Kreighton Manufacturing purchased on credit £50,000 worth of production materials from a British company when the exchange rate was $1.97 per British pound.At the year-end balance sheet date,the exchange rate increased to $2.76.If the liability is still unpaid at that time,Kreighton must record a:

A) gain of $39,500.
B) loss of $39,500.
C) gain of $138,000.
D) loss of $138,000.
E) neither a gain nor loss.

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Rachel Chinyama · Accepted Answer

Final Answer : B, Explanation :  The increase in the exchange rate from $1.97 to $2.76 per British pound means Kreighton will have to pay more dollars to settle the £50,000 liability. Initially, the liability was $98,500 (£50,000 * $1.97). At the new exchange rate, it becomes $138,000 (£50,000 * $2.76). The difference, $39,500 ($138,000 - $98,500), is a loss because it increases the amount of dollars needed to settle the same amount of debt in pounds.

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