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CS Executive · Corporate Accounting and Financial Management · Consolidation of Accounts

Under AS 21, when the cost to the parent of its investment in a subsidiary is less than the parent's portion of equity of the subsidiary at the date of investment, how is the difference treated in the consolidated financial statements?

The difference is treated as a capital reserve in the consolidated financial statements. Under AS 21, when the parent's cost of investment is lower than its portion of the subsidiary's equity at the date of investment, the shortfall is a capital reserve, not goodwill or a profit and loss item.

  1. ATreated as goodwill and shown as an asset
  2. BTreated as a capital reserveCorrect
  3. CCharged to the consolidated statement of profit and loss
  4. DAdjusted against minority interest

Explanation

AS 21 provides that where cost of investment is less than the parent's portion of equity at the date of investment, the difference is treated as capital reserve. Goodwill arises only in the opposite case, where cost exceeds the parent's portion of equity.

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