Drape Ltd. took a long-term loan of USD 30,000 from an entity registered in U.S.A. on 1 st April, 2024. Interest of USD 2,400 is payable annually on…

(i) Initial carrying amount of loan in books Loan amount received = USD 30,000 Present value of loan Cash flow of interest USD 30,000 x 8% = 2,400 for 6 years. PV of cash flow of interest USD 2,400 x 4.2305 = 10,153.20 PV of Repayment of loan USD 30,000 x 0.5346 = 16,038.00 Total 26,191.20 When effective interest rate is different from the contractual rate, it results into transaction cost due to which the initial present value of the loan is different from the transaction price. Accordingly, here difference of USD 3,808.80 (USD 30,000 - USD 26,191.20) will be recorded as transaction cost. As per Ind AS 21, foreign currency transactions are initially recorded at the rate of exchange in force when the transaction was first recognized. Loan to be converted in Rupees (₹) = USD 26,191.20 x 74/USD = 19,38,149 Therefore, the loan would initially be recorded at 19,38,149. (ii) Calculation of Finance Cost for the year 2024-2025 The finance cost = USD 26,191.20 x 11% = USD 2,881 The finance cost would be recorded at an average rate for the period since it accrues over a period of time. Hence, the finance cost for financial year 2024-2025 in Rupees (₹) is 2,07,432 (USD 2,881 x 72/USD) The actual payment of interest would be recorded at USD 2,400 x 78/USD = 1,87,200 (iii) Calculation of closing balance of loan as at 31 st March 2025 Period Opening Financial Liability (USD) Interest @ 11% EIR (USD) Cash outflow (USD) Closing balance of loan (USD) A B C A+B-C 2024-2025 26,191.20 2,881 2,400 26,672.20 (iv) Computation of Exchange Gain/Loss for the year 2024-2025 The loan balance is a monetary item, so it is translated at the rate of exchange at the reporting date. So, the closing loan balance in Rupees (₹) is USD 26,672.20 x 78/USD = 20,80,432 In this case, the exchange difference is ₹ [20,80,432 - (19,38,149 + 2,07,432 – 1,87,200)] = 1,22,051. This exchange loss of 1,22,051 is taken to profit and loss account. Note: Effective interest rate is more than the contractual rate of interest in general when an entity incurs any transaction cost or repayment of loan is not at par value. Since in the question, there is no transaction cost or no repayment information different from par value, effective interest rate should have been equivalent to contractual interest rate. The above solution has been drawn considering Effective Interest Rate of 11%, leading to calculation of initial recognition of loan amount on the date of acquisition of loan and difference being treated as transaction cost. However, alternatively one may draw the solution considering Effective Interest Rate of 11% (as given) only for calculation of finance cost without change in the initial recognition of loan amount on the date of acquisition of loan or considering interest rate of 8%. In both the case the solutions will be drawn as follows: Alternative: Considering Effective Interest Rate of 11% (as given) only for calculation of finance cost without change in the initial recognition of loan amount on the date of acquisition of loan (i) Initial carrying amount of loan in books Loan amount received = USD 30,000 As per Ind AS 21, foreign currency transactions are initially recorded at the rate of exchange in force when the transaction was first recognized. Loan to be converted in Rupees (₹) = USD 30,000 x 74 / USD = 22,20,000 Therefore, the loan would initially be recorded at 22,20,000. (ii) Calculation of Finance Cost for the year 2024-2025 The finance cost = USD 30,000 x 11% = USD 3,300 The finance cost would be recorded at an average rate for the period since it accrues over a period of time. Hence, the finance cost for financial year 2024-2025 in Rupees (₹) is 2,37,600 (USD 3,300 x 72 / USD) The actual payment of interest would be recorded at USD 2,400 x 78/USD = 1,87,200 (iii) Calculation of closing balance of loan as at 31 st March, 2025 Period Opening Financial Liability (USD) Interest @ 11% EIR (USD) Cash outflow (USD) Closing balance of loan (USD) A B C A+B-C 2024-2025 30,000 3,300 2,400 30,900 (iv) Computation of Exchange Gain/Loss for the year 2024-2025 The loan balance is a monetary item, so it is translated at the rate of exchange at the reporting date. So, the closing loan balance in Rupees (₹) is USD 30,900 x 78 / USD = 24,10,200 In this case, the exchange difference is ₹ [24,10,200 - (22,20,000 + 2,37,600 – 1,87,200)] = 1,39,800 This exchange loss of 1,39,800 is taken to profit and loss account. Alternative: Considering Interest rate of 8% (as computed) (i) Initial carrying amount of loan in books Loan amount received = USD 30,000 As per Ind AS 21, foreign currency transactions are initially recorded at the rate of exchange in force when the transaction was first recognized. Loan to be converted in Rupees (₹) = USD 30,000 x 74 USD = 22,20,000 Therefore, the loan would initially be recorded at 22,20,000. (ii) Calculation of Finance Cost for the year 2024-2025 The finance cost = USD 2,400 as given in the question The finance cost would be recorded at an average rate for the period since it accrues over a period of time. Hence, the finance cost for financial year 2024-2025 in Rupees (₹) is 1,72,800 (USD 2,400 x 72/USD) The actual payment of interest would be recorded at USD 2,400 x 78/USD = 1,87,200 (iii) Calculation of closing balance of loan as at 31 st March, 2025 Period Opening Financial Liability (USD) Interest @ 8% (USD) Interest paid Closing Financial Liability (USD) A B A+B-C 2024-2025 30,000 2,400 2,400 30,000 (iv) Computation of Exchange Gain/Loss for the year 2024-2025 The loan balance is a monetary item, so it is translated at the rate of exchange at the reporting date. So, the closing loan balance in Rupees (₹) is USD 30,000 x 78/USD = 23,40,000 In this case, the exchange difference is ₹ [23,40,000 – (22,20,000 + 1,72,800-1,87,200)] = 1,34,400 This exchange loss of 1,34,400 is taken to profit and loss.