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Artwright has entered into a derivative contract during the year ended 30 November 2004, detail of which is as follows:
Initial recognition at FV $1m
FV at year end $9m (liability)
Reason
Artwright has an asset that is concerned will fall in value and it wishes to cover this risk. Thus during the year it has entered into derivative B to cover any fall in value. In fact, the asset has risen in value by $8.5mThe loss on the derivative is $10m. How the loss is $10 million?
Can you please explain with the help of double entry?
The double entries shouldn’t be like this?
Instrument
Dr Derivative Asset $1m
Cr Cash $1mItem (Gain)
Dr Asset (item) $8.5
Cr P&L $8.5Instrument (Loss)
Dr P&L ??
Cr Derivative Asset ???The loss is 10m because it cost 1m and in now fair valued at a 9m liability
Debit Profit or Loss 1.5m
Debit Asset 8.5m
Credit Derivative 10mOK? That seems to work for me
Sorry i don’t get it, what were the entries made at the initial recognition and for recording the fair value at year end?
Am I not correct here ….. you have given me the entries on initial recognition! and for recording the fair value at the year end!
Could you please explain step by step how you arrived at a loss of $10 please?
Thank you!!
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