Question

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

a) Amount in AUD as at 1^st March 2020: NZ$ 750,000 / NZ$ 1.20 = AUD 625,000

Amount in AUD as at 30^th June 2020: NZ$ 750,000 / NZ$ 1.30 = AUD 576,923.08

b) Journal entries up to 1^st June 2021, showing the amount of exchange gain or loss:

1^st Mar 2020 Machinery WIP A/c Dr                           AUD 625,000

                        To New Zealand Company A/c                                              AUD 625,000

(being non-current machinery recorded under WIP at AUD 625,000 (i.e. NZ$ 750,000 / NZ$ 1.20)

30^th Jun 2020 New Zealand Company Dr                  AUD 48,076.92

                        To Unrealized Gain A/c                                                          AUD 48,076.92

(being unrealized gain recorded on New Zealand Company A/c at reporting date AUD 48,076.92 (i.e. 625,000-576,923.08)

30^th Jun 2021 Machinery A/c Dr                                 AUD 625,000

                        To Machinery WIP                                                                  AUD 625,000

(being machinery recorded after completion)

30^th Jun 2021 Realized FX Loss A/c Dr              AUD 23,076.92          

                        To New Zealand Company A/c AUD 23,076.92                                   

(being exchange realized loss recorded AUD 23,076.92 ((NZ$ 750,000/NZ$ 1.25) – AUD 576,923.08)

30^th Jun 2021 New Zealand Company A/c Dr           AUD 600,000

                        To Bank A/c                                                                            AUD 600,000

(being amount paid to New Zealand Company after completion of machinery)

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