On April 16, 2007, ColorCo purchased a put option for $800 on Choco common stock. The put option gives ColorCo the option to sell 5,000 shares of Choco at a strike price of $25 per share for a period of one year. The market price of a Choco share is $25 on April 16, 2007 (the intrinsic value is therefore $0). On June 30, 2007, the market price for Choco stock is $24 per share, and the time value of the option is $550.

Instructions

(a) Prepare the journal entry to record the purchase of the put option on April 16, 2007.

(b) Prepare the journal entry(ies) to recognize the change in the fair value of the put option as of June 30, 2007.

(c) What was the effect on net income of entering into the derivative transaction for the 3-month period ending June 30, 2007?