Spiralling Crude Oil Prices Prompted AMAR Company to Purchase Call

question 56

Multiple Choice

Spiralling crude oil prices prompted AMAR Company to purchase call options on oil as a price-risk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil. On November 30, 20X8, AMAR purchases call options for 20,000 barrels of oil at $100 per barrel at a premium of $4 per barrel, with a February 1, 20X9, call date. The following is the pricing information for the term of the call: The information for the change in the fair value of the options follows:
On February 1, 20X9, AMAR sells the options at their value on that date and acquires 20,000 barrels of oil at the spot price. On April 1, 20X9, AMAR sells the oil for $112 per barrel.
Based on the preceding information, the entries made on April 1, 20X9 will include:

• A) a debit to Other Comprehensive Income for $200,000.
• B) a debit to Cost of Goods Sold for $2,240,000.
• C) a credit to Oil Inventory for $2,240,000.
• D) a credit to Cost of Goods Sold for $100,000.

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