Assume that on January 15, 2021 MAK agrees to purchase US$500,000 for C$550,000 for delivery on January 15, 2022. The exchange rate at MAK's December 31, 2021 year-end was US$1 = C$0.95 and the January 15, 2022 exchange rate is US$1 = C$0.97.What is the foreign exchange gain or loss recognized at Jan 15, 2022?
A)$10,000 gain.
B)$10,000 loss.
C)$75,000 gain.
D)$75,000 loss.

Question

Quizplus · Accepted Answer

At the settlement date of January 15, 2022, the exchange rate is US$1 = C$0.97. Therefore, to purchase US$500,000, MAK would need C$485,000 (US$500,000 * C$0.97). Initially, MAK agreed to purchase US$500,000 for C$550,000. Thus, MAK gains C$65,000 (C$550,000 - C$485,000) due to the favorable change in the exchange rate. However, the question asks for the gain or loss recognized at January 15, 2022, not the total gain or loss from the transaction. The exchange rate at MAK's year-end (December 31, 2021) was US$1 = C$0.95, which means US$500,000 would have been worth C$475,000 (US$500,000 * C$0.95) at that time. The actual amount paid on January 15, 2022, was C$485,000, so compared to the year-end valuation, MAK experiences a loss of C$10,000 (C$485,000 - C$475,000). This is a mistake in my explanation; the correct interpretation is that MAK would recognize a gain, not a loss, because the initial agreement was for C$550,000, and the value of the transaction at the year-end exchange rate would have been C$525,000 (US$500,000 * C$1.05, which is the inverse of C$0.95). The correct calculation for the gain or loss at January 15, 2022, should compare the initial agreement amount with the amount based on the exchange rate at that date. Since MAK agreed to pay C$550,000 and only needs to pay C$485,000 at the exchange rate on January 15, 2022, the actual gain is C$65,000, not C$10,000. The error was in the calculation and interpretation of the exchange rate changes and their impact on the transaction. The correct answer should reflect the gain due to the change in exchange rate from the time of the agreement to the settlement date.

Assume That on January 15, 2021 MAK Agrees to Purchase