Download Prepare accounting entries relating to foreign currency transactions

Prepare accounting entries relating to
foreign currency transactions
Contents
Key to resources
2
Introduction
3
Accounting standard for foreign currency
3
Import and export of goods
3
Receiving a loan and repayment
8
Import of non-current assets
10
Hedging
12
Translation of the financial statements of foreign operations
13
Summary
13
Feedback to questions 12.7, 12.8 and 12.11
14
This learning guide is based on the following resource:
Textbook
Woodford WL and Mills AD (2005) Company Accounting, LexisNexis Butterworths,
Chatswood, NSW
Prepare accounting entries relating to foreign currency transactions
© NSW DET 2006, 2006/053/12/2006 LRR 4699
1
Key to resources
Key
Resource
1
Chapter 12, Overview, p 442
2
Chapter 12, table indicating effect of movements in exchange rates on
amounts receivable or payable in a foreign currency, p 443
3
Chapter 12, self-assessment question 12A, p 443
4
Chapter 12:
5

example 1, p 444

example 2, p 445
Chapter 12, questions 12.1 and 12.2, p 446
For feedback to these questions, go back to where you were in this guide.
6
Chapter 12, Unrealised exchange gains/losses, p 446
7
Chapter 12, example 3, p 448
8
Chapter 12, self-assessment question 12B (example is for periodic inventory),
p 447
9
Chapter 12, question 12.7, p 449
Feedback is provided at the end of this learning guide.
10
Chapter 12, question no 12.8, p 449
Feedback is provided at the end of this learning guide.
11
Chapter 12:

table indicating effect of movements in exchange rates on amounts
receivable or payable in a foreign currency, p 443

example 4 (realised exchange loss), p 450
12
Chapter 12, example 5 (unrealised exchange gain and realised exchange loss),
p 451
13
Chapter 12, self-assessment 12C, p 453
14
Chapter 12, question 12.11, p 452
Feedback is provided at the end of this learning guide.
15
Chapter 12, example 6, p 453
16
Chapter 12, question 12.13, p 454
For feedback, return to where you were in this learning guide.
17
Chapter 12, example 8 (purchase of a non-current asset), p 458
18
Chapter 12, question 12.19, p 458
For feedback, return to where you were in this learning guide.
19
2
Chapter 12, Hedging, p 442
Prepare accounting entries relating to foreign currency transactions
© NSW DET 2006, 2006/053/12/2006 LRR 4699
Introduction
In this guide the focus is on foreign currency transactions, as stipulated
under AASB 121.
Accounting standard for foreign
currency
Go to Resource 1
Note: The Key to resources is provided at the front of this learning guide.
The applicable accounting standard for foreign currency transactions is
AASB 121. Areas of study under the guidelines of this standard are:

