Problem
On October 15, 2017, Oil Products Co. purchased 4,000 barrels of fuel oil with a cost of $240,000 ($60 per barrel). Oil Products is holding this inventory in anticipation of the winter 2018 heating season. Oil Products accounts for its inventory at the lower-of-FIFO-cost-or-net realizable value. To hedge against potential declines in the value of the inventory, Oil Products also purchased a put option on the fuel oil. Oil Products paid an option premium of $300 for the put option, which gives Oil Products the option to sell 4,000 barrels of fuel oil at a strike price of $60 per gallon. The option expires on March 1, 2018. The following data are available with respect to the values of the fuel of inventory and the put option.
|
Date
|
Market Price of Fuel Oil
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Time Value of Put Option
|
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October 31, 2017
|
$58 per gallon
|
$175
|
|
November 30, 2017
|
57 per gallon
|
105
|
|
December 31, 2017
|
54 per gallon
|
40
|
Instructions -
(a) Prepare the journal entries of Oil Products for the following dates.
1. October 15, 2017--Oil Products purchases fuel oil and the put option on fuel oil.
2. October 31, 2017--Oil Products prepares financial statements.
3. November 30, 2017--Oil Products prepares financial statements.
4. December 31, 2017--Oil Products prepares financial statements.