ACCT6010 Class 11 Foreign Currency In-Class Exercise
Foreign currency transactions
AusEng Ltd’s presentation and functional currency is the AUD (A$). AusEng Ltd sells engineering equipment locally and throughout Asia. It has major customers in Malaysia. AusEng Ltd decided to open a branch in Malaysia, where the local currency is Malaysian ringgit (MR).
AusEng Ltd makes the following purchases in Malaysia on 1 July 20X8.
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MR Buildings 100 000 Land 200 000
AusEng Ltd also opened a Malaysian bank account with a deposit of MR50 000 on 1 July 20X8.
Sales prices are determined as 100% mark up on AusEng Ltd’s Australian costs, translated into MR for purposes of invoicing the customer. (This is effectively the same as invoicing the customer in A$ but it means that the customers do not have the inconvenience of having to make foreign currency arrangements.) Service fees are also consistent with fees charged to Australian customers because the source of competition is other Australian suppliers. During the year ended 30 June 20X9 AusEng Ltd entered into the following transactions:
30 September 20X8 20 February 20X9 31 May 20X9
Transaction
Sale Service fee
MR 294 000 260 000 264 000
Exchange Rate A$ 1 = MR 2.45 A$ 1 = MR 2.60 A$ 1 = MR 2.40
The sales on 30/9/20X8 and 20 February 20X9 were paid on the day of delivery by direct deposit to AusEng’s Australian bank account.
The service fee on 31/5/20X9 was on credit terms and the receivable remains outstanding at 30/6/20X9.
The Malaysian branch of AusEng Ltd is managed by an engineer who was transferred to Malaysia from AusEng’s Queensland office. The engineer is paid directly into her Australian bank account.
Local expenses of MR30 000 were incurred evenly throughout the year. The manager withdrew a petty cash float which is used to pay for local expenses and is reimbursed from the Malaysian bank account as required.
The building is depreciated at a rate of 10% per annum.
The following additional exchange rate information is available.
1 July 20X8 Average for the year 30 June 20X9
Taxes are ignored in this illustration.
A$ 1 = MR 2.35 A$ 1 = MR 2.48 A$ 1 = MR 2.50
Prepare journal entries to account for the foreign currency transactions, assets and
liabilities of AusEng Ltd in accordance with AASB 121 for the year
1. Record the investment in assets in Malaysia on 1 July 20X8. Journal entry
ended 30/6/X9.
1 July 20X8
Dr Buildings
Dr Cash (Malaysia)
Bldg MR100 000/2.35; Land MR200 000/2.35; Malaysian bank a/c MR50 000/2.35
2. Record the revenue transactions. Journal entry
30 September 20X8 Dr Cash
Cr Sales Revenue
MR 294 000/2.45 Journal entry
20 February 20X9 Dr Cash
Cr Sales Revenue
MR 260 000/2.6 Journal entry
31 May 20X9
Dr Accounts Receivable (Malaysia)
Cr Service Revenue MR 264 000/2.40
42 553 85 106 21 277
3. Record the summary journal entry for sundry expenses of MR 30 000 which were incurred uniformly throughout the year and resulted in a reduction in the Malaysian cash asset. Hint: use the average exchange rate.
Y/E 30/6/20X9 (summary entry) Dr Expenses
Cr Cash (Malaysia) MR 30 000/2.48
4. Record depreciation expense Journal entry
Y/E 30/6/20X9 (summary entry) Dr Depreciation Expense
Cr Accumulated Depreciation
MR 100 000 x 10% translated at 2.35
5. Translate monetary items at the closing exchange rate and recognise foreign currency gain or loss in profit or loss.
At 30 June 20X9 the foreign currency monetary assets comprise accounts receivable and cash. There are no foreign currency liabilities.
Accounts Receivable = MR 264 000 Journal entry
30 June 20X9
Dr Foreign Currency loss
4 400 264000/2.5 = A$105 6000; 110 000 –105 600 = 4 400
Cr Accounts Receivable
Cash. MR20 000, being initial MR50 000 – cash expenses MR30 000. the closing balance to translate into A$ is MR20 000.
The amount at which this should be reported in AusEng Ltd’s balance sheet at 30/6/20X9 is $8000 (being MR20 000/2.5).
To determine the foreign currency gain or loss we need to determine the carrying amount of the Cash (Malaysia) account in AusEng Ltd’s ledger prior to the restatement to $8000. This is determined as follows, noting that AusEng Ltd maintains its accounting records in A$:
Cash (Malaysia) A/c Dr
1/7/X8 Deposit
Journal entry 30 June 20X9
What is the foreign currency gain or loss for the year ended 3/6/X9? $5,580 loss
30/6/X9 Expenses (refer summary journal entry)
Bal. (before closing rate)
restatement
Reduction in Cash (Malaysia) asset to reflect closing exchange rate ($9 180 – $8 000)
Dr Foreign Currency Loss Cr Cash (Malaysia)
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