[jessica8926]

Why is it that if the exchange rate decreases you have a foreign exchange transaction gain and if the rate goes up you have an exchange loss? For example, you purchase goods for 100,000 pesos:

Date & Rate:

12/1/Yr 1 : $0.10

12/31/Yr 1 : $0.08

2/1/Yr 2 : $0.09

So you have a year end gain of $2,000 on 12/31 but a closing date loss of $1,000 on 2/1. Why?

The way I see it is you have a gain because you have to pay less back and you have a loss because you have to pay more back. I know that is probably wrong and sounds stupid, but I am trying to make sense of it in an easy way. Anyone else have a trick to understanding why you have a gain if the rate goes down and vice versa?

AUD - 69, 77
REG - 74, 81
FAR - 75!
BEC - 71, 82

IL candidate!

Finally done (5/24/16)!! Yahooooooo!

[NYCaccountant]

Because for example, I purchased goods and I have to pay $100,000 Peso's. On 12/1 100,000 pesos = 10,000 US dollars. So I accrue the liability of $10,000. now on 12/31, I can get 100,000 peso for only 8 cents, which equates to $8,000. So I have $2,000 gain because I no longer have to pay $10,000, but $8,000 instead. So the liability has been written down to $8,000. On 2/1, 100,000 pesos will costs me $9,000 now (100,000*.09), so the peso is more expensive, so I have to write liability back up, which means a loss. Let me know if that helps.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[NYCaccountant]

Because for example, I purchased goods and I have to pay $100,000 Peso's. On 12/1 100,000 pesos = 10,000 US dollars. So I accrue the liability of $10,000. now on 12/31, I can get 100,000 peso for only 8 cents, which equates to $8,000. So I have $2,000 gain because I no longer have to pay $10,000, but $8,000 instead. So the liability has been written down to $8,000. On 2/1, 100,000 pesos will costs me $9,000 now (100,000*.09), so the peso is more expensive, so I have to write liability back up, which means a loss. Let me know if that helps.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[jessica8926]

Sounds so simple when you say it like that. Just another case of over thinking things! Can I ask you another question though?

I was trying to relate this back to the purchasing power principle and it states if you have a monetary asset like an A/P and you have inflation, you have a purchasing power gain. Is that because your A/P is fixed and will not increase due to inflation so you don't have to pay more?

AUD - 69, 77
REG - 74, 81
FAR - 75!
BEC - 71, 82

IL candidate!

Finally done (5/24/16)!! Yahooooooo!

[jessica8926]

Sounds so simple when you say it like that. Just another case of over thinking things! Can I ask you another question though?

I was trying to relate this back to the purchasing power principle and it states if you have a monetary asset like an A/P and you have inflation, you have a purchasing power gain. Is that because your A/P is fixed and will not increase due to inflation so you don't have to pay more?

AUD - 69, 77
REG - 74, 81
FAR - 75!
BEC - 71, 82

IL candidate!

Finally done (5/24/16)!! Yahooooooo!

[NYCaccountant]

Yes, that's correct. The AP balance is fixed and does not increase due to inflation.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[NYCaccountant]

Yes, that's correct. The AP balance is fixed and does not increase due to inflation.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[jessica8926]

Thanks NYCaccountant, you always seem to be answering my questions! I really appreciate it! Good luck to you 🙂

AUD - 69, 77
REG - 74, 81
FAR - 75!
BEC - 71, 82

IL candidate!

Finally done (5/24/16)!! Yahooooooo!

[jessica8926]

Thanks NYCaccountant, you always seem to be answering my questions! I really appreciate it! Good luck to you 🙂

AUD - 69, 77
REG - 74, 81
FAR - 75!
BEC - 71, 82

IL candidate!

Finally done (5/24/16)!! Yahooooooo!

[Author]

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