Foreign Currency Gain or Loss

Lesson

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Question

You are an accountant for Zero Morals, inc. and are adding some journal entries to account for a sale in a foreign currency.

This is what you've been told:

The cost of goods sold is $92,000.00.
Your firm has agreed to accept foreign currency as payment, equivalent of $102,000.00 at time of sale.
At the end of the initial fiscal (accounting) year, the value of the foreign currency had decreased by $4,000.00.
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 $10,000.00.

What are the necessary journal entries to cover the facts?

Answer

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👉 Answer:

First we account for the sale, assuming that there will be no changes to the current (spot) exchange rate.
Journal Entries
Accounts Receivable $102,000.00

Sales Revenue $102,000.00

Next, we have to account for our changes to inventory.

Now we need to update our records at the end of the first year, so we can close our books and report our financials.

Let's account for the changes to currency value so far.

Once we have payment in hand, we need to record the payment and make updates for our gain or loss on foreign exchange.

Let's start with the gain or loss on foreign exchange.

Finally, we'll record the payment (now that we know what it is).

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.