Question

Funny Ltd purchased merchandises for resale purpose amounting to Australian dollar $100,000 on 1 October 2018, in which 70% of these merchandises were sold before the year-end.

There were no other purchases of merchandises during 2018. The half of the amount was settled on 15 December 2018 and the balance was paid on 20 January 2019.

On 31 December 2018, the estimated net realizable value of the ending inventories was at A$24,000.

The financial year-end of the company is 31 December.

           Spot rate

1 October 2018                       A$1 = HK$6

15 December 2018                  A$1 = HK$5.8

31 December 2018                  A$1 = HK$5.9

20 January 2019                      A$1 = HK$6.1

(Note: A$=Australian dollar)

Required:

Prepare ALL journal entries for the years 2018 and 2019 relating the acquisition of merchandises, settlement of debt, exchange difference, and ending inventories (if any).             [10 marks]

Part B (5 marks)

OPI Ltd is a Hong Kong-owned company which is incorporated in Bermuda, with its registered office in Bermuda and head office in Hong Kong. All its factories are located in China and its products are manufactured and traded in China. The operation is financed by Hong Kong investors in Chinese RMB.

Required: Determine OPI’s functional currency. Justify your answer by referring to HKAS 21: The Effects of Changes in Foreign Exchange Rates.

Answer 1

Journal entries

Assuming Funny Ltd pays in HK$

1:Purchases Dr 600000HK$ (100000*6)

to creditors 600000HK$

2:Creditor dr 300000 HK$ (100000/2 *6 rate)

to foreign exchange gain   10000 HK$ (bal)

to bank 290000HK$ (50000*5.8)

3:Pl dr 5000 HK$ { 300000-(50000*5.9 rate )}

foreign exchange gain 5000

4:Creditor dr 300000 ( (100000/2*6 rate )

foreign exchange loss dr 5000 ( bal )

to bank (50000*6.1) 305000

5:Foreign exchange difference a/c 5000 ( 10000-5000)

to pl ( net gain )

6:ending inventory dr 177000 (30000*5.9)

to closing stock 177000

7 Cost of goods sold dr (70000*5.8) 406000 ( 100000*70%)

to beginning inventory 406000

Part B: A company functional currency is determined by the environment in which it primarily operates and function . In this cas OPI functional currency is chinese RMB , since the receivables , payables , day to day transactions are in chinese RMB as goods manufactured and traded in china which involves movement of local currency .

The presentation currency has to be in HK$ since this is the parent owned subsidiary .