CA Krishna Chaitanya M (Chartered Accountant) (463 Points)
18 July 2012mr A entered into for ward exchange contract with bank , to buy goods in future date , amount paid now to bank, what are the accounting entries to be passed in the books of A
StarShines
(Student CA Final )
(35 Points)
Replied 02 September 2012
| Originally posted by : chaitanya | ||
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mr A entered into for ward exchange contract with bank , to buy goods in future date , amount paid now to bank, what are the accounting entries to be passed in the books of A |
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Hi Chaitanya !
There are three (3) key features of a forward contract. These are: "Spot Rate", "Forward Rate" and "Asset to be exchanged".
Since you have not mentioned two of these, I'll make an assumption and explain through a simple illustration. Also note that the physical exchange takes place on 31st March 2012, I don't think you can pay cash today. You will only pay the forward premium today on 1st January 2012. But in the example below, I assumed that you (Mr.A) will pay the forward premium on the maturity date.
Example
Mr. A entered into a forward contract on 1st January 2012 with XYZ Bank to purchase, say, 50 kg rice (grain) on 31st March 2012. The current price (spot rate) of 50 kg rice is Rs.50,000. The bank agrees to sell rice on 31st March 2012 at Rs.55,000 (forward rate). The asset to be exchanged in Mr. A's case is grain.
Journal Entries from Mr.A's Perpective
The Journal Entry at the time of the "signing of the forward contract" would be:
On 1st January 2012:
Grains Receivable...Dr Rs.50,000 (spot rate) [asset account]
Forward Premium...Dr Rs.5,000 [expense account]
Forward Contract Payable...Cr Rs.55,000 [liability account]
The Journal Entry at "the maturity of the forward contract" would be:
On 31st March 2012:
Forward Contract Payable...Dr Rs.55,000 [liability account]
Grain...Dr Rs.55,000 [asset account]
Grains Receivable...Cr Rs.55,000 [asset account]
Cash...Cr Rs.55,000 [asset account]
StarShines
(Student CA Final )
(35 Points)
Replied 07 September 2012
Also, according to Indian accounting standards, the Premium is amortised over the life of the contract.
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