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

On 1 February, Kaveri Textiles Ltd. bought goods on credit for USD 10,000, payable on 31 May. The spot rate on 1 February was Rs 80. To hedge the payable, the company entered a forward contract on the same day to buy USD 10,000 at Rs 82 on 31 May. The company closes its books on 31 March. The contract is entered into to hedge the payable and not for trading. What amount of forward premium is recognised as an expense in the year ending 31 March?

Rs 10,000 is recognised. The premium is the forward rate minus the spot rate on the contract date, which is Rs 2 x USD 10,000 = Rs 20,000. AS 11 requires it to be amortised over the contract life, and two of the four months fall in this year.

  1. ARs 20,000
  2. BRs 10,000Correct
  3. CRs 5,000
  4. DRs 15,000

Explanation

Premium = (82 - 80) x 10,000 = Rs 20,000 over the contract life of 4 months (February to May). It is amortised over the life of the contract, and 2 of the 4 months fall in the current year: 20,000 x 2/4 = Rs 10,000. Rs 20,000 wrongly charges the whole premium in the first year.

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