Deegan5e SM Ch35

PART 9: FOREIGN CURRENCY
Chapter 35
Accounting for foreign currency transactions
35.1
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 madeup of accounts that were denominated in numerous currencies. Such financial statements
would be very difficult to understand.
35.2
At balance date (also referred to as reporting date) all foreign currency monetary assets and
monetary liabilities must be translated to Australian dollar equivalents (assumed to be the
functional currency) using the exchange rate in place at balance date. 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.
35.3
When a transaction occurs that is denominated in a foreign currency, that transaction should
initially be translated at the exchange rate in place at the date of the transaction (also referred
to as the spot rate).
35.4
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. It is not to be adjusted against the cost of the
inventory.
35.5
AASB 123 provides guidance in relation to qualifying assets. The standard relates to
borrowing costs, which are broadly defined within it as interest and other costs incurred by an
entity in connection with the borrowing of funds. Exchange rate differences generated in
relation to outstanding loans would be considered to be borrowing costs.
A qualifying asset is defined in AASB 123 as an asset that necessarily takes a substantial
period of time to get ready for its intended use or sale. According to paragraph 6 of AASB
123:
Examples of qualifying assets are inventories that require a substantial period of time
to bring them to a saleable condition, manufacturing plants, power generation
facilities and investment properties. Other investments, and those inventories that are
routinely manufactured or otherwise produced in large quantities on a repetitive basis
over a short period of time, are not qualifying assets. Assets that are ready for their
intended use or sale when acquired also are not qualifying assets.
AASB 123 requires that borrowing costs (which include the exchange differences) that relate
to qualifying assets should be included in the cost of acquisition of the asset, to the extent
that they arise before the assets cease to be qualifying assets. Only those differences
occurring before an asset ceases to be a qualifying asset should be included. The exchange
differences included in the cost of qualifying assets for the financial year are the amounts that
would otherwise have been included within the periods profit or loss. The amount capitalised
as the cost of the asset shall not exceed its recoverable amount. If exchange differences cause
the recoverable amount to be exceeded, the excess should be written-off to the income
statement. Paragraphs 11 and 12 of AASB 123 state:
Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan
351
11. Borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset shall be capitalised as part of the cost of that asset.
The amount of borrowing costs eligible for capitalisation shall be determined in
accordance with this Standard.
12. Under the allowed alternative treatment, borrowing costs that are directly
attributable to the acquisition, construction or production of an asset are included in
the cost of that asset. Such borrowing costs are capitalised as part of the cost of the
asset when it is probable that they will result in future economic benefits to the entity
and the costs can be measured reliably. Other borrowing costs are recognised as an
expense in the period in which they are incurred.
As indicated above, where a qualifying asset is not involved, there is a general rule that
exchange difference relating to monetary items shall be brought to account in the income
statement in the period in which the exchange rate changes.
35.6
We must refer to AASB 139 for the rules pertaining to accounting for hedging transactions.
Hedging refers to actions taken, whether by entering into a foreign currency contract or
otherwise, with the objective of mitigating possible adverse financial effects of movements in
exchange rates.
To minimise the risk associated with foreign currency monetary items, an entity may enter a
hedge contract. By entering into an agreement which takes a position opposite to the original
transaction, an entity can minimise its exposure to foreign currency movements. For example,
if an entity is required to pay an outstanding obligation that is denominated in a foreign
currency, then it can eliminate its risk to foreign currency movements by entering an
agreement with a third party, with that third party agreeing to supply the foreign currency at a
predetermined rate. For example, if the entity had purchased some inventory at a cost of
US$1 million (when the exchange rate was A$1.00 = US$0.65) for which payment was not
due for one month, then it can eliminate its risk by entering a forward-rate agreement with a
bank (this would be a hedging arrangement) in which the bank will agree to supply
US$1 million in one months time at a forward rate of A$1.00 = US$0.62. This means the
entity has locked the price in to $1 000 000 0.62 = A$1 612 903. That is, regardless of
what happens to exchange rates, the entity will pay A$1 612 903 for the goods (and the
inventory would be the hedged item). The entity will have a foreign currency receivable, and
a foreign currency payable for the same amount, denominated in the same currency. Any
gains or losses on one will be offset by gains or losses on the other. If the exchange rate
improves from the perspective of the Australian dollar, the entity will record a gain on the
liability with the overseas supplier, which will be fully offset by the loss recorded on the
agreement with the bank (due to a reduction in the value of the foreign currency receivable).
If the value of the Australian dollar declines then the opposite effects will occur.
35.7
A foreign currency monetary item is considered to be perfectly hedged if the gains or losses
on the hedge contract (perhaps a forward-rate agreement with a bank) offset the losses or
gains on the primary transaction (such as a purchase or sale of inventory to an overseas
party). For example, if a reporting entity had sold US$100 000 to a US customer and also
had a forward-exchange-rate agreement with the bank in which the bank agreed to buy
US$100 000 from the entity at a predetermined rate, then the overseas sale contract would
be considered to be perfectly hedged.
35.8
(a)
If the hedge contract is entered into prior to the date of a sale or purchase, and if it
relates to a particular purchase or sale (that is, it is a specific hedge which would be
of the form of a cash-flow hedge), then any gains or costs at the date of entering the
352
hedge (these would include brokerage fees, and any discounts or premiums on
hedging contracts due to differences in the spot rate and the forward rate when the
hedging contract was entered into), and any further gains or losses up to and
including the date of purchase or sale shall be adjusted against the sales or purchase
price of the goods or services. Subsequent gains or losses are then taken to the profit
and loss in the period in which the exchange rate fluctuation occurs.
(b)
35.9
If the hedge does not satisfy the requirements for a cash-flow hedge as stipulated by
paragraph 88 of AASB 139, then any cost or gains of entering the hedge shall be
deferred and amortised over the life of the hedge, and any foreign exchange gains or
losses shall be included in the profit or loss in the period in which they arise.
A foreign currency swap arises where the obligation related to a loan denominated in one
currency is swapped for a loan denominated in another currency.
For example, if a particular organisation has a number of receivables that are denominated in
a foreign currency, then changes in spot rates may potentially create sizeable foreign currency
gains, or sizeable foreign currency losses. If that same organisation is able to convert some of
its domestic loans into foreign currency loans, of the same denomination as its receivables,
then it will be able to effectively insulate or hedge itself from the effects of changes in spot
rates. Such an organisation may seek to find another entity that is prepared to swap its
foreign currency loans for the organisations domestic loans. That is, if we have receivables
and payables that are both denominated in another particular foreign currency, then changes
in the spot rates will create gains on one, but losses on the other. To the extent that the
receivables and payables are for the same amount and denominated in the same currency, the
losses on one monetary item (perhaps the foreign currency payable) will be offset by gains on
the other monetary item (perhaps the foreign currency receivable).
35.10 5 June 2008

