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CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Anand Engineering Ltd. started the year with net assets (equity) of Rs 50,00,000. During the year it earned profit of Rs 9,00,000, paid dividends of Rs 3,00,000 and issued fresh shares for Rs 5,00,000. General price inflation was 10% and the company wants to maintain financial capital in real terms, with the new share issue assumed to occur at year end. What is the profit after maintaining real financial capital?

The profit after maintaining real financial capital is Rs 1,00,000. Closing equity before the share issue is Rs 56,00,000 after adding profit and deducting dividends. Opening capital of Rs 50,00,000 must grow by 10% inflation to Rs 55,00,000, so only the excess Rs 1,00,000 is real profit.

  1. ARs 9,00,000
  2. BRs 4,00,000
  3. CRs 1,00,000Correct
  4. DRs 6,00,000

Explanation

Closing equity before share issue = 50,00,000 + 9,00,000 - 3,00,000 = Rs 56,00,000. Capital to be maintained in real terms = 50,00,000 x 1.10 = Rs 55,00,000. Real profit = 56,00,000 - 55,00,000 = Rs 1,00,000. Rs 4,00,000 wrongly deducts the capital increase after adding the issue, and Rs 6,00,000 ignores the inflation adjustment but deducts dividends only.

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