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CA Intermediate · Advanced Accounting · AS 13 Accounting for Investments

Vaigai Ltd. held 10,000 equity shares of Cauvery Ltd. (face value Rs 10), bought at Rs 90 each, as a long-term investment. Cauvery Ltd. later made a rights issue of 1 share for every 5 held at Rs 40 per share. Vaigai Ltd. sold its entire rights entitlement (renunciation) for Rs 15 per right. What is the effect on Vaigai Ltd.'s accounts as per AS 13?

Vaigai Ltd. credits a profit of Rs 30,000 to the profit and loss account. It was entitled to 2,000 rights (10,000 divided by 5), sold at Rs 15 each. AS 13 treats the proceeds from renouncing rights as profit, leaving the original shares' cost unchanged.

  1. AProfit of Rs 30,000 credited to profit and loss accountCorrect
  2. BCarrying amount of the 10,000 shares reduced by Rs 30,000
  3. CProfit of Rs 1,50,000 credited to profit and loss account
  4. DCarrying amount of the 10,000 shares increased by Rs 30,000

Explanation

Rights entitled = 10,000/5 = 2,000 rights; proceeds = 2,000 x 15 = Rs 30,000. Under AS 13, the profit from renunciation of rights is recognised in the profit and loss account, and cost of the original shares is unchanged. Reducing carrying amount is wrong, since AS 13 says to credit the profit instead, and Rs 1,50,000 wrongly uses 10,000 rights.

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