Question

Question: EXCEL (Derivative Financial Instrument) 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.

Date Market Price of Wade Shares Time Value of Call Option

September 30, 2017 \)77 per share $180

December 31, 2017 75 per share 65

January 4, 2018 76 per share 30

Instructions

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.

Short answer

Answer:

Loss on the settlement of the call option is $65. Call option debited by $240 and cash credited by $240. Call option debited by $1,400 and unrealized Holding Gain or loss- income credited by $1,400.

Step-by-step solution

Entry for the purchase of call option

Date	Particulars	Debit	Credit
July 7, 2017	Call Option	$240
	Cash		$240
	(Being entry for the purchase of call option)

Entry for the preparation of the financial statement

Date	Particulars	Debit	Credit
September 30, 2017	Call Option	$1,400
	Unrealized Holding Gain or loss- income		$1,400
	(Being entry for the preparation of financial statement)
September 30, 2017	Unrealized Holding Gain or loss- income	$60
	Call Option		$60
	(Being entry for the time value of the option)

 Step 3: Entry for the preparation of a financial statement

Date	Particulars	Debit	Credit
December 31, 2017	Call Option	$400
	Unrealized Holding Gain or loss- income		$400
	(Being entry for the preparation of financial statement)
December 31, 2017	Unrealized Holding Gain or loss- income	$115
	Call Option		$115
	(Being entry for the time value of the option)

Entry for the settlement of the call option

Date	Particulars	Debit	Credit
January 4, 2018	Cash	$1,000
	Loss on settlement of call option	$65
	Call option		$1,065
	(Being entry for the settlement of call option)