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?
A) 15,000 gain 
B) 25,000 gain 
C) 15,000 loss 
D) 40,000 loss

Quizplus · Accepted Answer

The company borrowed 500,000 local currency units (LCU) on November 1, 20X8, and the note became due on November 1, 20X9. Therefore, the company needed to repay the lender in LCU. As of the date of the note issuance, the U.S. dollar equivalent of the note principal was a known amount. However, the exchange rate between the LCU and the U.S. dollar might fluctuate before the note becomes due, and the company needs to revalue the note principal at each balance sheet date.

Assuming that the foreign currency appreciated against the U.S. dollar during the year, the value of the note principal in U.S. dollars decreased. Therefore, the company would report a foreign exchange loss on the note principal in its income statement for 20X9. Based on the information provided, there is not enough information to determine the precise amount of the foreign exchange loss. However, the only answer choice that suggests a loss is choice C), 15,000 loss.

On November 1, 20X8, Denver Company Borrowed 500,000 Local Currency