(c) Sobolo Ltd is a Ghanaian company that manufactures a special type of energy drink for export to Italy. The local currency of Sobolo Ltd is the Ghanaian Cedi. Sobolo’s sales prices are denominated in Euros and determined predominantly by competitive forces in Italy and Italian regulations. Sobolo holds its excess cash in Euros, only converting sufficient Euros into Cedis to settle its operating costs which are determined by conditions in Ghana. Sobolo pays some of its employees in dollars. The majority of the Sobolo’s borrowings are in Euros. The plant and equipment used by Sobolo were imported from the United Kingdom and invoiced in UK Sterling. Such costs are not significant when compared to the Cedi operating costs.

(d) On 24 December 2020, an entity with a functional currency of UK Pound Sterling sold goods on credit to a customer in France for 350,000 Euros. The customer settled the invoice on 5 January 2021. The entity’s reporting date is 31 December. The spot exchange rates are as follows: 24 December 2020: 1.5 Euros = 1 UK Pound Sterling 31 December 2020: 1.8 Euros = 1 UK Pound Sterling 5 January 2021: 1.2 Euros = 1 UK Pound Sterling

Required

Explain how the above transaction should be reported in the books of the entity.

Advise the directors of Sobolo Ltd on the appropriate currency to use as its functional currency. (5 marks)

Answer rating: 100% (QA)

C As per IAS 21 A The primary economic environment in which an entity operates is its functional Cur... View the full answer