1. On 8/1, Coruscant, Inc, a US Based Corporation, forecasts the purchase of 10,
ID: 2335321 • Letter: 1
Question
1. On 8/1, Coruscant, Inc, a US Based Corporation, forecasts the purchase of 10,000 units of inventory from a foreign vendor. The forecasted cost is estimated to be 150,000 FC. It is estimated inventory will be both delivered and paid for in October. Also, on 8/1, Coruscant purchased a call option to buy 150,000 FC at a striks price of $o.60 anytime during October. An option premium of $2,000 was initially paid. The option was sold on 10/15. The company also received the inventory and paid 150,000 FC on October 15. The company prepares monthly journal entries to record changes in the option value. The company excludes changes in the time value of the options from hedge effectiveness. August Iugust September.30 October 15 S0.58 $2,000 Spot Fair Valuc of Option Required S0.61 $2,500 $0.63 S5,100 $0.635 5.500 Prepare the journal entries required from 8/1 through 10/15,Explanation / Answer
Call Option premium A/c ..............Dr.
To Cash A/c
$ 2000
$ 2000
Statement of profit & loss A/c ......Dr.
To Call Option premium A/c
Call option Asset a/c Dr
To Statement of Profit & Loss A/c- Gain on increase in fair value
(Increase in fair value from $0.6 to $0.61)
$ 1500
$ 1500
Call Option Asset A/c ....................Dr.
Call option liability a/c....................Dr
Statement of Profit & Loss a/c- unrealized gain .........Dr
$150000
$11250
To Call option asset
(Gain recognized on exercise date)
Working Notes
For 8/31
Spot price = $ 0.61
Strike price = $ 0.60
Profit = $ 0.61-$ 0.60 = $ 0.01
Total profit = $ 0.01*150000 = $ 1500
For 9/30
Spot price = $ 0.63
Strike price = $ 0.60
Profit = $ 0.63-$ 0.60 = $ 0.03
Total profit = $ 0.03*150000 = $ 4500
For 10/15
Spot price = $ 0.635
Strike price = $ 0.60
Profit = $ 0.635-$ 0.60 = $ 0.035
Total profit = $ 0.035*150000 = $ 5250
Date Particulars Debit Amount Credit Amount 8/1 Call Option Asset A/c................Dr. $ 150000 To Call Option Liability A/c $ 150000 8/1Call Option premium A/c ..............Dr.
To Cash A/c
$ 2000
$ 2000
8/31Statement of profit & loss A/c ......Dr.
To Call Option premium A/c
2000 2000 8/1Call option Asset a/c Dr
To Statement of Profit & Loss A/c- Gain on increase in fair value
(Increase in fair value from $0.6 to $0.61)
$ 1500
$ 1500
9/30Call Option Asset A/c ....................Dr.
$ 4500 To Statement of Profit & Loss A/c $ 4500 10/15 Call Option Asset A/c ...................Dr. $ 5250 To Statement of Profit & Loss A/c $ 5250 10/15Call option liability a/c....................Dr
Statement of Profit & Loss a/c- unrealized gain .........Dr
$150000
$11250
To Call option asset
(Gain recognized on exercise date)
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