How to calculate the accounting entries for forward contracts?

Finance Management Banking & Finance Growth & Empowerment

Problem

ABC Company entered into a forward contract to buy its own shares.

Details for the same are given below and here, XXXX refers to the respective year.

Contract date − 1st Jan XXXX
Maturity date − 31st Dec XXXX
Exercise price of $110
No of shares − 1500
Market price − $100 (as on 1st Jan XXXX)
Market price − $150 (as on 1st Mar XXXX)
Market price − $130 (as on 31st Dec XXXX)

Calculate the accounting entries for forward contract as per the given information.

Solution

The solution is explained below −

Fair value of forward (on 31^st March) = 1500 * (150 -110) => 60000

Fair value of forward (on 31^st Dec) = 1500 * (130-110) => 30000

Fair value of forward (on 1^st Jan) = 0

Accounting entries

The accounting entries are as follows −

Date	Particulars	Dr	Cr
31^st March	Forward Asset Account Forward Value gain account	60000	60000
31^st Dec	Fair value loss account Forward Asset account	30000	30000
31^st Dec	Bank account Forward Asset Account	30000	30000

Net share settlement

Date	Particulars	Dr	Cr
31^st Dec	Treasury stock account Forward Asset Account	30000	30000

Gross share settlement

Date	Particulars	Dr	Cr
31^st Jan	Equity share suspense account Stock repurchase liability account	150000	150000
31^stMar	Interest account Share repurchase liability account	11250	11250
31^st Dec	Interest account Share repurchase liability account	2500	2500

Treasury stock account

Date	Particulars	Particulars	Cr
31^stJan	Treasury stock account Equity suspense account	150000	150000
31^stDec	Bank account Share repurchase liability account	180000	180000

Nagasravan Tamma

Updated on: 2022-05-17T15:03:08+05:30

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