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Question - On 5th June, 2018 Sydney Ltd acquires goods on credit from a supplier in London. The goods are shipped FOB London on 5th June, 2018. The cost of the goods is UK£500 000 and the debt remains unpaid as at 30th June, 2018. On 5th June, 2018 the exchange rate is A$1.00 = UK£0.43. On 30th June, 2018 it is A$1.00 = UK£0.40. Hence, the value of the Australian dollar has decreased relative to the UK pound. Sydney Ltd.'s reporting date is the 30th of June.
Required -
(a) Provide the accounting entries necessary to account for the above purchase transaction for the year ending 30th June, 2018.
(b) Why do companies need to translate foreign currency transactions into local currency?
(c) Some current assets, such as inventory, are required from an overseas supplier with the debt denominated in a foreign currency. In the absence of a hedge arrangement, if the exchange rate moves against the Australian dollar while the debt is outstanding, how should the movement be treated for accounting purposes? Provide a full explanation.
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