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

Meera Ltd holds 25% of the equity shares of Nirmal Ltd, an associate. Nirmal Ltd reported a profit after tax of ₹80,00,000 for the year. It has cumulative preference shares outstanding, and the preference dividend for the year of ₹10,00,000 has not been declared. Preference shares are held by outsiders. What share of the associate's profit should Meera Ltd include in its consolidated statement of profit and loss?

Meera should include ₹17,50,000. For cumulative preference shares, the associate's profit is first reduced by the preference dividend for the period, even though it is undeclared. That gives ₹70,00,000, and Meera's 25% share of this is ₹17,50,000.

  1. A₹20,00,000
  2. B₹22,50,000
  3. C₹17,50,000Correct
  4. D₹2,50,000

Explanation

For cumulative preference shares, the investor computes its share of profit after adjusting for the preference dividend for the period, whether or not declared. Adjusted profit = 80,00,000 − 10,00,000 = 70,00,000. Meera's share = 25% × 70,00,000 = 17,50,000. Using 25% of 80,00,000 gives 20,00,000, which ignores the preference dividend.

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