import of goods

export of trading goods

loan raising and repayment

discussion of hedge transactions

issues associated with the translation of financial statements.
Note the last two paragraphs in the Overview.
Exchange rates fluctuate on a daily basis and as a result exchange
gains/losses will need to be recorded in the books of account.
Import and export of goods
Now go to Resource 2
Carefully study the effect of movements of foreign currency against the
Australian dollar.
Prepare accounting entries relating to foreign currency transactions
© NSW DET 2006, 2006/053/12/2006 LRR 4699
3
Movements under the heading of ‘Amounts receivable’ refer to sales of
goods on credit. Movement under the heading of ‘Amounts payable’ refer to
purchases on credit.
Now go to Resource 3
This will help you to check your understanding.
Import of trading goods: realised exchange gains or
losses
Now go to Resource 4
Example 1 (where JK Ltd buys goods for resale from BC Ltd) is for periodic
inventory and therefore the debit is to purchases account.
If the perpetual inventory system is used, the debit would be to inventory
account. Note especially that the recording of the purchase and the payment
all occurred within the financial year. This gives rise to a realised exchange
gain (in this case)—that is, the Australian dollars needed to settle the
outstanding account in full was less than the original purchase price.
Compare example 1 with example 2.
In example 2, the recording of the purchase and the payment all occurred
within the same financial year but in this case the Australian dollars needed
to settle the outstanding account in full was more than the original purchase
price. This results in a realised exchange loss.
At the end of the financial year, realised exchange gains and losses are
transferred to the profit and loss account.
Now go to Resource 5
This will help you to check your understanding.
Feedback to questions12.1 and 12.2 from the textbook are provided below.
4
Prepare accounting entries relating to foreign currency transactions
© NSW DET 2006, 2006/053/12/2006 LRR 4699
Feedback to questions
Question 12.1
TX Ltd
General journal
Date
Details
Debit
20x0
Sep 15
$
Purchases
Credit
$
50 000.00
Accounts payable – AB Company Ltd
50 000.00
Recording purchase of $NZ50 000 @ $A1.00 = $NZ1.00
Nov 1
Accounts payable – AB Company Ltd
4 545.46
Realised exchange gain
4 545.46
Recording exchange gain on payment date when
$A1.00 = $NZ1.10 (50 000 – 45 454.54)
Accounts payable – AB Company Ltd
45 454.54
Bank
45 454.54
Payment to creditor
20x1
Jun 30
Realised exchange gain
4 545.46
Profit and loss
4 545.46
Balance transferred
Solution (above) is from Company Accounting, Woodford & Mills,
LexisNexis Butterworths, 2005. Reproduced with permission.
Prepare accounting entries relating to foreign currency transactions
© NSW DET 2006, 2006/053/12/2006 LRR 4699
5
Question 12.2
GL Ltd
General journal
Date
Details
Debit
20x2
Feb 1
$
Purchases
Credit
$
60 000.00
Accounts payable – RN Ltd
60 000.00
Recording purchase of $F60 000 @ $A1.00 = $F1.00
Jun 1
Realised exchange loss
606.06
Accounts payable – RN Ltd
606.06
Recording exchange loss on payment date when
$A1.00 = F0.99 (60 606.06 – 60 000)
Accounts payable – RN Ltd
60 606.06
Bank
60 606.06
Payment to creditor
Jun 30
Profit and loss
606.06
Realised exchange loss
606.06
Balance transferred
Solution (above) is from Company Accounting, Woodford & Mills,
LexisNexis Butterworths, 2005. Reproduced with permission.
Import of trading goods: unrealised exchange gains or
losses
Now go to Resource 6
If the outstanding amount owing to the accounts payable has not been paid
by balance date, it is recalculated with the exchange rate applicable at
balance date. Any difference between the exchange rate applicable at the
date of purchase and the exchange rate applicable at balance date will be an
unrealised gain or loss.
6
Prepare accounting entries relating to foreign currency transactions
© NSW DET 2006, 2006/053/12/2006 LRR 4699
Unrealised exchange gains or losses are also transferred to profit and loss
account.
Now go to Resource 7
Note that Example 3 is for periodic inventory.
For perpetual inventory, a further journal entry would be required for the
cost of goods sold. This entry is not affected by foreign currency
fluctuations and is not shown.
Now go to Resource 8
This will help you to check your understanding.
Now go to Resource 9
Feedback to question 12.7 is provided at the end of this guide.
Now go to Resource 10
Export of goods: realised exchange gains or losses
Go to Resource 11
Note that example 4 shows a realised exchange loss.
The sale and the receipt of the money for the outstanding account all
occurred within the financial year. The Australian dollar gained strength
against the foreign currency and there will be fewer Australian dollars
Prepare accounting entries relating to foreign currency transactions
