On December 1, 20X8, Winston Corporation acquired 100 shares of Linked Corporation at a cost of $40 per share. Winston 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 $250, an at-the-money put option to sell the 100 shares at $40 per share. The option expires on February 20, 20X9. Selected information concerning the fair values of the investment and the options follow:
Assume that Winston exercises the put option and sells Linked shares on February 20, 20X9.
-Based on the preceding information,which of the following journal entries will be made on February 20,20X9?

Question

On December 1, 20X8, Winston Corporation acquired 100 shares of Linked Corporation at a cost of $40 per share. Winston 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 $250, an at-the-money put option to sell the 100 shares at $40 per share. The option expires on February 20, 20X9. Selected information concerning the fair values of the investment and the options follow:
  Assume that Winston exercises the put option and sells Linked shares on February 20, 20X9.
-Based on the preceding information,which of the following journal entries will be made on February 20,20X9?

Quizplus · Accepted Answer

On February 20, 20X9, Winston will exercise the put option and sell the Linked shares for $40 per share. The fair value of the shares at that date is $44 per share, so Winston will recognize a loss on the sale of $4 per share. The journal entry to record this transaction will be:
Dr. Cash $4,000
Dr. Loss on sale of available-for-sale securities $400
Cr. Available-for-sale securities $4,000
Cr. Put option $250
To record the sale of 100 shares of Linked Corporation at $40 per share, less the loss on sale of $4 per share, and the expiration of the put option. The cost of the put option is not relevant for this journal entry.

On December 1, 20X8, Winston Corporation Acquired 100 Shares of Linked