If a foreign currency is strengthening with respect to the Canadian dollar, which of the following is true?

A) Both the current-rate method and the temporal method would show an exchange gain.
B) Both the current-rate method and the temporal method would show an exchange loss.
C) The current-rate method would show an exchange gain and the temporal method would show an exchange loss.
D) The current-rate method would show an exchange loss and the temporal method would show an exchange gain.

Question

Diane Barbado · Accepted Answer

Final Answer : C, Explanation :  The current-rate method uses the current exchange rate to translate all foreign currency transactions, and the temporal method uses different exchange rates depending on the type of transaction. If a foreign currency is strengthening with respect to the Canadian dollar, it means that more CAD can be obtained with the same amount of foreign currency, so the CAD is weakening. As a result, the current-rate method would show an exchange gain because the translated value of foreign currency assets would increase in CAD terms. However, the temporal method would show an exchange loss because the historical exchange rates used for translating some types of transactions (e.g. inventory and fixed assets) would be less favorable than the current rate. Therefore, the correct answer is C.

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