On December 1, 20X1 a company bought a call option costing $100,000 as a speculative investment. The call option gave the company the right to purchase100,000 barrels of oil for $110 per barrel during April 20X2. As of December 31, 20X1 the call option had a value of $125,000. The company liquidated the call optionon April 15, 20X2 in exchange for $175,000. Which of the following accurately describes GAAP accounting for this call option?bokMultiple ChoiceThe realized gain applicable to the year ending December 31, 20X1 is $25,000.The realized gain recognized on April 15, 20X2 is $75,000.The unrealized gain recognized on April 15, 20X2 is $50,000.The call option will be reported on the December 31, 20X1 balance sheet at $125,000 and a $25,000 unrealized gain will be reported as a component ofincome from continuing operations for the year ending December 31, 20X1.

Step 1:Given, Purchase of call option on Dec. 1, 20X1: $100,000Value of the call option as of Dec.…

Answered: On December 1, 20X1 a company bought a…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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ABC Corporation acquired a call option for 500 tons of oil for a strike price of P110,000 per ton to be exercised three months from now. The broker requires an initial margin of 30%. On the expiry date of the option, the market value of a ton of oil is P115,000. * Compute for the net gain or loss ?
During the third quarter of the current year, Beamer Manufacturing Company invested in derivative instruments for a variety of reasons. The various investments and hedging relationships are as follows:a. Call Option A—This option was purchased on July 10 and provided for the purchase of 10,000 units of commodity A in October at a strike price of $45 per unit. The company designated the option as a hedge of a commitment to sell 10,000 units of commodity A in October at a fixed price of $45 per unit. Information regarding the option and commodity A is as follows: July 10 July 31 August 31 September 30 Spot price Value of option $ 45 2000 $46 12400 $44 1000 $46.50 16000 b. Call Option B—This option provided for the purchase of 10,000 units of commodity B in October at a strike price of $30 per unit. The company designated the option as a hedge of a forecasted purchase of commodity B in October. Information regarding the option and commodity B is as follows: July 1…
On September 1, Westbrook Corporation purchased goods from a foreign supplier at a price of 1,000,000 francs and will make payment in three months on December 1. On September 1, Westbrook acquired an option to purchase 1,000,000 francs in three months at a strike price of $0.852. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the franc are as follows: Date September 1 September 30 December 1 Spot Rate $ 0.852 0.858 0.870 Call Option Premium for December 1 (strike price $0.852) $0.0020 0.0075 N/A Westbrook must close its books and prepare its third-quarter financial statements on September 30. The goods purchased on September 1 are sold in December. a-1. Assuming that Westbrook designates the foreign currency option as a cash flow hedge of a foreign currency payable, prepare journal entries for the import purchase and…
ABC Milling Corporation acquired three call options for wheat. The option has 10 tons of wheat as the underlying asset and P12,100 per ton as strike price. If on the exercise date, the market value of a ton of wheat is P12,250, what is the total value of the option contracts acquired by ABC?
C. L. Hooper purchased a call on 900 Troy oz. of Palladium with a strike price of $1,839.03. On the expiration date, the Palladium is selling at $1,850.25 per Troy oz. Option contracts on Palladium are based on 100 Troy oz. What is the payoff on the call contract ignoring all transaction costs? Question 47 options: $11, 220 - $11, 220 $10,098 - $10, 098 $0
Orange Company purchased as a long-term investment $100 million of 10% bonds, dated July 1, on July 1, 2021. Management wants to trade the investment actively in the market. For bonds of similar risk and maturity the market yield was 12%. The price paid for the bonds was $90 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2021, was $91 million. Requirements: Prepare the journal entry at the initial purchase date on July 1, 2021 Please prepare journal entry on Dec 31, 2021 when Orange Company received the interest payment 3. At what amount will Orange Company report its investment in the December 31, 2021 balance sheet? Prepare any adjusting entry, if necessary. 4. Company decides to sell the investment on January 7, 2022 when the market price increased to $92. Please prepare the TWO journal entries of sales transaction on January 7, 2022. 5. Suppose Orange Company…
d c'z Quail Company had an investment in bonds purchased at par for P8,000,000. On December 31, 2018, the remaining life of the bonds is 3 years with an annual interest payment at 10% payable at the end of each year. The issuer was facing a tough economic environment and informed all of the investors that it will be unable to make all payments according to the contractual terms. The entity had projected the expected cash flow for this investment to be P1,000,000 on December 31, 2019, P2,000,000 on December 31, 2020 and P6,000,000 on December 31, 2021. The market rate of interest is 12% for 2018, In connection with your audit, how much is the interest income for the year ended December 31, 2019?
Bicol Company uses approximately 200,000 units of raw material in its manufacturing operations. On December 1, 2021, the entity purchased a call option to buy 200,000 units of the raw material on July 1, 2022 at a strike price of P25 per unit. The entity paid P20,000 for the call option. The entity designated the call option as a cash flow hedge against price fluctuation for its July purchase. The market price of the raw material is P28 on December 31, 2021 and P21 on July 1, 2022. 1. What amount should be reported as derivative asset on December 31, 2021? a. 600,000 b. 580,000 C. 20,000 d. 0 2. What amount should be recognized as loss on call option in 2022? a. 300,000 b. 500,000 c. 200,000 d. 20,000
Norris Corporation purchased a $500,000 held-to-maturity security on January 1, 2003. The company was expecting a 4% rate of return. The security matured on December 31, 2004. a. Determine the amount that Norris would have been willing to pay for the security on January 1, 2003.
33. Subject :- Accounting
On February 18, 2018, Union Corporation purchased 10,000 shares of IBM bonds as a long-term investment for$600,000. Union will hold the bonds indefinitely, and may sell them if their price increases sufficiently. On December 31, 2018, and December 31, 2019, the market value of the bonds was $580,000 and $610,000, respectively.Required:1. What is the appropriate reporting category for this investment? Why?2. Prepare the adjusting entry for December 31, 2018.3. Prepare the adjusting entry for December 31, 2019.
On January 1, 2010 NukePower purchased a one-year $25,000,000 debt instrument that (1) guarantees the repayment of principal, (2) has a 1.50% annual coupon, and (3) provides for an additional return that is indexed to the price of Uranium (URA). Specifically, if the price of URA is above $850 per metric ton on 12/31/10, the holder of the debt receives an additional return equal to the difference between the market price and the $850 per metric ton threshold price, based on 12,500 metric tons of URA. The additional return feature is not separable from the host debt instrument. The yield to maturity on a similar quality debt instrument which does not have an additional return feature is 7.00% annually (based on annual interest), which would result in an issuance price of $23,714,953. Details on the price of URA, URA Call and Put options is provided below. Any interest calculations should use annual interest. The embedded option is designated as and qualifies as a cash flow hedge of…

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