Kettle Company purchased equipment for 375,000 British pounds from a supplier in
ID: 2465854 • Letter: K
Question
Kettle Company purchased equipment for 375,000 British pounds from a supplier in London on July 3, 2014. Payment in British pounds is due on Sept. 3, 2014. The exchange rates to purchase one pound is as follows:
July 3
August 31, (year end)
September 3
Spot-rate
1.57
1.59
1.54
On its August 31, 2014, income statement, what amount should Kettle report as a foreign exchange transaction gain: $11,250
In question #9 above - Are these direct exchange quotations or indirect exchange quotations? - Please answer
July 3
August 31, (year end)
September 3
Explanation / Answer
As the payment is due on September 3, 2014 and the purchase was done on July 3, 2014, the gain or loss from foreign exchange transaction will be the difference in amount in US dollars on both the dates.
USD amount on July 3 when equipment was purchased = british pounds*spot rate on July 3 = 375,000 pounds*1.57 = $588,750
USD amount paid on September 3, when the amount was due = british pounds*spot rate on September 3 = 375,000 pounds*1.54 = $577,500. Thus the amount paid on September 3 is lower than the amount determined on July 3. Gain = 588,750 - 577,500 = $11,250.
The quote above mentions the amount of USD required for 1 british pound. British pound is the foreign currency and USD is the domestic currency. Thus it mentions the amount of domestic currency that is required per unit of foreign currency. For July 3, 1 unit of British pound (foreign currency) requires 1.57 units of USD (home currency). This type of quote is known as direct quote.
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