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Add Accounts Receivable Purchase Agreement mark

learning objective 11 - to understand the accounting implications of and be able to make calculations related to foreign currency transactions in foreign currency transactions or economic activities denominated in a currency other than the entity's recording currency in other words if you're in the US you do all you almost all your business in u.s. dollars and you prepare your financial statements in the US dollars and that's really what's key is what you keep your books in so if you keep your books in the US Dollars and we're not gonna go we're gonna talk about this further in Chapter 12 then any transaction using a different currency than US dollars is going to be considered a foreign currency transactions and examples of foreign currency transactions could include buying or selling goods um where the price is stated in a foreign currency rather than US dollars loans payable or receivables in a foreign currency the purchase of sale of foreign currency forward exchange contracts which we'll talk about and the purchase of sale of foreign currency unit and this is actually very simple for financial statement purposes transactions denominated in a foreign currency must be translated into the currency that the reporting company uses so if you're in the United States and you're transacting in euros that you need to translate your transactions from euros into US dollars and any balances that you have on your balance sheet need to be adjusted as of the balance sheet date to u.s. dollars so what happens is you may have let's say a receivable that's denominated in Euros and someone owes you a thousand euros the value of a thousand euros in u.s. dollars is going to change constantly so every reporting period at the end of the period on the balance sheet date you're going to need to restate the value of that receivables into whatever the US dollar equivalent is of a thousand euros on that date and this will be a gain or loss and it's going to hit the income statement with a few exceptions that we'll be talking about so let's talk about foreign currency import and export transactions and that's where we'll start and then we'll go into forward exchange contracts where things are going to get a little bit more interesting and as when you engage in the transaction as of the transaction date you record the purchase of the sale at whatever the u.s. dollar equivalent is on this using the spot rate on the transaction date itself and then when you as of your next balance sheet a if there's a payable a receivable it's denominated in the foreign currency in other words it's for a certain number of euros and a set of dollars let's say then you're gonna translate that value into whatever it is in dollars as of the balance sheet 8 and any gain or loss is going to hit the income statement again then you're gonna have something called the settlement date the settlement date is when you get paid for your receivable while will you pay off your payable and you're gonna settle it on whatever the current exchange the spot rate is on that date and that'll be called a settlement and you'll record it at the US dollar equivalent of whatever you paid or whatever you receives of the foreign currency so basically everything gets translated again it gets recorded the u.s. dollar equivalent on the original data transaction it gets translated into the new value now it's marked to market value so to speak on your next balance sheet in any subsequent balance sheet dates and then you have what's called a settlement date where you would record any additional gain or loss when you either pay off your payable or you collect your receivable and the book differentiates between what they call a two transaction approach in a single transaction approach reality is that these things are always going to be done as a two transaction approach and let's say you owe a certain number of euros then your first transaction is going to be to sell dollars is it soon be going to be to purchase your euros then you have your euros and then to pay off your payables if you have a receivable in euros then you're gonna collect a certain number amount of euros and then you're going to sell the euros and receive the u.s. dollar equivalent so it's really two transactions and you're going to need to record a gain or loss again whenever you have any of these translations inevitably there's a gain or a loss so let's suppose on January 1st 2021 a US company acquires 5000 euros and at the time the direct exchange rate is $1 20 in other words that's a direct exchange rate meaning that one euro costs $1 20 to purchase so a thousand euros would cost $1,200 to purchase and the cost of the transaction at the time is six thousand up because five thousand times a dollar twenty-five thousand euros times the dollar 20 value would be six thousand euro so here we're giving up six thousand dollars in order to get five thousand euros so the easy part of the transaction is going to be credit cash for six thousand dollars and the thing is we keep our books in dollars so everything is kept on our books in u.s. dollar equivalent or whatever it is so even though I'm gonna call this account foreign currency units and EU R is the abbreviation for euro I'm still gonna value it at six thousand dollars because that's the value of five thousand euros in dollars and everything in my balance sheet is going to be kept everything on my books is going to be kept at the US dollar equivalent it's not kept at five thousand euros and the rest of the books are kept in dollars now July 1st the direct exchange rate at the time is a dollar ten and I'm gonna mark a justice to market value so at this time the book Val the market value of these euros has declined to $5,500 because it's 5000 euros times a dollar 10 direct exchange rate would be 5500 you got to be very careful that you're multiplying euro the foreign currency by the direct exchange rate and that you get that direction right because a lot of students will multiply when they need to divide and