## Right Shares: Renouncement under AS 13

### General Rule

When an investor receives right shares, they can either subscribe (take them up) or renounce (sell the rights to a third party).

Action	Journal Entry
Subscribe	Investment A/c Dr → To Bank
Renounce	Bank/CIB A/c Dr → To P&L A/c

Proceeds from renouncement are treated as income (credited to P&L).

---

### Exception – Fall in Value of Shares after Rights Issue

If the market value of the existing shares falls because of the rights issue, the income from renouncement is not transferred to P&L directly.

Instead, it is adjusted against the cost of investment to the extent of the fall.

Decision Rule:

```

Let: P = Proceeds from renouncement

F = Fall in market value of shares due to rights issue

If P ≤ F:

Entire P reduces cost of investment; nothing goes to P&L.

If P > F:

F reduces cost of investment; (P – F) goes to P&L as income.

```

Journal Entry (Exception):

```

Bank / CIB A/c Dr [P]

To Investment A/c [F] ← reduces cost

To P&L A/c [P – F] ← excess, if any

```

---

### Why This Exception Exists

A rights issue at below-market price mechanically dilutes the value of existing shares. The fall in value is not a real gain – it is a reclassification effect. Crediting the entire renouncement proceeds to P&L would overstate income. The exception corrects for this by first making the investor whole on the fall, then recognising only the net surplus as income.

Worked example

### Example 1

Example (General Rule – Page 65)

Right shares: 1,500 total

1/3 (500 shares) → Subscribed
2/3 (1,000 shares) → Renounced for ₹24,000

Subscription entry:

```

Investment A/c Dr ₹7,500

To Bank ₹7,500

```

Renouncement entry (general rule – no fall in value):

```

Bank A/c Dr ₹24,000

To P&L A/c ₹24,000

```

### Example 2

Example (Exception – Fall in Value, Page 65)

Same facts as above, but market value of shares fell by ₹2,500 due to the rights issue.

Proceeds from renouncement = ₹4,000 (illustrative)

Fall in value = ₹2,500

```

Bank A/c Dr ₹4,000

To Investment A/c ₹2,500 ← extent of fall

To P&L A/c ₹1,500 ← excess

```

### Example 3

Question 33 (Page 66)

Right shares issued; investor renounces all rights for ₹12,000.

Market value of investment: Before rights = ₹70,000 | After rights = ₹60,000

→ Fall = ₹10,000

Since Proceeds (₹12,000) > Fall (₹10,000):

```

Bank A/c Dr ₹12,000

To Investment A/c ₹10,000 ← extent of fall

To P&L A/c ₹2,000 ← excess

```

⚠️ Common exam mistakes

Crediting entire renouncement proceeds to P&L even when share value has fallen – the fall portion must reduce investment cost first.
Forgetting that the exception only applies when the fall is caused by the rights issue itself, not unrelated market movements.
When proceeds ≤ fall: students incorrectly still credit something to P&L; nothing should go to P&L in that case.
Confusing the subscription entry (debit Investment) with the renouncement entry (debit Bank/CIB).

Bare-Act text Para 23 (Rights Issue Treatment) · AS 13 – Accounting for Investments · click to expand

When the right to subscribe for shares is renounced, the proceeds from the renouncement are treated as income. However, if the proceeds are less than or equal to the fall in the carrying amount of the investment caused by the rights issue, such proceeds are adjusted against the carrying amount of the investment; only the excess, if any, is recognised as income.

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AS 13 – Right Shares: Renouncement and Fall-in-Value Exception

Worked example

⚠️ Common exam mistakes