Dr
Cr
Inventory
Accounts payable
543 478
543 478
543 478 = 250 000 0.46

30 June 2008
Dr
Cr
Loss on foreign currency

Accounts payable
24 704
Book value of foreign currency payable

Value of foreign currency payable at 30 June 2008 (250 000 0.44)
Loss on foreign currency payable
24 704
543 478
568 182
24 704
353
35.11 1 July 2008

Dr
Cr
Cash
Loan payable
4 166 667
4 166 667
Recognition of the foreign currency loan at the 1 July 2008 spot rate.
4 166 667 = 2 000 000 0.48
30 June 2009
Dr
Cr
Interest expense
Cash
320 000
320 000
Recognition of year end interest payment.

320 000 = (2 000 000 8%) 0.50
Dr
Cr
Loan payable
Foreign currency revenue
166 667
166 667
Recognition of the effect of retranslation of the loan at 30 June 2009 spot rates. The decrease
in the amount of the loan payable is to be treated as revenue in the period in which the
exchange rate moves.
Balance of payable at 1 July 2008: 2 000 000 0.48

Balance of payable at 30 June 2009: 2 000 000 0.50
Increase in loan payable
=
=
$4 166 667
4 000 000
$166 667
35.12 The accounting entries in the books of Coolum Ltd would be:
10 July 2008
Dr
Cr
Cash
Consulting revenue
1 282 051
1 282 051
Recognition of consulting revenue at the 10 July 2008 spot rate.

1 282 051 = 1 000 000 0.78
30 June 2009
Dr
Cr
Cash
Interest revenue
129 680
129 680
Recognition of the interest revenue at the 30 June 2009 spot rate.

129 680 = (1 000 000 10% 355/365) 0.75
354
Dr
Cr
Cash
Foreign currency revenue
51 282
51 282
Adjustment for the change in the Australian dollar equivalent of the overseas bank deposit
using the 30 June 2009 spot rates.
Balance of cash at 10 July 2008:
Balance of cash at 30 June 2009:
Increase in accounts receivable
1 000 000 0.78

400 000 0.75
=
=
$1 282 051
1 333 333
$51 282
35.13 Being under construction, the item would appear to be a qualifying asset under AASB 123
for the period from 1 March 2008 to 1 June 20085. Therefore, the movement in exchange
rates to 1 June 2008 would be incorporated in the cost of the asset. Any subsequent
movements would be taken to the income statement.
1 March 2008
Dr
Cr
Machinery
Accounts payable
625 000
625 000
750 000 1.20 = 625 000

To recognise the cost of the asset on 1 March 2008.
1 June 2008
Dr
Cr
Accounts payable
Machinery
48 077
48 077
(750 000 1.30) 625 000 = 48 077

To recognise the change in the Australian dollar equivalent of the foreign currency monetary
item during the period in which the asset is a qualifying asset.
30 June 2008
Dr
Cr
Foreign exchange expense

Accounts payable
23 077
23 077
(750 000 1.25) (750 000 1.30)

To recognise the change in the Australian dollar equivalent of the foreign currency monetary
item in the period after which the asset ceases to be a qualifying asset.
355
35.14 (i)
To record the purchase of inventory on 1 March 2008.

1 March 2008
Dr
Cr
Inventory
Accounts payableforeign currency
2 142 857
2 142 857
Transactions are to be measured and brought to account using the exchange rate at
the date of the transaction (the spot rate).
2 142 857 = 1 500 000 0.70
(ii)
To record the forward rate contract on 1 May 2008.

1 May 2008
Dr
Dr
Cr
Foreign currency receivableBank

Deferred hedge discount
Forward-rate contract commitment
1 333 333
137 255
1 470 588
1 333 333 = 1 000 000 0.75

1 470 588 = 1 000 000 0.68
The foreign currency receivable is valued at the spot rate (that days exchange rate).
It will increase or decrease in value as the exchange rate changes. Changes in the
value of the foreign currency receivable will offset the gains or losses on the accounts
payable, which is denominated in the foreign currency. The forward rate contract
commitment is valued at the forward rate agreed to with The Bank, and because it is
based on an agreed forward rate, it will not change. It represents the amount of
Australian dollars Possum Ltd will have to give the bank on 1 August 2008 to
receive, in exchange, US$1 000 000regardless of what happens to the exchange
rate. The deferred hedge discount represents the difference between the value of the
foreign currency receivable and the forward-rate commitment and provides the Bank
with a payment to cover it for the exchange rate risk it has agreed to accept as a
result of its forward-rate agreement with Possum Ltd.
(iii)
To record the foreign exchange gain on the account payable at 30 June 2008
Remember, we must account for the purchase transaction with the overseas supplier,
and the hedge transaction (probably with a domestic bank) separately. All foreign
currency monetary items must be adjusted at reporting date, with adjustment being
necessary to reflect the value of the foreign currency monetary items on the basis of
the reporting date spot rates.
356
30 June 2008
Dr
Cr

Foreign exchange gain
59 524
59 524
Accounts payable book value

Value at 30 June 2008 (1 500 000 0.72)
2 142 857
2 083 333
59 524
As the liability in Australian dollars has decreased, the movement in exchange rates
has created a gain in relation to the account payable.
(iv)
To record the foreign exchange gain on the forward rate contract to 30 June 2008
30 June 2008
Dr
Cr

Foreign exchange gain (income statement)
55 556
55 556
Book value of foreign currency receivable

Value at 30 June 2008 (1 000 000 0.72)
Gain on forward rate contract
1 333 333
1 388 889
55 556
As the receivable in Australian dollars has increased, the movement in exchange rates
has created a gain in relation to the receivable.
(v)
To record the amortisation of the deferred hedge discount from 1 May 2008 to
30 June 2008
30 June 2008
Dr
Cr
Hedge
discount
expense
statement)
(income
91 503
91 503
91 503 = (2/3) (137 255)

(vi)
To record the foreign exchange loss on the account payable from 30 June 2008 to
1 August 2008
1 August 2008
Dr
Cr
Foreign exchange loss

