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Lucky Traders is a subsidiary of United Traders, a US based trading company with a 31 December year end, and it is involved in the buying and selling of electronic accessories. Most of the inventories that Lucky Traders sells are imported from the parent company that is based in America. Given the nature of the business, Mr. Luckiness expresses his concern on the fact that the company is trading with companies that are not local companies. The company has been experiencing losses, because of this; Mr. Luckiness is concerned that the company's functional currency is US Dollars as the invoices that they receive are quoted in US Dollars. The consultant company for Lucky Traders have recommended that the company should enter a Foreword Exchange contract to hedge for the risk of the exchange rate. On 1 December 2019 Lucky Traders entered into the contract with Take A Little an American based company to supply to them 15 000 boxes of accessories when the exchange rate was $ 1: NAD14.00 and each of the box worth US$ 1 589. The stock was shipped FOB on the 10th December 2019 when the exchange rate was $1: NAD13.00.
The Forward Exchange Contract had the rates below:
Date $:NAD 01/12/19 -
31/12/19 1:17.00
31/01/2020 1:21.00
Required:
Problem 1: Discuss the functional currency for Lucky Trader Ltd?
Problem 2: Discuss the transaction date as per the case study and indicate the rate that will be used to translate the purchased inventory to N$.
Problem 3: Calculate total loss/gain made foreign exchange on the transaction above for the year ended 31 December 2019
Problem 4: Prepare the journal entry on 31 January when the transaction was fully settled.
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