ACCOUNTING STANDARDS -INTRODUCTION 1

ACCOUNTING STANDARDS BASICS

Accounting Standards – Introduction
QUESTION NO 1
What are Accounting Standards?

SOLUTION
Accounting Standards (AS) are written policy documents issued by an Expert Accounting
Body, or by Government, or by other Regulatory Body, covering the following aspects of
accounting transactions in Financial Statements –
1. Recognition of transactions and events in the Financial Statements.
2. Measurement of these transactions and events.
3. Presentation of these transactions and events in Financial Statements, in a meaningful &
understandable manner, &
4. Disclosure requirements in Financial Statements.

QUESTION NO 2
Outline the advantages and disadvantages of Accounting Standards.

SOLUTION
Objectives/Advantages Disadvantages
1. To promote the dissemination of timely and 1. In some cases,
useful financial information to all Stakeholders alternative solutions to
and Users. specific accounting
2. To provide a set of standard accounting policies, problems may have
valuation norms and disclosure requirements. valid supportive
3. To improve the quality of Financial Reporting, by arguments. Choice of
promoting comparability, consistency and any one solution
transparency. becomes difficult.
4. To ensure disclosure of accounting principles 2. Standards may be
and treatments, where important information is applied in a rigid and
not otherwise statutorily required to be disclosed. inflexible manner,
5. To reduce (or eliminate if possible), accounting focusing ore on form
alternatives, thereby leading to better inter-Firm than substance.
& Intra-Firm comparison of Financial Statements. 3. Standards cannot
6. To reduce scope for creative accounting i.e. override the Statute,
twisting of accounting policies to produce and should be framed
Financial Statements favourable to a particular within the framework of
interest group. the Law.

QUESTION NO 3
Explain the composition of the Accounting Standards Board (ASB) of ICAI.

SOLUTION
The Accounting Standards Board (ASB) was constituted on 21st April 1977 by the ICAI. Its
composition is as under:-
2 ACCOUNTING
1. Elected Members: (a) Elected members of the Council of the ICAI nominated on the
ASB, (b) Chairman of the Research Committee and the Chairman of the Expert
Advisory Committee of the ICAI, if they are not otherwise members of the ASB.

2. Nominated Members: Central Government’s Nominee on the Council representing –(a)

Department of Company Affairs (DCA) (b) C & AG, and (c) Central Board of Direct
Taxes (CBDT).

3. Professional Institutions: Representative of – (a) Institute of Cost and Works

Accountants of India (ICWAI)and (b) Institute of Company Secretaries of India (ICSA).

4. Academic Institutions: Representative from – (a) Universities & (b) Indian Institutes of
Management (IIM).

5. Government Representatives: Representative of – (a) Central Board of Excise and

Customs (CBEC), (b) Controller General of Accounts.

6. Institution Representatives: Representative of – (a) Reserve Bank of India (RBI), (b)

Securities and Exchange Board of India (SEBO) and (c) Financial Institutions.

7. Industry Associations: Representative from – (a) Associated Chambers of Commerce

and Industry (ASSOCHAM), (b) Confederation of Indian Industry (CII), and (c)
Federation of Indian Chambers of Commerce and Industry (FICCI).
8. Other Members: (a) Eminent Professionals co-opted by ICAI (either in practice or in
industry, government, education, etc.) and (b) Representative(s) of any other body, as
considered appropriate by the ICAI.

QUESTION NO 4
Outline the Objectives and Functions of the Accounting Standards Board (ASB) of ICAI.

SOLUTION
1. To conceive of and suggest areas in which Accounting Standards need to be
developed.
2. To formulate Accounting Standards with a view to assisting the Council of the ICAI in
evolving and establishing Accounting Standards in India.
3. To examine how far the relevant International Accounting Standard/ International
Financial Reporting Standard can be adapted while formulating the Accounting
Standard and to adopt the same.
4. To review, at regular intervals, the Accounting Standards from the point of view of
acceptance or changed conditions, and, if necessary, revise the same.
5. To provide, from time to time, interpretations and guidance on Accounting
Standards.
6. To carry out such other functions relating to Accounting Standards.

