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

Indian parent Veda Ltd. has a non-integral foreign subsidiary. At the start of the year its net assets were FC 1,00,000, translated at ₹70 per FC. The subsidiary earned a profit of FC 20,000 during the year, which accrued evenly (average rate ₹72) and paid no dividend. The closing rate is ₹75 per FC. What is the exchange difference to be accumulated in the foreign currency translation reserve for the year?

The foreign currency translation reserve is credited with ₹5,60,000. Closing net assets at ₹75 are ₹90,00,000, less opening ₹70,00,000 and profit at the average rate ₹14,40,000. Equivalently, ₹5,00,000 on opening net assets plus ₹60,000 on the year's profit.

  1. A₹5,00,000 credit
  2. B₹5,60,000 creditCorrect
  3. C₹6,00,000 credit
  4. D₹60,000 credit

Explanation

Closing net assets = 1,20,000 × 75 = ₹90,00,000. Opening net assets were ₹70,00,000 and the profit translated at the average rate is 20,000 × 72 = ₹14,40,000. Exchange difference = 90,00,000 − 70,00,000 − 14,40,000 = ₹5,60,000 credit. Check: 1,00,000 × (75 − 70) = ₹5,00,000 plus 20,000 × (75 − 72) = ₹60,000, total ₹5,60,000. ₹5,00,000 ignores the difference on the year's profit.

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