Question

Benjamin, Inc., operates an export/import business. The company has considerable dealings with companies in the country of Camerrand. The denomination of all transactions with these companies is alaries (AL), the Camerrand currency. During 2017, Benjamin acquires 22,000 widgets at a price of 8 alaries per widget. It will pay for them when it sells them. Currency exchange rates for 1 AL are as follows:

September 1, 2017	$	0.48
December 1, 2017		0.42
December 31, 2017		0.50
March 1, 2018		0.43

1. Assume that Benjamin acquired the widgets on December 1, 2017, and made payment on March 1, 2018. What is the effect of the exchange rate fluctuations on reported income in 2017 and in 2018?
2. Assume that Benjamin acquired the widgets on September 1, 2017, and made payment on December 1, 2017. What is the effect of the exchange rate fluctuations on reported income in 2017?
3. Assume that Benjamin acquired the widgets on September 1, 2017, and made payment on March 1, 2018. What is the effect of the exchange rate fluctuations on reported income in 2017 and in 2018?

(Input all amounts as positive values.)

Effect of Exchange Rate Fluctuations

a.2017

2018

b.2017

c.2017

2018

Answer 1

a. When Benjamin acquired the widgets on December 1, 2017 exchange rate was $0.42/1AL and Benjamin recorded the purchase entry in this amount.

Date	Particulars	Debit ($)	Credit ($)
Dec 1,2017	Purchase A/C	73920
	To Creditor A/C		73920

Calculation :- 22000 * 8 * $0.42 = $73920

While year ending on December 31, 2017 exchange rate was $0.50/1AL, so Benjamin will revise its financial statements and record the creditor amount by exchange rate on December 31,2017 (22000 * 8 * $0.50 = $88000)

So Loss due to Exchange rate fluctuation will be = 88000 - 73920 = $14080

Date	Particulars	Debit ($)	Credit ($)
Dec 31,2017	Exchange Rate fluctuation A/C	14080
	To Creditor A/C		14080

This exchange rate fluctuation will be transferred to statement of profit or loss A/C

Now when Benjamin made the payment on March 1, 2018 exchange rate was $0.43/1AL

So, Benjamin will make the payment of $22000 * 8 * $0.43 = $75680

So, in 2018 there will be a profit of $12320 ($88000 - 75680)

b.  When Benjamin acquired the widgets on September1, 2017 exchange rate was $0.48/1AL and Benjamin recorded the purchase entry in this amount.

Date	Particulars	Debit ($)	Credit ($)
Sept 1, 2017	Purchase A/C	84480
	To Creditor A/C		84480

Calculation :- 22000 * 8 * $0.48 = $84480

Now when Benjamin made the payment on December 1, 2017 exchange rate was $0.42/1AL

So, Benjamin will make the payment of $22000 * 8 * $0.42 = $73920

So, in 2018 there will be a profit of $10560 ($84480 - $73920)

c.  When Benjamin acquired the widgets on September1, 2017 exchange rate was $0.48/1AL and Benjamin recorded the purchase entry in this amount.

Date	Particulars	Debit ($)	Credit ($)
Sept 1, 2017	Purchase A/C	84480
	To Creditor A/C		84480

  Calculation :- 22000 * 8 * $0.48 = $84480

While year ending on December 31, 2017 exchange rate was $0.50/1AL, so Benjamin will revise its financial statements and record the creditor amount by exchange rate on December 31,2017 (22000 * 8 * $0.50 = $88000)

So Loss due to Exchange rate fluctuation will be = 88000 - 84480 = $3520

Date	Particulars	Debit ($)	Credit ($)
Dec 31,2017	Exchange Rate fluctuation A/C	3520
	To Creditor A/C		3520

This exchange rate fluctuation will be transferred to statement of profit or loss A/C

Now when Benjamin made the payment on March 1, 2018 exchange rate was $0.43/1AL

So, Benjamin will make the payment of $22000 * 8 * $0.43 = $75680

So, in 2018 there will be a profit of $12320 ($88000 - 75680)