Foreign Exchange Loss Accounting Example

This assignment presents a scenario illustrating the accounting treatment of foreign exchange losses. It involves a series of purchases made in British Pounds (£) and converted to US Dollars ($) using varying exchange rates. The provided journal entries demonstrate how to record these transactions and calculate the resulting foreign exchange loss. Workings are also included, detailing the purchase value, exchange rate fluctuations, and the impact on accounts payable.

Running head: FINANCIAL ACCOUNTING 2
Financial Accounting
Name of the Student:
Name of the University:
Author’s Note:

1FINANCIAL ACCOUNTING 2
Answer to Question 1:
Acquisition Analysis:
Particulars
Carrying
Amount
Fair
Value
Net Fair
Value
Share Capital
$200,00
0
Retained Earnings $74,000
General Reserve $6,000
Plant
$100,00
0
$110,00
0 $10,000
Land $60,000 $76,000 $16,000
Net Fair Value of
Identifiable Assets &
Liabilities A
$306,00
0
Consideration Transferred B
$263,20
0
Add: Non-Controlling
Interest C $63,000
Total Purchase
Consideration D=B+C
$326,20
0
Goodwill Acquired E=A-D $20,200
Fair Value of Subsidiary Ltd. F=C/20%
$315,00
0
Goodwill of Subsidiary Ltd. G=F-A $9,000
Less: Recorded Goodwill H $0
Unrecorded Goodwill I=G-H $9,000
Goodwill of Parent Ltd.-
Control Premium J=E-G $11,200

2FINANCIAL ACCOUNTING 2
In the books of Parent Ltd.
Journal Entries
Dr. Cr.
Date Particulars Amount Amount
Business Combination Entries:
Retained Earnings (1/7/16) A/c. Dr. $16,000
To, Deferred Tax Liability
A/c. $4,800
To, Transfer from BCVR A/c. $11,200
Accumulated Depreciation- Plant A/c. Dr. 50000
To, Plant A/c. 40000
To, Deferred Tax Liability
A/c. 3000
To, Business Combination
Valuation Reserve A/c. 7000
Depreciation Expenses A/c. Dr. 1000
To, Accumulated
Depreciation- Plant A/c. 1000
Deferred Tax Liability A/c. Dr. 300
To, Income Tax Expenses
A/c. 300
Goodwill A/c. Dr. $9,000
To, Business Combination
Valuation Reserve A/c. $9,000
Pre-Acquisition Entries:
1/7/2014 Share Capital A/c. Dr. $160,000
Retained Earnings (1/7/14) A/c. Dr. $59,200
General Reserve (1/7/14) A/c. Dr. $4,800
Goodwill A/c. Dr. $11,200
Business Combination Valuation Reserve
A/c. Dr. $28,000

3FINANCIAL ACCOUNTING 2
To, Shares in Subsidiary Ltd.
A/c. $263,200
1/7/2016 Share Capital A/c. Dr. $160,000
Retained Earnings (1/7/16) A/c. Dr. $64,800
General Reserve (1/7/16) A/c. Dr. $5,440
Goodwill A/c. Dr. $11,200
Business Combination Valuation Reserve
A/c. Dr. $21,760
To, Shares in Subsidiary Ltd.
A/c. $263,200
Transfer from BCVR A/c. Dr. $8,960
To, Business Combination
Valuation Reserve A/c. $8,960
NCI Share of Equity:
1/7/2014 Share Capital A/c. Dr. $40,000
Retained Earnings (1/7/14) A/c. Dr. $14,800
General Reserve (1/7/14) A/c. Dr. $1,200
Business Combination Valuation Reserve
A/c. Dr. $7,000
To, NCI A/c. $63,000
NCI Share of Changes in Equity:
General Reserve A/c. Dr. $160
Other Components of Equity A/c. Dr. $3,200
To, Business Combination
Valuation Reserve A/c. 2240
To, NCI A/c. $1,120
Interim Dividend Paid:
Dividend from Subsidiary A/c. Dr. 16000
To, Interim Dividend Paid
A/c. 16000
NCI A/c. Dr. 4000
To, Interim Dividend Paid
A/c. 4000

