Question

Pigskin Co., a U.S. corporation, sold inventory on credit to a British company on April 8, 2018. Pigskin received payment of 35,000 British pounds on May 8, 2018. The exchange rate was £1 = $1.54 on April 8 and £1 = 1.43 on May 8. What amount of foreign exchange gain or loss should be recognized?

Answer 1

The foreign exchange loss is $3,850.

Step-by-step explanation:

Foreign exchange gain or loss is the gain or loss made on transactions based on the movement in the exchange rates.

As at the time Pigskin Co. sold inventory on credit on April 8, 2018, the exchange rate was favorable to the company as it was £1 = $1.54. So, the value of the inventory was 35, 000 x $1.54 = $53,900 but the rate later moved downward when the company received payment on May 8, 2018 to £1 = $1.43, so the value of inventory sold became $50,050. Meaning that the company had suffered a loss of $50,050 - $53,900 = ($3,850). Alternatively, ($1.43 - $1.54) x 35,000 = ($3,850).