Question

On December 5, 2010, Unca Corporation, a U.S. firm, bought inventory items from

Skagerrak Corporation of Norway for 1,000,000 Norwegian kroner when the spot rate

for kroner was $0.166. The purchase was denominated in kroner. At Unca's fiscal year

end, December 31, 2010, the spot rate was $0.171. On January 4, 2011, Unca purchased

1,000,000 kroner for $167,500 and paid the invoice. How much gain or (loss) did Unca

report in its 2010 and 2011 income statements, respectively?

A) $(5,000) and $1,500

B) $0 and ($1,500)

C) ($5,000) and $3,500

D) $0 and ($3,500

Answer 1

At the time of purchase of inventory, spot rate for kroner = $0.166.

At Unca's fiscal year end, December 31, 2010, the spot rate was $0.171.

Purchase value = 1,000,000 Norwegian kroner

Hence, loss to be reported in Unca's income statement in 2010 = (0.171 - 0.166) x 1,000,000

= $(5,000)

On January 4, 2011, Unca purchased 1,000,000 kroner for $167,500 and paid the invoice.

Value of 1,000,000 kroner as on December 31, 2010 = 1,000,000 x 0.171

= $171,000

Hence, gain to be reported in Unca's income statement in 2011 = 171,000 - 167,500

= $3,500

Hence, correct option is (C)

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