Chapter 10: Consolidated Financial Statements - Test 4: answer key

Question 1 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Sterling Apparel Ltd. (SAL), an Indian garment manufacturer, prepares consolidated financial statements for the year ended 31 March 2027. During the year, SAL reviewed three strategic investments. It holds 24% of the voting power of Meridian Looms Ltd. (MLL), while a separate industrial investor holds 68%. SAL has no right to appoint MLL's board, but its representatives regularly participate in discussions on production budgets, pricing policy and major expansion plans. There is no agreement giving SAL control, and MLL is not a subsidiary or joint venture of SAL. SAL also owns 18% of Indigo Fabrics Ltd. (IFL). Under a shareholders' agreement, IFL must appoint SAL's nominee to its board and include SAL in its product-pricing and capital expenditure policy committee. These rights are substantive and have been exercised throughout the year. SAL does not control IFL. On 1 April 2026, SAL acquired 30% of the voting equity shares of Meridian Textiles Ltd. (MTL) for ₹34.50 lakh and obtained significant influence. MTL was neither a subsidiary nor a joint venture. Its acquisition-date balance sheet showed equity share capital of ₹70 lakh, general reserve of ₹20 lakh and retained earnings of ₹10 lakh. For the year ended 31 March 2027, MTL earned a profit after tax of ₹20 lakh. On 31 December 2026, it declared and paid a dividend of ₹5 lakh out of current-year profits. SAL received its entire entitlement and credited it to dividend income in its separate books. There were no other changes in MTL's equity, no impairment, no intra-group transactions and no differences in accounting policies. The finance team must determine the classification of the investees and the equity-method carrying amount of MTL.

Considering MLL's voting structure and SAL's participation in policy discussions, what is the appropriate classification of MLL under AS 23?

1. MLL is not an associate because another investor holds a substantial majority.
2. MLL is a subsidiary because SAL participates in major operational decisions.
3. MLL is an associate because SAL holds at least 20% of voting power. (correct answer)
4. MLL is a joint venture because SAL shares strategic discussions with another investor.

Answer: C — MLL is an associate because SAL holds at least 20% of voting power.

Explanation. SAL holds 24% of MLL's voting power, exceeding the 20% threshold under AS 23, paragraph 4. Significant influence is therefore presumed unless clearly disproved. MLL is neither controlled by SAL nor jointly controlled by it, so it qualifies as an associate. The fact that another investor holds 68% does not automatically prevent significant influence. The majority-ownership distractor incorrectly treats another shareholder's substantial holding as conclusive evidence against associate classification.

Where it goes wrong. Assuming that a majority shareholding by another investor automatically prevents the existence of significant influence.

Authority. AS 23, paras 3.1, 3.2 and 4

Question 2 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

SAL holds only 18% of IFL but enjoys substantive contractual rights to appoint a director and participate in pricing and capital expenditure policy decisions. What is the appropriate treatment?

1. Classify IFL as an associate because contractual rights demonstrate significant influence. (correct answer)
2. Treat IFL as an ordinary investment because the holding is below 20%.
3. Classify IFL as a subsidiary because board representation establishes control.
4. Exclude IFL because significant influence requires ownership of at least 25%.

Answer: A — Classify IFL as an associate because contractual rights demonstrate significant influence.

Explanation. Although SAL owns less than 20%, paragraph 4 permits significant influence to be established where the facts clearly demonstrate such power. Paragraph 5 identifies board representation and participation in policy-making processes as indicators of significant influence. The contractual rights are substantive and have been exercised. Since SAL cannot control IFL, the relationship is that of an associate. The below-20% option incorrectly treats the presumption as an absolute prohibition rather than a rebuttable presumption.

Where it goes wrong. Treating the 20% threshold as an absolute minimum instead of considering contractual and governance evidence.

Authority. AS 23, paras 3.1, 3.2, 4 and 5

Question 3 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Determine the goodwill arising on SAL's acquisition of its 30% interest in MTL on 1 April 2026.

1. Capital reserve of ₹4.50 lakh
2. Goodwill of ₹7.50 lakh
3. Capital reserve of ₹10.50 lakh
4. Goodwill of ₹4.50 lakh (correct answer)

Answer: D — Goodwill of ₹4.50 lakh

Explanation. MTL's acquisition-date net assets are ₹70 lakh + ₹20 lakh + ₹10 lakh = ₹100 lakh. SAL's share of these net assets is ₹100 lakh × 30% = ₹30 lakh. The acquisition cost is ₹34.50 lakh. Therefore, goodwill is ₹34.50 lakh − ₹30 lakh = ₹4.50 lakh. The difference represents goodwill because the investment cost exceeds the investor's share of equity. It is included in the carrying amount of the investment and disclosed separately under paragraph 12.

