Problem: On January 2, 2012, Jones Company purchases a call option for $420 on Merchant common stock. The call option gives Jones the option to buy 1,000 shares of Merchant at a strike price of $50 per share. The market price of a Merchant share is $50 on January 2, 2012 (the intrinsic value is therefore $0). On March 31, 2012, the market price for Merchant stock is $62 per share, and the time value of the option is $200.
(a) Prepare the journal entry to record the purchase of the call option on January 2, 2012.
Description/Account Debit Credit
(b) Prepare the journal entry(ies) to recognize the change in the fair value of the call option as of March 31, 2012.
Description/Account Debit Credit
(c) What was the effect on net income of entering into the derivative transaction for the period January 2 to March 31, 2012?
Unrealized Holding Gain: $____