Dark Limited is engaged in the construction and operation of thermal power plants in the country. It has entered into a purchase contract for USD…

The contract should be separated using the 6-month USD / ₹ forward exchange rate, as at the date of the contract (1 USD = 80). The two components of the contract are therefore: A sale contract for USD 2,00,000A six-month currency forward to purchase USD 2,00,000 at 80This gives rise to a gain or loss on the derivative, and a corresponding derivative asset or liability. On delivery 1. Bright Ltd. records the sales at the amount of the host contract = 1,60,00,000 2. The embedded derivative is considered to expire. 3. The derivative asset or liability (i.e. the cumulative gain or loss) is settled by becoming part of the financial asset on delivery. 4. In this case, the carrying value of the currency forward at 31st March 2024 on maturity is = 2,00,000 (85 – 80) = 10,00,000 (profit/asset) Below is the table summarising the computation of gain/ loss to be recorded at every period end Date Transaction Sales ₹ Debtors ₹ Derivative Asset (Liability) ₹ (Profit) Loss ₹ 1 st Oct. 2023 Embedded Derivative Nil Value 31 st Dec. 2023 Change in Fair Value of Embedded Derivatives MTM (80 - 70) X 2,00,000 (20,00,000) 20,00,000 31 st Mar. 2024 Change in Fair Value of Embedded Derivatives (85 - 70) x 2,00,000 30,00,000 (30,00,000) 31 st Mar. 2024 Recording sales at forward rate 1,60,00,000 1,60,00,000 31 st Mar. 2024 Embedded derivative settled against debtors 10,00,000 (10,00,000) Journal Entries to be recorded at every period end 1 st October, 2023 – No entry to be made 31 st December, 2023 Particulars Dr. Amount (₹) Cr. Amount (₹) Profit and loss A/c Dr. 20,00,000 To Derivative financial liability A/c 20,00,000 (Being loss on mark to market of embedded derivative booked) 31 st March, 2024 Particulars Dr. Amount (₹) Cr. Amount (₹) Derivative financial asset A/c Dr. 10,00,000 Derivative financial liability A/c Dr. 20,00,000 To Profit and loss A/c 30,00,000 (Being gain on embedded derivative based on spot rate at the date of settlement booked) 31 st March, 2024 Particulars Dr. Amount (₹) Cr. Amount (₹) Trade Receivable A/c Dr. 1,60,00,000 To Sales A/c 1,60,00,000 (Being sale booked at forward rate on the date of transaction) 31 st March, 2024 Particulars Dr. Amount (₹) Cr. Amount (₹) Trade Receivable A/c Dr. 10,00,000 To Derivative financial asset A/c 10,00,000 (Being derivative asset re-classified as a part of trade receivables, bringing it to spot rate on the date of sale)