CA Inter Advanced Accounting MCQ Test 15: answer key

Question 1 · 2 marks · AS 22 Accounting for Taxes on Income · hard

Scenario. Nirmal Forge Industries Ltd. is an unlisted manufacturer of alloy castings with a financial year ending 31 March. The following facts relate to the year ended 31 March 2026. Taxation: The written down value of plant and machinery as per the company's books is Rs. 6,40,00,000, while the written down value as per the income-tax records is Rs. 5,60,00,000, the whole of the difference having arisen from the higher depreciation allowed under the income-tax law. The company has an unabsorbed business loss of Rs. 1,10,00,000 accepted by the income-tax authorities as available for set-off. Against this loss the company holds a firm export order of Rs. 3,60,00,000 from a buyer, the order carrying a cancellation clause requiring payment of damages equal to 40% of the order value, supported by an irrevocable letter of credit and received in February 2026. Management projections for the next three years also show taxable profits. On 1 April 2025 the company carried a deferred tax liability of Rs. 16,00,000 on the plant and machinery difference and had not recognised any deferred tax asset on the loss. The income-tax rate applicable for FY 2025-26 is 30%. The Finance Act 2026, which reduces the rate to 25% with effect from 1 April 2026, received assent on 18 May 2026; the financial statements were approved on 10 June 2026. Borrowing costs: On 1 July 2025 the company drew a term loan of Rs. 6,00,00,000 at 11% per annum, repayable over eight years, used only for a captive power plant. Technical and administrative work began on 1 May 2025, the first expenditure on the plant was incurred on 1 August 2025, and site construction started on 1 September 2025. Unutilised loan funds were placed in fixed deposits and earned Rs. 2,40,000 during 1 August 2025 to 31 January 2026. The structure and installation of the plant were complete on 31 January 2026, but trial runs and testing continued until 31 March 2026 and commercial production began on 1 May 2026. The confirmed export order and contractual 40% cancellation damages establish virtual certainty supported by convincing evidence for recognising deferred tax assets on unabsorbed losses under AS 22.

For the year ended 31 March 2026, what net deferred tax amount should Nirmal Forge Industries Ltd. recognise in its balance sheet?

1. Net deferred tax asset of Rs. 9,00,000 (correct answer)
2. Net deferred tax asset of Rs. 7,50,000
3. Net deferred tax liability of Rs. 24,00,000
4. Net deferred tax asset of Rs. 33,00,000

Answer: A — Net deferred tax asset of Rs. 9,00,000

Working. DTL on PPE = (6,40,00,000 - 5,60,00,000) x 30% = Rs. 24,00,000. DTA on loss = 1,10,00,000 x 30% = Rs. 33,00,000. Net = 33,00,000 - 24,00,000 = Rs. 9,00,000 asset. At 25%: 27,50,000 - 20,00,000 = Rs. 7,50,000.

Explanation. The depreciation difference of Rs. 80,00,000 creates a deferred tax liability and the unabsorbed loss of Rs. 1,10,00,000 creates a deferred tax asset, as virtual certainty is supported by convincing evidence in the form of a binding export order carrying a heavy damages clause. Deferred tax is measured using the rate enacted or substantively enacted at the balance sheet date, which is 30%; the 25% rate is enacted only on 18 May 2026, after the reporting date. Hence 33,00,000 minus 24,00,000 gives a net asset of Rs. 9,00,000. Using 25% wrongly yields Rs. 7,50,000.

Where it goes wrong. Candidates apply the 25% rate announced by the Finance Act 2026 even though it is enacted after the balance sheet date.

Authority. AS 22; AS 22 para on measurement using enacted or substantively enacted rates

Question 2 · 2 marks · AS 22 Accounting for Taxes on Income · hard

What is the deferred tax charge or credit to be recognised in the statement of profit and loss for FY 2025-26, considering the opening deferred tax position given in the scenario?

