In 2016, Smithson Foods purchased $1,000,000 of 2.5% corporate bonds at par, and designated them as held-to-maturity investments. Throughout 2016, the market value of the bonds declined, but Smithson characterized the decline as temporary and made no adjustments to their cost.

On February 1, 2017, the bonds are selling at 98. To hedge against a further price decrease on the bonds, Smithson purchased for $3.10 per $100 of bonds, February 2018 in-the-moneyput options on the bonds at a strike price of 101. The intrinsic value of the puts was designated as the hedge instrument.

By June 30, 2017, Smithsons fiscal year-end, the bonds were selling at 99 and the puts for $2.30. On December 31, 2017, when the bonds were selling at 97, Smithson closed out its position by selling the puts for $4.20.

Requirements:

1. Determine the intrinsic value and the time value of the put options on February 1, 2017 and record the purchase of the options.

2. Record the change in the fair value for the put options by June 30, 2017. For clarity separate the changes in the intrinsic value and the time value into two entries.

3. Record the change in the fair value of the bonds by June 30, 2017. Note: that when a held-to-maturity investment is hedged, special hedge accounting treatment applies. Under this accounting treatment, fair value changes between the inception in the hedge and each balance sheet date are recorded in Net Income.

4. Record the change in the fair value for the put options by December 31, 2017. For clarity separate the changes in the intrinsic value and the time value into two entries.

5. Record the change in the fair value of the bonds by December 31, 2017.

6. Record the sale of the Put Option on December 31, 2017