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On October 1, 2019, Primark Corporation, a UK company sold a truck to ABC Corporation, a US company, for $10,000 and ABC agreed to pay in pounds on March 1, 2020
On October 1, 2019, Primark Corporation, a UK company sold a truck to ABC Corporation, a US company, for $10,000 and ABC agreed to pay in pounds on March 1, 2020. The spot rates for the British pound on October 1, 2019, December 31, 2019, and March 1, 2020, are $1.60, $1.58, and $1.64, respectively. Required: 1- Record these transactions in the accounting records of ABC Corporation and Primark Corporation 2- Did the U.S. dollar strengthen or weaken from October to March? Prove your answer, and state the implications for ABC business? (18 Marks)
Expert Solution
Accounting in the books of ABC Corporation
|
Date |
Particulars |
Ledger Folio |
Debit($) |
Credit($) |
|
01-10-2019 |
Truck A/c Dr. To Primark Corporation a/c (Payable in $ 10,000, Payable in Pounds £6250($10,000/£1.60/$) |
10,000 |
10,000 |
|
|
31-12-2019 |
Primark Corporation a/c Dr. To Foreign Exchange difference a/c (Payable in $ = £6250 x £1.58/$= $9875 Payable on 01-10-2020= $10,000 Difference = 125) |
125 |
125 |
|
|
01-03-2020 |
Primary Corporation a/c Dr Foreign Exchange difference a/c Dr To Bank a/c (Payment in $= £6250 x £1.64/$= $10250 Foreign exchange difference = $10250-9875= $ 375) |
9875 375 |
10250 |
|
|
01-03-2020 |
Foreign Exchange difference a/c Dr To Profit & Loss a/c |
250 |
250 |
Accounting in the books of Primark Corporation
|
Date |
Particulars |
Ledger Folio |
Debit(£) |
Credit(£) |
|
01-10-2019 |
ABC Corporation a/c Dr. To Truck A/c |
6250 |
6250 |
|
|
31-12-2019 |
No accounting in year end, as Primark Corporation does not have foreign exchange risk as the company gets Pound and not dollors. |
|||
|
01-03-2020 |
Bank A/c Dr. To ABC Corporation a/c |
6250 |
6250 |
Question 2:
US $/£ on 01-10-2019= $1.60/£
US $/£ on 31-12-2019= $1.58/£
This shows that US $ becomes stronger than UK £.
And thus $ becomes stronger and £ becomes weaker against $, ABC Corporation of US has to pay lesser $ to UK entity and it earns $125 as foreign exchange difference on 31-12-2019.
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