Clark Stone purchases raw material from its foreign supplier, Rinne Clay, on May 8. Payment of 1,500,000 foreign currency units (FC)is due in 30 days. May 31 is Clark's fiscal year-end. The pertinent exchange rates were as follows: How much Foreign Exchange Gain or Loss should Clark record on May 31?
A)$0.
B)$30,000 gain.
C)$30,000 loss.
D)$60,000 gain.
E)$60,000 loss.

Question

Clark Stone purchases raw material from its foreign supplier, Rinne Clay, on May 8. Payment of 1,500,000 foreign currency units (FC)is due in 30 days. May 31 is Clark's fiscal year-end. The pertinent exchange rates were as follows:  How much Foreign Exchange Gain or Loss should Clark record on May 31?
A)$0. 
B)$30,000 gain. 
C)$30,000 loss. 
D)$60,000 gain. 
E)$60,000 loss.

Quizplus · Accepted Answer

Clark Stone purchased raw material from Rinne Clay, and the payment of 1,500,000 FC was due in 30 days. At the time of purchase, the exchange rate was 1 FC = $0.05. On May 31, the exchange rate had changed to 1 FC = $0.04. 
Therefore, Clark Stone would have to pay $75,000 ($0.05 x 1,500,000 FC) for the raw material at the time of purchase. 
However, on May 31, the amount payable in USD would be $60,000 ($0.04 x 1,500,000 FC). This means that Clark Stone would incur a foreign exchange loss of $15,000 ($75,000 - $60,000) on the purchase. Hence, the correct answer is (C) $30,000 loss.

Clark Stone Purchases Raw Material from Its Foreign Supplier, Rinne