Where it goes wrong. Comparing investment cost with the entire net assets of the associate instead of the investor's proportionate share.

Authority. AS 23, paras 6, 11 and 12

Question 4 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Calculate the carrying amount of SAL's investment in MTL as at 31 March 2027 under the equity method.

1. ₹34.50 lakh
2. ₹39.00 lakh (correct answer)
3. ₹40.50 lakh
4. ₹36.60 lakh

Answer: B — ₹39.00 lakh

Explanation. The investment is initially recorded at ₹34.50 lakh. SAL's share of MTL's post-acquisition profit is ₹20 lakh × 30% = ₹6 lakh. Its dividend entitlement is ₹5 lakh × 30% = ₹1.50 lakh. Under the equity method, the investor's share of profits increases the investment carrying amount, whereas distributions reduce it. Therefore, the closing amount is ₹34.50 lakh + ₹6 lakh − ₹1.50 lakh = ₹39 lakh. Retaining dividend income without reducing the investment would overstate its carrying amount.

Where it goes wrong. Crediting the entire associate dividend to income without reducing the equity-method investment.

Authority. AS 23, para 6

Question 5 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Zenith Technologies Ltd. (ZTL) acquired 30% of the voting equity shares of Aster Mechatronics Ltd. (AML) on 1 April 2026 for ₹45 lakh. The investment gives ZTL significant influence but not control or joint control. AML's equity on the acquisition date comprised share capital of ₹80 lakh and accumulated reserves of ₹40 lakh. For the year ended 31 March 2027, AML earned a profit after tax of ₹30 lakh and declared and paid a dividend of ₹6 lakh out of post-acquisition profits. ZTL has recognised its dividend receipt as income in its separate financial statements. During the year, ZTL sold goods to AML for ₹25 lakh. The goods had cost ZTL ₹20 lakh. At 31 March 2027, 40% of these goods remained in AML's inventory and had not been sold outside the group. In a separate transaction, AML sold goods to ZTL for ₹20 lakh; those goods had cost AML ₹16 lakh. At the reporting date, 75% of this second consignment remained in ZTL's inventory. Both transactions were made at normal commercial prices, and the goods were correctly recorded by the respective buyer and seller. No impairment or recoverability issue exists. The management accountant has suggested eliminating the entire profit on both transactions from AML's results and has also proposed reducing the equity-method investment by the total unrealised profit without considering ZTL's ownership percentage. The finance director asks for the correct treatment under AS 23, including the acquisition-date goodwill, share of post-acquisition results, dividends received and the investor's proportionate interest in unrealised profits. Assume there are no other movements in AML's equity and no additional adjustments.

Calculate the goodwill arising on ZTL's acquisition of its 30% interest in AML.

1. Capital reserve of ₹9 lakh
2. Goodwill of ₹9 lakh (correct answer)
3. Goodwill of ₹15 lakh
4. Capital reserve of ₹15 lakh

Answer: B — Goodwill of ₹9 lakh

Explanation. AML's acquisition-date net assets are ₹80 lakh share capital plus ₹40 lakh accumulated reserves, totalling ₹120 lakh. ZTL's 30% share is ₹36 lakh. The investment cost is ₹45 lakh. Accordingly, goodwill is ₹45 lakh − ₹36 lakh = ₹9 lakh. This goodwill is included in the carrying amount of the associate investment and separately disclosed. Capital reserve would arise only if the investor's share in acquisition-date net assets exceeded the acquisition cost.

Where it goes wrong. Reversing the goodwill and capital reserve calculation by subtracting investment cost from the investor's share of net assets.

Authority. AS 23, paras 6, 11 and 12

Question 6 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

What unrealised profit should be eliminated to the extent of ZTL's interest in AML in respect of the goods sold by ZTL to AML?

1. ₹2.00 lakh
2. ₹1.00 lakh
3. ₹0.75 lakh
4. ₹0.60 lakh (correct answer)

Answer: D — ₹0.60 lakh

Explanation. ZTL's total profit on the transfer is ₹25 lakh − ₹20 lakh = ₹5 lakh. Since 40% of the goods remain unsold, unrealised profit is ₹5 lakh × 40% = ₹2 lakh. Under AS 23, only the investor's 30% interest in the unrealised profit is eliminated: ₹2 lakh × 30% = ₹0.60 lakh. The entire ₹2 lakh elimination would incorrectly apply AS 21's full subsidiary-consolidation approach instead of the proportionate elimination prescribed by AS 23.

