1.

On February 1, Durham Company writes a forward contract to sell Rubright Company

3,000,000 yen at a specific, fixed price of $0.00875 per yen with delivery in 60 days. The spot rate
at the end of the 60 days is $0.00913 per yen. The following is the forward rates information
throughout the 60-day term.

Remaining Term of Contract Forward Rate Notional Amount

60 days $0.00875 3,000,000
30 days 0.00891 3,000,000
0 days 0.00913 3,000,000
Assume the discount rate is 7%.
Required:
a. Compute the gain or loss for Rubright Company over the life of the contract.

b. Assume the contract is settled at the end of the 60 days, prepare the journal entries to
account for this contract on Rubright's books.

2.3. On September 23, Gensil Company buys 40 contracts on the Chicago Board of Trade to
deliver orange juice to a certified warehouse in November. Each contract is in units of 15,000
pounds at a futures price of $0.851 per pound. The initial margin on the contract is set at $18,000,
with a maintenance margin of $14,000. The futures prices are as follows:
Sept. 23 Sept. 24 Sept. 25
$0.851 $0.847 $0.850

Required:
a. Journalize the entries for Gensil Company for the first three days of the contract.

b. What is meant by the maintenance margin and how could it affect Gensil Company?
1.ANS:
a. Computation of gain on the contract:

Remaining Total Cumulative

Term of Forward Notional Forward Change in
Contract Rate Amount Value Forward Value
60 days $0.00875 3,000,000 $26,250
30 days 0.00891 3,000,000 26,730 $ 480
0 days 0.00913 3,000,000 27,390 1,140

30 day Total Life

Remaining of Contract
Cumulative change in forward value $480.00 $1,140.00
Present value of cumulative change
30 days at 7% [$480 - ($480  7%  1/12)] $477.20
0 days at 7% $1,140.00
Less previously recognized gain or loss 0 477.20
Current period gain or loss $477.20 $ 662.80

b. Journal entries for Rubright Company:

Feb 1 A memo entry to record acquisition of the contract. Initial value is zero.

Feb 28 Investment in forward contract 477.20

Gain on contract 477.20

Mar 31 Cash 1,140.00

Investment in forward contract 477.20
Gain on contract 662.80

DIF: M OBJ: Module-3

2.ANS:
a. Journal entries:

Sept 23 Futures contract - margin account 18,000

Cash 18,000

Sept 24 Futures contract - margin account 2,400

Gain on contract 2,400
[40 contracts  15,000 pounds 
($0.851 vs. $.847)]

Sept 25 Loss on contract 1,800

Futures contract - margin account 1,800
[40 contracts  15,000 pounds 
($0.847 vs. $.850)]

b. Maintenance margin. Each day, futures contracts are valued and marked-to-market. If the
margin account loses too much value and falls below a minimum balance, the maintenance
margin, Gensil Company will have to replenish the account through what is called a
margin call.
DIF: E OBJ: Module-3