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CMA Final · Corporate Financial Reporting · Consolidated Financial Statements and Separate Financial Statements

A Ltd holds 30% of B Ltd, an associate, acquired at a cost of Rs 6,00,000. During the year B Ltd reports profit of Rs 4,00,000 and pays a dividend of Rs 1,00,000 in total. Ignoring any other adjustments, what is the carrying amount of the investment in A Ltd's consolidated balance sheet at year end under the equity method?

The carrying amount is Rs 6,90,000. Under the equity method the investment starts at cost of Rs 6,00,000, is increased by the 30% share of profit of Rs 1,20,000, and is reduced by the Rs 30,000 dividend share received, since dividends are a return of the investment.

  1. ARs 6,90,000Correct
  2. BRs 7,20,000
  3. CRs 6,00,000
  4. DRs 7,50,000

Explanation

Equity method: cost Rs 6,00,000 plus share of profit 30% x 4,00,000 = Rs 1,20,000, less dividend received 30% x 1,00,000 = Rs 30,000. Result is Rs 6,90,000. Rs 7,20,000 ignores the reduction for dividends received, which reduce the investment's carrying amount.

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