1. Net deferred tax charge of Rs. 25,00,000
2. Net deferred tax credit of Rs. 25,00,000 (correct answer)
3. Net deferred tax credit of Rs. 9,00,000
4. Net deferred tax credit of Rs. 23,50,000

Answer: B — Net deferred tax credit of Rs. 25,00,000

Working. Closing net = +9,00,000 (asset). Opening net = -16,00,000 (liability). Movement = 9,00,000 - (-16,00,000) = Rs. 25,00,000 credit. Cross-check: DTA recognised 33,00,000 credit less incremental DTL (24,00,000 - 16,00,000) = 8,00,000 charge = 25,00,000 credit.

Explanation. Deferred tax is the movement in the net deferred tax balance, not the closing figure. The opening position was a net liability of Rs. 16,00,000, that is a negative Rs. 16,00,000, and the closing position is a net asset of Rs. 9,00,000. The movement of Rs. 25,00,000 is a credit to the statement of profit and loss, arising from recognition of the deferred tax asset of Rs. 33,00,000 less the additional liability of Rs. 8,00,000. Option (c) mistakes the closing balance for the movement.

Where it goes wrong. Taking only the closing net asset of Rs. 9,00,000 as the credit instead of the movement from the opening net liability.

Authority. AS 22; AS 22 recognition of deferred tax in the statement of profit and loss

Question 3 · 2 marks · AS 16 Borrowing Costs · hard

What amount of borrowing cost should be capitalised as part of the cost of the captive power plant for FY 2025-26?

1. Rs. 44,00,000
2. Rs. 41,60,000
3. Rs. 30,60,000 (correct answer)
4. Rs. 33,00,000

Answer: C — Rs. 30,60,000

Working. Eligible period 1 Aug 2025 to 31 Jan 2026 = 6 months. Interest = 6,00,00,000 x 11% x 6/12 = Rs. 33,00,000. Less temporary investment income Rs. 2,40,000 = Rs. 30,60,000.

Explanation. Capitalisation begins only when expenditure is incurred, borrowing costs are incurred and activities necessary to prepare the asset are in progress, all of which are first satisfied on 1 August 2025. It ceases when the asset is ready for its intended use, that is 31 January 2026, so six months of interest of Rs. 33,00,000 qualify, reduced by the income of Rs. 2,40,000 earned on the temporary deployment of those borrowings, giving Rs. 30,60,000. Option (a) ignores the temporary investment income.

Where it goes wrong. Capitalising from the loan drawdown date of 1 July 2025, or failing to deduct income on temporary investment of the specific borrowing.

Authority. AS 16; AS 16 specific borrowings and commencement of capitalisation

Question 4 · 2 marks · AS 16 Borrowing Costs · medium

Up to which date should borrowing costs be capitalised as part of the cost of the captive power plant?

1. 31 March 2026
2. 1 May 2026
3. 31 December 2025
4. 31 January 2026 (correct answer)

Answer: D — 31 January 2026

Working. Structure and installation complete 31 January 2026 = ready for intended use. Trial runs until 31 March 2026 and commercial production from 1 May 2026 are irrelevant to cessation.

Explanation. Capitalisation stops when substantially all activities needed to prepare the asset for its intended use or sale are complete. Physical construction and installation were complete on 31 January 2026, so the plant was ready for use on that date; continuing trial runs and the gap before commercial production do not postpone cessation. Option (a) wrongly links cessation to the close of the financial year, and option (b) wrongly links it to the date commercial production began.

Where it goes wrong. Linking cessation to commercial production or to the year end instead of the date the asset is ready for its intended use.

Authority. AS 16; AS 16 cessation of capitalisation

Question 5 · 2 marks · AS 17 Segment Reporting · medium

Scenario. Meridian Polymers Ltd. reports three business segments. For FY 2025-26, Segment P recorded external revenue of Rs. 42,00,000 and inter-segment revenue of Rs. 6,00,000; Segment Q recorded external revenue of Rs. 28,00,000 and inter-segment revenue of Rs. 3,00,000; Segment C recorded external revenue of Rs. 12,00,000 and no inter-segment revenue. Inter-segment transfers are priced at cost plus 8%. Other income comprised interest on deposits Rs. 2,00,000, dividend on investments Rs. 50,000, gain on sale of a non-current investment Rs. 1,50,000 and an unallocated recovery of Rs. 80,000 relating to a general corporate matter. Total revenue in the statement of profit and loss is Rs. 86,80,000.

