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CA Intermediate · Advanced Accounting · Accounting for Branches including Foreign Branches

Mumbai-based Kaveri Ltd has a branch in the USA that is a non-integral foreign operation under AS 11. At the start of the year the branch's net investment was USD 10,000 (translated at ₹80). The branch earned a profit of USD 2,000 during the year, translated at the average rate of ₹82. There were no remittances. The closing rate is ₹84. What is the exchange difference arising on translation, to be accumulated in the foreign currency translation reserve?

The exchange difference is a credit of ₹44,000 to the foreign currency translation reserve. Closing net assets of USD 12,000 at ₹84 equal ₹10,08,000. Opening net investment at ₹80 plus profit at the average rate of ₹82 gives ₹9,64,000, and the balancing figure is ₹44,000.

  1. A₹44,000 creditCorrect
  2. B₹48,000 credit
  3. C₹4,000 credit
  4. D₹40,000 credit

Explanation

Closing net assets = USD 12,000 × 84 = 10,08,000. Opening net investment 10,000 × 80 = 8,00,000 plus profit 2,000 × 82 = 1,64,000 gives 9,64,000. Exchange difference = 10,08,000 − 9,64,000 = 44,000 credit. Using 12,000 × (84 − 80) gives 48,000, which ignores that profit was translated at the average rate.

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