On January 1, Multicorp, a U.S. firm, sells £200,000 of merchandise on account to an importer in Britain with payment due on February 15. The relevant exchange rates are as follows:
January 1 $1.6260
January 31 $1.5995
February 15 $1.5900
February 28 $1.5855
What would be the gain or loss for U.S. tax purposes on February 15?

Question

Quizplus · Accepted Answer

On January 1, the cost of the merchandise sold was $325,200 (200,000 × 1.6260). On February 15, when payment is due, the accounts receivable balance is £200,000 × $1.5900/£ = $318,000. Thus, the exchange loss is $7,200 ($325,200 - $318,000). Since this is a realized exchange loss, it is recognized for U.S. tax purposes. Therefore, the correct answer is C.