Question

Question)

Mikakos Ltd is an Australian company that purchases inventories (PPE) from Shultz AG, which is a German company. The most recent acquisition involved the acquisition of inventories for 150,000 pounds with contract terms including FOB shipping point. Credit dates are:

Date                          Event                                   Exchange Rate

1 May 2020              Inventories Ordered              A$1= 0.55 pounds

11 May 2020            Inventories shipped              A$1= 0.58 pounds

30 June 2020 End of reporting period       A$1= 0.60 pounds

31 July 2020             Payment                           A$1= 0.64 pounds

Required: Prepare the journal entries for Mikakos Ltd to record this transaction.

Answer 1

Dear Student,

No entry is passed at the time order booking. Purchase is recorded on billing date. It is reinstated at accounting year end at the closing exchange rate. Loss or profit is booked. Thereafter at the time of payment, payment will be made at exchage rate on the payment date. Any exchange gain or loss will be booked.

Date	Dr. /Cr.	Account Title	Debit (in A$)	Credit (in A$)
01-05-2020		No entry on inventories ordered
11-05-2020	Dr.	Purchase A/c	2,72,730
	Cr.	Shultz AG		2,72,730
	(Being purchases made for 150,000 pounds convered on exchange rate of A$1 = 0.55 pounds or 1 Pound = A$ 1.8182)
30-06-2020	Dr.	Shultz AG	22,730
	Cr.	Exchange Gain A/c		22,730
	(Being reinstatement done for exchange gain due to change in exchage A$1 = 0.55 pounds to A$1 = 0.60)
31-07-2020	Dr.	Shultz AG	2,50,000
	Cr.	Exchange Loss A/c		15,625
	Cr.	Bank A/c		2,34,375
	(Being payment made at A$1 = 0.64 pounds or 1 pound = A$ 1.5625 and exchange loss booked)