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.
