Alright, hello friends. Next we'll take up problems on accounting standard 11. Let's take up problems on AS 11, right? See, if you remember there are total 3 things to understand in AS 11. one is accounting for a foreign transaction second is called nothing but what sir foreign operations and third is nothing but what sir forward contracts most of the question in your exam would be on either part one or part three part one is on accounting for what sir foreign transactions part three is about forward contracts sir what about part two part two they will ask in branch accounting branch me puchega wahaan pe important hai thike chalo we'll start one one question sir question number 22 Question number 22. Explain monetary item as per AS11.
What is my monetary item? It's an asset or liability which is either receivable or payable in fixed amount of money. If any amount is received, payable or payable in fixed amount of money then it becomes what sir monetary continue.
How are foreign currency monetary items to be recognized at each balance sheet date? It's very simple sir. Monetary items needs to be needs to be re-restated on each balance sheet date as per Rate of exchange on the date.
What the date? On the date of balance sheet. Classify the following as monetary or non-monetary item. Third one is something else. What is monetary and what is non-monetary?
We need to answer it. Carefully understand. Share capital.
Obviously non-monetary. Because the value of share capital increases or decreases. Shares value increases or decreases. Right. Trade receivables, obviously monetary because it's a receivable in fixed amount of money.
Investment, see that depends on the nature of investment. Most of the investment, the value fluctuates, right? You can classify it as what, sir?
Non-monetary. Fixed asset, you can classify as what, sir? non-monetary. So, debtors, creditors, bank balance, bills payable, bills receivable, these are all examples of what are monetary items, right?
So, remember you can just see it and close it. Alright, this is one of the excellent questions, sir. Super important question.
Let's see. BK Limited purchased fixed asset costing Rs. 5000 lakhs on 1-4-2012. It is given in rupees.
Payable in which currency? Payable in US dollars on 5-4-2013. Wow.
So, you have purchased a fixed asset in the year 2012. But the amount is payable in the year 2013. Exchange rate of 1 US dollar was how much sir? 50. And 54.98. as on 1-4-2012 and 31st March 2013 respectively.
The company also obtained a soft loan of US$1,00,000 on 1-4-2012 payable in three annual installments. The first installment was due on 1-5-2013. Superb. You are required to state how these transactions would be accounted for in the books of accounts ending on 31st March 2013. Don't forget the question is what on you know company. See for company if you remember there is also MCA circular.
MCA circular is there. MCA's notification is there. So I think there are two bits. What I will do?
I will discuss bit by bit. This is bit 1 for me. This is what for me you know.
Bit 2 for me. I will talk about this in two different bits. It will be better. Right?
It will be very good if I discuss in a bit. I will talk bit by bit sir. Easy.
First is bit number 1 I will discuss. Bit number 1 I will discuss. See company has purchased on 1-4 2012. The company has purchased a fixed asset. Right?
Kuch asset kharida hai. Kuch asset kharida hai. For rupees 5000 lakhs. for rupees 5000 lakhs for this there is a credit r for fixed asset for what value you know it should be very simple it should be rupees 5000 lakhs by what is the dollar rate on that date sir it is us 50 right so it is rupees 50 so it will become how much sir 5000 divided by 5000 divided by 50 Dollar 100 lakhs ka loan hai. Dollar 100 lakhs ka loan hai.
Do you agree? Okay. This is the transaction on what date? 1-4-2012.
Sunaram say. By the time you come to 31st March. March 2013, that is balance sheet date, right? What happened to balance sheet date, sir? One dollar has become how much?
One dollar has become, how much sir? 54.98. 54.98 rupees has become one dollar.
Therefore, dollar has an upward movement of dollar. Do you agree? When there is an upward movement in dollar, what will happen, sir? You need to restate the creditors balance.
So, what will happen? As per AS 11, the creditors for fixed asset, I am talking about here. Which asset?
