Question

Fujitsu Ltd purchases inventory from DFO Ltd, a listed British company. Relevant events and the spot rates at each date are shown as follows: Date	Event	Spot rate
15 March 2019	Order £300,000 of inventory	A$1.00 = £0.37
11 May 2019	Purchase takes place as inventory shipped to Fujitsu Ltd (FOB)	A$1.00 = £0.41
30 June 2019	End of financial year	A$1.00 = £0.43
02 July 2019	Inventory arrives at warehouse	A$1.00 = £0.42
14 August 2019	Payment of £300,000 to supplier	A$1.00 = £0.39

Required:

a) Prepare appropriate journal entries for each relevant event. (Round amounts to the nearest dollar). Show your working.

b) What is a qualifying asset? Provide two (2) examples. (3 marks, maximum 300 words)

Answer 1

a)

Journal entries

Date	Particulars	Debit	Credit
15 March 2019	No entry
11 May 2019	Purchases a/c	$731,707.32
	To DFO Ltd a/c		$731,707.32
30 June 2019	DFO Ltd a/c	$34,032.90
	To Foreign exchange gain/loss a/c		$34,032.9
	(Year end exchange gain accounted)
14 Aug 2019	Foreign exchange gain/loss a/c	$71,556.35
	To DFO Ltd a/c		$71,556.35
	(Foreign exchange loss accounted)
14 Aug 2019	DFO Ltd a/c	$769,230.77
	To Cash a/c		$769,230.77

For recording year end exchange loss or gain

= (300,000 x 1/0.41) - (300,000 x 1/0.43)

= $34,032.9

Exchange loss or gain on payment

= (300,000 x 1/0.43) - (300,000 x 1/0.39)

= $71,556.35

b)

Qualifying asset refers to an asset that takes significant time to get ready for its projected use or sale.It takes substantial period to build them.

Any borrowing costs incurred during this period are capitalised to the qualifying asset.

E.g. Building under construction, Intangible assets under development, inventories that take substantial time to bring them to saleable condition.