QUESTION 2 (25 marks)

Exchanger Limited imports goods from various countries abroad and has asked you, a trainee financial accountant, for advice on how to account for the effects of changes in foreign exchange rates. Exchanger Limiteds year-end is 31 December, and its reporting or functional currency is the euro (N$).

Exchanger Limited made a credit sale to a US customer on 1 October 2019 for US$100,000. This transaction was incorrectly recorded by Exchanger Limited as a sale of N$100,000. Exchanger Limited received part payment on 30 November 2019 of US$500,000 and this again was incorrectly recorded as N$ 500,000 in its records.

The following exchange rates applied during the financial year:

REQUIRED

(a) The financial controller of Exchanger Limited has asked you to prepare a report which addresses the following:

i. In accordance with IAS 21 The Effect of Changes in Foreign Exchange Rates, describe what is meant by the following:

(i) A foreign currency transaction.

(ii) An exchange difference.

ii. Outline how the following items denominated in a foreign currency are restated to presentation currency. (The functional currency is not the currency of a hyperinflationary economy).

(i) Assets and liabilities.

(ii) Income and expenses.

(iii) Any resulting exchange differences. (12 Marks)

(b) Prepare journal entries to show how the above transactions should be recorded in the books of Exchanger Limited for the year ended 31 December 2019. (10 Marks)

(c) Calculate the foreign exchange gain or loss at the 31 December 2019 for Exchanger Limited. (3 Marks)

1 October 2019 30 November 2019 31 December 2019 US$ 1 = N$ 12.50 US$ 1= N$ 12.00 US$ 1 = N$ 11.00