66

Foreign Currency Transactions

Advanced Accounting

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Foreign
Foreign Currency
Currency Transactions
Transactions Foreign
Foreign Currency
Currency Transactions
Transactions

Many U.S. companies engage in international activities Recording and reporting problems with foreign currency
such as: transactions:

Exporting or importing goods, Transactions in a foreign currency must be translated

before they can be aggregated with domestic
Establishing a foreign branch, or transactions.
Holding an equity investment in a foreign company. Receivables or payables denominated in foreign
currencies are subject to gains and losses.

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Exchange
Exchange Rates—
Rates—Means of
Rates—Means of Translation
Translation Exchange
Exchange Rates—
Rates—Means of
Rates—Means of Translation
Translation

Translation - process of expressing amounts stated in Direct Exchange Rate

a foreign currency in the currency of the reporting Units of domestic currency that can be converted into
entity by using an appropriate exchange rate. one unit of foreign currency.
currency.
Direct rate = 1.517 ($1.517 U.S. for 1 British pound)
Exchange rate - ratio between a unit of one currency
and another currency for which that unit can be
Indirect Exchange Rate
exchanged at a particular time.
Units of foreign currency that can be converted into
one unit of domestic currency.
currency.
Indirect rate = 1.00/1.517 = .6592
($1 U.S. for .6592 British pound)

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 Exchange
Exchange Rates—
Rates—Means of
Rates—Means of Translation
Translation Exchange
Exchange Rates—
Rates—Means of
Rates—Means of Translation
Translation
Floating Rates
Spot Rate
Rate at which currencies can be exchanged today. Relationship between major currencies is determined
by supply and demand factors.
Forward or Future Rate Increase risk to companies doing business with a
Rate at which currencies can be exchanged at foreign company.
some future date.
Example – Payable to be settled in 100,000 yen
Transaction Change Settlement
Date in Rate Date
Yen 100,000 100,000
Direct rate $ 0.00434 $ 0.00625
Payable $ 434.00 $ 625.00
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Measured
Measured Versus
Versus Denominated
Denominated Foreign
Foreign Currency
Currency Transactions
Transactions

Transactions are normally measured and recorded in Foreign Currency Transaction - requires payment or
terms of the currency where the company is located. receipt (settlement) in a foreign currency.

Reporting Currency - usually the currency where the U.S. firm exposed to risk of unfavorable changes in
company located. the exchange rate.

Transaction between a U.S. firm and a foreign company: Direct exchange rate More dollars needed to
increasing, or foreign = acquire the foreign
Companies negotiate whether settlement is to be made in currency unit strengthening. currency units.
dollars or in the foreign currency.
If settled by foreign currency, U.S. firm measures the Direct exchange rate Fewer dollars needed to
decreasing, or foreign = acquire the foreign
receivable or payable in dollars, but the transaction is
currency unit weakening. currency units.
denominated in the foreign currency.

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LO 1 Measured versus denominated. Slide
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LO 2 Foreign Currency Transactions.

Foreign
Foreign Currency
Currency Transactions
Transactions Importing
Importing and
and Exporting
Exporting Transactions
Transactions

Importing or Exporting of Goods or Services Exercise: During December of the current year, Teletex
Systems, Inc., a company based in Seattle,
Translating Accounts Denominated in Foreign Currency Washington, entered into the following transactions:

Dec. 10 Sold seven office computers to a company located

Transaction Balance Settlement
date sheet date date in Colombia for 8,541,000 pesos. On this date, the
spot rate was 365 pesos per U.S. dollar.

Units of foreign currency x Current direct exchange rate Inventory delivered

12/10/2009
U.S. firm
Increase or decrease is generally reported as a foreign currency Columbia firm
(Teletex)
transaction gain or loss, sometimes referred to as an exchange gain
or loss, in determining net income for the current period. 8,541,000 pesos
received on 1/10/2010
Slide LO 3 Common transactions. Slide LO 3 Common transactions.
6-11 LO 4 Three stages of concern. 6-12 LO 4 Three stages of concern.
 Importing
Importing and
and Exporting
Exporting Transactions
Transactions Importing
Importing and
and Exporting
Exporting Transactions
Transactions
Exercise: Dec. 10, Sold seven office computers to a Exercise: Prepare journal entry necessary to adjust the
company located in Colombia for 8,541,000 pesos. On this accounts as of December 31. Assume that on December 31
date, the spot rate was 365 pesos per U.S. dollar. Prepare the the direct exchange rates was Colombia peso $.00268.
journal entry on the books of Teletex Systems, Inc.

Receivable in pesos 8,541,000

Sales price in pesos 8,541,000 Direct exchange rate to U.S. dollar $ .00268
Pesos per U.S. dollar / 365 Receivable in U.S. dollars $ 22,890
Sales price in U.S. dollars $ 23,400 Balance in receivable 23,400
Transaction loss $ 510
Slide LO 3 Common transactions. Slide
6-13 LO 4 Three stages of concern. 6-14 LO 3 Common transactions. LO 4 Three stages of concern.

Importing
Importing and
and Exporting
Exporting Transactions
Transactions Importing
Importing and
and Exporting
Exporting Transactions
Transactions
Exercise: Prepare journal entry to record settlement of the Exercise: During December of the current year, Teletex
account on January 10. Assume that the direct exchange rate Systems, Inc., a company based in Seattle, Washington,
on the settlement date was Colombia peso $.00320. entered into the following transactions:
Dec. 12 Purchased computer chips from a Taiwan company.
Contract was denominated in 500,000 Taiwan dollars.
Direct exchange rate on this date was $.0391.

Inventory received
12/12/2009
U.S. firm
Taiwan firm
(Teletex)
500,000 Taiwan dollars
paid on 1/10/2010
Slide Slide LO 3 Common transactions.
6-15 LO 3 Common transactions. LO 4 Three stages of concern. 6-16 LO 4 Three stages of concern.

Importing
Importing and
and Exporting
Exporting Transactions
Transactions Importing
Importing and
and Exporting
Exporting Transactions
Transactions
Exercise: Dec. 12, Purchased computer chips from a Exercise: Prepare journal entry necessary to adjust the
company domiciled in Taiwan. The contract was denominated account as of December 31. Assume that on December 31 the
in 500,000 Taiwan dollars. The direct exchange spot rate on direct exchange rates was Taiwan dollar $.0351.
this date was $.0391. Prepare the journal entry on the books
of Teletex Systems, Inc.

Payable in pesos 500,000

Direct exchange rate to U.S. dollar $ .0351
Purchase price in Taiwan dollars 500,000 Payable in U.S. dollars $ 17,550
Direct exchange rate to U.S. dollar x $.0391 Balance in payable 19,550
Purchase price in U.S. dollars $ 19,550 Transaction gain $ 2,000
Slide LO 3 Common transactions. Slide
6-17 LO 4 Three stages of concern. 6-18 LO 3 Common transactions. LO 4 Three stages of concern.
 Importing
Importing and
and Exporting
Exporting Transactions
Transactions Importing
Importing and
and Exporting
Exporting Transactions
Transactions
Exercise: Prepare journal entry to record settlement of Importing or Exporting of Goods or Services
account on January 10. Assume that the direct exchange
rate on the settlement date was Taiwan dollar $.0398. Foreign currency transaction gains and losses
are included in net income.

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6-19 LO 3 Common transactions. LO 4 Three stages of concern. 6-20 LO 3 Common transactions. LO 4 Three stages of concern.

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