Page 21 - 35. FR APRIL 22 MTP QP ANSWERS

they will not be considered as related party.

Solution 6
(a) Either
The amount of borrowing cost to be capitalized requires determination of interest cost on foreign

currency loan and eligible exchange loss difference to be adjusted, if any.
(i) Interest on foreign currency loan for the period:
USD 20,000 x 5% = USD 1,000
Converted in `: USD 1,000 x ` 48/USD = `` 48,000
(ii) Increase in liability due to change in exchange difference:

USD 20,000 x (48 - 45) = ` 60,000
(iii) Interest that would have resulted if the loan was taken in Indian Currency:
USD 20,000 x ` 45/USD x 11% = ` 99,000
(iv) Difference between interest on foreign currency borrowings and interest on local currency
borrowings:
` 99,000 - 48,000 = ` 51,000

Since interest saving of ` 51,000 is less than the exchange loss of Rs. 60,000, exchange loss to the
extent of ` 51,000 will be capitalized as borrowing costs.
Therefore, total borrowing cost to be capitalized will be:
(1) Interest cost on borrowings in foreign currency ` 48,000

(2) Exchange difference to the extent considered to be an adjustment to interest cost ` 51,000
` 99,000
The remaining exchange loss of ` 9,000 (60,000 – 51,000) will be expensed off in the Statement
of Profit and loss.
(a) OR
Presented as disposal group held for sale

(1) PQR Ltd.’s fleet of vehicles is classified as held for sale because it constitutes a group of assets to be
sold in their present condition and the sale is highly probable at the reporting date (as a contract has
been entered into).
(2) DEF Ltd.’s sale of its retail business will not be completed until the final terms (e.g. of purchase price)
are agreed. However, the business is ready for immediate sale and the sale is highly probable to be

completed by April, 20X1. This implies that the retail business is a disposal group held for sale, unless
other evidence after the reporting date but before the financial statements are approved for issue, comes
to light to indicate the contrary.
Not presented as disposal group held for sale
(1) XYZ Ltd.’s shares in Alpha Ltd. are not available for an immediate sale as shareholders’ approval is
required. Also, no specific potential buyer has been identified. Taking these facts into consideration, it is

clear that the sale is not highly probable.

(b) Accounting treatment in the books of M Ltd. (Functional Currency Rupees)
M Ltd. will recognize sales of ` 996 lacs (12 lacs Euro x ` 83)

Profit on sale of inventory = ` 996 lacs – ` 830 lacs = ` 166 lacs.
On balance sheet date, receivable from G Ltd. will be translated at closing rate i.e. 1 Euro = ` 85.

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