This question DOES NOT require you to complete I/S, B/S, or C/F. You are US comp

Question

This question DOES NOT require you to complete I/S, B/S, or C/F. You are US company. You purchased products on Dec 1, 2014 from an UK company at 50,000 Euro. That is, you would pay in Euro, not in US$. Your fiscal year ends on Dec 31. You paid to the UK supplier on Feb 1, 2015. Below, see the exchange rates for different dates: Dec 1, 2014: $1.07/Euro Dec 31, 2014: $1.09/Euro Feb 1, 2015: $1.06/Euro What would be your journal entry for Dec 31, 2014? (Year-End Exchange Rate Adjustment) *All figures in [ ] are positive. Currency Exchange Gain [$1000] / AP [$1000] Currency Exchange Loss [$1000] / AP [$1000] AP [$1000] / Currency Exchange Gain [$1000] AP [$1000] / Currency Exchange Loss [$1000]

Explanation / Answer

Answer is option second Currency Exchange Loss [$1000] / AP [$1000]

Explanation;

As we know that loss is debited and increase in account payable is credited. That is why entry will be as follow;

Account Titles

Debit

Credit

Currency Exchange Loss

$1000

     Account Payable (AP)

$1000

Loss is calculated as follow;

As per information of the question it is clear that on Dec. 31, 2014 exchange rate is $1.09 / Euro in compare to exchange rate of $1.07 / Euro on Dec. 1, 2014. It means that now US company have to pay more amount due to weak US currency.

So difference in exchange rates on Dec. 31, 2014 ($1.09 – $1.07) = $.02

So total currency exchange loss on Dec. 31, 2014 will be ($.02 * $50000) = $1000

Account Titles

Debit

Credit

Currency Exchange Loss

$1000

     Account Payable (AP)

$1000

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