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CMA Intermediate · Corporate Accounting and Auditing · Cash Flow Statement

Meridian Ltd acquired machinery on deferred payment terms and paid an instalment of ₹5,00,000 during the year. Of this, ₹1,20,000 was interest and ₹3,80,000 was the loan element. How should this payment be classified as per AS 3?

Interest of ₹1,20,000 goes under financing activities and the loan element of ₹3,80,000 goes under investing activities. AS 3 says a single transaction with differently classified flows must be split, with interest as financing and the loan portion as investing for deferred-payment asset purchases.

  1. AEntire ₹5,00,000 under investing activities
  2. BEntire ₹5,00,000 under financing activities
  3. CInterest ₹1,20,000 under financing and loan element ₹3,80,000 under investingCorrect
  4. DInterest ₹1,20,000 under investing and loan element ₹3,80,000 under financing

Explanation

AS 3 states that when an instalment on a fixed asset acquired on deferred payment includes interest and loan, the interest element is classified under financing activities and the loan element under investing activities. Hence ₹1,20,000 is financing and ₹3,80,000 is investing. Option D reverses the classification.

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