4FINANCIAL ACCOUNTING 2
Final Dividend Declared:
Dividend from Subsidiary A/c. Dr. 8000
To, Final Dividend Declared
A/c. 8000
NCI A/c. Dr. 2000
To, Final Dividend Declared
A/c. 2000
Dividend Payable A/c. Dr. 8000
To, Dividend Receivable A/c. 8000
Profit in Opening Inventory of Subsidiary
Ltd.:
Retained Earnings (1/7/16) A/c. Dr. 3500
Income Tax Expenses A/c. Dr. 1500
To, Cost of Sales A/c. 5000
Sales & Profit in Closing Inventory:
Sales Revenue A/c. Dr. 120000
To, Cost of Sales A/c. 110000
To, Inventory A/c. 10000
Deferred Tax Assets A/c. Dr. 3000
To, Income Tax Expenses
A/c. 3000
NCI A/c. Dr. 1400
To, NCI Share of Profit A/c. 1400
Sale of Plant: Subsidiary to Parent:
Retained Earnings (1/7/16) A/c. Dr. 7000
Deferred Tax Asset A/c. Dr. 3000
To, Plant A/c. 10000
NCI A/c. Dr. 1400
To, Retained Earnings
(1/7/16) A/c. 1400
Accumulated Depreciation A/c. Dr. 3000

5FINANCIAL ACCOUNTING 2
To, Retained Earnings
(1/7/16) A/c. 1000
To, Depreciation Expense
A/c. 2000
Income Tax Expenses A/c. Dr. 600
Retained Earnings (1/7/16) A/c. Dr. 300
To, Deferred Tax Asset A/c. 900
NCI Share of Profit A/c. Dr. 280
Retained Earnings (1/7/16) A/c. Dr. 140
To, NCI A/c. 420
Management & Consulting Fees:
Management & Consulting Fees A/c. Dr. 10000
To, Manufacturing Expenses
A/c. 5600
To, Administrative Expenses
A/c. 4400
Income Tax Expenses A/c. Dr. 3000
To, Deferred Tax Asset A/c. 3000
NCI Share of Profit A/c. Dr. 1400
To, NCI A/c. 1400
Debentures held by Parent:
Debentures A/c. Dr. 200000
To, Debentures in Subsidiary
Ltd. A/c. 200000
Interest on Debenture:
Debenture Interest A/c. Dr. 10000
To, Financial Expenses A/c. 10000
Income Tax Expenses A/c. Dr. 3000
To, Deferred Tax Asset A/c. 3000
NCI Share of Profit A/c. Dr. 1400
To, NCI A/c. 1400

6FINANCIAL ACCOUNTING 2
Answer to Question 2:
Acquisition Analysis:
Particulars
Carrying
Amount
Fair
Value
Net Fair
Value
Share Capital
$330,00
0
Retained Earnings
$220,00
0
General Reserve $50,000
Plant
$500,00
0
$550,00
0 $50,000
Land
$600,00
0
$800,00
0
$200,00
0
Net Fair Value of
Identifiable Assets &
Liabilities A
$850,00
0
Consideration Transferred B
$200,00
0
Implied Value of
Consideration C=B/25%
$800,00
0
Goodwill Acquired E=A-D
($50,000
)
Gain on Bargain Purchase F=Ex25% $12,500
In the books of Rules Ltd.
Journal Entries
Dr. Cr.

