Advanced Adjustments: Pre-Acquisition Dividends, CRR, Non-Cash Debentures, Hidden Interest, and Depreciation as Balancing Figure

## Advanced Adjustments in Complex CFS Questions

These adjustments appear in higher-difficulty illustrations and are easy to mishandle. Each one has a clear logical basis.

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### 1. Pre-Acquisition Dividend

When investments are bought mid-year and a dividend is received that relates to the pre-acquisition period:

• It is not income — it reduces the cost of the investment
• Journal: Dr Cash/Bank | Cr Investment A/c
• In CFS: Investing Activity inflow (return of cost, not return on cost)
• Do NOT reverse it in PBT reconciliation — it was never recorded in P&L, so there is nothing to reverse

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### 2. Capital Redemption Reserve (CRR) Created from General Reserve

• Preference shares are redeemed → CRR must be created equal to the nominal value redeemed
• If created by transfer from General Reserve: Dr GR | Cr CRR
• Zero cash effect — exclude from CFS entirely
• In ledger reconciliation: reduce General Reserve by the CRR transfer amount

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### 3. Land Revaluation → Capital Reserve

• Entry: Dr Land A/c | Cr Capital Reserve
• No cash flow — purely a book adjustment
• In Land account working: treat the revaluation increment as a non-cash Cr item
• Capital Reserve opening balance is reconciled by this non-cash credit

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### 4. Hidden Adjustment: Interest on Debentures

If debentures exist in the balance sheet but interest expense is not explicitly shown in P&L:

• Calculate interest: Rate % × Face value of debentures
• This interest must have been charged somewhere — find it
• In PBT reconciliation: add back the interest (non-operating financing cost)
• Show the cash paid as Financing Activity outflow (interest paid on debentures)

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### 5. Debentures Issued Against Plant (Non-Cash Transaction)

• Entry: Dr Plant A/c | Cr 9% Debentures A/c
• No cash involved — excluded from both Investing and Financing sections of CFS
• In the Plant ledger, the Cr side shows the debenture consideration
• In the Debenture ledger, the Cr side shows the plant acquisition
• Disclose in supplementary schedule of non-cash transactions

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### 6. Depreciation as Balancing Figure

When the date of asset purchase is unknown, you cannot time-apportion depreciation:

• Prepare the asset account T-ledger
• Opening + Cash additions + Non-cash additions (debentures etc.) − Disposals (at cost) = Closing + Depreciation
• Depreciation = balancing figure on Cr side
• Use this figure in PBT reconciliation (add back)

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### Summary Table