Question

Hard Wood Builders Ltd. uses fir 2x6 lumber as its framing material. On November 15, 2020,
Hard Wood Builders enters into a forward contract for 1,500,000 board feet of lumber at
$0.25 per board foot for March 2021 delivery. At December 31, 2020, the market price for
March delivery is $0.26. On March 5, 2021, Hard Wood Builders took delivery of 1,500,000
board feet for $0.25 and settled the forward contract. The market rate on this date was $0.28
per board foot.
Required
a. Record any required entries related to this contract.

Answer 1

JOURNAL ENTRIES ;

ASSET A/C DR. 375000

TO F/C CONTRACT A/C CR. 375000

(ASSET RECOGNITION ON THE DATE OF CONTRACT)

ON 31/12/

ASSET A/C DR. 15000 TO GAIN/LOSS ON F/C. A/C CR. 15000

(INCREASE IN MARKET RATE RECOGNITION)

ON MARCH 5 /2020

FORWARD CONTRACT A/C DR. 375000

TO CASH/BANK A/C CR. 375000

(AT THE TIME OF SETTLEMENT)

ASSET A/C DR. 30000

TO GAIN/LOSS ON F/C A/C CR. 30000

(CHANGE IN MARKET RATE RECOGNITION). GAIN/LOSS ON F/C A/C DR. 45000

TO PROFIT & LOSS A/C CR. 45000

(CLOSING ENTRIES)