In the segment report of Meridian Polymers Ltd. for FY 2025-26, what amount is shown as unallocated income in the reconciliation of segment revenue to total revenue?

1. Rs. 4,80,000 (correct answer)
2. Rs. 2,50,000
3. Rs. 3,50,000
4. Rs. 4,00,000

Answer: A — Rs. 4,80,000

Working. Segment revenue = 42,00,000 + 6,00,000 + 28,00,000 + 3,00,000 + 12,00,000 = Rs. 91,00,000. Inter-segment = Rs. 9,00,000; external = Rs. 82,00,000. Total revenue Rs. 86,80,000 - 82,00,000 = Rs. 4,80,000 = 2,00,000 + 50,000 + 1,50,000 + 80,000.

Explanation. Segment revenue is Rs. 91,00,000 including inter-segment transfers, which are eliminated to arrive at external revenue of Rs. 82,00,000; the difference of Rs. 4,80,000 to total revenue of Rs. 86,80,000 comprises income not allocated to segments, being interest Rs. 2,00,000, dividend Rs. 50,000, gain on sale of investment Rs. 1,50,000 and the general corporate recovery Rs. 80,000. Option (b) wrongly drops the gain and the corporate recovery.

Where it goes wrong. Treating only interest and dividend as unallocated and omitting the gain on sale of investment and the corporate recovery.

Authority. AS 17; AS 17 reconciliation of segment revenue with enterprise revenue

Question 6 · 2 marks · AS 11 The Effects of Changes in Foreign Exchange Rates · medium

Scenario. Vantage Marine Exports Ltd. has its head office in Kochi, a marketing branch in Singapore and a sourcing branch in Nepal. The Singapore branch maintains its own banking and borrowings, takes its own pricing decisions, remits nothing to Kochi and sells mainly to local customers in Singapore dollars. The Nepal branch merely procures goods for the head office at prices fixed by Kochi and remits all collections weekly. The following data relate to the Singapore branch for FY 2025-26. The net assets of the branch were USD 4,00,000 on 1 April 2025 when the exchange rate was Rs. 78 per USD; the branch earned a profit of USD 1,20,000 evenly through the year, the average rate being Rs. 82; the net assets at 31 March 2026 were USD 5,20,000 and the closing rate was Rs. 86. On 1 April 2024 the company borrowed USD 2,00,000 at 6% for eight years to buy a depreciable packing plant. The exchange rate was Rs. 79 on 1 April 2025 and Rs. 83 on 31 March 2026, and the loan is outstanding at the year end. On the same date the company also drew a seven-year loan of USD 1,35,000 for working capital, on which the exchange difference for FY 2025-26 was Rs. 5,40,000. The company has exercised, irrevocably and for all such items, the option available in AS 11 for long-term foreign currency monetary items. Grants: In June 2025 the state government paid Rs. 18,00,000 as compensation for losses suffered by the company in the cyclone of FY 2023-24, with no further obligation attached. On 1 April 2025 the company also received Rs. 24,00,000 towards the cost of a sorting machine purchased and installed on that date for Rs. 80,00,000 and depreciated on the straight-line basis over eight years with no residual value. The company presents asset-related grants as deferred income.

How should the exchange difference on the USD 2,00,000 plant loan for FY 2025-26 be dealt with, given that the company has exercised the option available for long-term foreign currency monetary items?

1. Recognise it in profit or loss for the year as an exchange loss
2. Add it to the cost of the plant and depreciate over its remaining life (correct answer)
3. Accumulate it in FCMITD and amortise over the balance loan period
4. Transfer it to the foreign currency translation reserve for the branch

Answer: B — Add it to the cost of the plant and depreciate over its remaining life

Working. USD 2,00,000 x (Rs. 83 - Rs. 79) = Rs. 8,00,000. Relates to a depreciable plant, therefore added to cost of the plant.

