XYZ Ltd. is a company incorporated in India. It provides - 10,00,000 interest free loan to its wholly owned Indian subsidiary, ABC Ltd. There are no…

Ind AS 109 requires that financial assets and liabilities are recognized on initial recognition at its fair value, as adjusted for the transaction cost. In accordance with Ind AS 113 Fair Value Measurement, the fair value of a financial liability with a demand feature (e.g., a demand deposit) is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid. Both parent and subsidiary recognize financial asset and liability, respectively, at fair value on initial recognition. The difference between the loan amount and its fair value is treated as an equity contribution to the subsidiary. This represents a further investment by the parent in the subsidiary. Accounting in the books of XYZ Ltd (Parent) Particulars Amount Amount On the date of loan Loan to ABC Ltd (Subsidiary) Dr. 7,51,315 Deemed Investment (Capital Contribution) in ABC Ltd. Dr. 2,48,685 To Bank 10,00,000 (Being the loan is given to ABC Ltd and recognised at fair value) Accrual of Interest income Loan to ABC Ltd Dr. 75,131 To Interest income 75,131 (Being interest income accrued) – Year 1 Loan to ABC Ltd Dr. 82,645 To Interest income 82,645 (Being interest income accrued) – Year 2 Loan to ABC Ltd Dr. 90,909 To Interest income 90,909 (Being interest income accrued) – Year 3 On repayment of loan Bank Dr. 10,00,000 To Loan to ABC Ltd (Subsidiary) 10,00,000 Accounting in the books of ABC Ltd (Subsidiary) Particulars Amount Amount On the date of loan Bank Dr. 10,00,000 To Loan from XYZ Ltd (Payable) 7,51,315 To Equity (Deemed Capital Contribution from XYZ Ltd) 2,48,685 (Being the loan taken from XYZ Ltd. and recognised at Fair value) Accrual of Interest Interest expense Dr. 75,131 To Loan from XYZ Ltd (Payable) 75,131 (Being interest expense recognised)–Year 1 Interest expense Dr. 82,645 To Loan from XYZ Ltd (Payable) 82,645 (Being interest expense recognised)–Year 2 Interest expense Dr. 90,909 To Loan from XYZ Ltd (Payable) 90,909 (Being interest expense recognised)–Year 3 On repayment of loan Loan from XYZ Ltd (Payable) Dr. 10,00,000 To Bank 10,00,000 Working Notes: 1. Computation of Present value of loan Rate 10% Amount of Loan 10,00,000 Year 3 Present Value 7,51,315 2. Computation of interest for Year I Present Value 7,51,315 Rate 10% Period of interest - for 1 year 1 Closing value at the end of year 1 8,26,446 Interest for 1st year 75,131 3. Computation of interest for Year 2 Value of loan as at the beginning of Year 2 8,26,446 Rate 10% Period of interest - for 2nd year 1 Closing value at the end of year 2 9,09,091 Interest for 2nd year 82,645 4. Computation of interest for Year 3 Value of loan as at the beginning of Year 3 9,09,091 Rate 10% Period of interest - for 3rd year 1 Closing value at the end of year 3 10,00,000 Interest for 3rd year 90,909