Hugh, Inc. purchased merchandise for 300,000 FC from a British vendor on November 30, 20X3. Payment in British pounds is due January 31, 20X4. Exchange rates to purchase 1 FC is as follows: In the December 31, 20X3 income statement, what amount should Hugh report as foreign exchange gain from this transaction?

Question

Hugh, Inc. purchased merchandise for 300,000 FC from a British vendor on November 30, 20X3. Payment in British pounds is due January 31, 20X4. Exchange rates to purchase 1 FC is as follows:  In the December 31, 20X3 income statement, what amount should Hugh report as foreign exchange gain from this transaction?

Quizplus · Accepted Answer

To determine the foreign exchange gain or loss, we need to convert the amount owed in FC to USD using the exchange rate as of the end of each reporting period. On December 31, 20X3, the exchange rate is 1 FC = $1.20. Therefore, the amount owed is 300,000 FC x $1.20/FC = $360,000.

On the date of purchase (November 30, 20X3), the exchange rate was 1 FC = $1.00. Therefore, the invoice amount in USD was $300,000.

When the payment is made on January 31, 20X4, we don't need to make any further adjustments because the amount owed in FC ($300,000) matches the amount paid in FC.

The foreign exchange gain is the difference between the initial invoice amount in USD ($300,000) and the amount owed in USD as of December 31, 20X3 ($360,000).

Therefore, the foreign exchange gain is $360,000 - $300,000 = $60,000.

However, the question asks for the amount to be reported on the income statement. Because this transaction has not been settled by December 31, 20X3, the gain is unrealized and should not be reported on the income statement. Therefore, the answer is $0.

However, if the question asked for the foreign exchange gain to be reported on the balance sheet, the answer would be $60,000 (unrealized gain).

Hugh, Inc Purchased Merchandise for 300,000 FC from a British Vendor