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

Mehta Traders Ltd (year ending 31 March) bought goods on credit from a foreign supplier on 1 February 2026 for USD 40,000 when the rate was ₹82. On 31 March 2026 the rate was ₹84. The creditor was settled in full on 15 May 2026 at ₹83. What exchange difference should be recognised in the profit and loss for the year ending 31 March 2027?

A gain of ₹40,000 is recognised in the year ending 31 March 2027. The creditor was already restated at ₹84 at the earlier balance sheet date, so settlement at ₹83 gives a gain of ₹1 × USD 40,000 in the settlement year.

  1. AGain of ₹40,000Correct
  2. BLoss of ₹40,000
  3. CLoss of ₹80,000
  4. DGain of ₹80,000

Explanation

At 31 March 2026 the creditor was restated at ₹84, giving a loss of 40,000 × 2 = ₹80,000 in FY 2025-26. On settlement in FY 2026-27 the rate fell from ₹84 to ₹83, a gain of 40,000 × 1 = ₹40,000. Comparing with the original ₹82 would wrongly show a ₹40,000 loss in the second year; that loss belongs to the net of both years.

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