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ACCT3321 Study Guide - Final Guide: Write-Off, Cash Flow, Cash Flow Hedge

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pearskunk216
3 Jul 2018
School
UWA
Department
Accounting
Course
ACCT3321
Professor
Lyndie Bayne

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FOREIGN CURRENCY TRANSACTIONS AND FORWARD EXCHANGE
CONTRACTS
Foreign currency transactions
- Australian companies to account for a transaction denominated by foreign
currency by measuring the transaction in the company’s functional currency
oE.g. an Australian company entering into a transaction denominated in
US$ may need to account for that transaction by measuring the
relevant balance using A$
- Functional currency = the currency of the primary economic environment in
which the company operates
- A foreign currency transaction involves a currency other than the functional
currency
oE.g. buy or sell goods at prices denominated in Japanese Yen/pounds,
borrow or lend funds where the amounts payable are in US$
- Monetary items are units of currency held and assets and liabilities to be
received or paid in fixed or determinable amounts of currency.
oThey need to be translated into A$
oE.g. if we bought machinery from America and we were going to pay
for it in 3 months’ time, the accounts payable that is in dollars is the
monetary item.
Exchange rate
-Spot rate – rate on a particular day
-Closing rate at end of day – rate at the end of the day
- Usually quoted showing a buying rate and selling rate – what the rate will be
when bought and sold – bid-ask spread?
Indirect
A$1.00 equals US$1.05/1.08
Therefore, the bid (buying) rate of US$1.05 to buy A$1 from the customer
The offer (selling) rate of UD$1.08 to sell A$1 to customer
Therefore, the dealer gets US$0.03 for acting as the medium, the difference being
the bid-ask spread.
Australian company has foreign currency payable of US$5,000 and a receivable of
US$5,000.
- US$5,000/ 1.05 = $4,762 – payable
- US$5,000/1.08 = A$4,630 – receivable
- Bid-ask spread = A$132
Direct
- US$1.00 equals A$0.9259/0.9524
- Therefore, the bid (buying) rate of A$0.9259 to buy US$1 from a customer
- The offer (selling) rate of A$0.9524 to sell US$1 to customer
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Australian company has foreign currency payable of US$5,000 and a receivable
of US$5,000
- US$5,000 x 0.9524 = $4,762 – payable
- US$5,000 x 0.9259 = $4,630 – receivable
- Bid-ask spread = A$132
Exchange gains (losses) on monetary asset arise if there is an increase (decrease)
in the direct rate of exchange or decrease (increase) in the indirect rate of exchange.
-Non-monetary items
oIs an asset or liability that is not receivable or payable in foreign
currency
oE.g. inventory and property, plant and equipment
oInitially measured at historical cost, using the spot exchange rate at the
date of acquisition
oSubsequent measurement: no exchange differences if original
translated cost still applies
oExchange differences do affect the measurement
Qualifying assets
Inventories requiring time to bring them to a saleable
position, assets resulting from development,
manufacturing plants.
Cost includes borrowing costs
Fair value assets
Is translated using the spot exchange rate at the date of
revaluation
write-downs and impairments
using spot exchange rate at the date of write-down
using closing exchange rate at the end of the reporting
period
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Document Summary

Australian companies to account for a transaction denominated by foreign currency by measuring the transaction in the company"s functional currency: e. g. an australian company entering into a transaction denominated in. Us$ may need to account for that transaction by measuring the relevant balance using a$ Functional currency = the currency of the primary economic environment in which the company operates. A foreign currency transaction involves a currency other than the functional currency: e. g. buy or sell goods at prices denominated in japanese yen/pounds, borrow or lend funds where the amounts payable are in us$ Spot rate rate on a particular day. Closing rate at end of day rate at the end of the day. Therefore, the bid (buying) rate of us. 05 to buy a from the customer. The offer (selling) rate of ud. 08 to sell a to customer. Therefore, the dealer gets ussh. 03 for acting as the medium, the difference being the bid-ask spread.

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Related Questions

Zugar Company is domiciled in a country whose currency is the dinar. Zugar begins 2017 with three assets: cash of 20,000 dinars, accounts receivable of 80,000 dinars, and land that cost 200,000 dinars when acquired on April 1, 2016. On January 1, 2017, Zugar has a 150,000 dinar note payable, and no other liabilities. On May 1, 2017, Zugar renders services to a customer for 120,000 dinars, which was immediately paid in cash. On June 1, 2017, Zugar incurred a 100,000 dinar operating expense, which was immediately paid in cash. No other transactions occurred during the year. Currency exchange rates for 1 dinar follow:

April 1, 2016 $ 0.33 = 1 dinar

January 1, 2017 0.36 = 1

May 1, 2017 0.37 = 1

June 1, 2017 0.39 = 1

December 31, 2017 0.41 = 1

a) Assume that Zugar is a foreign subsidiary of a U.S. multinational company that uses the U.S. dollar as its reporting currency. Assume also that the dinar is the subsidiary’s functional currency. What is the translation adjustment for this subsidiary for the year 2017?

