Overhill Farms Inc. has a large portfolio of debt securities, classified as available-for-sale. As part of this portfolio, Overhill holds $1,000,000 par value of Tyson Foods bonds, purchased at par and currently valued at 99.5. To protect against further declines in value, on November 1, 2020, Overhill purchased for $3,500 3-month put options at an exercise price of 99.8. Overhill designates the intrinsic value of the puts as the hedge instrument, and reports all income effects of the

investment and its hedge in nonoperating gains (losses).

Required

a.

Prepare journal entries to record purchase of the puts and relevant events on November 1, 2020, and

when the books are closed at December 31, 2020, the bonds are selling for 99.3, and the options are

selling for $5,300.

b.

On January 31, 2021, Overhill sells the bonds for their current value of 99.2, and sells the put options

for their intrinsic value of $6,000. Prepare the journal entries to record the sales of the bonds and the

options, and calculate the net cash gain or loss realized on these sale transactions.

C.

How much of the realized cash gain or loss is recognized in 2020 income? In 2021 income?