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Chapter 13: Q13P (page 658)

Question: (Derivative Financial Instrument) Johnstone Co. purchased a put option on Ewing common shares on July 7,

2017, for \(240. The put option is for 200 shares, and the strike price is \)70. (The market price of a share of Ewing stock on that

date is \(70.) The option expires on January 31, 2018. The following data are available with respect to the put option.

Date Market Price of Ewing Shares Time Value of Put Option

September 30, 2017 \)77 per share $125

December 31, 2017 75 per share 50

January 31, 2018, 78 per share 0

Instructions

Prepare the journal entries for Johnstone Co. for the following dates.

(a) July 7, 2017—Investment in a put option on Ewing shares.

(b) September 30, 2017—Johnstone prepares financial statements.

(c) December 31, 2017—Johnstone prepares financial statements.

(d) January 31, 2018—Put option expires.

Short Answer

Expert verified

Answer:

Loss on the settlement of put option is $70. Put option is debited by $240 and cash credited by $240. Put option debited by $1,400 and unrealised holding gain or loss income credited by $1,400. Unrealized Holding Gain or loss- income debited by $115 and put option credited by $115.

Step by step solution

01

Entry for the purchase of put option

Date

Particulars

Debit

Credit

July 7, 2017

Put Option

$240

Cash

$240

(Being entry for the purchase of put option)

02

Entry for the preparation of the financial statement

Date

Particulars

Debit

Credit

September 30, 2017

Put Option

$1,400

Unrealized Holding Gain or loss- income

$1,400

(Being entry for the preparation of financial statement)

September 30, 2017

Unrealized Holding Gain or loss- income

$115

Put Option

$115

(Being entry for the time value of the option)

03

Entry for the preparation of a financial statement

Date

Particulars

Debit

Credit

December 31, 2017

Put Option

$400

Unrealized Holding Gain or loss- income

$400

(Being entry for the preparation of financial statement)

December 31, 2017

Unrealized Holding Gain or loss- income

$75

Put Option

$75

(Being entry for the time value of the option)

04

Entry for the settlement of the put option

Date

Particulars

Debit

Credit

January 4, 2018

Loss on settlement of call option

$50

Put option

$50

(Being entry for the settlement of Put option)

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