Pratt Agriculture sells approximately 600,000 bushels of grain each month. On January 1, 2013, Pratt purchased an

Question:

Pratt Agriculture sells approximately 600,000 bushels of grain each month. On January 1, 2013, Pratt purchased an option to sell 600,000 bushels of grain on January 1, 2015, at a price of $1.25 per bushel. The market price on January 1, 2013, is $1.25 per bushel. Pratt had to pay $90,000 to purchase this grain put option, which it designated as a hedge against price decreases for its January 2015 sales of grain.
On December 31, 2013, the price of grain is $1.75 per bushel. Because there is still time for the price of grain to potentially fall below $1.25 per bushel before the option expires (thus making it advantageous to exercise the put option), the option has a value on December 31, 2013, of $23,000. (Note: This December 31, 2013, option value already takes into account an appropriate adjustment for the time value of money.) On December 31, 2014, the price of grain is $1.35 per bushel.
Instructions:
Make all journal entries necessary on Pratt's books in 2013, 2014, and 2015 to record this option and the sale of 600,000 bushels of grain in January 2015.
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Intermediate Accounting

ISBN: 978-0538479738

18th edition

Authors: Earl K. Stice, James D. Stice

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