As 13 accounting for investments
Querist : Anonymous
According to AS 13, When right shares are brought on cum right basis ( say @ Rs.105) and if the post rights issue price drops to a price lower than the acquisition cost ( say Rs.100),then according to AS 13 the sale proceeds from sale of rights ( say Rs.7) are used for REDUCING THE COST OF INVESTMENT TO REFLECT ITS MARKET VALUE and any excess sale proceeds ( of Rs.2) treated as income.
what is the case if post rights issue price drops down to Rs.95, in this case we can reduce from Cost only to the extent of Rs.7 which brings the Invest.to Rs.98 (105-7.whereas the market price is @ Rs.95. how far is it justified to say that investment shall be brought down to reflect market value?? bringing down the value from 98 to 95 is not deinately justified because we do valuatino on the closing day but not on post rights day.
Kindly clarify.
Querist : Anonymous
Therefore in case of Market value from 105 to 100, you are required to bring the value of investment to its market value i.e. 100, you deduct only Rs 5
In Case of Market value becoming from rs 105 to 95, only Rs 7 are required to be deducted jsut as to bring the cost of cum-right share as ex-right share cost and u r absolutely right marking to Rs 95 to be done on the closing date,a s it is all about valuation of Investment.
Theoritically, after every issue of either the bonus and right issue, The "THEORITICAL POST PRICE OF SHARE" comes down as compared to previous price
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