Parker Corp., a U.S. company, had the following foreign currency transactions during 2011:
(1.) Purchased merchandise from a foreign supplier on July 5, 2011 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2011 at the U.S. dollar equivalent of $82,000.
(2.) On October 1, 2011 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-interest-bearing note payable in euros on October 1, 2011. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2011, and $881,000 on October 1, 2012.
-What amount should be included as a foreign exchange gain or loss from the two transactions for 2011?
A) $2,000 loss.
B) $2,000 gain.
C) $10,000 gain.
D) $14,000 loss.
E) $14,000 gain.

Question

Quizplus · Accepted Answer

(1.) No foreign exchange gain or loss as the payment was made within 30 days from the date of purchase.
(2.) The note payable was issued in euros, but the company reports in U.S. dollars, so the fluctuation in the exchange rate affects the reported value of the note. At the end of 2011, the exchange rate had decreased, resulting in a gain of $10,000 ($872,000 / 0.84 euro per dollar - $860,000 / 0.80 euro per dollar = $10,000 gain).