Question

In: Accounting

Problem 6 Chow Co. purchased rice from China for 100,000 renminbi (r) on Nov. 1, 2013....

Problem 6

Chow Co. purchased rice from China for 100,000 renminbi (r) on Nov. 1, 2013. Payment is due on Jan. 30, 2014. The rates were as follows:

Date Spot Rate (DER)

Nov. 1, 2013 $0.120

Dec. 31, 2013 $0.124

Jan. 30, 2014 $0.127

Record all journal entries on the transaction, balance sheet and settlement dates.

Please Show all computations.

Expert Solution

Journal Entries in Books of Chow Co.

1. At time of Purchase

Since the purchase was made on Nov 1, 2013, applicable exchange rate for recording purpose will be $0.120. Hence, entry would be as under

Purchase A/c Debit $12000

Supplier A/c Credit $12000

(10000*$0.120)

2. At Balance sheet date

As per standards, all monetary items are translated to the exchange rate prevailing on balance sheet date and resultant exchange gain/loss to be recorded. Since, the prevailing exchange rate on Dec 31, 2013 was $0.124; the resultant figure will be notional loss of foreign exchange loss. Hence, entry will be:

Foreign Exchange Loss A/c Debit $400

Supplier A/c Credit $400

(100000*($0.124-$0.120))

3. At Settlement date

At the settlement date i.e. Jan 30, 2014, the exchange rate further rose to $0.127 and the payment is settled with such rate with the supplier and total of $12700 will be paid. Hence the entry would be as under:

Supplier A/c Debit $12400

Foreign Exchange Loss A/c Debit $300 (100000*($0.127-$0.124))

Bank A/c Credit $12700 (100000*$0.127)

Note: Please feel free to ask any clarity or any query on any point.

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