On March 1, 2017, Prairie Farms forecasts that it will purchase 1,000,000 units of a commodity in six months. To hedge against rising prices, Prairie Farms invests in 1,000,000 September 2017 call options for the commodity. The call options have a strike price of $3.30 per unit, and cost $0.65 each. The current market price of the commodity is $3.25 per unit. The intrinsic value of the options is designated as the hedging instrument, and the option investment qualifies as a cash flow hedge of the forecasted purchase. Changes in option time value are reported directly in income. On June 30, 2017, the market price of the commodity is $3.40 per unit, the options have a market price of S0.50 per unit, and Prairie Farms sells the options.

Required 

Prepare the journal entry to record the sale of the options.

Answer rating: 100% (QA)

sol Journal Entries in the books of Prairie Farms Date Particulars Debit Credit 01032020 Investm... View the full answer