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CMA Final · Corporate Financial Reporting · Accounting of Financial Instruments

Meera Pharma Ltd extinguishes part of a loan, carrying amount Rs 80 lakh in total, by issuing shares. The portion extinguished has a carrying amount of Rs 20 lakh. The shares issued have a reliably measurable fair value of Rs 23 lakh on the date of extinguishment. What is the correct accounting?

Meera Pharma recognises a loss of Rs 3 lakh in profit or loss. The shares are measured at fair value Rs 23 lakh, exceeding the Rs 20 lakh carrying amount of the extinguished part, and the loan remaining is Rs 60 lakh.

  1. ALoss of Rs 3 lakh in profit or loss; loan remaining Rs 60 lakhCorrect
  2. BLoss of Rs 3 lakh in other equity; loan remaining Rs 60 lakh
  3. CGain of Rs 3 lakh in profit or loss; loan remaining Rs 60 lakh
  4. DNo gain or loss; shares recorded at Rs 20 lakh; loan remaining Rs 60 lakh

Explanation

Part of a liability can be extinguished and removed. Consideration is the fair value of shares, Rs 23 lakh, against carrying amount Rs 20 lakh, so the difference of Rs 3 lakh is a loss in profit or loss. The remaining loan is Rs 80 lakh - Rs 20 lakh = Rs 60 lakh.

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