On December 1,20X8,Merry Corporation acquired 10 deep discount bonds of Venus Corporation at a cost of $600 per bond.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 10 bonds at $600 per bond.The option expires on February 20,20X9 and is properly designated as a hedge at the time of purchase.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 bonds 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 10 deep discount bonds of Venus Corporation at a cost of $600 per bond.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 10 bonds at $600 per bond.The option expires on February 20,20X9 and is properly designated as a hedge at the time of purchase.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 bonds 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 10 deep discount bonds of Venus Corporation at a cost of $600 per bond.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 10 bonds at $600 per bond.The option expires on February 20,20X9 and is properly designated as a hedge at the time of purchase.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 bonds 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 10 Deep Discount Bonds of Venus