On October 5, 2020, Kappa Cloth Ltd. enters into a forward contract to purchase 10,000 metres of cotton fabric at $ 1 per metre, good until February 1, 2021. At December 31, 2020, the forward price for February 2021 delivery of cotton fabric has increased to $ 1.06 per metre. The adjusting entry at December 31, 2020 would be
A) No entry required.
B) Derivatives-Financial Assets/Liabilities &emsp; &emsp;600
Unrealized Gain or Loss (OCI) &emsp; &emsp;600

C) Derivatives-Financial Assets/Liabilities &emsp; &emsp;600
Gain or Loss on Derivatives &emsp; &emsp;600

D) Gain or Loss on Derivatives &emsp; &emsp;600
Derivatives-Financial Assets/Liabilities &emsp; &emsp;600

Question

On October 5, 2020, Kappa Cloth Ltd. enters into a forward contract to purchase 10,000 metres of cotton fabric at $ 1 per metre, good until February 1, 2021. At December 31, 2020, the forward price for February 2021 delivery of cotton fabric has increased to $ 1.06 per metre. The adjusting entry at December 31, 2020 would be
A) No entry required.
B) Derivatives-Financial Assets/Liabilities &emsp; &emsp;600 
Unrealized Gain or Loss (OCI) &emsp; &emsp;600

C) Derivatives-Financial Assets/Liabilities &emsp; &emsp;600 
Gain or Loss on Derivatives &emsp; &emsp;600

D) Gain or Loss on Derivatives &emsp; &emsp;600 
Derivatives-Financial Assets/Liabilities &emsp; &emsp;600

Quizplus · Accepted Answer

The correct answer is C because the increase in the forward price from $1.00 to $1.06 per metre for 10,000 metres results in a favorable change in the value of the forward contract by $600 (10,000 metres * $0.06). This change is recognized in the financial statements through an adjusting entry that increases the asset or decreases the liability (depending on the direction of the contract) and records the gain in the income statement.