On April 1, 2020, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2021. The dollar value of the loan was as follows: How much foreign exchange gain or loss should be included in Shannon's 2020 income statement?
A)$3,000 gain.
B)$3,000 loss.
C)$6,000 gain.
D)$6,000 loss.
E)$7,000 gain.

Question

On April 1, 2020, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2021. The dollar value of the loan was as follows:  How much foreign exchange gain or loss should be included in Shannon's 2020 income statement?
A)$3,000 gain. 
B)$3,000 loss. 
C)$6,000 gain. 
D)$6,000 loss. 
E)$7,000 gain.

Quizplus · Accepted Answer

To calculate the foreign exchange gain or loss on the 100,000 euro loan, we need to convert the euro amount to U.S. dollars using the spot rate on the date of the loan. Let's assume that the spot rate on April 1, 2020, was $1.10 per euro. Therefore, the loan was worth $110,000 on the date it was borrowed.

Now, let's assume that the spot rate on December 31, 2020, was $1.05 per euro. Therefore, the loan was worth $105,000 on December 31, 2020.

To calculate the foreign exchange gain or loss, we need to subtract the value of the loan on December 31, 2020, from the value of the loan on the date it was borrowed, and then convert the result to U.S. dollars using the spot rate on December 31, 2020.

In this case, the calculation would be as follows:

Value of loan on April 1, 2020: $110,000 (100,000 euros x $1.10/euro)
Value of loan on December 31, 2020: $105,000 (100,000 euros x $1.05/euro)
Foreign exchange loss: $5,000
Foreign exchange loss in euros: 4,762 euros ($5,000 / $1.05/euro)

Since the U.S. dollar has weakened against the euro during the year, Shannon Company should record a foreign exchange loss of $5,000 (or 4,762 euros) in its income statement for 2020. Therefore, the correct answer is D) $6,000 loss. However, it should be noted that the choices provided are not accurate, as neither of them represents the amount of gain or loss calculated above.