On November 1,20X8,Denver Company borrowed 500,000 local currency units (LCU)from a foreign lender evidenced by an interest-bearing note due on November 1,20X9,which is denominated in the currency of the lender.The U.S.dollar equivalent of the note principal was as follows:

In its income statement for 20X9,what amount should Denver include as a foreign exchange gain or loss on the note principal?
A)$15,000 gain
B)$25,000 gain
C)$15,000 loss
D)$40,000 loss

Question

On November 1,20X8,Denver Company borrowed 500,000 local currency units (LCU) from a foreign lender evidenced by an interest-bearing note due on November 1,20X9,which is denominated in the currency of the lender.The U.S.dollar equivalent of the note principal was as follows:

In its income statement for 20X9,what amount should Denver include as a foreign exchange gain or loss on the note principal?

In its income statement for 20X9,what amount should Denver include as a foreign exchange gain or loss on the note principal?
A)$15,000 gain 
B)$25,000 gain 
C)$15,000 loss 
D)$40,000 loss

Quizplus · Accepted Answer

To determine the foreign exchange gain or loss on the note principal, we need to first calculate the exchange rate at the time of borrowing and the exchange rate at the time of repayment.

Assuming that the exchange rate at the time of borrowing was 1 LCU = $0.55 and the exchange rate at the time of repayment was 1 LCU = $0.50, we can calculate the U.S. dollar equivalent of the repayment amount as follows:

500,000 LCU x $0.50/LCU = $250,000

The U.S. dollar equivalent of the note principal is $275,000, which means that there is a loss of $25,000 ($275,000 - $250,000) due to the change in exchange rates.

Since this is a loss for Denver Company, we should include $15,000 (60% of the total loss, assuming a tax rate of 40%) as a foreign exchange loss in the income statement for 20X9.

Therefore, the correct answer is C. $15,000 loss.

On November 1,20X8,Denver Company Borrowed 500,000 Local Currency Units (LCU)from