Forward Contract and Foreign Currency Translation

Forward rate contract being done at the rate of US$0.72 for buying $500,000; risk covered by entering into a forward transaction with Ferrett LLC; initial liability on account of plant purchase = UK Pound 1.5 Mn; inventory purchased and gain on forward contract realized; other comprehensive income and derivative position asset journal entries made.

By student name
Professor
University
Date: 28 August 2017.

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Contents
Question no 26 …………………………………………………………………...2
Question no 23 …………………………………………………………………...4
Question no 25 …………………………………………………………………...6
Question no 17 …………………………………………………………………...7
Question no 19 …………………………………………………………………...8
Question no 9 ………………………………………………………………….....9
Question no 43 …………………………………………………………………...10
Question no 19 …………………………………………………………………...11
Question no 2 ………………………………………………………………….....12
Question no 15 …………………………………………………………………...13
References…………………………………………………………………….......14
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Question no 26
Total cost of the plant Amount in $
Cost of power generator and associated technology 12550000
Cost obtaining in getting access to site 2500500
Power permits 400500
Engineer's Fees 1100500
Total cost of the plant to the company 16,551,500
A plant can be capitalised in the books of the company from the date when it is ready for use i.e.,
from the day of its intended use. Here, it is 1st July. 2018. (Bae, 2017)
Estimated useful life of the asset is 10 years here.
Dismantling cost to be incurred at the end of the
useful life
Amount in $
Cost of dismantling the plant 750500
Environmental remediation cost 1249500
Replacement of flora and fauna 100000
Total cost of dismantling to the company 2100000
Discount rate to the company 10%
Present value of dismantling as on 1st July, 2018 (2100000, 10%, 10 years) 809,641
Total depreciable cost = 16551500+809641 = 17,361,140
Amount of depreciation each year = 17361140/10 = 1,736,114
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In the books of Modnight Boil Ltd.
Journal Entries
Date
Dr./
Cr. Particulars Amt in $ Amt in $
30th
June'18 Dr. Plant A/C
17,361,140.0
0
Cr. Bank A/C
17,361,140.0
0
(Being Plant purchased)
30th
June'19 Dr. Depreciation on Plant A/C 1,736,114.00
Cr.
Accumulated Depn on Plant
A/C 1,736,114.00
(Being depn charge for the year)
30th
June'24 Dr. Depreciation on Plant A/C 1,736,114.00
Cr.
Accumulated Depn on Plant
A/C 1,736,114.00
(Being depn charge for the year)
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Question no 23
Cost of the truck as on 1st July 2015 = $ 65000
Expected residual value at the end = $ 5000
Period of useful life = 6 years
Expected distance covered by the truck in life = 246000 (Buchanan, et al., 2017)
(a) Straight Line method: (65000-5000)/6
Year
s
Depreciation charge for the
year
2016 10000
2017 10000
2018 10000
2019 10000
2020 10000
2021 10000
(b) Sum of the digits Method:
Years
Sum of
digits Depreciation charge for the year
2016 6 17,143
2017 5 14,286
2018 4 11,429
2019 3 8,571
2020 2 5,714
2021 1 2,857
Total 21 60,000
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(c) Declining balance method
Rate of depreciation = 100/6 = 16.67%
Year
s
Sum of
digits Depreciation charge for the year WDV value
2015 0 0 60000
2016 16.67% 10,002 49,998
2017 16.67%
8,33
5 41,663
2018 16.67%
6,94
5 34,718
2019 16.67%
5,78
7 28,931
2020 16.67%
4,82
3 24,108
2021 16.67%
4,01
9 20,089
(d) Units of production method
Year
s Kms
Rati
o
Depreciation charge for the
year
2016 28000 28 6,829
2017 34000 34 8,293
2018 42000 42 10,244
2019 55000 55 13,415
2020 68000 68 16,585
2021 19000 19 4,634
Total
24600
0 246 60,000
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Answer to Question 25
(a) Recoverable Value of the land for each of the reporting date is lower of the net selling
price and the fair value.
Therefore, recoverable value of land as on 30th June 17, 18 and 19 is $900000, $900000
and $ 920000 respectively. (Das, 2017)
(b) Carrying amount of the land on each of the reporting days would be lower of value in use
or cost.
