Spiralling Crude Oil Prices Prompted AMAR Company to Purchase Call

question 52

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, which of the following adjusting entries would be required on December 31, 20X8?

• A) Option A
• B) Option B
• C) Option C
• D) Option D

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Definitions:

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A form of authority that a third party reasonably believes an agent has, based on the principal's behavior or words, which can bind the principal to agreements made by the agent.

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An official document that grants permission or authority for certain actions or activities.

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To officially sanction or ratify an agreement or treaty, thereby making it legally binding.

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The legal ability of a party to enter into a contract, including being of legal age and having sound mind.