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

Mehta Textiles Ltd. purchased machinery from a German supplier on 1 January 2025 for EUR 10,000 at Rs 90 per EUR, payable after six months. On 31 March 2025 the rate was Rs 93 per EUR. The payment was made on 30 June 2025 at Rs 92 per EUR. The company closes its books on 31 March. What exchange difference will be recognised in the profit and loss statement for the year ending 31 March 2026 (the following year)?

The company recognises a gain of Rs 10,000 in FY 2025-26. The creditor was carried at Rs 9,30,000 after restatement at 93, and settlement at 92 costs Rs 9,20,000. Only the difference from the last balance sheet rate falls in the settlement year.

  1. AGain of Rs 10,000Correct
  2. BLoss of Rs 10,000
  3. CLoss of Rs 20,000
  4. DLoss of Rs 30,000

Explanation

At 31 March 2025 the creditor was restated at Rs 93, giving Rs 9,30,000 against Rs 9,00,000 booked, and a loss of Rs 30,000 was recognised in FY 2024-25. On settlement in FY 2025-26 the payment is 10,000 x 92 = Rs 9,20,000 versus the carrying amount of Rs 9,30,000, giving a gain of Rs 10,000. Taking Rs 20,000 loss (92 vs 90) ignores the earlier year's recognition and double counts.

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