Where it goes wrong. Eliminating all of an unrealised profit in an associate transaction instead of eliminating only the investor's proportionate interest.

Authority. AS 23, para 13

Question 7 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

What amount of unrealised profit should be eliminated to the extent of ZTL's interest in AML in respect of the goods sold by AML to ZTL?

1. ₹0.90 lakh (correct answer)
2. ₹1.20 lakh
3. ₹3.00 lakh
4. ₹0.75 lakh

Answer: A — ₹0.90 lakh

Explanation. AML earned a profit of ₹20 lakh − ₹16 lakh = ₹4 lakh on the sale. Seventy-five per cent remains unsold, giving unrealised profit of ₹4 lakh × 75% = ₹3 lakh. ZTL's 30% interest is ₹3 lakh × 30% = ₹0.90 lakh. This amount is eliminated when applying the equity method. The ₹3 lakh alternative incorrectly eliminates the associate's entire profit rather than only the investor's interest, while using the 25% ownership of outside parties would reverse the allocation.

Where it goes wrong. Applying the wrong ownership percentage or eliminating the full unrealised upstream profit instead of only the investor's interest.

Authority. AS 23, para 13

Question 8 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Determine the carrying amount of ZTL's investment in AML at 31 March 2027 after all relevant equity-method adjustments.

1. ₹52.50 lakh
2. ₹51.00 lakh
3. ₹50.70 lakh (correct answer)
4. ₹53.10 lakh

Answer: C — ₹50.70 lakh

Explanation. The investment begins at ₹45 lakh. ZTL's share of AML's profit is ₹30 lakh × 30% = ₹9 lakh. Its share of the dividend is ₹6 lakh × 30% = ₹1.80 lakh. Unrealised profit elimination comprises ₹0.60 lakh on ZTL's sale and ₹0.90 lakh on AML's sale, totalling ₹1.50 lakh. The closing carrying amount is ₹45 lakh + ₹9 lakh − ₹1.80 lakh − ₹1.50 lakh = ₹50.70 lakh. Ignoring either transaction would overstate the investment.

Where it goes wrong. Forgetting to deduct the investor's share of unrealised profit from both directions of associate transactions.

Authority. AS 23, paras 6 and 13

Question 9 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Vardhan Health Ltd. (VHL) acquired 35% of the voting equity shares of Medica Diagnostics Ltd. (MDL) on 1 April 2024 for ₹28 lakh. The investment gave VHL significant influence, but not control or joint control. At acquisition, MDL's net assets were ₹60 lakh. VHL has applied the equity method in its consolidated financial statements from the date the investment qualified as an associate. No dividends, revaluations or other changes in MDL's equity occurred during the periods below. MDL incurred a loss of ₹50 lakh for the year ended 31 March 2025 and a further loss of ₹40 lakh for the year ended 31 March 2026. VHL has no guarantee, binding commitment or other obligation to fund MDL's losses, and it has not made payments on MDL's behalf. MDL then earned a profit of ₹8 lakh in 2026-27 and a profit of ₹12 lakh in 2027-28. All stated profits and losses are after tax and accrue evenly, although each year's results are available as actual annual figures. There are no inter-company transactions or unrealised profits. The audit committee is concerned that the equity-method investment may be presented below zero after consecutive losses. The finance controller proposes recognising VHL's share of every subsequent loss and profit without interruption, while the external auditor refers to the limitation on recognising losses once the investment's carrying amount reaches nil. The committee requires a year-by-year reconciliation showing the recognised share of losses, the amount of losses not recognised, the effect of later profits and the carrying amount of the investment at 31 March 2025, 2026, 2027 and 2028.

What is the carrying amount of VHL's investment in MDL as at 31 March 2025 after recognising VHL's share of the first year's loss?

1. ₹10.50 lakh (correct answer)
2. ₹17.50 lakh
3. ₹0.00 lakh
4. ₹28.00 lakh

Answer: A — ₹10.50 lakh

Explanation. VHL initially records the investment at ₹28 lakh. Its 35% share of MDL's first-year loss is ₹50 lakh × 35% = ₹17.50 lakh. The carrying amount is reduced by the recognised share of the loss: ₹28 lakh − ₹17.50 lakh = ₹10.50 lakh. The amount is not reduced to zero because the investor's share of the first-year loss does not exhaust the original investment. Paragraph 6 requires post-acquisition losses to reduce the equity-method carrying amount.

