3. On 1 March 2011 Holme s Ltd enters into a binding agreement with a New Zealan

Question

3. On 1 March 2011 Holme s Ltd enters into a binding agreement with a New Zealand company, which d. The cost of uires the New Zealand Company to construct an item of machinery for Holmes Lt the machinery is NZ$750,000. The machinery is completed on 1 June 2011 and shipped FO8 Aucklar on that date. The debt is unpaid at 30 June 2011, which is also Holmes Ltd's reporting date. The debt is paid at 3 July 2011 11 The exchange rates at the relevant dates are: ( cepee 1 June 2011 30 June 2011 3 July 2011 A$1.00- NZ$1.20 A$1.00 NZ$1.35 A$1.00 NZ$1.25

Explanation / Answer

1 March 2011:

No entry because only agreement has been entered on this date.

1 June 2011:

Machinery Dr. A$ 625000 (NZ$750000/1.20)

Accounts payable Cr A$ 625000

(Being machinery purchased in credit)

30 June 2011:

Equivalent A$ as on 30 June 2011 = NZ$750000/1.35 = A$555555.55

Exchange gain = A$625000 - A$555555.55 = A$69444.45

Journal:

Accounts payable Dr 69444.45

Exchange gain Cr 69444.45

(Being exchange gain recorded)

3 July 2011:

Debt repayment amount = NZ$750000/1.25 = A$600000

Accounts payable balance as on 30 June 2011 =

625000-69444.45 = 555555.55

Journal:

Accounts payable Dr 555555.55

Retained Earnings Dr 44444.45

Cash Cr 600000

(Being repayment of amount made)

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