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CA Final · Financial Reporting · Recognition and Derecognition of Financial Instruments

Lakshmi Foods Ltd has a term loan from Canara Bank with a carrying amount of Rs 50,00,000. The terms are renegotiated and the modification is assessed as a substantial modification, so it is accounted for as an extinguishment. The fair value of the new liability is Rs 48,00,000. The company pays Rs 1,50,000 as fees to the bank for the modification. What is the gain on extinguishment recognised in profit or loss?

The net gain is Rs 50,000. The extinguishment gain is the carrying amount of Rs 50,00,000 less the new liability's fair value of Rs 48,00,000, which is Rs 2,00,000. Fees of Rs 1,50,000 are part of the gain or loss on extinguishment, so they reduce it.

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

Explanation

Gain before fees = 50,00,000 - 48,00,000 = Rs 2,00,000. When the modification is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on extinguishment. Net gain = 2,00,000 - 1,50,000 = Rs 50,000. Option A is wrong because it ignores the fees; they are not spread over the new liability's term.

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