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      Question

      As per AS 13, long-term investments are carried at cost.

      When a permanent diminution in value occurs, the carrying amount must be reduced and the reduction recognized as an expense. Why is this requirement necessary?
      A To ensure assets are not overstated and to reflect true recoverable value Correct Answer Incorrect Answer
      B To avoid taxation on capital gains Correct Answer Incorrect Answer
      C To reduce profits intentionally Correct Answer Incorrect Answer
      D To comply with Companies Act Sec 123 Correct Answer Incorrect Answer
      E None Correct Answer Incorrect Answer

      Solution

      • The principle of prudence requires permanent diminution to be recognized immediately to prevent asset overstatement.

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