You are on page 1of 21

Appendix D: Foreign Currency Transactions

Instructor’s Lecture

Foreign Currency Transactions
When U.S. companies sell products or services to foreign companies, and they receive U.S. dollars, no special accounting problems are presented Likewise, when U.S. companies buy products or services from foreign companies, and they pay in U.S. dollars, no special accounting problems are presented

then the U.S. if a U. . Japanese yen.).S. company buys merchandise on account from a foreign company and the price is to be paid in the foreign currency (British pounds. company may incur an exchange gain or loss. etc.Foreign Currency Transactions However.

company sells merchandise on account to a foreign company. if a U.Foreign Currency Transactions Similarly. and payment is to be made by the foreign company in its own currency.S. then the U. . company may incur an exchange gain or loss.S.

or a purchase on account is completed in one accounting period unrealized a sale on account. or a purchase on account spans two accounting periods.Foreign Currency Transactions Exchange gains and losses may be realized a sale on account. necessitating an adjusting entry .

S.S. company purchases merchandise on account from a Costa Rican company for 600. .003 per colone. and the U.000 colones on June 1.Foreign Currency Transactions Realized Gains and Losses: Purchases from Foreign Companies Assume that a U. the exchange rate is $0. The price is quoted in colones. company must pay in colones. On June 1.

003 per colone * $0.800 .003 x 600.800 Purchased merchandise on account (net 30) for 600.800* A/P—Costa Rican Co.000 colones.Foreign Currency Transactions Realized Gains and Losses: Purchases from Foreign Companies June 1 Merchandise Inventory 1. exchange rate $0.000 = $1. 1.

Foreign Currency Transactions Realized Gains and Losses: Purchases from Foreign Companies  On July 30. it now needs more dollars to purchase the same amount of colones.0035 x 600.000 colones is what the U. company goes to the bank to exchange dollars into colones.S.0035. company makes the payment on account. company needs. the exchange rate is $0. .S. It needs $2.S.000 colones. Keep in mind that the price was negotiated in colones. when the U. When the U.100 ($0. so 600.000) to get 600.

Foreign Currency Transactions Realized Gains and Losses: Purchases from Foreign Companies Here is the entry on July 30: July 30 A/P—Costa Rican Co.100 * this amount is the balance of the A/P account **Note that a debit of 300 is necessary to make the journal entry balance. Exchange Loss Cash 1. “Exchange Loss” is an expense account.800* 300** 2. .

Foreign Currency Transactions Realized Gains and Losses: Sales to Foreign Companies Assume that a U. On January 15. company will receive Canadian dollars.150. and the U. The cost of merchandise sold was $1.65 per Canadian dollar. company sells merchandise on account to a Canadian company for 3. the exchange rate is $0. .000 Canadian dollars on January 15.S. The price is quoted in Canadian dollars.S.

15 A/R—Canadian Co.150 * $0.950* 1. 1.Foreign Currency Transactions Realized Gains and Losses: Sales to Foreign Companies Jan.65 x 3.950 1.000 = $1.950 .150 1. Sales 15 Cost of Merchandise Sold Merchandise Inv.

S. Keep in mind that the price was negotiated in Canadian dollars. company goes to the bank to exchange the Canadian dollars into U. how much will it receive? . when the U. When the U.Foreign Currency Transactions Realized Gains and Losses: Purchases from Foreign Companies On February 16. company receives the payment on account.S. so 3. the exchange rate is $0.S. dollars. company will receive.73.000 Canadian dollars is what the U.S.

16 Cash A/R—Canadian Co. .190* 1.950 **this amount is the balance of the A/R account ***Note that a credit of 240 is necessary to make the journal entry balance.000 = $1. “Exchange Gain” is a revenue account. Exchange Gain 2.950** 240*** * $0.73 x 3.Foreign Currency Transactions Realized Gains and Losses: Purchases from Foreign Companies Here is the entry on February 16: Feb.

Foreign Currency Transactions Summary Purchases: exchange rate exchange rate Sales: exchange rate exchange rate exchange loss exchange gain exchange gain exchange loss .

Foreign Currency Transactions Unrealized Gains and Losses: If financial statements must be prepared between the date of sale or purchase and the date cash is to be received or paid. . an unrealized gain or loss may result.

Foreign Currency Transactions Unrealized Gains and Losses: For example. the exchange rate was $1. On that date.50 per British pound. . The cost of merchandise sold was $1.000 pounds. assume that a sale on account had been made to a British company on December 20 for 1.000.

Sales 20 Cost of Merchandise Sold Merchandise Inv.Foreign Currency Transactions Unrealized Gains and Losses: Dec.500 1.000 1.500 . 20 A/R—British Co. 1.500* 1.000 * $1.000 = $1.50 x13.

company uses a calendar year.S.50 on December 31. .Foreign Currency Transactions Unrealized Gains and Losses: The U. so an adjusting entry must be made on December 31 for any unrealized gain or loss if the exchange rate is not $1. Keep in mind that payment will not be received until January 19.

000 = $50 .Foreign Currency Transactions Unrealized Gains and Losses: If the exchange rate is $1. 31 A/R—British Co. Exchange Gain 50* 50** *($0.50) x 1. the following entry records the unrealized exchange gain: Dec.55 on December 31.55-$0.

1.550 . and the customer account in the A/R subsidiary ledger would look like this: A/R 12/20 1.Foreign Currency Transactions Unrealized Gains and Losses: The Accounts Receivable T-account in the general ledger.500 12/31 50 bal.

the following entry records the receipt of cash on account from the sale: Jan.Foreign Currency Transactions Unrealized Gains and Losses: If the exchange rate is $1.450* 100** 1.450 1. * $1. 19 Cash Exchange Loss A/R—British Co.000 = $1. ***this amount is the balance of the A/R account .550*** **Note that a debit of 100 is necessary to make the journal entry balance.45 x 1.45 on January 19. “Exchange Loss” is an expense account.