Solution to foreign exchange problem;

              Bulletin HASKINS & SELLS 49
Solution to Foreign Exchange Problem
T H E problem dealing with Chilean ex-change,
which appeared in the February
number of the BULLETIN, is recognized
as a problem set at the November, 1919,
examination of the American Institute of
Accountants and published in the Decem­ber,
1919, number of the Journal of Ac­countancy.
It is a fine type of problem;
short, well balanced, and containing noth­ing
with which a student of accountancy
should not be familiar. At the same time
it represents a good test of the mentality
and particularly of those qualities of mind
which are necessary attributes of an accoun­tant.
The situation in so far as the Pan-Ameri­can
Chemical Company is concerned must
be considered from two points of view.
The New York books show the advances
to the Chilean plant as they accumulate
from cable transfers. The advances are
shown on the New York books in U . S.
dollars. They remain that way. Fur­ther,
they do not change until a report of
some sort, frequently called an account
current, is received and serves to clear the
account, or, in other words, to show what
disposition has been made of the funds ad­vanced.
All such entries are made in
U. S. dollars.
In the meantime the funds have gotten
into a country where the unit of money is
the peso instead of the dollar. The ac­counts
at the plant are kept in the currency
of the country. Sometimes it is merely a
matter of convenience. In some countries
it is required by law. The entries in the
accounts may or may not be paralleled in
American money. Such is probably the ex­ception
rather than the rule. Financial re­ports
or accounts current in such cases fre­quently
show both currencies.
The student who would work out the
problem in question must first assume the
point of view of the Chilean plant. Hav­ing
received from New York U . S. dollars,
he must expect to account to New York for
so and so many U . S. dollars. He must
convert them for use into pesos. He must
keep his accounts in pesos. When he comes
to render his accounting he must convert
back to dollars.
Exchange governs the conversions both
from dollars into pesos and from pesos
into dollars. The problem is one in profit
and loss. Assume that when one dollar is
converted into pesos, exchange is quoted
so that one dollar equals six pesos. If the
six pesos are held until exchange rises to
the point where the rate is three pesos to
the dollar, then converting the six pesos
into dollars would yield two dollars. The
result is a profit of one dollar. Pesos are
like any commodity. They are bought at
one price and, if sold or used at another
price, the result is a profit or a loss, as the
case may be.
In the problem in question various sums
in dollars were transferred from New
York to Chile by cable. They were con­verted
into pesos at various rates. The
rates were not the same at all times as
those prevailing according to the problem.
The rates prevailing were, however, used
in crediting out the sums disbursed, thus
giving rise to what proves to be a profit
on exchange.
For example, the first transfer of $30,-
000 realized 120,000 pesos. This, it will
be seen, was at the rate of four pesos to
the dollar. The disbursements for wages
relating to plant construction for the six
months ended June 30, 1918, were 60,000
pesos. The rate, as stated in the problem,
from January 1 to June 30, 1918, was
three pesos to the dollar.
60,000 pesos at 3 to the dollar = $20,000
60,000 pesos at 4 to the dollar = 15,000
Profit, $ 5,000
In accordance with the statement in the
problem to the effect that production and