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How to calculate the accounting entries for forward contracts?
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 31st March) = 1500 * (150 -110) => 60000
Fair value of forward (on 31st Dec) = 1500 * (130-110) => 30000
Fair value of forward (on 1st Jan) = 0
Accounting entries
The accounting entries are as follows −
| Date | Particulars | Dr | Cr |
|---|---|---|---|
| 31st March | Forward Asset Account Forward Value gain account | 60000 | 60000 |
| 31st Dec | Fair value loss account Forward Asset account | 30000 | 30000 |
| 31st Dec | Bank account Forward Asset Account | 30000 | 30000 |
Net share settlement
| Date | Particulars | Dr | Cr |
|---|---|---|---|
| 31st Dec | Treasury stock account Forward Asset Account | 30000 | 30000 |
Gross share settlement
| Date | Particulars | Dr | Cr |
|---|---|---|---|
| 31st Jan | Equity share suspense account Stock repurchase liability account | 150000 | 150000 |
| 31st Mar | Interest account Share repurchase liability account | 11250 | 11250 |
| 31st Dec | Interest account Share repurchase liability account | 2500 | 2500 |
Treasury stock account
| Date | Particulars | Particulars | Cr |
|---|---|---|---|
| 31st Jan | Treasury stock account Equity suspense account | 150000 | 150000 |
| 31st Dec | Bank account Share repurchase liability account | 180000 | 180000 |
Updated on: 17-May-2022
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