Question

Use the following information for Problems 11 and 12. Brandt Corp. (a U.S.-based company) sold parts to a South Korean customer on December 1, 2020, Page 466 with payment of 10 million South Korean won to be received on March 31, 2021. The following exchange rates apply:

- Date : December 1, 2020, Spot Rate : $0.0035, Forward Rate Spot Rate (to March 31, 2021 : $0.0034
- Date : December 31, 2020, Spot Rate : 0.0033, Forward Rate Spot Rate (to March 31, 2021 : 0.0032
- Date : March 31, 2021, Spot Rate : 0.0038, Forward Rate Spot Rate (to March 31, 2021 : N/A

Assuming that Brandt did not hedge its foreign exchange risk, how much foreign exchange gain or loss should it report on its 2020 income statement with regard to this transaction?
a. $5,000 gain
b. $3,000 gain
c. $2,000 loss
d. $1,000 loss

Answer 1

Brandt Corp. should report a $2,000 foreign exchange loss on its 2020 income statement, as the spot rate of the South Korean won decreased from $0.0035 to $0.0033 from December 1 to December 31, 2020. Therefore, the correct option is C.

Step-by-step explanation:

To calculate the foreign exchange gain or loss Brandt Corp. should report on its 2020 income statement, we need to look at the spot rate change from December 1, 2020, to December 31, 2020. On December 1, the spot rate was $0.0035, and on December 31, it was $0.0033. The value of 10 million South Korean won at the beginning was $0.0035 * 10,000,000 won = $35,000. At the end of the year, the value became $0.0033 * 10,000,000 won = $33,000. This shows a loss of $35,000 - $33,000 = $2,000 for Brandt Corp. for the year 2020, due to the exchange rate falling from $0.0035 to $0.0033.

Brandt Corp. will have to report a foreign exchange loss on its income statement for the year 2020, and the correct answer in this scenario is a $2,000 loss (Option C).