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CA Intermediate · Advanced Accounting · AS 13 Accounting for Investments

Arjun Traders Ltd. purchased 1,000 equity shares of Zenith Ltd. for Rs 80 per share, paying Rs 80,000 in total, and this included a cum-dividend component. Shortly after, Zenith declared a dividend of Rs 5 per share for the previous year (face value Rs 10), which was received by Arjun Traders. The dividend related to the pre-acquisition period. What is the cost of the investment to be recorded after adjusting for the dividend?

The investment cost is Rs 75,000. Under AS 13, dividend received out of pre-acquisition profits is not income but a recovery of part of the cost, so Rs 5,000 is deducted from the Rs 80,000 paid, rather than credited to profit and loss.

  1. ARs 85,000
  2. BRs 80,000
  3. CRs 75,000Correct
  4. DRs 70,000

Explanation

Dividend received = 1,000 x 5 = 5,000, relating to the pre-acquisition period. Under AS 13, pre-acquisition dividend is deducted from the cost of investment. Cost = 80,000 - 5,000 = 75,000. Taking it to profit and loss would leave cost at 80,000, which is incorrect.

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