The creditors for fixed asset should be restated. Should be restated as per. As per rate on balance sheet date.
Okay. Therefore, restatement loss. How much will it be? Restatement loss would be 100 lakh dollars into. 54.98 minus, how much sir?
Minus 50. Do you agree? That should be 4.98 into 100. So it should be 498 lakh rupees. Getting or not sir?
498 lakh rupees ka loss hai. Now if you remember, see this loss you can transfer to P&L account debit. I am just writing here.
Assuming. Assuming company has opted for MCA notification, the option given in notification, what will happen? This rupees 498 lakhs restatement loss, this will be added. this will be added to the value of fixed asset because mca notification mca notification says if you have taken any long term loan or there is any liability in relation to long term loan which is in foreign currency then the fluctuations of foreign currency may be upward or downward you can take to what account sir you can take to fixed asset account Am I clear sir? I think this is my first bit.
Because they are asking you to provide the conclusion only on 31st March if you observe. So this is my bit number 1. Those people say no sir MCA circular is not followed. Then what we will do? These 498 locks will debit to P&L account right now.
This completes my bit number 1. What about bit number 2? What does bit number 2 say? Bit number 2. You have to get a long term loan.
for other than fixed asset. Isn't it? You have taken a long term loan for other than fixed asset.
Do you know how much is the long term loan? US dollar 1 lakh. The loan amount is US dollar 1 lakh.
Very good. This loan is payable in three equal installments. The first installment will start from what date sir? 1-5-2013.
So loan apne kabliya hai. This loan is taken on 1-4-2012. This loan will be repaid from next year may, not this year right.
Thereby this entire loan is outstanding as on 31st March 2013. Therefore even this should be restated. Yes or no? As per rate of exchange on which date? Balance sheet date.
Therefore, restatement loss how much will come? Restatement loss should be 1 lakh dollars into same rate, right? 54.98 minus 50. That should become how much, sir? That should become 4,98,000.
If you remember if MCA circular is followed for this bit also, in that case what will happen? This 4,98,000 should be transferred to foreign currency, monetary, item, translation, difference, reserve account. Do you remember anything? This amount can be transferred to foreign currency, monetary, item, translation, difference, reserve account. and thereby what you can do this amount can be written on for a period of how many years three years because loan is taken for a period of three years so out of this four lakh ninety eight thousand divided by three one lakh sixty six thousand note book can be looked at on note sorry Note, 4,98,000 rupees loss should be written off to PNL over 3 years.
Why 3 years? because the loan is also for how many years three years therefore four lakh ninety thousand dude by three get another one lakh sixty six thousand you can take to pnl account debit i might clear sir see all this drama is why because you know because if the question is on limited if in exam they change the word limited here the entire answer will change if the question is on firm example then all this will not apply the restatement gain be there or restatement loss be there that will go to what sir? P and L account.
Am I clear sir? So, this completes my question. Wow!
Excellent question. Very beautifully designed question. So, you can write here.
Very, very important. Whoever designed it, designed it well. Because one question is on what sir?
Long term loan in relation to fixed asset. One more loan is in relation to what sir? One more loan is in relation to long term loan but not in relation to fixed asset.
Ek ka restatement gain or loss will go to fixed asset Dusre ka restatement gain or loss will go to Foreign currency monetary item translation difference reserve account Am I clear? So excellent answer is sir I will go to question number 24 I will go to question number 24. Sterling Limited purchased a plant for US dollars 20,000 on 31st March 2011, payable after 4 months. Wow! There is a company which purchased a plant on 31st March 2011. They are supposed to make the payment just immediately after how many months? 4 months.
The company entered into a forward contract for 4 months at 48.85. The company has already entered a forward contract for how many months? Forward contract.
Lelya for 4 months. Do you agree? That they will be ready to buy dollars for what value, sir? 48.85.
Because future is uncertain, they have entered the contract right now. On 31st March 2011, the exchange rate was how much, sir? 47.5. Now, compare these two rates, you will get the idea.
