Skip to content

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

Ganga Pharma Ltd renegotiated a Rs 2 crore financial liability with a creditor and issued 10 lakh equity shares (face value Rs 10) on 31 March. Quoted price on that date was Rs 22 per share, but the creditor had agreed the terms a month earlier when the price was Rs 18. Carrying amount of the liability is Rs 2 crore. Which accounting is correct?

Ganga measures the shares at fair value on the date they are issued, Rs 22 each, totalling Rs 2.20 crore. Against the Rs 2 crore carrying amount, the Rs 20 lakh excess is recognised as a loss in profit or loss.

  1. AEquity at Rs 1.80 crore, gain Rs 20 lakh, using the price at the date of agreement
  2. BEquity at Rs 2.20 crore, loss Rs 20 lakh in profit or loss, using the price on the date of extinguishmentCorrect
  3. CEquity at Rs 2.00 crore, no gain or loss
  4. DEquity at Rs 1 crore face value, gain Rs 1 crore

Explanation

The equity is measured at fair value when issued to extinguish the liability: 10,00,000 x Rs 22 = Rs 2.20 crore. Compared with the carrying amount of Rs 2 crore, the difference of Rs 20 lakh is a loss in profit or loss. Option A uses the earlier price, which is not the measurement date.

Did you get it right without looking?

One question tells you little. A timed set on Financial Instruments: Equity and Financial Liabilities shows your real accuracy, how long you take and where you lose marks.

Practise Financial Instruments: Equity and Financial LiabilitiesFree diagnostic mock

More Financial Instruments: Equity and Financial Liabilities questions