Question

Flapp Corporation, a U.S. corporation, conducts all of its transactions in the U.S. dollar. It sells inventory for $1 million to a Canadian company when the exchange rate is $1US: $1.2Can. The Canadian company pays for the inventory when the exchange rate is $1US: $1.25Can. What is Flapp’s exchange gain or loss on this sale? a. Flapp does not have a foreign currency exchange gain or loss, since it conducts all of its transactions in the U.S. dollar. b. Flapp’s account receivable for the sale is $1 million (when the exchange rate is $1US: $1.2Can.) and it collects on the receivable when the exchange rate is $1US: $1.25Can. Flapp has an exchange gain of $50,000. c. Flapp’s account receivable for the sale is $1 million (when the exchange rate is $1US: $1.2Can.). It collects on the receivable at $1US: $1.25Can. Flapp has an exchange loss of $5,000. d. Flapp’s foreign currency exchange loss is $50,000.

Answer 1

Solution:

Flapp Corporation conducts all of its transaction in US dollars.

Since the Flapp Corporation is doing all transaction in home currency i.e. US dollars. It means they sell in US dollars and receive the payments in US dollars, hence no risk of exchange loss or gain.

Exchange loss or gain risk will arise when the selling or purchasing currency is different than the home currency.

Therefore, the correct option is a. Flapp does not have a foreign currency exchange gain or loss, since it conducts all of its transactions in the U.S. dollar