Question

On 1 March 2020 Holmes Ltd enters into a binding agreement with a New Zealand company, which requires the New Zealand Company to construct an item of machinery for Holmes Ltd. The cost of the machinery is NZ$750,000. The machinery is completed on 1 June 2021 and shipped FOB Auckland on that date.

The debt is unpaid at 30 June 2020, which is also Holmes Ltd’s reporting date.

The exchange rates at the relevant dates are:

1 March 2011 A$1.00 = NZ$1.20

1 June 2011 A$1.00 = NZ$1.30

30 June 2011 A$1.00 = NZ$1.25

Required:

a) Determine the amount in AUD, as at: • 1 March 2020; and • 30 June 2020.

b) Prepare the journal entries for the above dates showing the amount of exchange gain or loss .

Answer 1

It was entered into agreement on March2020 for completion of Machinery ,but it was completed on 1 Jun 2020, then on 1 Jun 2020 using Exchange rate as on 1 June i.e. :AS$1=NZ$1.3

NZ$750000=AS$(750000)/1.3)=AS$576923

Machinery Ac Dr AS$ 576923

To payable AS$ 576923

(being machinery capitalised )

On 30 Jun 2020, reporting date ,all the capital assets are to be at closing rate so, value of machine as at 30 Jun will change by

As$1=NZ$1.25

Nz$750000=AS$(750000/1.25)=$600000

So, difference in figure is = AS$ 600000-576923=$23077

So,since machinery cost rose up due to exchange fluctuations an entry for recording the forex loss will be :

Machinery A/C Dr 23077

To payable 23077

Also,

Profit and loss ac Dr 23077

To Loss on foreign exchange 23077

These entries has to be done at year end .