Madison Paving Company purchased equipment for 350,000 British pounds from a supplier in London on July 7, 2014.Payment in British pounds is due on Sept.7, 2014.The exchange rates to purchase one pound is as follows: On its August 31, 2014 income statement, what amount should Madison Paving report as a foreign exchange transaction gain:

Question

Madison Paving Company purchased equipment for 350,000 British pounds from a supplier in London on July 7, 2014.Payment in British pounds is due on Sept.7, 2014.The exchange rates to purchase one pound is as follows:  On its August 31, 2014 income statement, what amount should Madison Paving report as a foreign exchange transaction gain:

Quizplus · Accepted Answer

To calculate the foreign exchange transaction gain or loss, we need to identify the functional currency and the transaction currency. In this case, Madison Paving Company's functional currency is the US dollar, and the transaction currency is the British pound.

On July 7, 2014, when Madison Paving purchased the equipment, the exchange rate was $1.71 per pound. This means that the cost of equipment in US dollars was:

$1.71 per pound * 350,000 pounds = $598,500

On September 7, 2014, when Madison Paving needs to make the payment, the exchange rate has changed to $1.67 per pound. This means that the cost of equipment in US dollars at the time of payment is:

$1.67 per pound * 350,000 pounds = $584,500

Madison Paving will need to pay $584,500 in US dollars to settle the invoice. However, they had already recorded the cost of the equipment as $598,500 on July 7.

The foreign exchange transaction gain is the difference between the two amounts, or:

$598,500 (original cost) - $584,500 (cost at time of payment) = $14,000

Therefore, the answer is C) $10,500.

Madison Paving Company Purchased Equipment for 350,000 British Pounds from a Supplier