Spiralling Crude Oil Prices Prompted AMAR Company to Purchase Call

question 17

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 30,2008,AMAR purchases call options for 20,000 barrels of oil at $100 per barrel at a premium of $4 per barrel,with a February 1,2009,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 1,2009,AMAR sells the options at their value on that date and acquires 20,000 barrels of oil at the spot price.On April 1,2009,AMAR sells the oil for $112 per barrel.

-Based on the preceding information,the entries made on April 1,2009 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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