Question

On April 10, 2016, when the spot rate is $1.30/€, a U.S. company sells merchandise to a customer in Italy. The spot rate is $1.31/€ on June 30, the company’s year-end. Payment of €100,000 is received on August 10, 2016, when the spot rate is $1.28/€. What is the effect on fiscal 2016 and 2017 income?

	Fiscal 2016	Fiscal 2017
a.	$1,000 exchange loss	$3,000 exchange gain
b.	No effect	$2,000 exchange loss
c.	No effect	$2,000 exchange gain
d.	$1,000 exchange gain	$3,000 exchange loss

Answer 1

• At year end, company has to revalue its assets and liabilities on the basis of closing exchange rates.
• Accounts receivables originally recorded at $1.3/ €.

If the buyer had paid on that day, the company would have received $130000

On 30 June, the rate went up to $1.31/ €.

If the buyer had paid on 30 June, company would have received $131000. Hence, there is a $1000 exchange gain to be recorded in Fiscal year 2016 as per accounting standards.

• On 30 June, accounts receivables would now be recorded in books at a re-valued amount of $131000.

However, when the buyer paid €100000 on Aug 10, rates went $1.28/ €.

This implies, the company received only $128000, while accounts receivables were existing at $131000. Hence, there will be an exchange loss to be recorded of $3000 in Fiscal 2017

• Answer 1 is Option (d)
• Answer 2 is Option (d)