Question
Bronze Ltd enters into a call option contract with Titanium Ltd that gives Bronze Ltd the right to acquire 200,000 shares in Aqua Ltd. The
Bronze Ltd enters into a call option contract with Titanium Ltd that gives Bronze Ltd the right to acquire 200,000 shares in Aqua Ltd. The options premium is $0.30 each. The details of the options contract are:
Contract date 1 March 2021
Settlement terms Net cash settlement
Exercise date (only at maturity) 31 August 2021
Exercise right holder Gold Ltd
Exercise price per share $2.00
Share price at maturity $2.45
Number of shares under option contract 200,000
Fair value of option contract on 1 March 2021 $60,000 ($0.30 per option)
Fair value of option contract on 30 June 2021 $70,000 ($0.35 per option)
Fair value of option contract on 31 August 2021 $90,000 ($0.45 per option)
1. Prepare the journal entry for Bronze ltd as the call option holder.
2. Explain whether Bronze Ltd would classify the options as a debt instrument, a derivative financial instrument, or an equity instrument. Justify your answer. Could Bronze Ltd measure the options subsequent to initial recognition at fair value through other comprehensive income?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started