Question

The Assistant Treasurer of Ingenuity Ltd. has read on the Internet that the stock price of Papillon Inc. is about to take off. In order to profit from this potential development, Ingenuity purchased a call option on Papillon common shares on July 7, 2017 for $480. The call option is for 240 shares (notional value), and the strike price is $80. The option expires on January 31, 2018. The following data are available with respect to the call option

Date	Fair Value of Options	Market Price of Papillon Shares
Sept 30th , 2017	1,780	$86 per share
Dec 4th 2018	965	83 per share
Jan 4th, 2018	1,550	85 per share

Required: Prepare the journal entries for Ingenuity for the following dates: (a) July 7, 2017: Invests in call option on Papillon shares. (b) September 30, 2017: Ingenuity prepares financial statements. (c) December 31, 2017: Ingenuity prepares financial statements. (d) January 4, 2018: Ingenuity settles the call option net on the Papillon shares

Answer 1

Answer
Date	Account Description	Debit	Credit
07-Jul-17	Call Option Assets (480*240)	$115,200
	To Cash		$115,200
	(To record Call option Purchased)
30-Sep-17	Call Option Assets (1780*240)-115200	$312,000
	To Fair value Gain		$312,000
	(To record Increase in Fair vale of Option)
31-Dec-17	Fair value Loss	$195,600
	To Call Option Assets		$195,600
	(To record Unrealised Loss recorded)
04-Jan-18	Cash	$372,000
	To Fair value Gain		$140,400
	To Call Option Assets		$231,600
	(To record Call option Settled)

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