How to calculate the accounting entries for forward contracts?

Finance ManagementBanking & FinanceGrowth & 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 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 −

DateParticularsDrCr
31st MarchForward Asset Account
Forward Value gain account
60000
 
 
60000
31st DecFair value loss account
Forward Asset account
30000
 
 
30000
31st DecBank account
Forward Asset Account
30000
 
 
30000

Net share settlement

DateParticularsDrCr
31st DecTreasury stock account
Forward Asset Account
30000
 
 
30000

Gross share settlement

DateParticularsDrCr
31st JanEquity share suspense account
Stock repurchase liability account
150000
 
 
150000
31st MarInterest account
Share repurchase liability account
11250
 
 
11250
31st DecInterest account
Share repurchase liability account
2500
 
 
2500

Treasury stock account

DateParticularsParticularsCr
31st JanTreasury stock account
Equity suspense account
150000
 
 
150000
31st DecBank account
Share repurchase liability account
180000
 
 
180000
raja
Updated on 17-May-2022 15:03:08

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