Identifying Unrealised Gains on Incomplete Transactions?

📌 CONCEPT: An unrealised gain occurs when a company acquires a majority stake in another company at a price lower than the market value of the shares, resulting in an increase in the value of the investment. This gain is referred to as an unrealised gain because it has not been realised until the company decides to sell the shares.

📐 RULE / FORMULA: The accounting principle to be applied in such a scenario is that the unrealised gain is recorded in the books of the acquiring company as a separate item, usually under the head 'Unrealised Gain on Revaluation of Investments'.

💡 WORKED EXAMPLE: Arjun Ltd. acquired 3/4th of the outstanding shares of XYZ Ltd. for ₹ 9,00,000. The book value of the shares was ₹ 6,50,000. However, the market value of the shares has increased to ₹ 12,00,000. To record this transaction, Arjun Ltd. would debit the cost of acquisition (₹ 9,00,000) and credit the unrealised gain on revaluation of investments (₹ 6,50,000 - ₹ 9,00,000 = ₹ 2,50,000) to the books.

⚠️ COMMON MISTAKE: Students often forget to record the unrealised gain separately, treating it as part of the cost of acquisition, which is incorrect.