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
Foreign Currency Transactions
However, if a U.S. company buys
merchandise on account from a foreign
company and the price is to be paid in
the foreign currency (British pounds,
Japanese yen, etc.), then the U.S.
company may incur an exchange gain or
loss.
Foreign Currency Transactions
Similarly, if a U.S. company sells
merchandise on account to a foreign
company, and payment is to be made by
the foreign company in its own
currency, then the U.S. company may
incur an exchange gain or loss.
Foreign Currency Transactions
Exchange gains and losses may be
realized
a sale on account, 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, necessitating an
adjusting entry
Foreign Currency Transactions
Realized Gains and Losses:
Purchases from Foreign Companies
Assume that a U.S. company purchases
merchandise on account from a Costa
Rican company for 600,000 colones on
June 1. The price is quoted in colones,
and the U.S. company must pay in
colones. On June 1, the exchange rate is
$0.003 per colone.
Foreign Currency Transactions
Realized Gains and Losses:
Purchases from Foreign Companies
June 1 Merchandise Inventory
1,800*
A/P—Costa Rican Co.
1,800
Purchased
merchandise on account
(net 30) for 600,000
colones; exchange rate
$0.003 per colone
* $0.003 x 600,000 = $1,800
Foreign Currency Transactions
Realized Gains and Losses:
Purchases from Foreign Companies
On July 30, when the U.S. company makes the
payment on account, the exchange rate is
$0.0035. Keep in mind that the price was
negotiated in colones, so 600,000 colones is
what the U.S. company needs. When the U.S.
company goes to the bank to exchange dollars
into colones, it now needs more dollars to
purchase the same amount of colones. It needs
$2,100 ($0.0035 x 600,000) to get 600,000
colones.
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.
Exchange Loss
Cash
1,800*
300**
2,100
* 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” is an
expense account.
Foreign Currency Transactions
Realized Gains and Losses:
Sales to Foreign Companies
Assume that a U.S. company sells
merchandise on account to a Canadian
company for 3,000 Canadian dollars on
January 15. The price is quoted in
Canadian dollars, and the U.S. company
will receive Canadian dollars. On
January 15, the exchange rate is $0.65
per Canadian dollar. The cost of
merchandise sold was $1,150.
Foreign Currency Transactions
Realized Gains and Losses:
Sales to Foreign Companies
Jan. 15 A/R—Canadian Co.
Sales
15 Cost of Merchandise Sold
Merchandise Inv.
* $0.65 x 3,000 = $1,950
1,950*
1,950
1,150
1,150
Foreign Currency Transactions
Realized Gains and Losses:
Purchases from Foreign Companies
On February 16, when the U.S. company
receives the payment on account, the
exchange rate is $0.73. Keep in mind
that the price was negotiated in Canadian
dollars, so 3,000 Canadian dollars is
what the U.S. company will receive.
When the U.S. company goes to the bank
to exchange the Canadian dollars into
U.S. dollars, how much will it receive?
Foreign Currency Transactions
Realized Gains and Losses:
Purchases from Foreign Companies
Here is the entry on February 16:
Feb. 16 Cash
A/R—Canadian Co.
Exchange Gain
2,190*
1,950**
240***
* $0.73 x 3,000 = $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. “Exchange Gain” is a revenue account.
Foreign Currency Transactions
Summary
Purchases:
exchange rate
exchange rate
exchange loss
exchange gain
Sales:
exchange rate
exchange rate
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, assume that a sale on
account had been made to a British
company on December 20 for 1,000
pounds. On that date, the exchange rate
was $1.50 per British pound. The cost of
merchandise sold was $1,000.
Foreign Currency Transactions
Unrealized Gains and Losses:
Dec. 20 A/R—British Co.
Sales
20 Cost of Merchandise Sold
Merchandise Inv.
* $1.50 x13,000 = $1,500
1,500*
1,500
1,000
1,000
Foreign Currency Transactions
Unrealized Gains and Losses:
The U.S. company uses a calendar year,
so an adjusting entry must be made on
December 31 for any unrealized gain or
loss if the exchange rate is not $1.50 on
December 31.
Keep in mind that payment will not be
received until January 19.
Foreign Currency Transactions
Unrealized Gains and Losses:
If the exchange rate is $1.55 on December 31, the
following entry records the unrealized exchange gain:
Dec. 31 A/R—British Co.
Exchange Gain
*($0.55-$0.50) x 1,000 = $50
50*
50**
Foreign Currency Transactions
Unrealized Gains and Losses:
The Accounts Receivable T-account in the
general ledger, and the customer account
in the A/R subsidiary ledger would look
like this:
A/R
12/20 1,500
12/31
50
bal.
1,550
Foreign Currency Transactions
Unrealized Gains and Losses:
If the exchange rate is $1.45 on January 19, the following
entry records the receipt of cash on account from the sale:
Jan. 19 Cash
Exchange Loss
A/R—British Co.
1,450*
100**
1,550***
* $1.45 x 1,000 = $1,450
**Note that a debit of 100 is necessary to make the journal
entry balance. “Exchange Loss” is an expense account.
***this amount is the balance of the A/R account