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CMA Final · Corporate Financial Reporting · Accounting of Financial Instruments

Narmada Infra Ltd has a term loan with carrying amount Rs 1,20,00,000. By renegotiation, it issues 4,00,000 shares (face value Rs 10) in full settlement of only Rs 40,00,000 of the carrying amount of the loan (a part); the balance continues. Shares have a reliable fair value of Rs 8 per share at the extinguishment date. Which statement is correct?

A gain of Rs 8,00,000 is recognised in profit or loss. The extinguished part, Rs 40,00,000, less shares at fair value of Rs 32,00,000 gives the gain, and it must be disclosed as a separate line item in profit or loss or in the notes.

  1. AGain of Rs 8,00,000 in profit or loss, disclosed as a separate line item or in the notesCorrect
  2. BGain of Rs 88,00,000 in profit or loss
  3. CLoss of Rs 8,00,000 in profit or loss
  4. DNo gain or loss, as only part of the liability is settled

Explanation

Part of a liability may be extinguished, and the part removed is Rs 40,00,000. Consideration = 4,00,000 x Rs 8 = Rs 32,00,000. Difference Rs 8,00,000 is a gain in profit or loss, disclosed separately in profit or loss or in the notes. The remaining Rs 80,00,000 is unaffected.

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