Question

Derivatives:

Problem 3: The treasurer of Miller Co. has read on the Internet that the stock price of Wade Inc. is about to take off. In order to profit from this potential development, Miller Co. purchased a call option on Wade common shares on July 7, 2017, for $240. The call option is for 200 shares (notional value), and the strike price is $70. (The market price of a share of Wade stock on that date is $70.) The option expires on January 31, 2018. The following data are available with respect to the call option. Market Price of Time Value of Date Wade Shares Call Option September 30, 2017 $77 per share $180 December 31, 2017 75 per share January 4, 2018 76 per share 30 65 REQUIRED: Prepare the journal entries for Miller Co. for the following dates. (a) July 7, 2017 - Investment in call option on Wade shares. (b) September 30, 2017 - Miller prepares financial statements. (c) December 31, 2017 - Miller prepares financial statements. (d) January 4, 2018 - Miller settles the call option on the Wade shares.

Answer 1

Answer -

a) Answer -

Investment in call option on Wade shares

Date	Account title	Debit	Credit
Jul. 7, 2017	Call option	$240
	Cash		$240

b) Answer -

Miller prepares financial statements

Date	Account title	Debit	Credit
Sep. 30, 2017	Call option [($77 - $70) * 200 shares]	$1400
	Unrealized holding gain or loss-Income		$1400
Sep. 30, 2017	Unrealized holding gain or loss-Income	$60
	Call option ($240 - $180)		$60

c) Answer -

Miller prepares financial statements

Date	Account title	Debit	Credit
Dec. 31, 2017	Unrealized holding gain or loss-Income	$400
	Call option [($75 - $77) * 200 shares]		$400
Dec. 31, 2017	Unrealized holding gain or loss-Income	$115
	Call option ($180 - $65)		$115

d) Answer -

Miller settles the call option on the Wade shares

Date	Account title	Debit	Credit
Jan. 4, 2018	Call option [($76 - $75) * 200 shares]	$200
	Unrealized holding gain or loss-Income		$200
Jan. 4, 2018	Unrealized holding gain or loss-Income	$35
	Call option ($65 - $30)		$35
Jan. 4, 2018	Cash ($6 * 200 shares)	$1200
	Loss on settlement of call option	$30
	Call option		$1230

Call option
$240
$1400	$60
$200	$400
	$115
	$35
$1230