Lesson details
- Estimated study time
- 110 min
Learning objectives (3)
Cedar Trail's functional currency is stipulated as the U.S. dollar. It sells goods for €200,000 when one euro equals $1.08. The receivable begins at $216,000. At year-end, one euro equals $1.11, so the carrying amount is $222,000 and the transaction gain is $6,000.
Write the rate as “USD per EUR.” If the source instead quotes EUR per USD, invert it deliberately and retain the source quotation. Most spreadsheet currency errors are not difficult algebra; they are unlabeled direction and date errors.
A payable uses the same multiplication but a different interpretation. When the euro strengthens, a euro receivable produces a gain for a dollar-functional entity, while a euro payable produces a loss. Show the monetary-item kind and signed gain or loss rather than forcing both through one verbal shortcut.
If settlement occurs after year-end at $1.10 per euro, the receivable becomes $220,000 cash and a $2,000 post-close loss relative to the $222,000 carrying amount. Do not combine that later-period loss with the year-end remeasurement. The $6,000 gain is recognized in Year 5; the $(2,000) settlement loss is recognized in the following period. Across the receivable's full life, those amounts net to a $4,000 gain, the same change from the initial $216,000 carrying amount to $220,000 cash collected.
Functional currency is supplied for the exercise. The learner still prepares an indicator memo from cash flows, sales prices, financing, expenses, autonomy, and intercompany evidence, and marks contrary evidence. Highly inflationary status, hedges, taxes, and long-term intercompany balances remain explicit handoffs.