Foreign Exchange Transactions
A transaction taking
place between two or more enterprises (concerns) located in the same country
are recorded and finalized in their respective books of accounts in the same
currency.
However, when one of
theses concerns is situated in a different country, each of them has to enter
the transaction in its respective currency (domestic currency) in its books of
accounts evidenced in the relevant document quantified in the currency of one
of the concerns. Hence, the other concern (other than the one whose currency
the document is quantified in) needs to record the transaction evidenced by the
document (sale bill, Purchase bill etc.) in its own currency. Thus, a need to
convert the currency arises which is affected by using currency exchange rates.
This give rise to the basic problem.
Important Terms
a) Average
Rate – it is the mean of the exchange rates in force during a period.
b) Closing
Rate – it is the exchange rate at the balance sheet date.
c) Exchange
Difference – It is the difference resulting from reporting the same number of
units of a foreign currency in the reporting currency at different rates.
d) Exchange
Rate – It is the ratio for exchange of two currencies.
e) Fair
Value – It is amount for which an asset could be exchanged, or a liability
settled, between knowledgeable, willing parties in an arm’s length transaction.
f) Foreign
Currency – It is a currency other than the reporting currency of an enterprise.
g) Reporting
Currency – It is the currency used in presenting the financial statements.
h) Monetary
Items – It includes the money held and assets & liabilities to be received
or paid in fixed or determinable amounts of money (i.e. Cash in hand and in
banks, Debtors, Creditors, Bills Receivable, Bills Payable), in short, all
current assets except stock.
i) Non-Monetary
Items – It includes the assets & liabilities other than monetary items.
j) Settlement
Date – It is the date at which a receivable is due to be collected or a payable
is due to be paid.
k) Recoverable
Amount – It is the amount, which the enterprise expects to recover from the
future use of an asset, including its residual value on disposal.
l) Spot Rate – A transaction in foreign currency is recorded in the books of accounts on the date on which the transaction occurs at the exchange rate on that date. This exchange rate is called as the spot rate.
Practical Problems
1. Charul
Associates, Surat purchased raw materials from Thomas INC, New York, U.S.A.
of US $ 50,000 on 1st January, 2008. The
payments were made as under:
|
Date of Payments |
|
US $ |
Exchange
Rate Per $ |
|
01.02.2008 |
|
10,000 |
Rs. 41 |
|
01.03.2008 |
|
25,000 |
Rs. 39 |
|
01.04.2008 |
|
10,000 |
Rs. 39 |
|
01.05.2008 |
|
5,000 |
Rs. 41 |
The exchange rate on 1st
January, 2008 and 31st March, 2008 were Rs. 40 per $ and Rs.42 per $
respectively.
You are
required to prepare Thomas INC Account and Foreign Exchange Fluctuation Account
in the books of Charul Associates. Indicating clearly amount in $, rate of
exchange and amount in rupees.
Charul Associates follows financial year as accounting
year.
2. Journalise
the following transactions in the books of Exim Ltd. for the year 31st
August, 2007 and also prepare
‘Foreign Exchange Fluctuation Account’ applying AS – 11.
a) On 1st
July, 2006; goods worth US $ 1,05,000 were exported to M/s Pasco Ltd. The
amount
was realized as
below:
Date
Amount
realized in US $
05.11.2006 70,000
11.05.2007 35,000
b) Goods
worth US $ 5,000 were exported on 15th July, 2006 to Joe Company
Ltd, USA. The amount was received
after 30 days.
c) On
15th September, 2006; Raw Materials worth US $ 20,000 were imported
from Robert Ltd.
payable 50%
immediate and the balance on 15th April, 2007.
d) Raw
Materials were imported on 31st October, 2006 worth US $ 10,000 from
Blue Cross Ltd. U.K. The payment was
made after 45 days.
e) On
15th December, 2006; goods worth US $ 75,000 were exported to Thomas
Ltd., U.K. The amount was received
as below:
Date Amount
realized in US $
15.02.2007 30,000
15.03.2007 45,000
f) Plant
and Machinery were imported from California Equipments Ltd. on 1st
January, 2007 for US $ 14,000. The
payment for the same was made on 30th April, 2007.
|
The exchange rates for 1 US $ were as below: |
|
||||
|
|
|
|
|
|
|
|
Date |
|
Rate |
|
Date |
Rate |
|
01.07.2006
|
|
Rs. 41 |
|
01.01.2007 |
Rs. 42.25 |
|
15.07.2006
|
|
Rs. 41.25 |
|
15.02.2007 |
Rs. 42.50 |
|
14.08.2006
|
|
Rs. 41.50 |
|
15.03.2007 |
Rs. 42.75 |
|
15.09.2006
|
|
Rs. 41 |
|
31.03.2007 |
Rs. 42 |
|
31.10.2006
|
|
Rs. 41.75 |
|
15.04.2007 |
Rs. 42.50 |
|
05.11.2006
|
|
Rs. 40 |
|
30.04.2007 |
Rs. 42.75 |
|
15.12.2006 |
|
Rs. 42 |
|
11.05.2007 |
Rs. 42 |
3. M/s Vipor Ltd. has entered into the following
transactions in foreign currency during the year ended 31st March, 2007.
a) On 7th
April, 2006; goods worth US $ 8,000 exported to M/s Warne Ltd. of USA.