Explanation. Where the option for long-term foreign currency monetary items is exercised, an exchange difference relating to the acquisition of a depreciable capital asset is adjusted in the cost of that asset and depreciated over its balance useful life. The difference is 2,00,000 x (83 - 79) = Rs. 8,00,000. Option (c) applies to long-term monetary items other than those relating to depreciable capital assets, and option (d) applies to a non-integral foreign operation, not to a loan of the head office.

Where it goes wrong. Routing every long-term monetary item to the FCMITD account without checking whether it relates to a depreciable capital asset.

Authority. AS 11; AS 11 option for long-term foreign currency monetary items

Question 7 · 2 marks · AS 11 The Effects of Changes in Foreign Exchange Rates · medium

How should the exchange difference of Rs. 5,40,000 on the seven-year working capital loan be treated for FY 2025-26?

1. Charged to profit or loss in the year in which the difference arises
2. Added to the carrying amount of the plant as a direct cost
3. Accumulated in FCMITD and amortised over the loan's balance period (correct answer)
4. Credited to the foreign currency translation reserve until repayment

Answer: C — Accumulated in FCMITD and amortised over the loan's balance period

Working. Loan term 7 years, long-term monetary item, not linked to a depreciable asset: Rs. 5,40,000 accumulated in FCMITD and amortised over the remaining tenure of the loan.

Explanation. The working capital loan is a long-term foreign currency monetary item that does not relate to the acquisition of a depreciable capital asset, so under the option exercised by the company the exchange difference is accumulated in the Foreign Currency Monetary Item Translation Difference Account and recognised as income or expense over the balance period of the loan. The balance in that account is presented under Reserves and Surplus. Option (a) would apply only if the option had not been exercised.

Where it goes wrong. Charging the whole difference to profit or loss, ignoring that the company has exercised the option for all long-term monetary items.

Authority. AS 11; AS 11 FCMITD and its presentation

Question 8 · 2 marks · AS 11 The Effects of Changes in Foreign Exchange Rates · hard

What amount of exchange difference should be accumulated in the foreign currency translation reserve in respect of the Singapore branch for FY 2025-26?

1. Rs. 28,60,000
2. Rs. 41,60,000
3. Rs. 98,40,000
4. Rs. 36,80,000 (correct answer)

Answer: D — Rs. 36,80,000

Working. Opening 4,00,000 x 78 = 3,12,00,000. Profit 1,20,000 x 82 = 98,40,000. Sum = 4,10,40,000. Closing 5,20,000 x 86 = 4,47,20,000. Difference = Rs. 36,80,000.

Explanation. The Singapore branch is a non-integral foreign operation, so its assets and liabilities are translated at the closing rate, income and expenses at the transaction or average rate, and the resulting difference is carried in the foreign currency translation reserve. Opening net assets translated at Rs. 78 give Rs. 3,12,00,000, profit at the average rate of Rs. 82 gives Rs. 98,40,000, and closing net assets at Rs. 86 give Rs. 4,47,20,000. The difference of Rs. 36,80,000 is the reserve movement.

Where it goes wrong. Translating the branch's profit at the closing rate, or treating the branch as integral and routing the difference to profit or loss.

Authority. AS 11; AS 11 translation of non-integral foreign operations

Question 9 · 2 marks · AS 12 Accounting for Government Grants · hard

What total amount should be credited to the statement of profit and loss for FY 2025-26 in respect of the two government grants?

1. Rs. 21,00,000 (correct answer)
2. Rs. 18,00,000
3. Rs. 3,00,000
4. Rs. 42,00,000

Answer: A — Rs. 21,00,000

Working. Revenue grant Rs. 18,00,000 credited in FY 2025-26. Deferred income release = 24,00,000 / 8 = Rs. 3,00,000. Total = Rs. 21,00,000.

