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 39,000 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	$	0.47
December 1, 2017		0.43
December 31, 2017		0.49
March 1, 2018		0.44

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?

Answer 1

During 2017, Purchases = 39000 widgets at the price of 8 AL per widget = 312,000 AL

Requirement 1

• If Benjamin acquired the widget on Dec 1, 2017,

Purchases would be recorded at = 312,000 AL * $0.43 per AL = $134,160

• Accounts Payable would be marked to market as on Dec 31, 2017

Accounts Payable = 312,000 * 0.49 = $152,880

Foreign Exchange loss in 2017 = $152,880 - $134,160 = $18,720

• Payments made on March 1, 2018

Amount Paid = 312,000 AL * 0.44 per AL = $137,280

Foreign exchange gain for 2018 = $152,880 - $137,280 = $15,600

Thus the reported income of 2017 would decrease by $18,720 and the reported income of 2018 would increase by $15,600

Requirement 2

• If Benjamin acquired the widget on Sep 1, 2017,

Purchases would be recorded at = 312,000 AL * $0.47 per AL = $146,640

• Payments made on Dec 1, 2017

Amount Paid = 312,000 AL * 0.43 per AL = $134,160

Foreign exchange gain for 2017 = $146,640 - $134,160 = $12,480

Thus the reported income of 2017 would increase by $12,480.

Requiremnet 3

• If Benjamin acquired the widget on Sep 1, 2017,

Purchases would be recorded at = 312,000 AL * $0.47 per AL = $146,640

• Accounts Payable would be marked to market as on Dec 31, 2017

Accounts Payable = 312,000 * 0.49 = $152,880

Foreign Exchange loss in 2017 = $152,880 - $146,640 = $6,240

• Payments made on March 1, 2018

Amount Paid = 312,000 AL * 0.44 per AL = $137,280

Foreign exchange gain for 2018 = $152,880 - $137,280 = $15,600

Thus the reported income of 2017 would decrease by $6,240 and the reported income of 2018 would increase by $15,600.

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