On April 1, 2020, Pritima Ltd. paid $375 for a call to buy 800 shares of...

On April 1, 2020, Pritima Ltd. paid $375 for a call to buy 800 shares of Niamini Corporation at a strike price of $65 per share any time during the next six months. The market price of Niamini’s shares was $50 per share on April 1, 2020. On June 30, 2020, the market price for Niamini’s stock was $87 per share, and the value of the option was $16,700.

a) Prepare the journal entry to record the purchase of the call option on April 1, 2020.

b) Prepare the journal entry(ies) to recognize the change in the call option’s fair value as of June 30, 2020.

c) Prepare the journal entry that would be required if Pritima Ltd. exercised the call option and took delivery of the shares as soon as the market opened on July 1, 2020

Expert Solution

	Answer

	Journal entry

	Date	Account Titles and Explanations	Debit	Credit
a)	01-Apr-20	Call option	$ 375
		To,Bank		$ 375
		(Being a call option purchased)

b)	30-Jun-20	Accounts receivable	$ 16,700
		To, Gain on forward contract		$ 16,700
		(Being the forward gain recognized)


		Gain on forward contract	$ 16,700
		To, Profit and loss account		$ 16,700
		(Being the forward gain recognized)

c)	01-Jul-20	Shares in NorthernTel	$ 69,600
		(800 X 87)
		To,Gain on forward contract		$ 17,600
		800 x (87-65)
		To,Bank		$ 52,000
		(Being the shares purchased)

		Gain on forward contract	$ 17,600
		To, Profit and loss account		$ 17,600
		(Being the forward gain recognized)



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