Module

MODULE 17

MULTIPLE-CHOICE QUESTIONS

1. On September 1, 2007, Bain Corp. received an order for equipment from a foreign customer for 300,000 local currency units (LCU) when the dollar equivalent was $96,000. Bain shipped the equipment on October 15, 2007, and billed the customer for 300,000 LCU when the US dollar equivalent was $100,000. Bain received the customer’s remittance in full on November 16, 2007, and sold the 300,000 LCU for $105,000. In its income statement for the year ended December 31, 2007, Bain should report as part of net income a foreign exchange transaction gain of

a. $0

b. $4,000

c. $5,000

d. $9,000

Answer: C

*When the sale is made on 10/15/07, Bain would record a receivable and sales at $100,000, the US dollar equivalent on that date.

Accounts receivable 100,000

Sales 100,000

On 11/16/07, Bain receives foreign currency worth $105,000. Since the receivable was recorded at $100,000, a $5,000 gain must be recorded.

Foreign currency 105,000

Accounts receivable 100,000

Foreign exchange

Transaction gain 5,000

The US dollar equivalent when the order was received on 0/1/07 ($96,000) is not used to compute the gain because no entry is recorded on this date. The receipt and acceptance of a purchase order from a customer is an executory commitment which is not generally recorded.

2. On September 1, 2007, Cano & Co. a US corporation, sold merchandise to a foreign firm for 250,000 Botswana pula. Terms of the sale require payment in pula on February 1, 2008. On September 1, 2007, the spot exchange rate was $.20 per pula. At December 31, 2007, Cano’s year-end, the spot rate was $.19, but the rate increased to $.22 by February 1, 2008, when payment was received. How much should Cano report as foreign exchange transaction gain or loss as part of 2008 income?

a. $0

b. $2,500 loss...