vice versa so what I'm gonna do here is I'm gonna adjust this to market value and credit foreign currency units and indicate what currency it is for this loss of $500 and the debit is going to be debit loss or I'm gonna breviary tsfc translation loss for $500 and that will in effect record the decline of value on my balance sheet now let's consider some more advanced transactions let's record we're going to record transactions going to add their current value and then dumort some orchid add each the end of each period so that the balance sheet is all recorded at market value and then again we're going to adjust to market value before we settle any receivables and payables so peerless products acquires goods on account from tokyo industries for 2 million yen and it's important to notice here that this has been denominated in yen and not in US dollars that means that they're gonna pay us in yen and not a fixed amount of US Dollars and the direct exchange rates at the time October 1st 2021 would be point zero seven dollars per yen December 31st it's going to be 0.008 and looking forward to the future April 1st when we pay off the payable is going to be 0.076 so first let's engage in the transaction and buy the goods the general entry would as it would always be debit inventory credit accounts payable but the thing is is that this is now ordinary accounts payable this accounts payable is denominated in yen and the value of the transaction on October 1st would be 2 million yen times 0.007 or $14,000 so 2 million yen sounds like a lot but it's really just $14,000 December 31st I'm gonna have a balance sheet date so previously my yen was worth 0.007 or $14,000 and now as of December 31st is 0.008 and again you wanted when you're doing these transactions you really want to think about and think out loud sometimes I used to work with this accounting guy his name was Marty right and what Marty would do is he would think he would say it out loud he would say right now I have an a payable for $14,000 but the currency went up and if the book value is gonna increase to $16,000 and it's a payable and the payables going up therefore I'm gonna need to pay more money and therefore I have a loss and you know obviously you can't say it out loud like that on an exam but sometimes it helps you to think about it so here the payable is going to increase by $2,000 meaning that I'm going to need to credit it and you could if you want to a t-account just to make sure you know you got a credit balance of 14,000 plus another credit or 2,000 is going to give you the 16,000 that you need so credit accounts payable for $16,000 and the debit is going to be foreign currency translation loss this goes right to the balance sheet I'm sorry right to the income statement as a loss now the transaction is going to settle we've got to pay off this debt in yeah on April 1st so the first thing that I'm gonna do is I'm gonna adjust the value now this was is on my balance sheet for sixteen thousand dollars but the exchange rate on April first went down to 0.007 six meaning that the balance sheet value can be brought back down to fifteen thousand two hundred so if the payable is going down that means I have a gain so I'm going to debit accounts payable and it's very important to note there in the name of the account that this is in yen and again it may help you to do a t-account and the transaction is going to be foreign currency translation game there's a few now I just want to comment on that we use a gain account for the credit and a loss account to debit and you might ask why don't we just don't use one account to net them the faz B is not clear that you're allowed to do that so what a lot of companies will do is that we poured a net gain or a net loss on their income statement and sometimes they'll combine it with a lot of other items but somewhere in the notes what they'll usually do is they'll slow them separately and always they'll show that net gross gain the gross loss they'll offset them and show you the net gain or loss so we do have to keep track of foreign currency translation gains and for our currency translation losses in separate accounts and I from what I understand I'm not 100% sure this the fast be never said that you have to do this or not that you have to gross up your gains and losses and then offset them and the financial statements themselves but it's common practice for companies to do that and since you have to disclose these numbers separately then you don't have to but everybody seems to do it then you need to keep track of them in separate accounts so it may be a little confusing that when you have a gain your credit gain and when you have a lawsuit a bit loss but it's just so that you a granade these separately and then you can offset them when you need them you can offset them and report them net but you need again he needs to disclose the total gain and total loss because that just seems like what everybody does um okay now there's a little problem here because we don't have any n but we owe fifteen thousand two hundred dollars worth of yen so we have to as we have to by the end so I'm going to go to a foreign currency broker and I'm gonna give them 15 thousand two hundred dollars and they're going cuz that's the going the going value of 2 million yen is fifteen thousand two hundred dollars so I'm gonna give them 15 thousand two hundred US dollars and they're gonna give me 2 million yen which are worth fifteen thousand two hundred so they can go on my books for fifteen thousand two hundred then I'm going to take my two million yen and I'm gonna pay it to this supplier and that's going to relieve me of my accounts payable which is also on the books for fifteen thousand two hundred dollars so the book points out that this can be record is one end to entry I don't think that's a smart thing to do because these the purchase of yen and the settlement of the payable are really separate transactions and I think that for paper trail purposes you want to write this up this gain in a separate transaction nonetheless the book says you can do it so it must be true