Where it goes wrong. Applying the nil-carrying-amount restriction prematurely when the investor's share of losses is still less than the investment balance.

Authority. AS 23, paras 6 and 18

Question 10 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

At 31 March 2026, what should be the carrying amount of VHL's investment in MDL and the amount of loss that remains unrecognised?

1. Carrying amount ₹3.50 lakh; unrecognised loss ₹0 lakh
2. Carrying amount ₹0 lakh; unrecognised loss ₹0 lakh
3. Carrying amount ₹0 lakh; unrecognised loss ₹3.50 lakh (correct answer)
4. Carrying amount ₹3.50 lakh; unrecognised loss ₹10.50 lakh

Answer: C — Carrying amount ₹0 lakh; unrecognised loss ₹3.50 lakh

Explanation. At 1 April 2025, the investment carried ₹10.50 lakh. VHL's share of the second-year loss is ₹40 lakh × 35% = ₹14 lakh. AS 23 permits recognition only up to the remaining carrying amount of ₹10.50 lakh. The investment therefore reaches nil and the excess loss of ₹14 lakh − ₹10.50 lakh = ₹3.50 lakh remains unrecognised. As VHL has no binding obligation or guarantee, it cannot recognise the excess as an additional liability.

Where it goes wrong. Recognising the entire share of the associate's loss even after the investment carrying amount has reached nil.

Authority. AS 23, para 18

Question 11 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

What amount of VHL's share of MDL's 2026-27 profit can be recognised under the equity method, and what unrecognised loss remains?

1. Recognised profit ₹2.80 lakh; unrecognised loss ₹0 lakh
2. Recognised profit ₹0 lakh; unrecognised loss ₹0.70 lakh (correct answer)
3. Recognised profit ₹0.70 lakh; unrecognised loss ₹0 lakh
4. Recognised profit ₹2.10 lakh; unrecognised loss ₹0.70 lakh

Answer: B — Recognised profit ₹0 lakh; unrecognised loss ₹0.70 lakh

Explanation. VHL's share of the 2026-27 profit is ₹8 lakh × 35% = ₹2.80 lakh. However, ₹3.50 lakh of losses from the earlier year remains unrecognised. Under paragraph 18, the investor resumes recognising profits only after its share of subsequent profits equals the previously unrecognised losses. Consequently, the entire ₹2.80 lakh offsets the earlier loss, leaving ₹0.70 lakh unrecognised. No profit is credited to the consolidated statement of profit and loss in this year.

Where it goes wrong. Resuming profit recognition immediately when an associate returns to profitability without first recovering previously unrecognised losses.

Authority. AS 23, para 18

Question 12 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Calculate the amount of MDL's 2027-28 profit that VHL may recognise and the resulting carrying amount of its investment at 31 March 2028.

1. Recognised profit ₹4.20 lakh; carrying amount ₹4.20 lakh
2. Recognised profit ₹0.70 lakh; carrying amount ₹0.70 lakh
3. Recognised profit ₹2.80 lakh; carrying amount ₹2.80 lakh
4. Recognised profit ₹3.50 lakh; carrying amount ₹3.50 lakh (correct answer)

Answer: D — Recognised profit ₹3.50 lakh; carrying amount ₹3.50 lakh

Explanation. VHL's share of the 2027-28 profit is ₹12 lakh × 35% = ₹4.20 lakh. The unrecognised loss brought forward is ₹0.70 lakh. This must first be recovered, leaving ₹4.20 lakh − ₹0.70 lakh = ₹3.50 lakh as recognised profit. Since the investment previously had a nil carrying amount, the recognised amount also becomes its closing carrying value of ₹3.50 lakh. Recognising the entire ₹4.20 lakh would ignore the remaining unrecognised loss.

Where it goes wrong. Recognising the full share of later profits instead of first recovering the remaining unrecognised share of earlier losses.

Authority. AS 23, para 18

Question 13 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Pioneer Ltd. holds exactly 20% of the voting power in Summit Industries Ltd. A different investor owns 72% of Summit's voting power. Pioneer has no control rights or joint control arrangement. What is the appropriate conclusion under AS 23?

Pioneer Ltd. holds exactly 20% of the voting power in Summit Industries Ltd. A different investor owns 72% of Summit's voting power. Pioneer has no control rights or joint control arrangement. What is the appropriate conclusion under AS 23?

