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On April 1, 2020, Gamma Corp. purchases a call option for $500, which gives Gamma the
right to buy 1,000 shares of Delta Inc. for $30 each until December 1, 2020. Delta Inc.
shares are currently trading for $30. At June 30, 2020, the options are trading at $4,800 and
the shares at $32 each. At December 1, 2020, the options expire with no value. The intrinsic
value of the option at April 1, 2020 is
A. $1,000.
B. $500.
C. $4,800.
D. $0.
On April 1, 2020, Gamma Corp. purchases a call option for $500, which gives Gamma the
right to buy 1,000 shares of Delta Inc. for $30 each until December 1, 2020. Delta Inc.
shares are currently trading for $30. At June 30, 2020, the options are trading at $4,800 and
the shares at $32 each. At December 1, 2020, the options expire with no value. At June 30,
2020, Gamma's quarter end, the adjusting entry would be
On April 1, 2020, Gamma Corp. purchases a call option for $500, which gives Gamma the
right to buy 1,000 shares of Delta Inc. for $30 each until December 1, 2020. Delta Inc.
shares are currently trading for $30. At June 30, 2020, the options are trading at $4,800 and
the shares at $32 each. At December 1, 2020, the options expire with no value. At
December 1, 2020, Gamma's entry would be
On October 5, 2020, Kappa Cloth Ltd. enters into a forward contract to purchase 10,000
metres of cotton fabric at $1 per metre, good until February 1, 2021. At December 31, 2020,
the forward price for February 2021 delivery of cotton fabric has increased to $1.06 per
metre. The adjusting entry at December 31, 2020 would be
A. Dr Derivatives—Financial Assets/Liabilities.............600 Cr Unrealized Gain or Loss
(OCI)................................600
B. Dr Gain or Loss on Derivatives..................................................................600 Cr
Derivatives—Financial Assets/Liabilities.....600
C. No entry required.
D. Dr Derivatives—Financial Assets/Liabilities.............600 Cr Gain or Loss on
Derivatives............................................................600
Answered by Expert Tutors
1. Option D
2. Option D
3. Option A
4. Option D
Step-by-step explanation
1. Underlying price = $30
Strike price = $30
Intrinsic value of the options = Underlying price - Strike price = $300 - $300 = $0
Option D, $0 is the right answer.
(Gain amount:
$1.06 - $1.00 = $0.06
$0.06*10,000 = $600)
Option D is correct.