59 524
Book value of account payable as at 30 June 2008

Value of account payable at 1 August 2008 (1 500 000 70)
59 524
2 083 333
2 142 857
59 524
As the liability in Australian dollars has increased, the movement in exchange rates
has created a loss in relation to the account payable.
(vii)
To record the foreign exchange gain on the hedge contract from 30 June 2008 to
1 August 2008
357
1 August 2008
Dr
Cr

39 682
39 682
Book value of foreign currency receivable at 30 June 2008

Value of receivable at 1 August 2008 (1 000 000 0.70)
Gain on forward-rate contract
1 388 889
1 428 571
39 682
As the receivable in Australian dollars has increased, the movement in exchange rates
has created a gain in relation to the receivable.
(viii)
To record the amortisation of the deferred hedge discount from 30 June 2008 to
1 August 2008
1 August 2008
Dr
Cr
Hedge discount expense

45 752
45 752
45 752 = (1/3) (137 255)

(ix)
To record the settlement of the forward-rate contract and the account payable on
1 August 2008
1 August 2008
Dr
Cr
Dr
Cr
Cr

Cash
Cash
1 470 588
1 470 588
2 142 857
1 428 571
714 286
On 1 May 2008, The Bank had agreed to provide Possum with US$1 000 000 in
exchange for A$1 470 588. The value of this amount when denominated in Australian
dollars, as at 1 August 2008, is $1 428 571. Possum also has to make a payment for
an additional US$500 000 at the 1 August exchange rate for funds were not subject to
a forward-rate agreement.
35.15 As the hedge contract was entered into before the date of purchase, and as it specifically
relates to the purchase or the inventory, the exchange differences on the hedge contract to the
extent that they occur up to the date of the purchase, and the costs arising at the time of
entering the transaction, shall be deferred in equity and subsequently included in the
measurement of the purchase price of the inventory. The hedge is considered to represent a
cash-flow hedge that satisfies the requirements of paragraph 88 of AASB 139.
358
(i)
To record the hedge contract on 1 March 2008

1 March 2008
Dr
Dr
Cr

Deferred hedge discount (in equity)
3 333 333
416 667
3 750 000
The right to receive the foreign currency is valued at the spot rate. The forward-rate
contract commitment is valued at the agreed forward rate.
3 333 333 = 1 500 000 0.45
3 750 000 = 1 500 000 0.40
(ii)
To record the purchase of the inventory on 1 June 2008

1 June 2008
Dr
Cr
Inventory
3 488 372
3 488 372
$3 488 372 = 1 500 000 0.43

To record the accounts payable and inventory at the spot rate on the date of purchase
pursuant to AASB 121.
(iii)
To record the change in the value of the forward-rate contract for the period to the
date of the purchase
1 June 2008
Dr
Cr

Deferred foreign exchange gain (in equity)
150 039
Dr
Cr

Inventory
150 039
150 039
150 039
Book value of hedge contract

Value of hedge contract at 1 June 2008 (1 500 000 0.43)
Gain on hedge receivable to 1 June 2008
3 333 333
3 488 372
150 039
Gains or losses on the hedge contract, up to the point of purchase, are taken to
owners equity and then subsequently adjusted against the cost of inventory pursuant
to AASB 121.
(iv)
To transfer the deferred hedge discount to inventory on the date of purchase

1 June 2008
Dr
Cr
Inventory
416 667
416 667
359
To increase the cost of the inventory by the deferred discount on the forward-rate
contract, which pursuant to AASB 121 has been transferred to equity until the date of
purchase.
(v)
To record the foreign exchange loss on the account payable to 30 June 2008
30 June 2008
Dr
Cr

357 782
357 782
Account payable, as recorded at 1 June 2008

Account payable at 30 June 2008 (1 500 000 0.39)
Foreign exchange loss due to the change in the spot rate
3 488 372
3 846 154
357 782
As the payable in Australian dollars has increased, the movement in exchange rates
has created a loss.
(vi)
To record the gain on the forward-rate contract at 30 June 2008

30 June 2008
Dr
Cr

357 782
357 782
Hedge receivable as at 1 June 2008

Hedge receivable as at 30 June 2008 (1 500 000 0.39)
Foreign exchange gain on hedge contract
3 488 372
3 846 154
357 782
As the purchase occurred previously, gains and losses are included in the periods
profit or loss. They are only deferred up until the date of purchase. The gain on the
foreign currency receivable offsets the loss due relating to the movement in the value
of the accounts payable.
(vii)
To record the foreign exchange gain on accounts payable between 30 June 2008 and
1 August 2008
1 August 2008
Dr
Cr

187 617
Accounts payable balance at 30 June 2008

Accounts payable using the 1 August 2008 spot rate
(1 500 000 0.41)
Gain on monetary item due to change in spot rate
187 617
3 846 154
3 658 537
187 617
As the payable in Australian dollars has decreased, the movement in exchange rates
has created a gain.
3510
(viii)
To revise the value of the foreign currency receivable

1 August 2008
Dr
Cr

187 617
187 617
Foreign currency receivable as at 30 June 2008

Foreign currency receivable as at 1 August 2008
(1 500 000 0.41)
Loss on foreign currency receivable
3 846 154
3 658 537
187 617
As the commitment in Australian dollars has decreased, the movement in exchange

rates has created a loss which offsets the gain on the amount owed to the foreign
supplier.
(ix)
To record settlement of the foreign currency contract

1 August 2008
Dr
Cr

Cash
3 750 000
3 750 000
The bank supplies Kanga Ltd with 1 500 000 at the agreed forward rate of
A$1.00 = 0.40.
3 750 000 = 1 500 000 0.40
(x)
To record payment of the account payable on 1 August 2008

1 August 2008
Dr
Cr

3 658 537
3 658 537
1 086 957 = 500 000 0.46

The Bank transfers 1 500 000 (A$3 658 537) to Ferrett plc, as agreed to on
1 March 2008.
35.16 The transaction is not a hedge of a specific commitment for the purposes of AASB 139.
Hence, any gains or losses on the hedge shall be transferred to the income statement, and any
costs associated with entering the hedge agreement are deferred and amortised over the term
of the hedge contract, because the hedge contract was entered into after the date of sale.
(i)
To record the sale on 1 May 2008

1 May 2008
Dr
Cr
Accounts receivableforeign currency

Sales
5 952 381
5 952 381
The sale is recorded using the spot rate on the date of the sale in accordance with
AASB 121.
3511
2 777 778 = 5 000 000 0.84