1. Summit cannot be an associate because another investor controls the majority voting power.
2. Summit is presumed to be an associate because the 20% voting-power threshold is met. (correct answer)
3. Summit must be treated as a subsidiary because its 20% interest is significant.
4. Summit cannot be an associate unless Pioneer owns more than 25% of voting power.

Answer: B — Summit is presumed to be an associate because the 20% voting-power threshold is met.

Explanation. AS 23, paragraph 4, presumes significant influence where the investor holds 20% or more of voting power. Exactly 20% satisfies the threshold. The fact that another investor holds 72% does not automatically prevent Pioneer from exercising significant influence. Summit is not a subsidiary of Pioneer because Pioneer lacks control. The 25% option introduces a threshold that does not exist in AS 23. The presumption remains rebuttable by evidence demonstrating absence of significant influence.

Where it goes wrong. Replacing the prescribed 20% threshold with an assumed higher threshold or treating another investor's majority holding as conclusive.

Authority. AS 23, paras 3.1, 3.2 and 4

Question 14 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. A Ltd. owns 17% of B Ltd. Under a binding agreement, A Ltd. has the right to appoint a representative to B Ltd.'s board and participates in its annual operating-policy and budget decisions. A Ltd. cannot control B Ltd. Which treatment is appropriate?

A Ltd. owns 17% of B Ltd. Under a binding agreement, A Ltd. has the right to appoint a representative to B Ltd.'s board and participates in its annual operating-policy and budget decisions. A Ltd. cannot control B Ltd. Which treatment is appropriate?

1. Treat B Ltd. as an ordinary investment because ownership is below 20%.
2. Treat B Ltd. as a subsidiary because board representation exists.
3. Treat B Ltd. as a joint venture because budget discussions are shared.
4. Treat B Ltd. as an associate because contractual rights establish significant influence. (correct answer)

Answer: D — Treat B Ltd. as an associate because contractual rights establish significant influence.

Explanation. A 17% investment would ordinarily create a presumption of no significant influence. However, paragraphs 4 and 5 allow that presumption to be overcome by clear evidence. A's contractual board representation and actual participation in policy-making demonstrate the power to participate in B's financial and operating decisions. As these rights do not amount to control or joint control, B qualifies as an associate and the equity method applies in consolidated financial statements.

Where it goes wrong. Considering only the percentage shareholding and ignoring contractual evidence of significant influence.

Authority. AS 23, paras 3.1, 3.2, 4 and 5

Question 15 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. An investor holds 24% of the voting power of an investee. However, a legally binding agreement restricts the investor to protective rights, gives an independent administrator exclusive responsibility for all ordinary policy decisions and prevents board representation, policy participation and managerial interchange. No material transactions or essential technical-information arrangements exist. What is the appropriate AS 23 conclusion?

An investor holds 24% of the voting power of an investee. However, a legally binding agreement restricts the investor to protective rights, gives an independent administrator exclusive responsibility for all ordinary policy decisions and prevents board representation, policy participation and managerial interchange. No material transactions or essential technical-information arrangements exist. What is the appropriate AS 23 conclusion?

1. Significant influence exists automatically because 24% voting power exceeds 20%.
2. The investee is a joint venture because the investor's rights are restricted.
3. The presumption of significant influence may be rebutted by the stated evidence. (correct answer)
4. The investee is a subsidiary because the investor holds more than 20%.

Answer: C — The presumption of significant influence may be rebutted by the stated evidence.

Explanation. The 24% holding initially creates a presumption of significant influence under paragraph 4. However, that presumption is not absolute. The legally binding arrangements restrict the investor to protective rights and prevent participation in financial and operating policy decisions. The absence of the indicators in paragraph 5 supports rebutting the presumption. The percentage alone is therefore insufficient when the substantive rights clearly demonstrate that significant influence does not exist.

Where it goes wrong. Treating the 20% presumption as irrebuttable even when the investor's substantive rights demonstrate that significant influence is absent.

Authority. AS 23, paras 3.1, 3.2, 4 and 5

Question 16 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Kaveri Ltd. acquires 25% of the equity shares of Delta Ltd. for ₹18 lakh. Delta's net assets on the acquisition date are ₹80 lakh. Determine the capital reserve or goodwill arising and the initial carrying amount of the investment under the equity method.

Kaveri Ltd. acquires 25% of the equity shares of Delta Ltd. for ₹18 lakh. Delta's net assets on the acquisition date are ₹80 lakh. Determine the capital reserve or goodwill arising and the initial carrying amount of the investment under the equity method.

