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Subject Topic: 2009 AICPA Newly Released Questions - 36 (Topic Closed Topic Closed) Post ReplyPost New Topic
  
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milu119
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Posted: 09 May 2009 at 13:27 | IP Logged  

36. On December 1 of the current year, Bann Co. entered into an option contract to purchase 2,000 shares of Norta Co. stock for $40 per share (the same as the current market price) by the end of the next two months. The time value of the option contract is $600. At the end of December, Norta's stock was selling for $43, and the time value of the option is now $400. If Bann does not exercise its option until January of the subsequent year, which of the following changes would reflect the proper accounting treatment for this transaction on Bann's December 31, year-end financial statements?

a. The option value will be disclosed in the footnotes only.
b. Other comprehensive income will increase by $6,000.
c. Net income will increase by $5,800.
d. Current assets will decrease by $200.

Explanation
Choice "c" is correct.

Please help me to solve this problem. I came up with answer for this - NI is inc. by $6,000.


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Nolo
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Posted: 10 May 2009 at 04:01 | IP Logged  

The option's value has increased $6,000 due to the $3 increase of the underlying stock.
The option has also lost $200 in time value.
Net: $5,800

The option is a trading security. Unrealized gains/losses are recognized currently in income.
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milu119
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Posted: 10 May 2009 at 08:42 | IP Logged  

Thank you for help.

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jrupa
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Posted: 10 May 2009 at 13:49 | IP Logged  

hi nolo

where did u learn the accounting for option contract... are u using becker.. if yes.. where is the matter .. which page and which chapter.. coz i was not able to undestand teh question when i saw...

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persist
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Posted: 24 May 2009 at 08:31 | IP Logged  

Can someone explain in detail how to approach this problem!

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