Problem 19-1 Call options as investments (LO 19-2, LO 19-4)

On July 1, 20X1, Stan Getz, Inc., bought call option contracts for 500 shares of Selmer Manufacturing common stock. The contracts cost $200, expire on September 15, and have an exercise price of $40 per share. The market price of Selmers stock that day was also $40 a share. On July 31, 20X1, Selmer stock was trading at $38 a share, and the option contracts fair value was $125that is, Getz could buy the identical $40 strike price contracts on July 31 for $125. On August 31, 20X1, the market price of Selmer stock was $44 a share, and the fair value of the options contracts was $2,075.

Required:

Prepare the journal entry to record Getzs purchase of call option contracts on July 1, 20X1.

Prepare the journal entry to record the change in fair value of the option contracts on July 31, 20X1.

Prepare the journal entry to record the change in fair value of the option contracts on August 31, 20X1.

What entry would Getz make to record exercising the options on September 15, 20X1, when Selmers shares were trading at $46?

Suppose instead that Getz allowed the option contracts to expire on September 15, 20X1, without exercising them. What entry would Getz then make?