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

Mahalaxmi Pvt Ltd holds 40% in Tara Foods Ltd, an associate. At the start of the year the carrying amount of the investment was ₹50 lakh. During the year Tara Foods reported a loss of ₹160 lakh. In the next year Tara Foods reported a profit of ₹60 lakh. No dividends were paid in either year and Mahalaxmi has no obligation to fund the associate's losses. Under AS 23, what is the carrying amount of the investment at the end of the second year?

The carrying amount is ₹10 lakh. In year one the share of loss, ₹64 lakh, exceeds the ₹50 lakh carrying amount, so the investment goes to nil and ₹14 lakh of loss is left unrecognised. In year two the share of profit, ₹24 lakh, is recognised only after setting off that ₹14 lakh.

  1. A₹10 lakhCorrect
  2. B₹24 lakh
  3. C₹0
  4. D₹38 lakh

Explanation

Year 1 share of loss is 40% × 160 = ₹64 lakh. The investment is reduced to nil and the unrecognised loss is 64 − 50 = ₹14 lakh. Year 2 share of profit is 40% × 60 = ₹24 lakh. Profit is recognised only after it equals the unrecognised losses, so 24 − 14 = ₹10 lakh is recognised. Recognising the full ₹24 lakh ignores the unrecognised losses.

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