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RIT Co. has an investment of 5,000 shares in a public company, SIT Ltd. In October 2017, RIT Co. purchased

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RIT Co. has an investment of 5,000 shares in a public company, SIT Ltd. In October 2017, RIT Co. purchased 5,000 put options for SIT Ltd. 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 Co.?
(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 be accounted for?
(c) Is this accounting treatment transparent?

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a The purpose of the put options purchased by RIT Co is to hedge against the potential decline in th…View the full answer


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Related Book For  answer-question
Intermediate Accounting

Intermediate Accounting

ISBN: 978-1119048541

11th Canadian edition Volume 2

Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Nicola M. Young, Irene M. Wiecek, Bruce J. McConomy

See More Books
Question Details
Chapter # 4
Section: Exercises
Problem: 1
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Question Posted: September 06, 2023 03:01:30
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