© NSW DET 2006, 2006/053/12/2006 LRR 4699
7
received to settle the balance owing. Realised exchange gains or losses are
transferred to profit and loss.
Export of goods: unrealised exchange gains or losses
If the amount owing by an accounts receivable has not been received by
balance date then the amount owing is recalculated using the exchange rate
applicable at balance date. Any gain or loss as a result will be unrealised.
Unrealised exchange gains or losses are transferred to profit and loss at
balance date.
Go to Resource 12
Go to Resource 13
Test your understanding to date by answering self-assessment question 12C.
Go to Resource 14
Note: Feedback to question 12.11 is provided at the end of this learning
guide.
Receiving a loan and repayment
Now go to Resource 15
Note that the loan was received and repaid within the same financial year.
Therefore the exchange difference (a loss in this case) was realised.
8
Prepare accounting entries relating to foreign currency transactions
© NSW DET 2006, 2006/053/12/2006 LRR 4699
Note also the need to calculate the interest paid on the loan converted to
Australian dollars and to transfer both the realised exchange difference and
the interest to profit and loss.
Now go to Resource 16
This will help you to check your understanding.
Feedback to question 12.13
General journal
Date
Details
Debit
$
20x8
Jul 1
Credit
Bank
$
694 444
Loan from YK Ltd
694 444
Recording receipt of loan for $US500 000 when
$A1 = $US0.72 (500 000  0.72)
20x9
Jun 30
Interest expense
65 217
Bank
65 217
Recording interest payment for year
(9/100 × 500 000 = 45 000  0.69)
Realised exchange loss
30 194
Loan from YK Ltd
30 194
Recording exchange loss where $A1 = $US0.69
(724 638 – 694 444)
Loan from YK Ltd
724 638
Bank
724 638
Recording repayment of $US500 000 loan when $A1 = $US0.69
Profit and loss
95 411
Interest expense
65 217
Realised exchange loss
30 194
Balance transferred
Solution (above) is from Company Accounting, Woodford & Mills,
LexisNexis Butterworths, 2005. Reproduced with permission.
Prepare accounting entries relating to foreign currency transactions
© NSW DET 2006, 2006/053/12/2006 LRR 4699
9
Import of non-current assets
Now go to Resource 17
You will have noted in Example 8 that the process for the purchase of a noncurrent asset is similar to the purchase of trading goods.
The exception is if the asset has to be constructed overseas and is deemed to
be a qualifying asset. Exchange rate differences will form part of the cost of
the asset up until the time its construction is complete even though the
amount owing remains unpaid. After construction is complete, exchange
rate differences are written off to profit and loss as for the import of goods.
Note: The accounting entries for a qualifying asset are beyond our scope.
Now go to Resource 18
This will help you to check your understanding.
Feedback to the textbook question follows.
10
Prepare accounting entries relating to foreign currency transactions
© NSW DET 2006, 2006/053/12/2006 LRR 4699
Feedback to question 12.19
(a)
DD Ltd
General journal
Date
Details
Debit
20x5
Aug 15
$
Purchases
Credit
$
82 819.38
Accounts payable – Interpel Corporation
82 819.38
Recording purchase of $S94 000 @ $A1.00 = $S1.1350
Dec 15
Realised exchange loss
6 237.94
Accounts payable – Interpel Corporation
6 237.94
Recording realised exchange loss at payment date when
$A1.00 = $S1.0555
Accounts payable – Interpel Corporation
89 057.32
Bank
89 057.32
Payment to creditor
20x6
Jun 30
Profit and loss
Realised exchange loss
6 237.94
6 237.94
Balance transferred
Prepare accounting entries relating to foreign currency transactions
© NSW DET 2006, 2006/053/12/2006 LRR 4699
11
(b)
Date
Details
20x5
Aug 15
Equipment
Debit
Credit
$
$
82 819.38
Accounts payable – Interpel Corporation
82 819.38
Recording non-current asset purchase of $S94 000 @ $A1.00 =
$S1.1350
Dec 15
Realised exchange loss
6 237.94
Accounts payable – Interpel Corporation
6 237.94
Recording exchange loss on payment date when
$A1.00 = $1.0555
Accounts payable – Interpel Corporation
89 057.32
Bank
89 057.32
Payment to creditor
20x6
Jun 30
Profit and loss
6 237.94
Realised exchange loss
6 237.94
Balance transferred
Solution (above) is from Company Accounting, Woodford & Mills,
LexisNexis Butterworths, 2005. Reproduced with permission.
Hedging
Now go to Resource 19
Note that the operative standard for hedging is AASB 139. (For our
purposes, the study of hedging is limited to the material in the textbook.)
12
Prepare accounting entries relating to foreign currency transactions
© NSW DET 2006, 2006/053/12/2006 LRR 4699
Translation of the financial statements
of foreign operations
If a company has a foreign operation, the financial statements of that
operation need to be changed from the foreign currency to Australian
dollars. This process is known as ‘translating’.
Paragraph 39 of AASB 121 generally covers the process. Here are the main
principles:

