Tutorial 04 Solutions
Subject Code:
ACC 3000
Subject Name:
Financial Reporting
Tutorial due in:
Tutorial Questions:
Tutorial release date:
Week 5
Deegan Chapter 33: RQ – 1, 2, 3, 4, 12, 18a &18b and 19a&19b
Week 5 Friday evening after 6.00pm
.
Chapter 33: Review Questions
(1) It is necessary to translate because if the transactions were not denominated in a single
presentation currency, such as Australian dollars, then the financial statements could be made up
of accounts that were denominated in numerous currencies. Such financial statements would be
very difficult to understand.
(2) At the end of the reporting period all foreign currency monetary assets and foreign
currency monetary liabilities must be translated to Australian dollar equivalents (assumed to
be the functional currency) using the exchange rate in place at the end of the reporting
period. As paragraph 23 of AASB 121 states: At each end of the reporting period foreign
currency monetary items shall be translated using the closing rate. Apart from a limited
number of cases (for example, transactions relating to qualifying assets and gains and
losses pertaining to certain hedges), gains or losses on translating the foreign currency
monetary items must be treated as either expenses or income of the reporting period and
included within profit or loss. This is consistent with paragraph 28 of AASB 121 which states:
Exchange differences arising on the settlement of monetary items or on translating monetary
items at rates different from those at which they were translated on initial recognition during
the period or in previous financial statements, shall be recognised in profit or loss in the
period in which they arise, except as described in paragraph 32.
(3) When a transaction occurs that is denominated in a foreign currency, that transaction
should initially be translated to the functional currency at the exchange rate in place at the
date of the transaction (also referred to as the ‘spot rate’). This is consistent with paragraph
21 of AASB 121 which states: A foreign currency transaction shall be recorded, on initial
recognition in the functional currency, by applying to the foreign currency amount the spot
exchange rate between the functional currency and the foreign currency at the date of the
transaction.
(4) If the exchange rate moves against the Australian dollar and the debt is outstanding then
this will result in an increase in the Australian dollar equivalent of the amount that is payable.
This increase is to be treated as an expense entitled ‘loss on foreign currency transactions’
(or similar). It is not to be adjusted against the cost of the inventory.
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Suggested Solutions taken from the Solutions Manual to accompany Australian Financial Accounting 7 Edition by Deegan.
© McGraw-Hill Australia, Ltd
Page 1 of 4
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(12) The accounting entries in the books of Coolum Ltd would be:
10 July 2014
Dr
Cash
1 282 051
Cr
Consulting revenue
1 282 051
(to recognise consulting revenue at the 10 July 2014 spot rate: 1 282 051 = 1 000 000 ÷ 0.78)
30 June 2015
Dr
Cash
129 680
Cr
Interest revenue
129 680
(to recognise the interest revenue at the 30 June 2015 spot rate: 129 680 = (1 000 000 × 10% × 355/365)
÷ 0.75)
Dr
Cash
51 282
Cr
Foreign exchange gain
51 282
(to adjust for the change in the Australian dollar equivalent of the overseas bank deposit using the 30
June 2015 spot rates)
=
$1 282 051
Balance of cash at 10 July 2014: 1 000 000 ÷ 0.78
Balance of cash at 30 June 2015: 400 000 ÷ 0.75
=
1 333 333
Increase in accounts receivable
$51 282
.
(18) (a) (i) 30 April 2014
Dr
Cr
Inventory
Accounts payable
35 294
35 294
Being the recording of inventory delivered and the associated liability to the supplier. The
inventory was delivered on 30 April 2014 and therefore the inventory and accounts payable will be
translated at the exchange rate on that date.
HK$300 000 ÷ 8.50 = A$35 294
(ii)
30 May 2014
Accounts payable
11 765
Dr
Cr
Cash
11 682
Cr
Foreign exchange gain
83
Being the payment of a third of the outstanding creditors balance on 30 May 2014 of HK$100 000
A$11 682.24
HK$100 000 ÷ 8.56 =
A$11 764.71
HK$100 000 ÷ 8.50 =
82.47
35 294 ÷ 3 = 11 765
(iii)
30 June 2014
Accounts payable
11 765
Dr
Cr
Cash
11 641
Cr
Foreign exchange gain
124
Being the payment of a third of the initial creditors balance on 30 June 2014 of HK$100 000
A$11 641.44
HK$100 000 ÷ 8.59 =
A$11 764.71
HK$100 000 ÷ 8.50 =
123.32
As at the end of the reporting period we would have an outstanding liability of HK$100 000. This
will need to be stated at the spot rate at 30 June 2014 and the exchange difference taken to profit
or loss.