Explanation. The compensation of Rs. 18,00,000 for expenses of an earlier period, given with no further related costs, is recognised in the statement of profit and loss of the period in which it becomes receivable. The asset-related grant of Rs. 24,00,000 presented as deferred income is credited to profit or loss over the eight-year useful life of the machine at Rs. 3,00,000 a year. The total credit is therefore Rs. 21,00,000. Option (d) recognises the entire asset grant at once.

Where it goes wrong. Crediting the full asset-related grant to profit or loss in the year of receipt instead of releasing it over the useful life.

Authority. AS 12; AS 12 presentation of grants related to revenue and to specific fixed assets

Question 10 · 2 marks · AS 20 Earnings Per Share · hard

Scenario. Aarohi Systems Ltd. had 12,00,000 equity shares of Rs. 10 each outstanding on 1 April 2025. On 1 July 2025 the company bought back 2,40,000 equity shares and cancelled them. On 1 January 2026 each remaining Rs. 10 share was split into two shares of Rs. 5 each. The profit attributable to equity shareholders for the year ended 31 March 2026 was Rs. 51,00,000. No other change in the number of shares took place during the year.

What is the weighted average number of equity shares to be used in computing basic earnings per share of Aarohi Systems Ltd. for FY 2025-26, stated in post-split shares?

1. 10,20,000
2. 20,40,000 (correct answer)
3. 19,20,000
4. 24,00,000

Answer: B — 20,40,000

Working. Pre-split weighted average = 12,00,000 x 3/12 + 9,60,000 x 9/12 = 3,00,000 + 7,20,000 = 10,20,000. Split factor 2, applied to the whole year = 20,40,000 shares.

Explanation. The buy-back changes the number of shares from 1 July 2025 and is weighted for nine months. The split on 1 January 2026 changes the denomination without changing resources, so it is applied to all shares outstanding from the beginning of the year. In pre-split terms the weighted average is 12,00,000 x 3/12 plus 9,60,000 x 9/12, that is 10,20,000 shares, which becomes 20,40,000 shares after doubling for the split. Option (c) ignores the timing of the buy-back.

Where it goes wrong. Applying the split only from 1 January 2026, or using the year-end share count without weighting the buy-back.

Authority. AS 20; AS 20 weighted average number of shares and adjustment for split

Question 11 · 2 marks · Buy-back of Securities (Ch 12) · hard

Scenario. Kaveri Agro Chem Ltd. is an unlisted public company. Its balance sheet as at 31 March 2026 shows: 24,00,000 equity shares of Rs. 10 each fully paid; 30,000 8% preference shares of Rs. 100 each fully paid, issued three years ago; capital reserve Rs. 12,00,000; revaluation reserve Rs. 28,00,000 created on revaluation of land in FY 2023-24; capital redemption reserve Rs. 10,00,000; general reserve Rs. 96,00,000; securities premium Rs. 18,00,000; surplus in the statement of profit and loss Rs. 34,00,000; 9% debentures Rs. 60,00,000; unsecured loans from a bank Rs. 40,00,000; and trade payables Rs. 25,00,000. On 1 April 2026, after complying with sections 68 to 70 of the Companies Act, 2013 and with the approval of its board, the company bought back 4,80,000 equity shares at Rs. 20 per share and extinguished them. The board decided that the premium payable on buy-back would first be adjusted against the securities premium account and the shortfall against the general reserve, and that the transfer to the capital redemption reserve required by section 69 would be made wholly out of the general reserve. Cash for the buy-back was arranged from the company's bank balances; no fresh borrowing was made and no other reserve movement took place during FY 2026-27.

At a buy-back price of Rs. 20 per share, what is the maximum number of equity shares that Kaveri Agro Chem Ltd. could have bought back under the resources test in section 68(2)(c) of the Companies Act, 2013?

1. 6,00,000 shares
2. 4,80,000 shares
3. 5,22,500 shares (correct answer)
4. 4,18,000 shares

Answer: C — 5,22,500 shares

Working. Paid-up capital = 2,40,00,000 + 30,00,000 = Rs. 2,70,00,000. Distributable reserves = 96,00,000 + 18,00,000 + 34,00,000 = Rs. 1,48,00,000. Total = Rs. 4,18,00,000. 25% = Rs. 1,04,50,000. Shares = 1,04,50,000 / 20 = 5,22,500.

