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CA Intermediate · Advanced Accounting · AS 13 Accounting for Investments

Arjun Ltd. acquired 1,000 equity shares of Sagar Ltd. (face value Rs 10) for Rs 25,000 cum-dividend. Sagar Ltd. had declared a dividend of 20% for the preceding year, out of pre-acquisition profits, and Arjun Ltd. received it after purchase. Applying AS 13, what is the cost of the investment to be carried and the amount credited to profit and loss for this dividend?

The investment is carried at Rs 23,000 and nothing is credited to profit and loss. Dividend of Rs 2,000 (20% on 1,000 shares of Rs 10) comes from pre-acquisition profits, so AS 13 treats it as a recovery of cost and reduces the carrying cost of the investment.

  1. ACost Rs 25,000; dividend Rs 2,000 credited to profit and loss
  2. BCost Rs 23,000; Rs 2,000 dividend credited to profit and loss
  3. CCost Rs 23,000; no credit to profit and lossCorrect
  4. DCost Rs 25,000; no credit to profit and loss

Explanation

Dividend = 20% x 10 x 1,000 = Rs 2,000, paid out of pre-acquisition profits. AS 13 requires such dividend to be deducted from the cost of the investment, not taken to income. Cost = 25,000 - 2,000 = 23,000. Crediting it to profit and loss would be wrong.

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