Question & Answer: Topic 5: Accounting for foreign currency transactions…..

Topic 5: Accounting for foreign currency transactions

Tassie Ltd is an Australian company with a reporting periods ending on 30 June.

During the year ended 30 June 2017, Tassie Ltd purchased goods from Britania Ltd, a company based in London. On 15 March 2017, Tassie Ltd ordered goods of £300 000 from Britania under FOB London contract. On 11 May, the goods were shipped FOB London and arrived at Tassie Ltd’s warehouse on the 2 July 2017. Tassie Ltd paid the £300 000 due to Luca on the 14 August 2017.

Applicable exchange rates are as follows.

15 March 2017 A$1.00 = 37p

11 May 2017 A$1.00 = 41p

30 June 2017 A$1.00 = 43p

2 July 2017 A$1.00 = 42p

14 August 2017 A$1.00 = 39p

Required:

(1) In accordance with AASB 121, prepare the relevant journal entries of Tassie Ltd for the years ending 30 June 2017 and 30 June 2018.

(2) Assuming that, instead of goods, Tassie Ltd was purchasing plant and equipment, which is installed ready for use on 15 July 2017 when the rate is still A$1.00=42p.

Prepare relevant journal entries of Tassie Ltd for the years ending 30 June 2017 and 30 June 2018.

Expert Answer

 

(1) For the Year ending on June 30, 2017:

On March 15, 2017: There would ne no entry since Tassie Limited just ordered the Goods which do not confirm the foreign exchange risk.

On May 11, 2017: Since the Contract is FOB London Contract, the Goods were shipped FOB London on this date. Britania Ltd is entitled to get the payment on due date as it has performed its necessary part. Following entries is to be made to record the transaction intially at the spot rate of 11 May:

Good in Transit Dr. (300000 / 0.41) A$ 731,707.32

To Britania Limited A$ 731,707.32

On June 30, 2017: Liability of Britania Limited being a foreign currency monetary item, needs to be restated at the closing rate of foreign currency as per AASB-121. Following entry is to be passed:

Britania Limited Dr. {(300000 / 0.43) – 731707.32} A$ 34,032.90

To Exchange Rate Gain A$ 34,032.90

Exchange Rate Gain Dr. A$ 34,032.90

To Profit & Loss A/c A$ 34,032.90

On July 2, 2017: Goods have been received on this date so following entry to be passed:

Inventory Dr. A$ 731,707.32

To Goods in Transit A$ 731,707.32

For the Year ending on June 30, 2018:

On August 14, 2017: Tassie Ltd finally paid the amount so following entry shall be passed:

Britania Limited Dr. (300000 / 0.39) A$ 697,674.42

Exchange Rate Loss Dr. A$ 71,556.35

To Bank A$ 769,230.77

Profit & Loss Dr. A$ 71,556.35

To Exchange Rate Loss A$ 71,556.35

(2) Journal Entries remain same with the following exceptions:

a) Capital Goods in Transit shall be used instead of Goods in Transit.

b) On July 02, 2017, Capital Goods in Transit shall be converted to Capital work in Process till the date of ready to use.

c) On July 15, 2017, Capital Work in Process shall be transferred to Propety, plant and equipment and the amount stands in CWIP shall also get transferred. No adjustment for exchange rate gain should be done.

d) Other entries and facts will remain same specially Exchange rate Gain / Loss.

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