Assume The Following Spot Exchange Rates Between The US Doll

Assume The Following Spot Exchange Rates Between The Us Dollar And T

Assume the following spot exchange rates between the U.S. dollar and the British pound sterling: April 1 $1.8685, April 30 $1.8258, May 31 $1.7740. On April 1, ABC, Inc., a U.S. international company, sells goods to a British importer for £1,000,000. Payment is to be received on May 31, and ABC, Inc. adjusts its financial statements quarterly. What are the journal entries for ABC, Inc. on April 1, April 30, and May 31? Was the dollar strengthening or weakening over the period of the contract? Submit in Excel.

Paper For Above instruction

In the realm of international finance, understanding the impact of exchange rate fluctuations on company financial statements is essential. For companies engaged in cross-border transactions, currency movements can lead to significant gains or losses, affecting profitability and financial position. This paper examines a specific scenario involving ABC, Inc., a U.S.-based company engaging in a sale to a British importer, and analyzes the journal entries on key dates corresponding to the exchange rate movements, alongside the assessment of whether the U.S. dollar appreciated or depreciated over the period.

The scenario involves three critical dates: April 1, April 30, and May 31, with specific exchange rates provided for each date. On April 1, ABC, Inc. makes a sale worth £1,000,000, and the payment is due on May 31. The exchange rates indicate the value of the U.S. dollar relative to the British pound on each date: $1.8685 on April 1, $1.8258 on April 30, and $1.7740 on May 31. The volatility in these rates over the period reflects the dollar's strengthening against the pound by May 31 compared to April 1.

Initially, on April 1, ABC records the sale and accounts for receivables at the spot rate prevailing on that date. The journal entry recognizes the receivable in USD and the sales revenue in GBP. As the dollar weakens or strengthens, the USD amount of the receivable fluctuates, necessitating adjustments through foreign currency translation adjustments (FCTA) in accordance with accounting standards such as ASC 830 or IAS 21.

On April 1, the initial journal entry is: Debit Accounts Receivable (USD) for £1,000,000 x $1.8685 = $1,868,500; Credit Sales Revenue for £1,000,000 (or equivalent in GBP in the ledger). This sets the baseline for subsequent revaluation.

By April 30, the exchange rate has changed to $1.8258. To reflect the change, ABC adjusts the accounts receivable from its initial USD value. The adjusting entry records the difference as a foreign currency translation gain or loss. At this date, the receivable is revalued at: £1,000,000 x $1.8258 = $1,825,800. The decrease from the initial $1,868,500 to $1,825,800 results in a foreign currency translation loss, which is recorded in earnings or other comprehensive income based on accounting standards.

Finally, on May 31, when the payment is received, the exchange rate is $1.7740, and the receivable is settled at: £1,000,000 x $1.7740 = $1,774,000. The difference between the revalued amount on April 30 ($1,825,800) and the settlement amount ($1,774,000) results in another foreign currency translation loss, which affects the income statement accordingly. The journal entry to record the receipt involves debiting cash or bank account and crediting accounts receivable, with the difference recognized as a foreign currency translation gain or loss.

The overall trend in exchange rates indicates that the USD appreciated against the GBP from April 1 to May 31, reducing the USD amount required to settle the receivable. The dollar's strength over the contract period can be concluded as an appreciation, as evidenced by the decline in dollar equivalents from initial recognition to settlement. This appreciation reduced ABC's USD receivable value upon receipt, impacting the company's reported earnings.

In conclusion, tracking these currency fluctuations and appropriately recording the journal entries ensure accurate financial reporting in accordance with international accounting standards. The scenario highlights the importance of effective foreign currency risk management and the need for precise translation adjustments, especially for companies engaged in international trade.

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