On October 15, 2020, 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 2021 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, 2021. 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, 2020   $58 per gallon   $175 November 30, 2020    57 per gallon    105 December 31, 2020    54 per gallon    40 Instructions  a. Prepare the journal entries of Oil Products for the following dates. 1.    October 15, 2020—Oil Products purchases fuel oil and the put option on fuel oil. 2.    October 31, 2020—Oil Products prepares financial statements. 3.    November 30, 2020—Oil Products prepares financial statements. 4.    December 31, 2020—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, 2020.  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, 2020.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

On October 15, 2020, 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 2021 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, 2021. 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, 2020   $58 per gallon   $175
November 30, 2020    57 per gallon    105
December 31, 2020    54 per gallon    40
Instructions

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

1.    October 15, 2020—Oil Products purchases fuel oil and the put option on fuel oil.

2.    October 31, 2020—Oil Products prepares financial statements.

3.    November 30, 2020—Oil Products prepares financial statements.

4.    December 31, 2020—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, 2020.

 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, 2020.

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 4 steps with 10 images

Blurred answer
Knowledge Booster
Financial Reporting in Hyperinflationary Economies
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
  • SEE MORE QUESTIONS
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education