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

Mehta Pharma Ltd. took a short-term foreign currency loan of USD 20,000 on 1 October for working capital, when the rate was ₹80. At the reporting date 31 March the rate was ₹83. The loan was repaid on 30 June of the next year at ₹81. What exchange difference is recognised in the profit and loss of the next year (ending 31 March)?

A gain of ₹40,000 is recognised in the next year. The loan was carried at the closing rate of ₹83 (₹16,60,000) and settled at ₹81 (₹16,20,000). The difference is measured from the previous reporting-date rate, not from the original ₹80 rate.

  1. AGain of ₹60,000
  2. BLoss of ₹40,000
  3. CGain of ₹40,000Correct
  4. DLoss of ₹20,000

Explanation

At 31 March the loan was restated at ₹83, so ₹3 × 20,000 = ₹60,000 loss was booked in the first year. On repayment at ₹81 the liability settles at 20,000 × 81 = ₹16,20,000 against a carrying amount of 20,000 × 83 = ₹16,60,000, giving a gain of ₹40,000 in the next year. The overall loss of ₹20,000 is split across the two years, so showing it in the second year is wrong.

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