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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