[faye1001]

This question is from CPAexcel.

Orr Corporation had a realized foreign exchange loss of $13,000 for the year ended December 31, 20X8, and must also determine whether the following items will require year‐end adjustment.

-Orr had a $7,000 gain resulting from the translation of the accounts of its wholly owned foreign subsidiary for the year ended December 31, 20X8.
-Orr had an account payable to an unrelated foreign supplier payable in the supplier’s local currency. The U.S. Dollar equivalent of the payable was $60,000 on October 31, 20X8 and $64,000 on December 31, 20X8. The invoice is payable on January 30, 20X9.
In Orr’s 20X8 consolidated income statement, what amount should be included as foreign exchange loss?

A $ 6,000
B $10,000
C $13,000
D $17,000

The correct answer is D, 17,000. Here is the explanation.
The translation loss (or gain) would not be included in net income for the year, but rather would be reported as an item of other comprehensive income (outside net income) for the year. The $4,000 loss on the account payable ($64,000 − $60,000 = $4,000) would be included in net income. Therefore the correct amount of foreign exchange loss is $13,000 + $4,000 = $17,000, not $10,000.

I understand why it put 13,000 and 4,000 together to get the total loss, but does the OCI separate the foreign transaction gain and loss? that’s why it doesn’t use the total loss offset the gain? Thanks!!

[Substantive Testing]

The thing is Income Statement is a financial statement, and Other Comprehensive Income (OCI) is another financial statement. If you have a loss and a gain in the income statement for foreign transaction, then it will cancel out, but you cannot cancel out a gain in income statement with a loss in OCI. They must be presented separately and independently as such. Therefore, it is very important to know what goes into income statement and what goes into OCI (cough cough* translation gain).

[Anonymous]

Translation Gain or Loss – OCI
Transaction Gains and Losses – net income on the income statement

[Author]

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