Journal entry for Foreign Exchange

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ِAhmad Al-darabea (Querist)
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21 May 2022 Dear Friends,

I need your assistance, I need a solution for the below question that I have?

Purchases for the amount of EUR 12,000 were bought from one supplier in France and the invoice is payable within 60 days in Euros. the invoice was received and recorded in the company's accounts on May 31st, 2006 the exchange rate of Euros to US$ was 1 Euro=1.30 US$ and 1 Euro= 1.25 US$ on May 31st,2006 and June 30th, 2006 respectively.

Please prepare the required journal entries on May 31st and June 30th assuming that the company maintains its Accounting in U.S. dollars and closes its accounts on a quarterly basis.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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09 July 2024 Certainly! Let's prepare the journal entries based on the information provided for the purchases made in Euros from a supplier in France, considering the exchange rates on May 31st and June 30th, 2006.

### Journal Entries:

#### May 31st, 2006:

1. **Recognition of Invoice in Euros:**

**Journal Entry:**

Dr. Purchases (EUR) 12,000
Cr. Accounts Payable (EUR) 12,000

**Explanation:**
- Debit Purchases (EUR) to recognize the purchase of goods from the supplier in France.
- Credit Accounts Payable (EUR) to record the liability in Euros payable to the supplier.

2. **Recording Exchange Rate Adjustment (May 31st, 2006):**

Given the exchange rate of 1 Euro = 1.30 US$ on May 31st, 2006:

**Journal Entry:**

Dr. Exchange Rate Gain (Income Statement) 1,000
Cr. Accounts Payable (EUR) 1,000

**Explanation:**
- Debit Exchange Rate Gain to recognize the gain due to the strengthening of the US dollar against the Euro.
- Credit Accounts Payable (EUR) to adjust the liability to reflect the revised US dollar equivalent based on the exchange rate.

#### June 30th, 2006:

3. **Adjustment for Exchange Rate (June 30th, 2006):**

Given the exchange rate of 1 Euro = 1.25 US$ on June 30th, 2006:

**Journal Entry:**

Dr. Accounts Payable (EUR) 500
Cr. Exchange Rate Loss (Income Statement) 500

**Explanation:**
- Debit Accounts Payable (EUR) to adjust the liability downward based on the lower exchange rate.
- Credit Exchange Rate Loss to recognize the loss due to the weakening of the US dollar against the Euro.

### Summary:

- The initial purchase of EUR 12,000 is recorded in Euros on May 31st, 2006.
- A gain of $1,000 is recognized on May 31st due to the strengthening of the US dollar.
- An adjustment of $500 loss is recognized on June 30th due to the weakening of the US dollar.

These entries reflect the impact of foreign currency fluctuations on the company's liability in US dollars, considering the exchange rates on the respective dates. Adjustments for foreign exchange gains or losses are typical in companies that transact in multiple currencies to accurately reflect the financial position in the reporting currency (in this case, US dollars).