On 1 May 2022, Ocean Blue Ltd enters a forward exchange contract to sell US$180 000 in 8 months' time at 31 December 2022. The relevant exchange rates are: $\begin{array}{|l|c|c|}
\hline &\text { Spot Rate } & \begin{array}{c}
\text { Forward Rate (for } \
\text { 31 Dec. 2022) }
\end{array} \\hline 1 \text { May 2022 } & \begin{array}{l}
\text { US } \$ 1.00= \
\mathrm{A} \$ 1.00
\end{array} & \begin{array}{l}
\text { US } \$ 1.00= \
\mathrm{A} \$ 1.05
\end{array} \\hline \text { 30 June 2022 - end of reporting period } & \begin{array}{l}
\text { US } \$ 1.00= \
\mathrm{A} \$ 0.98
\end{array} & \begin{array}{l}
\text { US } \$ 1.00= \
\mathrm{A} \$ 1.02
\end{array} \\hline \begin{array}{l}
31 \text { December } 2022 \text { - contract settlement } \
\text { date }
\end{array} & \begin{array}{l}
\text { US } \$ 1.00= \
\mathrm{A} \$ 0.95
\end{array} & \begin{array}{l}
\text { US } \$ 1.00= \
\mathrm{A} \$ 0.95
\end{array}\
\hline
\end{array}$ The journal entry required at 30 June 2022 to record any foreign exchange gain or loss on the forward contract is:
A) DR Loss of forward contract A$5400; CR Forward contract A$5400
B) DR Loss of forward contract A$5042; CR Forward contract A$5042
C) DR Forward contract A$5400; CR Gain on forward contract A$5400
D) No entry is required.

Question

Quizplus · Accepted Answer

At 30 June 2022, the forward rate for 31 December 2022 is A$1.02, compared to the contracted rate of A$1.05. The contract is for US$180,000, so the difference (A$1.05 - A$1.02 = A$0.03) multiplied by US$180,000 equals a gain of A$5400. This gain is recorded as a credit to Gain on forward contract and a debit to Forward contract.

On 1 May 2022, Ocean Blue Ltd Enters a Forward