On August 1, 2020, Sage Ltd. purchased a call option from Starco Corporation. The option gave Sage the right to buy 8,000 shares in a third company, Dillon Ltd., at a price of $10 per share. On the day Sage purchased the option, Dillon shares were trading at $10 each. Sage paid $1,300 for the options. On August 31, 2020, the Dillon shares were trading at $12 each, and the options for Dillon shares were trading at $25,000. On September 15, Sage settled the options in cash when the Dillon shares were trading at $16 and the options were trading at $48,000.

QUESTION:

1) Prepare the journal entries to record the above transactions.

A) (To record the acquisition of the option.)

B) (To record the change in value of the option.)

C) (To record the change in value of the option.)

D) (To record the settlement of the option.)

2) Prepare the September 15 journal entry settling the option for cash, and assuming Sage accepted instead the shares in Dillon.

A) (To record the change in value of the option.)

B) (To take delivery of the shares using the option.)