Explanation. The resources test restricts buy-back to 25% of paid-up capital plus reserves available for distribution, that is 25% of Rs. 4,18,00,000, which equals Rs. 1,04,50,000. At Rs. 20 per share this permits 5,22,500 shares. The 25% of paid-up equity capital test permits 6,00,000 shares and the debt-equity test is not binding here, so the resources test governs. Option (b) is the number actually bought back, not the ceiling.

Where it goes wrong. Applying the 25% of equity share capital test instead of the 25% of paid-up capital plus distributable reserves test.

Authority. Section 68(2)(c) of the Companies Act, 2013; Section 68(2)(d) of the Companies Act, 2013

Question 12 · 2 marks · Buy-back of Securities (Ch 12) with Schedule III (Ch 11) · hard

Immediately after recording the buy-back, what total amount is presented under the head Reserves and Surplus in the balance sheet prepared as per Division I of Schedule III?

1. Rs. 1,98,00,000
2. Rs. 1,02,00,000
3. Rs. 2,22,00,000
4. Rs. 1,50,00,000 (correct answer)

Answer: D — Rs. 1,50,00,000

Working. Capital reserve 12,00,000 + revaluation 28,00,000 + CRR (10,00,000 + 48,00,000) 58,00,000 + securities premium (18,00,000 - 18,00,000) nil + general reserve (96,00,000 - 30,00,000 - 48,00,000) 18,00,000 + surplus 34,00,000 = Rs. 1,50,00,000.

Explanation. Only the premium element of Rs. 48,00,000 reduces reserves; the nominal Rs. 48,00,000 reduces share capital and is replaced inside reserves by the capital redemption reserve, which is a transfer and not a reduction. Closing reserves are capital reserve 12,00,000, revaluation reserve 28,00,000, capital redemption reserve 58,00,000, securities premium nil, general reserve 18,00,000 and surplus 34,00,000, totalling Rs. 1,50,00,000. Option (b) deducts the entire consideration from reserves.

Where it goes wrong. Reducing reserves by the full buy-back consideration of Rs. 96,00,000 instead of only the premium of Rs. 48,00,000.

Authority. Schedule III Division I; Sections 68 and 69 of the Companies Act, 2013

Question 13 · 2 marks · Buy-back of Securities (Ch 12) · medium

What is the amount of reserves available for distribution as dividend that the company can count towards the buy-back ceiling under section 68(2)(c)?

1. Rs. 1,48,00,000 (correct answer)
2. Rs. 1,58,00,000
3. Rs. 1,76,00,000
4. Rs. 1,88,00,000

Answer: A — Rs. 1,48,00,000

Working. General reserve 96,00,000 + securities premium 18,00,000 + surplus 34,00,000 = Rs. 1,48,00,000. Excluded: capital reserve 12,00,000, revaluation reserve 28,00,000, CRR 10,00,000.

Explanation. Reserves available for distribution are general reserve, securities premium and the surplus in the statement of profit and loss, aggregating Rs. 1,48,00,000. Capital reserve, revaluation reserve and the capital redemption reserve are excluded, the first two because they do not represent realised distributable profits and the last because its use is restricted. Option (c) wrongly includes the revaluation reserve and option (b) wrongly includes the capital redemption reserve.

Where it goes wrong. Including the revaluation reserve, capital reserve or capital redemption reserve in the reserves available for distribution.

Authority. Section 68 of the Companies Act, 2013; Section 2 definition of reserves available for distribution

Question 14 · 2 marks · Buy-back of Securities (Ch 12) · medium

Following the board's stated allocation under Sections 68 and 69, what amount is transferred to the Capital Redemption Reserve (CRR) and what is the closing balance of the General Reserve after the buy-back?

