Penitent Ltd acquired a parcel of 10,000 call options in Remorse Company Ltd on 1 May 2004. The price of the options was $0.50 each and they may be exercised any time over the next 3 years. The exercise price is $11. On Penitent Ltd's balance date - 30 June 2004 - the company is still holding the options. The market price of the options at that time was $1.20 each and the price of Remorse Company's shares had risen to $19. What are the entries required to record the purchase of the options and the adjusting entry to mark the options to market in Penitent's books?
A.

B.

C.

D.

E. None of the given answers.

Question

Penitent Ltd acquired a parcel of 10,000 call options in Remorse Company Ltd on 1 May 2004. The price of the options was $0.50 each and they may be exercised any time over the next 3 years. The exercise price is $11. On Penitent Ltd's balance date - 30 June 2004 - the company is still holding the options. The market price of the options at that time was $1.20 each and the price of Remorse Company's shares had risen to $19. What are the entries required to record the purchase of the options and the adjusting entry to mark the options to market in Penitent's books?
A.
  
B.
  
C.
  
D.
  
E. None of the given answers.

Quizplus · Accepted Answer

Entry to record purchase of options:
Dr. Options (asset) $5,000
Cr. Cash $5,000

Adjusting entry to mark options to market:
Dr. Options (asset) $7,000 (10,000 x $1.20)
Cr. Unrealized gain (income) $2,000 (10,000 x ($1.20-$0.50))

Penitent Ltd Acquired a Parcel of 10,000 Call Options in Remorse