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

Mumbai Exports Ltd. has a foreign branch in the USA that is a non-integral foreign operation, so AS 11 requires the net investment method. At the start of the year, the branch's net assets were USD 10,000 (rate Rs 80). The branch earned a profit of USD 2,000 during the year, with an average rate of Rs 82. No remittances were made, and the closing rate is Rs 84. What is the exchange difference on translation, to be accumulated in the foreign currency translation reserve?

The exchange difference is a credit of Rs 44,000. Closing net assets of USD 12,000 at Rs 84 equal Rs 10,08,000. Opening net assets at Rs 80 (Rs 8,00,000) plus profit at the average rate of Rs 82 (Rs 1,64,000) total Rs 9,64,000. The balance is the translation reserve credit.

  1. ARs 44,000 creditCorrect
  2. BRs 40,000 credit
  3. CRs 24,000 credit
  4. DRs 48,000 credit

Explanation

Opening net assets are 10,000 × 80 = Rs 8,00,000. The profit at average rate is 2,000 × 82 = Rs 1,64,000. Closing net assets are 12,000 × 84 = Rs 10,08,000. The difference is 10,08,000 − 8,00,000 − 1,64,000 = Rs 44,000 credit. Rs 48,000 is wrong because it applies the full rate movement of 4 to closing net assets and ignores that the profit was translated at the average rate.

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