Kreighton Manufacturing purchased on credit £50,000 worth of production materials from a British company when the exchange rate was $1.97 per British pound.At the year-end balance sheet date the exchange rate increased to $2.76.If the liability is still unpaid at that time,Kreighton must record a:

Question

Quizplus · Accepted Answer

When the exchange rate increased from $1.97 to $2.76, this meant that the British pound strengthened against the U.S. dollar. As a result, Kreighton Manufacturing would need to pay more dollars than they originally anticipated in order to settle their liability. This represents a loss for Kreighton, as they will need to pay more dollars than the liability is currently valued at on their books. The amount of the loss can be calculated as:
£50,000 x ($2.76 - $1.97) = $39,500
Therefore, the correct choice is B - loss of $39,500.

Kreighton Manufacturing Purchased on Credit £50,000 Worth of Production Materials