Question

Please Help the below question:

Question 3

(a) Tobaco Berhad, with the Ringgit Malaysia as its functional currency, purchases plant from a foreign entity for $18 million on 31 May 2019 when the exchange rate was $2 to RM1. The entity also sells goods to a foreign customer for $10.5million on 30 September 2019, when the exchange rate was $1.75 to RM1. At the entity’s year end of 31 December 2019, both amounts are still outstanding and have not been paid. The closing exchange rate was $1.5 to RM1. 

Required:

Explain the accounting treatment for both sale and purchases transactions for Tobacco Berhad.

(b) Truly Berhad has a 100%-owned foreign subsidiary, which has a carrying value at a cost of RM25 million. It sells the subsidiary on 31 December 2019 for $45million. As at 31 December 2019, the credit balance on the exchange reserve, which relates to this subsidiary, was RM6 million. The functional currency of the entity is the Ringgit Malaysia and the exchange rate on 31 December 2019 is RM1 to $1.5. The net asset value of the subsidiary at the

date of disposal was RM28 million.

 Required:

Explain the accounting treatment for the disposal transaction.

(c) Public Bhd, a company incorporated in Malaysia, whose functional currency is

the Ringgit Malaysia (RM) and whose year ends on 31 December, has two overseas subsidiaries. Public is preparing to finalise its financial statements for the year ended 31 December 2019 and has the following inter-company accounts with the two subsidiaries:

(i) A loan of INR8 million to Republic, a company in India whose functional currency is the Indian Rupee (INR), which has been outstanding since the acquisition of Republic in 2015 and which it does not regard as repayable in the foreseeable future. (ii) A trade receivables account balance amounting to RM300,000 from Private, a foreign company whose functional currency is the Rupiah, held in the books of Private at 725 million Rupiah. (iii) A short-term loan of INR4 million to Private taken out on 30 June 2019 and repayable on 30 June 2020.

Required:

(i) Compute the exchange differences, if any, to be recognised in 2019 for the above items and explain their respective treatment in the separate financial statements of:

(1) Public

(2) Republic

(3) Private

(ii) Public’s presentation currency is the Ringgit Malaysia (RM). Explain, stating your reasons, how the above exchange difference in (a) above should be treated in the consolidated financial statements of Public.

Answer 1

Solution On date of Foreign Currency Transaction: A foreign currency transaction is initially recorded by translation in the entity's functional currency at the exchange rate on the transaction date Spot Rate. At the reporting date: Monetary items are translated at the exchange rate at the reporting date i.e., closing rate; Non-monetary items measured at historical cost are not translated / restated; instead they remain at the exchange rate at the date of the transaction; and Exchange difference is the difference resulting from translating a given number of units of one currency into another currency at different exchange rates. Exchange differences arising on the settlement of monetary items or on translating monetary items are recognised in profit or loss A foreign currency transaction is a transaction that is denominated or requires settlement in a foreign currency including transactions arising when an entity -buys or sells goods or services whose price is denominated in a foreign currency; -otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency. Tabaco Berhad purchase Plant from Foreign entity for $18 Million i.e. Denominated in foreign currency Dollars differs from its functional currency Ringgit Malaysia. Hence it is foreign Currency Transaction. 19 this foreign currency transaction shall be recorded at Spot Rate of On 31st mc Currency RM9000000 Plant To Vendor (Account Payable) (To record purchase of Plant) RM9000000 Tabaco Berhad sells good to foreign customer for $10.5 Million i.e. Denominated in foreign currency Dollars differs from its functional currency Ringgit Malaysia. Hence it is foreign Currency Transaction. On 30 September, 2019 this foreign currency transaction shall be recorded at Spot Rate of Currency Account Receivable RM6000000 To Sales RM 6000000 (To record sale of goods)

On 31 Dec 2019 Reporting Date Following item are reported in Balance Items A. Plant- Non-Monetary Assets - Recorded at Historical Cost.ie. RM 9000000. B. Vendor- Monetary Item (are to be settled in cash) Record at Closing Exchange Rate, RM 9000000 x $2 = $1.5 = RM 12000000 C. Account Receivable- Monetary Item recorded at Closing exchange spot rate, RM 6000000 x $1.75 = $1.5 = RM 7000000 Computation of Foreign Exchange Loss on translating monetary items are recognised in profit or loss. Vendor (Account Payable) Account Receivable RM90,00,000 RM1,20,00,000 RM60,00,000 RM70,00,000 RM30,00,000 RM10,00,000 RM40,00,000 Foreign Currency Translation Loss