(Fair Value Hedge) On November 3, 2007, Sprinkle Co. invested $200,000 in 4,000 shares of the common stock of Johnstone Co. Sprinkle classified this investment as available-for-sale. Sprinkle Co. is considering making a more significant investment in Johnstone Co. at some point in the future but has decided to wait and see how the stock does over the next several quarters.

To hedge against potential declines in the value of Johnstone stock during this period, Sprinkle also purchased a put option on the Johnstone stock. Sprinkle paid an option premium of $600 for the put option, which gives Sprinkle the option to sell 4,000 Johnstone shares at a strike price of $50 per share.

The option expires on July 31, 2007. The following data are available with respect to the values of the Johnstone stock and the put option.

Instructions

(a) Prepare the journal entries for Sprinkle Co. for the following dates.
(1) November 3, 2006—Investment in Johnstone stock and the put option on Johnstone shares.
(2) December 31, 2006—Sprinkle Co. prepares financial statements.
(3) March 31, 2007—Sprinkle prepares financial statements.
(4) June 30, 2007—Sprinkle prepares financial statements.
(5) July 1, 2007—Sprinkle settles the put option and sells the Johnstone shares for $43 per share.

(b) Indicate the amount(s) reported on the balance sheet and income statement related to the Johnstone investment and the put option on December 31, 2006.

(c) Indicate the amount(s) reported on the balance sheet and income statement related to the Johnstone investment and the put option on June 30, 2007.

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Date December 31, 2006 March 31, 2007 June 30, 2007 Market Price of Johnstone Shares Time Value of Put Option $50 per share 45 per share 43 per share $375 175 40