Payment received on 15th
April, 2006.
b) On
10th May, 2006; export of goods worth US $ 13,000 to M/s Marshal
Ltd. of Canada. Payment received in
advance on 5th May, 2006.
c) On 15th
June, 2006; taw materials were imported worth US $ 9,000 from M/s Thomson Ltd.
of Italy. Payment was made on 30th
June, 2006.
d) On
20th July, 2006; goods worth US $ 5,000 exported to M/s ABC Ltd. of
Japan. Payment was not received till
31st March, 2007.
e) On 1st
September, 2006; a machine worth US $ 18,000 was imported from M/s Stephon
Ltd.
of West Germany.
Payment for the same was made as under:
Date Amount
paid in US $
01.10.2006 8,000
01.11.2006 6,000
01.12.2006 4,000
f) On
15th January, 2007; raw materials worth US $ 6,500 were imported
from M/s Bishop Ltd. of UK. Payment
for the same was outstanding on 31st March, 2007.
g) On
10th February, 2007; spare parts worth US $ 800 imported from M/s
Garner Ltd. of France against
immediate payment.
Exchange rates of US $ during the year 2006-2007 were as
follows:
Date Exchange Rate Date Exchange
Rate
07.04.2006
Rs.
41.00 01.09.2006
Rs.
42.25
15.04.2006
Rs.
41.25 01.10.2006
Rs.
42.50
05.05.2006
Rs.
41.50 01.11.2006
Rs.
42.75
10.05.2006
Rs.
41.00 01.12.2006
Rs.
42.00
15.06.2006
Rs.
41.75 15.01.2007
Rs.
41.75
30.06.2006
Rs.
40.00 10.02.2007
Rs.
42.00
20.07.2006
Rs.
42.00 31.03.2007
Rs.
42.50
You are required to pass journal entries
in the books of M/s Vipro Ltd. for the above transactions applying AS-11 for
the year ended 31st March, 2007.
4.
Shyamsundar Ltd. imported goods worth US $
4,00,000 from M/s Hogg & Co. of U.S.A. on 10th August, 2007;
when the exchange rate was Rs. 41.00.
Shyamdundar Ltd. agreed to pay the amounts in four equal instalments as
under:
|
Date |
Exchange
Rate |
|
10.09.2007 |
Rs. 42.25 |
|
10.09.2007 |
Rs. 43.00 |
|
10.11.2007 |
Rs. 43.50 |
|
10.12.2007 |
Rs. 43.70 |
Prepare Foreign Exchange Fluctuation Account in the Books
of Shyamsundar Ltd.
5. a) Swapnil Ltd. dealer in cosmetics exports
goods on 1st January, 2006 worth $ 50,000 to WK Ltd. in New York. The payment was
received on 31st March, 2006. On the date of invoice,the exchange rate was $ = Rs. 47 and
when the payment was received it was $ = Rs. 48.Journalise the above transactions in
the books of Swapnil Ltd.
b) X
Ltd. an Indian Company advanced $ 16,000 for import of goods from US Company of
USA on 1st February,
2006. The goods were received along with purchase bill for $ 25,000 on 1st March, 2006. The balance amount was paid
on 15th March, 2006.
The rate of exchange on the various
dates was as follows:
01.02.2006 $ 1 = Rs. 47.50
01.03.2006 $ 1 = Rs. 48.00
15.03.2006 $ 1 = Rs. 49.00
Pass Journal Entries for the above transactions in the
books of X Ltd.
6.
Aranya Ltd. imported goods from Bluebirds Ltd.
of USA worth US $ 1,50,000 on 1st December 2013 when the exchange
rate was Rs. 60 per US $. The amount to be paid in installments is as follows:
|
Date |
Amount of
Installment US $ |
Exchange Rate per US
$ (Rs.) |
|
31.12.2013 15.01.2014 10.02.2014 30.04.2014 |
20,000 40,000 60,000 30,000 |
60 62 59 65 |
Aranya Ltd. closes the books on 31st March every
year. On 31st March 2014 the exchange rate was Rs. 63 per US $.
You are required to pass journal entries for the years
ended 31st March 2014 and 31st March 2015 in the books of
Aranya Ltd.
Also prepare Foreign Exchange Fluctuation Account in the
books of Aranya Ltd. for the relevant years.
7.
Smita Ltd. of Mumbai sold goods worth $
10,00,000 to Barak Ltd. of America on 31st January, 2014. Amounts
were received from Barak Ltd. as follows:
|
Date |
|
$
|
|
01.02.2014 |
|
4,00,000
|
|
01.03.2014 |
|
1,00,000
|
|
30.03.2014 |
|
5,00,000
|
Accounts are closed on 31st March, every year.
Exchange Rate of $ 1.
31.01.2014 Rs.
61
01.02.2014 Rs.
60
01.03.2014 Rs.
62
30.03.2014 Rs.
58
Pas journal entries in the books of Smita Ltd. for the year
ended 31st March 2014.
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