Question

Journal entries for an accounts payable denominated in Canadian Dollars ($US strengthens and weakens)

Assume that your company purchases inventories from a Canadian supplier on November 3. The invoice specifies that payment is to be made on February 1 in Canadian dollars ($CAD) in the amount of $150,000 (CAD). Your company operates on a calendar year basis.

Assume the following exchange rates:

November 3	$0.76:CAD$1
December 31	$0.71:CAD$1
February 1	$0.73:CAD$1

Prepare the journal entries to record the purchase (assume perpetual inventory accounting), the required adjusting entry at December 31, and the payment on February 1.

Date	Description	Debit	Credit
11/3	AnswerAccounts payableAccounts receivableCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)Hedged firm commitment (liability)InventoriesSales	Answer	Answer
	AnswerAccounts payableAccounts receivableCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)Hedged firm commitment (liability)InventoriesSales	Answer	Answer
12/31	AnswerAccounts payableAccounts receivableCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)Hedged firm commitment (liability)InventoriesSales	Answer	Answer
	AnswerAccounts payableAccounts receivableCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)Hedged firm commitment (liability)InventoriesSales	Answer	Answer
2/1	Accounts payable	Answer	Answer
	AnswerAccounts payableAccounts receivableCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)Hedged firm commitment (liability)InventoriesSales	Answer	Answer
	AnswerAccounts payableAccounts receivableCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)Hedged firm commitment (liability)InventoriesSales	Answer	Answer

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Answer 1

Date	Account Title	Debit	Credit
Nov. 3	Inventories	114,000
	Accounts Payable (150,000 * 0.76)		114,000
Dec. 31	Accounts Payable	7,500
	Foreign currency Transaction gain (150,000*(0.76 – 0.71))		7,500
Feb 1	Accounts Payable	106,500
	Foreign currency Transaction gain (150,000* (0.73 – 0.71))	3,000
	Cash (150,000 * 0.73)		109,500

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