On October 15, 2020, Oil Products Co. purchased 4,000 barrels of fuel oil with a cost of

Question:

On October 15, 2020, Oil Products Co. purchased 4,000 barrels of fuel oil with a cost of $240,000 ($60 per barrel). Oil Products is holding this inventory in anticipation of the winter 2021 heating season. Oil Products accounts for its inventory at the lower-of-FIFO-cost-or-net realizable value. To hedge against potential declines in the value of the inventory, Oil Products also purchased a put option on the fuel oil. Oil Products paid an option premium of $300 for the put option, which gives Oil Products the option to sell 4,000 barrels of fuel oil at a strike price of $60 per gallon. The option expires on March 1, 2021. The following data are available with respect to the values of the fuel of inventory and the put option.

Instructions

a. Prepare the journal entries of Oil Products for the following dates.

1. October 15, 2020?Oil Products purchases fuel oil and the put option on fuel oil.

2. October 31, 2020?Oil Products prepares financial statements.

3. November 30, 2020?Oil Products prepares financial statements.

4. December 31, 2020?Oil Products prepares financial statements.

b. Indicate the amount(s) reported on the balance sheet and income statement related to the fuel oil inventory and the put option on November 30, 2020.

c. Indicate the amount(s) reported on the balance sheet and income statement related to the fuel oil and the put option on December 31, 2020.

Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity. Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...

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