Question

Clark Co., a U.S. corporation, sold inventory on December 1, 2021, with payment of 12,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:

Dec. 1 Spot rate: $ 1.831
Dec. 31 Spot rate: $ 1.976
Jan. 30 Spot rate: $ 1.768
What amount of foreign exchange gain or loss should be recorded on December 31?
A) $756 gain.
B) $1,740 loss.
C) 8756 loss.
D) $756 loss.
E) $1,740 gain

Answer 1

Clark Co. will record a $1,740 foreign exchange gain on December 31 due to the increase in the value of the British pound relative to the dollar from the transaction date to the reporting date.

Step-by-step explanation:

To determine the amount of foreign exchange gain or loss that should be recorded by Clark Co. on December 31st, the difference between the spot rates on the transaction date and the reporting date must be calculated. On December 1, Clark Co. sold inventory for 12,000 British pounds when the spot rate was $1.831. By December 31, the spot rate changed to $1.976. The calculation is as follows:

(12,000 pounds * $1.976) - (12,000 pounds * $1.831) = $23,712 - $21,972 = $1,740

Since the value of the British pound increased relative to the dollar, Clark Co. would record a foreign exchange gain, not a loss. Therefore, on December 31, Clark Co. should record a $1,740 gain.