Explanation

Under the temporal method:

• Monetary assets and liabilities are translated at the current exchange rate
• Non-monetary assets and liabilities are translated at historical exchange rates

Analysis of the balance sheet items:

• Monetary assets: Cash (400,000) + Accounts receivable (280,000) = 680,000 EUR
• Monetary liabilities: Accounts payable (200,000) + Long-term debt (1,400,000) = 1,600,000 EUR
• Net monetary liability position: 1,600,000 - 680,000 = 920,000 EUR

Impact of EUR strengthening against USD:

• When the functional currency (EUR) strengthens against the reporting currency (USD), monetary liabilities create translation losses
• The net monetary liability position of 920,000 EUR means the company has more monetary liabilities than monetary assets
• As EUR strengthens, the USD value of these liabilities increases, creating a translation loss

Therefore, the company recognizes a translation loss on the income statement.