7FINANCIAL ACCOUNTING 2
Date Particulars Amount Amount
Profit after Tax from Commercial Ltd.:
30/6/2017 Investment in Commercial Ltd.A/c. Dr. $52,500
To, Investment Income from
Commercial Ltd. A/c. $52,500
Dividends Paid by Commercial Ltd.:
Cash A/c. Dr. $5,000
To, Investment in Commercial
Ltd.A/c. $5,000
Dividends Declared by Commercial
Ltd.:
Dividends Receivable A/c. Dr. $6,250
To, Investment in Commercial
Ltd.A/c. $6,250
Additional Depreciation on Plant:
Investment Income from Commercial
Ltd. A/c. Dr. $2,500
To, Investment in Commercial
Ltd.A/c. $2,500
Other Comprehensive Income:
Investment in Commercial Ltd.A/c. Dr. $1,250
To, Other Comprehensive
Investment Income from
Commercial Ltd. A/c. $1,250

8FINANCIAL ACCOUNTING 2
Answer to Question 3:
Requirement a:
In the books of Tassie Ltd.
Journal Entries
Dr. Cr.
Date Particulars Amount Amount
15/3/2017 Purchase A/c. Dr.
$810,81
1
To, Accounts Payable A/c. $810,811
30/6/2017 Accounts Payable A/c. Dr.
$113,13
6
To, Foreign Exchange Gain A/c. $113,136
Profit & Loss A/c.
$810,81
1
Purchase A/c. $810,811
Foreign Exchange Gain A/c. Dr.
$113,13
6
To, Other Comprehensive Income A/c. $113,136
14/8/2017 Accounts Payable A/c. Dr.
$697,67
4
Foreign Exchange Loss A/c. Dr. $71,556
To, Cash A/c. $769,231
31/7/2018 Other Comprehensive Income A/c. Dr. $71,556
To, Foreign Exchange Loss A/c. $71,556
Workings:
Date
Purchase
Value (in £)
Exchang
e Rate
Purchase
Value (in $)
Opening
Payable
Balance (in
$)
Closing
Payable
Balance (in
$)
Foreign
Exchnage
Gain/(loss)

9FINANCIAL ACCOUNTING 2
15/3/2017 £300,000 0.37 $810,811 $0 $810,811 $0
30/6/2017 £300,000 0.43 $697,674 $810,811 $697,674 $113,136
14/8/2017 £300,000 0.39 $769,231 $697,674 $0 ($71,556)
Requirement 2:
In the books of Tassie Ltd.
Journal Entries
Dr. Cr.
Date Particulars Amount Amount
15/3/2017 Plant & Equipment A/c. Dr.
$810,81
1
To, Accounts Payable A/c. $810,811
30/6/2017 Accounts Payable A/c. Dr.
$113,13
6
To, Foreign Exchange Gain A/c. $113,136
Foreign Exchange Gain A/c. Dr.
$113,13
6
To, Other Comprehensive Income A/c. $113,136
15/7/2017 Foreign Exchange Loss A/c. $16,611
Accounts Payable A/c. $16,611
14/8/2017 Accounts Payable A/c. Dr.
$714,28
6
Foreign Exchange Loss A/c. Dr. $54,945
To, Cash A/c. $769,231
31/7/2018 Other Comprehensive Income A/c. Dr. $71,556
To, Foreign Exchange Loss A/c. $71,556
Workings:
Date
Purchase
Value (in £)
Exchang
e Rate
Purchase
Value (in $)
Opening
Payable
Balance (in
$)
Closing
Payable
Balance (in
$)
Foreign
Exchnage
Gain/(loss)

10FINANCIAL ACCOUNTING 2
15/3/2017 £300,000 0.37 $810,811 $0 $810,811 $0
30/6/2017 £300,000 0.43 $697,674 $810,811 $697,674 $113,136
15/7/2017 £300,000 0.42 $714,286 $697,674 $714,286 ($16,611)
14/8/2017 £300,000 0.39 $769,231 $714,286 $0 ($54,945)
Bibliography:
Arnold, G., & Kyle, S. (2017). Intermediate Financial Accounting Volume 2.
Hoyle, J. B., Schaefer, T., & Doupnik, T. (2015). Advanced accounting. McGraw Hill.