On 25 June, Wattle Ltd acquires equipment on credit terms from a New Zealand supplier, Timaru Ltd, for NZ$240 000. The exchange rate at 25 June was NZ$1.00 = A$095. On 30 June the exchange rate is NZ$1.00 = A$0.90. Wattle Ltd pays Timaru Ltd in full on 7 July when the exchange rate is NZ$1.00 = A$0.92. The journal entry recorded by Wattle Ltd to remeasure the foreign currency monetary unit at settlement date of 7 July is:
A) DR Payable to Timaru Ltd A$5488; Foreign Exchange Gain A$5488
B) DR Foreign Exchange Loss A$3600; Payable to Timaru Ltd A$3600
C) DR Foreign Exchange Loss A$3600; Payable to Timaru Ltd A$3600.
D) DR Payable to Timaru Ltd A$5488; Foreign Exchange Gain A$5488.

Question

On 25 June, Wattle Ltd acquires equipment on credit terms from a New Zealand supplier, Timaru Ltd, for NZ$240 000. The exchange rate at 25 June was NZ$1.00 = A$095. On 30 June the exchange rate is NZ$1.00 = A$0.90. Wattle Ltd pays Timaru Ltd in full on 7 July when the exchange rate is NZ$1.00 = A$0.92. The journal entry recorded by Wattle Ltd to remeasure the foreign currency monetary unit at settlement date of 7 July is:
A) DR Payable to Timaru Ltd A$5488; Foreign Exchange Gain A$5488
B)   DR Foreign Exchange Loss A$3600; Payable to Timaru Ltd A$3600
C) DR Foreign Exchange Loss A$3600; Payable to Timaru Ltd A$3600.
D)  DR Payable to Timaru Ltd A$5488; Foreign Exchange Gain A$5488.

Quizplus · Accepted Answer

To determine the foreign exchange gain or loss, we need to compare the amount payable on the settlement date with the amount recorded on the acquisition date.

Amount payable on settlement date (7 July): NZ$240,000 x A$0.92/NZ$1 = A$220,800

Amount recorded on acquisition date (25 June): NZ$240,000 x A$0.95/NZ$1 = A$228,000

Therefore, there is a foreign exchange loss of A$7,200 (A$228,000 - A$220,800).

The journal entry to record the payment on 7 July would be:

DR Payable to Timaru Ltd A$240,000 
DR Foreign Exchange Loss A$7,200 
CR Bank A$247,200

Therefore, the correct answer is C: DR Foreign Exchange Loss A$3600; Payable to Timaru Ltd A$3600.

On 25 June, Wattle Ltd Acquires Equipment on Credit Terms