Reference no: EM132913796
Everest Ltd is an Australian company based in Melbourne that manufactures and sells outdoor and camping equipment. Seventy percent of sales are made to Australian customers, fifteen percent to European customers, ten percent to North American customers and five percent to other countries. The competitive forces and regulations of Australia mainly determine the sales prices of Everest Ltd's goods. Everest Ltd sources all its labour and fifty percent of its materials from Australia. Forty percent of its materials are sourced from China and ten percent are sourced from the United States. Everest Ltd uses the Australian dollar (AUD) as its functional currency and has a 30 June reporting date.
The following events and transactions occurred between May and July 2020:
10 May: Purchased inventory from a United States supplier, Oregon Outdoor Supplies Inc., for the agreed price of USD 108,000.
1 June: Purchased land in the United States for USD 390,000. Everest Ltd uses the revaluation model to measure land in accordance with AASB 116 Property, Plant and Equipment.
10 June: Sold inventory to a United States customer, Home Mart Inc., for the agreed price of USD 36,000.
30 June: The fair value of the land in the United States was USD 400,000.
10 July: Paid USD 108,000 to Oregon Outdoor Supplies Inc.
15 July: Received USD 36,000 from Home Mart Inc.
The following exchange rates are available:
Date Exchange Rate
10 May 2020 AUD 1 = USD 1.20
1 June 2020 AUD 1 = USD 1.30
10 June 2020 AUD 1 = USD 1.50
30 June 2020 AUD 1 = USD 2.00
10 July 2020 AUD 1 = USD 1.80
15 July 2020 AUD 1 = USD 1.60
Required
Problem (a) Explain why, in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates, Everest Ltd uses the Australian dollar (AUD) as its functional currency.
Problem (b) Provide the journal entries for Everest Ltd to account for the above transactions and events. For the sale of inventory, ignore the journal entry to recognise cost of goods sold expense.
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