Question

Question 5                                                                                                                                                         

On 3 June 2019 Canberra Ltd an Australian based company acquired goods on credit from a supplier in the USA. The goods are shipped free on board (FOB) from Chicago on 3 June 2019. The cost of the goods is USD 500,000 and the debt remains unpaid as at 30 June 2019.

On 3 June 2019, the exchange rate is A$1.00 = USD 0.75.

On 30 June 2019 the exchange rate is A$1.00 = USD 0.95.

Hence, the value of the Australian dollar has increased relative to the US Dollar. Canberra Ltd’s reporting date is 30 June.

Required

1. Provide the accounting entries necessary to account for the purchase   transaction, noted above, for the year ending 30 June 2019.                                                                                                                             
2. When initially recognising a transaction that is denominated in a foreign currency, what exchange rate should be used to translate the transaction to Australian Dollars?                                                           

Answer 1

1. Accounting entries in the books of Canberra Ltd

a) Purchase of Good

03/06/2019 Purchase Account Dr 666666.67

To Accounts Payable 666666.67

30/06/2019 Accounts Payable Dr 140350.88

To Foreign Exchange Gain 140350.88

Workings

As on 03/06/2019, exchange rate

AS$1= 0.75 USD

therefore, 1USD = (1/0.75) AS$

500000USD= (1/0.75)*500000 AS$

= 666666.67 AS$

As on 30/06/2019, exchange rate.

AS$1= 0.95 USD

therefore, 1USD = (1/0.95) AS$

500000USD= (1/0.95)*500000 AS$

= 526315.79

therefore foreign exchange gain = 666666.67-526315.79

=140350.88

2.Transactions denominated in foreign currencies must initially be translated at the exchange rate in place as at the date of the transaction (the transaction date’s spot rate) using the entity’s reporting currency. Later on the balance sheet date these should be translated using the spot rate as on the balance sheet. Any gain or loss arising on the balance sheet translation to be treated as expense in the same period.