Question
Champion Inc. purchased a call option as a speculative investment on January 1 for $125, allowing Champion Inc. to purchase 200 of Rising Star
Champion Inc. purchased a call option as a speculative investment on January 1 for $125, allowing Champion Inc. to purchase 200 of Rising Star Co. common shares at $100 per share through January 1 of the following year. Champion Inc. prepared the following table to track the activity of this investment during the year. Rising Star Co.: Call Option: Date Market Price per Share Fair Value Jan. 1 $100 $125 June 30 90 50 Dec. 31 102 400 Required a. Prepare the following journal entries for Champion Inc. 1. Purchase of the call option on January 1. 2. Adjust the call option to fair value on June 30. 3. Adjust the call option to fair value on December 31. Ref. Account Name 1. Call Option Cash Dr. Cr. 25,000 0 x 0 25,000 x To record purchase of call option 2. Unrealized Gain or Loss-OCI Cash 15,000 0 x 0 15,000 x 3. To record fair value adjustment of call option Call Option 70,000 0 x Unrealized Gain or Loss-OCI 0 70,000 x To record fair value adjustment of call option b. What is the impact on the income statement of holding this speculative investment during the year? Note: Do not use a negative sign with your answer. Income Statement Year 1 Other revenue Net unrealized gain on call option $ 55,000 x
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