Partridge Ltd holds a well-diversified portfolio of shares with a current market value on 1 April 2004 of $1 million.On this date Partridge Ltd decides to hedge the portfolio by taking a sell position in fifteen SPI futures units.The All Ordinaries SPI is 3,130 on 1 April 2004.A unit contract in SPI futures is priced based on All Ordinaries SPI and a price of $25.The futures broker requires a deposit of $80,000.On 30 June the All Ordinaries SPI has fallen to 2,980 and the value of the company's share portfolio has fallen to $950,000.On 1 July 2004 Partridge Ltd decides to sell its shares and close out its futures contract.At this date the portfolio has a market value of $925,000 and the All Ordinaries SPI is 2,900.Assume all entries have been made to mark to market the futures contract and record changes in the deposit up to 1 July.What are the entries to record the transactions of 1 July 2004 (only)?
A.

B.

C.

D.

E. None of the given answers.

Question

Partridge Ltd holds a well-diversified portfolio of shares with a current market value on 1 April 2004 of $1 million.On this date Partridge Ltd decides to hedge the portfolio by taking a sell position in fifteen SPI futures units.The All Ordinaries SPI is 3,130 on 1 April 2004.A unit contract in SPI futures is priced based on All Ordinaries SPI and a price of $25.The futures broker requires a deposit of $80,000.On 30 June the All Ordinaries SPI has fallen to 2,980 and the value of the company's share portfolio has fallen to $950,000.On 1 July 2004 Partridge Ltd decides to sell its shares and close out its futures contract.At this date the portfolio has a market value of $925,000 and the All Ordinaries SPI is 2,900.Assume all entries have been made to mark to market the futures contract and record changes in the deposit up to 1 July.What are the entries to record the transactions of 1 July 2004 (only)?
A.
  
B.
  
C.
  
D.
  
E. None of the given answers.

Quizplus · Accepted Answer

On 1 July 2004, Partridge Ltd sells its shares for $925,000, realizing a loss of $25,000. It also closes out its futures contract by buying back the 15 SPI futures units for $25 * 15 * 2900 = $1,087,500, resulting in a gain of $12,500. The difference between the loss on the shares and the gain on the futures contract is a net loss of $12,500, which should be recognized in the income statement as a loss on hedging. The entries would be:
- DR Cash $925,000
- CR Investment in shares $950,000
- DR Futures contracts $1,087,500
- CR Cash $1,007,500
- DR Loss on hedging $12,500
- CR Futures contracts $12,500

Partridge Ltd Holds a Well-Diversified Portfolio of Shares with a Current