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CMA Intermediate · Financial Accounting · The Effects of Changes in Foreign Exchange Rates (AS 11)

Gupta Ltd. purchased raw materials from a UK supplier for GBP 10,000 on 5 June at Rs 100.00 per GBP, on credit. On 20 June it paid GBP 10,000 when the rate was Rs 101.50. What is the amount of exchange difference on settlement, and its nature?

The exchange difference is a loss of Rs 15,000. The purchase was recorded at Rs 10,00,000 at the Rs 100 rate, but settling GBP 10,000 at Rs 101.50 required Rs 10,15,000, so the company paid Rs 15,000 more than the recorded liability.

  1. ARs 15,000 lossCorrect
  2. BRs 15,000 gain
  3. CRs 10,000 loss
  4. DNo exchange difference arises

Explanation

Purchase recorded at 10,000 x 100 = Rs 10,00,000. Settlement costs 10,000 x 101.50 = Rs 10,15,000. The extra Rs 15,000 paid is an exchange loss, since the liability cost more rupees to settle. A gain would have the wrong sign, and Rs 10,000 is a miscalculation.

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