Question

In: Accounting

Marko Company sold spray paint equipment to Spain for 4,000,000 pesetas (P) on October 1, with...

Marko Company sold spray paint equipment to Spain for 4,000,000 pesetas (P) on October 1, with payment due in six months. The exchange rates were


October 1, 20X6	1 peseta	=	$	0.0048
December 31, 20X6	1 peseta	=		0.0075
April 1, 20X7	1 peseta	=		0.0073

Required:
a. Did the dollar strengthen or weaken relative to the peseta during the period from October 1 to December 31? Did it strengthen or weaken between January 1 and April 1 of the next year?

b. Prepare all required journal entries for Marko as a result of the sale and settlement of the foreign transaction, assuming that its fiscal year ends on December 31. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Expert Solution

(a) Dollar has weakened during the period from October 1st to December 31. As it is evident from the exchange rate that the rate has been increased from 1peseta = $0.0048 to 1 peseta = $0.0075 which means peseta has strengthened during that period. If peseta has strengthened in relation to dollar, dollar would have weakened during the same period.

Dollar has strengthened during the period from January 1to April 1. As it is evident from the exchange rate that the rate has been decreased from 1peseta = $0.0075 to 1 peseta = $0.0073 which means peseta has weakened during that period. If peseta has weakened in relation to dollar, dollar would have strengthened during the same period.

(b) Journal entry on October 1st, 20x6( amount in $)

Debtors Account. Dr. 19,200

To Sales 19,200

( For being, sales accounted for 4,000,000 peseta @ $0.0048)

Journal entry on December 31, 20x6 (amount in $)

Debtors Account. Dr. 10,800

To Exchange gain. 10,800

(For being, exchange gain on increase in peseta exchange rate from $ 0.0048 to $0.0075 that is from $19,200 to $30,000 and the difference of $10,800 accounted at the year end)

Journal entry on April 1, 20x7 (amount in $)

Cash account. Dr 29,200

Exchange loss. Dr 800

To Debtors Account. 30,000

( For being, Marko company received payment from Spain for its sale at $0.0073 and the difference in exchange rate from December 31, 20x6 is recorded as exchange loss)

ekkarill92 answered 6 months ago

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