B is corrent. No journal entry is prepared on 11/15/Y2 when the goods are ordered, so the spot rate for LCUs on that date ($.4955) is not relevant to the solution of this problem. On 12/10/Y2, Celt would record the purchase and related accounts payable at $97,500 (200,000 LCUs × $.4875). A foreign exchange transaction gain (loss) is to be recognized if the spot rate on the settlement date (or any intervening balance sheet date) is different from the rate on the transaction date. At 12/31/Y2, the spot rate is $.4675, which means the account payable must be adjusted down to $93,500 (200,000 LCUs × $.4675), resulting in a gain of $4,000. A shortcut approach is to multiply the change in the exchange rate ($.4875 – $.4675 = $.02) by the payable balance in LCUs ($.02 × 200,000 LCUs = $4,000).
A is incorrect. No journal entry is prepared on 11/15/Y2 when the goods are ordered, so the spot rate for LCUs on that date ($.4955) is not relevant to the solution of this problem. On 12/10/Y2, Celt would record the purchase and related accounts payable at $97,500 (200,000 LCUs × $.4875). A foreign exchange transaction gain (loss) is to be recognized if the spot rate on the settlement date (or any intervening balance sheet date) is different from the rate on the transaction date. At 12/31/Y2, the spot rate is $.4675, which means the account payable must be adjusted down to $93,500 (200,000 LCUs × $.4675), resulting in a gain of $4,000. A shortcut approach is to multiply the change in the exchange rate ($.4875 – $.4675 = $.02) by the payable balance in LCUs ($.02 × 200,000 LCUs = $4,000).
C is incorrect. No journal entry is prepared on 11/15/Y2 when the goods are ordered, so the spot rate for LCUs on that date ($.4955) is not relevant to the solution of this problem. On 12/10/Y2, Celt would record the purchase and related accounts payable at $97,500 (200,000 LCUs × $.4875). A foreign exchange transaction gain (loss) is to be recognized if the spot rate on the settlement date (or any intervening balance sheet date) is different from the rate on the transaction date. At 12/31/Y2, the spot rate is $.4675, which means the account payable must be adjusted down to $93,500 (200,000 LCUs × $.4675), resulting in a gain of $4,000. A shortcut approach is to multiply the change in the exchange rate ($.4875 – $.4675 = $.02) by the payable balance in LCUs ($.02 × 200,000 LCUs = $4,000).
D is incorrect. No journal entry is prepared on 11/15/Y2 when the goods are ordered, so the spot rate for LCUs on that date ($.4955) is not relevant to the solution of this problem. On 12/10/Y2, Celt would record the purchase and related accounts payable at $97,500 (200,000 LCUs × $.4875). A foreign exchange transaction gain (loss) is to be recognized if the spot rate on the settlement date (or any intervening balance sheet date) is different from the rate on the transaction date. At 12/31/Y2, the spot rate is $.4675, which means the account payable must be adjusted down to $93,500 (200,000 LCUs × $.4675), resulting in a gain of $4,000. A shortcut approach is to multiply the change in the exchange rate ($.4875 – $.4675 = $.02) by the payable balance in LCUs ($.02 × 200,000 LCUs = $4,000).
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