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

Mehta Exports entered into a forward contract on 1 January 2027 to sell USD 20,000 at Rs 85.00 per USD, maturing 30 June 2027. It is a hedge with premium accounted separately. Spot on 1 January 2027 was Rs 84.00; spot on 31 March 2027 was Rs 84.60. What is the exchange difference on the contract for the year ended 31 March 2027, and what is its nature?

The exchange difference is the amount translated at the reporting-date rate less the amount at the inception rate: 20,000 x (84.60 - 84.00) = Rs 12,000. It is a loss because the contract obliges the firm to sell dollars after the dollar has strengthened.

  1. ARs 12,000 gain
  2. BRs 12,000 lossCorrect
  3. CRs 32,000 loss
  4. DRs 20,000 gain

Explanation

Exchange difference = USD 20,000 x (84.60 - 84.00) = Rs 12,000, using the spot at inception as the base. It is a loss because the company agreed to sell dollars and the spot rose, so the contract is worse off. Using the contracted forward rate of 85.00 as the base would give a different figure and ignore the premium treatment.

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