Mr. Rohan acquired 200 equity shares of Zeta Technologies Ltd. on a cum-right basis for 1,40,000 as a long-term investment. Subsequently, the…

As per AS 13, “Accounting for Investments”, when investments are acquired on a cum-right basis, and the market value of investments immediately after becoming ex-rights is lower than their cost, it may be appropriate to apply the sale proceeds of rights to reduce the carrying amount of such investments to their market value. In this case, Mr. Rohan purchased 200 equity shares of Alpha Ltd. on a cum-right basis at a total cost of 1,40,000. Subsequently, when the right issue was announced in the proportion of 1:1 at a price of 214per share, he received the right entitlement to acquire 200 shares but decided not to subscribe and instead sold his rights for 24,000. After the shares became ex-rights, their market value declined to 1,20,000. Therefore, the market value of the shares immediately after becoming ex-rights was - 20,000 lower than their cost (₹ 1,40,000 - 1,20,000). Accordingly, in line with AS 13, it would be appropriate to apply - 20,000 out of the rights sale proceeds towards reducing the carrying amount of investment from 1,40,000 to 1,20,000, so as to reflect its ex-right market value. The balance amount of 4,000 (₹ 24,000 - 20,000) shall be credited to the Profit and Loss Account as income. Therefore, the investment in 200 equity shares will be shown at a carrying amount of 1,20,000 in the books of Mr. Rohan.