On 12th April 2018 Pit Bull Ltd enters into a contract with a New Zealand compan

Question

On 12th April 2018 Pit Bull Ltd enters into a contract with a New Zealand company, Secure Ltd, whereby Secure Ltd will build a printing machine for Pit Bull Ltd.

The machine has been priced at NZ$850000. The printing machine is completed on 14th June 2019 and shipped FOB Wellington on that date.

The debt remains unpaid at 30th June 2019, which is the end of Pit Bulls Ltd’s financial reporting period.

The exchange rates at the relevant dates are as follows:

12Th April 2018 A$1.00 = NZ$1.20

30th June 2018 A$1.00 = NZ$1.15

14th June 2019 A$1.00 = NZ$1.30

30th June 2019 A$1.00 = NZ$1.25 Required:

Complete the full journal entries for Pit Bull Ltd for the years ending 30th June 2018 and 30th June 2019 to reflect the above events.

(Marks: 20)

Explanation / Answer

As the machinery is under construction,the item will be considered as a qualifying asset under AASB 123 for the period from 12th april 2018 to 14Th June 2019. Therefore the exchange rate movements to 14th June 2019 will be incorporated to the cost of the asset. Any subsequent changes will be taken to the profit and loss account.

Journal Entries for 2018

Entries for the year 2019

Date Account title and explanation Debit Credit 12 April,2018 Machinery $708333 Accounts Payable $708333 ($850000/1.20) (to recognize the cost of asset 30 June,2018 Machinery $30787 Accounts Payable $30797 (($850000/1.15)-$708333) to recognize cost of asset as at 30 june 2018

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