Question

# On September 1, 2019, a U.S.-based company with the \$US as its functional currency purchased merchandise...

On September 1, 2019, a U.S.-based company with the \$US as its functional currency purchased merchandise for 14,000 units of the foreign company’s local currency. On that date, the spot rate was \$1.42. The U.S.-based company paid the bill in full on February 10, 2020, when the spot rate was \$1.39. The spot rate was \$1.38 on December 31, 2019.

What amount should the U.S.-based company report as a foreign currency transaction gain (loss) in its income statement for the year ended December 31, 2019?

Solution :

Company will report \$ 560 foreign currency gain in its income statement.

Working :

The Company must have created liabity on September 1, 2019 at the rate 1.42 \$

Total Liability on September 1, 2019 = 14,000 * \$ 1.42

= \$ 19,880

Company will restate the liability on Decmber 31, 2019.

The Spot rate on December 31, 2019 = \$ 1.38

Revised Liability = 14,000 * \$ 1.38

= \$ 19,320

Foreighn Currency Exchange Gain (loss) = \$ 19,880 - 19,320

Foreighn Currency Transaction Gain   = \$ 560

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