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CMA Final · Corporate Financial Reporting · Accounting of Financial Instruments

Meghna Infra Ltd owes Rs 2 crore (carrying amount) to a lender. On 31 March, the lender accepts 3 lakh shares for 40% of the liability, and the rest remains payable. Fair value of the shares on 31 March is Rs 25 per share, reliably measurable; on the date of the agreement earlier it was Rs 30. The extinguishment takes place on 31 March. What gain or loss is recognised?

The gain is Rs 5 lakh. The extinguished part is 40% of Rs 2 crore, i.e. Rs 80 lakh. Shares are measured at fair value on the extinguishment date, 3 lakh x Rs 25 = Rs 75 lakh, and the difference is recognised in profit or loss.

  1. AGain of Rs 5 lakhCorrect
  2. BGain of Rs 80 lakh
  3. CGain of Rs 5 crore
  4. DGain of Rs 4.25 crore

Explanation

Part extinguished = 40% x Rs 2 crore = Rs 80 lakh. Equity is measured at the date the liability is extinguished: 3,00,000 x Rs 25 = Rs 75 lakh. Gain = Rs 80 lakh - Rs 75 lakh = Rs 5 lakh. Using the earlier Rs 30 price would give a loss of Rs 10 lakh, which is wrong because the measurement date is the extinguishment date.

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