b) Assume that Zugar is a foreign subsidiary of a U.S. multinational company that uses the U.S. dollar as its reporting currency. Assume also that the U.S. dollar is the subsidiary’s functional currency. What is the remeasurement gain or loss for 2017?

c) Assume that Zugar is a foreign subsidiary of a U.S. multinational company. On the December 31, 2017, balance sheet, what is the translated value of the Land account? On the December 31, 2017, balance sheet, what is the remeasured value of the Land account? (Input all amounts as positive.)

a) Positive Translation adjustment = ?

b) gain remeasurement = ?

c) Translated value of land = 82,000 & Remeasured value of land = 66,000

Sendelbach Corporation is a U.S.-based organization with operations throughout the world. One of its subsidiaries is headquartered in Toronto. Although this wholly owned company operates primarily in Canada, it engages in some transactions through a branch in Mexico. Therefore, the subsidiary maintains a ledger denominated in Mexican pesos (Ps) and a general ledger in Canadian dollars (C$). As of December 31, 2017, the subsidiary is preparing financial statements in anticipation of consolidation with the U.S. parent corporation. Both ledgers for the subsidiary are as follows:

Main Operation—Canada
Debit Credit
Accounts payable C$ 41,555
Accumulated depreciation 42,000
Buildings and equipment C$ 182,000
Cash 41,000
Common stock 65,000
Cost of goods sold 218,000
Depreciation expense 8,400
Dividends, 4/1/17 34,000
Gain on sale of equipment, 6/1/17 6,500
Inventory 94,000
Notes payable—due in 2020 84,000
Receivables 83,000
Retained earnings, 1/1/17 150,590
Salary expense 38,000
Sales 327,000
Utility expense 10,500
Branch operation 7,745
Totals C$ 716,645 C$ 716,645
Branch Operation—Mexico
Debit Credit
Accounts payable Ps 67,500
Accumulated depreciation 40,000
Building and equipment Ps 55,000
Cash 66,500
Depreciation expense 3,500
Inventory (beginning—income statement) 38,000
Inventory (ending—income statement) 35,500
Inventory (ending—balance sheet) 35,500
Purchases 72,000
Receivables 36,000
Salary expense 10,500
Sales 139,000
Main office 35,000
Totals Ps 317,000 Ps 317,000

Additional Information

The Canadian subsidiary’s functional currency is the Canadian dollar, and Sendelbach’s reporting currency is the U.S. dollar. The Canadian and Mexican operations are not viewed as separate accounting entities.

The building and equipment used in the Mexican operation were acquired in 2007 when the currency exchange rate was C$0.21 = Ps 1.

Purchases of inventory were made evenly throughout the fiscal year.

Beginning inventory was acquired evenly throughout 2016; ending inventory was acquired evenly throughout 2017.

The Main Office account on the Mexican records should be considered an equity account. This balance was remeasured into C$7,745 on December 31, 2017.

Currency exchange rates for 1 Ps applicable to the Mexican operation follow:

Weighted average, 2016 C$ 0.26
January 1, 2017 0.28
Weighted average rate for 2017 0.30
December 31, 2017 0.31

The December 31, 2016, consolidated balance sheet reported a cumulative translation adjustment with a $51,950 credit (positive) balance.

The subsidiary’s common stock was issued in 2004 when the exchange rate was $0.44 = C$1.

The subsidiary’s December 31, 2016, retained earnings balance was C$150,590, an amount that has been translated into U.S.$70,363.

The applicable currency exchange rates for 1 C$ for translation purposes are as follows:

January 1, 2017 US$ 0.70
April 1, 2017 0.69
June 1, 2017 0.68
Weighted average rate for 2017 0.67
December 31, 2017 0.65

Remeasure the Mexican operation’s account balances into Canadian dollars. (Note: Back into the beginning net monetary asset or liability position.)

Prepare financial statements (income statement, statement of retained earnings, and balance sheet) for the Canadian subsidiary in its functional currency, Canadian dollars.

Translate the Canadian dollar functional currency financial statements into U.S. dollars so that Sendelbach can prepare consolidated financial statements.

Complete this question by entering your answers in the tabs below.

Show less

Req A

Remeasure the Mexican operation’s account balances into Canadian dollars. (Note: Back into the beginning net monetary asset or liability position.) (Input all amounts as positive values.)
Canadian Dollars
Debit Credit
Accounts payable
Accumulated depreciation
Building and equipment
Cash
Depreciation expense
Inventory (beginning—income statement)
Inventory (ending—income statement)
Inventory (ending—balance sheet)
Purchases
Receivables
Salary expense
Sales
Main office
Total

b. Prepare financial statements (income statement, statement of retained earnings, and balance sheet) for the Canadian subsidiary in its functional currency, Canadian dollars.
c. Translate the Canadian dollar functional currency financial statements into U.S. dollars so that Sendelbach can prepare consolidated financial statements.

(Round U.S. Dollar values to 2 decimal places. Amounts to be deducted and losses should be indicated with a minus sign.)

