Question

On November 15, 20X3, Chow Inc., a U.S. company, ordered merchandise FOB shipping point from a German company for €200,000. The merchandise was shipped and invoiced on December 10, 20X3. Chow paid the invoice on January 10, 20X4. The spot rates for euros on the respective dates were

Answer 1

Answer:

$4,000 gain

Explanation:

Some information was missing:

the spot rates for euros were:

• November 15, 20X3 $0.4955  per €1
• December 10, 20X3 $0.4875  per €1
• December 31, 20X3  $0.4675  per €1
• January 10, 20X4 $0.4475  per €1

In Chow's December 31, 20X3, income statement, the foreign exchange gain is ?

the goods costed €200,000 x 0.4875 = $97,500 on December 10, 20x3

the goods costed €200,000 x 0.4675 = $93,500 on December 31, 20x3

Since the goods were sold FOB shipping point, we have to use the shipping date (December 10) to calculate the original price. By December 31, the price in US dollars had decreased by $4,000 resulting in a foreign exchange gain.