Accounts payable
123
Dr
Cr
Foreign exchange gain
123
A$11 641.44
HK$100 000 ÷ 8.59 =
A$11 764.71
HK$100 000 ÷ 8.50 =
123.37
Suggested Solutions taken from the Solutions Manual to accompany Australian Financial Accounting 7 Edition by Deegan.
© McGraw-Hill Australia, Ltd
Page 2 of 4
(iv)
31 July 2014
Dr
Accounts payable
11 186
Cr
Cash
11 186
Being the payment of cash on 31 July 2014: HK$100 000 ÷ 8.94 = A$11 186
The remaining balance on accounts payable (A$11 641 – 11 186 = A$456) will be taken to the
profit and loss as an exchange gain.
Dr
Accounts payable
456
Cr
Foreign exchange gain
456
18(b) The engine diagnosis machine will be a qualifying asset under the definitions within AASB 123,
being an asset under construction or otherwise being made ready for future productive use by the
company in its own operations.
The asset will be qualifying until construction is complete and the asset has been received by the
company. Whilst being constructed the exchange differences must be included in the cost of
construction.
30 April 2013
Dr
Asset under construction
31 250
Cr
Accounts payable
31 250
¥5 000 000 ÷ 160 = A$31 250
In practice, an adjustment would also be required to take account of the change in exchange rates
to 30 June 2013. We will assume that exchange rates had not changed.
31 May 2014
Accounts payable
10 417
Dr
Cr
Asset under construction
10 417
Being exchange difference on asset up to date of ceasing to be a qualifying asset
20 833
¥5 000 000 ÷ 240
Less historic cost
31 250
(10 417)
Machinery
20 833
Dr
Cr
Asset under construction
20 833
At 30 June 2014 we will need to take the exchange difference to profit or loss, as the asset has
ceased to be a qualifying asset from 30 May 2014.
30 June 2014
Dr
Accounts payable
425
Cr
Foreign exchange gain
¥5 000 000 ÷ 245 = A$20 408.
Thus the exchange difference is A$(20 833 – 20 408) = A$425
The cash was paid on 31 July 2014.
425
31 July 2014
Accounts payable
19 231
Dr
Cr
Cash
19 231
¥5 000 000 ÷ 260 = A$19 231
The remaining exchange difference will then need to be taken to profit or loss.
31 July 2014
Dr
Accounts payable
Cr
Foreign exchange gain
20 408 – 19 231 = 1177
1177
1177
.
.
(19)(a) 15 March 2014
No entry as order only
Suggested Solutions taken from the Solutions Manual to accompany Australian Financial Accounting 7 Edition by Deegan.
© McGraw-Hill Australia, Ltd
Page 3 of 4
11 May 2014
Dr
Inventory
Cr
731 707
Accounts payable
731 707
[to recognise the purchase of inventory (£300 000/0.41)]
30 June 2014
Accounts payable
Dr
Cr
34 033
Foreign exchange gain
300 000 ÷ 0.41 =
300 000 ÷ 0.43 =
Gain
34 033
731 707
697 674
34 033
14 August 2014
Dr
Foreign exchange loss
Cr
Accounts payable
300 000 ÷ 0.43 =
300 000 ÷ 0.39 =
Dr
Accounts payable
Cr
Cash
71 556
71 556
697 674
769 230
71 556
769 230
769 230
(£300 000 ÷ 0.39)
19(b) 15 March 2014
No entry as order only
11 May 204
Dr
Plant and equipment
Cr
Accounts payable
[to recognise the purchase. (300 000 ÷ 0.41 = 731 707)]
30 June 2014
Dr
Accounts payable
Cr
Plant and equipment
(300 000 ÷ 0.41) – (300 000 ÷ 0.43) = 34 033
731 707
731 707
34 033
34 033
As it is assumed to be a qualifying asset, any gain or loss to the date of delivery is
transferred to the cost of the asset. A qualifying asset includes an asset under construction
or otherwise being made ready for future productive use by the company in its own
operations.
15 July 2014
Dr
Plant and equipment
Cr
Accounts payable
(£300 000 ÷ 0.43 – £300 000 ÷ 0.42)
16 611
16 611
As it has ceased being a qualifying asset on 15 July 2014, any further gain or loss will go to profit
or loss.
14 August 2014
Dr
Foreign exchange loss
Cr
Accounts payable
(£300 000 ÷ 0.42 – £300 000 ÷ 0.39)
Dr
Cr
Accounts payable
Cash
54 945
54 945
769 230
769 230
Suggested Solutions taken from the Solutions Manual to accompany Australian Financial Accounting 7 Edition by Deegan.
© McGraw-Hill Australia, Ltd
Page 4 of 4