Rare Earth Ltd is an Australian mining company listed on the ASX. The company is an exporter of iron ore to overseas steel mills. The company's functional currency is AS and its financial year ends on 30 June 2021. The company entered various sale transactions during the year. Relevant exchange rates are as follows: Date Spot rate = 1 April 2021 1 June 2021 30 June 2021 31 July 2021 A$1 = US$0.80 A$1 = US$0.78 A$1 = US$0.80 A$1 = US$0.82 Forward rate (for 31/07/2021) A$1 = US$0.77 A$1 = US$0.74 A$1 = US$0.76 A$1 = US$0.82 i. On 1 April 2021, Rare Earth Ltd sold iron ore to a Malaysian customer for US$1,350,000. On 31 July 2021, the customer paid for the iron ore. ii. On 1 June 2021, Rare Earth Ltd sold iron ore to a Korean customer for US$2,340,000. On 31 July 2021, the customer paid for the iron ore. On 1 June 2021, the company entered into a forward exchange contract to sell US$2,340,000, which it designated as a hedge of the customer account. Required: a) Prepare the entries of Rare Earth Ltd to account for its foreign currency transactions in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates. (12 marks) (Entries should be rounded to the nearest dollar. Assume a 0% discount rate for any fair value calculations. Show all workings.) b) Based on the above transactions, illustrate foreign exchange risk and explain how forward exchange contracts can be used to manage the foreign exchange risk. (8 marks) Rare Earth Ltd is an Australian mining company listed on the ASX. The company is an exporter of iron ore to overseas steel mills. The company's functional currency is AS and its financial year ends on 30 June 2021. The company entered various sale transactions during the year. Relevant exchange rates are as follows: Date Spot rate = 1 April 2021 1 June 2021 30 June 2021 31 July 2021 A$1 = US$0.80 A$1 = US$0.78 A$1 = US$0.80 A$1 = US$0.82 Forward rate (for 31/07/2021) A$1 = US$0.77 A$1 = US$0.74 A$1 = US$0.76 A$1 = US$0.82 i. On 1 April 2021, Rare Earth Ltd sold iron ore to a Malaysian customer for US$1,350,000. On 31 July 2021, the customer paid for the iron ore. ii. On 1 June 2021, Rare Earth Ltd sold iron ore to a Korean customer for US$2,340,000. On 31 July 2021, the customer paid for the iron ore. On 1 June 2021, the company entered into a forward exchange contract to sell US$2,340,000, which it designated as a hedge of the customer account. Required: a) Prepare the entries of Rare Earth Ltd to account for its foreign currency transactions in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates. (12 marks) (Entries should be rounded to the nearest dollar. Assume a 0% discount rate for any fair value calculations. Show all workings.) b) Based on the above transactions, illustrate foreign exchange risk and explain how forward exchange contracts can be used to manage the foreign exchange risk. (8 marks)
