Management Accounting: Exchange Rate Fluctuations and Protection Methods

MANAGEMENT ACCOUNTING
STUDENT ID:
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Question 1
The given situation pertains to a company named Striking Furs which is a US based company
and tends to import furs from a Canadian supplier named Capable Trappers Ltd. The requisite
journal entries for the various events are highlighted as follows.
1) Considering the perpetual inventory system is used, hence the inventory account is debited
and accounts payable is credited since the inventory has been purchased on account. The
inventory price is quoted in CAD and needs to be converted into USD considering $ 0.85
USD = 1 CAD. The USD amount for inventory = 25000*0.85 = USD 21,250. The date of
this event is December 11, 2017 and the requisite journal entry for the same is indicated
below.
2) In the given case, there has been fluctuation of exchange rate resulting in appreciation of
CAD against USD owing to which there would loss incurred by Striking Furs. This loss
would be adjusted against the accounts payable. The quantum of loss on account of exchange
rate fluctuations would be (0.89-0.85)*25000 = USD 1,000. The adjusting entry for this
would be made at the end of year i.e. December 31, 2017 and the relevant journal entry for
the same is indicated below.
3) When the payment for the inventory bought earlier is payment, there is gain realised by
Striking Furs since the USD has appreciated against the CAD. Appreciation of USD against