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

Kiran Ltd holds 25% of Mehta Ltd, an associate, acquired at a cost of Rs 10,00,000 that included goodwill of Rs 1,00,000. During the year, Mehta Ltd earned a profit of Rs 8,00,000 and declared and paid a dividend of Rs 4,00,000. There were no other changes in Mehta Ltd's net worth. What is the carrying amount of the investment in Kiran Ltd's consolidated balance sheet at year end, assuming the acquisition was at the start of the year?

The carrying amount is Rs 11,00,000. Cost of Rs 10,00,000 is increased by the 25% share of profit, Rs 2,00,000, and reduced by the dividend received of Rs 1,00,000, since dividends are a return of investment and not income in the consolidated statements under the equity method.

  1. ARs 11,00,000Correct
  2. BRs 12,00,000
  3. CRs 10,00,000
  4. DRs 11,50,000

Explanation

Share of profit = 25% x 8,00,000 = Rs 2,00,000. Dividend received = 25% x 4,00,000 = Rs 1,00,000, which reduces the carrying amount under the equity method. Carrying amount = 10,00,000 + 2,00,000 - 1,00,000 = Rs 11,00,000. Rs 12,00,000 ignores the dividend.

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