On 1/1/2014 ACME Company purchased a 1,000,000 Pound Sterling two year CD for $1

Question

On 1/1/2014 ACME Company purchased a 1,000,000 Pound Sterling two year CD for $1,500,000. This 12% CD pays interest on June 30 and December 31.

REQUIRED:

Make the journal entry ACME makes on 1/1/2014

Make the journal entry ACME makes on 6/30/2014 when the Pound Sterling is $1.45

Make the journal entries needed on December 31 when the Pound Sterling is $1.55

For the interest received

To revalue the CD

Make the journal entry ACME makes on 6/30/15 when the Pound Sterling is $1.67

Make the journal entries needed on December 31 when the Pound Sterling is $1.46 for

The interest received

The collection of the note.

Explanation / Answer

Accounting for CD in the books of ACME Company

CD (1,000,000 GBP)

To Bank

(Being 1,000,000 GBP of CDs purchased at the rate of $1.50 per GBP having maturity of 2 years with coupon rate of 12% and semi annual interest payments)

Bank A/c

To Interest on CD

( Being Interest on CD received @ 12% for 6 months in GBP and converted into $ at the prevailing rate i.e., $1.45)

Note: Changes in value of CD on account of Forex fluctuations will be recognised only on the closure of account i.e., Year End)

Bank A/c

To Interest on CD

( Being Interest on CD received @ 12% for 6 months in GBP and converted into $ at the prevailing rate i.e., $1.55)

CD A/c

To Foreign currency transaction gain A/c

( Being Change in value of CD on account Forex Fluctuation recognised)

Bank A/c

To Interest on CD

( Being Interest on CD received @ 12% for 6 months in GBP and converted into $ at the prevailing rate i.e., $1.67)

Bank A/c

To Interest on CD

( Being Interest on CD received @ 12% for 6 months in GBP and converted into $ at the prevailing rate i.e., $1.46)

Bank A/c

Foreign currency transaction Loss A/c

To CD (1,000,000 GBP)

( Being Cash upon collection of the Note at the rate of $1.46 per GBP and the loss on Forex Fluctuation is recognised).

{Forex Loss = GBP 1,000,000 * ($1.55 - $1.46) = $90,000}

$1,460,000

$90,000

$1,550,000

Date Entries Debit Credit 01/01/2014

CD (1,000,000 GBP)

To Bank

(Being 1,000,000 GBP of CDs purchased at the rate of $1.50 per GBP having maturity of 2 years with coupon rate of 12% and semi annual interest payments)

$1,500,000 $1,500,000 06/30/2014

Bank A/c

To Interest on CD

( Being Interest on CD received @ 12% for 6 months in GBP and converted into $ at the prevailing rate i.e., $1.45)

Note: Changes in value of CD on account of Forex fluctuations will be recognised only on the closure of account i.e., Year End)

$87,000 $87,000 12/31/2014

Bank A/c

To Interest on CD

( Being Interest on CD received @ 12% for 6 months in GBP and converted into $ at the prevailing rate i.e., $1.55)

$93,000 $93,000 12/31/2014

CD A/c

To Foreign currency transaction gain A/c

( Being Change in value of CD on account Forex Fluctuation recognised)

$50,000 $50,000 6/30/2015

Bank A/c

To Interest on CD

( Being Interest on CD received @ 12% for 6 months in GBP and converted into $ at the prevailing rate i.e., $1.67)

$100,200 $100,200 12/31/2015

Bank A/c

To Interest on CD

( Being Interest on CD received @ 12% for 6 months in GBP and converted into $ at the prevailing rate i.e., $1.46)

$87,600 $87,600 12/31/2015

Bank A/c

Foreign currency transaction Loss A/c

To CD (1,000,000 GBP)

( Being Cash upon collection of the Note at the rate of $1.46 per GBP and the loss on Forex Fluctuation is recognised).

{Forex Loss = GBP 1,000,000 * ($1.55 - $1.46) = $90,000}

$1,460,000

$90,000

$1,550,000

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