Question

On April 1, 2020, Gamma Corp. purchases a call option for $ 500, which gives Gamma the right to buy 1,000 shares of Delta Inc. for $ 30 each until December 1, 2020. Delta Inc. shares are currently trading for $ 30. At June 30, 2020, the options are trading at $ 4,000 and Gamma prepare financial statements on This June 30, 2020. At December 1, 2020, the options expire with no value.

What entry (if any) Gamma will prepare to record this option on June 30, 2020

		a) Derivatives—Financial Assets/Liabilities............................................... 4,000           Gain or Loss on Derivatives..........................................................           4,000
		b.) Derivatives—Financial Assets/Liabilities............................................... 3,500           Gain or Loss on Derivatives..........................................................           3,500
		c.) Other Comprehensive Loss..................................................................... 3,500           Derivatives—Financial Assets/Liabilities.....................................            3,500
		d.) no entry.

Answer 1

The Stock option (derivatives) when are Non- hedge in nature or of speculation they should be remeasure to fair value at each end period and profit or loss should be transferred to profit or loss

In the given case call option purchase price is $500 at the end of the accounting period June 30 the fair value is $4000

Hence the journal will be

B) Derivatives—Financial Assets/Liabilities 3,500

Gain or Loss on Derivatives      3,500

The increment is of 4000-500 or 3,500 Which is profit

Therefor option A, C, D are not corrected

Note: C is of same value but it is loss and in the case we are gaining