Question

Lucky Traders is a subsidiary of United Traders, a US based trading company with a 31
December year end, and it is involved in the buying and selling of electronic accessories. Most of
the inventories that Lucky Traders sells are imported from the parent company that is based in
America.
Given the nature of the business, Mr. Luckiness expresses his concern on the fact that the
company is trading with companies that are not local companies. The company has been
experiencing losses, because of this; Mr. Luckiness is concerned that the company’s functional
currency is US Dollars as the invoices that they receive are quoted in US Dollars.
The consultant company for Lucky Traders have recommended that the company should enter a
Foreword Exchange contract to hedge for the risk of the exchange rate.
On 1 December 2019 Lucky Traders entered into the contract with Take A Little an American
based company to supply to them 15 000 boxes of accessories when the exchange rate was $ 1:
NAD14.00 and each of the box worth US$ 1 589. The stock was shipped FOB on the 10th
December 2019 when the exchange rate was $1: NAD13.00.
Due to the delay in the customs and clearance of the orders stock only arrived at the premises of
Lucky Traders on 15 December 2019 when the exchange rate was $1:NAD16.00 the debt was
not settled as at 31 December 2019 and the final payment was only made on the 31 January
2020. When the exchange rate was $1: NAD 17.50 at 31 December 2019
The company entered the FEC contract with Capelex Bank to fix the rate on the 31 January 2020
at $1:NAD15.50. Due to the outbreak of Covid-19 US Dollar has strengthen and Namibian dollar
has declined and the rate moved to $1: NAD 18.00.

The Forward Exchange Contract had the rates below:
Date $:NAD
01/12/19 -
31/12/19 1:17.00
31/01/2020 1:21.00

Required:


2.3 Calculate total loss/gain made foreign exchange on the transaction above for the
year ended 31 December 2019

2.4 Prepare the journal entry on 31 January when the transaction was fully settled.

Answer 1

2.3 Calculation of Gain/Loss-

Sales to little an American based Company-

= Amount Received - Amount Billed

= (15000 1589 17.5) - (15000 1589 14)

= 417,112,500 - 333,690,000

= 83,422,500.00 (Foriegn Currency Gain)

2.4 Jornal Entries-

Capelex Bank a/c Dr 369,442,500

Gain on foreign Sale 131,092,500

To Contract for sale 500,535,000