On August 1,Deluka Computers,Inc.purchased thirty computer chips,on account,from a company located in Taiwan for 500,000 Taiwan dollars.On that date the Taiwan dollar is worth $0.040.On September 1,when the Taiwan dollar was worth $0.038,payment was made.Deluka Computers uses the perpetual inventory system.The journal entry on August 1 by Deluka Computers,Inc.would be:
A)debit Inventory $19,000 and credit Accounts Payable $19,000.
B)debit Inventory $20,000 and credit Accounts Payable $20,000.
C)debit Inventory $20,000,credit Foreign-Currency Transaction Gain $1,000,and credit Accounts Payable $19,000.
D)debit Inventory $20,000 and credit Cash $20,000.

Question

Quizplus · Accepted Answer

On August 1, Deluka Computers purchased the computer chips on account, which means they have an accounts payable and an increase in inventory. Since the transaction is denominated in Taiwan dollars, the exchange rate needs to be taken into account to determine the cost in U.S. dollars. The cost of 500,000 Taiwan dollars at a rate of $0.040 is $20,000 ($0.040 x 500,000). Therefore, the journal entry would be to debit Inventory for $20,000 and credit Accounts Payable for $20,000.