1. Capital reserve ₹2 lakh; initial investment ₹18 lakh (correct answer)
2. Goodwill ₹2 lakh; initial investment ₹20 lakh
3. Capital reserve ₹2 lakh; initial investment ₹20 lakh
4. Goodwill ₹2 lakh; initial investment ₹18 lakh

Answer: A — Capital reserve ₹2 lakh; initial investment ₹18 lakh

Explanation. Kaveri's share of Delta's acquisition-date net assets is ₹80 lakh × 25% = ₹20 lakh. This exceeds the investment cost of ₹18 lakh by ₹2 lakh, giving rise to capital reserve. Nevertheless, under paragraph 6, the equity-method investment is initially recorded at cost, namely ₹18 lakh. The capital reserve is incorporated in the carrying amount reconciliation and disclosed separately. Showing the investment initially at ₹20 lakh would ignore the acquisition cost measurement.

Where it goes wrong. Recording the investor's proportionate share of net assets as the initial investment instead of recording the actual cost.

Authority. AS 23, paras 6, 11 and 12

Question 17 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. R Ltd. acquired 25% of S Ltd. for ₹32 lakh. During the subsequent year, S Ltd. earned a profit of ₹36 lakh and distributed a dividend of ₹8 lakh. Calculate the closing carrying amount of the associate investment under the equity method.

R Ltd. acquired 25% of S Ltd. for ₹32 lakh. During the subsequent year, S Ltd. earned a profit of ₹36 lakh and distributed a dividend of ₹8 lakh. Calculate the closing carrying amount of the associate investment under the equity method.

1. ₹40 lakh
2. ₹30 lakh
3. ₹38 lakh
4. ₹39 lakh (correct answer)

Answer: D — ₹39 lakh

Explanation. The initial carrying amount is ₹32 lakh. R's share of S's profit is ₹36 lakh × 25% = ₹9 lakh. Its share of the dividend is ₹8 lakh × 25% = ₹2 lakh. Under the equity method, the share of profit increases the investment, while distributions reduce the carrying amount. Therefore, the closing carrying amount is ₹32 lakh + ₹9 lakh − ₹2 lakh = ₹39 lakh. Treating the dividend as additional income without reducing the investment would result in overstatement.

Where it goes wrong. Recognising the dividend as an additional return without reducing the investment carrying amount.

Authority. AS 23, para 6

Question 18 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. On 1 October 2026, Nova Ltd. acquired 30% of Alpha Ltd. for ₹22 lakh and obtained significant influence. Alpha earned a profit of ₹12 lakh evenly throughout 2026-27. It also declared and paid a post-acquisition dividend of ₹3 lakh. What is the carrying amount of Nova's investment as at 31 March 2027?

On 1 October 2026, Nova Ltd. acquired 30% of Alpha Ltd. for ₹22 lakh and obtained significant influence. Alpha earned a profit of ₹12 lakh evenly throughout 2026-27. It also declared and paid a post-acquisition dividend of ₹3 lakh. What is the carrying amount of Nova's investment as at 31 March 2027?

1. ₹24.70 lakh
2. ₹22.90 lakh (correct answer)
3. ₹23.80 lakh
4. ₹25.60 lakh

Answer: B — ₹22.90 lakh

Explanation. The initial investment is ₹22 lakh. Since significant influence arose on 1 October, only six months of Alpha's annual profit is post-acquisition: ₹12 lakh × 6/12 = ₹6 lakh. Nova's share is ₹6 lakh × 30% = ₹1.80 lakh. The dividend received is ₹3 lakh × 30% = ₹0.90 lakh and reduces the investment. Therefore, the closing carrying amount is ₹22 lakh + ₹1.80 lakh − ₹0.90 lakh = ₹22.90 lakh.

Where it goes wrong. Including the full-year associate profit instead of restricting the equity-method adjustment to the period after significant influence commenced.

Authority. AS 23, paras 6 and 11

Question 19 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Investor Ltd. owns 25% of Associate Ltd. Investor sold inventory costing ₹10 lakh to the associate for ₹14 lakh. At the reporting date, 50% of the goods remained unsold in the associate's inventory. Calculate the unrealised profit to be eliminated under AS 23.

Investor Ltd. owns 25% of Associate Ltd. Investor sold inventory costing ₹10 lakh to the associate for ₹14 lakh. At the reporting date, 50% of the goods remained unsold in the associate's inventory. Calculate the unrealised profit to be eliminated under AS 23.