1. CRR transfer Rs. 48,00,000 and closing general reserve Rs. 66,00,000
2. CRR transfer Rs. 48,00,000 and closing general reserve Rs. 18,00,000 (correct answer)
3. CRR transfer Rs. 96,00,000 and closing general reserve Rs. 48,00,000
4. CRR transfer Rs. 58,00,000 and closing general reserve Rs. 18,00,000

Answer: B — CRR transfer Rs. 48,00,000 and closing general reserve Rs. 18,00,000

Working. Nominal value = 4,80,000 x 10 = Rs. 48,00,000 to CRR. Premium = 4,80,000 x 10 = Rs. 48,00,000; securities premium Rs. 18,00,000 absorbs part, general reserve absorbs Rs. 30,00,000. Closing general reserve = 96,00,000 - 30,00,000 - 48,00,000 = Rs. 18,00,000.

Explanation. Section 69 requires a sum equal to the nominal value of the shares bought back, that is 4,80,000 x Rs. 10 = Rs. 48,00,000, to be transferred to the capital redemption reserve where the buy-back is out of distributable reserves. The premium of Rs. 48,00,000 is met first from securities premium of Rs. 18,00,000 and the balance Rs. 30,00,000 from general reserve. General reserve therefore falls from Rs. 96,00,000 to Rs. 18,00,000. Option (a) ignores the premium charge to general reserve.

Where it goes wrong. Forgetting to reduce the general reserve by the premium shortfall of Rs. 30,00,000 in addition to the CRR transfer.

Authority. Section 69(1) of the Companies Act, 2013

Question 15 · 2 marks · Amalgamation of Companies (Ch 13) · hard

Scenario. Sunrise Ceramics Ltd. took over the business of Bluewave Tiles Ltd. as at 1 April 2026. The balance sheet of Bluewave Tiles Ltd. on that date showed equity shares of Rs. 10 each Rs. 20,00,000; 9% preference shares Rs. 8,00,000; general reserve Rs. 6,00,000; surplus Rs. 3,00,000; 12% debentures Rs. 5,00,000; trade payables Rs. 4,00,000; land and building Rs. 18,00,000; plant and machinery Rs. 12,00,000; inventory Rs. 6,00,000; trade receivables Rs. 7,00,000; and cash and bank Rs. 3,00,000. Sunrise Ceramics Ltd. holds Rs. 1,50,000 of the 12% debentures of Bluewave Tiles Ltd., bought earlier in the open market. The purchase consideration was agreed at Rs. 26,00,000, discharged by Sunrise Ceramics Ltd. in cash and shares. The amalgamation is in the nature of purchase.

In the books of Bluewave Tiles Ltd., what is the loss on realisation transferred to the equity shareholders' account?

1. Rs. 12,50,000
2. Rs. 9,50,000
3. Rs. 11,00,000 (correct answer)
4. Rs. 8,00,000

Answer: C — Rs. 11,00,000

Working. Debit side: 18,00,000 + 12,00,000 + 6,00,000 + 7,00,000 + 3,00,000 = Rs. 46,00,000. Credit side: 4,00,000 + 5,00,000 + 26,00,000 = Rs. 35,00,000. Loss = 46,00,000 - 35,00,000 = Rs. 11,00,000. If only external debentures of Rs. 3,50,000 are credited, loss becomes Rs. 12,50,000.

Explanation. The realisation account is debited with all assets taken over, Rs. 18,00,000 plus Rs. 12,00,000 plus Rs. 6,00,000 plus Rs. 7,00,000 plus Rs. 3,00,000, amounting to Rs. 46,00,000, and credited with trade payables Rs. 4,00,000, the full 12% debenture liability Rs. 5,00,000 and purchase consideration Rs. 26,00,000, amounting to Rs. 35,00,000. The shortfall of Rs. 11,00,000 is the loss borne by the equity shareholders. Option (a) wrongly excludes the debentures held by the transferee.

Where it goes wrong. Reducing the debenture liability by the Rs. 1,50,000 held by the transferee company, although the whole liability is transferred to the realisation account.

Authority. AS 14; Amalgamation in the nature of purchase