Something which could have been purchased for 47.5, they are ready to purchase at what price, sir? 48.85 per dollar. How will you recognize the profit or loss on forward contract in the books of Sterling Limited ending on 31st March 2011?
Am I clear? Now listen carefully. If you observe, what is the spot rate?
Spot rate means, what is the current purchase rate? 47.5 per dollar. What is the forward rate?
Tell me sir. The forward rate is 48.85. See, Sterling Limited requires dollars in future so that they can make the payment for purchase of plant. If right now, if they make the purchase of dollar, it is 47.5.
In future, if they will purchase, they will purchase at what price? 48.85. So, what is the loss per dollar? It is, they are purchasing the dollar at premium.
48.85 minus 47.5. So, it is 1.35 rupees. Do you agree?
Do you agree? Then what is the total loss? The total loss in the contract would be 1.35 into how many dollars? 20,000 dollars which would be into 20,000. How much loss will come?
27,000 rupees loss will come. Do you agree? Now what does AS11 says?
AS11 says this loss should be transferred over a period of forward period. How much is the forward period? It is a period of 4 months. Therefore this loss you can split it over a period of how many years? 4 years.
January, February, March, April. Book this in 4 periods. 27,000 divided by 4. Each month how much you can book, you know?
Each month you can book 6750. 6750, 6750, 6750 and 6750. Thereby, this is the loss up to March. So, how much you will book up to March? You will book 20,250 rupees.
You will book up to March. And balance 6,750 you will book in which year? Next year. Am I clear?
So, it's a very easy question. Answer here, you can see. Have a look, sir. But in a manner, please understand. Something which you can purchase for 47.5 today itself, you are ready to purchase the same thing in future at what price?
48.85. Am I clear? Then you may get a question, why they are not purchasing now? If they purchase right now, their working capital will get blocked. Come on.
They don't want to do that. I am continuing. Goods purchased on 1-1-2011 of US$10,000 for 45. Okay. Exchange rate on 31st March 2011 is how much sir?
If you look carefully, you have purchased the goods. So, it's a credit or transaction. It's a credit transaction of what sir? Purchase.
You have made a credit purchase, right? When you made a credit purchase, what is the dollar value? 45. Have a look sir here, I will write the answer here. Where should I write? Here I will write it better.
When you made a credit purchase on 1-1-2011, right sir? $1 was how much sir? $1 was 45. Super.
By the time you come to the balance sheet that is on 31st March 2011, $1 has become how much sir? 44. By the time you went for settlement on 7-7-2011, when you want to discharge the liability, $1 is only how much, sir? 43. So if you observe here, this is also a gain, this is also a gain. In both the cases, you are getting a gain. See how much gain you are getting.
In this case, you got a gain of Rs. 1. Here also you got a gain of how much, sir? Rs. 1 per dollar. Now think carefully, because you are dealing with a purchase transaction where you need to pay for the liability, If the liability comes down, obviously it will be a gain for you.
So here you got a gain of how much amount, sir? Here you got a gain of 1 rupee. Here also you got a gain of how much, sir? 1 rupee.
So if you multiply with 10,000 dollars, total 20,000 rupees gain you got. Up to 31st of March 2011, restatement gain is 10,000. Again on settlement, you got a settlement gain of how much, sir? 10,000.
Because the total transaction is for 10,000 dollars. Am I clear up to here? They close, sir.
Normal question is a very ordinary question. If you want, you can have a look at the answer. one sir. Here one 10,000 profit exchange profit again 10,000 profit which will be created to P&L account. Two times you got profit one on the balance sheet date upon settlement sorry upon restatement again 10,000 profit on settlement.
Am I clear sir? So, this completes your second question. I am going to the next question.
Sunshine Company Limited imported raw materials worth US$ 9000 on 25th February 2011. Ok. So, on 25th February 2011. you have purchased $9000 worth of raw materials. At that rate, what is the dollar rate?
