Foreign Currency Transactions for Empress, Inc.

Introduction

Congratulations on your new job as Empress, Incorporated’s accountant! It’s time to dive right into work.

A U.S. company, Empress had the following series of transactions in Japan during December 2020 and January 2021:

December 15: Purchased inventory of Japanese paper dolls on account for 5,000,000 yen (¥).
December 20: Sold 50% of the December 15 inventory on credit for 4,000,000 yen (¥).
December 31: Collected 4,000,000 yen (¥) from customer.
January 15: Paid 4,500,000 yen (¥) to creditor.

Exchange rates between the dollar and the yen were as follows:

Date	Exchange Rate
December 15, 2020	¥1 = $0.0090
December 20, 2020	¥1 = $0.0092
December 31, 2020	¥1 = $0.0093
January 15, 2021	¥1 = $0.0091
January 31, 2021	¥1 = $0.0094

You need to prepare all journal entries for Empress Incorporated in connection with the purchase, the sale, and payment, along with any January 31, 2021, adjusting entries. A quick check at the books lets you know that Empress uses a perpetual inventory system.

But how do you know what the appropriate exchange rate is and how the changes in the exchange rate are accounted for?

Introduction Transcript

Check Your Understanding

If given the debits and credits for the Japanese paper dolls, can you fill in the correct accounts?

Remember, your company had the following series of transactions in Japan during December 2020 and January 2021:

December 15: Purchased inventory of Japanese paper dolls on account for 5,000,000 yen (¥).
December 20: Sold 50% of the December 15 inventory on credit for 4,000,000 yen (¥).
December 31: Collected 4,000,000 yen (¥) from customer.
January 15: Paid 4,500,000 yen (¥) to creditor.

Exchange rates between the dollar and the yen were as follows:

Date	Exchange Rate
December 15, 2020	¥1 = $0.0090
December 20, 2020	¥1 = $0.0092
December 31, 2020	¥1 = $0.0093
January 15, 2021	¥1 = $0.0091
January 31, 2021	¥1 = $0.0094

Finish preparing all journal entries for Empress Company in connection with the purchase, sale, and payment along with any December 31, 2020 and January 31, 2021 adjusting entries. Select from the dropdown menu to choose the correct account for each journal entry. Note the calculation that was used for each entry. Look carefully at the above information to understand where the numbers come from.

warningNote: After two incorrect attempts, the correct answer will be shown.

Date	Debit	Credit	Calculation
December 15, 2020	45,000		(¥5,000,000 × 0.0090)
		45,000
December 20, 2020	36,800		(¥4,000,000 × 0.0092)
		36,800
	22,500		(50% x 45,000) or [(¥5,000,000 × 0.0090) x 50%]
		22,500
December 31, 2020	1,500
		1,500	(¥5,000,000 × 0.0090) - (¥5,000,000 × 0.0093)
	37,200		(¥4,000,000 × 0.0093)
		36,800	(¥4,000,000 × 0.0092)
		400	(¥4,000,000 × 0.0093) - (¥4,000,000 × 0.0092)
January 15, 2021	900		(¥4,500,000 × 0.0093) - (¥4,500,000 × 0.0091)
		900
	40,950		(¥4,500,000 × 0.0091)
		40,950
January 31, 2021	50
		50	(¥500,000 × 0.0093) - (¥500,000 × 0.0094)

Prepare Further Journal Entries

Empress also imports dolls from Mexico and has the following series of transactions in Mexico during 2021:

March 1: Bought inventory costing 80,000 pesos (₱) on credit.
May 1: Sold 80% of the inventory for 90,000 pesos (₱) on credit.
August 1: Collected 85,000 pesos (₱) from customers.
September 1: Paid 80,000 pesos (₱) to creditors.

Exchange rates between the dollar and the pesos (₱) are as follows:

Date	Exchange Rate
March 1, 2021	1 ₱ = $0.25
May 1, 2021	1 ₱ = $0.26
August 1, 2021	1 ₱ = $0.27
September 1, 2021	1 ₱ = $0.29
December 31, 2021	1 ₱ = $0.30

Prepare all related journal entries in U.S. dollars along with any December 31, 2021, adjusting entries.

Date	Accounts	Debit	Credit
March 1, 2021

May 1, 2021



August 1, 2021


September 1, 2021


December 1, 2021

Feedback:

This is what the journal entries should look like, along with what the calculations are.

Date	Accounts	Debit	Credit	Calculation
March 1, 2021	Inventory	20,000		(80,000₱ × $0.25)
	Accounts payable		20,000	Adjusting entry
May 1, 2021	Accounts receivable	23,400		(90,000₱ × $0.26)
	Sales		23,400	Adjusting entry
	Cost of goods sold	16,000		(20,000 x 80%) or [(80,000 x 0.25) x 80%]
	Inventory		16,000	Adjusting entry
August 1, 2021	Cash	22,950		(85,000₱ × $0.27)
	Accounts receivable		22,100	(85,000₱ × $0.26)
	Foreign exchange gain		850	(85,000₱ x $0.27) - (85,000₱ x $0.26)
Sept. 1, 2021	Accounts payable	20,000		(80,000₱ × $0.25)
	Foreign exchange loss	3,200		(80,000₱ x $0.25) - (80,000₱ x $0.29)
	Cash		23,200	(80,000 × $0.29)
Dec. 31	Accounts receivable	200		Adjusting entry
	Foreign exchange gain		200	[5,000 × ($.0.26 - $0.30)]

Wrap Up

Congratulations! You are prepared to account for foreign currency transactions.