Question

On January 1, 2025, Mills Corp. purchased a call option on shares of XYZ stock. Terms of the contract were as follows: - Number of shares: 100 - Strike price: $160 per share - Expiration date: April 30,2025 - Total cost of the option contract: $110 - Seller of the option contract: First Investment Bank On January 1, 2025, XYZ stock was trading at $160 per share. The following additional information is known: - On March 31. 2025 , the price of XYZ stock was $180 per share. A market appraisal indicated that the time value of the option contract was $90 - On ARril 5.2025, the price of XYZ stock was $175 per share. A market appraisal indicated that the time value of the option contract was $80. On this date, Mills settled the option contract. Required: 1. Prepare the appropriate journal entry or entries related to transactions occurring in January 2025 through March 2025 . Uf no entry is required for a transaction/ovent, select "No journal entry required" in the first account field.). 2. Indicate p. would have included in its. March 2025 quarterly financial statements related to the option 3. Prepare the appropriate journal entry or entries related to settlement of the option in April 2025. (If no entry is required for a contract. 3. Prepare the appropriate journai entry or entries related to settlement of the option in April 2025. (If no entry is required for a ransaction/event, select "No joumal entry required" in the first account field.) Complete this question by entering your answers in the tabs below. Prepare the appropriate journal entry or entries related to settiement of the option in April 2025. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

The question pertains to the financial accounting of a call option contract from its purchase to its settlement, including the journal entries required for the changes in the option's value and its settlement.

Step-by-step explanation:

The question focuses on the accounting treatment of a call option contract. When Mills Corp purchased the call option on shares of XYZ stock on January 1, 2025, it made an investment and incurred an expense.

Correspondingly, an asset account "Investment in Call Option" would be debited with the total cost of the option contract, and a cash or cash equivalent account would be credited. No further entries would be required until the value change needs to be recorded or the option is exercised or expires.

By March 31, 2025, XYZ's stock price increased, and the time value of the contract was appraised at $90. This would lead to an adjustment journal entry recognizing the increase in fair value of the call option. The difference between the initial value and this new appraisal must be recorded as either an unrealized gain or an increase in the asset's value.

The settlement of the option in April, when Mills Corp decided to exercise the option or sell it due to increase in the underlying stock's price, would involve the final fair value appraisal and the actual gains realized from the transaction.