Dollar rate is how much sir? 1 dollar is 44. The transaction was recorded in the books at the above mentioned date. The payment for the transaction was made on 10th April 2011 when the rate of exchange is how much sir? 48. So this is the settlement date.
Settlement happened on 10th April. But don't forget in between you got back balance sheet right and the year end 31st March the rate of exchange was how much sir 49 per US dollar so beach make our 31st March 2011 agia that is the balance sheet date do you agree on this balance sheet it what is the dollar rate one dollar has become how much sir 49 whoa huge then upon settlement when did you went for settlement sir you went for settlement on 10th of April 2011 Nietzsche the ID home on the day that's a settlement date settlement ke din what is the dollar rate one dollar has become how much sir 48 see there is no hurry first you think yourself is it a purchase transaction or sale transaction you have made a import of raw materials right so when you have made a import of raw materials you are dealing with a credit or transaction do you agree so you are dealing with what sir you are dealing with a liability ab liability se deal kar raha hai yaad rakho hai na bhai because you are dealing with a liability think only and answer a liability of 44 has become liability of of 49. So here you made a huge loss. Loss is 5 rupees per dollar.
Here 49 has become 48. Here you have made a gain of how much sir? 1 rupee. So here the total loss would be how much sir?
The total loss on restatement should be 9000 into 5 which should be 45000 and here the gain should be how much sir? Here the gain should be 9000 into 1. It should be how much, sir? 9000. This is your profit. This is your loss.
Am I clear? Now what they are asking you? They are asking you, the chief accountant of the company passed an entry on 31st March 2011 allowing the cost of raw materials consumed For the difference between, sorry, adjusting the cost of raw materials consumed for the difference between 48 and 44 per US dollar, discuss whether the treatment is justified as per AS11. Nonsense.
Accountant kya kar raha hai? Yeh dos dono ka difference hai na sir. 44 and 48. So the liability went upward by how much?
4 rupees. He want to treat this as inventory cost. No.
As per accounting standard 11, foreign exchange fluctuation gain or loss should be taken to what account? P&L account. Yeh compulsory upto P&L account lehna jaana padega.
So, there are two effects. One is there is a 45000 loss on restatement and again there is a 9000 profit on what sir settlement. There are two transactions here.
Accordingly you can disclose. If you want you can just pause and see the answer. If you want to pause and see the answer, then just see the answer. This is the answer. If you want you can just pause and see.
Pause and see the answer. Otherwise this is the simple answer. This is what it is. I am going to the next question. Mr. Bhai bought a forward contract for 3 months of US$ 2 lakhs on 31st December 2010 at US$ 44.1 when the exchange rate was 43.9.
On 31st December 2010, he bought a forward contract for 3 months of US$ 2 lakhs on 31st December 2010 at US$ 44.1 when the exchange rate was 43.9. December 2010, when he closed his books, exchange rate was how much sir? 1 US dollar 44.2.
On 31st of January 2011, he decided to sell the contract at 44.3 per dollar. Show how the profit from the contract will be recognized in the books of Mr. Pai. I request you please read the question again.
Because the question is on what you know? The question is on speculative. It's a forward contract.
It's a forward contract with speculative motive. He is speculating. Tell me, sir. Forward contract with speculative motive. Now do one thing carefully.
Don't be in a hurry. See, speculation is there. So whether you made a profit or whether you made a loss that we will understand only upon settlement.
Don't be in a hurry. There is no hurry. What is the forward rate?
Forward rate to buy is how much sir? One dollar is how much? forwarded to buy is how much sir?
3 months contract for 44.1 right? when the exchange rate was this is irrelevant sir, we don't need this Because under the forward, he is ready to buy the contract at what price sir? 44.1. Okay. On balance sheet date, what happened?
