Foreign Exchange and Translation

Q1 UK company (reporting in £) borrows $5m on 1.1.X1 (Transaction date!), to be repaid on 31.12.X5

(Settlement date!) .

How should the loan be accounted for after

initial recognition?

Two options:
(a) Use of historical exchange rate or
(b) Closing rate for subsequent measurement of the loan

Q2 A US company buys goods from a German company. The order is placed on 1 st January 2020, at an
agreed price of €124,250 euros. At the time the exchange rate of €:$ was 2:1.
The US company decides to pay the supplier a few weeks later, when the exchange rate has changed to
2.05:1

Q3 European Trading Co. plc is a British parent (reporting in £)

 Invests on 1/1/20X1 CHF 3M in Swiss subsidiary
 Swiss subsidiary locally borrows CHF 2M and buys factory for CHF 5M
 Subsidiary reports CHF 500,000 as profit for 20X1
 Exchange rate £ / CHF:
Rate on 1/1/20X1 : £ 1 = CHF 4
Rate on 31/12/20X1: £ 1 = CHF 3
Average rate during 20X1: £ 1 = CHF 3.5

1 Jan 20X1 31 Dec 20X1

Fixed assets 5,000 5,000

less Depreciation - -250
Net current assets
Inventory __ 500
Monetary assets __ 750
Current liabilities __ -500
5,000 5,500
Long-term liabilities -2,000 -2,000
Total net assets 3,000 3,500
Financed by equity 1
Share capital 3,000 3,000
Retained earnings __ 500
Total equity 3,000 3,500
Q4.

Q5. A company with the dollar as its functional currency, purchases plant from a foreign entity for €18m on
31 May 2019 when the exchange rate was €2 to $1. The entity also sells goods to a foreign customer for
€10.5m on 30 September 2019, when the exchange rate was €1.75 to $1. At the entity’s year end of 31
December 2019, both amounts are still outstanding and have not been paid. The closing exchange rate was
€1.5 to $1.
How would the company account for these items as at 31 December 2019?

Q6. A company has a 100%-owned foreign subsidiary, which has a carrying value at a cost of $25m. It sells
the subsidiary on 31 December 2019 for €45m. As at 31 December 2019, the credit balance on the exchange
reserve, which relates to this subsidiary, was $6m. The functional currency of the entity is the dollar and the
exchange rate on 31 December 2019 is $1 to €1.5. The net asset value of the subsidiary at the date of
disposal was $28m.

Q7. Laertes Inc., a US-based company (year-end 31 st December 2019) buys a consignment of goods from a
supplier in Germany.
The order is placed on the 1st May 2019 for €124,250.

At the time of delivery the exchange rate was €2 to $1.

The company pays the supplier in full on the 1st July when the exchange rate is €2.05 to $1.

Laertes Inc. then sells the goods to a Mexican company, and agrees a price of
MXN 1,496,000 on the 15th July, when the exchange rate was MXN17 to $1.

Laertes Inc. receives payment in full on 1st August, when the exchange rate had moved to MXN18 to $1.

Required:

Show the entries in the books of Laertes Inc. for the following:

(1) The purchase and the payment to the German company.

(2) The sale and payment from the Mexican Company, including the recognition of profit on the sale
(3) How would the statement of comprehensive income look if the company had only made these two
foreign transactions?

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 Lecture Questions ppt
Q 8: Balshaw plc enters into a contract to purchase a piece of machinery from Euxton Inc at a price of
$85,000 on the following terms:
10% payable on delivery
50% one month later 40% two months later.

The machinery is ordered on 1st March 2017, and is dispatched from the US on 1st April 2017. The
machinery is received by Balshaw plc on 30th May 2017.
Balshaw plc makes the due payments on 1st June 2017, 1st July 2017, and the final settlement on 1st August
2017. The £/$ exchange rates were as follows
Date Exchange rate
1 March 2017 £1 = $1.20
1 April 2017 £1 = $1.25
30 May 2017 £1 = $1.20
1 June 2017 £1 = $1.20
30 June 2017 £1 = $1.15
1 July 2017 £1 = $1.15
1 August 2017 £1 = $1.10

Balshaw plc has a year end of the 30th June. Show both the statement of financial position and income
statement entries of Balshaw plc for the years ending 30th June 2017 and 2018.

Q 9: Iago Ltd acquired a German subsidiary on 3 January 2018 when the subsidiary’s retained earnings
amounted to EUR 4,000. On 30 November 2019, Iago Ltd purchased goods from the German subsidiary for
EUR 5 ,000. The goods remained unsold at the year-end and remained unpaid at the year-end.

The applicable exchange rates for EURO:STERLING:

3 January 2018: 0,.78
30 November 2019: 0.8525
31 December 2019: 0.8562
Average in 2019: 0.8188
Average in 2018: 0.7261
The financial statements of the German subsidiary at 31 December 2019 were as follows:

STATEMENT OF FINANCIAL POSITION

ASSETS
Property, Plant and Equipment 80,000
Inventories 23,000
Trade Receivables 23,000
Cash at Bank 20,000
TOTAL ASSETS 146,000

LIABILITIES AND EQUITY

Share Capital 100,000
Retained Earnings 31,000
Bank Loan 10,000
Trade Payables 5,000
TOTAL EQUITY AND LIABILITIES 146,000

STATEMENT OF PROFIT OR LOSS

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Sales 135,000
Cost of Sales (110,000)
Other Expenses (7,000)
PROFIT BEFORE TAX 18,000
Income Tax Expenses (3,000)
PROFIT AFTER TAX 15,000

Required: As far as possible, translate the financial statements of the German subsidiary at 31 December
2019 in the presentation currency of GBP for the purposes of consolidation, including calculations of the
following:

(a) the intra-group balances using an appropriate rate for the year ending 2019
(b) the retained earnings of the subsidiary by year
(c) Show how you have derived your calculation for any foreign exchange difference that may have
arisen when restating the subsidiary’s financial statements
(d) Explain your use of the appropriate exchange rate in each case (20 marks)
(e) Discuss the possible methods available to a company when translating the value of non-current assets
purchased and held in a foreign currency. (5 marks)

Q 10:
FOREIGN EXCHANGE RATES:
Dollars ($) and Euros (€)
DIRECT INDIRECT
($1 / €1) (€1 / $1)
7/1/X8 $1.167 €0.855
12/31/X8 1.176 0.850
12/31/X9 1.156 0.865
Dollar weakens 7/1 to 31/12/19
Dollar strengthens 31/12/19 to 31/12/20
Company holds €20,000 (euros):
(Must revalue account denominated in foreign
currency units to equivalent U.S. dollar value)