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CA Intermediate · Advanced Accounting · AS 23 Accounting for Investments in Associates in Consolidated Financial Statements

Arjun Ltd acquired 40% of the equity shares of Bhavani Ltd on 1 April 2025 for ₹ 5,00,000. On that date, Arjun's share in the net assets of Bhavani (book value) was ₹ 4,40,000. For the year ended 31 March 2026, Bhavani reported a profit after tax of ₹ 3,00,000 and paid a dividend of ₹ 1,00,000 during the year. Under the equity method of AS 23, what is the carrying amount of the investment in Arjun's consolidated balance sheet at 31 March 2026?

The carrying amount is ₹ 5,80,000. Under the equity method, cost of ₹ 5,00,000 is increased by the 40% share of profit of ₹ 1,20,000 and reduced by the 40% share of dividend of ₹ 40,000, because dividends received are a return of investment.

  1. A₹ 5,80,000Correct
  2. B₹ 5,40,000
  3. C₹ 6,20,000
  4. D₹ 5,20,000

Explanation

Carrying amount = cost 5,00,000 + share of profit (40% x 3,00,000 = 1,20,000) - share of dividend (40% x 1,00,000 = 40,000) = 5,80,000. Goodwill of 60,000 is embedded in the carrying amount. Ignoring the dividend deduction gives 6,20,000, which is wrong because dividends reduce the carrying amount.

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