On August 1, Central 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 to record the sale on August 1 would include a:
A) credit to Accounts Payable $19,000.
B) credit to Accounts Payable $20,000.
C) credit to Foreign-Currency Transaction Gain $1,000.
D) credit to Cash $20,000.

Question

Quizplus · Accepted Answer

The purchase was made on account, so there needs to be a credit to Accounts Payable for the full amount of 500,000 Taiwan dollars. Since the conversion rate on August 1 was $0.040 per Taiwan dollar, the purchase is initially recorded as a debit to Inventory for $20,000 ($0.040 x 500,000). When payment is made on September 1 at a conversion rate of $0.038 per Taiwan dollar, the liability is settled for 500,000 Taiwan dollars x $0.038 = $19,000. Therefore, the journal entry to record the payment on September 1 would include a credit to Cash for $19,000, and a debit to Accounts Payable for $19,000. There is no gain or loss to record in this transaction.