Lithium Ltd

(17 marks – 5 minutes reading time; 26 minutes writing time)

PART A

Lithium Ltd is a South African-based supplier of chemical products to industrial clients. On

6 April 2015, an order was received from a German Company, Neubaten GmbH, for delivery on
30 April 2015. The risks and rewards of ownership (and control) transferred to Neubaten GmbH on
25 April 2015.

The shipment was for an amount of €45 000. The payment terms were 60 days from delivery and
Neubaten GmbH duly settled the amount on 26 June 2015. (Assume that the time value of money is
not material.)

Since Lithium Ltd expected the Rand to appreciate against the Euro, it entered into a 2-month
forward exchange contract to sell €45 000 and thereby fix the amount of Rands which it would
receive on payment date. The contract was entered into on 30 April 2015.

Lithium Ltd has a year-end of 31 May.

The following exchange rates applied:

6 April €1 = R8.40
25 April €1 = R8.45
30 April €1 = R8.50
31 May €1 = R8.20
26 June €1 = R7.80

The following rates were available on forward exchange contracts:

30 April €1 = R8.10 (2 month contract)
31 May €1 = R7.90 (2 month contract)
€1 = R8.00 (1 month contract).

Required:
Prepare the journal entries, in the books of Lithium Ltd, to record the effects of the above information
for both the 2015 and 2016 financial years. (Narrations and tax-related entries are not required).
(12 marks)

PART B

Suede Plc made a loan of £100 000 to Lithium Ltd on 1 December 2013. Interest is paid annually in
arrears on 30 November every year at a rate of 10% per annum.

Lithium Ltd has a year end of 31 May and the following Rand:Pound (£) exchange rates applied:

Spot rates £1 =
31 May 2014 R 9.50
30 November 2014 R10.00
31 May 2015 R11.00

Average rates
31 May 2014 – 31 May 2015 R10.30
30 November 2013 – 30 November 2014 R 9.60
31 May 2014 – 30 November 2014 R 9.80

Required:
Provide the journal entry (or entries) in the books of Lithium Ltd to record the accrual and related
payment of interest for the 6-month period ended 30 November 2014.
(5 marks)