Question

Sharp Ltd purchases inventory from Ace Ltd, a listed British company. Relevant events and the spot rates at each date are shown as follows:

           

Date	Event	Spot rate
15 March 2019	Order £300,000 of inventory	A$1.00 = £0.37
11 May 2019	Purchase takes place as inventory shipped to Sharp Ltd (FOB)	A$1.00 = £0.41
30 June 2019	End of financial year	A$1.00 = £0.43
02 July 2019	Inventory arrives at warehouse	A$1.00 = £0.42
14 August 2019	Payment of £300,000 to supplier	A$1.00 = £0.39

Required:

1. Given the same events as in , assume that, instead of inventory, the purchase is plant and equipment, which is installed ready for use on 15 July 2019 when the rate is still A$1.00 = £0.42. Prepare appropriate journal entries for each relevant event, up to 15 July 2019. (Round amounts to the nearest dollar)

Answer 1

15 March 2019. No Entry

11 May 2019

Prepaid Expenses Dr. GBP 300000

Accounts Payable Cr. GBP 300000

(Being Plant & Equipment booked becasue of FOB terms and put in Prepaid expenses Account)

30 June 2019

Accounts receivable Dr. $ 6000(GBP 300000*(.43-.41)

Profit on exchange Cr. $ 6000

(Being profit on exchange transferred)

15 July 2019

When Plant and Equipment arrived at warehouse : No Entry

Plant & Equipment Dr. GBP 300000

Loss on Exchange Dr. GBP 3000(GBP 300000*(.42-.41)

Prepaid Expenses Cr. GBP 300000

Accounts payable Cr. GBP 3000

(Being plant booked and Loss transferred to Loss on Exchange)