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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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