Question

A company in Melbourne sells merchandise to a company in Auckland on 3 November. The sales price is NZ$65 000 and the exchange rate on this date is A$1 = NZ$1.1. Settlement of the invoice is made by the New Zealand company in New Zealand dollars on 10 December when the rate of exchange is A$1 = NZ$1.40.

Required

1. Give the entries in the books of the Australian company on the date of sale and date of settlement, prepared in accordance with the requirements of AASB 121.
2. Now assume that the Australian company’s reporting period ends on 31 December when the exchange rate is A$1 = NZ$1.40, and that the New Zealand company settles its account with the Australian company on 10 January. Show the closing entry as at 31 December and the settlement on 10 January in accordance with the requirements of AASB 121.
3. In your own words describe what you understand as the Functional Currency according to AASB121

Answer 1

a.

03-11     New Zealand Co. A/c                     Dr. 59091

                                To           Sales 59091

(Being sales of Merchadalise)

10-12     Bank                                      A/c         Dr.                          46429

Foreign Exchange Transaction Reserve 12662

                                To           New Zealand Co.                                              59091

(Being amount recognised from New Zealand)

31-12     Foreign Exchange Transaction Reserve A/c           Dr. 12662

                                To           P/L A/c                                           12662

                (Balance in FEF a/c Transferred to P/L)  

b.

03-11     New Zealand Co. A/c                     Dr. 59091

                                To           Sales 59091

(Being sales of Merchadalise)

31-12   

10-01     Bank                      A/c                                         Dr.          46429

Foreign exchange Transaction Reserve 12662

                                To           New Zealand Co.                                              59091