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CMA Final · Corporate Financial Reporting · Accounting of Financial Instruments

Kaveri Power Ltd settles a loan with carrying amount Rs 80,00,000 by issuing 3,00,000 shares of Rs 10 face value. The shares are unlisted and their fair value cannot be reliably measured. The fair value of the loan extinguished is determined as Rs 74,00,000. What amount is credited to equity for the shares and what is the profit or loss effect?

Equity is recorded at Rs 74,00,000, the fair value of the liability extinguished, because the share fair value is not reliably measurable. The Rs 6,00,000 difference from the Rs 80,00,000 carrying amount is recognised as a gain in profit or loss.

  1. AEquity Rs 74,00,000; gain Rs 6,00,000Correct
  2. BEquity Rs 80,00,000; gain nil
  3. CEquity Rs 30,00,000; gain Rs 50,00,000
  4. DEquity Rs 74,00,000; gain Rs 74,00,000

Explanation

Where share fair value cannot be reliably measured, the equity instruments are measured to reflect the fair value of the liability extinguished, Rs 74,00,000. The difference from the carrying amount, Rs 80,00,000 less Rs 74,00,000, is a Rs 6,00,000 gain in profit or loss. Carrying amount is not the basis for equity.

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