Question

On 12th April 2018 Pit Bull Ltd enters into a contract with a New Zealand company, Secure Ltd, whereby Secure Ltd will build a printing machine for Pit Bull Ltd.

The machine has been priced at NZ$850000. The printing machine is completed on 14th June 2019 and shipped FOB Wellington on that date.

The debt remains unpaid at 30th June 2019, which is the end of Pit Bulls Ltd’s financial reporting period.

The exchange rates at the relevant dates are as follows:

12Th April 2018 A$1.00 = NZ$1.20

30th June 2018 A$1.00 = NZ$1.15

14th June 2019 A$1.00 = NZ$1.30

30th June 2019 A$1.00 = NZ$1.25 Required:

Complete the full journal entries for Pit Bull Ltd for the years ending 30th June 2018 and 30th June 2019 to reflect the above events.

(Marks: 20)

Answer 1

As the machinery is under construction,the item will be considered as a qualifying asset under AASB 123 for the period from 12th april 2018 to 14Th June 2019. Therefore the exchange rate movements to 14th June 2019 will be incorporated to the cost of the asset. Any subsequent changes will be taken to the profit and loss account.

Journal Entries for 2018

Date	Account title and explanation	Debit	Credit
12 April,2018	Machinery	$708333
	Accounts Payable		$708333
	($850000/1.20)
	(to recognize the cost of asset
30 June,2018	Machinery	$30787
	Accounts Payable		$30797
	(($850000/1.15)-$708333)
	to recognize cost of asset as at 30 june 2018

Entries for the year 2019

Date	Account Title and Explanation	Debit	Credit
14 June,2019	Accounts Payable	$85284
	Machinery		$85284
	($850000/1.3)-($850000/1.15)
	(to recognize the change in Australian Dollar equivalent to the foreign currency monetary item,during the period in which item is a qualifying asset)
30 June 2019	Foreign Exchange loss	$26154
	Accounts payable		$26154
	($850000/1.25)-($850000/1.30)