On December 1,2014 a company bought a call option costing $100,000 as a speculative investment.The call option gave the company the right to purchase 100,000 barrels of oil for $110 per barrel during April 2015.As of December 31,2014 the call option had a value of $125,000.The company liquidated the call option on April 15,2015 in exchange for $175,000.Which of the following accurately describes GAAP accounting for this call option?
A)The realized gain applicable to the year ending December 31,2014 is $25,000.
B)The realized gain recognized on April 15,2015 is $75,000.
C)The unrealized gain recognized on April 15,2015 is $50,000.
D)The call option will be reported on the December 31,2014 balance sheet at $125,000 and a $25,000 unrealized gain will be reported as a component of income from continuing operations for the year ending December 31,2014.

Question

Quizplus · Accepted Answer

Under GAAP, the call option is reported at its fair value of $125,000 on the December 31, 2014 balance sheet, and the $25,000 increase in value from the purchase price is recognized as an unrealized gain in income from continuing operations for the year ending December 31, 2014.

On December 1,2014 a Company Bought a Call Option Costing