Question

On December 20, 2017, Butanta Company (a U.S. company headquartered in Miami, Florida) sold parts to a foreign customer at a price of 50,000 ostras. Payment is received on January 10, 2018. Currency exchange rates for 1 ostra are as follows: December 20, 2017 $ 1.08 December 31, 2017 1.05 January 10, 2018 1.01 How does the fluctuation in exchange rates affect Butanta's 2017 income statement?

Answer 1

Answer:

There would be a foreign exchange loss of $1,500 that would ne recognized in the 2017 income statement.

Explanation:

Income statement is a component of the company's financial statements that shows the financial performance.

Based on IAS 21 the Effects of Changes in Foreign Exchange Rates, the translation method for assets and liabilities is the closing rate. It can be established that the parts Butanta sold to a foreign customer were recorded as Accounts receivable (Asset), therefore, the translation method by IAS 21 above applies.

In the question, we have the following rates:

December 20, 2017:         1 ostra :  $1.08

December 31, 2017:          1 ostra : $1.05

January 10, 2018               1 ostra : $1.01

As at December 31, 2017: (50,000 x $1.05) - (50,000 x $1.08) = $1,500 (foreign exchange loss)

On January 10, 2018 when payment is received, there would be a further loss of: (50,000 x $1.01) - (50,000 x $1.05) = $2,000 (foreign exchange loss)