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Hi Sir,
Question as below:-
Company A took out a speculative forward contract to buy coffee beans for delivery on 30 April 20×7 at an agreed price of $6,000 intending to settle net in cash. Due to a surge in expected supply, a forward contract for delivery on 30 April 20×7 would have cost $5,000 on 31 December 20×6. The year end is 31 December 20×6.Could you shows me the double entries/ disclosure on 31/12/20×6 & 30/4/20×7. Thanks
Because the answer provided is a financial liability of $1,000 is recognised with a corresponding charge of $1,000 to P&L.
I was wonder why this not relate to financial assets and how the double entry works.
30 April
No double entry as forwards and futures start at $nil value
SFP date
Either you win or lose. In this case you are (pretending to) buy at 6,000 but the purchase price later falls to 5,000. Therefore you are angry – you have lost.
Dr P&L Cr Financial liability 1,000 (use the difference in price)
(If the price had gone to 7,000 you would have had a financial asset)
Good question 🙂
Hi Sir,
How about the 5000? no need to record into stock or cash paid?
Will the financial liability reverse out in future?5,000 not recorded
At the end of the forward contract you have to go to the counterparty (bank) and give them 1,000
Dr Liability Cr Cash 1,000
Coffee bean is totally irrelevant
Derivative is a bet on the price of coffee SETTLED IN CASH
No one gets any coffee from this transaction
Ok, very clear. How about the disclosure? even though there’s no cash involved still need to disclose in account right? if is physical settlement, will still need to disclose on 31 Dec 20×6?
Disclosure in line with IFRS 7.
May be disclosed as a contractual commitment.
Mercifully (:)) examiner doesn’t seem to be interested in intricacies of disclosure.
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