Question

In: Accounting

On December 20, 2017, Butanta Company (a U.S. company headquartered in Miami, Florida) sold parts to...

On December 20, 2017, Butanta Company (a U.S. company headquartered in Miami, Florida) sold parts to a foreign customer at a price of 135,000 ostras. Payment is received on January 10, 2018. Currency exchange rates for 1 ostra are as follows:

December 20, 2017 $ 1.23
December 31, 2017 1.20
January 10, 2018 1.16
  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?

Solutions

Expert Solution

As per IAS-21 - The Effects of Changes in Foreign Exchange Rates,

At the year end Foreign currency monetary items are translated into the functional currency using the closing rate & Difference between the Initital Recorded Value & Closing Value shall be adjusted in Income Statement, under Foreign Currency Fluctuations.

Initial Recorded Value = Value at the time of sales

On Dec. 20, 2017 - Recorded Value of Sundry Debtors = 135,000 * $1.23 = $1,66,050 (Recorded at Spot Rate)

On Dec. 31, 2017 - Closing Value at Closing Rate = 135,000 * $1.20 = $1,62,000

Since $ appreciated against Ostras, we will receive $4050 ($1,66,050 - $1,62,000) less, this should be charged to Income Statement for 2017. Profit will reduce by $4,050.

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Now we have received the payment on 10th january, at that day spot rate is $1.16 per ostras

Total receipt = 135,000 * $1.16 = $1,56,600

we suppose to receive = $1,62,000 (Closing Balance at 2017 end, as we already adjusted loss)

therefore foreign Exchange Fluctuation Loss = $1,62,000 - $1,56,600 = $5,400.

The Loss of $5,600 shall be charged to Income Statement for 2018, Profit Will reduce by $5,400

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