Foreign Currency Amortization Examples

• Foreign Currency Amortization Schedule (Standard) Example Foreign Currency Amortization Schedule (Standard) Example

• Foreign Currency Amortization Schedule (Variable) Example Foreign Currency Amortization Schedule (Variable) Example

Foreign Currency Amortization Schedule (Standard) Example

The following is an example of amortizing prepaid assets denominated in a foreign currency using a foreign currency amortization schedule. This example assumes:

• Foreign currency transactions are recorded in local currency using the exchange rate in effect on the date the transaction occurred.

• The company's base currency is GBP.

• The effect of hedging transactions is not considered in the analysis.

Recording the Bill and Payment

Vendor bill (invoice) is recorded and paid at same exchange rate in single accounting period.

On February 1, a bill is received from a USD vendor for services to be rendered from 2/1/2010 to 4/30/2010. The bill is fully paid when received at the same exchange rate. The exchange rate on February 1 is 1.50 USD to 1.00 GBP (600 / 1.50 =400).

Accounting for bill:

Accounting for bill payment:

Since the bill is settled, there will be no revaluation of the transaction for A/P purposes at month-end.

Amortization Schedule

Because this prepayment represents services to be rendered evenly over three months, straight-line amortization method is used. The prepaid asset will be amortized to the Service Expense account. (Prepaid Services is the deferral/capitalization account).

The following amortization schedule is created:

*The foreign amount is based on the foreign amount of the transaction.

**The base amount is foreign amount divided by the rate on the transaction (200/1.5 =133.33)

Creation of Amortization Journal Entries

At the end of each period, amortization journal entries are created for the period using historical rates.

Journal posted on February 28, currency rate 1.50 USD to 1.00 GBP (200/1.50 =133.33):

Journal posted on March 31, currency rate 1.50 USD to 1.00 GBP (200/1.50 =133.33):

Journal posted on April 30, currency rate 1.50 USD to 1.00 GBP (200/1.50 =133.33):

Foreign Currency Amortization Schedule (Variable) Example

In this example, the vendor bill (invoice) is recorded and paid at same exchange rate in single accounting period. The bill represents services that will be completed over several months and tracked as a project. Expenses is to be amortized based on the percentage of project completion. This example assumes:

• Foreign currency transactions are recorded in local currency using the exchange rate in effect on the date the transaction occurred.

• The company's base currency is GBP.

• The effect of hedging transactions is not considered in the analysis.

Recording the Bill and Payment

On February 1, a bill is received from a USD vendor for services to be rendered. The bill is fully paid when received at the same exchange rate. The exchange rate on February 1 is 1.50 USD to 1.00 GBP (600 / 1.50 =400). The project associated with this bill for computer maintenance is created and associated with this line on the bill.

Accounting for bill, currency rate, 1.50 USD to 1.00 GBP (600/1.50 =400):

Accounting for bill payment, currency rate 1.50 USD to 1.00 GBP (600/1.50 =400):

Because the bill is settled, there is no revaluation of the transaction for A/P purposes at month-end.

Amortization Schedule

The amortization schedule is created without lines because the amount to amortize is based on the percentage of project completion and not known at this point.

The project work is completed as follows:

• February -25% complete (25% total)

• March -50% complete (75% total)

• April -25% complete (100% total)

The amortization schedule calculated the following amounts:

*The foreign amount is based on the foreign amount of the transaction.

**The base amount is foreign amount divided by the rate on the transaction (300/1.5 =200)

Creation of Amortization Journal Entries

At the end of each period, amortization journal entries are created for the period using historical rates.

Journal posted on February 28, currency rate 1.50 USD to 1.00 GBP (200/1.50 =133.33):

Journal posted on March 31, currency rate 1.50 USD to 1.00 GBP (300/1.50 =200.00):

Journal posted on April 30, currency rate 1.50 USD to 1.00 GBP (200/1.50 =133.33):

General Notices