QUESTION NO 5
What factors are considered by ASB while formulate Accounting Standards?
ACCOUNTING STANDARDS -INTRODUCTION 3
SOLUTION
Accounting Standards are issued under the authority of the Council of the ICAI. While
formulating the Accounting Standards the ASB will take into consideration the following -
1. International Accounting Standards (IASs) issued by the International Accounting
Standards Committee (predecessor body to IASB) or International Financial
Reporting Standards (IFRSs) issued by the IASB.
2. Applicable Laws in India
3. Customs and Usages in India
4. Business Environment prevailing in India.

QUESTION NO 6
Describe the procedure in the issue of an Accounting Standard in India.

SOLUTION
For formulating accounting Standards, the following procedure is adopted –

Step Procedure
1. Determining the Determination of – (a) the broad areas in which Accounting
need for AS Standards need to be formulated, and (b) the priority in regard to
the selection thereof.
2. Constituting Study Constituting a Study Group consisting of Members of ICAI and
Group others, to consider specific projects and prepare Preliminary Drafts
of proposed Accounting Standards.
3. Drafting the The Study Group makes a Draft of the proposed standard
Standard containing – (a) Objectives and Scope (b) Definitions of terms
used, (c) Recognition and measurement principles, wherever
applicable, and (d) Presentation and disclosure requirements.
4. Analysing the Draft • ASB considers the Preliminary Draft prepared by the Study
Group.
• When any revision is required on the basis of deliberations
the ASB either – (a) makes the same, or (b) refers the same
to the study Group.
ASB circulates the AS Draft to the Council Members of the ICAI
and the following specified bodies for their comments:-
(a) The Institute of Cost and Works Accountants of India
(ICWAI).
(b) The Institute of Company Secretaries of India (ICSI).
(c) Department of Company Affairs (DCA).
(d) Comptroller and Auditor General of India (C&AG).
(e) Central Board of Direct Taxes (CBDT).
(f) Standing Committee/Conference of Public Enterprises
(SCOPE).
5. Circulating the Draft (g) Reserve Bank of India (RBI).
(h) Indian Banks’ Association (IBA).
(i) Securities and Exchange Board of India (SEBI).
(j) Associated Chambers of Commerce and Industry
(ASSOCHAM), Confederation of Indian Industry (CII) and
Federation of Indian Chambers of Commerce and Industry
(FICCI).
4 ACCOUNTING
(k) Any other body considered relevant by the ASB keeping in
view the nature of the Accounting Standard.
6.Holding Discussion (a) ASB holds a meeting with the representatives of Specified
and Finalising Bodies, to ascertain their views on the Draft Accounting
Exposure Draft. Standard.
(b) Based on comments received and discussion with
representatives of specified bodies, ASB finalises the
Exposure Draft of proposed Accounting Standard.

7. Circulating the (a) The Exposure Draft of the Proposed Standard is issued for
Exposure Draft. comments by the Members of ICAI and the public.
(b) The Exposure Draft will also be specifically sent to Specified
Bodies (as listed above), Stock Exchanges and other interest
groups, as considered appropriate.

8. Finalising the Considering the comments received, the ASB finalises the draft of
Exposure Draft the Proposed Standard, and submits the same to the Council of the
ICAI.
9. Modifying and The Council of the ICAI considers the finalized draft Standard, and
issuing the if necessary, modifies the same in consultation with the ASB, and
Accounting then issues the Accounting Standard (after modification) on the
Standard. relevant subject.

QUESTION NO 7
Outline the nature and scope of Accounting Standards in India.

SOLUTION
1. AS are intended to apply only to material items. Material items are those the
knowledge of which will have a significant effect on the decisions of Users of Financial
Statements.

2. AS’s are primarily intended to be broad principles not detailed rules.

3. AS by their nature cannot and do not override the Local Regulations which govern the
preparation and presentation of Financial Statements in the country.

