On September 1, 2014, Bylin Company purchased merchandise from Himeji Company of
ID: 2769118 • Letter: O
Question
On September 1, 2014, Bylin Company purchased merchandise from Himeji Company of Japan for 20,000,000 yen payable on October 1, 2014. The spot rate for yen was $0.0079 on September 1, and the spot rate was $0.0077 on October 1. The purchase was paid on October 1, 2014. Part 1: Did the U.S. dollar strengthen or weaken from September to October and what are the implications for Bylin's business? Part 2: What journal entry did Bylin record on September 1, 2014? Part 3: What journal entry did Bylin record on October 1, 2014?
Explanation / Answer
Solution:
Byling Company (USA) purchased merchandise worth 20,000,000 Yen from Himeji Company (Japan).
Date of Purchase =Sept 1, 2014
Payment Date = October 1, 2014
Byling Company is a USA company and should record the purchases in their book in their home currency. It means Byling company would record the purchase in USD in their books of account.
Spot Rate on Sept 1, 2014
1 Yen = $0.0079
It means 1 Yen can purchase $0.0079.
Merchandise Purchase Amount Payable in US dollars on Sept 1, 2014 = 20,000,000 x 0.0079 = $158,000
Spot Rate on October 1, 2014
1 Yen = $0.0077 (It means 1 Yen can purchase only $0.0077)
Part 1: US Dollar currency strengthen from September to October against the Yen Currency. Byling Company need to pay less amount in home currency because of dollar is strengthen against the Yen currency. There will be a Exchange Profit to Byling Company.
Part 2: Journal entry did Bylin record on September 1, 2014
Date
Account Title
Debit
Credit
Sept 1, 2014
Purchase A/c Dr.
$158,000
To Himeji Company
$158,000
(Being merchandise purchased of value Yen 20,000,000 converted into US dollars by using Spot Rate 1 Yen = $0.0079
Part 3: Journal entry did Bylin record on October 1, 2014
Date
Account Title
Debit
Credit
Sept 1, 2014
Himeji Company Dr.
$158,000
To Cash A/c (20,000,000 x 0.0077)
$154,000
To Profit on Foreign Exchange
$4,000
(Being Payment made to Himeji Company against merchandise purchased of value Yen 20,000,000 converted into US dollars by using Spot Rate 1 Yen = $0.0077
Date
Account Title
Debit
Credit
Sept 1, 2014
Purchase A/c Dr.
$158,000
To Himeji Company
$158,000
(Being merchandise purchased of value Yen 20,000,000 converted into US dollars by using Spot Rate 1 Yen = $0.0079
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