Question

On 12th April 2018 Pit Bull Ltd enters into a contract with a New Zealand company, Secure Ltd, whereby Secure Ltd will build a printing machine for Pit Bull Ltd. The machine has been priced at NZ$850000 The printing machine is completed on 14th June 2019 and shipped FOB Wellington on that date. The debt remains unpaid at 30th June 2019, which is the end of Pit Bulls Ltd's financial reporting period The exchange rates at the relevant dates are as follows: 12Th April 2018 A$1.00 NZ$1.20 30th June 2018 A$1.00 NZ$1.15 14th June 2019 A$1.00 NZ$1.30 30th June 2019 A$1.00 NZ$1.25 Required: Complete the full journal entries for Pit Bull Ltd for the years ending 30th June 2018 and 30th June 2019 to reflect the above events

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Answer 1

Foreign Currency transactions are guided by IAS 21.

IAS 21 requires a foreign currency transaction to be recorded initially at the rate of exchange at the date of the transaction.

At each Balance Sheet date and every subsequent balance sheet date:

• foreign currency monetary amounts should be reported using the closing rate
• non-monetary items carried at historical cost should be reported using the exchange rate at the date of the transaction
• non-monetary items carried at fair value should be reported at the rate that existed when the fair values were determined.

The basic feature to differentiate between monetary and Non- Monetary items is to determine "Is there Right/Obligation to deliver - Fixed/Determinable amount of currency units?" If answer is Yes then it is Monetary Item, If No then Non-Monetary item.

Like Fixed Asset-Property Plant and Equipment -No Right /Obligation to Deliver -Non Monetary

Trade payable - Right /Obligation -Yes Currency flow is determinable.

In our Question as contract was entered on 12th April 2018 but no actual delivery was performed so this doesn't give rise to any foreign currency transaction. So there will be no transaction on 12th April as well as on 30th June 2018.

Now When the Machine was delivered on 14th June 2019 this gives rise to a contractual obligation to pay the Newzealand co. Secure Ltd.

So transaction on 14th June 2019

Fixed Asset (Plant) A/c Dr. 653846.15

To, Secure Ltd. (Trade payable) 653846.15

(Transaction recorded initially at the rate of conversion prevailing on that date A$1=NZ$1.3)

so NZ$ 850000 = 850000/1.3 = A$ 653846.15

Now on Closing Date 30th June 2019

Non Monetary Item will be presented at Historical Rate that is rate on 14th June 2019

Monetary item will be reported on the rate prevailing on the closing date and any difference is to be transferred to P&L A/c.

Rate on 30th June A$ 1 = NZ $ 1.25

Liability to report = 850000/1.25 = 680,000

Difference due to foreign currency fluctuation = 26153.85 (Loss)

Foreign Currency Fluctuation Loss Dr. 26153.85

To, Secure Ltd. (Trade Payable) 26153.85

(Being Liability increased)

Profit And Loss A/c 26153.85

To Foreign Currency Fluctuation Loss 26153.85

(Being loss trf. to P&L a/c)