Journal Questions

Short Futures—Trade Currency AUD, Functional Currency USD

For the following scenario, prepare journal entries, general ledgers, trial balance, income statement, and balance sheet.
XYZ Fund had the following trades in ABB in the futures market. The stock exchange requires that a margin of 20 percent of the value of the contract be maintained throughout the life of the contract.

Date                Product Expiry        Quantity           Rate (AUD)          B/S        Brokerage
22-Feb-07        25-Apr-07            –1,700                45                      S             320
18-Mar-07        25-Apr-07            –1,400                50                      S             350
13-Apr-07        25-Apr-07              2,000                43                      B             400
25-Apr-07        25-Apr-07              1,100                42                   Expiry 
 

Date               FX Rate
22-Feb-07     1.18182
28-Feb-07     1.17762
15-Mar-07     1.18322
31-Mar-07     1.17521
10-Apr-07     1.18231
25-Apr-07     1.17425

Date              Market Price
22-Feb-07        47
28-Feb-07        55
31-Mar-07        43
25-Apr-07        45

Long Futures—Trade Currency SGD, Functional Currency USD

For the following scenario, prepare journal entries, general ledgers, trial balance, income statement, and balance sheet.
AA Fund had the following trades in ABC in the futures market. The stock exchange requires that a margin of 10 percent of the value of the contract be maintained throughout the life of the contract.

Date               Product Expiry          Quantity          Rate (SGD)      B/S         Brokerage
25-Aug-07      25-Nov-07             10,000              52.5              B               5,300
18-Oct-07       25-Nov-07             15,000              51.0              B               5,200
10-Nov-07      25-Nov-07           –16,000              54.0               S               3,000
25-Nov-07      25-Nov-07             –9,000              53.0               Expiry 

Date                     FX Rate
25-Aug-07          1.5389
31-Aug-07          1.5432
30-Sep-07           1.5535
18-Oct-07           1.5375
31-Oct-07           1.5296
10-Nov-07           1.5431
25-Nov-07           1.5159

Date                   Market Price
31-Aug-07              49
30-Sep-07               47
31-Oct-07               53
25-Nov-07              57
 
Long Futures—Trade Currency JPY, Functional Currency USD

For the following scenario, prepare journal entries, general ledgers, trial balance, income statement, and balance sheet.
AA Fund had the following trades in ABC in the futures market. The stock exchange requires that a margin of 30 percent of the value of the contract be maintained throughout the life of the contract.

Date                Product Expiry         Quantity          Rate (JPY)         B/S           Brokerage
29-Jan-07        25-Apr-07               1,000             800                  B                530
15-Mar-07       25-Apr-07               1,500             820                  B                520
10-Apr-07       25-Apr-07              –1,600            845                   S               300
25-Apr-07       25-Apr-07                 –900            850                   Expiry 

Date                 FX Rrate
1-Jan-07          123.805
29-Jan-07        124.850
31-Jan-07        125.705
28-Feb-07       124.805
15-Mar-07       125.705
31-Mar-07       125.205
10-Apr-07       124.235
25-Apr-07       124.569

Date                Market Price
31-Jan-07         750
28-Feb-07        770
31-Mar-07        855
25-Apr-07        857
 
Short Futures—Functional Currency USD

For the following scenario, prepare journal entries, general ledgers, trial balance, income statement, and balance sheet.
ABC Fund had the following trades in IBM in the futures market. The stock exchange requires that a margin of 15 percent of the value of the contract be maintained throughout the life of the contract.

Date                 Product Expiry          Qty            Rate (USD)        B/S        Brokerage
22-Feb-07        25-Apr-07            –1,500            45                   S              320
18-Mar-07        25-Apr-07            –1,800            50                   S              350
13-Apr-07        25-Apr-07              2,000            43                   B              400
25-Apr-07        25-Apr-07              1,300            42                   Expiry 
 
Date              Market Price
22-Feb-07          47
28-Feb-07          55
31-Mar-07          43
25-Apr-07          45

Objective Questions

1. When an investor buys stock futures, and if it results in physical settlement, then
a. The investor has to pay the margin amount and take delivery of the stock.
b. The investor takes the delivery and pays at an agreed upon future date.
c. The investor can take the delivery on payment of a meager amount.
d. The investor takes the delivery and his broker pays for him.
e. The investor has to pay for the contracted price and take delivery of the stock.

2. When the stock futures are sold and it results in physical settlement, then the physical shares should be delivered by the investor to
a. The broker.
b. The exchange.
c. The buyer.
d. The custodian of the buyer.
e. Any individual who is authorized by the buyer to receive the shares.

3. When the futures contract results in physical settlement, then the brokerage originally expensed
a. Should be capitalized and taken to the concerned shares account.
b. Should be discounted.
c. Should be considered as part of the cost.
d. Should be reversed to the investor account.
e. Both a and d.

4. Which among the following is a correct accounting entry on payment of margin?

COMP: Please make the following choices somehow match the previous multiple choice NumberSub style, as “a.” “b.” etc.

a)

Date                    Particulars                                                        Debit (JPY)                     Credit (JPY)
1-Jan-X1         Futures Margin Account                                      25,000.00
To Bank Account                                                                                        25,000.00
(Being the margin amount on purchase of futures paid)

b)
Date                  Particulars                                                         Debit (JPY)                     Credit (JPY)
1-Jan-X1         Investment Equity stock Account                       25,000.00
To Bank Account                                                                                     25,000.00
(Being the margin amount on purchase of futures paid)

c)
Date                  Particulars                                                        Debit (JPY)                      Credit (JPY)
1-Jan-X1          Bank Account                                                   25,000.00
To Futures Margin Account                                                                     25,000.00
(Being the margin amount on purchase of futures paid)

d)
Date                  Particulars                                                       Debit (JPY)                       Credit (JPY)
1-Jan-X1          Bank Account                                                  25,000.00
To Investment Equity stock Account                                                      25,000.00
(Being the margin amount on purchase of futures paid)

e)
Date                 Particulars                                                      Debit (JPY)                        Credit (JPY)
1-Jan-X1         Futures Margin Account                                  25,000.00
To Investment Equity stock Account                                                      25,000.00
(Being the margin amount on purchase of futures paid)

5. Assuming a sale of stock futures being liquidation of long stock futures, which among the following is true in case of available-for-sale?
a. Receivable from broker amount will be shown as investments on the asset side of balance sheet.
b. Receivable from broker amount will be shown in the P&L account.
c. Receivable from broker will be shown as current assets on the balance sheet.
d. Receivable from broker shown off balance sheet.
e. Receivable from broker will be adjusted to payable to broker.

• When the investor buys the stock futures, and if it results in physical settlement, then the investor has to pay the contracted price and take delivery of the stock. The margin money paid will, however, be adjusted against the total money that the investor should pay the exchange.
• The brokerage paid on the futures trade would have been directly expensed and not taken as part of the cost of the shares that was to be acquired.
• When the futures contract results in physical settlement, then the brokerage originally expensed should be capitalized and taken to the concerned shares account.