Exercise 17-27 Your answer is partially correct. Try again. On August 15, 2016,

Question

Exercise 17-27 Your answer is partially correct. Try again. On August 15, 2016, Buffalo Co. invested idle cash by purchasing a call option on Counting Crows Inc. common shares for $684. The notional value of the call option is 760 shares, and the option price is $76. The option expires on January 31, 2017. The following data are available with respect to the call option. Date Market Price of Counting Crows Shares Time Value of Call Option September 30, 2016 $91 per share $342 December 31, 2016 $87 per share 124 January 15, 2017 $89 per share 57 Prepare the journal entries for Buffalo for the following dates.

. (a) Investment in call option on Counting Crows shares on August 15, 2016.

b) September 30, 2016—Buffalo prepares financial statements.

(c) December 31, 2016—Buffalo prepares financial statements.

(d) January 15, 2017—Buffalo settles the call option on the Counting Crows shares. (Credit account titles are automatically indented when amount is entered.

Explanation / Answer

Answer

Journal entries for Buffalo:

Value of Call Option on settlement:

Dr(684+7600) - Cr(342+2280+218+67)

Dr8284 - Cr2907 = Cr5377

Date Particulars Dr Cr August 15, 2016 Call Option $684 Cash $684 September 30, 2016 Call Option $7600 Unrealized Holding Gain ($10*760) $7600 Unrealized Holding Gain $342 Call Option(684-342) $342 December 31, 2016 Unrealized Holding Gain $2280 Call Option($3*760) $2280 Unrealized Holding Gain $218 Call Option(342-124) $218 January 15, 2017 Unrealized Holding Gain $67 Call Option(124-57) $67 Cash(760*$8) 6080 Gain on Settlement of Call Option(760*$1 – $57=$733) 703 Call Option 5377

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