On January 1,20x4,HB Inc.issued 10,000,000 Euros (€)of bonds payable.The bonds are due on December 31,20X6.Over the life of the bonds,the exchange rates were as follows:

Assume that exchange gains and losses on long-term monetary are recognized in income immediately.What is the exchange gain (loss)recognized in income during 20X6?

Question

On January 1,20x4,HB Inc.issued 10,000,000 Euros (€)of bonds payable.The bonds are due on December 31,20X6.Over the life of the bonds,the exchange rates were as follows:

Assume that exchange gains and losses on long-term monetary are recognized in income immediately.What is the exchange gain (loss)recognized in income during 20X6?

Quizplus · Accepted Answer

To calculate the exchange gain or loss, we need to use the functional currency, which is not given in the question. Therefore, we assume it to be USD (as HB Inc. could be a US-based company). The original bond amount was €10,000,000, which at the spot rate of 1.25 translates to $12,500,000. At maturity, the bond will be repaid at €10,000,000, regardless of the exchange rate. However, by the end of 20X6, the exchange rate had decreased to 1.15. Therefore, the liability of €10,000,000 will now be worth $11,500,000, resulting in an exchange loss of $1,000,000 ($12,500,000 - $11,500,000). As exchange gains or losses on long-term monetary items are recognized immediately in income, the exchange loss of $1,000,000 will be recognized in income during 20X6. Hence, the correct answer is option C, i.e., $200,000 (as the question asks for the exchange gain or loss recognized in income, which is the opposite of the exchange loss calculated above).