Topic list Syllabus reference

Required
State the accounting entries in the books of Seattle Co.
Answer
The purchase will be recorded in the books of Seattle Co using the rate of exchange ruling on 30 September.
DEBIT Purchases $37,500
CREDIT Trade payables $37,500
Being the $ cost of goods purchased for €60,000 (€60,000 -s- €1.60/$1)
On 30 November, Seattle Co must pay €30,000. This will cost €30,000 + €1.80/$1 = $16,667 and the company has therefore made an exchange gain of $18,750 - $16,667 = $2,083.
DEBIT Trade payables $18,750
CREDIT Exchange gains: profit or loss $2,083
CREDIT Cash $16,667
On 31 December, the year end, the outstanding liability will be recalculated using the rate applicable to that date: €30,000 €1,90/$1 = $15,789. A further exchange gain of $2,961 has been made and will be recorded as follows.







$2,961

DEBIT Trade payables
CREDIT Exchange gains: profit or loss $2,961
The total exchange gain of $5,044 will be included in the operating profit for the year ending 31 December.
On 31 January, Seattle Co must pay the second instalment of €30,000. This will cost them $16,216 (€30,000 4- €1.85/$1).
DEBIT

CREDIT

Trade payables
Exchange losses: profit or loss Cash

$15,789
$427
$16,216

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When a gain or loss on a non-monetary item is recognised in other comprehensive income (for example, where property is revalued), any related exchange differences should also be recognised in other comprehensive income.
One of the competences you require to fulfil Performance Objective 8 of the PER is the ability to evaluate the effect of chosen accounting policies on the reported performance and position of the company. Also to demonstrate the ability to evaluate any underlying estimates on the position of the entity.
It can also be used to support your competency in Performance Objective 7 which requires the ability to correct errors and to disclose them. This chapter deals with important disclosures and you can apply the knowledge you obtain from this chapter to help to demonstrate this competence.
Chapter Roundup
IAS 8 deals with changes in accounting estimates, changes in accounting policies and errors.
Changes in accounting policy are applied retrospectively.
Changes in accounting estimate are not applied retrospectively.
Prior period errors must be corrected retrospectively (IAS 8: para. 42).
IFRS 5 requires assets held for sale' to be presented separately in the statement of financial position. It sets out the criteria for recognising a discontinued operation.
Transactions involving foreign currency are very common in practice. IAS 21 sets out the accounting treatment for foreign currency transactions.
Quick Quiz

1. 
   How should a prior period error be corrected under IAS 8?
   
2. 
   Give the circumstances when a change in accounting policy might be required.
   
3. 
   When can a non-current asset be classified as held for sale?
   
4. 
   How should an asset held for sale be measured?
   
5. 
   How does IFRS 5 define a discontinued operation?
   
6. 
   What is meant by functional currency?
   

Answers to Quick Quiz

1. 
   By adjusting the opening balance of retained earnings (Section 3.2)
   
2. 
   (a) The change is required by an IFRS; or
   

2. 
   The change will result in a more appropriate presentation of events or transactions in the financial statements of the entity, providing more reliable and relevant information.
   

3. 
   (a) The asset must be available for immediate sale in its present condition.
   

2. 
   Its sale must be highly probable (ie significantly more likely than not).
   

4. 
   At the lower of carrying amount and fair value less costs of disposal
   
5. 
   See Key Term Section 4.6
   
6. 
   The currency of the primary economic environment in which the entity operates
   

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