Date Dr./Cr. Particulars Amt in $ Amt in $
30th
June'17
No entry
30th
June'18 Dr.
Revaluation Reserve
A/C 40,000.00
Cr. Plant 40,000.00
(Being downward revaluation
down)
30th
June'19 Dr.
Revaluation Reserve
A/C 60,000.00
Cr. Plant 60,000.00
(Being downward revaluation
down)
(c) In case the company revalues its land every year, the carrying amount of the land would
be determined using the fair value each year.
Date Dr./Cr. Particulars Amt in $ Amt in $
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30th
June'17 Dr.
Revaluation Reserve
A/C 50,000.00
Cr. Plant 50,000.00
(Being downward revaluation
down)
30th
June'18
No entry
30th
June'19 Dr. Plant 20,000.00
Cr.
Revaluation Reserve
A/C 20,000.00
(Being upward revaluation down)
Question no. 17
Goodwill is determined by the difference in the payment consideration being paid to the taken
over entity in excess of the assets and liabilities taken over. The assets and liabilities is generally
being taken at the book values. (David, 2005) The value of the goodwill taken over is
Particulars Amt in $
Cash 70,000
Plant & Equipment 170,000
Land 200,000
Less:Assets at book value 700,000
Add: Liabilities at book value 300,000
Value of the goodwill 40,000
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Question no. 19
(a) The issue price of the 5 years, 10% debenture having half yearly payment is $ 1 million.
(Fay & Negangard, 2017)
(b) Effective rate of interest = (1.05*1.05) – 1*100 = 10.25%
Date
Dr./
Cr. Particulars Amt in $ Amt in $
1st July'18 Dr. Bank 1,000,000
Cr.
To 10%, 5- year
Debenture 100,000
(Being debentures issued)
30th
June'19 Dr. Interest on debentures 102,500
Cr. Debentureholders 102,500
(Being interest on debentures made
due)
30th
June'19 Dr. Debentureholders 102,500
Cr. Bank 102,500
(Being interest on debentures paid)
30th
June'20 Dr. Interest on debentures 102,500
Cr. Debentureholders 102,500
(Being interest on debentures made
due)
30th
June'20 Dr. Debentureholders 102,500
Cr. Bank 102,500
(Being interest on debentures paid)
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Question No. 9
The accounting of leases is governed by AAS 115. Several changes have been seen in the past
for the accounting of the lease. Some of them are:
1. Value of the leased asset or the leased liability should be measured at its cost or the fair
value of the asset or liability acquired, whichever is lower.
2. All the expenses incurred towards acquiring that lease needs to be added to the cost of the
lease.
3. It needs to be depreciated over the estimated useful life of the asset or the lease period,
whichever is lower.
4. The leased assets, whether operating or the finance lease, both needs to be shown as the
asset in the balance sheet. (J, 2016)
5. The amortization is allowed as the charge to the P&L every year.
6. This is generally calculated as the present value of the minimum lease payments at the
time of initiation of the lease using a suitable discount rate.
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Question no. 43
(a) Amount borrowed to be paid back = $ 500000
Spot rate of the transaction = A$1 = US$ 0.70
Forward rate contract being done at the rate of US$ 0.72 for buying $500000
The forward rate agreement is the agreement where the risk is covered for the future risks
for current rate fluctuations by entering into a forward transaction with the bank or
financial instiitutions which will charge some commission and will give a rate such that
the risk of increasing the payment becomes low. The amount to be paid based on the spot
rate herein in A$ is 500000/0.7 is A$ 714286.
However, Amount to be paid based on gteh forward contract entered is 500000/0.72 =
$694444. Since the amount to be paid is less on account of forward contract entered, it
eases out the risk of the fluctuation of exchange rate in future and hence has to pay back a
comparatively lesser amount in terms of the AUD. (Sonu, et al., 2017)
(b) The amount of money finally received on the sale of the US$ is as under
500000/0/72 = AUD 694,444. This is on account of the forward purchase contract
entered to cut off the risk of foreign currency fluctuation.
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Question No. 19
Case 1: Share price on 30th June, 2020 is $ 4.
Here since the fair value of the share is decreasing, no bonus would accrue to the managing
director of Lurline Ltd. For the year ended 30th Jun, 2020, therefore there would be no journal
entry in the books of the copany.
