Amazing Corporation, a U.S. enterprise, sold product to a customer in Wales on O

Question

Amazing Corporation, a U.S. enterprise, sold product to a customer in Wales on October 1, 20x1 for 100,000 rubles with payment required on April 1, 20x2. Relevant exchange rates are:

October 1, 20x1: Spot rate $1.87 Forward rate (to 4/1/x2) $1.85

December 31, 20x1: Spot rate $1.85 Forward rate (to 4/1/x2) $1.84

April 1, 20x2: Spot rate $1.90

The discount factor corresponding to the company's incremental borrowing rate for 6 months is 0.95.

Assuming the Amazing Corporation does not hedge this transaction, what is the amount of exchange gain or loss that it should show on its December 31, 20x1 income statement?

Explanation / Answer

Hey Dear Student !!

See in this question no hedging cover is taken by company so Loss & Profit on exchange difference will be calculated with spot rates on the reporting dates.

Note: Student it seems that question is not properly drafted as they mentioned that US co. Billed to Wales Co. Where in Wales Currency is GBP (Pound) not Rubles further Ruble is also weak against US$ by 65 not 1.85. Where £ is strong against US$ nearly by 1.85.

So Answer would be as follows:-

When Bill was raised Amount was receivable by US Co. As follows £100000 X 1.87= $187000

On 31-Dec Amount is revalued at new spot rate as follows
£100000 X 1.85= $185000

Now amount receivable is less by $2000 so exchange difference is negative $2000.

Hope you understand my logical point of view, Pleasure Teaching You !!

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