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CA Intermediate · Advanced Accounting · AS 11 The Effects of Changes in Foreign Exchange Rates

Bharat Textiles Ltd purchased raw materials on credit from a US supplier for USD 10,000 on 5 January. The exchange rate on that date was Rs 82 per USD. The rate on 25 February, when the payment was made, was Rs 83 per USD. At what amount should the purchase be recorded in the books on 5 January?

The purchase is recorded at Rs 8,20,000. AS 11 requires initial recognition of a foreign currency transaction at the exchange rate on the transaction date, so USD 10,000 is converted at Rs 82. Later settlement rates do not change the original purchase value; they only create an exchange difference.

  1. ARs 8,20,000Correct
  2. BRs 8,30,000
  3. CRs 8,25,000
  4. DRs 10,000

Explanation

AS 11 requires a foreign currency transaction to be recorded on initial recognition by applying the exchange rate on the date of the transaction to the foreign currency amount. Purchase = USD 10,000 x Rs 82 = Rs 8,20,000. Rs 8,30,000 wrongly uses the later settlement rate, and Rs 8,25,000 wrongly uses an average of the two rates. The difference of Rs 10,000 arising at settlement is an exchange difference.

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