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Minns Co. purchased a put option on Justin common shares on July 7, 2017, for $400. The put option is for 400 shares, and the strike price is $70. (The market price of a share of Justin 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 Minns Shares Time Value of Put Option

September 30, 2017 $77 per share $250
December 31, 2017 $75 per share $75
January 31, 2018 $78 per share $0

Required:

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

a. July 7, 2017—Investment in put option on Justin shares.
b. September 30, 2017—Minns prepares financial statements.
c. December 31, 2017—Minns prepares financial statements.
d. January 31, 2018—Put option expires.

Sagot :

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Answer:

a. 7-Jul-17

Dr Put Option $400

Cr Cash $400

b. September 30, 2017

Dr Unrealized Holding gain or loss on income $150

Cr Put option $150

c. December 31, 2017

Dr Unrealized Holding gain or loss on income $175

Cr Put option $175

d. January 31, 2018

Dr Loss on settlement of put option $75

Cr Put option $75

Explanation:

Preparation of the journal entries for Minns Co. for the following dates.

a. Preparation of July 7, 2017 journal entry to record Investment in put option on Justin shares

7-Jul-17

Dr Put Option $400

Cr Cash $400

(Being to record Investment in put option)

b. Preparation of September 30, 2017 journal entry to record Minns preparation of financial statements.

September 30, 2017

Dr Unrealized Holding gain or loss on income $150

($400-$250)

Cr Put option $150

(Being to record Unrealized Holding gain or loss on income )

c. Preparation of December 31, 2017 journal entry to record Minns Preparation of financial statements

December 31, 2017

Dr Unrealized Holding gain or loss on income $175

($250-$75)

Cr Put option $175

(Being to record Unrealized Holding gain or loss on income )

d. Preparation of the journal entry to record January 31, 2018 Put option expires

January 31, 2018

Dr Loss on settlement of put option $75

Cr Put option $75

($75-$0)

(Being to record loss on settlement of put option)

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