On December 1, 20X8, Merry Corporation acquired 100 shares of Venus Corporation at a cost of $60 per share. Merry classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $400, an at-the-money put option to sell the 100 shares at $60 per share. The option expires on February 20, 20X9. Selected information concerning the fair values of the investment and the options follow:
Assume that Merry exercises the put option and sells Venus shares on February 20, 20X9.
Required:
1) Prepare the entries required on December 1, 20X8, to record the purchase of the Venus stock and the put options.
2) Prepare the entries required on December 31, 20X8, to record the change in intrinsic value and time value of the options, as well as the revaluation of the available-for-sale securities.
3) Prepare the entries required on February 20, 20X8, to record the exercise of the put option and the sale of the securities at that date.

Question

On December 1, 20X8, Merry Corporation acquired 100 shares of Venus Corporation at a cost of $60 per share. Merry classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $400, an at-the-money put option to sell the 100 shares at $60 per share. The option expires on February 20, 20X9. Selected information concerning the fair values of the investment and the options follow:  
Assume that Merry exercises the put option and sells Venus shares on February 20, 20X9.
Required:
1) Prepare the entries required on December 1, 20X8, to record the purchase of the Venus stock and the put options.
2) Prepare the entries required on December 31, 20X8, to record the change in intrinsic value and time value of the options, as well as the revaluation of the available-for-sale securities.
3) Prepare the entries required on February 20, 20X8, to record the exercise of the put option and the sale of the securities at that date.

Quizplus · Accepted Answer

The Answer of On December 1, 20X8, Merry Corporation acquired 100 shares of Venus Corporation at a cost of $60 per share. Merry classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $400, an at-the-money put option to sell the 100 shares at $60 per share. The option expires on February 20, 20X9. Selected information concerning the fair values of the investment and the options follow:  
Assume that Merry exercises the put option and sells Venus shares on February 20, 20X9.
Required:
1) Prepare the entries required on December 1, 20X8, to record the purchase of the Venus stock and the put options.
2) Prepare the entries required on December 31, 20X8, to record the change in intrinsic value and time value of the options, as well as the revaluation of the available-for-sale securities.
3) Prepare the entries required on February 20, 20X8, to record the exercise of the put option and the sale of the securities at that date.

On December 1, 20X8, Merry Corporation Acquired 100 Shares of Venus