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CMA Intermediate · Corporate Accounting and Auditing · Cash Flow Statement

Sundaram Ltd acquired machinery on deferred payment terms. The instalment paid during the year was ₹5,00,000, comprising ₹4,20,000 towards the principal amount and ₹80,000 as interest. As per AS 3, how should this payment be classified?

The loan element of ₹4,20,000 is classified under investing activities and the interest element of ₹80,000 under financing activities. AS 3 says a single transaction can contain differently classified cash flows, and for deferred payment asset instalments the interest is financing while the loan element is investing.

  1. AEntire ₹5,00,000 under investing activities
  2. B₹4,20,000 under investing and ₹80,000 under financing activitiesCorrect
  3. C₹4,20,000 under financing and ₹80,000 under investing activities
  4. DEntire ₹5,00,000 under financing activities

Explanation

AS 3 states that when an instalment on a fixed asset acquired on deferred payment includes interest and loan, the interest element is financing and the loan element is investing. So ₹4,20,000 is investing and ₹80,000 is financing. Option C reverses the classification.

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