Adjusting Entries for Foreign Currency Balances
Chocolate De-lites imports and exports chocolate delicacies. Some transactions are denominated in U.S. dollars and others in foreign currencies. A summary of accounts receivable and accounts payable on December 31, 20X6, before adjustments for the effects of changes in exchange rates during 20X6, follows:
Accounts receivable: |
|
In U.S. dollars | $164,000 |
In 475,000 Egyptian pounds (E£) | $ 73,600 |
Accounts payable: |
|
In U.S. dollars | $ 86,000 |
In 21,000,000 yen (¥) | $175,300 |
The spot rates on December 31, 20X6, were E£1 =$0.176 ¥1 = $0.0081
The average exchange rates during the collection and payment period in 20X7 are E£1 =$0.18 ¥1 =$0.0078
Required
a. Prepare the adjusting entries on December 31, 20X6.
b. Record the collection of the accounts receivable in 20X7.
c. Record the payment of the accounts payable in 20X7.
d. What was the foreign currency gain or loss on the accounts receivable transaction denominated in E£ for the year ended December 31, 20X6? For the year ended December 31, 20X7? Overall for this transaction?
e. What was the foreign currency gain or loss on the accounts receivable transaction denominated in ¥? For the year ended December 31, 20X6? For the year ended December 31, 20X7? Overall for this transaction?
f. What was the combined foreign currency gain or loss for both transactions? What could Chocolate De- lites have done to reduce the risk associated with the transactions denominated in foreign currencies?
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