Clark Co., a U.S. corporation, sold inventory on December 1, 2021, with payment of 12,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows: What amount of foreign exchange gain or loss should be recorded on December 31?

Question

Clark Co., a U.S. corporation, sold inventory on December 1, 2021, with payment of 12,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:  What amount of foreign exchange gain or loss should be recorded on December 31?

Quizplus · Accepted Answer

To determine the foreign exchange gain or loss, we need to compare the exchange rate on the date of the sale (December 1) with the exchange rate on the date of the financial statement (December 31).

On December 1, the exchange rate was $1.50 per British pound ($18,000 ÷ 12,000). On December 31, the exchange rate was $1.45 per British pound.

To calculate the gain or loss, we need to determine the difference between the two exchange rates and multiply it by the amount due:

Difference in exchange rates = $1.50 - $1.45 = $0.05
Amount due = 12,000 British pounds
Gain or loss = $0.05 x 12,000 = $600

Since the U.S. dollar strengthened against the British pound, there is a foreign exchange gain of $600 ($1,740 - $1,140). Therefore, the answer is (E) $1,740 gain.

Clark Co, a U