RIT Co. has an investment of 5,000 shares in a public company, SIT Ltd. In October 2023, RIT purchased 5,000 put options for SIT shares at a price of $2 per put option. The strike price associated with the put options is $100 per share, which is equal to the current trading price of the shares.

Instructions

a. What is the purpose of the put options purchased by RIT?

b. How would RIT account for the purchase of the put options? Assume that the value of the shares of SIT subsequently declines. How would this decline be accounted for?

c. Is this accounting treatment transparent?