Desi Of New York Sells Its Products To Customers In The Unit
Desi Of New York Sells Its Products To Customers In The United States
Desi of New York sells its products to customers in the United States and the United Kingdom. On December 16, 2011, Desi sold merchandise on credit to Bronson Ltd. of London at a price of 32,000 pounds. The exchange rate on that day for £1 was $2.0460. On December 31, 2011, when Desi prepared its financial statements, the rate was £1 for $2.0399. Bronson paid its bill in full on January 15, 2012, at which time the exchange rate was £1 for $2.0419. Desi immediately exchanged the 32,000 pounds for U.S. dollars.
Paper For Above instruction
This scenario involving Desi of New York's international credit sale to Bronson Ltd. presents an opportunity to analyze how foreign currency transactions impact financial reporting, currency translation, and accounting procedures. In this case, Desi engaged in a sale to a UK-based customer, Bronson Ltd., with the transaction denominated in British pounds (£). The key factors to consider include the timing of recognition, the calculation of foreign currency gains or losses, and the relevant accounting standards governing foreign currency transactions, primarily under GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards).
Initially, the sale was recorded on December 16, 2011, at an exchange rate of $2.0460 per pound. The total receivable in U.S. dollars at the date of sale can be calculated as follows:
\[
\text{Receivable in USD} = 32,000 \text{ pounds} \times \$2.0460 = \$65,472
\]
As of December 31, 2011, the financial statements needed to report the receivable at the current exchange rate, requiring a valuation adjustment due to changing currency values. The new rate was $2.0399 per pound, leading to a revaluation of the receivable:
\[
\text{Adjusted receivable} = 32,000 \times \$2.0399 = \$65,276.80
\]
The difference between the initial recorded amount ($65,472) and the revalued amount ($65,276.80) results in a foreign currency exchange loss:
\[
\$65,472 - \$65,276.80 = \$195.20
\]
This loss must be recognized in Desi's income statement as a foreign currency transaction loss, reflecting the decline in the value of the receivable during the reporting period.
The payment was made on January 15, 2012, at an exchange rate of $2.0419 per pound. Upon receipt and exchange, the final U.S. dollar amount received by Desi would be:
\[
32,000 \times \$2.0419 = \$65,340.80
\]
To determine the overall foreign currency gain or loss from the transaction, we compare the final amount received with the initial USD amount recorded at sale. The initial USD amount was $65,472, and the final converted amount is $65,340.80, indicating a loss:
\[
\$65,472 - \$65,340.80 = \$131.20
\]
Thus, Desi recognizes an additional foreign currency loss of \$131.20 upon settlement, in addition to the loss recognized at the balance sheet date.
The accounting treatment of these fluctuations hinges on the adoption of either the functional currency method (as per GAAP) or the translation method under IFRS. Under GAAP, the receivable is initially recorded at the spot rate on the transaction date, and subsequent adjustments are made to reflect exchange rate changes until settlement. The unrealized gain or loss at reporting dates is recognized in earnings. Conversely, IFRS may classify such transactions and the resulting gains or losses differently, often as part of profit or loss, depending on the company's accounting policies.
This case underscores the complexities of accounting for foreign currency transactions, especially in multinational trade. Recognizing and properly reporting foreign currency gains and losses ensures transparency, provides accurate financial information, and complies with applicable accounting standards. Companies engaged in international trade must develop robust systems for tracking exchange rate movements and translating foreign currency transactions consistently and accurately.
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