Question
On November 30, 2020, Price Traders, Inc., (PTI) made the journal entry, shown below, to record the exercise of a call option it purchased on
On November 30, 2020, Price Traders, Inc., (PTI) made the journal entry, shown below, to record the exercise of a call option it purchased on May 1, 2020 for $4,500, which gave it a right to purchase shares of Atlantic Fisheries, Inc., (AFI) for $8 each until December 31, 2020. The fair value of the call option was last updated on October 31, 2020.
Investment- AFI Common Shares DR....$100,000
Derivative - Call Option CR....$18,000
Cash CR....$64,000
Gain on Derivative-Call Options CR....$18,000
Using the given information, determine the following:
[i] The market value of AFI shares on November 30, 2020; [ii] the number of shares purchased; [iii] the total overall gain or loss from the call option; and [iv] the fair value of the call option on October 31, 2020.
a.[i] Market Value: $12.50 per share; [ii] Number of Shares Purchased: 8,000 shares; [iii] Total Overall Gain/Loss: $36,000 gain; [iv] Fair Value Call Option: $36,000.
b.[i] Market Value: $12.50 per share; [ii] Number of Shares Purchased: 8,000 shares; [iii] Total Overall Gain/Loss: $31,500 gain; [iv] Fair Value Call Option: $18,000.
c.[i] Market Value: $10.00 per share; [ii] Number of Shares Purchased: 10,000 shares; [iii] Total Overall Gain/Loss: $31,500 gain; [iv] Fair Value Call Option: $18,000.
d.
[i] Market Value: $10.00 per share; [ii] Number of Shares Purchased: 10,000 shares; [iii] Total Overall Gain/Loss: $18,500 gain; [iv] Fair Value Call Option: $18,000.
e.
None of the above. $10.00 per share; 10,000 shares; $18,000 gain; $18,000 call option value Oct. 31, 2020.
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