Question

On April 1, 2020, Blossom Ltd. paid $150 for a call to buy 530 shares of NorthernTel at a strike price of $25 per share any time during the next six months. The market price of NorthernTel’s shares was $25 per share on April 1, 2020. On June 30, 2020, the market price for NorthernTel’s stock was $35 per share, and the fair value of the option was $8,200.

Prepare the journal entry to record the purchase of the call option on April 1, 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
April 1, 2020	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount

eTextbook and Media

List of Accounts

  

  

Prepare the journal entry to recognize the change in the call option’s fair value as at June 30, 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
June 30, 2020	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount

eTextbook and Media

List of Accounts

  

  

Prepare the journal entry that would be required if Blossom Ltd. exercised the call option and took delivery of the shares as soon as the market opened on July 1, 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
July 1, 2020	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount

Answer 1

SOLUTION:

The journal entry to record the purchase of the call option on April 1, 2020

Date	Account Titles and Explanation	Debit($)	Credit($)
Apr. 1, 2020	Call option A/c Dr.	150
	To Cash A/c		150
	(To record the purchase of call option)

The journal entries to recognize the change in the fair value of the call option as of June 30, 2020

Date	Account Titles and Explanation	Debit	Credit
Jun. 30, 2020	Call option A/c (8200-150) Dr.	8050
	To Unrealized holding Gain or loss Income A/c		8050
	(To record the time value change)
Jun 30,2020	Call option A/c Dr.	5300
	To Unrealized holding Gain or loss Income ( Notes 1)		5300
	(To record the change in intrinsic value)

Notes:

1. The change in intrinsic value = 530 shares × change in price per share

Change in price per share= (Market price per share on 30 June – strike price per share on April 1,)

Change in price per share = $ 35 – $ 25

Change in price per share = $ 10

Therefore change in intrinsic value = 530 shares × $ 10 = $ 5300