Question

UGT Plc bought a new car on credit from Nissan Plc for use by the CEO at a price of US$100,000 on 1st October 2019. The invoice value was due for settlement in two equal instalments on 30th November 2019 and 31 January 2020. The first instalment was paid on the due date. The exchange rate moved as follows:

• 1st October 2019GHS5.00 /$

• 30 November 2019GHS5.20/$

• 31 December 2019GHS5. 50/$

It is discovered that the entire transactions (acquisition of the car and the instalment payment) have been omitted from the accounting records.

Depreciation of the car is to be calculated and accounted for at the rate of 20% per annum (pro-rata).

Calculate the value of the car to be recorded in the statement of financial position and the depreciation to be recorded in the income statement for the year ended 31/12/2019

Answer 1

Solution:

As per IAS 21, if an entity makes transactions in a foreign currency, the following rules apply. Upon initial recognition of the usable currency, a foreign currency transaction is registered by applying the spot exchange rate to the foreign currency value at the date of the transaction. Each reporting period, the following shall be done:

• Foreign exchange items shall be converted by the closing rate into the functional monetary currency;
• The exchange rate that was prevailing on the date of the transaction will continue translating non-monetary items measured in terms of the historical cost in a foreign currency.
• Non-monetary items measured at fair value in a foreign currency are translated by exchange rates at the date of measurement.

For the assets translated at historical exchange rates, the depreciation or amortization is translated at the same exchange rates as the assets to which it relates.

In the given question, the car is a non-monetary asset and will be recognized at the historical exchange rate (The rate on the date of purchase of the asset).

Hence, the value of the car will be 5 x 100,000 = GHS 500,000.

Depreciation value is 5 x 100,000 x 20% x 3/12 = GHS 25,000. This will be recorded in the income statement.

The value of the car to be recorded as on 31/12/2019 in the statement of financial position is GHS 475,000 (500,000 - 25,000).