Question

Accounting for foreign currency transactions

MyBeauty Ltd is an Australian company which specialises in manufacturing and distributing health and beauty products to both local and international clients. The company has a reporting period which ends on 30 June and the Australian dollar is the functional and presentation currency.

For the financial year ending 30 June 2019, MyBeauty LTd has entered into two independent transactions denominated in foreign currency as follows.

Transaction A

MyBeauty Ltd sells some goods on credit to Bristol Industries, a British company. The contract, dated 1 January 2019, is denominated in United Kingdom pounds and the contract amounts to £150,000. Bristol Industries settles the contract on 29 January 2019.

The relevant exchange rates are as follows:

3 January 2019	A$1.00 = £0.5684
29 January 2019	A$1.00 = £0.5892

Transaction B

On 1 July 2017, MyBeauty Ltd entered into a loan denominated in Euros, borrowing €300,000 from a European Bank. The following summarises the bank loan statements over the period 1 July 2017 to 30 June 2019.

Date	Details	Amount	Balances
		€	€
1 July 2017	Loan contract – principal	300,000	300,000 DR
30 June 2018	Interest	33,000	333,000 DR
30 June 2019	Interest	37,000	370,000 DR

The relevant exchange rates are as follows:

1 July 2017	A$1.00 = €0.6545
30 June 2018	A$1.00 = €0.6045
30 June 2019	A$1.00 = €0.6419

Required:

In accordance with AASB 121, prepare all relevant journal entries of MyBeauty Ltd to account for the above transactions for the financial years ending 30 June 2018 and 2019, where relevant.

Answer 1

Journal entries for transaction A

Date	Particulars	Debit (A$)	Credit (A$)
1 January 2019	Bristol Industries A/C	263,898.66
	To Sales A/C		263,898.66

Exchange rate on 1 January 2019 is not provided, hence the rate provided on 3 January is taken for calculation

150,000 pounds / 0.5684 pounds = A$ 263,898.66

On 29 January 2019 Bristol Industries will pay 150,000 pounds to My beauty Ltd. When My beauty will sell pounds and fetch A$, the difference will be recorded in foreign exchange fluctuation A/C

Date	Particulars	Debit ($)	Credit ($)
29 January 2019	Bank A/C	254,582.48
	Foreign exchange fluctuation A/C	9,316.18
	To Bristol Industries A/C		263,898.66

So, Bristol Industries was recorded at A$ 263,898.66 on the transaction date, but it fetched A$ 254,582.48.

Hence there was a loss of A$ 9,316.18 due to foreign exchange rate fluctuation.

Journal entries for Transaction B:-

1. Euros 300,000 / 0.6545

Date	Particulars	Debit (A$)	Credit (A$)
1 July 2017	Bank A/C	458,365.16
	To Loan A/C		458,365.16

2. Euros 33,000 / 0.6045

Date	Particulars	Debit (A$)	Credit (A$)
30 June 2018	Interest expense A/C	54,590.57
	To Bank A/C		54,590.57

3. Euros 300,000 / 0.6045 = A$ 496,277.92

Liability got increased by (A$ 496,277.92 - A$ 458,365.16 ) = A$ 37,912.76

Liability will be recorded at A$ 496,277.92 in balance sheet and the loss for exchange rate fluctuation will be recognized in statement of income.

Date	Particulars	Debit (A$)	Credit (A$)
30 June 2018	Foreign exchange fluctuation A/C	37,912.76
	To Loan A/C		37,912.76

4. Euros 37,000 / 0.6419 = A$ 57641.38

Date	Particulars	Debit (A$)	Credit (A$)
30 June 2019	Interest expense A/C	57641.38
	To Bank A/C		57641.38

5. Euros 300,000 / 0.6419 = A$ 467,362.52

Liability got decreased by (A$ 496,277.92 - A$ 467,362.52 ) = A$ 28915.40

Liability will be recorded at A$ 467,362.52 in balance sheet and the profit for exchange rate fluctuation will be recognized in statement of income.

Date	Particulars	Debit (A$)	Credit (A$)
30 June 2018	Loan A/C	28,915.40
	To Foreign exchange Fluctuation A/C		28,915.40