Question

On April 1, 2017, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2018. The dollar value of the loan was as follows:

Date Amount
April 1. 2010 $97,000
December 31, 2010 $103,000
April 1. 2011 $105,000

How much foreign exchange gain or loss should be included in Shannon's 2011 income statement?
(A) $1,000 gain.
(B) $1,000 loss.
(C) $2,000 gain.
(D) $2,000 loss.
(E) $8,000 loss.

Answer 1

(D) $2,000 loss.

Step-by-step explanation:

Shannon has taken a loan, the value of the loan is a liability for Shannon, an increase in the loan will represent more dollars to settle the debt. This increase in the loan to 105,000 from 103,000 translate to a loss of 2,000

as the company now needs 2,000 more dollars to settle the debt.

The acounting entry will be as follow:

loss on foreing exchange 2,000 debit

note payable 2,000 credit