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CA Intermediate · Advanced Accounting · AS 13 Accounting for Investments

Ganga Traders Ltd. purchased 1,000 equity shares of Yamuna Ltd. (face value Rs 10) cum-dividend at Rs 120 per share, total Rs 1,20,000. Shortly after, Yamuna Ltd. declared a pre-acquisition dividend of 20% of face value, which Ganga received. How should Ganga Traders account for the dividend and what is the carrying cost of the investment after receipt?

The Rs 2,000 dividend, being 20% of face value on 1,000 shares, is out of pre-acquisition profits. AS 13 requires it to be deducted from the cost of investment rather than taken to profit and loss, so the carrying cost falls from Rs 1,20,000 to Rs 1,18,000.

  1. ACredit Rs 2,000 to profit and loss; cost remains Rs 1,20,000
  2. BCredit Rs 2,000 to profit and loss; cost becomes Rs 1,18,000
  3. CDeduct Rs 2,000 from cost of investment; cost becomes Rs 1,18,000Correct
  4. DDeduct Rs 20,000 from cost; cost becomes Rs 1,00,000

Explanation

Dividend of 20% on face value Rs 10 is Rs 2 per share, i.e. 1,000 x 2 = Rs 2,000. Because it is out of pre-acquisition profits, AS 13 requires it to be deducted from the cost of the investment. Cost = 1,20,000 - 2,000 = Rs 1,18,000. Crediting it to profit and loss is wrong.

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