Madison Paving Company purchased equipment for 350,000 British pounds from a supplier in London on July 7,2017.Payment in British pounds is due on Sept.7,2017.The exchange rates to purchase one pound is as follows: On its August 31,2017 income statement,what amount should Madison Paving report as a foreign exchange transaction gain:

Question

Madison Paving Company purchased equipment for 350,000 British pounds from a supplier in London on July 7,2017.Payment in British pounds is due on Sept.7,2017.The exchange rates to purchase one pound is as follows:  On its August 31,2017 income statement,what amount should Madison Paving report as a foreign exchange transaction gain:

Quizplus · Accepted Answer

The transaction took place on July 7,2017 when the exchange rate was 1 pound= $1.32. Therefore, the cost of equipment was 350,000 pounds x $1.32/pound = $462,000.

On August 31, 2017, the exchange rate was 1 pound= $1.30. If Madison Paving pays the supplier on September 7, 2017, it will need to exchange $462,000 / $1.30 per pound = 355,384.62 pounds.

However, Madison Paving only needs to pay 350,000 pounds, so it has a gain of 5,384.62 pounds. The gain in USD dollars is calculated as 5,384.62 pounds x $1.30/pound = $7,000. Therefore, the foreign exchange transaction gain reported on the income statement is $10,500 ($7,000 gain in USD x 1.5 exchange rate).

Madison Paving Company Purchased Equipment for 350,000 British Pounds from a Supplier