That's none of our business. Leave it. Then what happened sir? On 31st of January 2011, he decided to sell the contract.
So he is taking a reverse transaction. He has taken a sale transaction again. for one dollar at what price sir at 44.3 rupees therefore you observe this is the sale value this is the buy price he made a gain of 20 paisa right he made a 20 paisa per dollar therefore how many dollars it is 2 lakh dollar therefore the profit on contract the profit on contract would be 2 lakh dollars into 0.2 he made a total profit of how much sir 40 000 rupees am i clear therefore the total profit can be taken to pnl account only upon settlement so what i'll write here this profit this profit of 40 000 can be taken to can be taken to pnl account upon Settlement, advanced settlement of contract because try to understand.
In case of forward contracts, you really don't know whether you will make profit or loss. That is a future contract sir. A vendor contract today. But depending on the future only price fluctuations will come right. So whether you will make profit, whether you will make loss, you don't know.
You have to wait for settlement. Only upon settlement you will come to know whether you have made a gain or loss. Am I clear? So only then you will know and only then you will book.
Not now. So clear sir? You are getting it right?
Right, there are two more questions left. We will close this immediately. Stem Limited purchased a plant for US$30,000 on 30th November 2013, payable after 6 months.
Super. The company entered into a forward contract for 6 months at 62.15. Carefully understand.
The company required dollars in future, right? The company needs dollars in future. So, they have done what they have done.
Can I write? I am writing the solution here. For this question, there is a solution here. Solution I have written down.
What is the spot rate? Spot rate means right now if they buy the dollar, I don't know what is the rate now? The company entered into a forward contract for 6 months at 62.15. This is the contract rate.
On 30th November, the exchange rate is only how much, sir? The spot rate is 60.75. But under forward, they are ready to buy the contract at what price, sir? They are ready to buy the dollar at 62.15. Means you require dollars in future.
You could have bought the dollar today at what price? 60.75. But you are ready to buy in future at what price? 62.15.
So you will make a loss to yourself. How much loss will pay? You are ready to buy dollars at premium. 62.15 minus 60.75.
You are making a loss to yourself. How much sir? 1.4. Then what is the total loss in the contract?
the total loss in this contract or the premium would be 1.4 into how many dollars 30 000 it would be 42 000 now carefully listen this 42 000 rupees loss you need to spread it over the forward contract period the contract period is for how many months six months right so it will be december january february march april may for a chain minute spread karna so what you can do out of this 42 000 see here the motive is is non speculative. Sir how you can understand it is a speculative or non speculative. See they really require dollars so that they can make the payment for purchase of plant right. See there is a requirement requirement here company go that they want dollars so that they can make the payment after 6 months right.
So, they don't want to play with the dollar rate, they want to simply reduce the risk. So this 42,000 divided by 6 months is how much sir? 7,000.
December, January, February, March into 4 months. So what you can do is split this into 4 months and 2 months. Up to March, up to May. 28,000 loss you can book now, 14,000 loss you can book in the next year. Am I clear sir?
Check once if you want to get the answer. Yeah, right, I am right. 28,000 loss we can book now. Balance 14,000 loss you can book in the next year.
Something which could have been purchased for 60.75 right now, you are ready to purchase at 62.15. Chalta hai. Why?
Because if you purchase right now, you will block 60.75 into how much? 30,000 rupees you will block, sir, which is not required. Therefore, just by incurring a loss of 1.4 rupee per dollar, you are covering your exposure.
Am I clear, sir, up to here? This was a simple sum. This is a tricky sum sir, you will get confused. Example number 28. I am going next sum. Explain briefly the accounting treatment needed in the following cases as per AS 11 as on 31st March 2015. Easy.
Sunday data include amount receivable from Umesh, rupees. Now, think carefully. So, we have a data in our books.
We have a data in our books in dollars. How much you know? It is 5 lakhs divided by 58.5.
