- 10 Marks
Question
Medina Power Ltd has carried out certain transactions denominated in foreign currency during its financial year ended 31 October 2019 and has also conducted foreign operations through a foreign entity. Medina Power Ltd.’s functional and presentation currency is the cedi.
On 31 July 2019, Medina Power Ltd purchased goods from a foreign supplier for 16 million dinars. At 31 October 2019, the supplier had not yet been paid and the goods were still held in inventory by Medina Power Ltd.
On 31 July, Medina Power Ltd sold goods to a foreign customer for 8 million dinars, and it received payment for the goods in dinars on 31 October 2019.
Medina Power Ltd had also purchased an investment property on 1 November 2018 for 56 million dinars. At 31 October 2019, the investment property had a fair value of 48 million dinars. The company uses the fair value model in accounting for investment properties.
Medina Power Ltd wants advice on how to treat these transactions in the financial statements for the year ended 31 October 2019.
Required:
Discuss the accounting treatment of the above transactions in accordance with the advice required by the directors. (You should show detailed workings as well as a discussion of the accounting treatment used.)
Answer
Inventory and payable
- The inventory and trade payable would be recorded initially at GH¢10 million (16 million dinars x GH¢0.6250).
- At the year-end on 31 October 2019, the amount payable is still outstanding. It should be re-translated at the closing rate to GH¢12.3 million (16 million dinars x GH¢0.7692).
- This creates an exchange loss of GH¢2.3 million (12.3 – 10) which should be recognized in profit or loss.
- Unless it has been impaired, the inventory (a non-monetary asset) should be recorded at GH¢10 million at the year-end.
Sale of goods
- The sale of goods should be recorded at GH¢5 million (8 million dinars x GH¢0.6250) as revenue and as a trade receivable.
- Payment in dinars was received on 31 October 2019 and the actual cedi value of the dinars received was GH¢6.2 million (8 million dinars x GH¢0.7692).
- This creates a gain on exchange of GH¢1.2 million (6.2 – 5) which should be recognized in profit or loss.
Investment property
- The investment property should be recognized on 1 November 2018 at GH¢40 million (56 million dinars x GH¢0.7143).
- At the year-end on 31 October 2019, the property should be recognized at its fair value of GH¢36.9 million (48 million dinars x GH¢0.7692).
- The fall in fair value (40 – 36.9 = 3.1) should be recognized in profit and loss as a loss on investment property.
- The property is a non-monetary asset and when a gain or loss on a non-monetary item is recognized in profit or loss, the element of the gain or loss relating to exchange rates is also recognized in profit or loss.
- Topic: Foreign currency
- Series: MAY 2020
- Uploader: Olaoluwa