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CMA Intermediate · Financial Accounting · The Effects of Changes in Foreign Exchange Rates (AS 11)

Mumbai Textiles Ltd has a non-integral foreign operation in USD. At the start of the year its net assets were USD 50,000 and the closing rate was ₹80 per USD. At the year end the closing rate is ₹83 per USD and there was no profit, loss or other change in equity during the year. What is the exchange difference on translating the opening net investment, and its treatment?

The exchange difference is a gain of ₹1,50,000, being USD 50,000 x (83 minus 80). Because the operation is non-integral, the gain is credited to the foreign currency translation reserve and not to profit and loss.

  1. A₹1,50,000 loss, charged to profit and loss
  2. B₹1,50,000 gain, credited to profit and loss
  3. C₹1,50,000 gain, credited to foreign currency translation reserveCorrect
  4. D₹1,50,000 loss, debited to foreign currency translation reserve

Explanation

Net assets of USD 50,000 were reported at ₹40,00,000 (50,000 x 80) and are now translated at the closing rate at ₹41,50,000 (50,000 x 83). The difference of ₹1,50,000 is a gain, because the investment is worth more rupees. Under AS 11 it is accumulated in the foreign currency translation reserve, not taken to profit and loss.

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