Foreign Currency Transaction Gain & Losses Flashcards
On October 1, Velec Co., a U.S. company, contracted to purchase foreign goods requiring payment in euros 1 month after their receipt at Velec’s factory. Title to the goods passed on December 15. The goods were still in transit on December 31. Exchange rates were one dollar to 1.06 euros, 1.04 euros, and 1.05 euros on October 1, December 15, and December 31 respectively. Velec should account for the exchange rate fluctuation for the year as
A gain included in net income.
Answer (A) is correct.
A receivable or payable stated in a foreign currency is adjusted to its current exchange rate at each balance sheet date. The transaction gain or loss arising from this adjustment should ordinarily be reflected in current income. Because title passed on December 15, the liability fixed in euros should have been recorded on that date at the 1.04 euro exchange rate. The increase to 1.05 euros per dollar at year-end decreases the dollar value of the liability and results in a transaction gain. Such a gain is reported as a component of income from continuing operations.
