Assume a U.S. company purchases goods worth €1,500,000 from a German company and has to make payment in sixty days. The exchange rate is US$1.50/€1. When the payment is made sixty days later, the exchange rate is US$1.25/€1. How would the company record the transaction on the order date and the payment date?
The U.S. company will have to record the purchase of goods as €1,500,000 x $1.50 = $2,250,000 on order date. On payment date, the U.S. company pays $1,875,000 because the exchange rate sixty days later is US$1.25/€1. It will record the payment of $2,250,000 to offset the accounts payable but also record an exchange gain of $375,000 for a net effective payment of $1,875,000.