Question

The Latimore Company invested $8.5 million in a new plant in Italy when the exchange rate was 1.1500 euros to the dollar. At the end of the year, the rate was 1.2000 euros to the dollar. (Indirect quotes.)
a. Did Latimore make or lose money on the exchange rate movement? If so, how much?

b. What kind of exchange rate gain or loss was it?

c. What was the tax impact if Latimore’s marginal tax rate is 40%?

Answer 1

Answer:

Latinmore made money on the exchange rate movement. It was an exchange rate gain of $369,566. The marginal tax impact was $147,826.

Explanation:

Since the standard practice in accounting is to reflect the current situation of the company, any change in the exchange rate that affects the assets of the company abroad must be recognized. The financial income of exchange gains are registered in the Income Statement and affects the base to pay income tax.