On December 1, 2018, a U.S. company sold merchandise to a foreign company for 75
ID: 2592719 • Letter: O
Question
On December 1, 2018, a U.S. company sold merchandise to a foreign company for 750,000 yuan. The payment in yuan is due on January 31,2019. The spot rate was as follows: $0.20 per yuan on December 1, 2018; $0.19 per yuan on December 31, 2018; and $0.21 per yuan on January 31, 2019 when the payment was received. Which of the following incorrectly describes the accounting for this foreign currency transaction?
The receivable was recorded at $150,000 on December 1, 2018.
The receivable was recorded at $142,500 on the December 31, 2018 balance sheet.
The foreign currency transaction gain included on the income statement for the year ending December 31, 2018 was $7,500.
The foreign currency transaction gain included on the income statement for the year ending December 31, 2019 was $15,000.
Explanation / Answer
Following statement incorrectly describes the accounting for this foreign currency transaction :
Explanation :
On December 1, 2018 , ie on date of sales the accounts receivable should be recorded at the spot price prevailing on that day = $0.20 per yuan . Therefore receivable was recorded at $150,000( 750,000 yuan * $0.20 per yuan) on December 1, 2018.
On December 31, 2018 the exchange rate drop to $0.19 per yuan. which means now accounts receivable balance on December 31, 2018 should be $142,500( 750,000 yuan * $0.19 per yuan)
This decrese in accounts receivable on December 31, 2018 of $7,500 ( $150,000 - $142,500) should be included on the income statement for the year ending December 31, 2018 as foreign currency transaction loss.
On January 31,2019 , U.S. company should received the payment as per the spot rate prevelling on that day ie $0.21 per yuan ie $157,500 ( 750,000 yuan * $0.21 per yuan). Thus foreign currency transaction gain included on the income statement for the year ending December 31, 2019 was $15,000 ( $142,500 - $157,500)
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