Warren Co. purchased a put option on Echo common shares on January 7, 2020, for $360. The put option is for 400 shares, and the strike price is $85 (which equals the price of an Echo share on the purchase date). The option expires on July 31, 2020. The following data are available with respect to the put option.Date Market Price of Echo Shares Time Value of Put OptionMarch 31, 2020 $80 per share $200June 30, 2020  82 per share  90July 6, 2020  77 per share  25InstructionsPrepare the journal entries for Warren Co. for the following dates. a. January 7, 2020—Investment in put option on Echo shares. b. March 31, 2020—Warren prepares financial statements. c. June 30, 2020—Warren prepares financial statements. d. July 6, 2020—Warren settles the put option on the Echo shares.

Question
Asked Feb 3, 2020
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Warren Co. purchased a put option on Echo common shares on January 7, 2020, for $360. The put option is for 400 shares, and the strike price is $85 (which equals the price of an Echo share on the purchase date). The option expires on July 31, 2020. The following data are available with respect to the put option.

Date   Market Price of Echo Shares   Time Value of Put Option
March 31, 2020   $80 per share   $200
June 30, 2020    82 per share    90
July 6, 2020    77 per share    25
Instructions

Prepare the journal entries for Warren Co. for the following dates.

 a. January 7, 2020—Investment in put option on Echo shares.

 b. March 31, 2020—Warren prepares financial statements.

 c. June 30, 2020—Warren prepares financial statements.

 d. July 6, 2020—Warren settles the put option on the Echo shares.

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Expert Answer

Step 1

GIVEN :

 7 Jan 2020 Purchases of put option                $ 360

No of put option shares                                    400

Strike price                                                        485

 

The market price of Echo shares (per share )

 

On 31 March 2020 

 $80                                      

 

On 30june2020           

$ 82

On 6 July 2020

 $ 77

 

Time  value of Put option

 

On 31 March 2020                                           

$200

On 30 june2020

$90

On 6 July 2020

$25

Step 2

Journal entries in the book of Warren co. at the time of investment in a Put option on Echo shares

Accounting homework question answer, step 2, image 1

Step 3

Journal entry at the time of preparation of the financial statement

Accounting homework question answer, step 3, image 1

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