(Fair Value Hedge) On November 3, 2007, S Co. invested $200,000 in 4,000 shares of the common stock of J Co. S classified this investment as available-for-sale. S Co. is considering making a more significant investment in J Co. at some point in the future but has decided to wait and see how the stock does over the next several quarters. To hedge against potential declines in the value of J stock during this period, S also purchased a put option on the Johnstone stock. Sprinkle paid an option premium of $600 for the put option, which gives S the option to sell 4,000 J shares at a strike price of $50 per share. The option expires on July 31, 2007. The following data are available with respect to the values of the J stock and the put option. Date Market Price of J Shares Time Value of Put Option December 31, 2006 $51 per share $375 March 31, 2007 54 per share 175 June 30, 2007 55 per share 40 A. Prepare the journal entries for S Co. for the following dates. November 3, 2006—Investment in J stock and the put option on J shares. December 31, 2006—S Co. prepares financial statements. March 31, 2007—S prepares financial statements. June 30, 2007—S prepares financial statements. July 1, 2007—S settles the put option and sells the J shares.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Question

(Fair Value Hedge) On November 3, 2007, S Co. invested $200,000 in 4,000 shares of the common stock of J Co. S classified this investment as available-for-sale. S Co. is considering making a more significant investment in J Co. at some point in the future but has decided to wait and see how the stock does over the next several quarters.

To hedge against potential declines in the value of J stock during this period, S also purchased a put option on the Johnstone stock. Sprinkle paid an option premium of $600 for the put option, which gives S the option to sell 4,000 J shares at a strike price of $50 per share. The option expires on July 31, 2007. The following data are available with respect to the values of the J stock and the put option.

Date	Market Price of J Shares	Time Value of Put Option
December 31, 2006	$51 per share	$375
March 31, 2007	54 per share	175
June 30, 2007	55 per share	40

A. Prepare the journal entries for S Co. for the following dates.

November 3, 2006—Investment in J stock and the put option on J shares.
December 31, 2006—S Co. prepares financial statements.
March 31, 2007—S prepares financial statements.
June 30, 2007—S prepares financial statements.
July 1, 2007—S settles the put option and sells the J shares.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions