US Company sells goods to a French customer for 10,000 Euros on Dec 1. Rate = $1.10. On Dec 31, Rate = $1.15. On Jan 15, payment is received when Rate = $1.12. What is the impact on Year 1 Net Income?

Answer options:

$500 Gain

$200 Gain

$500 Gain in OCI

How to approach this question

1. Calculate value at transaction date. 2. Calculate value at Balance Sheet date. 3. Difference is Gain/Loss in Net Income.

Full Answer

A.$500 Gain✓ Correct

Foreign currency transaction gains/losses are recognized in Net Income in the period the exchange rate changes. Year 1 Gain = 10,000 * ($1.15 - $1.10) = $500.

Common mistakes

Waiting until settlement to recognize the gain.

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