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 55,000 ostras. Payment is received on January 10, 2018. Currency exchange rates for 1 ostra are as follows:

December 20, 2017	$	1.15
December 31, 2017		1.12
January 10, 2018		1.08

1. How does the fluctuation in exchange rates affect Butanta's 2017 income statement?
2. How does the fluctuation in exchange rates affect Butanta's 2018 income statement?

Answer 1

A)

As per the concept, "The Effects of Changes in Foreign Exchange Rates" exchange differences arising on reporting an enterpise's monetary items at rates different from those at which they were initially recorded during the period, should be recognized as income or expenses in the period in which they arise. Thus, in this case sale is made on December 20, 2017 whereas payment was received on January 10,2018. The exchange differences arising in such case will be treated as Income or Expense.

Given Information,

• Butanta Company sold parts to a foreign customer at 55,000 ostras on December 20, 2017. (The Exchange rate on that day is $1.15 per 1 ostra.)
• Exchange Rate at the end of the year 2017 is $1.12 per 1 ostra.
• Exhange Rate on the date of receipt of payment is $1.08 per 1 ostra.

Effect of Fluctuation in Exchange Rate on 2017 Income Statement :

1. As on the date of sale, Exchange rate is more when compared to exchange rate at the end of the year i.e., $1.15 > $1.12. So we can say that, by year end Foreign exchange rate has been decreased.
2. Therefore the differences [ (1.15-1.12)*55000] 1650 ostras shall be treated as Foreign Exchange Loss.
3. The Respective amount i.e., 1650 ostras will be debited to Income Statement as it is a loss. It will be debited with the head "Foreign Exhange Loss".

Effect of Fluctuation in Exchange Rate on 2018 Income Statement :

1. As on the date of sale, Exchange rate is more when compared to exchange rate at the end of the year i.e., $1.12 > $1.08. So we can say that, by year end Foreign exchange rate has been decreased.
2. Therefore the differences [ (1.12-1.08)*55000] 2200 ostras shall be treated as Foreign Exchange Loss.
3. The Respective amount i.e., 1650 ostras will be debited to Income Statement as it is a loss. It will be debited with the head "Foreign Exhange Loss".