Alabama Company (a U.S.company)purchases inventory from a Japanese company for 5, 000, 000 yen when the exchange rate is $.012.Alabama makes payment when the exchange rate is .013.When making the journal entry for payment, Alabama Company will record a
A)debit to Cash for $60, 000
B)credit to Cash for $60, 000
C)gain of $5, 000
D)loss of $5, 000

Question

Quizplus · Accepted Answer

Alabama Company initially records the inventory at $60,000 (5,000,000 yen x $0.012). When the payment is made, the cost in dollars is $65,000 (5,000,000 yen x $0.013). The difference of $5,000 is recorded as a loss due to the unfavorable change in the exchange rate.

Alabama Company (A U