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

Gupta Ltd. holds inventory imported from Japan, bought on 10 February 2025 for JPY 5,00,000 at Rs 0.55 per JPY (Rs 2,75,000). At 31 March 2025 the closing rate is Rs 0.58 per JPY. The net realisable value of the inventory is Rs 2,80,000. The supplier has not yet been paid. How should the inventory be carried in the balance sheet and what exchange difference arises on the creditor?

Inventory stays at Rs 2,75,000 because it is non-monetary, carried at historical rate cost, and cost is lower than NRV of Rs 2,80,000. The creditor is monetary and is restated to Rs 2,90,000, producing an exchange loss of Rs 15,000 in profit and loss.

  1. AInventory at Rs 2,75,000; exchange loss Rs 15,000 on creditorCorrect
  2. BInventory at Rs 2,80,000; exchange loss Rs 15,000 on creditor
  3. CInventory at Rs 2,90,000; exchange loss Rs 15,000 on creditor
  4. DInventory at Rs 2,75,000; no exchange difference as it is a non-monetary item

Explanation

Inventory is a non-monetary item carried at historical cost expressed at the transaction-date rate, Rs 2,75,000, which is below NRV of Rs 2,80,000, so cost applies. The creditor is a monetary item restated: 5,00,000 x 0.58 = Rs 2,90,000 against Rs 2,75,000, a loss of Rs 15,000. Option with no difference confuses the inventory with the creditor.

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