On June 15, 2020, Smithson Foods purchased $1,000,000 of 2.5 percent corporate bonds at par and designated
Question:
On June 15, 2020, Smithson Foods purchased $1,000,000 of 2.5 percent corporate bonds at par and designated them as available‑for‑sale investments. On December 31, 2020, Smithson’s year‑end, the bonds are selling at 98.5. On February 1, 2021, the bonds are selling at 98. To hedge against a further price decrease on the bonds, Smithson purchased for $3.10 per $100 of bonds, February 2022 put options on the bonds at a strike price of 101. The intrinsic value of the puts was designated as the hedging instrument. On December 31, 2021, when the bonds were selling at 97, Smithson closed out its position by selling the puts for $4.20. Early in 2022, Smithson sold the bonds at 97.
Required
Prepare Smithson Foods’ journal entries during 2020, 2021, and 2022 related to the puts and the bonds. Gains and losses related to the bonds that are appropriately reported in income appear in “non-operating gains (losses).”
Advanced Accounting
ISBN: 978-1259444951
13th edition
Authors: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupni