Question

On June 1, 2018, DCI purchased a call option for $450, which gave it the right to buy 10,000 shares of iLines, Inc., for $54 each until December 1, 2018 . On that date, iLines’ shares were being traded for $52. On June 30, 2018, the option contract could be traded in the market at $96,000. On December 1, 2018, with the shares being traded at $70 each, DCI exercised the option and took delivery of the shares of iLines.

You are required to record all necessary entry/entries related to this option on:

a]   June 1, 2018 when DCI acquired the call option.

b]   June 30, 2018, when DCI closed its books of accounts.

c]   December 1, 2018 assuming DCI exercises the call option and takes delivery of the shares of iLynes.

d]   December 1, 2018, assuming DCI settles the call option for cash without taking delivery of the iLynes shares

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

Answer 1

		Journal entries in the books of DCI
			Debit	Credit
a)	June 1 2018	Call option Derivatives Asset a/c         Dr	$            540
		To Cash/Bank account		$           540
		(Being call option purchased for $540)
b)	June 30 2018	Call option Derivatives Asset a/c         Dr	$      41,460
		To Unrealised gain Mark to Market account		$     41,460
		(Being unrealised gain on call option recoginsed at close of books for $ 41460 (96000 market value - (10000 shares *54 strike price)- premium paid of 540, this unrealised gain would be reversed on the next day)
c)	Dec 1 2018	Call option Derivatives Asset a/c     Dr	$      15,460
		To Realised gain account		$     15,460
		(Being net gain of 15,460 (10000 shares* (70 market value - 54 strike price) - Option premium of 540) recognised
c)	Dec 1 2018	iLynes Shares account                            Dr	$      16,000
		To Call option Derivatives Asset a/c		$     16,000
		(Being Ilynes shares received on account of exercise of call option)
d)	Dec 1 2018	Cash/Bank account a/c                            Dr	$      16,000
		To Call option Derivatives Asset a/c		$     16,000
		(Being cash received on account of exercise of call option)