Jared Limited purchased a machine for US$ 20,000 on 31 December 2024, payment being due after four months. On the same date the company entered into…
CA Intermediate · Advanced Accounting · MTP · January 2026
Jared Limited purchased a machine for US$ 20,000 on 31 December 2024, payment being due after four months. On the same date the company entered into a four-month forward contract at 78.85 per US$. The spot exchange rate on 31 December 2024 was - 77.50 per US$. (i) How should Jared Limited recognise the profit or loss on the forward contract in its books for the year ended 31 March 2025? Explain the accounting treatment and point out when and where the gain or loss should be recorded. Additional transaction Trade payables of Jared Limited include an amount due to Sterling Limited of 9,75,000, which was recorded at the prevailing exchange rate on the date of purchase. The original transaction was recorded using US$ 1 = 75.00. The exchange rate on the balance-sheet date (31 March 2025) was US$ 1 = 79.00. The payment was actually made on 1 May 2025, when the exchange rate was US$ 1 = 78.30. (ii) Calculate: the exchange difference as at 31 March 2025, andthe exchange difference on 1 May 2025 (on settlement). Also explain the required accounting treatment in Jared Limited's books in accordance with AS 11 — The Effects of Changes in Foreign Exchange Rates.
Suggested Answer and Working Notes:
(i) Forward Rate 78.85 Less: Spot Rate (77.50) Premium on Contract 1.35 Contract Amount US$ 20,000 Total Loss (20,000 x 1.35) 27,000 Contract period 4 months (3 months falling in the year ended 31st March, 2025) Loss to be recognized (27,000x 3/4) = 20,250 in the year ended 31st March, 2025. (ii) As per AS 11 “The Effects of Changes in Foreign Exchange Rates", exchange differences arising on the settlement of monetary items or on reporting an enterprise's monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognised as income or as expenses in the period in which they arise. Trade payables Foreign Currency Amount ₹ Initial recognition (9,75,000/75) US $13,000 1 US $ = 75 Exchange Rate on Balance sheet date 1 US $ = 79 Exchange Difference Loss US $ 13,000 X (79 - 75) 52,000 Exchange Rate on Settlement date 1 US $ = 78.30 Exchange Difference Profit US $ 13,000 x (79 - 78.30) 9,100 For the year ended 31st March, 2025 exchange diffefence loss amounting - 52,000 will be charged to statement of Profit & Loss A/c. However, there is exchange difference gain of 13,000 x (79-78.30) = 9,100 on 1st May, 2025. Thus gain of 9,100 will be credited to statement of Profit & Loss A/c for the year ended 31st March, 2026.
Topics: AS 11
Related Questions in this Topic
- OR ABC Ltd, borrowed 10,000 US $ in foreign currency on 1st April, 2025 at 6% p.a. annual interest and acquired a deprec...
- Explain the key aspects which required the need for convergence towards global standards of financial reporting
- Karna Ltd., an Indian Company, has the following foreign currency transactions during the financial year 2025-26: (i) O...
- Legal Ltd. is engaged in the manufacturing of rubber. For its plant, it required machineries of latest technology. It us...
- Trade payables of CAT Ltd. include amount payable to JBB Ltd.,10,00,000 recorded at the prevailing exchange rate on the ...