1. ₹2.00 lakh
2. ₹1.00 lakh
3. ₹0.50 lakh (correct answer)
4. ₹4.00 lakh

Answer: C — ₹0.50 lakh

Explanation. The total internal profit is ₹14 lakh − ₹10 lakh = ₹4 lakh. Since 50% of the goods remain unsold, unrealised profit is ₹4 lakh × 50% = ₹2 lakh. Under paragraph 13, the elimination is restricted to the investor's 25% interest. Thus, ₹2 lakh × 25% = ₹0.50 lakh is eliminated. The ₹2 lakh option would be appropriate to a full subsidiary-consolidation adjustment, not the equity-method treatment of an associate.

Where it goes wrong. Eliminating the entire unrealised profit rather than the investor's proportionate interest under the equity method.

Authority. AS 23, para 13

Question 20 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. An associate in which the investor holds 40% sells inventory costing ₹15 lakh to the investor for ₹18 lakh. One-third of the goods remain unsold at the reporting date. Determine the unrealised profit adjustment under AS 23.

An associate in which the investor holds 40% sells inventory costing ₹15 lakh to the investor for ₹18 lakh. One-third of the goods remain unsold at the reporting date. Determine the unrealised profit adjustment under AS 23.

1. ₹0.40 lakh (correct answer)
2. ₹1.00 lakh
3. ₹1.20 lakh
4. ₹0.80 lakh

Answer: A — ₹0.40 lakh

Explanation. The associate's profit on the sale is ₹18 lakh − ₹15 lakh = ₹3 lakh. One-third remains unsold, so unrealised profit is ₹3 lakh × 1/3 = ₹1 lakh. The investor's share is ₹1 lakh × 40% = ₹0.40 lakh. This amount is eliminated from the investor's share of the associate's results under the equity method. The entire ₹1 lakh is not eliminated because AS 23 limits the adjustment to the investor's interest in the associate.

Where it goes wrong. Applying the entire unrealised profit adjustment to an associate transaction without restricting it to the investor's percentage interest.

Authority. AS 23, para 13

Question 21 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. An investor has an equity-method carrying amount of ₹3.60 lakh in an associate in which it holds 30%. During the current year, the associate incurs a loss of ₹18 lakh. The investor has no obligation to fund the associate and has not made payments on its behalf. What is the appropriate treatment?

An investor has an equity-method carrying amount of ₹3.60 lakh in an associate in which it holds 30%. During the current year, the associate incurs a loss of ₹18 lakh. The investor has no obligation to fund the associate and has not made payments on its behalf. What is the appropriate treatment?

1. Recognise a further loss of ₹1.80 lakh and report a negative investment.
2. Recognise the entire ₹5.40 lakh loss and create a liability for the excess.
3. Recognise only ₹1.80 lakh and retain an investment balance of ₹1.80 lakh.
4. Reduce the investment to nil and leave ₹1.80 lakh of losses unrecognised. (correct answer)

Answer: D — Reduce the investment to nil and leave ₹1.80 lakh of losses unrecognised.

Explanation. The investor's share of the associate's loss is ₹18 lakh × 30% = ₹5.40 lakh. However, its investment carrying amount is only ₹3.60 lakh. Under paragraph 18, losses are recognised only to the extent of the carrying amount, reducing it to nil. The excess ₹5.40 lakh − ₹3.60 lakh = ₹1.80 lakh remains unrecognised because the investor has no binding obligation or payment commitment. A negative investment balance cannot ordinarily be recognised.

Where it goes wrong. Recognising losses beyond the nil carrying amount despite having no guarantee or other obligation to fund the associate.

Authority. AS 23, para 18

Question 22 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. An investor owns 40% of an associate and has a carrying amount of ₹2.40 lakh immediately before recognising the current year's losses. The associate incurs a loss of ₹12 lakh. The investor has a binding guarantee requiring it to meet up to ₹0.80 lakh of the associate's obligations. What additional liability should be recognised after reducing the investment to nil?

An investor owns 40% of an associate and has a carrying amount of ₹2.40 lakh immediately before recognising the current year's losses. The associate incurs a loss of ₹12 lakh. The investor has a binding guarantee requiring it to meet up to ₹0.80 lakh of the associate's obligations. What additional liability should be recognised after reducing the investment to nil?

