CONVERSION OF LOAN INTO EQUITY

[S.C. WADHWA]

X (A Pvt. Ltd. Company in India) purchased 500 shares @ 1 Euro each of B (A company incorporated outside India). Since B shares capital consisted of 500 shares, it became wholly owned susbsidiary of X.

X also gave loan of 700 Euro to B during financial year 2013-14 which was recoverted in indian Rs. As on 31/03/14.

Now, during financial year 2014-15, this loan is converted into 700 shares of 1 Euro each.

Please advise

What entry is to be passed

At what value, transaction to be booked

[DR.MARIAPPAN GOVINDARAJAN]

Whether you have got clarified in the above said issue? If not please inform.

AI Summary

Conversion of loan into equity raises accounting valuation and entry questions for parent on books after foreign currency loan conversion. X, an Indian private company holding all shares of a foreign subsidiary B, had a euro denominated loan to B that was converted into Indian rupees as at the prior balance date; in the following year that loan was converted into 700 shares of B at the nominal euro amount. The central accounting questions are the journal entries to extinguish the loan and recognise the additional investment, the valuation basis in INR for booking the transaction, and treatment of any foreign exchange differences between loan carrying amount and share subscription consideration.