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CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Ranchi Steels Ltd. has opening equity of Rs 50,00,000. During the year, profit was Rs 9,00,000, it issued fresh shares for Rs 6,00,000 and paid dividends of Rs 3,00,000. Under the capital maintenance concept in financial terms (no price-level adjustment), what profit is measured for the year, and what is the closing equity?

Profit is Rs 9,00,000 and closing equity is Rs 62,00,000. Share issue and dividends are transactions with owners and do not alter profit, so equity equals 50,00,000 plus 9,00,000 plus 6,00,000 minus 3,00,000.

  1. AProfit Rs 9,00,000; closing equity Rs 62,00,000Correct
  2. BProfit Rs 6,00,000; closing equity Rs 62,00,000
  3. CProfit Rs 9,00,000; closing equity Rs 56,00,000
  4. DProfit Rs 12,00,000; closing equity Rs 62,00,000

Explanation

Profit under financial capital maintenance is the increase in net assets other than owner contributions and distributions. Closing equity = 50,00,000 + 9,00,000 + 6,00,000 - 3,00,000 = Rs 62,00,000. Profit stays Rs 9,00,000, because the share issue and dividend are owner transactions. Deducting dividend from profit (Rs 6,00,000) is the common mistake.

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