Norton Co., a U.S. corporation, sold inventory on December 1, 2011, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows: What amount of foreign exchange gain or loss should be recorded on December 31?

Question

Norton Co., a U.S. corporation, sold inventory on December 1, 2011, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:  What amount of foreign exchange gain or loss should be recorded on December 31?

Quizplus · Accepted Answer

To determine the foreign exchange gain or loss, we need to compare the exchange rate on the date of the sale (December 1) with the exchange rate on the date of the financial statement (December 31).

On December 1, the exchange rate was 1 British pound = $1.60 USD (10,000 pounds x 1.60 = $16,000 USD).

On December 31, the exchange rate was 1 British pound = $1.51 USD (10,000 pounds x 1.51 = $15,100 USD).

The difference between the two exchange rates is:

$15,100 - $16,000 = $900 loss

Since the US dollar appreciated against the British pound, Norton Co. would record a foreign exchange loss of $900 ($900 loss $ - (-$41)  which was the gain before the correction ) on their December 31 financial statement. However, based on the given answer choices, the closest option is a foreign exchange gain of $941, which is incorrect.

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