On November 1, Year One, the Chapman Company signs a forward exchange contract to receive one million Japanese yen on February 1, Year Two, for $10,000 based on the three-month forward exchange rate at that time of $1 for 100 Japanese yen (1,000,000 x 1/100 or $10,000). On that same day, Chapman acquired inventory for one million yen to be paid in exactly three months. The forward exchange receivable is designated as a hedge for this payable. On November 1, the spot (current) exchange rate is $1 for 94 Japanese yen but that rate change, by December 31, to $1 for 96 Japanese yen. As of December 31, Year One, the forward exchange rate to be paid one month in the future is $1 for 103 Japanese yen. What is the overall impact to be recognized on net income at the end of Year One?

a Zero 

 B $71 loss

I got the answer as B, this is how I got

he has a payable of $10,000

on dec 31st forward exchange to be paid in one month is $1 to 103

so that means , he will have to pay 1,000,000/103 = $9709

Gain of $291

He purchased 1,000,000 yen to pay this payable at the rate of $1 for 94, so he paid 1,000,000/94 = 10,638

Forward rate on Dec 31st is $1 = 96

1,000,000/96 = 10,417

so a loss of $221

Gain due to one month future rate = $291

Loss due to change in forward rate on Dec 31st = $221

so a gain of (291-221) = $70

The forward rate on 12/31 is $1 for 103 yen.

The spot rate on 12/31 is $1 for 96 yen.

I forgot about the payable; it's in a foreign currency while the reporting currency is U.S.; it has to be revalued at each reporting date using the spot rate. On the date of the purchase of inventory, the payable is valued at $1 for 94 yen; on B/S date, the payable is valued at $1 for 96 yen. Originally, the payable was valued at 1,000,000(1/94)=10,638.29. On B/S date, the value is 1,000,000(1/96)=10,416.67. Since it's a payable, the 221.62 reduction in the USD value of the 1,000,000 yen payable is a gain.

The loss of 291 comes from the change in the forward rate. The contract they currently have is at a rate of $1 for 100 yen. The rate for the a futures contract ending on the same date at B/S date is $1 for 103 yen; in other words, they paid $.01/yen and currently the market is paying $.00970873/yen. Since the contract is for the purchase of 1,000,000 yen, they're currently holding a forward contract in which more is paid for the currency than the market is paying for a forward contract ending on the same date by $291.27 (10,000-9708.73).

(292) Unrealized loss on the forward contract+221 gain on remeasurement of yen payable=(71) net effect on I/S.