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Foreign Currency Gain or Loss

Lesson
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Question
You are an accountant for Ultra Biz and are adding some journal entries to account for a sale in a foreign currency.

The only relevant information you've discovered is as follows:

  • The COGS is $80,000.00.

  • Between the end of the initial year and the cash payment in the subsequent year, the value of the foreign currency had decreased in value by $2,000.00.

  • The buyer agreed to pay the current equivalent of $91,000.00 in his own currency.

  • At the end of the initial fiscal (accounting) year, the value of the foreign currency had decreased by $6,000.00.

What are the necessary journal entries to cover the facts?
Answer
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👉 Answer:

  • Journal Entries
    Accounts Receivable     $91,000.00    
         Sales Revenue     $91,000.00    
    Cost of Goods Sold     $80,000.00    
         Inventory     $80,000.00    
    Loss on foreign exchange     $6,000.00    
         Accounts Receivable     $6,000.00    
    Loss on foreign exchange     $2,000.00    
         Accounts Receivable     $2,000.00    
    Cash     $83,000.00    
         Accounts Receivable     $83,000.00    

👩‍🎓 Here are the steps to figure it out:

  1. First we account for the sale, assuming that there will be no changes to the current (spot) exchange rate.
    Journal Entries
    Accounts Receivable     $91,000.00    
         Sales Revenue     $91,000.00    
  2. Next, we have to account for our changes to inventory.
    Journal Entries
    Accounts Receivable     $91,000.00    
         Sales Revenue     $91,000.00    
    Cost of Goods Sold     $80,000.00    
         Inventory     $80,000.00    
  3. Now we need to update our records at the end of the first year, so we can close our books and report our financials.
  4. Let's account for the changes to currency value so far.
    Journal Entries
    Accounts Receivable     $91,000.00    
         Sales Revenue     $91,000.00    
    Cost of Goods Sold     $80,000.00    
         Inventory     $80,000.00    
    Loss on foreign exchange     $6,000.00    
         Accounts Receivable     $6,000.00    
  5. Once we have payment in hand, we need to record the payment and make updates for our gain or loss on foreign exchange.
  6. Let's start with the gain or loss on foreign exchange.
    Journal Entries
    Accounts Receivable     $91,000.00    
         Sales Revenue     $91,000.00    
    Cost of Goods Sold     $80,000.00    
         Inventory     $80,000.00    
    Loss on foreign exchange     $6,000.00    
         Accounts Receivable     $6,000.00    
    Loss on foreign exchange     $2,000.00    
         Accounts Receivable     $2,000.00    
  7. Finally, we'll record the payment (now that we know what it is).
    Journal Entries
    Accounts Receivable     $91,000.00    
         Sales Revenue     $91,000.00    
    Cost of Goods Sold     $80,000.00    
         Inventory     $80,000.00    
    Loss on foreign exchange     $6,000.00    
         Accounts Receivable     $6,000.00    
    Loss on foreign exchange     $2,000.00    
         Accounts Receivable     $2,000.00    
    Cash     $83,000.00    
         Accounts Receivable     $83,000.00    
  8. As always, it's a good idea to go through the journal entries and make sure that the debits equal the credits, which, in this case, they do.
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