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

On 1 April 2025, Arjun Ltd acquired 40% of the equity of Sagar Ltd for Rs 5,00,000. On that date Sagar's net worth was Rs 10,00,000 (share capital and reserves, book values equal fair values). For the year ended 31 March 2026 Sagar earned a profit of Rs 3,00,000 and paid no dividend. What is the carrying amount of the investment in Arjun's consolidated balance sheet at 31 March 2026?

The carrying amount is Rs 6,20,000. The investment is initially at cost of Rs 5,00,000, including goodwill of Rs 1,00,000, and is increased by Arjun's 40% share of Sagar's profit of Rs 1,20,000. No dividend was received, so nothing is deducted.

  1. ARs 6,20,000Correct
  2. BRs 5,00,000
  3. CRs 7,00,000
  4. DRs 6,00,000

Explanation

Share of net assets at acquisition = 40% x 10,00,000 = Rs 4,00,000, so goodwill = 5,00,000 - 4,00,000 = Rs 1,00,000, which stays embedded in the carrying amount. Share of profit = 40% x 3,00,000 = Rs 1,20,000. Carrying amount = 5,00,000 + 1,20,000 = Rs 6,20,000. Rs 6,00,000 wrongly ignores goodwill by sorting on net assets... it deducts nothing but misses the profit share arithmetic.

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