Question

Ruthie Inc. had a debit adjustment of $2700 for the year ended December 31, 2022, from restating its foreign subsidiary's accounts from their local currency units into U.S. dollars.

Additionally, Ruthie had a payable to a foreign vendor It is denominated in the vendor's local currency. On December 31, 2021, this payable for 290,000 local currency units (LCU) was correctly included in Ruthie's balance sheet at $125000. When the payable was settled on May 2, 2022, the U.S. dollar–equivalent was $141500.In Ruthie's 2022 consolidated statement of income, how much should be reported as foreign exchange gain/(loss) in computing net income?

Answer 1

Ruthie Inc. should report a foreign exchange loss of $16,500 in its 2022 consolidated statement of income, representing the difference between the original balance sheet valuation of the payable ($125,000) and the settlement amount ($141,500) due to changes in the exchange rate.

Step-by-step explanation:

The question pertains to how Ruthie Inc. should recognize a foreign exchange gain or loss on its consolidated statement of income due to a change in exchange rates between the time when a payable is recorded and when it is settled. Ruthie Inc. had a payable of 290,000 LCU that was valued at $125,000 on December 31, 2021. By the time the payable was settled on May 2, 2022, the amount paid was $141,500. Therefore, the company experienced a loss due to the change in the exchange rate, and this loss should be recognized in the income statement.

To calculate the foreign exchange loss, we subtract the original payable amount in USD ($125,000) from the settlement amount in USD ($141,500), resulting in a foreign exchange loss of $16,500.