On August 15, 2014 XYZ Inc. made an investment by purchasing a call option on AB

Question

On August 15, 2014 XYZ Inc. made an investment by purchasing a call option on ABC Inc common shares for $360. The notional value of the call option is 400 shares and the option price is $40 (Market price of ABC is $40). The option expires on 1/31/15. The following data applies with respect to the call option.

Date                                    Market Price of ABC Shares                  Time Value of Call Option

9/30/14                                             $48/share                                                         $180

12/31/14                                           $46/share                                                         $65

1/15/15                                             $47/share                                                         $30

Prepare journal entries for XYZ for the following dates:

1. 8/15/14 investment in options of ABC

2. 9/30/14 XYZ prepares financial statements

3. 12/31/14 XYZ prepares financial statement

4. 1/15/15 XYZ settles the call option on the ABC shares

Explanation / Answer

Solution:

XYZ Inc. - Journal Entries Date Particulars Debit Credit 15-Aug-14 Call Option Dr $360.00        To Cash $360.00 (Being call option purchased) 30-Sep-14 Call Option Dr (400*8) $3,200.00        To Unrealized holding gain or loss - Income $3,200.00 (To record change in intrinsic value) 30-Sep-14 Unrealized holding gain or loss - Income Dr ($360 - $180) $180.00        To Call Option $180.00 (To record the time value change) 31-Dec-14 Unrealized holding gain or loss - Income Dr (400*$2) $800.00        To Call Option $800.00 (To record change in intrinsic value) 31-Dec-14 Unrealized holding gain or loss - Income Dr ($180 - $65) $115.00        To Call Option $115.00 (To record the time value change) 15-Jan-15 Call Option Dr (400*1) $400.00        To Unrealized holding gain or loss - Income $400.00 (To record change in intrinsic value) 15-Jan-15 Unrealized holding gain or loss - Income Dr ($65 -$30) $35.00        To Call Option $35.00 (To record the time value change) 15-Jan-15 Cash A/c Dr (400*7 + 30) $2,830.00 Unrealized holding gain or loss - Income Dr $2,470.00        To Call Option $2,830.00        To Gain on settlement of call option - Income $2,470.00 (Being settlement of call option)

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