P17-13 (Derivative Financial Instrument) The treasurer of Miller
Co. has read on the Internet that the stock price of Wade Inc. is about to take
off. In order to profit from this potential development, Miller Co. purchased a
call option on Wade common shares on July 7, 2014, for $240.00 The call option
is for 200 shares (notional value), and the strike price is $70.00. (The market
price of a share of Wade stock on that date is $70.00) The option expires on
January 31, 2015. The following data are available with respect to the call
option
Date Market Price of Wade Shares Time Value
of Call Option
September 30, 2014 $77.00 per share $180.00
December 31, 2014 $75.00 per share $65.00
January 4, 2015 $76.00 per share $30.00
Instructions
(a) Prepare the journal entry for Miller Co. for July 7,
2014—Investment in call option on Wade shares.
(b) Prepare the journal entry for Miller Co. for September 30,
2014—Miller prepares financial statements.
(c) Prepare the journal entry for Miller Co. for December 31,
2014—Miller prepares financial statements.
(d) Prepare the journal entry for Miller Co. for January 4,
2015—Miller settles the call option on the Wade shares.
TUTORIAL PREVIEW
(a) Prepare the journal entry for Miller Co. for July 7,
2014—Investment in call option on Wade shares.
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Jul 7,
14
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Call Option
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240
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Cash
|
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240
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