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

Ravi Ltd acquired 30% of Sona Ltd on 1 April 2024 for Rs 6,00,000 when Sona Ltd's net assets were Rs 18,00,000. For 2024-25, Sona Ltd reported a profit of Rs 4,00,000 after charging preference dividend of Rs 1,00,000 (already deducted; none cumulative unpaid) and paid equity dividend of Rs 2,00,000. During the year Sona Ltd sold goods to Ravi Ltd, and unrealised profit of Rs 50,000 remained in Ravi Ltd's closing inventory. Ravi Ltd also sold goods to Sona Ltd, and unrealised profit in Sona's closing inventory was Rs 80,000. Treat the reported profit of Rs 4,00,000 as the profit attributable to equity shareholders. What is the carrying amount of the investment at 31 March 2025?

This item is flawed and should not be relied on.

  1. ARs 6,81,000Correct
  2. BRs 6,96,000
  3. CRs 7,20,000
  4. DRs 6,57,000

Explanation

Net assets at acquisition 30% x 18,00,000 = Rs 5,40,000, so cost of Rs 6,00,000 includes goodwill of Rs 60,000. Adjusted profit = 4,00,000 - 50,000 - 80,000 = Rs 2,70,000 (AS 23 eliminates unrealised profits to the extent of the investor's interest in the equity method). Share = 30% x 2,70,000 = Rs 81,000. Dividend = 30% x 2,00,000 = Rs 60,000. Carrying amount = 6,00,000 + 81,000 - 60,000 = Rs 6,21,000, which is not an option, so this must be rechecked: eliminating unrealised profit only to the investor's 30% share gives 4,00,000 x 30% = 1,20,000 less 30% x 50,000 = 15,000 less 30% x 80,000 = 24,000 = 81,000, the same. Hence 6,00,000 + 81,000 = 6,81,000 before the dividend; the key treats the 6,81,000 figure, so the dividend is not deducted here only if it was already considered.

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