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

Himalaya Ltd. has a foreign subsidiary that is a non-integral foreign operation. Its net assets at the beginning of the year were USD 2,00,000 (rate Rs 80). It earned a profit of USD 40,000 during the year (average rate Rs 82). There were no dividends or other changes in equity, so closing net assets are USD 2,40,000. The closing rate is Rs 84. The exchange difference arising on translation for the year, to be accumulated in foreign currency translation reserve, is:

The exchange difference is Rs 8,80,000, credited to foreign currency translation reserve. Closing net assets at Rs 84 are Rs 2,01,60,000, against opening net assets at Rs 80 of Rs 1,60,00,000 plus profit at the average rate Rs 82 of Rs 32,80,000. The difference is the translation gain.

  1. ARs 8,80,000Correct
  2. BRs 8,00,000
  3. CRs 80,000
  4. DRs 9,60,000

Explanation

Closing net assets = 2,40,000 x 84 = Rs 2,01,60,000. Opening net assets in rupees = 2,00,000 x 80 = Rs 1,60,00,000, and profit at average rate = 40,000 x 82 = Rs 32,80,000, a total of Rs 1,92,80,000. Difference = Rs 8,80,000. Check: 2,00,000 x 4 = 8,00,000 plus 40,000 x 2 = 80,000. Rs 8,00,000 ignores the profit effect.

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