Question

In: Accounting

On August 15, 2017, Jarvis Company issued 50,000 options on the shares of RBC (Royal Bank...

On August 15, 2017, Jarvis Company issued 50,000 options on the shares of RBC (Royal Bank Corporation). Each option gives the option holder the right to buy one share of RBC at $60 per share until March 16, 2018. Jarvis received $25,000 for issuing these options. At the company’s year-end of December 31, 2017, the options contracts traded on the Montreal Exchange at $.40 per contract. On March 16, 2018, RBC shares closed at $58 per share, none of the options were exercised, so the options had to be removed and any gain or loss earned thus far reported.

Required:

Record all journal entries related to these call options.

Solutions

Expert Solution

Royal Bank Corporation [Call Buyer] Jarvis Company [Call Seller]
Date Particulars Ledger Folio Debit ($) Credit ($) Date Particulars Ledger Folio Debit ($) Credit ($)
25-Aug-17 Financial Assets A/c Dr…      25,000 25-Aug-17 Bank A/c Dr…..      25,000
To Bank A/c      25,000 To Financial Liability A/c      25,000
[Being Call Option is Purchased] [Being Call Option is sold]
31-Dec-17 Statement of Profit or Loss A/c Dr..        5,000 31-Dec-17 Financial Liability A/c Dr..        5,000
To Financial Assets A/c        5,000 To Statement of Profit or Loss A/c        5,000
[Being Financial Assets Revalued] [Being Financial Liability Revalued]
16-Mar-18 Statement of Profit or Loss A/c Dr..      20,000 16-Mar-18 Financial Liability A/c Dr..      20,000
To Financial Assets A/c      20,000 To Statement of Profit or Loss A/c      20,000
[Being Call option is not exercised because price reduce below strike price, hence loss booked] [Being Call option is not exercised because price reduce below strike price, hence profit booked]

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