Question

On August 15, 2014 XYZ Inc. made an investment by purchasing a call option on ABC Inc common shares for $360. The notional value of the call option is 400 shares and the option price is $40 (Market price of ABC is $40). The option expires on 1/31/15. The following data applies with respect to the call option.

Date                                    Market Price of ABC Shares                  Time Value of Call Option

9/30/14                                             $48/share                                                         $180

12/31/14                                           $46/share                                                         $65

1/15/15                                             $47/share                                                         $30

Prepare journal entries for XYZ for the following dates:

1. 8/15/14 investment in options of ABC

2. 9/30/14 XYZ prepares financial statements

3. 12/31/14 XYZ prepares financial statement

4. 1/15/15 XYZ settles the call option on the ABC shares

Answer 1

Solution:

XYZ Inc. - Journal Entries
Date	Particulars	Debit	Credit
15-Aug-14	Call Option Dr	$360.00
	To Cash		$360.00
	(Being call option purchased)
30-Sep-14	Call Option Dr (400*8)	$3,200.00
	To Unrealized holding gain or loss - Income		$3,200.00
	(To record change in intrinsic value)
30-Sep-14	Unrealized holding gain or loss - Income Dr ($360 - $180)	$180.00
	To Call Option		$180.00
	(To record the time value change)
31-Dec-14	Unrealized holding gain or loss - Income Dr (400*$2)	$800.00
	To Call Option		$800.00
	(To record change in intrinsic value)
31-Dec-14	Unrealized holding gain or loss - Income Dr ($180 - $65)	$115.00
	To Call Option		$115.00
	(To record the time value change)
15-Jan-15	Call Option Dr (400*1)	$400.00
	To Unrealized holding gain or loss - Income		$400.00
	(To record change in intrinsic value)
15-Jan-15	Unrealized holding gain or loss - Income Dr ($65 -$30)	$35.00
	To Call Option		$35.00
	(To record the time value change)
15-Jan-15	Cash A/c Dr (400*7 + 30)	$2,830.00
	Unrealized holding gain or loss - Income Dr	$2,470.00
	To Call Option		$2,830.00
	To Gain on settlement of call option - Income		$2,470.00
	(Being settlement of call option)