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. On January 10, the rate of exchange is A$1 = NZ$1.2

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

ANSWER:-

(3) As per para 9 of AASB 121, functional currency is the currency in which primary economic activities are carried out normally. Generally functional currecy is the currency of the country where company operates. For example if company is situated in Australia currency will be AUD. If Company is situated in India currency will be Indian Rupees and so on.