Spiraling 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: Futures PriceDateSpot Price (for Feb 1, 20X9, delivery)November 30, 20X8$100 $101 December 31, 20X8 105 106 February 1, 20X9 110 The information for the change in the fair value of the options follows:DateTime Value Intrinsic Value Total Value November 30, 20X8$80,000 $0 $80,000 December 31, 20X8 30,000 100,000 130,000 February

Question

1, 20X9 0   200,000   200,000  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, the entries made on April 1, 20X9 will include:

A. a debit to Cost of Goods Sold for $2,240,000.
B. a credit to Cost of Goods Sold for $100,000.
C. a credit to Oil Inventory for $2,240,000.
D. a debit to Other Comprehensive Income for $200,000.

Answer 1

Answer: D