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the fair value of the financial instrument. The difference in fair value and transaction cost will be treated as
investment in Subsidiary YK Ltd.
Both KK Ltd. and YK Ltd. should recognise financial asset and liability, respectively, at fair value on initial

recognition, i.e., the present value of Rs10,00,000 payable at the end of 3 years using discounting factor of
10%. Since the question mentions fair value of the loan at initial recognition as Rs8,10,150, the same has been
considered. 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.

Journal entries in the books of KK Ltd. (holding Company) (for one year)
At origination
Loan to YK Ltd. A/c Dr. Rs 8,10,150
Investment in YK Ltd. A/c Dr. Rs 1,89,850 Rs 10,00,000

To Bank A/c
During periods to repayment- to recognise interest
Year 1 – Charging of Interest

Loan to YK Ltd. A/c Dr. Rs 81,015
To Interest income A/c Rs 81,015
Transferring of interest to Profit and Loss

Interest income A/c Dr. Rs 81,015
To Profit and Loss A/c Rs 81,015
On repayment

Bank A/c Dr. Rs 10,00,000
To Loan to YK Ltd. A/c Rs 10,00,000
Note- Interest needs to be recognised in statement of profit and loss. The same cannot be adjusted

against capital contribution recognised at origination.

Journal entries in the books of YK Ltd. (Subsidiary Company) (for one year)
At origination

Bank A/c Dr. Rs 10,00,000
To Loan from KK Ltd. A/c Rs 8,10,150
To Equity Contribution in KK Ltd. A/c Rs 1,89,850

During periods to repayment- to recognise interest
Year 1
Interest expense A/c Dr. Rs 81,015

To Loan from KK Ltd. A/c Rs 81,015
On repayment

Loan from KK Ltd. A/c Dr. Rs 10,00,000
To Bank A/c Rs 10,00,000
In the consolidated financial statements, there will be no entry in this regard since loan and interest
income/expense will get set off.

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