(ii)
To record the forward-rate contract entered into on 1 June 2008

1 June 2008
Dr
Cr
Cr
Accounts receivableBank
5 555 556
542 005
6 097 561
The accounts receivable is converted at the forward rate, which is the amount that the
bank has agreed to provide in exchange for US$5 000 000. The value of this
receivable will not change, regardless of fluctuations in the exchange rate. The
forward-rate contract commitment is converted at the spot rate on the date on the
contract. The balance of the forward-rate commitment will change as the spot rate
changes. Any gains or losses on the value of the forward-rate contract commitment
will offset some of the gains or losses on the value of the accounts receivable which is
denominated in the foreign currency. The deferred hedge will be amortised over the
life of the hedge.
5 555 556 = 5 000 000 0.90
6 097 561 = 5 000 000 0.82
(iii)
To record the movement in the account receivable to 30 June 2008

30 June 2008
Dr
Cr

70 028
70 028
Book value of account receivable

Value of receivable at 30 June 2008 (5 000 000 0.85)
5 952 381
5 882 353
70 028
As the receivable in Australian dollars has decreased, the movement in exchange rates
has created a loss in relation to the account receivable.
(iv)
To record the movement on the forward-rate contract obligation to 30 June 2008

30 June 2008
Dr
Cr

Foreign currency gain
Book value of forward rate commitment

Value of forward rate commitment at 30 June 2008
(5 000 000 0.85)
215 208
215 208
6 097 561
5 882 353
215 208
has created a gain in relation to the commitment with The Bank.
(v)
To record one months amortisation of the deferred hedge premium for the period to
30 June 2008
3512
30 June 2008
Dr
Cr

180 668
180 668
180 668 = (1/3) 542 005

(vi)
To record the movement in the accounts receivable balance to 1 September 2008

1 September 2008
Dr
Cr

68 399
68 399
Book value of account receivable

Value of receivable at 1 September 2008 (5 000 000 0.86)
5 882 353
5 813 954
68 399
As the receivable in Australian dollars has decreased, the movement in exchange rates
has created a loss in relation to the account receivable.
(vii)
To record the movement in the forward-rate commitment to 1 September 2008

1 September 2008
Dr
Cr

68 399
68 399
Book value of forward-rate commitment

Value of commitment at 1 September 2008 (5 000 000 0.86)
5 882 353
5 813 954
68 399
has created a gain in relation to the commitment to the bank.
(viii)
To record two months amortisation of the deferred hedge premium

1 September 2008
Dr
Cr

361 337
361 337
361 337 = (2/3) 542 005

(ix)
To record receipt of the account receivable and settlement of the forward-rate

commitment on 1 September 2008
1 September 2008
Dr
Dr
Cr
Cr
Cash
Accounts receivableBank
5 555 556
5 813 954
5 555 556
5 813 954
3513
The company will provide the bank with US$5 000 000 to settle the forward-rate
commitment and the bank will convert the $US into Australian dollars at the agreed
forward rate of A$1 = US$90 thereby, providing A$5 555 556 to Platypus Ltd.
35.17 Accounting entries in the books of Crescent Ltd.
1 July 2008
Dr
Cr
Cash
Foreign loan
18 750 000
18 750 000
To recognise, at the 1 July 2008 spot rate, the initial loan received from the US company.
(18 750 000 = 15 000 000 0.80)
Dr
Cr
Foreign currency receivable

Australian loan
18 750 000
18 750 000
To recognise the swap with Plummer Ltd of the foreign currency loan, for the loan
denominated in Australian dollars. Crescent Ltd now has a foreign loan and a foreign
currency receivable. The foreign currency receivable has arisen because Plummer Ltd has
agreed to take responsibility for the overseas loan in exchange for Crescent Ltd taking
responsibility for the Australian loan. As Crescent Ltd has both a payable and a receivable
that are of the same amount and denominated in the same foreign currency, it is insulated
from any foreign currency gains or losses that may result from changes in the exchange rates.
30 June 2009
Dr
Cr

Foreign loan
Value of loan as at 1 July 2008:

Value of loan as at 30 June 2009:
Increase in the value of the loan
Dr
Cr
2 678 571
2 678 571
15 000 000 0.80 =
15 000 000 0.70 =

Value of receivable as at 1 July 2008:

Value of receivable as at 30 June 2009:
Increase in the value of the receivable
18 750 000
21 428 571
2 678 571
2 678 571
2 678 571
15 000 000 0.80 =
15 000 000 0.70 =
18 750 000
21 428 571
2 678 571
As can be seen here, as the risk of the foreign currency exposure has been shifted fully to
Plummer Ltd, Crescent Ltd does not record any net foreign currency gains or lossesthe
gain on the foreign currency receivable offsets the loss on the foreign currency loan.
Dr
Cr
Interest expense
Cash
1 714 286
1 714 286
1 714 286 = (15 000 000 0.08) 0.7

Dr
Cr
Interest expense
Cash
160 714
160 714
160 714 = 18 750 000 10 per cent 1 714 286

3514
Crescent initially has to make the payment to the US company for the funds it borrowed.
That is, even in the presence of the agreement with Plummer, Crescent will still comply with
its contractual commitment with the overseas capital supplier. However, Plummer has agreed
to take responsibility for the overseas loan, whilst Crescent Ltd agreed to take responsibility
for Plummer Ltds domestic loan. The interest payment on the domestic loan is $1 875 000
(that is, $18 750 000 10%). Crescent Ltd will pay Plummer Ltd $160 714, such that
Crescent Ltds total interest expense ($1 714 286 + $160 714) is that which is payable on the
domestic loan ($1 875 000)the loan for which it has agreed to take responsibility.
In the books of Plummer Ltd.
1 July 2008
Dr
Cr
Cash
Loan
18 750 000
18 750 000
To recognise the domestic loan taken out by Plummer Ltd.

