Copyright2010McGraw-HillAustraliaPtyLtdPPTsto.pptVIP

Copyright ? 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 35-* Worked Example 35.10—Solution (cont.) Accounting entries in the books of Lennox Ltd 01 July 2011 Dr Cash 1 250 000 Cr Foreign loan 1 250 000 [to recognise, at the 1 July 2011 spot rate, the initial loan received from the US company (1 250 000 = 1 000 000 ÷ 0.80)] There is no entry to recognise the swap as the fair value of the swap agreement is deemed to be zero on 1 July 2011 as shown in the table on previous slide The effect of the entering the swap means that Lennox Ltd is insulated from any foreign currency gains or losses that might result from changes in the exchange rates 30 June 2012 Dr Foreign exchange loss 178 571 Cr Foreign loan 178 571 Value of loan as at 1 July 2011 (1 000 000 ÷ 0.80) 1 250 000 Value of loan as at 30 June 2012 (1 000 000 ÷ 0.70) 1 428 571 Increase in the value of the loan 178 571 Copyright ? 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 35-* Worked Example 35.10—Solution (cont.) Dr Swap 178 571 Cr Gain on swap contract 178 571 (to recognise the gain on the swap contract negotiated with Angourie Ltd—see table. The swap would be considered to represent a financial asset) Dr Interest expense 142 857 Cr Cash 142 857 [142 857 = (1 000 000 × 0.10) ÷ 0.7] Dr Cash 17 857 Cr Interest expense 17 857 (142 857 – (1 250 000 × 10 per cent) = 17 857) Lennox initially has to make the payment to the US company for the funds it borrows. That is, even in the presence of the agreement with Angourie, Lennox will still comply with its contractual commitment with the overseas capital supplier. However, Angourie has agreed to take responsibility for the overseas loan, while Lennox Ltd has agreed to take responsibility for Angourie Ltd’s domestic loan. The interest payment on the domestic loan is $125 000 (that is $1 250 000 × 10%). Lennox Ltd will receive $17 8