Show less
SENDELBACH CORPORATION
Financial Statements
For the Year Ended December 31, 2017
Canadian Dollar U.S. Dollar
Income Statement:
C$
C$
C$
Statement of Retained Earnings:
Retained earnings, 1/1/15 C$
Retained earnings, 12/31/15 C$
Balance Sheet:
Assets:
C$
Total C$
Liabilities and Equities:
C$
Total C$

Sendelbach Corporation is a U.S.–based organization with operations throughout the world. One of its subsidiaries is headquartered in Toronto. Although this wholly owned company operates primarily in Canada, it engages in some transactions through a branch in Mexico. Therefore, the subsidiary maintains a ledger denominated in Mexican pesos (Ps) and a general ledger in Canadian dollars (C$). As of December 31, 2015, the subsidiary is preparing financial statements in anticipation of consolidation with the U.S. parent corporation. Both ledgers for the subsidiary are as follows:
Main Operation—Canada
Debit Credit
Accounts payable C$ 39,605
Accumulated depreciation 41,000
Buildings and equipment C$ 181,000
Cash 40,000
Common stock 64,000
Cost of goods sold 217,000
Depreciation expense 8,300
Dividends, 4/1/15 33,000
Gain on sale of equipment, 6/1/15 6,400
Inventory 93,000
Notes payable—due in 2018 83,000
Receivables 82,000
Retained earnings, 1/1/15 149,590
Salary expense 37,000
Sales 326,000
Utility expense 10,400
Branch operation 7,895
Totals C$ 709,595 C$ 709,595
Branch Operation—Mexico
Debit Credit
Accounts payable Ps 64,900
Accumulated depreciation 39,900
Building and equipment Ps 54,000
Cash 66,000
Depreciation expense 3,400
Inventory (beginning—income statement) 37,000
Inventory (ending—income statement) 35,000
Inventory (ending—balance sheet) 35,000
Purchases 71,000
Receivables 35,000
Salary expense 10,400
Sales 138,000
Main office 34,000
Totals Ps 311,800 Ps 311,800
Additional Information
•

The Canadian subsidiary’s functional currency is the Canadian dollar, and Sendelbach’s reporting currency is the U.S. dollar. The Canadian and Mexican operations are not viewed as separate accounting entities.
•

The building and equipment used in the Mexican operation were acquired in 2005 when the currency exchange rate was C$0.22 = Ps 1.
• Purchases should be assumed as having been made evenly throughout the fiscal year.
•

Beginning inventory was acquired evenly throughout 2014; ending inventory was acquired evenly throughout 2015.
•

The Main Office account on the Mexican records should be considered an equity account. This balance was remeasured into C$7,895 on December 31, 2015.
• Currency exchange rates for 1 Ps applicable to the Mexican operation follow:
Weighted average, 2014 C$ 0.27
January 1, 2015 0.29
Weighted average rate for 2015 0.31
December 31, 2015 0.32
•

The December 31, 2014, consolidated balance sheet reported a cumulative translation adjustment with a $50,950 credit (positive) balance.
• The subsidiary’s common stock was issued in 2004 when the exchange rate was $0.43 = C$1.
•

The subsidiary’s December 31, 2014, Retained Earnings balance was C$149,590.00, a figure that has been translated into US$71,043.
• The applicable currency exchange rates for 1 C$ for translation purposes are as follows:
January 1, 2015 US$ 0.70
April 1, 2015 0.69
June 1, 2015 0.68
Weighted average rate for 2015 0.67
December 31, 2015 0.65
a.

Remeasure the Mexican operation’s figures into Canadian dollars. (Hint: Back into the beginning net monetary asset or liability position.) (Input all amounts as positive values.)

Canadian Dollars
Debit Credit
Accounts payable 20,768
Accumulated depreciation 8,778
Building and equipment 11,880
Cash 21,120
Depreciation expense 748
Inventory (beginning—income statement) 9,990
Inventory (ending—income statement) 10,850
Inventory (ending—balance sheet) 10,850
Purchases 22,010
Receivables 11,200
Salary expense 3,224
Sales 42,780
Main office 7,895
Remeasurement loss 49
Total 91,071 91,071

b.

Prepare financial statements (income statement, statement of retained earnings, and balance sheet) for the Canadian subsidiary in its functional currency and Prepare consolidated financial statement in parent currency (that is U.S. dollars). (Round U.S. Dollar values to 2 decimal places. Amounts to be deducted and losses should be indicated with a minus sign.)

SENDELBACH CORPORATION
Financial Statements
For the Year Ended December 31, 2015
Canadian Dollar U.S. Dollar
Income Statement:
Sales C$ 368,780
Cost of goods sold
Gross profit C$ 368,780 $0.00
Salary expense
Utility expense
Depreciation expense
Gain on sale of equipment
Remeasurement loss
Net income C$ 368,780 $0.00
Statement of Retained Earnings:
Retained earnings, 1/1/15 C$
Net income
Dividends
Retained earnings, 12/31/15 C$ 0 $0.00
Balance Sheet:
Assets:
Cash C$
Receivables
Inventory
Buildings and equipment
Accumulated depreciation
Total assets C$ 0 $0.00
Liabilities and Equities:
Accounts payable C$
Notes payable
Common stock
Retained earnings
Total liabilities and equities C$ 0 $0.00

I figured out part A but need help with part B please!

Thank you in advance!!!