On December 5,2014,Unca Corporation,a U.S.firm,bought inventory items from Skagerrak Corporation of Norway for 1,000,000 Norwegian kroner when the spot rate for kroner was $0.166.The purchase was denominated in kroner.At Unca's fiscal year end,December 31,2014,the spot rate was $0.171.On January 4,2015,Unca purchased 1,000,000 kroner for $167,500 and paid the invoice.How much gain or (loss)did Unca report in its 2014 and 2015 income statements,respectively?
A)$(5,000)and $1,500
B)$0 and ($1,500)
C)($5,000)and $3,500
D)$0 and ($3,500)

Question

Quizplus · Accepted Answer

To calculate the gain/loss, we need to convert the purchase amount to U.S. dollars using the spot rates at the time of purchase and at year-end:
Purchase amount in USD on December 5, 2014: 1,000,000 NOK x $0.166/NOK = $166,000
Purchase amount in USD on December 31, 2014: 1,000,000 NOK x $0.171/NOK = $171,000

Since the spot rate increased, Unca Corporation had a foreign currency gain of $5,000 in 2014 ($171,000 - $166,000 = $5,000).

On January 4, 2015, Unca purchased 1,000,000 NOK at a spot rate of $0.1675/NOK, which means they paid $167,500 for the kroner. The inventory items were purchased at $171,000, so Unca incurred a foreign currency loss of $3,500 in 2015 ($171,000 - $167,500 = -$3,500).

Therefore, the correct answer is option C.