Question

Question 2 (IAS 21) Sugar Limited is a mining company operating across Europe and the Middle East. Sugar’s functional currency is the Euro (€).

On 25th March 2015, the directors came across classified information regarding the discovery of diamonds in Guatemala. Sugar Limited approached the two main banks in Guatemala, Barclays Bank and Standard Bank, for a loan that would fund a start-up mine in the area. The local currency in Guatemala is the Guatemalan Guenzel (G).

Barclays bank offered a larger amount but at a relatively high 12% interest rate whereas after a month of negotiations, Standard bank agreed to drop its rates to 8%, albert on a lower sum. Sugar limited signed a loan agreement with Standard Bank, the terms of which are as follows:

Terms of the standard bank loan ? Loan amount, effective 1 June 2015 G 48 000 000

? Interest rate, capitalised annually on 31 May 8%

? Loan repayments Annually , due on 31 May

? Annual loan repayments to include interest for the preceding 12 months plus a set capital amount of: G 960 000

? Repayment term 50 years

Related exchange rates as follows

Date Exchange Rates Euro 1: Guenzel (G)

01 June 2015 1: 8.0

31 March 2016 1: 6.0

31 May 2016 1: 7.5

31 March 2017 1: 7.8

Average for 1 June 2015 to 31 March 2016 1:7.0

Average for 1 April to 2016 to 31 May 2016 1: 7.2

Average for 1 June 2016 to 31 March 2017 1: 7.2

Required Prepare the necessary journal entries in Sugar Limited’s general journal for its year ended 31 March 2016 and 31 March 2017. (Ignore tax but show all your workings)

Answer 1

Solution
Since, the functional currency of Sugar Limited is Euro, the entire accounting will be in terms of Euro only.
Particulars	Numbers	Denominations
Loan Amount	48,000,000	(in G)
Interest rate	8%	per annum
Annual Installment	960000	G
Term of Loan	50	years
Date of borrowing	1-Jun-15	Date
Date of Book Closure	March 31 (every year)	Date
In terms of questions, Sugar Limited is required to repay annually a sum of G 960,000 together with interest @ of 8% on May 31 every year starting from May 31, 2016
Exchange Rate Information provided by the question:
Date/Period	Exchange rate (G/Euro)
1-Jun-15	8
31-Mar-16	6
31-May-16	7.5
31-Mar-17	7.8
Average for 1 June 2015 to 31 March 2016	7
Average for 1 April to 2016 to 31 May 2016	7.2
Average for 1 June 2016 to 31 March 2017	7.2
Date Particulars Working Note Amount (in Euros) Amount (in Euros) 1-Jun-15 Bank Acount Dr. 1 6000000 Loan from Standard Bank Cr. 6000000 (Being Loan taken from Standard Bank - G48,000,000) 31-Mar-16 Interest Expenes Dr. 2                              457,143 Interest Payable to Standard Bank Cr.                         457,143 (Being Interest Liability accrued for March 2016) 31-Mar-16 Loss on Foreign Exchange fluctuation Dr. 3                           2,000,000 Loan from Standard Bank Cr.                      2,000,000 (Restatement of Loan liability as On March 31, 2016) 31-Mar-16 Loss on Foreign Exchange fluctuation Dr. 3                                76,190 Interest Payable to Standard Bank Cr.                           76,190 (Restatement of Interest liability as On March 31, 2016) 31-May-16 Interest Expenses Dr. 4                                85,333 Interest Payable to Standard Bank Cr.                           85,333 (Interest expenses for 2 months @ 8% on G 48000000) - booked directly @ G 7.5/Euro instead of G 7.2/Euro to avoid repetitiive restatements) 31-May-16 Interest Payable to Standard Bank Dr. 5                              106,667 Gain on Foreign Exchange fluctuation Cr.                         106,667 (Reversal of loss on forex fluctuation booked on March 31, 2016) 31-May-16 Interest Payable to Standard Bank Dr.                              512,000 Bank Account Cr.                         512,000 (Being Interest Paid) 31-May-16 Loan from Standard Bank Dr. 6                              160,000 Bank Account Cr.                         128,000 Gain on Foreign Exchange fluctuation Cr.                           32,000 (Payment of Loan installment) 31-Mar-17 Interest Expenses Dr. 7                              435,556 Interest Payable to Standard Bank Cr.                         435,556 (Interest Expenses on Outstanding Loan as on March 31, 2017 for 10 months) 31-Mar-17 Interest Payable to Standard Bank Dr. 8                           33,504.27 Gain on Foreign Exchange fluctuation Cr.                      33,504.27 (Restatement Of Interest Liabilities) 31-Mar-17 Loan from Standard Bank Dr. 9                           1,809,231 Gain on Foreign Exchange fluctuation Cr.                      1,809,231 (Restatement of Loan amount) Further, an yearly entry Of transferring P&L items to Statement Of Profit and loss is also required to be passed
1 Calculation of loan amount in Euros As on June 1, 2015 Euro 1 = G 8 Euro 6,000,000 = G 48,000,000 2 Calculation of Interest as on March 31, 2016 Interest for 10 months @ of 8% on G 48,000,000 Interest = G 3,200,000 Interest in Euros: Euro 1 = G 7 average rate of exchange G 7 per Euro is used as it is a P&L item converted at average rate of exchange Euro 457,143 = G 3,200,000 3 Restatement of Loan amount And interest Liability as On March 31, 2016 Restatement of Loan Euro 1 = G 6 (as on March 31, 2016) Euro 8,000,000 = G 48,000,000 Resulting foreign exchange Loss = Euro 8,000,000 less Euro 6,000,000 = Euro 2,000,000 Restatement of Interest Liability Euro 1 = G 6 Euro 533,333 = G 3,200,000 Resulting foreign exchange Loss = Euro 457,143 less Euro 533,333 = Euro 76,190 4 Interest expenses for two months Interest In G = 48000000*8%*2/12 =            640,000 Interest in Euros 640000/7.5 (as on May 31, 2016: Euro 1 = G 7.5) 85333.33333 5 Restatement of Interest liability Of 10 months Denominated @ G6/Euro = 533333.3 Should be denominated @ G7.5/Euro 426666.7 Accordingly, foreign exchange gain = Euro 533,333 less Euro 426,667 Euro 106,667 6 Repayment of first Installment Installment Amount =            960,000 (in G) Installment Amount in Euros            128,000 (in Euros) Installemt amount already stated In books @ G6/Euro = Euro 160000 Installment amount to appear In books @ G7.5/Euro = Euro 128000 Accordingly, 160000 Foreign exchange gain of G1.5/Euro It Implies a total gain of 32000 Euros 7 Interest expenses as On March 31, 2017 Loan amount outstanding =        47,040,000 (in G) Interset Rate = 8% Interest period = 10 (in Months) Interest Amount         3,136,000 (in G) Interest amount (in Euros) =            435,556 (Euro 1 = G 7.2) 8 Restatement of Interest as on March 31, 2017 Interest amount (in Euros) =        402,051.28 (Euro 1 = G 7.8) Foreign Exchange fluctuation =         33,504.27 Euros 9 Restatement of Loan liability as On March 31, 2017 Outstanding Loan =        47,040,000 (in G) Stated In Books @ G6/Euro         7,840,000 Euros To appear In books @ G7.8/Euro =         6,030,769 Euros Forex Gain         1,809,231 Euros