Lindy, a US corporation, bought inventory items from a
supplier in Argentina on November 5, year 1, for 100,000 Argentine
pesos, when the spot rate was $.4295. At Lindy’s December
31, year 1 year-end, the spot rate was $.4245. On January 15,
year 2, Lindy bought 100,000 pesos at the spot rate of $.4345 and
paid the invoice. How much should Lindy report as part of net
income for year 1 and year 2 as foreign exchange transaction gain
or loss?

Year 1....... Year 2

(a) A transaction has occurred in which settlement will
be made in Argentine pesos. Since Lindy’s functional currency is
the US dollar, a foreign exchange transaction gain (loss) will
result if the spot rate on the settlement date is different than the
rate on the transaction date. A provision must be made at any
intervening year-end date if there has been a rate change. Thus,
in year 1, a $500 foreign exchange transaction gain [100,000 ×
($.4295 – $.4245)] would be recognized, while in year 2 a $1,000
foreign exchange transaction loss [100,000 × ($.4245 – $.4345)]
would be recognized.