CA Inter P1 · Chapter 8 · Question 5 of 10
Case: Bhavya Ltd acquired 60% of Ketaki Ltd on 1 April for ₹9,00,000. In June, Ketaki Ltd paid a dividend of ₹1,00,000 entirely out of profits earned before 1 April. In Bhavya Ltd's books, the dividend received should be treated as:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) A reduction in the cost of investment, which becomes ₹8,40,000
Explanation
Dividends received out of pre-acquisition profits are a return of part of the purchase price, not income. Bhavya's share = 60% x 1,00,000 = 60,000, credited to the investment account. Revised cost = 9,00,000 - 60,000 = ₹8,40,000. This also reduces the goodwill computed on consolidation.
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