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Foreign Exchange Transactions in Accounting

The document outlines a revision question for a university course on foreign exchange transactions, focusing on the application of spot rates, Incoterms, and journal entries. It presents a case study involving Bright Smile Limited, a South African company, that purchased machines from a U.S. supplier, detailing the transaction timeline and relevant exchange rates. The document includes specific questions regarding exchange rate quoting methods, CIF shipping, and the classification of monetary and non-monetary items in financial statements.

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kimberlyfaith31
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161 views3 pages

Foreign Exchange Transactions in Accounting

The document outlines a revision question for a university course on foreign exchange transactions, focusing on the application of spot rates, Incoterms, and journal entries. It presents a case study involving Bright Smile Limited, a South African company, that purchased machines from a U.S. supplier, detailing the transaction timeline and relevant exchange rates. The document includes specific questions regarding exchange rate quoting methods, CIF shipping, and the classification of monetary and non-monetary items in financial statements.

Uploaded by

kimberlyfaith31
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

Revision Question

UNIVERSITY OF JOHANNESBURG
COLLEGE FOR BUSINESS AND ECONOMICS
DEPARTMENT OF COMMERCIAL ACCOUNTING
FAC22A2

UNIT 6: Foreign Exchange Transaction


Learning objectives
• Know how to use the indirect method for spot rates
• Knowing how to apply the different between spot rates given in a scenario
• Know how to the apply the different International Chamber of Commerce Terms of Trade
(commonly referred to as “Incoterms”)
• Know how to calculate the foreign gain/loss when the settlement date is after year-end
• Knowing how to process journal entries
• Know how to identify monetary and non-monetary items
Question 1 (Source: GAAP Graded Questions, Question 20.4 Adapted)
Bright Smile Limited, a South African company that manufactures toothpastes, bought 5 machines
required for testing the quality of toothpastes manufactured. The machines will be used in one of
the company’s factories based in Pretoria. The machines were bought from Industrial Warehouse
Limited, a company based in United State of America (currency of US dollar: $) that produces
machines for companies in the manufacturing industry.
Details relating to the machines purchased are as follows:

• The machines were ordered on 25 October 2021.


• The machines were loaded onto the ship on 15 November 2021. The ship left for South
Africa 5 days later on the 20 November 2021.
• The machines arrived in South Africa on 1 December 2021.
• The total invoice price was $50 000, invoiced on a Carriage, Insurance Freight basis (CIF).
• Bright Smile Limited paid the Industrial Warehouse Limited on 31 January 2022.
Bright Smile Limited’s Functional and presentation currency is the Rand (R). Related exchange
rates are as follows:

Spot Rate
Date SA Rand (R): US Dollar
($)
25 October 2021 13.50: 1
15 November 2021 13.75: 1
20 November 2021 13.80: 1
1 December 2021 14.10: 1
31 December 2021 14.20: 1
31 January 2022 14.40: 1

You are required to:


1. What method is used to quote the exchange rates? Give a reason for your answer. (2)
2. Briefly explain what shipping on a CIF basis means. (2)
3. Which items in the scenario are monetary items in Bright Smile Limited’s financial
statements? Give a reason for your answer (2)
4. Which items in the scenario are non-monetary items in Bright Smile Limited’s financial
statements? Give a reason for your answer (2)
5. Which elements will the monetary items and the non-monetary item be recorded as in
Bright Smile Limited’s financial statements? (2)
6. Provide the necessary journal entry/entries to recognize the above transactions in the
records of Bright Smile Limited on the following date: (7)
a) Transaction date
b) Settlement date
Note: Show all workings and Journal narration is not required
7. Calculate the balance of the monetary item that will be presented in the financial
statements of Bright Smile Limited for the year ended 31 December 2021. (1)

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