QUESTION
(a) AQALAM PLC whose functional currency is Naira (N) with an accounting year-end of
31st December of each year purchased raw materials on credit from Kumasi PLC of
Accra, Ghana invoiced at ₵100,000 on 1st April 2016, when the exchange rate was N
1=₵1.58 . As at 31st December, 2016, the end of its accounting year, AQALAM PLC did
not settle Kumasi PLC. As at that date the exchange rate was N 1=₵1.52. You are
required to record these transactions in the books of AQALAM PLC by means of a
journal showing exchange rate fluctuation to December 31, 2016.
(b) Nasara Plc, a Nigerian multinational company whose functional currency is Naira (N)
with an accounting year-end of 31st December of each year purchased raw materials on
credit from Smart Inc. of the United States of America invoiced at $10,000 on 2nd April
2016, when the exchange rate was N450 = US$1. Nasara PLC settled its account on 30th
July 2016 when the exchange rate was N485 = US$1. You are required to show the
foreign currency gain(s) or losse(s) by way of journal entries.
Solution
(a) At initial recognition: the purchase is recorded on 1st April, 2016 as follows:
In the Books of AQALAM PLC
General Journal
Dr (₦) Cr (₦)
Purchases (₵100,000 /₵1.58 ) 63,291
Trade Payable (₵100,000 /₵1.58 ) 63,291
Being the initial recognition of purchase of raw materials
On 31st December 2016, the trade payables will be retranslated at the closing rates as follows:
₵100,000 /₵1.582= ₦65,789
Exchange rate difference amount to:
₦65,789-₦63,291= ₦2,498
Thus;
Dr (₦) Cr (₦)
Profit or loss (Exchange difference) 2,498
Trade Payable (Exchange difference) 2,498
Being the exchange rate difference arising from the credit purchase
of raw materials during the year
Page 1 of 2
Note: the trade payables will reflect ₦65,789 at the end of the period while if the raw materials
have not been used, sold or impaired will still be recognized at ₦63,291.
(b) In the Books of Nasara PLC
General Journal
Particulars Dr. Cr.
N N
Purchases 4,500,000
Smart Inc. 4,500,000
Being credit purchases for US$10,000 at exchange rate of
N450= US$ 1
Smart Inc. 4,500,000
Profit & Loss (exchange loss) 350,000
Bank 4,850,000
Being payment for credit purchases for US$10,000 at exchange
rate of N485= US$ 1
Workings:
(1) 2nd April 2016 on exchange rate was N450 = US$1:
$10,000 x N450 = N 4,500,000
(2) 30th July 2016 on exchange rate was N485 = US$1:
$10,000 x N485 = N 4,850,000
Page 2 of 2