Mint Corporation has several transactions with foreign entities.Each transaction is denominated in the local currency unit of the country in which the foreign entity is located.On October 1,20X8,Mint purchased confectionary items from a foreign company at a price of LCU 5,000 when the direct exchange rate was 1 LCU = $1.20.The account has not been settled as of December 31,20X8,when the exchange rate has decreased to 1 LCU = $1.10.The foreign exchange gain or loss on Mint's records at year-end for this transaction will be:
A)$500 loss
B)$500 gain
C)$378 gain
D)$5,500 loss

Question

Quizplus · Accepted Answer

The foreign exchange gain is calculated based on the difference in the exchange rate from the time of purchase to the year-end. Initially, the cost was 5,000 LCU * $1.20 = $6,000. By year-end, the value of the payable in USD, due to the exchange rate change to 1 LCU = $1.10, is 5,000 LCU * $1.10 = $5,500. The difference of $500 ($6,000 - $5,500) represents a foreign exchange gain, not a loss, because Mint Corporation will pay less in USD than initially expected.

Mint Corporation Has Several Transactions with Foreign Entities