On November 1, Year One, a U.S. company acquires 1,000 widgets from a company in
ID: 2589950 • Letter: O
Question
On November 1, Year One, a U.S. company acquires 1,000 widgets from a company in France for 8,000 euros on credit. The company still holds all of this inventory on December 31. The debt has not yet been paid. The company is getting ready to prepare its Year One financial statements in its functional currency, the U.S. dollar. On November 1, 1 euro was worth $1.72, but on December 31, 1 euro is worth only $1.61. What is reported on the company’s Year One income statement? What is reported on the company’s
balance sheet as of December 31, Year One?
Explanation / Answer
November 1:
Purchases Dr $13760 (8000*1.72)
Accounts payable Cr $13760
December 31:
Accounts payable Dr 880
Foreign exchange gain Cr 880 [(13760 - (8000*1.61)]
On income statement, purchase account will be debited by $13760, Foreign exchange gain will be credited by $880. In balancehseet, Closing inventory will be shown for $13760 and Accounts payable will be shown for $13760 - $880 = $12880.
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