_____ Petex's Swiss subsidiary, Setex, sold inventory on credit to a British customer on 12/22/06. The sale was denominated in pounds, and the customer paid in full in March 2007. From the sales date to 12/31/06, the pound strengthened, relative to the franc. The U.S. dollar is Setex's functional currency. Setex's gain should be reported as
A) An offset to the uncollected receivable.
B) A separate component of stockholders' equity (bypassing the income statement).
C) A deferred credit reported immediately below liabilities.
D) An adjustment to the recorded sales amount.
E) An FX transaction gain in the current income statement.

Question

Quizplus · Accepted Answer

The gain from the strengthening of the pound relative to the franc (with the U.S. dollar as the functional currency) should be recognized as a foreign exchange transaction gain in the current income statement. This is because changes in exchange rates affecting cash flows from receivables denominated in a foreign currency are recognized in the income statement at the time of payment.

_____ Petex's Swiss Subsidiary, Setex, Sold Inventory on Credit to a British