Question

The Assistant Treasurer of Ingenuity Ltd. has read on the Internet that the stock price of...

The Assistant Treasurer of Ingenuity Ltd. has read on the Internet that the stock price of
Papillon Inc. is about to take off. In order to profit from this potential development, Ingenuity
purchased a call option on Papillon common shares on July 7, 2017 for $480. The call option is
for 240 shares (notional value), and the strike price is $80. The option expires on January 31,
2018. The following data are available with respect to the call option

D

Date Fair Value Option Market Price of Papillio Shares
Sept 30,2017 $1,780 $86 per share
Dec 4, 2018 $965 $83 per share
Jan 4, 2018 $1,550 $85 per share

Required:
Prepare the journal entries for Ingenuity for the following dates:

(a) July 7, 2017: Invests in call option on Papillon shares.

(b) September 30, 2017: Ingenuity prepares financial statements.

(c) December 31, 2017: Ingenuity prepares financial statements.

(d) January 4, 2018: Ingenuity settles the call option net on the Papillon shares.

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Homework Answers

Answer #1
Date Account Description Debit Credit
7-Jul-17 Call Option Assets    115,200.00
Cash    115,200.00
(Being Call option Piurchased)
30-Sep-17 Call Option Assets    312,000.00
Fair value Gain    312,000.00
(Being Increase in Fair vale of Option)
31-Dec-17 Fair value Loss    195,600.00
Call Option Assets    195,600.00
(Being Unrealised Loss recorded)
4-Jan-18 Cash    372,000.00
Fair value Gain    140,400.00
Call Option Assets    231,600.00
(Being Call option Settled)


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