Fogg Co., a U.S. company, contracted to purchase foreign goods. Payment in foreign currency was due one month after the goods were received at Fogg's warehouse. Between the receipt of goods and the time of payment, the exchange rates changed in Fogg's favor. The resulting gain should be included in Fogg's financial statements as a(an):
a. Extraordinary item.
b. Component of income from continuing operations.
c. Deferred credit.
d. Separate component of other comprehensive income.
Explanation
Choice "b" is correct, component of income from continuing operations.
Rule: Gains and losses resulting from foreign exchange transactions that are an "extension" of the parent's domestic operations are included as a component of "income from continuing operations" in the period in which they occur. They are not extraordinary items.
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