Dr
Cr
Loan receivable
Foreign currency payable
18 750 000
18 750 000
To recognise the swap of the domestic loan obligations for the foreign loan obligations of
Crescent Ltd (15 000 000 0.8).
30 June 2009
Dr
Cr

Foreign currency payable
2 678 571
2 678 571
Plummer Ltd has recorded a loss as a result of taking on the responsibilities of Crescent Ltds
US loan. But, as indicated earlier, the reason Plummer Ltd sought to take responsibility for
the US loan was that it had receivables that were denominated in US dollars. Adjustments to
the value of these receivables (not shown in this illustration due to lack of information) will
offset, fully or partially, the losses on the overseas loan.
Value of payable as at 1 July 2008:
Value of payable as at 30 June 2009:
Increase in the value of the payable
Dr
Cr
Interest expense
Cash
15 000 000 0.80 =

15 000 000 0.70 =
18 750 000
21 428 571
2 678 571
1 875 000
1 875 000
To recognise the interest payment made by Plummer Ltd on the domestic loan. As per the
swap agreement, however, Crescent will take responsibility for the domestic loan
commitments.
1 875 000 = 18 750 000 10%
Dr
Cr
Cash
Interest expense
160 714
160 714
An adjustment payment between Plummer and Crescent is made such that in total Plummer
will only make total payments equivalent to the interest on the overseas loan (the loan it has
taken responsibility for as part of the swap).
Cash flows associated with domestic loan:
18 750 000 10% =
1 875 000
3515
Cash flows associated with overseas loan:

(15 000 000 8%) 0.70 =
Amount to be transferred from Crescent to
Plummet
35.18 (a)
(i)
1 714 286
160 714
30 April 2008
Dr
Cr
Stock
Trade creditors
35 294
35 294
Being the recording of stock delivered and the associated liability to the
supplier. The stock was delivered on 30 April 2008 and therefore the stock and
trade creditor will be translated at the exchange rate on that date.
HK$300 000 8.50 = A$35 294
(ii)
30 May 2008
Dr
Cr
Cr
Trade creditors
Cash
11 765
11 682
83
Being the payment of a third of the outstanding creditors balance on

30 May 2008 of HK$100 000.
HK$100 000 8.56 =
HK$100 000 8.50 =
A$11 682.24
A$11 764.71
82.47
35 294 3 = 11 765
(iii)
30 June 2008
Dr
Cr
Cr
Trade creditors
Cash
11 765
11 641
124
Being the payment of a third of the initial creditors balance on 30 June 2008 of
HK$100 000.
A$11 641.44
A$11 764.71
123.32
HK$100 000 8.59 =

HK$100 000 8.50 =
As at the reporting date we would have an outstanding liability of

HK$100 000. This will need to be stated at the spot rate at 30 June 2008 and
the exchange difference taken to the income statement.
Dr
Cr
Trade creditors
Exchange gain
HK$100 000 8.59 =

HK$100 000 8.50 =
(iv)
123
123
A$11 641.44
A$11 764.71
123.32
31 July 2008
3516
Dr
Cr
Trade creditors
Cash
11 186
11 186
Being the payment of cash on 31 July 2008.

HK$100 000 8.94 = A$11 186
The remaining balance on trade creditors (A$11 641 11 186 = A$456)
will be taken to the profit and loss as an exchange gain.
Dr
Cr
(b)
Trade creditors
Exchange gain
456
456
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 2007
Dr
Cr
Asset under construction

Creditors
31 250
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 2007. We will assume that exchange rates had not changed.
3517
30 May 2008
Dr
Cr
Creditors
10 417
10 417
Being exchange difference on asset up to date of ceasing to be a qualifying asset.

5 000 000 240
Less historic cost
Dr
Cr
20 833
31 250
(10 417)
Machinery
20 833
20 833
At 30 June 2008 we will need to take the exchange difference to the profit and loss,
as the asset has ceased to be a qualifying asset from 30 May 2008.
30 June 2008
Dr
Cr
Creditors
Exchange gain
425
425
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 2008
31 July 2008
Dr
Cr
Creditors
Cash
19 231
19 231
5 000 000 260 = A$19 231

The remaining exchange difference will then need to be taken to the income
statement.
31 July 2008
Dr
Cr
Creditors
Exchange gain
1 177
1 177
20 408 19 231 = 1 177

(c)
1 January 2008
Dr
Cr
Cash
$US loan payable
28 985 507
28 985 507
US$20 000 000 @ US$0.69 = A$1 = A$28 985 507

Being recognition of the $US loan taken out.
3518
1 January 2008
Dr
Dr
Cr

Forward-rate commitment
6 666 666
410 257
7 076 923
20 000 000 11.5% 2 =
4 600 000
US$4 600 000 @ 0.69 =

US$4 600 000 @ 0.65 =
6 666 666
7 076 923
$ 410 257
Note: This hedge does not meet the tests for deferral identified in AASB 139 and any
changes in the value of the hedged item and hedging instrument are to be taken to
profit or loss (rather than initially to equity).
30 June 2008
Dr
Cr
Interest expense
Accrued interest
1 796 875
1 796 875
US$20 000 000 0.115 0.5 = US$1 150 000 (for 6 months)
US$1 150 000 @ 0.64 = A$1 796 875
Being the accrual of interest expense for the year ended 30 June 2008.
30 June 2008
Dr
Cr

$US loan payable
2 264 493
2 264 493
US$20 000 000 @ 0.69

US$20 000 000 @ 0.64
28 985 507
31 250 000
$ 2 264.493
Restatement of $US loan account to the spot rate as at 30 June 2008

30 June 2008
Dr
Cr

520 834
US$4 600 000 @ 0.69

US$4 600 000 @ 0.64
520 834
6 666 666
7 187 500
$ 520 834
Restatement of the hedge contract to the spot rate at the year end.
3519
30 June 2008
Dr
Cr

102 564
102 564
410 257 4 = $102 564

Being amortisation of the deferred hedge amount over the life of the hedge.
(d)
(i)
To record the hedge contract on 31 January 2008

Dr
Dr
Cr

714 286
63 492
777 778
The right to receive the foreign currency is valued at the spot rate. The
forward-rate contract commitment is valued at the agreed forward rate. Note:
This is a hedge of a specific commitment.
714 286 = 350 000 0.49
777 778 = 350 000 0.45
(ii)
To record the purchase of the inventory on 30 May 2008

Dr
Cr
Inventory
744 681
744 681
$744 681 = 350 000 0.47

To record the accounts at the spot rate on the date of purchase.
(iii)
To record the change in the value of the forward-rate contract to 30 May 2008
Dr
Cr

30 395
Dr
Cr

Inventory
30 395
Book value of hedge contract (350 000 0.49)