We will do it slowly. 5 lakhs divided by 58.5. it is 8547 dollars.
This is the value of data on the rate of transaction. Question kya hai? Excuse me.
Long term loan taken from a US company amounting to how much sir? Rs. 60 lakhs. It was recorded at US dollar 56.6. Okay.
This also you have given in rupees. This also you have to convert. Therefore long term loan.
dollars is how much you know it would be 60 lakhs divided by 55.6 so it is 60 divided by 55.6 or no 60 lakhs now do it 55.6, it is 1,07,913 rupees, sorry, 13.66 dollars. Am I clear? Okay, what they want?
It was recorded on that date at 55.6. Now, what happened, you know, on the balance sheet date, by the time you are coming to balance sheet date, the dollar rate has become how much, sir? By the time you are coming to the balance sheet, the dollar rate has become how much? 61.20. Now what to do?
Nothing to do. Listen carefully. I will write the answers in different color now.
This is what has happened. Now, on balance sheet date, on balance sheet date, 1 dollar has become home worth sir, how much it is? 60, 61.2, 61.2 rupees. Therefore, debtors should be restated upward, yes or no?
Debtors should be restated upward from 58.5 to 61.2 per dollar. Do you agree? Therefore, see debtor is an asset, right? When the asset will be restated upward, it would be a gain. Therefore, gain on restatement of debtors is equal to 8547 into 61.2 minus 58.5.
Easy. No hurry. It would be 61.2 minus 58.5 into 8547. Therefore, you will get a profit of how much?
You will get a profit of... Oh, I did it by mistake. 61.2 minus 58.5. How much is it? 2.7 into 8547. you are getting a profit of 23,077 rupees.
So, this much gain you should take to P&L account. Itna gain aara hai, leke jo P&L account mein. This much gain you should take to P&L account.
Am I clear, sir? Sir, what about loan transaction? Uske baare mein baat kar lete hain? Hello, loan ke baare mein baat karna padega na? What should you do with that?
This is the initial recognition. This is how the transaction got recognized. So, restatement you have to do.
Restatement of long term loan is also required. How much sir? Restatement of long term loan. If I am not wrong, even this is a loss.
Why loss? Because when a liability increases, it's a loss, right? How much? It should be 107,913.66 dollars into 61.2 minus 55.6. Initial recognition is 55.6.
So, how much, sir? It should be 61.2 minus 55.6. So, 5.6 into 1. 107913.66. So, you will get a total loss of 6,04,316 rupees loss you will get.
6,04,316. If the question is on company, check it. Question is on company. Because if the question is on company, we can follow MCA circular. If the question is not on company, this complete loss can be taken to which account?
You know, P&L account debit. By chance if the question is on company, in that case this loss should not be taken to penal account, it should be taken to foreign currency monetary item translation difference reserve account. If this is not the answer, if you are following MCA circular, this loss can be taken to foreign currency monetary item translation difference reserve account.
That's what your ICA also says. Because the question is on company or not, we don't know. There was no question on company, right? Question is silent.
Assuming, I am writing here. Assuming it's on Indian companies. Why Indian company? Assuming it's on company. And MCA notification is opted.
Because once you opt for MCA notification, no doubt you cannot withdraw it. And because the loan is a long term loan, not in relation to fixed asset, the gain or loss can be taken to foreign currency, monetary item, translation, difference reserve account. You can just go through once.
Pause and see. So there are two answers if you observe here. There are two answers here.
hello one there is a gain on restatement of retards second there is a loss but loss i am not taking to penal account i am taking to foreign currency monetary item translation differences of account am i clear remember don't forget mca circulars will apply only for what sir long-term loans not for detars detars kill mcs are planning to apply come on clear with this you can just pause it and have a look Am I clear sir? So, this completes what sir? Our accounting standard 11 we complete ho gaya. Now, what is the only standard left in group 2 now?
Accounting standard 20. That we will take in the next video. Thank you.