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Accounting for Investments, Equities, Futures and Options, Volume 1 by R. Venkata Subramani

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CHAPTER 7

Accounting for Equity Stock Futures

LEARNING OBJECTIVES

After studying this chapter, you should have a grasp of the following:

  • The trade life cycle of exchange traded equity stock futures.
  • Journal entries to be recorded during the different phases of the trade life cycle.
  • FX revaluation and FX translation process for these trades.
  • Illustration of long stock futures with FX translation.
  • Preparation of journal entries and general ledger accounts.
  • Preparation of income statement and balance sheet after the equity futures trades are done.
  • Illustration of short stock futures with FX translation.

TRADE LIFE CYCLE FOR EQUITY STOCK FUTURES

The sequence of events for trading in equity stock futures is as follows:

1. If you bought futures, then account for the buy trade of equity stock.

2. If you sold futures, then account for the sell trade of equity stock.

3. Transfer the brokerage/commission on the original trade to stock.

4. Perform the FX revaluation entries.

5. Perform the FX translation entries.

Accounting for a Buy Trade

When the investor buys stock futures resulting in physical settlement, then the investor has to pay for 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 equity shares will be accounted for as a regular purchase of shares, and the treatment will depend upon whether it is held for trading or as available-for-sale.

Assume that the ...

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