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LEC (2) Inter Acc B

This document discusses foreign currency transactions and conversion gains and losses. It provides examples of how to record transactions where the exchange rate changes between when an amount is recorded and when it is paid. Debits and credits are used to record inventory purchases and sales where payment is made in a foreign currency. Profits or losses from changes in exchange rates are recorded on the income statement for the year the conversion takes place.

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Mariam Abdelalim
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8 views

LEC (2) Inter Acc B

This document discusses foreign currency transactions and conversion gains and losses. It provides examples of how to record transactions where the exchange rate changes between when an amount is recorded and when it is paid. Debits and credits are used to record inventory purchases and sales where payment is made in a foreign currency. Profits or losses from changes in exchange rates are recorded on the income statement for the year the conversion takes place.

Uploaded by

Mariam Abdelalim
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Foreign currency transactions and hedging

foreign exchange .
Conversion gain and losses:
Conversion is the process of exchanging amounts of
one foreign currency to another.
For example: suppose a local company in the united
state buys a large consignment of goods from a
supplier in Germany, the order is placed on 1 May and
the agreed price is € 124,250. at the time of delivery
the rate of foreign exchange was € 3,5 to $ 1, the
company would record the amount owed in its books
as follows:
debit credit
Dr. inventory account $ 35,500
(124.250 ÷3.5)
Cr. Payables account $ 35,500

- When the local company comes to pay the supplier, it


needs to obtain some foreign currency, by this time,
however, if the rate of exchange has altered to € 3.55 to $1,
the cost of raising € 124,250 would be (÷ 3.55) $35,000.
-The company would need to spend only $ 35,000 to settle a
debt for inventories “costing” $35,500.
- since it would be administratively difficult to alter the value
of the inventories in the company’s books of account, it’s
more appropriate to record a profit on conversion of $ 500
debit credit
Dr. Payables account $ 35,500

Cr. Cash $ 35,000


Cr. Profit on conversion $ 500

Profit (or losses) on conversion would be


included in profit or loss (income
statement) for the year in which conversion
(whether payment or receipt) takes place
Example: Suppose that another home company
sells goods to Chinese company, and it is agreed
that payment should be made in Chinese Yuan at a
price of Y 116,000, we will further assume that
the exchange rate at the time of sale is Y 10.75 to
$ 1, but when the debt is eventually paid, the rate
has altered to Y 10.8 to $ 1.
The company would record the sale as follow:

debit credit
Dr. Receivables account $ 10,800
116,000 ÷ 10.75
Cr. Sales account $ 10,800
- When the Y 116,000 are paid the local
company will convert them into $, to
obtain (÷10.8) $10,750.
- In this example, there has been a loss on
conversion of $ 50 which will be written off
to profit or loss (income statement) for the
year:
debit credit
Dr. Cash $ 10,750
Dr. loss on conversion $ 50

Cr. Receivables account $ 10,800


Example:
on 1 may a local company in Egypt buys goods from
a supplier in the United states, and the agreed price
is $ 20,000 at the time of delivery the rate of foreign
exchange was $ 1 to 17 L.E.
On 4 June, when the debt is eventually paid, the
rate has altered to $ 1 to 16 L.E.
- The cash balance is 400.000
Require:
1-Prepare Journal Entries on 1 may and 4 June.
2-Show the effect on the balance sheet on 1 may
and 4 June.
3-show the effect on the income statement for
the period .

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