On 1 October Merlin Co, whose functional currency is the dollar ($), bought inventory on credit for 120,000 dinars (D) when the exchange rate was D4 = $1. At its 31 December year end the invoice was still unpaid, the inventory was unsold and the rate was D5 = $1. What exchange difference arises, and at what amount is the inventory carried?

Correct answer: D) Exchange gain $6,000; inventory $30,000

Explanation

The purchase is recorded at the spot rate: D120,000 / 4 = $30,000. The payable is a monetary item, so it is retranslated at the closing rate: D120,000 / 5 = $24,000. The liability has fallen by $6,000, which is an exchange gain in profit or loss. Inventory is non-monetary and stays at its historical rate amount of $30,000 (subject to the NRV test).