Exercise 11.10

Forward to buy shares

Wilshere Ltd enters a forward contract to buy its own ordinary shares after 12 months at a

fixed forward price. Wilshere Ltd has a contractual obligation based on the forward price

and it has a contractual right based on the market price at the maturity date. Wilshere Ltd is

considering a range of different alternatives for the settlement of the contract. Details of the

contract are:

Contract date 1 February 2017

Maturity date 31 January 2018

Market price per share on 1 February 2017 $1.00

Market price per share on 31 December 2017 $1.10

Market price per share on 31 January 2018 $1.06

Fixed forward price per share on 31 January 2018 $1.04

Present value of forward price on 1 February 2017 $1.00

Number of shares under the forward contract 1 000 000

Fair value of forward contract on 1 February 2017 Nil

Fair value of forward contract on 31 December 2017 $630 000

Fair value of forward contract on 31 January 2018 $200 000

Required

Prepare the entries of Wilshere Ltd for the forward purchase contract on its own shares

assuming the company has a year end of 31 December and that the contract will be settled:

1. Cash for cash (net cash settlement)

2. Shares for shares (net share settlement)

3. Cash for shares (gross physical settlement)