Rio Tinto Ltd is an Australian mining company listed on the ASX. The company is an exporter
Question:
Rio Tinto Ltd is an Australian mining company listed on the ASX. The company is an exporter of iron ore to overseas steel mills. The company’s functional currency is A$ and its financial year ends on 30 June 2021. The company entered various sale transactions during the year. Relevant exchange rates are as follows:
Date | Spot rate | Forward rate (for 31/07/2021) |
1 April 2021 | A$1 = US$0.80 | A$1 = US$0.77 |
1 June 2021 | A$1 = US$0.78 | A$1 = US$0.74 |
30 June 2021 | A$1 = US$0.80 | A$1 = US$0.76 |
31 July 2021 | A$1 = US$0.82 | A$1 = US$0.82 |
i. On 1 April 2021, Rio Tinto Ltd sold iron ore to a Malaysian customer for US$1,350,000. On 31 July 2021, the customer paid for the iron ore.
ii. On 1 June 2021, Rio Tinto Ltd sold iron ore to a Korean customer for US$2,340,000. On 31 July 2021, the customer paid for the iron ore. On 1 June 2021, the company entered into a forward exchange contract to sell US$2,340,000, which is designated as a hedge of the customer account.
Required:
- Prepare the entries of Rio Tinto Ltd to account for its foreign currency transactions in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates.
(Entries should be rounded to the nearest dollar. Assume a 0% discount rate for any fair value calculations. Show all workings.)
- Based on the above transactions, explain foreign exchange risk in your own words and explain how forward exchange contracts can be used to manage the foreign exchange risk.
Accounting Business Reporting for Decision Making
ISBN: 9780730302414
4th edition
Authors: Jacqueline Birt, Keryn Chalmers, Albie Brooks, Suzanne Byrne, Judy Oliver