Question

1. On December 10, 2020, Astor, a US based corporation purchased inventory on credit from a vendor located in Qatar for 300,000 Qatar rial. Astor paid the Qatar vendor the 300,000 rial on February 10, 2021. The exchange rate between Qatar rial and US dollar on each of the following dates were:
                                                               Spot   

            December 10, 2020                 $.275  

            December 31, 2020                 $.268  

            February 10, 2021                   $.273

Prepare all necessary journal entries.

Answer 1

Solution -

Since we need to pass journal entries in books of buyer, so Reporting currency would be that of buyer i.e. U S dollar. And thats why we need to convert qatar rial in us dollar for the purpose of passing journal entries.

Also december 31,2020 has been assumed as closing date or year end date of financial year.

On december 10, 2020 :-

buyer's liability in us dollars on the date of purchase of inventory = 300,000 qatar rial * $ .275 = $ 82,500

So journal entry is :-

Date Particulars Debit Credit

10 december 2020 Inventory $ 82,500

Accounts payable $ 82,500

On december 31, 2020 :-

on 31 dec, we need to pass journal entry because it is closing date and we need to recognise unrealised loss or gain since there may be some fluctuation in foreign currency rate.

on 31 december 2020 , 300,000 qatar rial in dollars = 300,000 * $ .268 = $ 80,400

So there is gain to buyer due to fluctuation in foreign currency rate as now buyer's liability would stand at  $ 80,400 instead of $ 82,500. The amount of such Gain is = $ 82500 - $ 80400 = $ 2,100

Journal entry is as follows :-

Date Particulars Debit Credit

31 december 2020 Accounts payable $ 2,100

Foreign currency translation gain $ 2,100

Due to above said gain, buyer's liability to pay to seller would get reduced and thats why accounts payable has been debited.

On february 10, 2021 :-

On settlement date i.e. 10 feb 2021, 300,000 qatar rial in dollars = 300,000 * $ .273 = $ 81,900

The amount of $ 81,900 is more than 80,400 so this implies liability of buyer has increased to $ 81,900 in comparison to $ 80,400 which further implies that it is loss for buyer on because of foreign exchange rate fluctuation.This loss = $ 81,900 - $ 80,400 = $ 1,500.

On 10 feb 2021, payment is made and loss due change in foreign currency rate is recognised.

Journal is as follows :-

Date Particulars Debit Credit

10 february 2021 Accounts payable $ 80,400

Foreign currency translation loss $ 1,500

Cash $ 81,900