Question: (Free-Standing Derivative) Warren Co. purchased a put option on Echo common shares on January 7, 2017,

for \(360. The put option is for 400 shares, and the strike price is \)85 (which equals the price of an Echo share on the purchase

date). The option expires on July 31, 2017. The following data are available with respect to the put option.

Date Market Price of Echo Shares Time Value of Put Option

March 31, 2017 \(80 per share \)200

June 30, 2017, 82 per share 90

July 6, 2017, 77 per share 25

Instructions

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

(a) January 7, 2017—Investment in a put option on Echo shares.

(b) March 31, 2017—Warren prepares financial statements.

(c) June 30, 2017—Warren prepares financial statements.

(d) July 6, 2017—Warren settles the put option on the Echo shares.

Date

Particulars

Debit

Credit

January 7, 2017

Put Option

$360

Cash

$360

(Being entry for the purchase of put option)

Date

Particulars

Debit

Credit

March 31, 2017

Put Option

$2,000

Unrealized Holding Gain or loss- income

$2,000

(Being entry for the preparation of financial statement)

March 31, 2017

Unrealized Holding Gain or loss- income

$160

Put Option

$160

(Being entry for the time value of the option)

Date

Particulars

Debit

Credit

June 30, 2017

Unrealized Holding Gain or loss- income

$1,200

Put Option

$1,200

(Being entry for the preparation of financial statement)

June 30, 2017

Unrealized Holding Gain or loss- income

$110

Put Option

$110

(Being entry for the time value of the option)

Date

Particulars

Debit

Credit

July 6, 2017

Unrealized Holding Gain or loss- income

$65

Put Option

$65

(Being entry for the unrealized gain or loss)

July 6, 2017

Cash

$3,200

Gain on Sale of Put Option

$3,175

Put Option

$25

(Being entry for the settlement of put option