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CA Final · Financial Reporting · Financial Instruments: Equity and Financial Liabilities

Arjun Steels Ltd has a loan with a carrying amount of Rs 80 lakh. It issues equity shares to the lender to extinguish the loan in full. The shares have a reliably measurable fair value of Rs 72 lakh. How should the difference be treated?

Arjun Steels recognises a gain of Rs 8 lakh in profit or loss. The liability of Rs 80 lakh is removed, equity is recorded at fair value of Rs 72 lakh, and the difference between the carrying amount and the equity measured is the profit or loss on extinguishment.

  1. AGain of Rs 8 lakh recognised in profit or loss on extinguishmentCorrect
  2. BLoss of Rs 8 lakh recognised in profit or loss
  3. CRs 8 lakh credited to securities premium only, with no profit or loss effect
  4. DRs 8 lakh ignored because the liability is recorded at Rs 72 lakh

Explanation

The equity issued is consideration paid under the derecognition requirements and is measured at fair value, Rs 72 lakh. The difference between the carrying amount of Rs 80 lakh and Rs 72 lakh is Rs 8 lakh. It is a gain in profit or loss. A loss would arise only if fair value exceeded carrying amount.

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