Question

Question 3 - Week 10 On 1 March 2020 Holmes Ltd enters into a binding agreement with a New Zealand company, which requires the New Zealand Company to construct an item of machinery for Holmes Ltd. The cost of the machinery is NZ$750,000. The machinery is completed on 1 June 2021 and shipped FOB Auckland on that date. The debt is unpaid at 30 June 2020, which is also Holmes Ltd’s reporting date. The exchange rates at the relevant dates are: 1 March 2020 A$1.00 = NZ$1.20 30 June 2020 A$1.00 = NZ$1.30 1 June 2021 A$1.00 = NZ$1.25

Required: a) Determine the amount in AUD, as at: • 1 March 2020; and • 30 June 2020. b) Prepare the journal entries for the above dates, up to 1 June 2021,showing the amount of exchange gain or loss .

Answer 1

solution

A. Computation of amount in AUD

No entry will be made at 1 march 2020 since by this date machinary not yet been delivered by the newzealand company

asset and liability are to be recognised as per exchange rate since at 1/06/2020 since machinary are completed and shipped by this date

So. cost of machinary in NZ = 750000
Exchange rate = A$1.00 = NZ$ = 1.30
Hence amount in AUD = (750000/1.30) = $576923.08

At the date of 30/06/2020 liability is revalued and the different between carrying amount of liability and revalued amount will be recognised in profit and loss a/c

Amount in = NZ 750000
Exchange rate = A$1.00 - NZ$1.25
Amount in AUD = $600000
(NZ$750000 / A$1.25)
Carrying amount = $$576923.08
Loss on foriegn exchange = $23076.92

.B. Journal entries

Date	particulars	amount in $ Dr.	amount in $ Cr.
1.06.2020	Machinary a/c dr	576923.08
	To accounts payble		576923.08

Date	particulars	amount in $ Dr.	amount in $ Cr.
30.06.2020	Foreign exchange loss	23076.92
	To Accounts payble		23076.92
	(600000-576923.08)

.