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    Jones Company: JE for Call Options and Unrealized Holding Gains

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    AE17-22 (Call Option)

    On January 2, 2012, Jones Company purchases a call option for $420 on Merchant common stock. The call option gives Jones the option to buy 1,000 shares of Merchant at a strike price of $50 per share. The market price of a Merchant share is $50 on January 2, 2012 (the intrinsic value is therefore $0). On March 31, 2012, the market price for Merchant stock is $62 per share, and the time value of the option is $200.

    (a) Prepare the journal entry to record the purchase of the call option on January 2, 2012.
    Description/Account Debit Credit

    (b) Prepare the journal entry(ies) to recognize the change in the fair value of the call option as of March 31, 2012.
    Description/Account Debit Credit

    (c) What was the effect on net income of entering into the derivative transaction for the period January 2 to March 31, 2012?

    Unrealized Holding Gain: $____

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    Solution Summary

    Your tutorial is attached in Excel and shows how to adjust for the change in stock price and the change in time value of the call option. The unrealized holding gain is also shown. Click in cells to see computations.