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JY investment Ltd holds a well-diversified portfolio of shares that has a market value of $1.5...

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Accounting

JY investment Ltd holds a well-diversified portfolio of sharesthat has a market value of $1.5 million on 30 June 2019. JY isconcerned about possible downturns in the share market and on 1March 2020 decides to take out a sell position in eleven “September2020 SPI 200 Futures” units when the SPI 200 is 5500. The SPI 200Futures 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 reportingdate of JY investment Ltd, the unit price of the September SPIfutures contracts has fallen to 5300 and the market value of thefirm’s portfolio of shares is $1 435 000. Assume broker allows a$50,000 drop before making a margin call to allow for minorfluctuations in the market. The shares are sold on 31 August 2020when the market value of the shares is $1 290 000 and the SeptemberSPI 200 futures contract closed out at 5250 on 31 August 2020.Assume the futures contracts qualify as a hedge, the shares aremarked to market.

REQUIRED: Prepare journal entries to account for the aboveevents from 1 March 2020 to 31 August 2020. Show all calculationsand round them to the nearest dollar amount. No narration isrequired.

Answer & Explanation Solved by verified expert
4.3 Ratings (723 Votes)

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
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