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CA Intermediate · Advanced Accounting · AS 13 Accounting for Investments

Sundaram Ltd. purchased 1,000 equity shares of Rao Ltd. (face value Rs 100) cum-dividend at Rs 260 per share on 1 October. The shares are a long-term investment. Rao Ltd. had declared a dividend of 10% for the preceding year, which was pre-acquisition and was received by Sundaram Ltd. later. Brokerage paid was Rs 5,000. As per AS 13, what is the carrying cost of the investment after treating the dividend correctly?

The carrying cost is Rs 2,55,000. Purchase price plus brokerage is Rs 2,65,000, but the Rs 10,000 dividend relates to the period before acquisition, so under AS 13 it is a recovery of cost and is deducted from the investment rather than taken to income.

  1. ARs 2,65,000
  2. BRs 2,55,000Correct
  3. CRs 2,50,000
  4. DRs 2,60,000

Explanation

Purchase = 1,000 x 260 = 2,60,000; add brokerage 5,000 = 2,65,000. The dividend is 10% of Rs 100,000... precisely 10% x Rs 100 x 1,000 = Rs 10,000, which is pre-acquisition and is deducted from cost. Cost = 2,65,000 - 10,000 = Rs 2,55,000. Rs 2,65,000 wrongly credits the dividend to profit and loss.

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