You are a U.S. importer desiring to purchase merchandise from an Italy exporter

Question

You are a U.S. importer desiring to purchase merchandise from an Italy exporter invoiced in Euros, at a cost of €160,000. You will contact your U.S. bank A (where of course you have an account denominated in U.S. dollars) and inquire about the exchange rate, which the bank quotes as €0.6250/$1.00. Consider you accept this price. Bank A then instructs its correspondent bank B in Italy to pay the Italy exporter the amount of the purchase. What will happen to the balance sheet of Bank B based on the correspondence relation between Bank A and B, and based on the relationship between Bank B and the Italian exporter? (i.e. increase or decrease in asset or liability, by what amount in what currency)?

Explanation / Answer

When Bank A instructs its correspondent Bank B in italy to pay the Italy exporter the amount of the purchase. Then Bank B will make Bank A its debtor and correspondingly the Italian exporter, its liability.
Entry will be:           Bank A     A/c     Dr
                                   To Importer A/c.

and now the importer become the liability for bank B. When the Bank B pays the importer its amount then it will decrease its laibility and correspondingly decrease its assets.
Entry will be:            Importer A/c        Dr          160000
                                    To Cash A/c.                        160000
This entry will be made in Euros.

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