Question

Exercise 17-27

On August 15, 2016, Marigold Co. invested idle cash by purchasing a call option on Counting Crows Inc. common shares for $594. The notional value of the call option is 660 shares, and the option price is $66. The option expires on January 31, 2017. The following data are available with respect to the call option.

Date		Market Price of Counting Crows Shares		Time Value of Call Option
September 30, 2016		$79 per share		$297
December 31, 2016		$76 per share		107
January 15, 2017		$78 per share		50

Prepare the journal entries for Marigold for the following dates.

(a)		Investment in call option on Counting Crows shares on August 15, 2016.
(b)		September 30, 2016—Marigold prepares financial statements.
(c)		December 31, 2016—Marigold prepares financial statements.
(d)		January 15, 2017—Marigold settles the call option on the Counting Crows shares.

(Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No.	Date	Account Titles and Explanation	Debit	Credit
(a)	Aug. 15, 2016Sep. 30, 2016Dec. 31, 2016Jan. 15, 2017
(b)	Aug. 15, 2016Sep. 30, 2016Dec. 31, 2016Jan. 15, 2017
		(To record the change in intrinsic value.)
		(To record the time value change.)
(c)	Aug. 15, 2016Sep. 30, 2016Dec. 31, 2016Jan. 15, 2017
		(To record the change in intrinsic value.)
		(To record the time value change.)
(d)	Aug. 15, 2016Sep. 30, 2016Dec. 31, 2016Jan. 15, 2017
		(To record the time value change.)
		(To record settlement of call option.)

Answer 1

SOLUTION :

Given that information ,

JOURNAL ENTRIES FOR THE MARIGOLD COMPANY

DATE	PARTICULARS	DEBIT ($)	CREDIT ($)
15/Aug/2016	Call option a/c dr To Cash a/c	594	594
Sep/30/2016	Call Option a/c dr [($79-$66)*660shares] To Unrealized Holding Gain or Loss income (being record the change in intrinsic value) Unrealized Holding Gain - loss incme a/c dr To call Option a/c (594-297) (being recording of time vaqlue change)	8,580 297	8,580 297
Dec/31/2016	Unrealized Holding Gain - Loss Income a/c dr To Call Option a/c($79-$76)*660shares (being recording the change in insrinc value ) Unrealized Holding Gain -Loss Income a/c dr To Call Option a/c($297-$107) (being recording of tie value change )	1,980 190	1,980 190
Jan/15/2017	Unrealized Holding Gain- Loss Income a/c dr To Call Option a/c($107-$50) (being recording the time value change ) Cash a/c dr (660*12) To Gain On settlement Of Call Option a/c    [ (660*$2)-50] (note -1) To Call Option a/c (Note -2) (being recording of Settlement of call option )	57 7,920	57 1,270 6,650

Note : 1 computation of gain on settlement of call option

=[(660shares * $1) - $50]

=$610

Calculation of Call Option Value on settlement

option price expires on 31/01/2017 =$66 and market price as on 15/01/2017 =$78

Therefore gain on settlement call option = $12

Number of Shares = 660

and ,

call option debit	call option credit
594	297
8580	1980
	190
	57
-6,650