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

Kaveri Exports Ltd has a USD 50,000 receivable arising from a sale. On 1 December 2025 it enters a 3-month forward contract to sell USD 50,000 at Rs 84.60 to hedge this receivable. The spot rate on 1 December 2025 is Rs 84.00. The company's year ends on 31 December. The premium or discount on the contract is not intended as speculation. What is the amount recognised for the forward premium/discount in the year ended 31 December 2025?

Rs 10,000 is recognised as income. The premium on the forward sale is Rs 30,000, being the Rs 0.60 gap times USD 50,000. It is amortised over the three-month contract life, and only one month falls in the year ended 31 December 2025.

  1. ARs 30,000 as income
  2. BRs 10,000 as incomeCorrect
  3. CRs 10,000 as expense
  4. DRs 20,000 as income

Explanation

Total premium = (84.60 - 84.00) x 50,000 = Rs 30,000. Because the company sells forward at a rate higher than spot, this is income. It is recognised over the contract life of 3 months, so 1 month's share is Rs 10,000. Recognising the full Rs 30,000 ignores the amortisation required over the life of the contract.

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