On June 1,2011,Dapple Industries Purchases an Option Contract for $5,000

question 37

Essay

On June 1,2011,Dapple Industries purchases an option contract for $5,000 on 10,000 gallons of aviation gas to minimize its purchasing cost price exposure.At the time,the market price is $2.50 per gallon and the option price of $2 per gallon will expire 6 months later.Dapple can exercise the option at its discretion.When Dapple prepares quarterly reports on June 30,Dapple is still holding the option.On June 30,the market price of aviation gas is $4.50 per gallon.The option is to be settled net.
On August 1,Dapple exercises the option when the gas market price is $5.00 per gallon and purchases 40,000 gallons of gas.On August 15,Dapple uses all of the gas on a charter flight.
Required:
What are Dapple's journal entries with regard to the aviation gas option? Assume this is a cash flow hedge.Ignore the time value of money.

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