Problem 1 (Options)

On April 1, 2020, Gamma Corp. purchases a call option for $ 500, which gives Gamma the right to buy 1,000 shares of Delta Inc. for $ 30 each until December 1, 2020. Delta Inc. shares are currently trading for $ 30. On June 30, 2020, the option is trading at $ 4,800 and the shares at $ 32 each. On December 1, 2020, Gamma exercises the option while the shares are trading at $38 each.

Instructions:

1. Determine the intrinsic value and the time value of the option on April 1, 2020.
2. Determine the intrinsic value and the time value of the option On June 30, 2020.
3. Prepare necessary journal entries to record the purchase of the option on April 1, the adjustment on June 30, 2020, Gammas quarter end, the exercise of the option on December 1, if Gamma settles the option by taking delivery.