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E17-22B (Derivative Transaction) On April 16, 2014, ColorCo purchased a put option for $800 on Choco common stock. The put option gives ColorCo the option to sell 5,000 shares of Choco at a strike price of $25 per share for a period of one year. The marke

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E17-22B (Derivative Transaction) On April 16, 2014, ColorCo purchased a put option for $800 on Choco common stock. The put option gives ColorCo the option to sell 5,000 shares of Choco at a strike price of $25 per share for a period of one year. The market price of a Choco share is $25 on April 16, 2014 (the intrinsic value is therefore $0). On June 30, 2014, the market price for Choco stock is $24 per share, and the time value of the option is $550.;Instructions;(a) Prepare the journal entry to record the purchase of the put option on April 16, 2014.;(b) Prepare the journal entry(ies) to recognize the change in the fair value of the call option as of June 30, 2014.;(c) What was the effect on net income of entering into the derivative transaction for the 3-month period ending June 30, 2014?

 

Paper#78445 | Written in 18-Jul-2015

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