Nov 2010 question

Hi, This type of sum is called cross holdings. Usually it comes in the final syllabus not at IPCC level only at the time they tested and in this publication also this sum and one more sum in purchase consideration type will be there for cross holdings thats all.

When the cross holdings sum comes you have to apply the simutaneous equation only to value the investments. Since we are valuing that investments that B/s value is not taken into account in the workings

Hello 

Lets understand this from Arun ltd.'s point of view.

Purcahse Consideration (by net asset method) = Sundry Assets -Sundry Liabilities. (in Bhairav's balance sheet)

Now Arun ltd's has shares of Bhairav ltd. which is for them , but the value of these investments (i.e. share of the 1000 Bhairav ltd.) reflect book value, not the intrinsic value.

INTRINSIC VALUE This is the amount which equity shareholders will get  on winding up.

Intrinsic value of shares of Bhirav ltd = x(let)= Assets- Liabilities-Preference Shares(i.e. equity shares + reserves is intrinsic value) 

Now, value of investments held by Arun ltd = x*1000/4000

Similarly Bhairav ltd. holds shares of Arun ltd.

In this case assume intrinsic value of shares of Arun ltd. = y and do the calculations by forming simultaneous equations.

If you are still in doubt, post further.