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CA Final · Financial Reporting · Financial Instruments: Equity and Financial Liabilities

Meera Constructions Ltd owes Rs 1,20,00,000 to a bank. The bank accepts shares with a fair value of Rs 45,00,000 in settlement of part of the liability, and the remaining part continues. The carrying amount of the portion extinguished is Rs 50,00,000. Total carrying amount of the liability is Rs 1,20,00,000. What are the carrying amount of the remaining liability and the gain recognised?

The remaining liability is Rs 70 lakh and the gain is Rs 5 lakh. Only the extinguished part, carried at Rs 50 lakh, is removed; the shares are measured at fair value Rs 45 lakh, and the difference is recognised in profit or loss.

  1. ARs 70,00,000 remaining; gain Rs 5,00,000Correct
  2. BRs 75,00,000 remaining; gain Rs 5,00,000
  3. CRs 70,00,000 remaining; gain Rs 75,00,000
  4. DRs 75,00,000 remaining; gain nil

Explanation

Appendix D covers extinguishing all or part of a liability. Portion extinguished has carrying amount Rs 50 lakh; remaining liability = 120 - 50 = Rs 70 lakh. Equity is measured at fair value Rs 45 lakh, so gain = 50 - 45 = Rs 5 lakh in profit or loss. Rs 75 lakh results from deducting the share fair value from the total, which wrongly mixes bases.

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