Question
On October 15, 2017, Oil Products Co. purchased 4,000 barrels of fuel oil with a cost of $240,000 ($60 per barrel). Oil Products is holding
On October 15, 2017, Oil Products Co. purchased 4,000 barrels of fuel oil with a cost of $240,000 ($60 per barrel). Oil Products is holding this inventory in anticipation of the winter 2018 heating season. Oil Products accounts for its inventory at the lower-of-FIFO-cost-or-net realizable value. To hedge against potential declines in the value of the inventory, Oil Products also purchased a put option on the fuel oil. Oil Products paid an option premium of $300 for the put option, which gives Oil Products the option to sell 4,000 barrels of fuel oil at a strike price of $60 per gallon. The option expires on March 1, 2018. The following data are available with respect to the values of the fuel of inventory and the put option.
Instructions attached.
o On October 15, 2017, Oil Products Co. purchased 4,000 barrels of fuel oil with a cost of $240,000 ($60 per barrel). Oil Products is holding this inventory in anticipation of the winter 2018 heating season. Oil Products accounts for its inventory at the lower-of-FIFO-cost-or-net realizable value. To hedge against potential declines in the value of the inventory, Oil Products also purchased a put option on the fuel oil. Oil Products paid an option premium of $300 for the put option, which gives Oil Products the option to sell 4,000 barrels of fuel oil at a strike price of $60 per gallon. The option expires on March 1, 2018. The following data are available with respect to the values of the fuel of inventory and the put option. Date October 31, 2017 November 30, 2017 December 31, 2017 Market Price of Fuel Oil $58 per gallon 57 per gallon 54 per gallon Time Value of Put Option $175 105 40 o Instructions o (a) Prepare the journal entries of Oil Products for the following dates. o 1. October 15, 2017--Oil Products purchases fuel oil and the put option on fuel oil. o 2. October 31, 2017--Oil Products prepares financial statements. o 3. November 30, 2017--Oil Products prepares financial statements. o 4. December 31, 2017--Oil Products prepares financial statements
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started