Value of hedge contract at 30/5/08 (350 000 0.47)
Gain on hedge receivable at 30/5/08
30 395
30 395
714 286
744 681
30 395
Gains or losses on specific hedge contracts, up to the point of purchase, to be

adjusted against the cost of inventory pursuant to AASB 139.
3520
(iv)
To transfer the deferred hedge discount to inventory on the date of purchase

Dr
Cr
Inventory
63 492
63 492
To increase the cost of the inventory by the deferred discount on forward-rate

contract, which pursuant to AASB 139 has been deferred until the date of
purchase.
(v)
To record the foreign exchange loss on the account payable at 30 June 2008
Dr
Cr

69 272
69 272
Account payable, as recorded at 30/5/08 (350 000 0.47)

Account payable at 30/6/08 (350 000 0.43)
Foreign exchange loss due to the change in the spot rate
744 681
813 953
69 272
As the payable in Australian dollars has increased, the movement in exchange

rates has created a loss.
(vi)
To record the gain on the forward-rate contract at 30 June 2008

Dr
Cr

69 272
69 272
Hedge receivable as at 30/5/08 (350 000 0.47)

Foreign exchange gain on hedge contract
744 681
813 953
69 272
As the purchase occurred previously, gains and losses are taken directly to the
income statement. They are only deferred up until the date of purchase.
(vii)
To record the foreign exchange gain on accounts payable between

30 June 2008 and 31 August 2008
Dr
Cr

61 047
61 047
Accounts payable balance at 30/6/08 (350 000 0.43)

Accounts payable using the 31/8/08 spot rate (350 000 0.40)
Loss on monetary item due to change in spot rate
813 953
875 000
61 047

(viii)
To revise the value of the foreign currency receivable.

Dr
Cr

61 047
Foreign currency receivable as at 30/6/08 (350 000 0.43)

Gain on foreign currency receivable
61 047
813 953
875 000
61 047
3521
(ix)
To record settlement of the foreign currency contract.

Dr
Cr

Cash
777 778
777 778
350 000 at the agreed forward rate of A$1.00 = 0.45

(x)

Dr
Cr

875 000
875 000
875 000 = 350 000 0.40

35.19 (a)
15/3/08
No entry as order only
11/5/08
Dr
Cr
Inventory
Trade creditorsforeign currency
731 707
731 707
To recognise the purchase of inventory (300 000/0.41).

30/6/08
Dr
Cr

34 033
34 033
300 000 0.41 =

300 000 0.43 =
Gain
731 707
697 674
34 033
14/8/08
Dr
Cr

71 556
71 556
300 000 0.43 =

300 000 0.39 =
Dr
Cr

Cash
697 674
769 230
71 556
769 230
769 230
(300 000 0.39)

(b)
15/3/08
No entry as order only
11/5/08
3522
Dr
Cr
Plant and equipment

Creditorsforeign currency
731 707
731 707
To recognise the purchase. (300 000 0.41 = 731 707)

30/6/08
Dr
Cr
Plant and equipment
34 033
34 033
(300 000 0.41) (300 000 0.43) = 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.
15/7/08
Dr
Cr
Plant and equipment

16 611
16 611
(300 000 0.43 300 000 0.42)

As it has ceased being a qualifying asset on 15/7/08, any further gain or loss will go to
profit and loss.
14/8/08
Dr
Cr

54 945
54 945
(300 000 0.42 300 000 0.39)

Dr
Cr
Cash
769 230
769 230
To recognise settlement. (300 000 0.39 = 769 230)

(c)
(i)
To record the hedge contract on 15 March 2008

Dr
Cr
Cr

Deferred hedge premium (in equity)
810 811
21 337
789 474
The right to receive the foreign currency is valued at the spot rate. The
forward rate contract commitment is valued at the agreed forward rate. This is
a hedge of a specific commitment and is a cash-flow hedge.
789 474 = 300 000 0.38
810 811 = 300 000 0.37
(ii)
To record the purchase of the inventory on 11 May 2008
3523
Dr
Cr
Inventory
731 707
731 707
$731 707 = 300 000 0.41

To record the accounts at the spot rate on the date of purchase.
(iii)
To record the change in the value of the forward-rate contract to 11 May 2008
Dr
Cr
Deferred foreign exchange loss (in equity)

79 104
Dr
Cr
Inventory
Deferred foreign exchange loss (in equity)
79 104
79 104
79 104
Book value of hedge contract (300 000 0.37)

Value of hedge contract at 11/5/08 (300 000 0.41)
Loss on hedge receivable at 11/5/08
810 811
731 707
79 104
Gains or losses on hedge contracts, up to the point of purchase, to be adjusted

against the cost of inventory pursuant to AASB 139.
(iv)
To transfer the deferred hedge premium to inventory on the date of purchase.

Dr
Cr
Deferred hedge premium (in equity)

Inventory
21 337
21 337
To decrease the cost of the inventory by the deferred hedge premium on the
forward-rate contract, which pursuant to AASB 139 has been deferred until
the date of purchase.
(v)
To record the foreign exchange gain on the account payable at 30 June 2008
Dr
Cr

34 033
34 033
Account payable, as recorded at 11/5/08 (300 000 0.41)

Account payable at 30/6/08 (300 000 0.43)
Foreign exchange gain due to the change in the spot rate
731 707
697 674
34 033
As the amount payable in Australian dollars has decreased, the movement in

exchange rates has created a gain.
(vi)
To record the loss on the forward-rate contract at 30 June 2008

Dr
Cr


Foreign exchange loss on hedge contract
34 033
34 033
731 707
697 674
34 033
3524
As the purchase occurred previously, gains and losses are taken directly to the
income statement. They are only deferred up until the date of purchase.
(vii)
To record the foreign exchange loss on accounts payable between

30 June 2008 and 14 August 2008
Dr
Cr

71 557
71 557
Accounts payable balance at 30/6/08 (300 000 0.43)

Accounts payable using the 14/8/08 spot rate (300 000 0.39)
Loss on monetary item due to change in spot rate
697 674
769 231
71 557

(viii) To revise the value of the foreign currency receivable to 14 August 2008
exchange rate
Dr
Cr

71 557
71 557

Gain on foreign currency receivable
(ix)
697 674
769 231
71 557
To record settlement of the foreign currency contract

Dr
Cr

Cash
789 474
789 474
789 474 = 300 000 0.38

(x)

Dr
Cr

769 231
769 231
769 231 = 300 000 0.39

(d)
The above example illustrates that an effective hedge contract produces equal and
opposite expense and revenue entriessuch that there is no overall profit or loss
effect. The transaction is recorded at the forward rate.
If the Australian dollar depreciates between the date of the purchase and the date of
the settlement, the effect of the hedge is to reduce the loss suffered by ABC Limited.
The gain on the hedge will offset the loss on the spot transaction.
If the Australian dollar appreciates (as in the question) there will be a gain on the spot
transaction (purchase), which will be offset by a loss on the forward rate agreement.
The company thus insulates itself from any losses but also prevents the realisation of
any gains in relation to the hedge.
35.20 (a)
Journal entries
3525
1.
Journal entries for purchase of machinery.

