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CMA Final · Corporate Financial Reporting · Accounting of Financial Instruments

Sagar Foods Ltd settles part of a loan only. The loan's total carrying amount is Rs 120 lakh. For Rs 30 lakh of the carrying amount, the company issues shares with a reliably measured fair value of Rs 36 lakh on the date that part of the liability is extinguished. What is the result in profit or loss for this part settlement?

A loss of Rs 6 lakh is recognised in profit or loss. The shares issued are measured at fair value of Rs 36 lakh, which exceeds the Rs 30 lakh carrying amount of the portion extinguished. Partial settlement is covered, and the balance of the loan remains outstanding.

  1. ALoss of Rs 6 lakhCorrect
  2. BGain of Rs 6 lakh
  3. CLoss of Rs 36 lakh
  4. DNo gain or loss because only part is settled

Explanation

Appendix D applies to all or part of a liability. Consideration paid is Rs 36 lakh against a carrying amount of Rs 30 lakh extinguished, so the difference is a loss of Rs 6 lakh in profit or loss. The remaining Rs 90 lakh stays as a liability. Saying no gain or loss ignores that part-extinguishment is within the scope.

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