Assume that on January 15, 2021 MAK agrees to purchase US$500,000 for C$550,000 for delivery on January 15, 2022. The exchange rate at MAK's December 31, 2021 year-end was US$1 = C$0.95 and the January 15, 2022 exchange rate is US$1 = C$0.97. What is the foreign exchange gain or loss recognized at year-end?
A)0
B)$65,000 loss.
C)$75,000 gain.
D)$75,000 loss.

Question

Quizplus · Accepted Answer

At year-end (December 31, 2021), the contract would be revalued at the then-current exchange rate of US$1 = C$0.95. The original contract was for US$500,000, which at the year-end rate would be worth C$525,000 (US$500,000 * C$0.95/US$1). The original agreement was for C$550,000, so compared to the year-end value, there is a C$25,000 unrealized loss due to the change in exchange rate. However, by the settlement date (January 15, 2022), the exchange rate changed to US$1 = C$0.97, making the US$500,000 worth C$485,000 (US$500,000 * C$0.97/US$1). Compared to the original agreement of C$550,000, this represents a C$65,000 loss. The question asks for the gain or loss recognized at year-end, not at the settlement date. The correct calculation for the year-end adjustment should consider the difference between the original contract value and the year-end revalued amount, which is not directly provided in the options. The explanation provided calculates the loss based on the final settlement, which is not what the question asks for. Therefore, the explanation does not correctly justify the selected answer choice, leading to confusion. The correct approach to determine the year-end exchange gain or loss would involve comparing the original contract value in Canadian dollars to its revalued amount at the year-end exchange rate, and then recognizing any resulting exchange gain or loss based on that comparison.

Assume That on January 15, 2021 MAK Agrees to Purchase