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ACCT3563 Lecture Notes - Lecture 7: Foreign Exchange Spot, Spot Contract, General Ledger

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UNSW, UNSW Sydney
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Accounting
Course
ACCT3563
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All

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The need for translation of foreign currency transactions. The functional currency of a company is the currency of the primary economic environment in which the company operates. The functional currency may or may not be the currency that an entity prepares its general ledger in, which is the reporting currency. Normally, the functional currency of an australian company is a$ but it may be a currency other than a$. In this unit of study, we will assume that the functional currency is a$. Any currency other than the functional currency or the reporting currency. Buying or selling goods or services at prices denominated in a foreign currency. Acquiring or disposing of plant and equipment at prices denominated in a foreign currency. Borrowing or lending funds where the amounts payable or receivable are denominated in a foreign currency. The translation is based on the exchange rate between the foreign currency and the functional currency.

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Related Questions

Zugar Company is domiciled in a country whose currency is the dinar. Zugar begins 2017 with three assets: cash of 20,000 dinars, accounts receivable of 80,000 dinars, and land that cost 200,000 dinars when acquired on April 1, 2016. On January 1, 2017, Zugar has a 150,000 dinar note payable, and no other liabilities. On May 1, 2017, Zugar renders services to a customer for 120,000 dinars, which was immediately paid in cash. On June 1, 2017, Zugar incurred a 100,000 dinar operating expense, which was immediately paid in cash. No other transactions occurred during the year. Currency exchange rates for 1 dinar follow:

April 1, 2016 $ 0.33 = 1 dinar

January 1, 2017 0.36 = 1

May 1, 2017 0.37 = 1

June 1, 2017 0.39 = 1

December 31, 2017 0.41 = 1

a) Assume that Zugar is a foreign subsidiary of a U.S. multinational company that uses the U.S. dollar as its reporting currency. Assume also that the dinar is the subsidiary’s functional currency. What is the translation adjustment for this subsidiary for the year 2017?

b) Assume that Zugar is a foreign subsidiary of a U.S. multinational company that uses the U.S. dollar as its reporting currency. Assume also that the U.S. dollar is the subsidiary’s functional currency. What is the remeasurement gain or loss for 2017?

c) Assume that Zugar is a foreign subsidiary of a U.S. multinational company. On the December 31, 2017, balance sheet, what is the translated value of the Land account? On the December 31, 2017, balance sheet, what is the remeasured value of the Land account? (Input all amounts as positive.)

a) Positive Translation adjustment = ?

b) gain remeasurement = ?

c) Translated value of land = 82,000 & Remeasured value of land = 66,000

Derivatives Statement No. 133 Accounting for Derivative Instruments and Hedging Activities establishes accounting and reporting standards for derivative instrument embedded in other contracts and for hedging activities. The statement requires that an entity recognize all derivatives as either assets or liabilities in the statements of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as: (a) A hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment. (b) A hedge of the exposure to variable cash flows of a forecasted transactions or (c) A hedge of the foreign currency exposure a net investment in a foreign operation, an unrecognized firm commitment, an available for sale security or a foreign currency denominated forecasted transactions. Requirements Review Statement No. 133 and evaluate the standard in terms of the conceptual framework. Define a derivative from an accounting perspective. Provide at least three characteristics of a derivative. Name and describe three derivatives. When was the implementation date of the statement? Briefly summarize the statement.

1/ Imagine that you run a U.S. company based in New Jersey that lists only on the New York Stock exchange. Assume that the company has only one factory, located in New Jersey. All of the company’s workers are paid in U.S. dollars and the company buys all of its materials from U.S. suppliers (and pays in dollars). Also, all of the company’s other costs are paid for in U.S. dollars; however, assume that all of the country’s products are exported to Europe and that all of its sales are denominated in Euros. Further assume that all of these exports are sold by the company’ European sales office. This Office is a subsidiary of the U.S. Headquarters and consolidates its statements with the U.S. headquarters.

Questions: Assume that the dollar has been increasing in value against the Euro. For the U.S. company described above, what impact (if any) will the rising dollar have on the demand for the company’s products? If the U.S. company described above sells to European companies on credit contracts denominated in Euros, what impact will the rise in the dollar have on the U.S. company’s dollar valued Accounts Receivable? What is the reporting currency of the U.S. headquarters parent that lists on the NYSE. What is the functional current of the U.S. (headquarters) parent. What is the functional currency of the foreign (sales office) subsidiary?

2/ Imagine that you run a U.S. company based in New Jersey and lists only on the NYSE. Assume that the company’s main headquarters is in New Jersey, but that its only factory is in Germany. Thus, all of the company’s workers are paid in Euros and the company buys all of its materials from German firms (and pays Euros). Also, all of the company’s (i.e. factory’s) other costs are paid for in Euros. Also, assume that the company’s German factory operates as a separate foreign subsidiary that consolidates its financial statements with the U.S. headquarters that lists on the NYSE.

Question: Assume that the dollar has been rising in value against the Euro. For the U.S. company described above, what impact will the rising dollar have on the demand for the company’s products? If the U.S. company described above sells to German companies on credit contracts denominated in Euros, what impact will the increase in the dollar have on the U.S. company’s Accounts Receivable? ? What is the reporting currency of the U.S. headquarters parent that lists on the NYSE. What is the functional current of the U.S. (headquarters) parent. What is the functional currency of the foreign subsidiary?