Question - Thomas Co. purchased merchandise from a vendor in England on November 20, 20x1, for 500,000 British pounds. Payment was due in British pounds on January 20, 20x2. The spot rates to purchase 1 pound were as follows.

November 20, 20x1      $1.25

December 31, 20x1      $1.20

January 20, 20x2          $1.17

How should the foreign currency transaction gain be reported on Thomas's financial statements at December 31, 20x1?

A gain of $40,000 as a separate component of stockholders' equity

A gain of $40,000 in the income statement

A gain of $25,000 as a separate component of stockholders' equity

A gain of $25,000 in the income statement