(Derivative Transaction) On January 2, 2017, Jones Company purchases a call option for $300 on Merchant common stock. The call option gives Jones the option to buy 1,000 shares of Merchant at a strike price of $50 per share. The market price of a Merchant share is $50 on January 2, 2017 (the intrinsic value is therefore $0). On March 31, 2017, the market pricefor Merchant stock is $53 per share, and the time value of the option is $200.Instructions(a) Prepare the journal entry to record the purchase of the call option on January 2, 2017.(b) Prepare the journal entry(ies) to recognize the change in the fair value of the call option as of March 31, 2017.(c) What was the effect on net income of entering into the derivative transaction for the period January 2 to March 31, 2017?

(Derivative Transaction) On January 2, 2017, Jones Company purchases a call option for $300 on Merchant common stock. The call option gives Jones the option to buy 1,000 shares of Merchant at a strike price of $50 per share. The market price of a Merchant share is $50 on January 2, 2017 (the intrinsic value is therefore $0). On March 31, 2017, the market pricefor Merchant stock is $53 per share, and the time value of the option is $200.Instructions(a) Prepare the journal entry to record the purchase of the call option on January 2, 2017.(b) Prepare the journal entry(ies) to recognize the change in the fair value of the call option as of March 31, 2017.(c) What was the effect on net income of entering into the derivative transaction for the period January 2 to March 31, 2017?

Financial Accounting

14th Edition

ISBN:9781305088436

Author:Carl Warren, Jim Reeve, Jonathan Duchac

Publisher:Carl Warren, Jim Reeve, Jonathan Duchac

Chapter15: Investments And Fair Value Accounting

Section: Chapter Questions

Problem 16E

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