During 2017, a U.S. company purchased inventory from a foreign supplier. The transaction was denominated in the local currency of the seller. The direct exchange rate increased from the date of the transaction to the balance sheet date. The exchange rate decreased from the balance sheet date to the settlement date in 2018. For the years 2017 and 2018, transaction gains or losses should be recognized as:
A) 2017, gain; 2018, gain
B) 2017, gain; 2018, loss
C) 2017, loss; 2018 loss
D) 2017, loss; 2018, gain

Question

Quizplus · Accepted Answer

In 2017, the direct exchange rate increased, meaning it took more of the U.S. company's currency to buy the same amount of foreign currency, indicating a loss. In 2018, the exchange rate decreased, meaning it took less of the U.S. company's currency to buy the same amount of foreign currency, indicating a gain.