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: Angela, Inc., a U.S. company, had a euro receivable from exports to Spain and a British pound payable resulting from imports from England. Angela recorded foreign exchange gain related to both its euro receivable and pound payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date?

A)Option A.
B)Option B.
C)Option C.
D)Option D.
E)Option E.

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:

Angela, Inc., a U.S. company, had a euro receivable from exports to Spain and a British pound payable resulting from imports from England. Angela recorded foreign exchange gain related to both its euro receivable and pound payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date?

A)Option A. 
B)Option B. 
C)Option C. 
D)Option D. 
E)Option E.

Quizplus · Accepted Answer

Since Shannon Company borrowed euros, the foreign currency increased in dollar value from the date of the transaction to the settlement date because the dollar weakened against the euro over time. As for Angela, if the foreign exchange gain was related to its euro receivable, then the euro increased in dollar value from the transaction date to the settlement date because the dollar weakened against the euro over time. If the foreign exchange gain was related to the pound payable, then the pound decreased in dollar value from the transaction date to the settlement date because the dollar strengthened against the pound over time. However, since the question asks about both the euro receivable and pound payable having foreign exchange gains, we cannot determine the net effect on dollar value without knowing the specific amounts involved. Therefore, the best choice is B, as it is the only option that accurately reflects the increase in dollar value of the euro borrowed by Shannon Company.