Question
Mega Company believes the price of oil will increase in the coming months. Therefore, it decides to purchase call options on oll as a
Mega Company believes the price of oil will increase in the coming months. Therefore, it decides to purchase call options on oll as a price-risk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil. On November 30, 20X1, Mega purchases call options for 18,000 barrels of oil at $30 per barrel at a premium of $2 per barrel with a March 1, 20X2, call date. The following is the pricing information for the term of the call: Futures Price Date November 30, 20x1 Spot Price $30 December 31, 20x1 March 1, 20x2 31 (for March 1, 20x2, delivery) $31 32 33 The information for the change in the fair value of the options follows: Date November 30, 20x1 December 31, 20x1 March 1, 20x2 Time Value $36,000 6,000 Intrinsic Value -0-9 18,000 54,000 Total Value $36,000 24,000 54,000 On March 1, 20X2, Mega sells the options at their value on that date and acquires 18,000 barrels of oil at the spot price. On June 1, 20X2, Mega sells the oil for $34 per barrel. Required: a. Prepare the journal entry required on November 30, 20X1, to record the purchase of the call options. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list Journal entry worksheet
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