On July 1, 2015, Houghton Company borrowed 280,000 euros from a foreign lender e
ID: 2576770 • Letter: O
Question
On July 1, 2015, Houghton Company borrowed 280,000 euros from a foreign lender evidenced by an interest-bearing note due on July 1, 2016. The note is denominated in euros. The U.S. dollar equivalent of the note principal is as follows:
Date: July 1, 2015 (date borrowed) Amount Borrowed: $235,000
Date: December 31, 2015 (Houghton’s year-end) Amount: 300,000
Date: July 1, 2016 (date repaid) Amount: 310,000
In its 2016 income statement, what amount should Houghton include as a foreign exchange gain or loss on the note?
A. 75,000 gain
B. 10,000 gain
C. 10,000 loss
D. 75,000 loss
Explanation / Answer
Answer
Foreign Exchange Gain/Loss on Note for Income Statement 2016
C. 10,000 Loss
Explanation - As per IAS 21, Asset and Liabilties are translated on the balance sheet date using the closing rate. Since, Interest bearing Note from a Foreign lender is a Liability, it will be translated as $ 300,000 on the year end 31 Dec 2015. Accordingly a foregign exchange loss of $ 65,000 will be recorded in the income statement for year 2015.
As per IAS 21, incomes and expenses are translated on the date of transactions using the exchange rate on the date of transaction. Hence, the borrowing and repayment of interest bearing note will be translated using the rate on the transaction date.
Accordingly, the repayment on 1 july 2016, will be recorded at $ 3,10,000. since, the note was previously recognised at the year end 31 Dec 2015 at $ 3,00,000. The Foreign Exhange loss of $ 10,000 will be recognised in the income statement of 2016.
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