Question

On November 1, 20X1, A U.S. company sold merchandise to a foreign company for 375,000 kroner. The payment in krone is due on January 31, 20X2. The spot rate was as follows: $0.20 per krone on November 1, 20X1; $0.21 per krone on December 31, 20X1; and $0.19 per krone on January 31, 20X2 when the payment was received. Which of the following incorrectly describes the accounting for this foreign currency transaction?

a. The receivable was recorded at $150,000 on December 1, 2018.
b. The receivable was recorded at $142,500 on the December 31, 2018 balance sheet.
c. The foreign currency transaction gain included on the income statement for the year ending December 31, 2018 was $7,500.
d. The foreign currency transaction gain included on the income statement for the year ending December 31, 2019 was $15,000.

Answer 1

All the options incorrectly account for this transaction:

a. The receivable was recorded at $150,000 on December 1, 2018.

THE RECEIVABLE SHOULD BE RECORDED AT $75,000 (= 375,000 KRONER X $0.20 = $75,000)

b. The receivable was recorded at $142,500 on the December 31, 2018 balance sheet.

THE RECEIVABLE SHOULD BE RECORDED AT $78,750 (= 375,000 KRONER X $0.21 = $78,750)

c. The foreign currency transaction gain included on the income statement for the year ending December 31, 2018 was $7,500.

THE FOREIGN CURRENCY TRANSACTION GAIN = $78,750 - $75,000 = $3,750

d. The foreign currency transaction gain included on the income statement for the year ending December 31, 2019 was $15,000.

THE FOREIGN CURRENCY TRANSACTION LOSE = $78,750 - (375,000 X $0.19) = -$7,500