Question

JY investment Ltd holds a well-diversified portfolio of shares that has a market value of $1.5 million on 30 June 2019. JY is concerned about possible downturns in the share market and on 1 March 2020 decides to take out a sell position in eleven “September 2020 SPI 200 Futures” units when the SPI 200 is 5500. The SPI 200 Futures contract unit value is the value of SPI 200 multiplied by $25. To enter the contract, JY pays an initial cash deposit (margin) of $150,000 to a broker. On 30 June 2020, the reporting date of JY investment Ltd, the unit price of the September SPI futures contracts has fallen to 5300 and the market value of the firm’s portfolio of shares is $1 435 000. Assume broker allows a $50,000 drop before making a margin call to allow for minor fluctuations in the market. The shares are sold on 31 August 2020 when the market value of the shares is $1 290 000 and the September SPI 200 futures contract closed out at 5250 on 31 August 2020. Assume the futures contracts qualify as a hedge, the shares are marked to market.

REQUIRED: Prepare journal entries to account for the above events from 1 March 2020 to 31 August 2020. Show all calculations and round them to the nearest dollar amount. No narration is required.

Answer 1

Journal Entries for above transactions are as follows -

1/03/20 Share capital a/c Dr.         150000

                   To bank a/c                     150000

(Being initial cash deposit paid for entering share selling contract)

31/8/20 Bank a/c                Dr.          1290000

                    To share capital a/c        1290000

( Being shares sold at market price)

As
on
30
jun
2020,
market
value
of
firm's
portfolio

of
shares
is
$1435000.

market
valu
e of share holding is $1500000

U
nit
price has fallen to 5300

Lower of both can be considered,

As per accounting principles