Exact Instruments sold equipment to a British research group at a price of 70,000 British pounds on December 1, 2011 with payment due in 90 days. Using the following exchange rates, what gain or loss from currency fluctuations should be recognized in 2011 and 2012, respectively? Dec. 1, 2011 $1.78 per British pound
Dec) 31, 2011 $1.82 per British pound
Mar) 1, 2012 $1.77 per British pound

Question

Quizplus · Accepted Answer

To determine the gain or loss from currency fluctuations, we need to compare the exchange rate at the date of the sale with the exchange rate at the date of payment.

We are given that the sale was made on December 1, 2011, and payment was due in 90 days. Therefore, payment was due on February 29, 2012.

At the date of sale, the exchange rate was $1.78 per British pound. To convert 70,000 British pounds to U.S. dollars:

70,000 x 1.78 = $124,600

At the date of payment (February 29, 2012), the exchange rate was $1.77 per British pound. To convert 70,000 British pounds to U.S. dollars:

70,000 x 1.77 = $123,900

Therefore, Exact Instruments would have received $700 less due to the currency fluctuations. This represents a loss.

Using the given exchange rates, we can see that the exchange rate strengthened (i.e., the U.S. dollar appreciated) between December 1, 2011 and December 31, 2011, resulting in a gain.

70,000 x (1.82 - 1.78) = $2,800

Between December 31, 2011 and February 29, 2012, the exchange rate weakened (i.e., the U.S. dollar depreciated), resulting in a loss.

70,000 x (1.77 - 1.82) = -$3,500

Therefore, the best choice is C: A $2,800 gain in 2011 and a $3,500 loss in 2012.

Exact Instruments Sold Equipment to a British Research Group at a Price