Question

Hunt Co. purchased merchandise for 300,000 British pounds from a vendor in London on November 30, 20X1. Payment in British pounds was due on January 30, 20X2. The exchange rates to purchase one pound were as follows:11/30/X1 12/31/X1---------- ----------Spot-rate $1.65 $1.6230-day rate 1.64 1.5960-day rate 1.63 1.56In its December 31, 20X1, income statement, what amount should Hunt report as foreign exchange gain?A. $12,000B. $9,000C. $6,000D. $0

Answer 1

Hunt Co. should report a foreign exchange gain of $9,000 on its December 31, 20X1, income statement due to the decrease in spot-rate from $1.65 to $1.62.

Step-by-step explanation:

When Hunt Co. purchased merchandise for 300,000 British pounds on November 30, 20X1, the spot-rate was $1.65. However, by December 31, 20X1, the spot-rate decreased to $1.62. To calculate the foreign exchange gain for the income statement, we compare the value of the payable in dollars at the time of purchase with the value of the payable in dollars at the year-end rate.

The initial value of the payable in U.S. dollars at the time of purchase was 300,000 pounds × $1.65 = $495,000. The value of the payable in U.S. dollars at the year-end rate was 300,000 pounds × $1.62 = $486,000. Thus, the foreign exchange gain that should be reported in the income statement is $495,000 - $486,000 = $9,000.