Question

On January 1, 2019, Rosewood Corp. purchased a put option on shares of ICM stock. Terms of the contract were as follows: Number of shares: 100 Strike price: $240 per share Expiration date: May 31, 2019 Total cost of the option contract: $100 Seller of the option contract: First Investment Bank On January 1, 2019, ICM stock was trading at $240 per share. The following additional information is known: On March 31, 2019, the price of ICM stock was $210 per share. A market appraisal indicated that the time value of the option contract was $80. On May 10, 2019, the price of ICM stock was $215 per share. A market appraisal indicated that the time value of the option contract was $70. On this date, Rosewood settled the option contract Required 1. Prepare the appropriate journal entry or entries related to transactions occurring in January 2019 through March 2019. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 2. Indicate any amounts that Rosewood Corp. would have included in its March 2019 quarterly financial statements related to the option contract. 3. Prepare the appropriate journal entry or entries related to settlement of the option in May 2019. (If no entry is required fora transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Solution

1	Journal entries during Jan to March 19
				(in USD)
	Date	Particulars	Dr	Cr
	01-Jan-19	Contract cost receivable	100			01-Jan-19	31-Mar-19	90.00
		Cash		100			31-May-19	151
	31-Mar-19	Contract cost	59.60
		Contract cost receivable		59.60
		(Being amortisation of cost for 90 days)
	31-Mar-19	Put option receivable	3000
		Gain on option (100*(240-210)		3000
2	Amount impacting on account of options taken
	Option contract receivable		3000	Asset
	Gain on option		3000	Gain in PL
	Contract cost amortised		59.60	Charged to PL
	Contract cost receivable		40.40	Asset
3	Journal entries in may 19
	31-May-19	Contract cost	40.40
		Contract cost receivable		40.40
		(Being amortisation of cost for balance 61 days)
	10-May-19	Cash	2500
		Loss on option (100(215-210)	500
		Put option receivable		3000