Question

On November 3, 2010, Sprinkle Co. invested €200,000 in 4,000 shares of the ordinary shares of Pratt Co. Sprinkle classified this investment as non-trading equity. Sprinkle Co. is considering making a more significant investment in Pratt Co. at some point in the future but has decided to wait and see how the shares do over the next several quarters.
To hedge against potential declines in the value of Pratt shares during this period, Sprinkle also purchased a put option on the Pratt shares. Sprinkle paid an option premium of €600 for the put option, which gives Sprinkle the option to sell 4,000 Pratt shares at a strike price of €50 per share. The option expires on July 31, 2011. The following data are available with respect to the values of the Pratt shares and the put option.


Instructions
(a) Prepare the journal entries for Sprinkle Co. for the following dates.
(1) November 3, 2010—Investment in Pratt shares and the put option on Pratt shares.
(2) December 31, 2011—Sprinkle Co. prepares financial statements.
(3) March 31, 2011—Sprinkle prepares financial statements.
(4) June 30, 2011—Sprinkle prepares financial statements.
(5) July 1, 2011—Sprinkle settles the put option and sells the Pratt shares for €43 per share.
(b) Indicate the amount(s) reported on the statement of financial position and income statement related to the Pratt investment and the put option on December 31, 2010.
(c) Indicate the amount(s) reported on the statement of financial position and income statement related to the Pratt investment and the put option on June 30,2011.


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  • CreatedJune 17, 2013
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