In: Accounting
On December 20, 2017, Butanta Company (a U.S. company headquartered in Miami, Florida) sold parts to a foreign customer at a price of 135,000 ostras. Payment is received on January 10, 2018. Currency exchange rates for 1 ostra are as follows:
December 20, 2017 | $ | 1.23 |
December 31, 2017 | 1.20 | |
January 10, 2018 | 1.16 | |
As per IAS-21 - The Effects of Changes in Foreign Exchange Rates,
At the year end Foreign currency monetary items are translated into the functional currency using the closing rate & Difference between the Initital Recorded Value & Closing Value shall be adjusted in Income Statement, under Foreign Currency Fluctuations.
Initial Recorded Value = Value at the time of sales
On Dec. 20, 2017 - Recorded Value of Sundry Debtors = 135,000 * $1.23 = $1,66,050 (Recorded at Spot Rate)
On Dec. 31, 2017 - Closing Value at Closing Rate = 135,000 * $1.20 = $1,62,000
Since $ appreciated against Ostras, we will receive $4050 ($1,66,050 - $1,62,000) less, this should be charged to Income Statement for 2017. Profit will reduce by $4,050.
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Now we have received the payment on 10th january, at that day spot rate is $1.16 per ostras
Total receipt = 135,000 * $1.16 = $1,56,600
we suppose to receive = $1,62,000 (Closing Balance at 2017 end, as we already adjusted loss)
therefore foreign Exchange Fluctuation Loss = $1,62,000 - $1,56,600 = $5,400.
The Loss of $5,600 shall be charged to Income Statement for 2018, Profit Will reduce by $5,400
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