On January 2, 2020, Windsor Company purchases a call option for $300 on Merchant common stock. The call option gives Windsor the option to buy 900 shares of Merchant at a strike price of $47 per share. The market price of a Merchant share is $47 on January 2, 2020 (the intrinsic value is therefore $0). On March 31, 2020, the market price for Merchant stock is $50 per share, and the time value of the option is $200.
Prepare the journal entry to record the purchase of the call option on January 2, 2020.
Prepare the journal entries to recognize the change in the fair value of the call option as of March 31, 2020.
Journal entry to record the purchase of the call option on jan 2, 2020
Date | ACCOUNT TITLES | DEBIT | CREDIT |
Jan 2, 2020 | Call option | $300 | |
Cash | $300 |
Journal entries to recognize the chance in fair value of the call option as of mar 31, 2020.
Date | ACCOUNT TITLES | DEBIT | CREDIT |
Mar 31, 2020 | Call option | $2700 | |
Unrealised holding gain or loss income (900×$3)** | $2700 | ||
Unrealised holding gain or loss income ($300-$200)* | $100 | ||
Call option | $100 | ||
** 900 shares × gain = 900×($50 - $47) = 900×$3 = $2700
*call option price - time value of option = $300 - $200 = $100.
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