A December 15, year 2 purchase of goods was denominated in a currency other than the entity’s functional currency. The transaction resulted in a payable that was fixed in terms of the amount of foreign currency, and was paid on the settlement date, January 20, year 3. The exchange rates between the functional currency and the currency in which the transaction was denominated changed between the transaction date and December 31, 2010, and again between December 31, year 2, and January 20, year 3. Both exchange rate changes resulted in gains. The amount of the gain that should be included in the year 3 financial statements would be
　　A. The gain from December 15, year 2, to December 31, year 3.
　　B. The gain from December 15, year 2, to January 20, year 3.
　　C. Zero.
　　D. The gain from December 31, year 2, to January 20, year 3.
　　Answer:D
　　D is corrent. Foreign currency transactions (economic activities denominated in a currency other than the entity’s recording currency) must be translated into the currency used by the reporting company at each balance sheet date as well as at the settlement date. The difference between the original payable and the translated amount is a foreign exchange transaction gain or loss to be recognized in the period of the adjustment. Thus, the gain caused by exchange rate fluctuations between 12/31/Y2 and 1/20/Y3 should be reported on the year 3 income statement.