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Hi sir, i’m not sure whether my journal entries for the following question is correct because it’s not provided in the answer key, could you please check for me.
Qn) An entity took out a bank loan for 12million dinars on 1 January 20X1.It repaid 3 million dinars to the bank on 30 November 20X1. The entity has a reporting date of 31 December 20X1 and a functional currency of dollars($). Exchange rates are as follows:
1 January 20×1 : 6 Dinars – $1
30 November 20X1 : 5 Dinars – $1
31 December 20X1 : 5.6 Dinars – $1
What is the total loss arising on the above transactions in the year ended 31 December 20X1 ?
My answer :
Initial transaction
12 million dinars / 6 dinars = $ 2 million
DR Cash $2million
CR loan payable $2millionOn repayment
12 million dinars / 5 dinars = $ 2.4 millionDR Loan payable $3million
CR Cash $2.4million
DR P/L-Foreign exchange loss $0.6millionAt reporting date
9 million dinars / 5.6 dinars = $ 1.6 millionDR loan payable $0.4 million
CR P/L foreign exchange gain $0.4 millionTherefore total loss = $0.6 million – $0.4 million
= $0.2 millionIs my understanding correct ?
I don’t understand the entry ‘on repayment 12 million dinars’ – what’s this one for?
Dr Loan payable 3 million dinars (not $!) = $600,000
Cr Cash $600,000
Dinar balance outstanding after payment = 9 million dinars
At year end, convert balance outstanding from 9 million dinars at closing exchange rate of 5.6 dinars = £1,600,000 …
… carry forward £1,600,000
This leaves a £200,000 balancing amount needed on the credit side of the loan account so …
… Dr foreign exchange losses on the SoPorL £200,000
Cr Loan account £200,000Clear now?
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