On August 1,Steffen 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.The journal entry on September 1 by Steffen Computers,Inc.would include a:
A)debit to Accounts Payable $19,000.
B)debit to Foreign-Currency Transaction Loss $1,000.
C)credit to Foreign-Currency Transaction Gain $1,000.
D)credit to Cash $20,000.

Question

Quizplus · Accepted Answer

The company purchased the chips for 500,000 Taiwan dollars, which is equivalent to $0.040 per dollar on August 1. On September 1, when the Taiwan dollar was worth $0.038, Steffen Computers, Inc. paid the supplier. This means that the company needed to pay $19,000 ($0.038 x 500,000) to settle the account. Since the exchange rate decreased, the company would record a Foreign-Currency Transaction Gain of $1,000 ($20,000 - $19,000) to account for the difference between the amount owed and the amount paid in U.S. dollars. Therefore, the correct journal entry on September 1 is:

Debit: Accounts Payable $19,000
Credit: Cash $20,000
Credit: Foreign-Currency Transaction Gain $1,000