[Kairos]

I can understand whats being explained by the text or problems but I have trouble wrapping my head around what’s a gain or loss

ie: the example below shows that it is a foreign currency gain when the dollar goes from .75 to .85. But wouldn’t it be a loss because you’re already receiving 100,000 of euro but now the purchasing power of the dollar in relation has become stronger so the euro you’re locked in to receive should be worth less. does anyone have a mnemonic or trick to rationalizing these sort of situations? Thanks!

Only July 1, 20XX, MDS sold inventory to a foreign buyer and agreed to accept €100,000, due in 8 months.

Spot Rates: July 1, 20X1 1 € = $.75

December 31, 20X1 1 € = $.85

February 1, 20X2 1 € = $.70

7/1/X1 Accounts Receivable (€100,000 X .75) $75,000

Sale 75,000

12/31/X1 Account Receivable (€100,000 X (.75 – .85) $10,000

Transaction Gain 10,000

2/1/X2 Transaction Loss $15,000

Accounts Receivable (€100,000 X (.85 – .70) 15,000

Cash (€100,000 X .70) $70,000

Accounts Receivable 70,000

[Jdn9201]

I remember while reviewing this section, being grateful for 7 years of international experience. 🙂 I don't think a pneumonic helps here. What helped me is keeping track of the reporting currency of the entity and knowing that when they report financial statements, they have to report everything in that currency. Even though the buying power remains the same in Euros, the AR automatically gets converted to USD at the end of the year (or FY). Since the dollar has appreciated, the AR is going to be worth more in dollars than it was when originally booked. So, keep track of the reporting currency then how that currency has gone up or down against the other currency. I hope that helps!

BEC - 88 8/29/15
REG - 82 11/14/15
AUD - 83 1/8/16
FAR - 80 2/29/16

[Missy]

It's the terminology that's confusing. Translate it to simple terms that even a non accountant could understand. If they paid on July 1, you would have had 75k in the bank and that's the way it was recorded. If they paid on Dec 31 you would have had 85k in the bank which is a gain of 10k. If they waited until Feb 1, you would only have seen a 70k deposit.

Old timer,  A71'er since 2010.

Finance manager/HR manager

 

 

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Kairos]

Thanks jdn9201 and mla11692! Your explanations helped a lot!!!

[Author]

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