How do I record a foreign currency transaction gain or loss on a receivable?

Question

AcadiFi · Accepted Answer

A foreign currency transaction is recorded initially using the spot rate on the transaction date. Monetary items such as receivables and payables are then remeasured at each balance sheet date using the current spot rate. Any difference caused by exchange rate changes goes to transaction gain or loss in earnings. When the receivable is later collected, the company recognizes another gain or loss for the change between the last measurement date and the collection date.

Example: Starline Industrial sells goods to a European customer for 100,000 euros when the rate is $1.08 per euro, so it records revenue and a receivable of $108,000. At year-end, the rate rises to $1.11. The receivable is remeasured to $111,000 and Starline records a $3,000 transaction gain. When cash is collected later and the rate falls to $1.10, the receivable becomes $110,000 and Starline records a $1,000 transaction loss before collection.

The key FAR point is that transaction gains and losses hit current earnings, not OCI. Candidates often confuse this with foreign subsidiary translation adjustments. Keep the timeline straight: initial recognition, year-end remeasurement, and settlement. As long as you compare the dollar carrying amount of the receivable at each step, the journal entries become much easier. Practice more in our CPA FAR question bank.

How do I record a foreign currency transaction gain or loss on a receivable?

Master FAR with our CPA Course

Related Questions

Practice Questions