Question

1. A U.S. company sells to customers in Canada and buys from suppliers in Singapore. At December 31, 2019, the company’s year-end, the following items are reported on its balance sheet:

Accounts receivable (C$2,500,000)..…………………… $2,125,000

Accounts payable(S$1,400,000)………………………….. 1,061,200

On January 22, 2020, when the spot rate is $0.845/C$, the company collects C$1,000,000 from customers. It collects the remaining C$1,500,000 on February 16, 2020, when the spot rate is $0.856. On February 23, 2020, when the spot rate is $0.762, the company pays suppliers S$800,000. On March 6, 2020, when the spot rate is $0.768, the company pays suppliers the remaining S$600,000. Using the attached T-account template, record the 12/31/19 balances (labeled “BAL”) and then prepare the necessary entries to recognize the above transactions.

Answer 1

INFORMATION PROVIDED IN QUESTION

Accounts Recievable as on 31.12.2019 in C$ 2500,000 = $ 2125,000

Accounts Payable as on 31.12.2019 in S$ 1400,000 = $ 1061,200

During the year 2020, both accounts are settled at different dates and exchange rates. Show necessary entries recording the transactions in 2020.

ANSWER:

a. Accounts Recievable:

Opening exchange rate = $ 2,125,000 / C$ 2,500,000 = $ 0.85 / C$

Collection on Jan 22,2020 C$ 1,000,000 @ $ 0.845 / C$. Hence, Loss = [(0.85-0.845) x 1,000,000] = ($ 5,000)

Collection on Feb 16,2020 C$ 1,500,000 @ $ 0.856 / C$. Hence, Profit = [(0.856-0.85) x 1,500,000] = $ 9,000

b. Accounts Payable:

Opening exchange rate = $ 1,061,200 / S$ 1,400,000 = $ 0.758 / S$

Payment on Feb 23,2020 S$ 800,000 @ $ 0.762 / S$. Hence, Loss = [(0.762-0.758) x 800,000] = $ 3,200

Payment on Mar 6,2020 S$ 600,000 @ $ 0.768 / S$. Hence, Loss = [(0.768-0.758) x 600,000] = $ 6,000

ENTRIES to recognise the transactions:

DATE 2020	PARTICULARS	AMOUNT $	AMOUNT $
JAN 22	BANK A/C (1000,000 x 0.845) DR	845,000
	EXCHANGE LOSS DR	5,000
	TO ACCOUNTS RECIEVABLE (1000,000 x 0.85)		850,000
FEB 16	BANK A/C (1500,000 x 0.856) DR	1,284,000
	TO ACCOUNTS RECIEVABLE (1500,000 x 0.85)		1,275,000
	TO EXCHANGE GAIN		9,000
FEB 23	ACCOUNTS PAYABLE A/C (800,000 x 0.758) DR	606,400
	EXCHANGE LOSS A/C DR	3,200
	TO BANK A/C (800,000 x 0.762)		609,600
MAR 6	ACCOUNTS PAYABLE A/C (600,000 x 0.758) DR	454,800
	EXCHANGE LOSS A/C DR	6,000
	TO BANK A/C ( 600,000 x 0.768)		460,800