The balance in Newsprint Corp.'s foreign exchange loss account was $10,000 on December 31,20X8,before any necessary year-end adjustment relating to the following:
(1)Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of its wholly owned foreign subsidiary for the year ended December 31,20X8.
(2)Newsprint had an account payable to an unrelated foreign supplier,payable in the supplier's foreign currency unit on January 15,20X9.The U.S.dollar-equivalent of the payable was $50,000 on the December 1,20X8,invoice date and $53,000 on December 31,20X8.
-Based on the information provided,in Newsprint's 20X8 consolidated income statement,what amount should be included as foreign exchange loss in computing net income,if the U.S.dollar is the functional currency and the remeasurement method is appropriate?
A)$15,000
B)$10,000
C)$25,000
D)$28,000

Question

Quizplus · Accepted Answer

Under the remeasurement method, the foreign exchange loss account is used to record gains and losses resulting from the remeasurement of foreign currency transactions in the functional currency.

In this case, there are two transactions that need to be considered:

(1) The restatement of accounts of the foreign subsidiary results in a $15,000 debit to the foreign exchange loss account.

(2) The payable to the foreign supplier represents a liability denominated in a foreign currency. The payable is remeasured at the end of the year using the exchange rate on December 31, 20X8. The increase in the U.S. dollar-equivalent of the payable from $50,000 to $53,000 represents a $3,000 loss, which is recorded in the foreign exchange loss account.

Therefore, the total foreign exchange loss for the year is $15,000 + $3,000 = $18,000.

However, the balance in the foreign exchange loss account at the beginning of the year was $10,000. Therefore, the amount that should be included as foreign exchange loss in computing net income is $18,000 - $10,000 = $8,000.

The answer choice D is the closest to the correct answer, as it reflects a total foreign exchange loss of $28,000. However, this answer choice is incorrect since it does not take into account the beginning balance in the foreign exchange loss account.

The Balance in Newsprint Corp