Question

Kendal Hills Farm Inc. (“Kendal”), is a small farm outside of Orono, Ontario. Kendal is where Emily Kranenburg grew up as her parents raised game birds. Emily left the farm to obtain her business degree and was working in the accounting department of a not-for-profit organization. Out of production for about 20 years, she returned to the farm in 2016 with her husband Dave Kranenburg in order to revive it as a significant agricultural operation. Dave and Emily Kranenburg are the owners and operators of Kendal. While the company is small and currently reports under ASPE, there are plans to take the company public. Kendal has a June 30th year end and it is currently July, 2020. Emily and Dave have approached you, a CPA with a local CPA firm, to advise on some accounting issues that arose during the year: 1. Equipment purchase Agricultural equipment with a useful life of 10 years was purchased from a U.S. supplier for US$200,000 in May, 2020. At the time, the exchange rate in effect was US$1 = C$1.22 and the equipment and associated payable were recorded at $244,000. At year end, the payable was still outstanding and both it and the equipment were still recorded at $244,000.The year-end exchange rate was US$1 = C$1.32. Emily is not sure if either the initial or year-end amounts were recorded correctly, but she would like to get a better understanding of how to account for this transaction, as she expects Kendal will engage in more transactions with U.S. suppliers in the future.

Answer 1

The equipment shall be recorded at historical cost, i.e., $244,000. There shall be no change in cost due to exchange rate fluctuations since it is a non-monetary asset. Year-end depreciation shall be charged based on the cost and the useful life of 10 years.

However, the payable to U.S supplier shall undergo a change.

Since, the company shall continue to associate with the supplier in future, the profit or gain from exchange rate fluctuations shall be charged to Income Statement.

The accounts payable being current liabilities shall be recorded at the closing rate. Hence, the increase in accounts payable due to foreign exchange rate fluctuation shall be [200,000*(1.32-1.22)] = $20,000

The journal entry is as follows-

Date	General Journal	Debit	Credit
June 30, 2021	Loss due to foreign exchange fluctuation	$20,000
	To Accounts Payable		$20,000
	(To record the loss on account of exchange rate fluctuation)

The $20,000 loss due to foreign exchange shall be transferred to the income statement.