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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › FOREIGN EXCHANGE
QUESTION
On 1 January 20X6 Wilkie Co, a company that uses the dollar ($) as its
functional currency, buys goods from an overseas supplier, who uses
Dinar (D) as its functional currency. The goods are priced at D35,000.
Payment is still outstanding at the reporting date of 31 March 20X6.
The prevailing exchange rates are:
1 January 20X6 D1.75 : $1
31 March 20X6 D1.90 : $1
ANSWER
Initial transaction
Translate at historic rate on 1 January 20X6, D35,000/1.75 = $20,000
Dr Purchases $20,000
Cr Payables $20,000
At the reporting date
Payables are monetary items, so retranslate at the closing rate on
31 March 20X6, reducing the payables balance to D35,000/1.90 =
$18,421 and recognising a gain of $1,579 ($20,000 – $18,421) in the
SPL.
Dr Payables $1,579
Cr SPL Exchange gain $1,579
DOUBT – In the above solution we have recored the payables at the closing rate and gain of 1579 is recorded and trasferred to PNL is isn’t this treatment wrong since the gain is unrealized it should be transferred to OCI and not to PNL ??
No, it is correct. All gains/losses on translation of foreign currency for monetary items are recognised through profit or loss.
Thanks