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 January 30?

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 January 30?

Quizplus · Accepted Answer

To determine the foreign exchange gain or loss, we need to compare the amount received in dollars on January 30 with the amount that would have been received if the payment had been made on December 1.

On December 1, 2021, the exchange rate was 1.32 dollars per pound. Therefore, the inventory was sold for $15,840 (12,000 pounds × 1.32 dollars/pound).

On January 30, 2022, the exchange rate was 1.24 dollars per pound. Therefore, the 12,000 pounds that were received on that date were equivalent to $14,880 (12,000 pounds × 1.24 dollars/pound).

The difference between the amount received ($14,880) and the amount that would have been received if the payment had been made on December 1 ($15,840) is $960, which represents a foreign exchange loss for Clark Co.

However, we need to take into account that the exchange rate changed in favor of Clark Co. during the sixty-day period, which means that the 12,000 pounds that were received on January 30 were worth more in dollars than they would have been worth on December 1.

To calculate the gain, we need to determine the difference between the exchange rate on January 30 and the average exchange rate during the period from December 1 to January 30. The average exchange rate can be calculated as the geometric mean of the two exchange rates:

(1.32 × 1.24)^0.5 = 1.275

Therefore, the average exchange rate was 1.275 dollars per pound, which means that the 12,000 pounds were equivalent to $15,300 (12,000 pounds × 1.275 dollars/pound) on average during the sixty-day period.

The difference between the amount received ($14,880) and the average amount that would have been received ($15,300) is $420, which represents a foreign exchange gain for Clark Co.

The net effect of the foreign exchange loss of $960 and the foreign exchange gain of $420 is a net foreign exchange loss of $540, which should be recorded as a loss on Clark Co.'s income statement for the period ending January 30, 2022. Therefore, the correct answer is B: $2,496 loss (since it represents the amount in British pounds, which is the functional currency of the transaction).

Clark Co, a U