Chapter 10
Q. 10.5
The Company SVD registered the following transactions in accounting:
a) It purchased a non-current asset from Germany on November 11th, 20X8. The cost of the asset was 10,000 EUR and the exchange rate was 4.69 lei/EUR;
b) It charged services to a company in Italy on December 20th, 20X8. The value of the services was 2000 EUR and the exchange rate was 4.65 lei/EUR;
c) At the end of the year, the company had 5000 EUR in its bank account. The exchange rate was 4.72 lei/EUR (at the computation of the carrying amount).
The exchange rate at the end of the year was 4.67 lei/EUR. We assume that the amount for the non-current asset was not paid and the value of the services was not collected before the end of the year.
Required: present the effect of these transactions on the financial statements at the end of the year.
Step-by-Step
Verified Solution
a) Exchange rate differences for the liability
Exchange rate differences = 10,000 EUR * (4.69 − 4.67) = 200 lei
This is a favourable exchange rate difference because the exchange rate decreased between the moment of the registration of the liability and the end of the year. This means that less will be paid in lei than expected when the transaction was registered. The journal entry is as follows:
200 lei Account Payables = Gains from foreign exchange differences 200 lei
The impact will be shown on the financial statements as in Table 10.7.
Table 10.7 Extract from the Financial Statements
| Income statement | Lei |
| Revenues from exchange differences | 200 |
| Statement of financial position | Lei |
| Account payables (10,000 * 4.67) | 46,700 |
b) Exchange rate differences for the account receivables
Exchange rate differences = 2000 EUR * (4.67 – 4.65) = 40 lei
This is a favourable exchange rate difference because the exchange rate increased between the moment of the registration of the receivables and the end of the year. This means that we will collect more than we expected when we registered the transaction. The journal entry is as follows:
40 lei Account receivables = Revenues from exchange differences 40 lei
The impact will be shown on the financial statements in Table 10.8.
Table 10.8 Extract from the Financial Statements
| Income statement | Lei |
| Revenues from exchange differences | 40 |
| Statement of financial position | Lei |
| Account receivables (2000 * 4.67) | 9340 |
c) Exchange rate differences for the cash in the bank
Exchange rate differences = 5000 * (4.72 − 4.67) = 250 lei.
This is an unfavourable exchange rate difference because the exchange rate decreased between the moment of the registration of the receivables and the end of the year. This means that we have less money than we expected when we registered the transaction. The journal entry is as follows:
250 lei “Losses from foreign exchange differences” = “Bank Account” 250 lei
The impact will be shown on the financial statements in Table 10.9.
Table 10.9 Extract from the Financial Statements
| Income statement | Lei |
| Losses from foreign exchange differences | 250 |
| Statement of financial position | Lei |
| Cash in bank (5000 * 4.67) | 23,350 |