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1. The intrinsic value of the call option on April 1, 2020 is $0 as the underlying and strike price are equal. 2. At June 30, 2020, Gamma records a gain of $4,300 by debiting derivatives for $4,300 and crediting gain. 3. At expiration on December 1, 2020, Gamma debits loss for $4,800 and credits derivatives for $4,800 to record the loss. 4. On December 31, 2020, Kappa records an unrealized gain of $600 by debiting derivatives and crediting gain, as the forward price increased from $1 to $1.06.

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227 views2 pages

Question Answer

1. The intrinsic value of the call option on April 1, 2020 is $0 as the underlying and strike price are equal. 2. At June 30, 2020, Gamma records a gain of $4,300 by debiting derivatives for $4,300 and crediting gain. 3. At expiration on December 1, 2020, Gamma debits loss for $4,800 and credits derivatives for $4,800 to record the loss. 4. On December 31, 2020, Kappa records an unrealized gain of $600 by debiting derivatives and crediting gain, as the forward price increased from $1 to $1.06.

Uploaded by

patel avani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Question

On April 1, 2020, Gamma Corp. purchases a call option for $500, which gives Gamma the
right to buy 1,000 shares of Delta Inc. for $30 each until December 1, 2020. Delta Inc.
shares are currently trading for $30. At June 30, 2020, the options are trading at $4,800 and
the shares at $32 each. At December 1, 2020, the options expire with no value. The intrinsic
value of the option at April 1, 2020 is

A. $1,000.
B. $500.
C. $4,800.
D. $0.

On April 1, 2020, Gamma Corp. purchases a call option for $500, which gives Gamma the
right to buy 1,000 shares of Delta Inc. for $30 each until December 1, 2020. Delta Inc.
shares are currently trading for $30. At June 30, 2020, the options are trading at $4,800 and
the shares at $32 each. At December 1, 2020, the options expire with no value. At June 30,
2020, Gamma's quarter end, the adjusting entry would be

A. Dr Derivatives—Financial Assets....................4,800     Cr Gain or Loss on


Derivatives ....................................................4,800
B. Dr Derivatives—Financial Assets ...................4,300     Cr Other Comprehensive
Income............4,300
C. No entry required.
D. Dr Derivatives—Financial Assets....................4,300      Cr Gain or Loss on
Derivatives ....................................................4,300

On April 1, 2020, Gamma Corp. purchases a call option for $500, which gives Gamma the
right to buy 1,000 shares of Delta Inc. for $30 each until December 1, 2020. Delta Inc.
shares are currently trading for $30. At June 30, 2020, the options are trading at $4,800 and
the shares at $32 each. At December 1, 2020, the options expire with no value. At
December 1, 2020, Gamma's entry would be

A. Dr Gain or Loss on Derivatives................................................................4,800 Cr


Derivatives—Financial Assets..................4,800
B. No entry required.
C. Dr Gain or Loss on Derivatives................................................................4,300 Cr
Derivatives—Financial Assets..................4,300
D. Dr Gain or Loss on Derivatives................................................................2,000  
Cr   Derivatives—Financial Assets..................2,000

On October 5, 2020, Kappa Cloth Ltd. enters into a forward contract to purchase 10,000
metres of cotton fabric at $1 per metre, good until February 1, 2021. At December 31, 2020,
the forward price for February 2021 delivery of cotton fabric has increased to $1.06 per
metre. The adjusting entry at December 31, 2020 would be
A. Dr Derivatives—Financial Assets/Liabilities.............600       Cr  Unrealized Gain or Loss
(OCI)................................600
B. Dr Gain or Loss on Derivatives..................................................................600      Cr
Derivatives—Financial Assets/Liabilities.....600
C. No entry required.
D. Dr Derivatives—Financial Assets/Liabilities.............600      Cr  Gain or Loss on
Derivatives............................................................600
Answered by Expert Tutors 

1. Option D
2. Option D
3. Option A
4. Option D

Step-by-step explanation
1. Underlying price = $30
Strike price = $30
Intrinsic value of the options = Underlying price - Strike price = $300 - $300 = $0
Option D, $0 is the right answer.

2. Derivative financial account a/c                    Dr.                  $4,300


Gain a/c                                                                                $4,300
(Fair value = $4800
Recorded cost = $500
Gain = $4800 - $500 = $4300)
The correct answer is option D ($4,300)

3. Loss a/c                       Dr.                  $4,800


Derivatives - financial assets a/c                                                      $4,800
(Loss amount = $0 - $4,800 = -$4,800)
Option A is correct.

4. Derivative-financial asset/liabilities a/c          Dr.                  $600


Gain a/c                                                                                 $600

(Gain amount:
$1.06 - $1.00 = $0.06
$0.06*10,000 = $600)
Option D is correct.

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