Questions

Dashboard ACC 4530.01, SPRING 2025 - ADVANCED ACCOUNTING

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Question text Accounting for Foreign-Currency-Denominated Receivable and Payable Assume that on November 2, 2021, we purchase product from a manufacturer located in Ireland and that the manufacturer requires payment in Euros (€). Our company purchases 9,000 units of product at a sales price of €9 per unit, and the assumed exchange rate on the date of sale is $1.20:€1 The invoice terms are 90 days, and the due date for payment is January 31, 2022. Assume that the exchange rate rises to $1.25:€1 on December 31 and to $1.30:€1 on January 31, 2022. a. Prepare the journal entries for the date of purchase, December 31, and the date of payment. [table] Date | Journal entry | Debit | Credit November 2, 2021 | Accounts payableAccounts receivableAOCI—Foreign currency transaction gainCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)InventoriesOCI—Foreign currency transaction gainSalesNo entry - DebitNo entry - Credit | | Answer 1CorrectMark 1.00 out of 1.00 | Accounts payableAccounts receivableAOCI—Foreign currency transaction gainCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)InventoriesOCI—Foreign currency transaction gainSalesNo entry - DebitNo entry - Credit | | Answer 2CorrectMark 1.00 out of 1.00 | (to record purchase of inventory) | | December 31, 2021 | Accounts payableAccounts receivableAOCI—Foreign currency transaction gainCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)InventoriesOCI—Foreign currency transaction gainSalesNo entry - DebitNo entry - Credit | | Answer 3CorrectMark 1.00 out of 1.00 | Accounts payableAccounts receivableAOCI—Foreign currency transaction gainCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)InventoriesOCI—Foreign currency transaction gainSalesNo entry - DebitNo entry - Credit | | Answer 4CorrectMark 1.00 out of 1.00 | (to record adjustment of the payable) | | January 31, 2022 | Accounts payableAccounts receivableAOCI—Foreign currency transaction gainCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)InventoriesOCI—Foreign currency transaction gainSalesNo entry - DebitNo entry - Credit | | Answer 5CorrectMark 1.00 out of 1.00 | Accounts payableAccounts receivableAOCI—Foreign currency transaction gainCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)InventoriesOCI—Foreign currency transaction gainSalesNo entry - DebitNo entry - Credit | | Answer 6CorrectMark 1.00 out of 1.00 | Accounts payableAccounts receivableAOCI—Foreign currency transaction gainCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)InventoriesOCI—Foreign currency transaction gainSalesNo entry - DebitNo entry - Credit | | Answer 7CorrectMark 1.00 out of 1.00 | (to record payment of the payable) | | [/table] b. Prepare the journal entries for the date of purchase, December 31, and the date of payment assuming that we are selling the inventory instead of purchasing it. [table] Date | | Debit | Credit November 2, 2021 | Accounts payableAccounts receivableAOCI—Foreign currency transaction gainCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)InventoriesOCI—Foreign currency transaction gainSalesNo entry - DebitNo entry - Credit | | Answer 8CorrectMark 1.00 out of 1.00 | Accounts payableAccounts receivableAOCI—Foreign currency transaction gainCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)InventoriesOCI—Foreign currency transaction gainSalesNo entry - DebitNo entry - Credit | | Answer 9CorrectMark 1.00 out of 1.00 | (to record the sale) | | December 31, 2021 | Accounts payableAccounts receivableAOCI—Foreign currency transaction gainCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)InventoriesOCI—Foreign currency transaction gainSalesNo entry - DebitNo entry - Credit | | Answer 10CorrectMark 1.00 out of 1.00 | Accounts payableAccounts receivableAOCI—Foreign currency transaction gainCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)InventoriesOCI—Foreign currency transaction gainSalesNo entry - DebitNo entry - Credit | | Answer 11CorrectMark 1.00 out of 1.00 | (to record the adjustment of the receivable) | | January 31, 2022 | Accounts payableAccounts receivableAOCI—Foreign currency transaction gainCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)InventoriesOCI—Foreign currency transaction gainSalesNo entry - DebitNo entry - Credit | | Answer 12CorrectMark 1.00 out of 1.00 | Accounts payableAccounts receivableAOCI—Foreign currency transaction gainCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)InventoriesOCI—Foreign currency transaction gainSalesNo entry - DebitNo entry - Credit | | Answer 13CorrectMark 1.00 out of 1.00 | Accounts payableAccounts receivableAOCI—Foreign currency transaction gainCashForeign currency transaction gainForeign currency transaction lossForward contract (asset)Forward contract (liability)Hedged firm commitment (asset)InventoriesOCI—Foreign currency transaction gainSalesNo entry - DebitNo entry - Credit | | Answer 14CorrectMark 1.00 out of 1.00 | (to record collection of the receivable) | | [/table]

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Question recap and key figures: - Purchase from Ireland on Nov 2, 2021: 9,000 units × €9 per unit = €81,000. - Exchange rate on Nov 2: $1.20 = €1. - Invoice terms: 90 days, payment due Jan 31, 2022. - Exchange rates: Dec 31 = $1.25 = €1; Jan 31, 2022 = $1.30 = €1. - For part (a), we are dealing with a foreign-currency-denominated payable (we pay in euros). - For part (b), the scenario is the same but we are selling the inventory instead of purchasing. Part (a) — Journal entries for the date of purchase, December 31, and date of payment (purchase scenario): - Nov 2, 2021 (date of purchase): You record the payable in USD equivalents and classify the underlying item as inventories. The amount initially recognized in USD is €81,000 × $1.20/€ = $97,200. Up front, there is no cash payment, so cash is not affected. Possible layout: Dr Inventories 97,200; Cr Accounts payable 97,200. If the accounting system tracks foreign currency translation separately, you may also see a separate recognition related to the change in foreign-currency exposure, but the basic entry to establish the payable is as above. - Dec 31, 2021 (revaluation date as rate changes to $1.25/€): The euro-denominated payable now has a USD carrying amount of €81,000 × $1.25/€ = $101,250. Since the USD per euro increased from 1.20 to 1.25, the USD amount of the payable increased by $4,050. This creates a foreign-currency transaction loss (to be recognized in earnings or OCI depending on hedge accounting and policy). The typical effect is to recognize a loss of ......Login to view full explanation

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