Orstralia Ltd is an Australian company that receives management consulting services from Spin Incorporated. On 15 June 2020, Orstralia received an invoice from Spin amounting to US$5 million for services provided over the period 1 January 2020 to 31 May 2020. On 15 July 2020, Orstralia paid the invoice. The functional currency of Orstralia Ltd is A$ and its financial year ends on 30 June. Applicable exchange rates are as follows:

Required

Prepare the entries of Orstralia Ltd to record the effects of the management fee transaction and related cash balance in accordance with AASB 121/IAS 21.

 

Answer:

As per IAS 21

Foreign currency transaction should be recorded initially at the exchange rate prevailing on the date of transaction irrespective of monetary or non-monetary transaction.

Subsequently on the reporting date monetary items should be reported at the closing rate and the difference is recorded as forex gain or loss in the income statement.

On settlement date the difference in exchange rate should be recorded as forex gain or loss in the income statement.

Exchange rates:

1 Jan. 2020 A$1 = US$0.70

31 May 2020 A$1 = US$0.64

Average 1 Jan. 2020 to 31 May 2020 A$1 = US$0.65

15 June 2020 A$1 = US$0.62

30 June 2020 A$1 = US$0.60

15 July 2020 A$1 = US$0.58

Journal entry on the date of invoice 15^th June 2020

Supplier charges payable = $5,000,000 / A$0.62 => 8,064,516

Average exchange rate during the service period from January to May = 0.65

Consulting fee charges = $5,000,000 / A$0.65 => A$7,692,307

Forex loss => A$8,064,516 - A$7,692,307 => A$372,208

Debit Consulting fee charges  A$7,692,307

Debit Forex loss                         A$ 372,208

Credit Consulting fee charges payable               A$8,064,516      

On reporting date 30^th June 2020

Exchange rate on 30^th June = 0.60

Supplier charges payable to be reported = $5,000,000 / A$0.60 => A$8,333,333

Exchange loss = A$8,333,333 - A$8,064,516 => A$260,817

Debit Forex loss                                    A$260,817

Credit Consulting fee charges payable                  A$260,817

On settlement date 15^th July 2020

Exchange rate on 15^th July 2020 = 0.58

Supplier charges payable to be settled = $5,000,000 / A$0.58 => A$8,620,690

Exchange loss = A$8,620,690 - A$8,333,333 => A$287,357

Debit Forex loss                                     A$287,357

Credit Consulting fee charges payable                  A$287,357

Debit Consulting fee charges payable    A$8,620,690

Credit Bank                                                                           A$8,620,690