Question

A U.S. company purchases a 90-day certificate of deposit from a Singapore bank on May 15,...

A U.S. company purchases a 90-day certificate of deposit from a Singapore bank on May 15, when the spot rate is $0.72/S$. The certificate has a face value of S$100,000 and pays interest at an annual rate of 2 percent. On August 13, the certificate of deposit matures, and the company receives principal and interest of S$100,500 and records interest revenue on the investment. The spot rate on August 13 is $0.75/S$. The average spot rate for the period May 15 – August 13 is $0.73/S$. The company's accounting year ends December 31.

The total exchange gain or loss on this investment is:

A.

$2,000 loss
B.

$2,000 gain
C.

$3,000 gain
D.

$3,000 loss
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Answer #1

Answer:

Face Value of Certificate = S$100,000

US Company would record on the purchase of certificate of deposit by using spot rate on the date of purchase.

US Company will record investment with $72,000 (S$100 000 * 0.72)

Spot Rate at maturity of Investment i.e. $0.75 / S$

The maturity proceeds from Investment using Spot Rate (S$100,000 * 0.75) = $75,000

Hence, the total exchange gain or loss on this Investment is $72,000 - $75,000 = $3,000 gain

The correct option is C. $3,000 gain

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