Question

On December 15, 20x1, ABC Co. enters into a 30-day forward contract to buy 10,000 yens at the forward rate of $1.50. On December 31, 20x1, the forward rate was $1.25 and by January 15, 20x2, the spot rate moved to $1.60

Requirements: Provide the journal entries under each of the following scenarios: (A) the contract is settled by the actual purchase of yens; (B) the contract is settled through net cash payment.

Answer 1

	Future contract must be accounted for now, when it is signed, and again on the date when the physical exchange takes place.
	Actual Purchase of commodity
1	Record a forward contract on the contract date on the balance sheet in ABC Co
		Debit	Credit
	Asset Receivable	15000			(10000*1.5)
	Contract Payable		15000
2	Record a forward contract on the balance sheet on the date the commodity is exchanged in ABC Co
	close out your asset and liability accounts
		Debit	Credit
	Contract Payable	15000
	Asset Receivable		15000
	Asset A/C	16000			(10000*1.6)	Spot Rate
	Foreign exchange gain		1000
	Cash		15000				Forward rate
	Net Cash Method
1	Record a forward contract on the contract date on the balance sheet in ABC Co
	No entry required as no cash is paid or received
2	Record a forward contract on the balance sheet on the date the commodity is exchanged in ABC Co
		Dr	Cr
	Asset A/c	16000
	Foreign exchange gain		1000
	Cash		15000