Question

Honk, Inc., a U.S. corporation, purchases weight-lifting equipment for resale from HiDisu, a Japanese corporation, for 60 million yen. On the date of purchase, 110 yen is equal to $1 U.S. (¥110:$1). The purchase is made on December 15, 2018, with payment due in 90 days. Honk is a calendar year taxpayer. On December 31, 2018, the foreign exchange rate is ¥112:$1.

On February 2, 2019, the invoice is paid when the exchange rate is ¥115:$1. What amount of foreign currency gain or loss, if any, must Honk recognize for 2018 as a result of this transaction? For 2019??

Answer 1

Calculation of foreign currency gain or loss for 2018
Total amount payable as at 15th Dec	$545,454.55	million	($60 million/110)
Total amount payable as at 31st Dec	$535,714.29	million	($60 million/112)
Foreign currency gain	$9,740.26	million
The amount payable based on 31st December year end exchange rate is lower than on date of purchase and thus there is gain for company
Calculation of foreign currency gain or loss for 2019
Total amount payable as at 31st Dec	$535,714.29	million	($60 million/112)
Total amount actually paid on 02nd Feb	$521,739.13	million	($60 million/115)
Foreign currency gain	$13,975.16	million