Page 30 - DCOM409_CONTEMPORARY_ACCOUNTING

Unit 2: Price Level Accounting

Calculation of Gain or Loss of Monetary Items Notes

Once the conversion factor and mid-point conversion factor are known, the next step is to
calculate gain or loss on monetary items.

Did u know? What are the monetary and non-monetary items?
Monetary items are those items that are fixed by contract or otherwise remain fixed
irrespective of any change in the general price level. Monetary items can either be monetary
assets or monetary liabilities. Examples of monetary items are cash, debtors, creditors,
outstanding expenses, and loan.
Value of non-monetary assets cannot be stated in fixed monetary amounts as they change
with the changes in the price level. The examples of non-monetary items include land,
building, plant, machinery, inventory of fixed goods and equity shares.

Example: Compute the net monetary result of Mohan Company Ltd. as at 31st December
2008 from the following particulars:

1.1.2008 31.12.2008
` `
Cash 500 1,000
Book Debts 2,000 2,500
Creditors 1,500 2,000
Loan 2,000 2,000
Retail Price Index Numbers are as follows:
January 1, 2008 200
December 31, 2008 300
Average for the year 240
Solution:
Calculation of conversion factors:
Conversion factor for items as on 1.1.2008: 300/200 = 1.5

Mid-term conversion factor for items arising during 2008: 300/240 = 1.25
Calculation of the increase or decrease in monetary assets/liabilities during 2008

as on 1.1.2008 as on 31.12.2008 Increase during 2008
(a) Monetary assets 2,500 3,500 1,000
(b) Monetary liabilities 3,500 4,000 500
Statement showing the net monetary result on account of price level changes

(i) Monetary liabilities as on 1.1.2008 should
have gone up with increase in price indices
(` 3,500x1.5) 5,250
(ii) Increase in monetary liabilities during 2008
which should have gone up with increase in
price indices (500 x 1.25) 625
Monetary liabilities on 31.12.2008 should
have stood at: 5,875
Contd...

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