Question

On January 2, 2020, Bridgeport Company purchases a call option for $300 on Merchant common stock. The call option gives Bridgeport the option to buy 980 shares of Merchant at a strike price of $50 per share. The market price of a Merchant share is $50 on January 2, 2020 (the intrinsic value is therefore $0). On March 31, 2020, the market price for Merchant stock is $52 per share, and the time value of the option is $180. Your answer is correct. Prepare the journal entry to record the purchase of the call option on January 2, 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts.) Account Twis Jan 2, 2020 er option of Cash

Answer 1

Answer:

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

Date	Account Titles and Explanation	Debit	Credit
Jan. 2, 2020	Call option A/c Dr.	300
	To Cash A/c		300
	(To record the purchase of call option)

Prepare the journal entries to recognize the change in the fair value of the call option as of March 31, 2020

Date	Account Titles and Explanation	Debit	Credit
Mar. 31, 2020	Unrealized holding Gain or loss Income A/c Dr.	120
	To Call option A/c (Notes 2)		120
	(To record the time value change)
Mar 31,2020	Call option A/c Dr.	1960
	To Unrealized holding Gain or loss Income ( Notes 1)		1960
	(To record the change in intrinsic value)

Notes:

1. The change in intrinsic value = 980 shares × change in price per share

Change in price per share= (Market price per share on 31 march – strike price per share on January 2,)

Change in price per share = $52 – $50

Change in price per share = $2

Therefore change in intrinsic value = 980 shares × $2 = $1960

2. The change in time value = purchase price of call option – Time value of the option

= $300 – $180

= $120