Either M Ltd is engaged in the business of manufacturing of bottles for pharmaceutical companies and non-pharmaceutical companies. It has a wholly…

Accounting treatment in the books of M Ltd (Functional Currency Rupees (₹)) M Ltd will recognize sales of 996lacs (12 lacs Euro x 83) Profit on sale of inventory = 996 lacs – 830lacs = 166 lacs. On balance sheet date, receivables from G Ltd. will be translated at closing rate i.e. 1 Euro = 85. Therefore, unrealised forex gain will be recorded in standalone profit and loss of 24lacs. (i.e. (85 - 83) x 12 Lacs) Journal Entries ₹ (in Lacs) ₹ (in Lacs) G Ltd. A/c Dr. 996 To Sales 996 (Being revenue recorded on initial recognition) G Ltd. A/c Dr. 24 To Foreign exchange difference (unrealised) 24 (Being foreign exchange difference recorded at year end) Accounting treatment in the books of G Ltd (Functional currency EURO) G Ltd will recognize purchases on 1 st February, 20X1 of Euro 12 lacs which will also be its closing stock at year end. Journal Entry (in Euros) (in Euros) Purchases Dr. 12 lakhs To M Ltd. 12 lakhs Accounting treatment in the consolidated financial statements Receivable and payable in respect of above-mentioned sale / purchase between M Ltd and G Ltd will get eliminated. The closing stock of G Ltd will be recorded at lower of cost or NRV. Euro (in lacs) Rate ₹ (in lacs) Cost 12 83 996 NRV (Assumed Same) 12 85 1020 Therefore, no write off is required. The amount of closing stock of 996lacs includes two components- Cost of inventory for 830lacs; and Profit element of 166lacs; and At the time of consolidation, the second element amounting to 166 lacs will be eliminated from the closing stock. Journal Entry ₹ (in Lacs) ₹ (in Lacs) Consolidated P&L A/c Dr. 166 To Inventory 166 (Being profit element of intragroup transaction eliminated)