Homework SourseOn April 10 2016 when the spot rate is 130 a US company sell
On April 10, 2016, when the spot rate is $1.30/€, a U.S. company sells merchandise to a customer in Italy. The spot rate is $1.31/€ on June 30, the company’s year-end. Payment of €100,000 is received on August 10, 2016, when the spot rate is $1.28/€. What is the effect on fiscal 2016 and 2017 income?
| Fiscal 2016 | Fiscal 2017 | |
| a. | $1,000 exchange loss | $3,000 exchange gain |
| b. | No effect | $2,000 exchange loss |
| c. | No effect | $2,000 exchange gain |
| d. | $1,000 exchange gain | $3,000 exchange loss |
Solution
Answer
If the buyer had paid on that day, the company would have received $130000
On 30 June, the rate went up to $1.31/ €.
If the buyer had paid on 30 June, company would have received $131000. Hence, there is a $1000 exchange gain to be recorded in Fiscal year 2016 as per accounting standards.
However, when the buyer paid €100000 on Aug 10, rates went $1.28/ €.
This implies, the company received only $128000, while accounts receivables were existing at $131000. Hence, there will be an exchange loss to be recorded of $3000 in Fiscal 2017
