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Point 1: On January 3, Linus Ltd. purchases a call option for $200 from Lucy Corp. to buy 1,000 Rerun Inc. shares at an exercise price of $42 per share. The option expires May 1. At this time the current market price of Rerun shares is also $42.
Point 2: On March 31 (Linus' year end), the market value of the Rerun shares is $53, and the fair value of the option has increased to $14,000.
Point 3: On April 15, Linus takes delivery of (buys) the Rerun shares as agreed in the option contract. The market value of Rerun's shares is now $54.
Question a. Calculate the intrinsic value and the time value of this option at
1. January 3
2 March 31
Question b. Prepare general journal entries for the following dates:
2. March 31
3. April 15
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