Penitent Ltd acquired a parcel of 10 000 call options in Remorse Company Ltd on 1 May 2014.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 2014 - 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?

Question

Quizplus · Accepted Answer

Purchase of the options:

Options account Debit: 5000 (10,000 x $0.50)
Cash/Cash equivalent account Credit: 5000

Adjusting entry to mark the options to market at the end of the period:

Options account Debit: 7000 (10,000 x $1.20 - market value of $0.50)
Unrealized Gain/Loss account Credit: 7000

Penitent Ltd Acquired a Parcel of 10 000 Call Options