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 payment on September 1 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

To record the payment on September 1, the following journal entry will be made:

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

The payment was made when the Taiwan dollar was worth $0.038, which means that Central Computers, Inc. paid 30 x 500,000 x $0.038 = $570,000. The original cost of the computer chips was only $600,000 (30 x 500,000 x $0.040). Therefore, Central Computers, Inc. gained a foreign-currency transaction gain of $570,000 - $600,000 = $30,000. This gain is recorded as a credit to Foreign-Currency Transaction Gain.