On September 22,20X1,Yumi Corp.purchased merchandise from an unaffiliated foreign company for 10,000 units of the foreign company's local currency.On that date,the spot rate was $.55.Yumi paid the bill in full,six months later,on March 20,20X2,when the spot rate was $.65.The spot rate was $.70 on December 31,20X1.What amount should Yumi report as a foreign currency transaction loss in its income statement for the year ended December 31,20X1?

Question

Quizplus · Accepted Answer

The foreign currency transaction loss is calculated by subtracting the amount that would be received using the current spot rate from the amount originally paid using the historical spot rate.

As of September 22, 20X1, Yumi Corp. purchased merchandise for 10,000 units of foreign currency at a spot rate of $.55. Therefore, the cost in U.S. dollars was:

10,000 units x $.55 = $5,500

As of December 31, 20X1, the spot rate was $.70. If Yumi Corp. had paid the bill on December 31, 20X1, the cost in U.S. dollars would have been:

10,000 units x $.70 = $7,000

Therefore, Yumi Corp. incurred a foreign currency transaction loss of:

$5,500 - $7,000 = -$1,500

Since this loss occurred in 20X1, it should be reported in the income statement for the year ended December 31, 20X1. The best choice is C, $1,500.