Accounting for a Written Put Option
On January 1,Year 1, the company wrote a put option agreeing to purchase 100 shares of its own stock for $50 per share on December 31,Year 2, at the option of the purchaser of the put option. The market price of the company’s shares on January 1, Year 1, was $50 per share. As of January 1, Year 1, this put option has a fair value of $1,200. Because the company’s shares increased in value during Year 1, the put option has a fair value of just $350 on December 1, Year 1. On December 31, Year 2, the company’s shares have a market price of $46 per share, so the purchaser of the put option exercised the option on that date. Make the journal entries necessary on January 1, Year 1, on December 31, Year 1, and on December 31, Year 2 on the books of the company that wrote the put option.