Question

Kearney Corporation sold call options on 20,000 shares of BCE Inc. on October 21, 2012. These options give the holder the right to buy BCE shares at $33 per share until May 17, 2013. For issuing these options, Kearney received $30,000. On December 31, 2012 (Kearney’s fiscal year-end), the options traded on the Montreal Exchange for $3.50 per option. On May 17, 2013, BCE’s share price increased to $37 and the option holders exercised their options. Kearney had no holding of BCE shares.

Required:

For Kearney Corporation, record the journal entries related to these call options.

Answer 1

solution :

given that Rundle Freight Company owns a truck that cost $33,000.

also given that Currently, the truck’s book value is $27,000, and its expected remaining useful life is five years

mentioned in gi ven indormation that

Rundle has the opportunity to purchase for $28,000 a replacement truck that is extremely fuel efficient. Fuel cost for the old truck is expected to be $7,000 per year more than fuel cost for the new truck.

some other given information The old truck is paid for but, in spite of being in good condition, can be sold for only $16,000.

Calculating the total relevant costs:

	retaining truck	replacing truck
cost of the new truck	$-	$28000
additional fuel cost (5*7000)	$35000	$-
oppurtunity cost	$16000	$-
total cost	$51000	$28000

final decision of retaining old truck :

the purchase cost of ol;d truck and book value are irrelevant

they are sunk cost

therefore they should not be considered

the comparision cost of replacing and retaining truck are given above

from the above table

the company should replace the old truck as it would cost $28000 in replacement as against the cost of reraining truck of $51000