Accounting for Foreign Currency–Denominated Accounts Payable Mardi Gras Corporati...

Accounting for Foreign Currency–Denominated Accounts Payable

Mardi Gras Corporation operates a group of specialty shops throughout the southeastern United States. The shops have traditionally stocked and sold kitchen and bath products manufactured in the United States. This year, Mardi Gras established a business relationship with a manufacturing company in Lucerne, Switzerland, to purchase a line of luxury bath products to sell in its shops. As part of the business arrangement, payments by Mardi Gras are due 30 days after receipt of the merchandise, whose cost is quoted and payable in Swiss francs.

Mardi Gras records the purchases in inventory when it receives the merchandise and records a liability to the Swiss company, using the exchange rate for Swiss francs on the date the inventory purchase is recorded. When payment is made, Mardi Gras debits or credits to inventory any difference between the liability previously recorded and the dollar amount required to settle the liability in Swiss francs. Mardi Gras uses a perpetual inventory system and the FIFO method of inventory costing and can easily trace these adjustments to the specific inventory purchased.

Required

Obtain the most current accounting standards on accounting for foreign currency transactions. You can obtain access to accounting standards through the FASB codification. As a staff accountant with the public accounting firm that audits Mardi Gras’s annual financial statements, write a memo to Marie Lamont, the manager in charge of the audit, discussing the client’s accounting for its transactions with the Swiss company. Support any recommendations with citations and quotations from the authoritative financial reporting standards.