1. ₹0 lakh
2. ₹0.80 lakh (correct answer)
3. ₹2.40 lakh
4. ₹4.80 lakh

Answer: B — ₹0.80 lakh

Explanation. The investor's share of the loss is ₹12 lakh × 40% = ₹4.80 lakh. First, ₹2.40 lakh is recognised by reducing the investment to nil. Paragraph 18 permits additional losses to be provided for only to the extent of obligations incurred or payments made on behalf of the associate. The investor has a binding guarantee of ₹0.80 lakh, so an additional liability of ₹0.80 lakh is recognised. The remaining ₹1.60 lakh is not recognised.

Where it goes wrong. Recognising all losses beyond the investment balance instead of restricting additional recognition to the actual guarantee or other commitment.

Authority. AS 23, para 18

Question 23 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. An investor has ₹2.40 lakh of previously unrecognised losses relating to its associate. The investor owns 30% of the associate, which reports a subsequent profit of ₹10 lakh. What amount of profit can the investor recognise under AS 23?

An investor has ₹2.40 lakh of previously unrecognised losses relating to its associate. The investor owns 30% of the associate, which reports a subsequent profit of ₹10 lakh. What amount of profit can the investor recognise under AS 23?

1. ₹3.00 lakh
2. ₹2.40 lakh
3. ₹0.60 lakh (correct answer)
4. Nil

Answer: C — ₹0.60 lakh

Explanation. The investor's share of the associate's subsequent profit is ₹10 lakh × 30% = ₹3 lakh. AS 23 requires the investor to recognise profits only after recovering previously unrecognised losses. The first ₹2.40 lakh offsets the accumulated unrecognised losses, and only the excess ₹3 lakh − ₹2.40 lakh = ₹0.60 lakh is recognised as profit. The full ₹3 lakh cannot be credited immediately because the earlier unrecognised loss has priority.

Where it goes wrong. Recognising subsequent profits immediately without first recovering the accumulated unrecognised share of losses.

Authority. AS 23, para 18

Question 24 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. A company holds a 35% interest in an associate and prepares both separate financial statements and consolidated financial statements. Which treatment is appropriate for this investment in the two sets of statements?

A company holds a 35% interest in an associate and prepares both separate financial statements and consolidated financial statements. Which treatment is appropriate for this investment in the two sets of statements?

1. Apply AS 13 in separate financial statements and AS 23 equity method in consolidated financial statements. (correct answer)
2. Apply AS 23 equity method in separate financial statements and AS 13 in consolidated financial statements.
3. Apply AS 21 line-by-line consolidation in separate and consolidated financial statements.
4. Apply AS 13 in both sets of financial statements because the investee is not a subsidiary.

Answer: A — Apply AS 13 in separate financial statements and AS 23 equity method in consolidated financial statements.

Explanation. AS 23 applies to the preparation and presentation of consolidated financial statements by an investor and requires investments in associates to be accounted for using the equity method, subject to the prescribed exceptions. It does not govern the investment's accounting in separate financial statements. The study material specifies that AS 13 applies in the investor's separate financial statements. Therefore, the two sets of financial statements follow different applicable requirements.

Where it goes wrong. Applying the equity method in the investor's separate financial statements merely because the investee qualifies as an associate.

Authority. AS 23, paras 1, 2 and 6; AS 13, Accounting for Investments

Question 25 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. On 1 April 2027, an investor loses significant influence over an associate but retains 14% of its equity shares. The carrying amount of the investment immediately before that date is ₹26 lakh. What is the correct treatment from the date significant influence ceases?

On 1 April 2027, an investor loses significant influence over an associate but retains 14% of its equity shares. The carrying amount of the investment immediately before that date is ₹26 lakh. What is the correct treatment from the date significant influence ceases?

1. Continue the equity method because some equity shares are still held.
2. Discontinue the equity method and treat ₹26 lakh as cost under AS 13 thereafter. (correct answer)
3. Write off the entire investment because ownership has fallen below 20%.
4. Transfer the investment to subsidiary assets and continue recognising associate profits.

Answer: B — Discontinue the equity method and treat ₹26 lakh as cost under AS 13 thereafter.

Explanation. Under paragraph 9, the investor discontinues the equity method from the date it ceases to have significant influence while retaining all or part of its investment. The investment is subsequently accounted for under AS 13, and its carrying amount on the discontinuation date becomes its cost thereafter. Accordingly, ₹26 lakh is treated as the cost for subsequent accounting. The investment is not automatically written off merely because ownership falls below 20%.

Where it goes wrong. Continuing the equity method after significant influence ceases or automatically writing off the retained investment.

Authority. AS 23, para 9; AS 13, Accounting for Investments