Skip to content

CMA Final · Corporate Financial Reporting · Accounting of Financial Instruments

Kaveri Power Ltd. owes ₹80,00,000 (carrying amount) to a lender. It issues 3,00,000 equity shares to extinguish the entire liability. The shares are unlisted and their fair value cannot be reliably measured. The fair value of the liability extinguished is ₹72,00,000. What is the amount at which the equity instruments are initially measured and the resulting profit or loss effect?

Equity is measured at ₹72,00,000 and a gain of ₹8,00,000 is recognised in profit or loss. Where the fair value of the shares cannot be reliably measured, they reflect the fair value of the liability extinguished, and the difference from the carrying amount is the gain.

  1. A₹80,00,000 equity; no gain or loss
  2. B₹72,00,000 equity; gain of ₹8,00,000Correct
  3. C₹72,00,000 equity; loss of ₹8,00,000
  4. D₹80,00,000 equity; gain of ₹8,00,000

Explanation

When the fair value of the equity cannot be reliably measured, the equity is measured to reflect the fair value of the liability extinguished, i.e. ₹72,00,000. The difference from the carrying amount of ₹80,00,000 is a gain of ₹8,00,000 in profit or loss. Using the carrying amount would wrongly hide the gain.

Did you get it right without looking?

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

Practise Accounting of Financial InstrumentsFree diagnostic mock

More Accounting of Financial Instruments questions