On December 1, 20X8, Winston Corporation acquired 10 deep discount bonds from Linked Corporation at a cost of $400 per bond. Winston classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $250, an at-the-money put option to sell the 10 bonds at $400 per bond. The option expires on February 20, 20X9. Selected information concerning the fair values of the investment and the options follow: December 1, December 31, February 20, 20X8 20X8 20X9Linked Corporation Per Bond: $400 ? ? Put Option (100 shares) Market Value $250 $400 $400 Intrinsic Value 0 ? 400 Time
Value $250 $100 ? Assume that Winston exercises the put option and sells Linked bonds on February 20, 20X9.Based on the preceding information, the journal entry made on December 31, 20X8 to record the decrease in the time value of the options will include:
A. a credit to Put Option for $300.
B. a credit to Put Option for $100.
C. a debit to Loss on Hedge Activity for $150.
D. a debit to Loss on Hedge Activity for $300.
Answer: C
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