Question

In: Accounting

On June 1, 2007, Prens Funds, Ltd. purchases a call option for $3,000, which gives Prens...

On June 1, 2007, Prens Funds, Ltd. purchases a call option for $3,000, which gives Prens Funds the right to buy 20,000 shares of Delta Plumbers, Inc., for $54 each until December 1, 2007. Delta shares are currently trading for $52. At June 30, 2007, the option contract could be traded in the market at $96,000. At December 1, 2007, with the shares being traded at $70 each, Prens Funds exercised the option and took delivery of the shares of Delta.

Required: Record all necessary entry/entries related to this contract on the following dates:

a]   June 1, 2007 when Prens Funds acquired the call option.

b]   June 30, 2007, when Prens Funds closes its books of accounts.

c]   December 1, 2007 assuming Prens Funds exercised the call option and took delivery of the shares of Delta.

d] December 1, 2007, assuming Prens Funds settles the call option for cash without taking delivery of the Delta shares.

NOTE:       If no entry is needed, write "No entry necessary".

Solutions

Expert Solution

Journal Entries in the books of Prens Funds, Ltd.
Date Particulars Debit Credit
01-06-2007 Call Option $          3,000.00
Bank $          3,000.00
30-06-2007 Call Option (96000-3000) $       93,000.00
Profit and Loss A/c $       93,000.00
01-12-2007 Delta Shares (70 x 20000) $ 14,00,000.00
Bank $ 10,80,000.00
Call Option $       96,000.00
Profit and Loss A/c $    2,24,000.00
(Being Call option settled with delivery of shares)
01-12-2007 Bank [(70-54) x 20000] $    3,20,000.00
Call Option $       96,000.00
Profit and Loss A/c $    2,24,000.00
(Being Call option settled in cash on net basis)

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