Question

PROBLEM 5: FOREIGN CURRENCY (20 MARKS TOTAL)

Use the information here for answering questions 1 to 3 on this page.

On 1 April 2020, Winton Ltd, an Australian entity, places an order for GBP £200,000 of inventory with Austen plc, a UK supplier. On the same date, Winton Ltd enters into a forward exchange contract with the bank to buy GBP £200,000, to be settled on 31 July 2020. The goods are shipped FOB London on 1 May 2020 and are paid for on 31 July 2020. Winton Ltd has a reporting date of 30 June.

The following exchange rates are applicable.

       Spot rate            Forward rate for 31/7/20
1 April 2020          A$1 = 0.63 GBP               A$1 = 0.61 GBP
1 May 2020          A$1 = 0.67 GBP               A$1 = 0.64 GBP
30 June 2020       A$1 = 0.62 GBP               A$1 = 0.60 GBP
31 July 2020         A$1 = 0.59 GBP               A$1 = 0.59 GBP

Q1: Complete the table showing the movement and the change in value of the hedged item

Type text or numbers as appropriate in the following table. Enter numbers as numerals only. Use a negative symbol '-' in front of your number where appropriate to indicate a loss. Enter a 0 if you do not need to enter data in that field.

Q2: Complete the table showing the movement and the change in value of the hedging instrument

Type text or numbers as appropriate in the following table. Enter numbers as numerals only. Use a negative symbol '-' in front of your number where appropriate to indicate a loss or a liability. Enter a 0 if you do not need to enter data in that field.

Q3: Provide the journal entries for Winton Ltd to reflect the above transactions

Answer 1

Date of Transactions	Transaction Details	Spot Rate	Forward Rate
01.04.2020	Enter into Contract and Places Order	No Entry	No Entry
01.04.2020	Enter into Forward Contract also for 4 months Settlement	No Entry	No Entry
01.05.2020	Goods Shipped	A $ 1 = 0.67 GBP
30.06.2020	Reporting Date	A $ 1 = 0.62 GBP
Q 1	Hedge Item: Here Hedge Item is Inventory
	Here, NO recording at 01.04.2020 because risk and Title nothing has transferred , simply entering into contract will never be regarded as purchase or sale.
	Domestic Currency	Ausralian Dollar
	Foreign Currency	Great Britain Pound GBP
	Recording at 01.05.20202	1 / 0.67 A$ X 200000 GBP	298507 A $
	On Reporting Date 30. 06.2020	1/ 0.62 A $ X 200000 GBP	322581 A $
	Loss on Hedge Item	322581 A $ - 298507 A $	24074 A $
	Actual Settlement	1/0.59 A $ X 200000	338983 A $
	Loss on Hedge Item	338983 A $ - 322581 A $	16402 A $
	Total Loss Booked On Settlement		40476
Q 2	Hedge Intrument : Forward Contract
	Domestic Currency	Ausralian Dollar
	Foreign Currency	Great Britain Pound GBP
	Contract entered on 01.04.2020	Forward Rate = 0.61 GBP
	will Purchase GBP at 0.61 GBP against 1 A $
	Hence , Cost	1/0.61 A $ X 200000 GBP	327869 A $
	On Reporting Date 30. 06.2020	1/ 0.62 A $ X 200000 GBP	322581 A $
	Loss   on Hedge Intrument	327869 A $ - 322581 A $	5288 A $
	Profit on Settlement	(1/ 0.59 A $ - 1/0.61 A $ ) X 200000 GBP	11114 A $
Q 3	Journal Entry	All values in A $
Date	Accounting Description	Dr.	Cr.
01.04.2020	No entry for Enterring into PO contract as well as Forward Contract
01.05.2020	Purchases- Inventory A/c Dr.	298507 A $
	To Creditor ( GBP Settlement)		298507 A $
	( Being Purchases recorded)
30.06.2020	Loss on Hedge Item ( p and L A/c)	24074 A $
	To Creditor ( GBP Settlement)		24074 A $
	( Being Monetray items as per IAS 21)
30.06.2020	Loss on Hedge Instrument	5288 A $
	To Forward Contract A/c		5288 A $
	( Being Loss on Hedge Recorded )
31.07.2020	Loss on Hedge Item ( p and L A/c)	16402 A $
	To Creditor ( GBP Settlement)		16402 A $
	( Being Updated as per prevailing Rate)
31.07.2020	Creditor ( GBP Settlement)	338983 A $
	To Cash A/c		338983 A $
	( BEIng Amount Settled )
31.07.2020	Forward Contract A/c Dr.	11114 A $
	To Profit n Forward Contract		11114 A $
	( Being Profit on Forward Contract)