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 45,000 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

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?

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?

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?

	Effect of Exchange Rate Fluctuations a. 2017 2018 b. 2017 c. 2017 2018

Answer 1

Effect of exchange rate fluctuations
a. 2017   Loss     $28,800
     2018   Gain     $25,200
b. 2017    Gain     $21,600
c. 2017    Loss      $7,200
    2018    Gain      $ 25,200

Explanation
a. .Benjamin, Inc. has a liability of AL 360,000. On the date that this liability was created (December 1,2017), the liability had a dollar value of $151,200 (AL 360,000 ×  $.42). On December 31, 2017, thedollar value has risen to $180,000 (AL 360,000 × $.50). The increase in the dollar value of the liability creates a foreign exchange loss of $28,800 ($180,000 – $151,200) in 2017.
      By March 1, 2018, when the liability is paid, the dollar value has dropped to $154,800 (AL 360,000 ×$.43) creating a foreign exchange gain of $25,200 ($154,800 – $180,000) to be reported in 2018.

b.Benjamin, Inc. has a liability of AL 360,000.On the date that this liability was created (September 1,2017), the liability had a dollar value of $172,800 (AL 360,000 × $.48). On December 1, 2017, whenthe liability is paid, the dollar value has decreased to $151,200 (AL 360,000 × $.42). The drop in thedollar value of the liability creates a foreign exchange gain of $21,600 ($151,200 – $172,800) in 2017.

c. .Benjamin, Inc. has a liability of AL 360,000. On the date that this liability was created (September 1,2017), the liability had a dollar value of $172,800 (AL 360,000 × $.48). On December 31, 2017, thedollar value has risen to $180,000 (AL 360,000 × $.50). The increase in the dollar value of the liabilitycreates a foreign exchange loss of $7,200 ($180,000– $172,800) in 2017.
      By March 1, 2018, when the liability is paid, the dollar value has dropped to $154,800 (AL 360,000 ×$.43) creating a foreign exchange gain of $25,200 ($154,800 – $180,000) to be reported in 2018.