Question

All of the transactions below come from The Lord of the Rings. Show how each is recorded in the balance of payments for the specified location. Remember, all transactions produce two entries: a credit (+) and a debit (-). If a part of the transaction involves the current account, you must specify which portion of the current account is involved (i.e., the trade balance, net factor income from abroad, or net unilateral transfers). Each question is worth one point EXAMPLE: The Hobbits of the Shire trade 100 barrels of ale worth 20 silver pennies to Rivendell for 20 elf bows worth the same amount. Record this transaction in the Shire's balance of payments aссоиnt. Answer: This is a case of barter. The export of the ale is booked as a credit (+20 silver pennies) in the trade balance portion of the Shire's current account (EX, export of a good). The import of the bows is recorded as a debit (-20 silver pennies), also in the trade balance portion of the Shire's current account (IM, import of a good). 1. Shortly after Aragorn, son of Arathorn, became king of the reunited Kingdom of Gondor and Armor (KGA), he paid the riders of Rohan 10,000 çastar (C) for their mercenary service (which is a factor rental) rendered in the siege of Minas Tirith. Please write the entries for this transaction for the balance of payments accounts of the KGA. 2. Sauron, the dark lord of Mordor, writes off a debt of 10,000 mordos. (the currency of Mordor) that Saruman, the white wizard of Isengard, owes him, because the ents destroy Isengard, rendering Saruman unable to pay his debt. Please write the entry in the balance of payments account for Mordor. 3. Lobelia and Lotho Sackville-Baggins, who are from Sackville, which is southwest of the Shire, acquire Bag End, which is Frodo Baggin's house in the Shire, for 1,000 silver pennies Please write the entries for this transaction in the balance of payments accounts of the Shire.

Answer 1

a) It will be recorded in BOP on Current account

KGA Account debit

to Minis Tirith Account

rule followed Debit all the expenses and losses, credit all the income and gains.

b) It will be recorded in BOP on Capital Account

Mordor account debit

to Isenberg account

c) It will be recorded in BOP on Capital Account as it is foreign direct investment.

Sackville Account Debit

to Shire Account