Chapter 11, Problem 11.22P

To determine

Introduction: Foreign exchange rate is the rate at which currency of one country is changed to currency of another country is called foreign exchange rate. Mainly there are two rate, i.e. direct exchange rate and indirect exchange rate.

Foreign exchange gain or loss: Foreign exchange gain or loss arises when there is selling or buying of any goods and services in foreign currency.

The recording of the journal entries related to the sale made by T company, use of forward contract and entries regarding the settlement.

Explanation of Solution

1. Journal entries to record sale of blue jeans to a firm in South Korea is as follows:

Date	Particulars	Debit ($)	Credit ($)
Jan-15	Accounts receivable	7400
	To sales account		7400
	(Recording entry for sale of blue jeans to a company in South Korea)
Mar-15	Cash	7400
	To Accounts receivable		7400
	(Recoding entry for receiving cash from South Korean company in Dollars)

2. Journal entries to record purchase of woolen goods from a firm in Ireland is as follows:

Date	Particulars	Debit ($)	Credit ($)
Mar-08	Purchase account	4354
	To Accounts payable (€7000*0.622)		4354
	(recording entry for purchase of woollen goods from Ireland)
May-01	Accounts payable	84
	To foreign currency gain account [€7000*(0.610-0.622)]		84
	(Recording entry for revaluing the account payable value at settlement date)
May-01	Accounts payable	4270
	To foreign currency units (€7000*0.610)		4270
	(Recording entry for payment of Euros to Ireland)

3. Journal entries to record purchase of toys from a firm in Taiwan and the forward contract is as follows:

Date	Particulars	Debit ($)	Credit ($)
May-12	Foreign currency units receivable from broker	3008
	To Dollars payable to broker (NT$80,000*0.0376)		3008
	(Recording entry for entering into the 120-day forward contract @0.0376)
Aug-01	Foreign currency receivable from broker	16
	To foreign currency gain [(0.0376-0.0378) *80,000]		16
	(Recording entry for change in the rate of forward contract as on August 1)
Aug-01	Purchase account	2960
	To Accounts payable (80000*0.0370)		2960
	(Recording entry for purchase of goods as the goods were delivered on August 1 but rate should be when contract was made i.e. at spot rate on May 12)
Aug-01	Foreign currency transaction loss	40
	To Accounts payable [(0.0370-0.0375) *80000]		40
	(Recording entry for revaluing the accounts payable at spot rate i.e. 0.0375)
Sep-09	Foreign currency transaction loss	48
	To Foreign currency receivable from broker [(0.0378-0.0372)*80000]		48
	(Recording entry for revaluing the forward contract at the time of settlement)
Sep-09	Accounts payable [(0.0375-0.0372) *80000]	24
	To Foreign currency transaction gain		24
	(Recording entry for revaluing accounts payable at settlement date)
Sep-09	Dollars payable to broker	3008
	To Cash		3008
	(Recording entry for settlement of forward contract by payable Dollars to broker)
Sep-09	Foreign currency units	2976
	To Foreign currency receivable from broker (80000*0.0372)		2976
	(Recording entry for receipt of Taiwan dollars from broker at spot rate i.e. 0.0372)
Sep-09	Accounts payable	2976
	To Foreign currency units (80000*0.0372)		2976
	(Recording entry for settlement of the contract of purchase and paying Taiwan Dollars to the company)

4. Journal entry related to sale of microcomputers to a German company and entries related to forward contract entered is as follows:

Date	Particulars	Debit ($)	Credit ($)
Jun-06	Accounts receivable	90,000
	To Sales accounts (€150,000*0.600)		90,000
	(Recording entry for sale of microcomputers to a German company)
Jul-06	Dollars receivable from broker	87,000
	To Foreign currency units payable to broker (€150,000*0.580)		87,000
	(Recording entry for entering into the 60-day forward contract)
Sep-04	Foreign currency transaction loss	2250
	To Accounts receivable [(0.600-0.585) *150,000]		2250
	(Recording entry for revaluing the accounts receivable on September 4 i.e. settlement date)
Sep-04	Foreign currency transaction loss	750
	To Foreign currency units payable to broker [(€150,000*(0.580-0.585)]		750
Sep-04	Foreign currency units	87,750
	To Accounts receivable (150000*0.585)		87,750
	(Recording entry for receipt of Euros from German company on settlement date at spot rate i.e. 0.0585)
Sep-04	Foreign currency payable to broker	87,750
	To Foreign currency units (150,000*0.585)		87,750
	(Recording entry for delivering Euros to broker as per the forward contract)
Sep-04	Cash	87,000
	To Dollars receivable from broker (150000*0.580)		87,000
	(Recording entry for receipt of Dollars from broker as per forward contract)