Question

Question: On October 15, 2017, Oil Products Co. purchased 4,000 barrels of fuel oil with a cost of

\(240,000 (\)60 per barrel). Oil Products is holding this inventory in anticipation of the winter 2018 heating season. Oil Products

accounts for its inventory at the lower-of-FIFO-cost-or-net realizable value. To hedge against potential declines in the value of

the inventory, Oil Products also purchased a put option on the fuel oil. Oil Products paid an option premium of \(300 for the put

option, which gives Oil Products the option to sell 4,000 barrels of fuel oil at a strike price of \)60 per gallon. The option expires

on March 1, 2018. The following data are available with respect to the values of the fuel of inventory and the put option.

Date Market Price of Fuel Oil Time Value of Put Option

October 31, 2017 \(58 per gallon \)175

November 30, 2017 57 per gallon 105

December 31, 2017 54 per gallon 40

Instructions

(a) Prepare the journal entries of Oil Products for the following dates.

(1) October 15, 2017—Oil Products purchases fuel oil and the put option on fuel oil.

(2) October 31, 2017—Oil Products prepares financial statements.

(3) November 30, 2017—Oil Products prepares financial statements.

(4) December 31, 2017—Oil Products prepares financial statements.

(b) Indicate the amount(s) reported on the balance sheet and income statement related to the fuel oil inventory and the put

option on November 30, 2017.

(c) Indicate the amount(s) reported on the balance sheet and income statement related to the fuel oil and the put option on

December 31, 2017.

Short answer

Answer:

Unrealized income of put option is $65. Inventory debited by $240,000 and cash credited by $240,000. Put option debited by $300 and cash credited by $300. Loss in inventory debited by $8,000 and allowance to reduce inventory credited by $8,000.

Step-by-step solution

Journal entries of transactions

Date	Particulars	Debit	Credit
October 15, 2017	Inventory	$240,000
	Cash		$240,000
	(Being entry for the purchase of fuel oil)
October 15, 2017	Put Option	$300
	Cash		$300
	(Being entry for the purchase of put option)
2.
October 31, 2017	Loss in Inventory	$8,000
	Allowance to reduce inventory		$8,000
	(Being entry for the loss in inventory)
October 31, 2017	Put Option	$8,000
	Unrealized Holding Gain or Loss- Income		$8,000
	(Being entry for the unrealized income)
October 31, 2017	Unrealized Holding Gain or Loss- Income	$125
	Put Option		$125
	(Being entry of change in time value)
3.
November 30, 2017	Loss in Inventory	$4,000
	Allowance to reduce inventory		$4,000
	(Being entry for the loss in inventory)
November 30, 2017	Put Option	$4,000
	Unrealized Holding Gain or Loss- Income		$4,000
	(Being entry for the unrealized income)
November 30, 2017	Unrealized Holding Gain or Loss- Income	$70
	Put Option		$70
	(Being entry of change in time value)
4.
December 31, 2017	Loss in Inventory	$12,000
	Allowance to reduce inventory		$12,000
	(Being entry for the loss in inventory)
December 31, 2017	Put Option	$12,000
	Unrealized Holding Gain or Loss- Income		$12,000
	(Being entry for the unrealized income)
December 31, 2017	Unrealized Holding Gain or Loss- Income	$65
	Put Option		$65
	(Being entry of change in time value)

Income Statement and balance sheet

Partial Balance Sheet
Oil Product Co.
November 30, 2017
Current Assets:
Put Option	$4,000
Stockholder’s Equity:
Accumulated other comprehensive income	$4,000

Oil Product Co.
Income Statement
November 30, 2017
Other Expenses:
Loss in inventory	$4,000

 Step 3: Income Statement and balance sheet

Partial Balance Sheet
Oil Product Co.
June 30, 2017
Current Assets:
Put Option	$12,000
Stockholder’s Equity:
Accumulated other comprehensive income	$12,000

Oil Product Co
Income Statement
December 31, 2017
Other Expenses:
Loss in inventory	$12,000