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 $53 per share $375 March 31, 2007 51 per share 175 June 30, 2007 54 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.
(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 |
$53 per share |
$375 |
|
March 31, 2007 |
51 per share |
175 |
|
June 30, 2007 |
54 per share |
40 |
A. Prepare the
- 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.
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