The purchase represents an acquisition of a qualifying asset. It is assumed that the
asset is being constructed between purchase date and delivery date. In accordance
with AASB 123, exchange differences arising in respect of a qualifying asset should
be included in the cost of acquisition of the asset to the extent that this does not result
in the assets carrying amount exceeding its recoverable amount.
(i)
30 April 2008
Dr
Cr
Machinery
Creditorforeign currency
328 947
328 947
Being the purchase of the asset on 30 April at a rate of US$0.76.

328 947 = 250 000 0.76
(ii)
30 June 2008
Dr
Cr
Machine
8 891
8 891
Being the movement in the exchange rate to 30 June 2008 brought to account.
250 000 0.76 =
250 000 0.74 =
(iii)
328 947
337 838
8 891
31 July 2008
Dr
Cr
Dr
Cr
Machine
Bank
9 384
9 384
173 611
173 611
Being revaluation of the creditor to 31 July 2008 at US$0.72, and payment of

the first instalment.
250 000 0.74 =
250 000 0.72 =
337 838
347 222
9 384
347 222 0.5 = 173 611

(iv)
31 August 2008
Dr
Cr
Dr
Cr
Machine
Bank
4 692
4 692
168 919
168 919
Being final revaluation and the payment of the second instalment. The asset
was delivered on 31 August 2008, and so remains a qualifying asset until that
date.
125 000 0.72 =
173 611
3526
125 000 0.74 =

(v)
168 919
4 692
30 June 2009
Dr
Cr
Depreciation expense
Accumulated depreciationmachinery
28 544
28 544
Being 10 months depreciation of the asset at 10% pa

($342 530 @ 10% 10/12)
2.
Purchase of inventory where hedge was not taken out prior to the acquisition of the
stock and hence it is considered that the hedging transaction does not satisfy the
requirements for deferral of gains and losses to equity provided within AASB 139.
Exchange losses to be taken to the income statement in the period of the gain or loss.
Costs arising at the time of entering the hedge are amortised to the income statement
over the period of the hedge.
(i)
30 May 2008
Dr
Cr
Inventory
357 143
357 143
Being the purchase of stock from Germany.

DM 500 000 @ DM 1.4 = A$1.00.
500 000 1.40 = 357 143
Dr
Dr
Cr

357 143
5 175
362 318
Being the forward-exchange contract. The amount receivable is DM 500 000

@ 1.4 and the amount payable is DM 500 000 @ 1.38 (the contract rate).
(ii)
30 June 2008
Exchange differences arising on the non-specific hedge are taken to the
income statement. However, they exactly offset the exchange profit or loss on
revaluation of the related creditor.
Dr
Cr
Loss on foreign exchange

42 857
42 857
Being the revaluation of the creditor at year end to DM 1.25/A$1.00.

500 000 1.40 =
500 000 1.25 =
Dr
Cr

Gain on foreign exchange
357 143
400 000
42 857
42 857
42 857
3527
Being the revaluation of the forward-exchange contract at year end to DM

1.25 A$1.00.
Dr
Cr

1 725
1 725
5 175 3 = 1 725
(iii)
31 August 2008
Dr
Cr
Loss on foreign exchange

34 783
34 783
Being the final revaluation of the creditor balance at DM 1.15/A$1.00.

500 000 1.25 =
500 000 1.15 =
Dr
Cr
400 000
434 783
34 783

Gain on foreign exchange
34 783
34 783
Being the final revaluation of the forward-exchange contract at

