020	Investment (Options ) A/C	Dr	$6,50,000
	Cash A/C			$6,50,000
	Being Options purchased at $0.65 each
30-06-2020	Cash A/c	Dr	$5,00,000
	Profit and Loss A/c	Dr	$1,50,000
	Investment A/c			$6,50,000
	Being Options sold at $0.5 each

S.No	Particulars	Amount
1	Cost of each Option (Investment Unit)	$0.65
2	Sale Proceeds of each Option (Investment Unit)	$0.50
3	Loss on Sale per option (1-2)	$0.15
4	Number of Options	1000000
5	Total Loss (3*4)	$1,50,000.00