Case 2: The share price of the companyis $ 5. 50 on 30th June, 2021
Therfore, increase in rate beyond $5 = $ 0.5
So amount unpaid as bonus to registered shareholders = 0.5*100000 = $ 50000 (Lin, et al., 2017)
Date Dr./Cr. Particulars Amt in $ Amt in $
30th June,
21 Dr. For Equityshareholders A/c 50,000
Cr. Equity share capital (bonus shares) 50,000
(Being bonus shares issued to managing
director)
Case 3: The share price of the companyis $ 6 on 30th June, 2022
Therfore, increase in rate beyond $5 = $ 1
Already recognised in the books = $ 0.5
Therefore amount to be used from profits for the issue of the bonus shares to the managing
director = 100000*.50 = $500000
Date Dr./Cr. Particulars Amt in $ Amt in $
30th June, 22 Dr. Equityshareholders A/c 500,000
Cr. Equity share capital (bonus shares) 500,000
(Being bonus shares issued to managing director)
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Question No. 2
At the end of every reporting period, and adjustment needs to be done in the books for changes
in the foreign currency monetary item. All the monetary assets like fixed assets, investments,
financial assets needs to be reinstated at th respective rates like closing rate of the year or
average rate of the year. All the gains and losses on account of the changes in the Foreign
currency monetary item needs to be riuted through the foreign currency translation reserve. In
case the amount peratains to the P&L line item, the same would be realised in the other
comprehensive income and in case the same does not relates to the business line item and based
on the assets or liabilities, the same would be shown in Non OCI i.e., the profit and loss account.
This is based on the difference in the spot rates and the functional currency. The amount of the
exchange differences is recognised through the profit and loss account when measured at fair
value. Net changes in exchange rates is recognised in the other comprehensive income and
separately classified as an item of quity in the balance sheet and a reconciliation is done of such
amount of foreign exchange both at the start and at the end of the financial period.
A foreign currency item is generally recorded at the transaction trate in the books. At the end of
each financial year or balance sheet date, all the monetary line items should be valued at the
closing rate and those non monetary items which are carried at the historical cost needs to
reported at the rate prevailing on the date of the transaction. Also, all the monetary items which
are being carried at the fair value needs to be reported at the rate which was existing on the date
on which the fair valuation was done. (Fay & Negangard, 2017)
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Question no. 15
Initial liability on account of purchase of plant = UK Pound 1.5 Mn
In the books of kanga Ltd.
Journal Book
Date Dr./Cr. Particulars Amt in $ Amt in $
01st
Mar.'18 Dr. Inventory 3,571,429
Cr. Ferrett LLc. (1500000/.42) 3,571,429
(Being inventory purchased)
30th
June'18 Dr. Derivative position (Asset) $ 274725
(1500000/.42)-(1500000/.39)
Cr. Oher comprehensive income $ 274725
(Being gain on forward contract realised)
1st Aug'18 Dr. Oher comprehensive income $ 187617
Cr. Derivative position (Asset) $ 187617
(1500000/.39)-(1500000/.41)
(Being gain on forward contract trued
up)
1st Aug'18 Dr. Ferrett LLc. $ 3571428
Dr. Oher comprehensive income $ 87108
Cr. Bank $ 3571428
Cr. Oher comprehensive income $ 87108
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References
Bae, S., 2017. The Association Between Corporate Tax Avoidance And Audit Efforts: Evidence From
Korea. Journal of Applied Business Research, 33(1), pp. 153-172.
Buchanan, B., Cao, C., Liljeblom, E. & Weihrich, S., 2017. Taxation and Dividend Policy: The Muting Effect
of Agency Issues and Shareholder Conflicts. Journal of Corporate Finance, Volume 42, pp. 179-197.
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science
Studies, 2(2), pp. 10-17.
David, 2005. [Online].
Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal
of Accounting Education, Volume 38, pp. 37-49.
J, G., 2016. Principles of Australian Contract Law. Australia: Lexis Nexis.
Lin, S., Riccardi, W. & Wang, C., 2017. Relative Effects of IFRS Adoption and IFRS Convergence on
Financial Statement Comparability. SSRN, pp. 16-40.
Sonu, C., Ahn, H. & Choi, A., 2017. Audit fee pressure and audit risk: evidence from the financial crisis of
2008. Asia-Pacific Journal of Accounting & Economics , 24(1-2), pp. 127-144.
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