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Consider 2 lakh acquirer shares issued as contingent consideration with FV ₹25 lakh at acquisition. Target IS met. If classified as a financial LIABILITY (variable share count to deliver ₹40 lakh value): at settlement the entity issues shares with FV ₹40 lakh. Identify the journal entry on settlement (face value of share ₹10).
ADr Contingent liability ₹40 lakh, Cr Equity share capital ₹40 lakh
BDr Contingent liability ₹25 lakh, Dr P&L loss ₹15 lakh, Cr Equity share capital ₹16 lakh (1,60,000 × ₹10), Cr Securities premium ₹24 lakh (1,60,000 × ₹15)
CDr P&L loss ₹40 lakh, Cr Equity share capital ₹40 lakh
DDr Contingent liability ₹25 lakh, Cr Equity share capital ₹25 lakh
Answer & Solution
Correct answer: B. Dr Contingent liability ₹25 lakh, Dr P&L loss ₹15 lakh, Cr Equity share capital ₹16 lakh (1,60,000 × ₹10), Cr Securities premium ₹24 lakh (1,60,000 × ₹15)
Number of shares issued = 40,00,000 / 25 = 1,60,000 (₹25 is the share's market price at issue). Face value ₹10 × 1,60,000 = ₹16 lakh equity capital; premium ₹15 × 1,60,000 = ₹24 lakh. Settlement of the liability (carried at ₹25 lakh) and the P&L loss ₹15 lakh between revaluation periods total to the ₹40 lakh shares issued.
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