Jasper Jellies Purchases Debt Securities on December 1, 2020 at a Par

Essay

Jasper Jellies purchases debt securities on December 1, 2020 at a par value of $1,000,000, classified as available-for-sale. To protect their value, on December 1, 2020, Jasper pays $10,000 for put options on the securities with a $1,000,000 strike price, expiring on March 1, 2021, and designates their intrinsic value as the hedge instrument. Jasper closes its books on December 31. On March 1, 2021, Jasper exercises the options and delivers the securities to the option writer. All income effects of the securities and the put options are reported in the financial gains (losses) account. Relevant market prices for the securities and the put options are as follows:
$$\begin{array} { | l | c | c | c | } \hline & \text { December 1, 2020 } & \text { December 31, 2020 } & \text { March 1,2021 } \\\hline \text { Securities } & \$ 1,000,000 & \$ 980,000 & \$ 975,000 \\\hline \text { Put options } & \$ 10,000 & \$ 22,000 & \$ 25,000 \\\hline\end{array}$$ Required
a. Prepare the appropriate entries on December 1 to record purchase of the securities and options and on December 31 to adjust the accounts.
b. What is the intrinsic value of the put options on December 1 and December 31?
c. Make the appropriate entries on March 1 to adjust the accounts, exercise the put options and deliver the securities to the option writer.
d. The options increased in value by $15,000 during this period, and the securities declined in value by $25,000. Were the options an effective hedge? Explain.