Answer:
a. It results in a gain on foreign exchange of $1,200
b. It results in a loss on foreign exchange of $500
Explanation:
The accounting standard related to foreign exchange is IAS 21 and it requires that financial assets and liabilities in the balance sheet are recognized at the spot rate and revalued at year end using the closing rate with the difference between the amounts at transaction date and year end recognized as a gain/loss in the income statement.
Since the item was purchased on account, the inventory is not a financial asset and will thus not be revalued. However, the accounts payable will be revalued.
The entries posted on purchase would have been debit inventory and credit accounts payable.
On November 1, 2017
1 markka = $0.754
100,000 markka = $75,400
when the rate changes to $0.742,
100,000 markka = $74,200
The difference
= $75,400 - $74,200
= $1,200
There has been a reduction in the liability by this difference hence
Debit Accounts payable $1,200
Credit Foreign exchange gain $1,200
January 15, 2018 where the rate becomes $0.747,
100,000 markka = $74,700
The difference then becomes
= $74,200 - $74,700
= ($500)
This is an increase in the liability hence
Debit Foreign exchange loss $500
Credit Accounts payable $500
