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

Chandra Ltd acquired 25% of Dhruv Ltd on 1 April 2025 for ₹5,00,000. Net assets of Dhruv Ltd on that date were ₹24,00,000. For 2025-26, Dhruv Ltd earned a profit of ₹4,00,000 and declared and paid a dividend of ₹2,00,000 during the year. What is the carrying amount of Chandra Ltd's investment in Dhruv Ltd at 31 March 2026 in the consolidated financial statements?

The carrying amount is ₹5,50,000. Cost of ₹5,00,000 increases by the 25% profit share of ₹1,00,000 and decreases by the dividend received of ₹50,000, because dividends are a return of investment, not income, under the equity method.

  1. A₹5,00,000
  2. B₹5,50,000Correct
  3. C₹5,00,000 plus ₹1,00,000 profit share, giving ₹6,00,000
  4. D₹6,50,000

Explanation

Share of profit = 25% × ₹4,00,000 = ₹1,00,000. Dividend received = 25% × ₹2,00,000 = ₹50,000, which reduces the carrying amount under the equity method. Carrying amount = ₹5,00,000 + ₹1,00,000 − ₹50,000 = ₹5,50,000. Option ₹6,00,000 ignores the dividend. Capital reserve of ₹1,00,000 arises on acquisition (₹6,00,000 share of net assets vs ₹5,00,000 cost) but is already embedded in cost.

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