Question

Wolfe Computer is a U.S. company that manufactures portable personal computers. Many of the components for the computer are purchased abroad, and the finished product is sold in foreign countries as well as in the United States. Among the recent transactions of Wolfe are the following: Oct. 28 Purchased from Mitsutonka, a Japanese company, 20,000 disk drives. The purchase price was ¥184,000,000, payable in 30 days. Current exchange rate, $0.0105 per yen. (Wolfe uses the perpetual inventory method; debit the Inventory of Raw Materials account. ) Nov. 9 Sold 700 personal computers to the Bank of England for £572,727 due in 30 days. The cost of the computers, to be debited to the cost of Goods Sold account, was $518,000. Current exchange rate, $1.65 per British pound. (Use one compound journal entry to record the sale and the cost of goods sold. In recording the cost of goods sold, credit Inventory of Finished Goods.) Nov.27 Issued a check to Inland Bank for $1,836,000 in full payment of account payable to Mitsutonka. Dec. 2 Purchased 10,000 gray-scale monitors from German Optical for €1,140,000, payable in 60 days. Current exchange rate, $0.7030 per euro. (Debit Inventory of Raw Materials.) Dec. 9 Collected dollar-equivalent of £572,727 from the Bank of England. Current exchange rate, $1.63 per British pound. Dec.11 Sold 10,000 personal computers to Computique, a Swiss retail chain, for SFr22,500,000, due in 30 days. Current exchange rate, $0.6000 per Swiss franc. The cost of the computers, to be debited to cost of Goods Sold and credited to Inventory of Finished Goods, is $7,400,000. Required: a. Prepare in general journal form the entries necessary to record the preceding transactions. b. Prepare the adjusting entries needed at December 31 for the €1,140,000 account payable to German Optical and the SFr22,500,000 account receivable from Computique. Year-end exchange rates, $0.7000 per euro and $0.5980 per Swiss franc. (Use a separate journal entry to adjust each account balance.) c. Compute the unit sales price of computers in U.S. dollars in either the November 9 or December 11 sales transaction. (The sales price is the same in each transaction.) d. Compute the exchange rate for the yen, stated in U.S. dollars, on November 27.

Answer 1

Date	General Journal	Debit	credit
Dec 31	Accounts payable	3420
	Gain on fluctuation in foreign exchange rates		3420
Dec 31	fluctuation in foreign exchange rates	45000
	Accounts receivable		45000

1)Loss due to foreign exchange fluctuation in accounts payable = Amount in Euro [ Exchange rate at time of purchase -exchange rate at balance sheet date]

        = 1,140,000 [.7030 - .7000]

         = 1,140,000 * .003

          = 3420 gain

since we are paying less amount (.7000 )than at the time of purchase (.7030) ,there is a gain

2)Loss due to foreign exchange fluctuation in accounts receivable = Amount in SFr [exchange rate at balance sheet date- Exchange rate at time of purchase ]

              = 22,500,000 [.5980 - 60 ]

             = 22,500,000 *- .002

            = - 45000 loss

since we are receiving less amount (.5980 )than at the time of purchase (.60) ,there is a loss.