Assets and liabilities are translated at the closing exchange rate at the
date of the balance sheet.

Income and expenses are translated at exchange rates at the date of the
transaction.

Resulting exchange differences from the above are recognised as a
separate component in equity, eg foreign currency translation reserve,
and not transferred to profit and loss.
You are not required to translate financial statements as part of your studies
and study is limited to the above material.
Summary
In this learning guide on the preparation of foreign currency transactions,
our coverage included the accounting standard that governs foreign currency
transactions (AASB121) and the guidelines under this standard relating to
the import and export of goods, loans and repayments as well as the process
of translating.
Prepare accounting entries relating to foreign currency transactions
© NSW DET 2006, 2006/053/12/2006 LRR 4699
13
Feedback to questions 12.7, 12.8 and
12.11
The following solutions are from Company Accounting, Woodford & Mills,
LexisNexis Butterworths, 2005. Reproduced with permission.
Question 12.7 feedback
EW Ltd
Worksheet – Amounts ‘owing’ on relevant dates:
Krone
$A
1 April 20x5
1 200 000
250 548.07
30 April 20x5
1 200 000
248 678.89
1 June 20x5
1 200 000
250 783.69
(a)
General journal
Date
Details
Debit
20x5
Apr 1
$
Purchases
Credit
$
250 548.07
Accounts payable – EN Corporation
250 548.07
Recording purchase of Krone
1 200 000 @ $A1.00 = Krone 4.7895
Apr 30
Accounts payable – EN Corporation
1 869.18
Unrealised exchange gain
1 869.18
Recording unrealised exchange gain at balance date @ $A1.00 =
Krone 4.8255 (250 548.07 – 248 678.89)
Unrealised exchange gain
1 869.18
Profit and loss
1 869.18
Balance transferred
Jun 1
Realised exchange loss
2 104.80
Accounts payable – EN Corporation
2 104.80
Recording realised exchange loss at payment date when $A1.00 =
Krone 4.7850 (250 783.69 – 248 678.89)
Accounts payable – EN Corporation
Bank
14
250 783.69
250 783.69
Prepare accounting entries relating to foreign currency transactions
© NSW DET 2006, 2006/053/12/2006 LRR 4699
Payment to creditor
20x6
Apr 30
Profit and loss
2 104.80
Realised exchange loss
2 104.80
Balance transferred
(b)
Unrealised exchange gain
20x5
Apr 30
20x5
Profit and loss
1 869.18
Apr 30
Accounts payable –
EN Corporation
1 869.18
Realised exchange loss
20x5
Jun 1
20x6
Accounts payable –
EN Corporation
2 104.80
Apr 30
Profit and loss
2 104.80
Accounts payable – EN Corporation
20x5
Apr 30
20x5
Unrealised
exchange gain
Balance c/d
1 869.18
Apr 1
Purchases
250 548.07
248 678.89
250 548.07
Jun 1
Bank
250 783.69
250 548.07
May 1
Balance b/d
248 678.89
Jun 1
Realised
exchange loss
250 783.69
2 104.80
250 783.69
Question 12.8 feedback
Worksheet – amounts ‘owing’ on relevant dates:
$US
$A
15 August 20x4
15 000
20 833
31 December 20x4
15 000
20 548
Prepare accounting entries relating to foreign currency transactions
© NSW DET 2006, 2006/053/12/2006 LRR 4699
15
15 January 20x5
16
15 000
21 429
Prepare accounting entries relating to foreign currency transactions
© NSW DET 2006, 2006/053/12/2006 LRR 4699
General journal
Date
Details
Debit
20x4
Aug 15
$
Purchases
Credit
$
20 833
Accounts payable – EB Ltd
20 833
Recording purchase of $US15 000 when $A1 =
$US0.72
Dec 31
Accounts payable – EB Ltd
285
Unrealised exchange gain
285
Recording unrealised exchange gain at balance
date when $A1 = $US0.73 (20 833 – 20 548)
Unrealised exchange gain
285
Profit and loss
285
Balance transferred
20X5
Jan 15
Realised exchange loss
881
Accounts payable – EB Ltd
881
Recording realised exchange loss where $A1 =
$US0.73 (21 429 – 20 548)
Accounts payable – EB Ltd
21 429
Bank
21 429
Payment to creditor (15 000  0.70)
Dec 31
Profit and loss
Realised exchange loss
881
881
Balance transferred
Prepare accounting entries relating to foreign currency transactions
© NSW DET 2006, 2006/053/12/2006 LRR 4699
17
Question 12.11 feedback
Thear Ltd
General journal
Date
Details
Debit
20x6
May 1
$
Accounts receivable – Islander Ltd
Credit
$
400 000.00
Sales
400 000.00
Recording sales of $A400 000 ($F430 000) @ $A1.00 =
$F1.075
Jun 30
Unrealised exchange loss
1 851.87
Accounts receivable – Islander Ltd [see Note]
1 851.87
Recording unrealised exchange loss at balance date on
$F430 000 when
$A1.00 = $F1.080 (430 000  1.08 = 398 148.13)
Profit and loss
1 851.87
Unrealised exchange loss
1 851.87
Balance transferred
Aug 15
Realised exchange loss
1 834.77
Accounts receivable – Islander Ltd
1 834.77
Recording realised exchange loss at payment date on
$F430 000 when $A1.00 = $F1.085
(398 148.13 – 396 313.36)
Bank
396 313.36
Accounts receivable
396 313.36
Receipt of payment (430 000  1.085 = 396 313.36)
20x7
Jun 30
Profit and loss
1 834.77
Realised exchange loss
1 834.77
Balance transferred
Note: The credit could be transferred to an exchange loss allowance and
deducted from accounts receivable in the balance sheet.
18
Prepare accounting entries relating to foreign currency transactions
© NSW DET 2006, 2006/053/12/2006 LRR 4699