A U.S.manufacturer has sold computer services to a foreign firm, billed the firm and later received 200,000 foreign currency units (FC).The exchange rates were 1 FC = $.75 on the date of the sale and 1 FC = $.80 when the receivable was settled.On the transaction date, the settlement exchange rate is estimated to be 1 FC = $.72.By the settlement date, what is the total exchange gain or loss recorded for the transaction if the two-transaction method is used?

Question

Quizplus · Accepted Answer

The two-transaction method treats the sale and the subsequent cash receipt as separate transactions. At the time of the sale, the receivable is recorded at the current exchange rate, which is 1 FC = $.75. Therefore, the value of the sale in U.S. dollars is 200,000 FC * $.75 = $150,000. When the receivable is settled, the exchange rate is 1 FC = $.80, making the value of the 200,000 FC received equal to 200,000 FC * $.80 = $160,000. The difference between the settlement amount ($160,000) and the recorded amount ($150,000) is a $10,000 exchange gain.

A USManufacturer Has Sold Computer Services to a Foreign Firm, Billed