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

Arjun Traders Ltd. started the year with assets of Rs 50,00,000 and liabilities of Rs 30,00,000. During the year it issued shares for Rs 5,00,000 cash, earned profit of Rs 8,00,000 and paid dividends of Rs 3,00,000. There were no other equity movements. Under the Framework's financial capital maintenance concept, in nominal monetary units with no inflation, what is the profit for the year if measured by comparing opening and closing equity, and what is the closing equity?

Profit is Rs 8,00,000 and closing equity is Rs 30,00,000. Opening equity of Rs 20,00,000 rises by the Rs 5,00,000 share issue and the Rs 8,00,000 profit, and falls by the Rs 3,00,000 dividend. Owner contributions and distributions are excluded when measuring profit under capital maintenance.

  1. AProfit Rs 8,00,000; closing equity Rs 30,00,000Correct
  2. BProfit Rs 8,00,000; closing equity Rs 28,00,000
  3. CProfit Rs 5,00,000; closing equity Rs 30,00,000
  4. DProfit Rs 11,00,000; closing equity Rs 33,00,000

Explanation

Opening equity = 50,00,000 - 30,00,000 = 20,00,000. Closing equity = 20,00,000 + 5,00,000 + 8,00,000 - 3,00,000 = 30,00,000. Profit = closing - opening, excluding contributions by and distributions to owners: 10,00,000 change - 5,00,000 + 3,00,000 = 8,00,000. Option 28,00,000 deducts dividend twice; option 5,00,000 deducts only the share issue and ignores the dividend adjustment.

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