DM 1.15/A$1.00.
Dr
Cr
Dr
Cr
Dr
Cr

Cash
362 318
362 318
434 783
434 783
3 450
3 450
5 175 x 2/3 = 3 450
3528
35.20 (b)
Hedges
Broadly speaking, there are three types of hedges identified within AASB 139fair value
hedges, cash flow hedges, and hedges of net investments in foreign operations. As paragraph
86 of AASB 139 states:
Hedging relationships are of three types:
(a) fair value hedge: a hedge of the exposure to changes in fair value of a recognised
asset or liability or an unrecognised firm commitment, or an identified portion of
such an asset, liability, or firm commitment, that is attributable to a particular risk
and could affect profit or loss;
(b) cash flow hedge: a hedge of the exposure to variability in cash flows that (i) is
attributable to a particular risk associated with a recognised asset or liability (such as
all or some future interest payments on variable rate debt) or a highly probable
forecast transaction and (ii) could affect profit or loss; and
(c) hedge of a net investment in a foreign operation as defined in AASB 121.
The most common forms of hedges are fair value hedges and cash flow hedges. Fair value
hedges would be used to hedge the value of particular assets or liabilitiesfor example, to
hedge the value of a share portfolio (and the value of a share portfolio might be hedged by
acquiring share price index (SPI) futures as a hedging instrument). A cash flow hedge on the
other hand would be used to hedge a future expected cash flowfor example to hedge an
amount that is payable to a foreign supplier where the amount is denominated in US dollars.
Because Chapter 35 concentrates on hedges associated with cash flows pertaining to
transaction denominated in a foreign currency, cash flow hedges are the form of hedge that are
described in detail. For a cash flow hedge, AASB 139 allows certain costs to be deferred to
equity, rather being taken to profit and loss, to the extent that certain requirements are
satisfied. These requirements are stipulated at paragraph 88 of AASB 139, which states:
A hedging relationship qualifies for hedge accounting under paragraphs 89102 if, and
only if, all of the following conditions are met.
(a) At the inception of the hedge there is formal designation and documentation of the
hedging relationship and the entitys risk management objective and strategy for
undertaking the hedge. That documentation shall include identification of the
hedging instrument, the hedged item or transaction, the nature of the risk being
hedged and how the entity will assess the hedging instruments effectiveness in
offsetting the exposure to changes in the hedged items fair value or cash flows
attributable to the hedged risk.
(b) The hedge is expected to be highly effective (see Appendix A paragraphs AG105
AG113) in achieving offsetting changes in fair value or cash flows attributable to the
hedged risk, consistently with the originally documented risk management strategy
for that particular hedging relationship.
(c) For cash flow hedges, a forecast transaction that is the subject of the hedge must be
highly probable and must present an exposure to variations in cash flows that could
ultimately affect profit or loss.
(d) The effectiveness of the hedge can be reliably measured, that is, the fair value or
cash flows of the hedged item that are attributable to the hedged risk and the fair
value of the hedging instrument can be reliably measured (see paragraphs 46 and 47
and Appendix A paragraphs AG80 and AG81 for guidance on determining fair
value).
(e) The hedge is assessed on an ongoing basis and determined actually to have been
highly effective throughout the reporting periods for which the hedge was
designated.
3529
To the extent that the above requirements are satisfied, paragraph 95 states:
If a cash flow hedge meets the conditions in paragraph 88 during the period, it shall be
accounted for as follows:
(a) the portion of the gain or loss on the hedging instrument that is determined to be an
effective hedge (see paragraph 88) shall be recognised directly in equity through the
statement of changes in equity (see AASB 101); and
(b) the ineffective portion of the gain or loss on the hedging instrument shall be
recognised in profit or loss.
Paragraph 96 further states:
More specifically, a cash flow hedge is accounted for as follows:
(a) the separate component of equity associated with the hedged item is adjusted to the
lesser of the following (in absolute amounts):
(i) the cumulative gain or loss on the hedging instrument from inception of the
hedge; and
(ii) the cumulative change in fair value (present value) of the expected future cash
flows on the hedged item from inception of the hedge;
(b) any remaining gain or loss on the hedging instrument or designated component of it
(i.e. not an effective hedge) is recognised in profit or loss; and
(c) if an entitys documented risk management strategy for a particular hedging
relationship excludes from the assessment of hedge effectiveness a specific component
of the gain or loss or related cash flows on the hedging instrument (see paragraphs 74,
75 and 88(a)), that excluded component of gain or loss is recognised in accordance
with paragraph 55.
If a cash-flow hedge satisfies the requirements of paragraph 88 provided above, then at the
point that the original purchase or sales transaction occurs (at a point following the entering of
the hedging arrangement), the gains or losses taken to equity will then be adjusted against the
cost of the inventory, or the sales amount. Subsequent gains and losses will be taken to the
income statement. This is consistent with the following paragraphs of AASB 139 (particularly
paragraph 98(b)):
97. If a hedge of a forecast transaction subsequently results in the recognition of a
financial asset or a financial liability, the associated gains or losses that were
recognised directly in equity in accordance with paragraph 95 shall be reclassified
into profit or loss in the same period or periods during which the asset acquired or
liability assumed affects profit or loss (such as in the periods that interest income or
interest expense is recognised). However, if an entity expects that all or a portion of
a loss recognised directly in equity will not be recovered in one or more future
periods, it shall reclassify into profit or loss the amount that is not expected to be
recovered.
98. If a hedge of a forecast transaction subsequently results in the recognition of a nonfinancial asset or a non-financial liability, or a forecast transaction for a non-financial
asset or non-financial liability becomes a firm commitment for which fair value
hedge accounting is applied, then the entity shall adopt (a) or (b) below:
(a) it reclassifies the associated gains and losses that were recognised directly in
equity in accordance with paragraph 95 into profit or loss in the same period or
periods during which the asset acquired or liability assumed affects profit or loss
(such as in the periods that depreciation expense or cost of sales is recognised).
However, if an entity expects that all or a portion of a loss recognised directly in
3530
equity will not be recovered in one or more future periods, it shall reclassify into
profit or loss the amount that is not expected to be recovered; or
(b) it removes the associated gains and losses that were recognised directly in
equity in accordance with paragraph 95, and includes them in the initial cost or
other carrying amount of the asset or liability.
99. An entity shall adopt either (a) or (b) in paragraph 98 as its accounting policy and
shall apply it consistently to all hedges to which paragraph 98 relates.
100. For cash flow hedges other than those covered by paragraphs 97 and 98, amounts
that had been recognised directly in equity shall be recognised in profit or loss in the
same period or periods during which the hedged forecast transaction affects profit or
loss (e.g. when a forecast sale occurs).
3531

Deegan5e SM Ch35

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PART 9: FOREIGN CURRENCY

It is necessary to translate because if the transactions were not denominated in a single

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

35.10 5 June 2008

543 478 = 250 000 0.46

Loss on foreign currency

Book value of foreign currency payable

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

35.11 1 July 2008

Recognition of year end interest payment.

Balance of payable at 1 July 2008: 2 000 000 0.48

Recognition of consulting revenue at the 10 July 2008 spot rate.

Recognition of the interest revenue at the 30 June 2009 spot rate.

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

1 000 000 0.78

750 000 1.20 = 625 000

(750 000 1.30) 625 000 = 48 077

Foreign exchange expense

(750 000 1.25) (750 000 1.30)

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

To record the purchase of inventory on 1 March 2008.

To record the forward rate contract on 1 May 2008.

Foreign currency receivableBank

1 333 333 = 1 000 000 0.75

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Accounts payableforeign currency

Accounts payable book value

Foreign currency receivableBank

Book value of foreign currency receivable

91 503 = (2/3) (137 255)

Foreign exchange loss

Book value of account payable as at 30 June 2008

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Foreign currency receivableBank

Book value of foreign currency receivable at 30 June 2008

Hedge discount expense

45 752 = (1/3) (137 255)

Forward-rate contract commitment

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

To record the hedge contract on 1 March 2008

Foreign currency receivableBank

To record the purchase of the inventory on 1 June 2008

$3 488 372 = 1 500 000 0.43

Foreign currency receivableBank

Deferred foreign exchange gain (in equity)

Book value of hedge contract

To transfer the deferred hedge discount to inventory on the date of purchase

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Foreign exchange loss

Account payable, as recorded at 1 June 2008

To record the gain on the forward-rate contract at 30 June 2008

Foreign currency receivableBank

Hedge receivable as at 1 June 2008

Accounts payableforeign currency

Accounts payable balance at 30 June 2008

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

To revise the value of the foreign currency receivable

Foreign exchange loss

Foreign currency receivable as at 30 June 2008

As the commitment in Australian dollars has decreased, the movement in exchange

To record settlement of the foreign currency contract

Forward-rate contract commitment