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?

A)Option A
B)Option B
C)Option C
D)Option D

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?

A)Option A 
B)Option B 
C)Option C 
D)Option D

Quizplus · Accepted Answer

The fair value of the shares on February 20, 20X9 is $33, resulting in a loss of $7 per share. Since Winston exercised the put option and sold the shares for $40 per share, the option was in-the-money and produced a gain of $7 per share. Thus, the net effect on Winston's financial statements is no change in overall value. The journal entry to record the sale of the shares and the exercise of the option would be:
Debit Cash: $4,000
Credit Available-for-sale securities: $4,000
Debit Put option: $250
Credit Gain on sale of securities: $250

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