On October 15, 2020, Teal Co. purchased 3,920 barrels of fuel oil with a cost of $246,960 ($63 per barrel). Teal is holding this inventory in anticipation of the winter 2021 heating season. Teal 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, Teal also purchased a put option on the fuel oil. Teal paid an option premium of $280 for the put option, which gives Teal the option to sell 3,920 barrels of fuel oil at a strike price of $63 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 October 31, 2020 November 30, 2020 December 31, 2020 Market Price of Fuel Oil $61 per gallon 60 per gallon 57 per gallon Time Value of Put Option $174 96 41
On October 15, 2020, Teal Co. purchased 3,920 barrels of fuel oil with a cost of $246,960 ($63 per barrel). Teal is holding this inventory in anticipation of the winter 2021 heating season. Teal 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, Teal also purchased a put option on the fuel oil. Teal paid an option premium of $280 for the put option, which gives Teal the option to sell 3,920 barrels of fuel oil at a strike price of $63 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 October 31, 2020 November 30, 2020 December 31, 2020 Market Price of Fuel Oil $61 per gallon 60 per gallon 57 per gallon Time Value of Put Option $174 96 41
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:On October 15, 2020, Teal Co. purchased 3,920 barrels of fuel oil with a cost of $246,960 ($63 per barrel). Teal is holding this
inventory in anticipation of the winter 2021 heating season. Teal 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, Teal also purchased a put option on the fuel oil. Teal paid an
option premium of $280 for the put option, which gives Teal the option to sell 3,920 barrels of fuel oil at a strike price of $63 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
October 31, 2020
November 30, 2020
December 31, 2020
Market Price of Fuel Oil
$61 per gallon
60 per gallon
57 per gallon
Time Value of Put Option
$174
96
41
Transcribed Image Text:(a)
Prepare the journal entries of Teal for the following dates.
(1)
(2)
(3)
(4)
No.
(Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry"
for the account titles and enter O for the amounts.)
(1)
October 15, 2020-Teal purchases fuel oil and the put option on fuel oil.
October 31, 2020-Teal prepares financial statements.
(2)
November 30, 2020-Teal prepares financial statements.
December 31, 2020-Teal prepares financial statements.
Date
Account Titles and Explanation
(To record investment in stock.)
(To record purchase of put option.)
(To record the time value change.)
(To adjust the value of inventory.)
(To record the change in intrinsic value.)
Debit
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