Our client sell items in Eurozone and collect sale proceeds in Euros. They buy from China thus need Chinese Yuan to make payments to their suppliers.
Say on 1st April 2020 Client entered in a forward exchange contract to sell €10,000 and buy Yuan with settlement date of 30th June 2020. When they enter in the forward contract their bank American Express asks them to deposit 10% as a security.
At 1st April 2020 – Contract signed + deposit paid
- No accounting entry needs to be made for contract signed.
- Accounting entry for deposit is simple.
Dr Deposit €1,0001
Cr Bank €1,000
Note 1. We will need to open this deposit account in Euros in the accounting software.
At 30th June 2020 – Settlement Date
| Date | Spot Rate | Forward Rate 30th June 2020 |
| 1st April 2020 | 7 | 9 |
| 30th June 2020 | 8 | 8 |
Step 1: Calculate the profit or loss on forward.
| Yuan | Rate | |
| Forward Contract | ¥ 90,000 | 1 : 9 |
| If bought in spot market | ¥ 80,000 | 1 : 8 |
| Gain | ¥ 10,000 | |
| Gain in Euro | €1,250 | 1:8 |
Step 2: Accounting Journal entry that needs to be passed
Dr China Bank Account €11,2502
Cr Bank €9,0003
Cr Deposit €1,0004
Cr FX Gain/loss €1,2505
Notes
- We will post this transaction with FX rate of 8 Yuan to 1 Euro.
- We will need to give balance amount to fulfil our obligations before bank gives us ¥90,000.
- Deposit will be used up as part payment.
- As calculated earlier.
Roy Accountants 