Question

On November 3, 20X2, PRD Corporation acquired 100 shares of JRS Company at a cost of $12 per share. PRD classifies them as available-for-sale securities. On this same date, PRD decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $100, an at-the-money put option to sell the 100 shares at $12 per share. The option expires on March 3, 20X3. The fair values of the investment and the options follow:


Required
a. Prepare the entries required on November 3, 20X2, to record the purchase of the JRS stock and the put options.
b. Prepare the entries required on December 31, 20X2, to record the change in intrinsic value and time value of the options, as well as the revaluation of the available-for-sale securities.
c. Prepare the entries required on March 3, 20X3, to record the exercise of the put option and the sale of the securities at thatdate.


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  • CreatedMay 23, 2014
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