Question

Astrotuff Company is planning to purchase 200,000 pounds of nylon from Tangsun Company. On November 1, 2011, Astrotuff entered into a 90-day forward contract to hedge the planned purchase. The forward contract is to purchase 200,000 pounds of nylon at $1.80 per pound( forward rate at November 1, 2011). On November 1, 2011, the spot price of nylon is $1.75 per pound, but Astrotuff anticipates significant increase in the price of nylon. The forward contract is to to be setteled net.
?On December 31, 2011, Astrotuff's year end, the forward rate to January 30, 2012 is $1.78 per pound. The spot
?and forward rats on January 30, 2012 are $1.85 per pound. Astrotuff purcahses 200,000 pounds of nylon on January 30 when the forward contract expires.

?The journal entries is as follow:

11/1/11 No entry
?12/31/11
? Other comprehensive Income 4,000
?    Forward Contract ($1.80-$1.78*200,000)    4,000
?    Exchange loss 6,667
?    Other comprehensive income 6,667
? Discoutn=1.75-1.80=0/05*200,000=10,000
? 60/90*10,000=6667
?I don't understand why this is exchange loss. Also
?I don't know why they use $1.75.
?Please help em. Thanks!

Answer 1