Question

You are reviewing your client’s Multicurrency company Balance Sheet, and the balance as of the previous fiscal year-end for their Canadian bank account, which they closed last year, is a $10 debit balance in US dollars (the home currency). However, the Canadian dollar balance correctly indicates the account has been closed. Why would this be the case?

Answer 1

Answer:

Foreign exchange loss

Explanation:

A foreign exchange gain/loss is normal for companies that operate in foreign countries. E.g. you prepared your financial statements by converting the foreign currency into your local currency, in this case you converted Canadian dollars to US dollars. But then the exchange rate between the currencies changes. If the value of the Canadian dollar's value increased after conversion, then you gained, and an adjustment must be made to show that gain. But if the Canadian dollar's value decreased after the conversion, then you lost (what happened here) and an adjusting entry must be made to report the loss.

In order to correct his, you must:

Dr Foreign exchange gain/loss 10

    Cr Canadian bank account 10