FAR – Foreign Currency Accounting

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    lizbette
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    Confused about the answer to this question, because Becker text says: “A foreign exchange transaction gain or loss will result if the exchange rate changes between the time a purchase or sale in foreign currency is contracted for and the time actual payment is made.”

    In the following problem, the purchase was contracted on October 1. But Becker answer key says we look at the December 15 date. Why?

    On October 1, Velec Co., a U.S. company, contracted to purchase foreign goods requiring payment in francs one month after their receipt at Velec’s factory. Title to the goods passed on December 15. The goods were still in transit on December 31. Exchange rates were one dollar to 22 francs, 20 francs, and 21 francs on October 1, December 15, and December 31, respectively. Velec should account for the exchange rate fluctuation as:
    a. A gain reported net of tax after discontinued operations.
    b. A gain included in net income before discontinued operations.
    c. A loss reported net of tax after discontinued operations.
    d. A loss included in net income before discontinued operations.

    Explanation
    Choice “b” is correct. The transaction would first be journalized when title transfers to the buyer on December 15. At fiscal year-end, the exchange rate has increased from one dollar to 20 francs on 12/15 to one dollar to 21 francs on 12/31, so a foreign exchange gain would be recognized.

    Choice “d” is incorrect. The transaction would first be journalized when title transfers to the buyer. At fiscal year-end, the exchange rate has increased so a foreign exchange gain would be recognized.

    Choice “a” is incorrect. Foreign exchange gains and losses are not reported net of tax after discontinued operations. Such gains and losses are reported in income from continuing operations.

    Choice “c” is incorrect. Foreign exchange gains and losses are not reported net of tax after discontinued operations. Such gains and losses are reported in income from continuing operations.

    REG - PASSED!
    FAR - failed. then PASSED!
    AUD - PASSED!
    BEC -

    REG (8/11/16) -
    FAR (TBD) -
    AUD (TBD) -
    BEC (TBD) -

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