Question

On January 2, 2020, Windsor Company purchases a call option for $300 on Merchant common stock. The call option gives Windsor the option to buy 900 shares of Merchant at a strike price of $47 per share. The market price of a Merchant share is $47 on January 2, 2020 (the intrinsic value is therefore $0). On March 31, 2020, the market price for Merchant stock is $50 per share, and the time value of the option is $200.

Prepare the journal entry to record the purchase of the call option on January 2, 2020.

Prepare the journal entries to recognize the change in the fair value of the call option as of March 31, 2020.

Answer 1

Journal entry to record the purchase of the call option on jan 2, 2020

Date	ACCOUNT TITLES	DEBIT	CREDIT
Jan 2, 2020	Call option	$300
	Cash		$300

Journal entries to recognize the chance in fair value of the call option as of mar 31, 2020.

Date	ACCOUNT TITLES	DEBIT	CREDIT
Mar 31, 2020	Call option	$2700
	Unrealised holding gain or loss income (900×$3)**		$2700
	Unrealised holding gain or loss income ($300-$200)*	$100
	Call option		$100

​​​​​** 900 shares × gain = 900×($50 - $47) = 900×$3 = $2700

*call option price - time value of option = $300 - $200 = $100.

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