Question

On June 30, Year 7, Apple Company, which prepares monthly financial statements, acquired from Bee Company for 500,000 yen a machine with life of 5 yrs and no residual value. To pay Bee Company, Apple Company borrowed 500,000 yen from Soy Bank (in China) on a 12%, 60 day note. Apple Company acquired a 510,000 yen draft to York Bank (in the U.S.) on August 29, Year 7 to pay the maturity value of the note to Soy Bank. Relevant exchange rates for the yen were as follows:

Buying rate Selling Rate

June 30, Yr 7................$0.0081 $0.0084

July 31, Yr 7.................$0.0080 $0.0082

August 29, Yr 7............$0.0082 $0.0085

REQUIRED: Prepare journal entries (including explanations for Apple Company on June 30, July 31 and August 29, Yr 7 including interest accrual and depreciation of the machine. use 30 day months for July and August interest.

Answer 1

The accounting should be as per IAS 21

Depreciation on machine=(Cost-Salvage Value)/5X12		8333
At the time of purchase currency rate should be recorded at $ 0.0081/Y
Cost of machinery recorded at Y 500000 X 0.0081 = $ 4050
The accounting should be as per IAS 21
Loan should be initially recognized at same amount
Depreciation on machine in $ = 8333 X 0.0081=67.5
Interest accrual for July= $4050 X 12%/12=$40.5
Interest accrual for August= ($4050+$40.5) X 12%/12=$40.9
Interest and repayment on loan as on 31.08.Year7 should be recognized at $0.0082/Y
Loan interest and repayment should in $= 510000 X 0.0082=$4182
Foreign exchange loss on loan = $ 4182-$4050-$40.5-$40.9=$50.6
Journal
Date	Account Title	Dr	Cr
30.06.YEAR7	Machinery	4050
	Bee Company		4050
	Being Machinery purchased
30.06.YEAR7	Bee Company	4050
	Loan		4050
31.07.YEAR7	Profit & Loss A/c	67.5
	Depreciation		67.5
	Being depreciation charged on machinery
31.07.YEAR7	Depreciation	67.5
	Accumulated Depreciation		67.5
	Being depreciation transferred to accumulated depreciation
31.07.YEAR7	Interest	40.5
	Loan		40.5
	Interest accrued on loan
29.08.Year7	Interest	40.9
	Loan		40.9
	Interest accrued on loan
29.08.Year7	Loan	4182
	Bank		4182
	Being loan repaid along with interest
31.08.Year7	Profit & Loss A/c	67.5
	Depreciation		67.5
	Being depreciation charged on machinery
31.08.Year7	Depreciation	67.5
	Accumulated Depreciation		67.5
	Being depreciation transferred to accumulated depreciation
31.08.Year7	Foreign Exchange Loss	50.6
	Loan		50.6
	Exchange loss on loan a/c recognized.
31.08.Year7	Profit & Loss A/c	50.6
	Foreign Exchange loss		50.6
	Being foreign exchange loss transferred to Profit & Loss a/c