QUESTION V

On April $1,2022,$ the Bush Investment Traders Corporation $[$BIT$]$ purchased a call option for $$175$ on the

Worldwide Hotels, Inc., $[$WWH$]$ common shares. This call option gives $[$BIT$]$ the right to buy $700$ shares

of $[$WWH$]$ at an exercise$/$strike price of $$27$ per share any time during the next six months. The market

price of $[$WWH$]$ shares was $$27$ per share on April $1,2022.$ On June $30,2022,$ the fair value of the

option was $$10,000.$ On the following day when the market price for $[$WWH$]$ stock was $$38$ per share,

$[$BIT$]$ exercised the option.

Required

$1.$ Determine the Gain or Loss on the Derivatives which BIT would record on June $30,2022.$

$2.$ BIT exercised the call option on July $1,2022$ and took delivery of the WWH shares on that date

when the market price was $$38$ per share. What would be the journal entry to record this

transaction?

$3.$ Now assume that BIT exercised the call option on July $1,2022$ and settled the contract without

taking delivery of the WWH shares when the market price was $$38$ per share. What would be the

journal entry to record this transaction?

The next three Questions are independent of the information given above.

$4.$ On July $1,2020,$ Pelosi Corporation, Inc., $[$PCI$]$ purchased a put option for $$4,000,$ which gave it

the right to sell $1,000$ shares of Sunak Ships, Inc., $[$SSI$]$ for $$30$ each until July $1,2021.$ On

November $6,2021$ SSI shares are trading at $$25$ each and SSI settles the option directly $($without

receiving the SSI shares$).$ The derivative has not been updated since the date of purchase. The

journal entry on the books of PCI to record this transaction on November $6,2021$ would be:

$5.$ On November $30,2020,$ Singh Inc., made the journal entry to record the exercise of a call option it

purchased on May $1,2020$ for $$9,500,$ which gave it a right to purchase shares of Balsa Inc., for

$$10$ each until December $31,2020.$ The fair value of the call option was last updated on October

$31,2020.$ The following journal entry was made:

DR $....$ Investment$-$ Balsa Inc., Common Shares $........$ $$145,000$;

CR $.....$ Derivative $-$ Call Option $........$ $$18,000$;

CR $.....$ Cash $........$ $$100,000$;

CR $.....$ Gain on Derivative $-$ Call Options $........$ $$27,000.$

Determine the market value of Balsa shares on November $30,2020,$ the number of shares

purchased, the total overall gain or loss from the call option and the fair value of the call

option on October $31,2020.$

$6.$ Assume the same facts in Question $5$ above. How much would Singh Inc., have asked for as a cash

settlement $($net settlement$)$ of the call option on November $30,2020$ had they decided not to take

delivery of the Balsa Inc. shares?