4. If a particular AS is not in conformity with law, the provisions of law will prevail and the
Financial Statements should be prepared in conformity with such law. (In the Financial
Statements, there should be a description of the accounting treatment made, along with
the reason that it has been adopted because of Law/Court/Tribunal Order description of
the difference between the AS and the treatment given by the Enterprise, and (c)
financial impact, if any, arising due to the difference.

5. The prescribed disclosure (by way of appropriate notes explaining the treatment of
particular items) to be made in Financial Statements and the Auditor’s Report, are
intended only as a clarification, and need not be treated as adverse comments on the
Financial Statements.
ACCOUNTING STANDARDS -INTRODUCTION 5
6. ICAI specifies the date from which a particular standard will come into effect and the
class of enterprises to which it will apply. However, no standard will have retrospective
application, unless otherwise stated.

7. AS will be mandatory from respective date(s) mentioned in the Accounting Standard(s).

The Auditor is responsible for examining compliance with AS in the Financial
Statements and reporting deviations therefrom.

8. Treatment of a Revenue/Expense (or) Receipt/Payment under AS will not influence its

treatment under Tax Laws, governing allowability of expense, treatment of
income/receipt, etc. However, in case of audit u/s 44AB of the Income Tax Act, 1961,
all Financial Statements prepared under Mercantile System of Accounting should
comply with AS.

QUESTION NO 8
Write short notes on Accounting Standard Interpretations (ASIs).

SOLUTION

1. Accounting Standard Interpretations (ASIs) seek to answer issues/questions that

arise in the course of applicant of an Accounting Standard. ASIs are issued after the
issue of the relevant Standard.

2. ASB considers matters requiring interpretation on any Accounting Standard and

issues ASIs under the authority of the Council. Both the Accounting Standard (AS)
and its Interpretation (ASI) have the same authority. Hence for a mandatory AS, its
ASI will also be mandatory, for a recommendatory AS, its ASI will also be
recommendatory.

3. Subsequent to Notification of ICAI’s AS under Companies (Accounting Standards)

Rules 2006, the ASB has incorporated the ASI’s as ‘Explanation’ to the relevant
paragraphs of the AS itself (except ASI 2, 11, 12, 23, 27 and 29 which have not
been notified by Central Government) (See page 8.8 for Companies (Accounting
Standards) Rules, 2006).

Note: Issues covered in the ASIs are discussed in the respective AS itself.

QUESTION NO 9
Write short notes on compliance with Accounting Standards.

SOLUTION

1. Effective Date: AS will be mandatory from respective date(s) mentioned in the

Accounting Standard(s).

2. Auditors’ Role: The mandatory status of an Accounting Standard implies that -

(a) Members of ICAI should ensure compliance with the Accounting Standard in
the presentation of Financial Statements of enterprises and discharge their
attest functions.
6 ACCOUNTING
(b) Members are bound to make adequate disclosures of any deviation from
Accounting Standard(s), in their Audit Reports to make Users of Financial
Statements aware of deviation(s).

3. Partial compliance not allowed: Financial Statements are said to be in compliance with
the Accounting Standards only when they comply with all the requirements of each
applicable Accounting Standard.

QUESTION NO 10
Write short notes on the applicability of Accounting Standards (AS), based on activities
performed.

SOLUTION
In the audit of an organisation whose objects are charitable or religious, the Organisation holds
that AS are not applicable, since only a very small proportion of its activities are business in
nature. Comment.

Classification of Enterprises based on activities performed.

Fully Commercial Activities Fully Non-Commercial Partly Commercial and

Activities Partly Non-Commercial
Activities.

AS Fully applicable AS not applicable AS fully applicable, i.e.

to all activities.

1. General Purpose Financial Statements: Accounting Standards are designed to apply to

General Purpose Financial Statements and other Financial Reporting, which are subject
to the attest function of the Members of the ICAI.

2. Fully Commercial Activities: Accounting Standards apply in respect of any enterprise

(whether organized in corporate, co-operative or other forms) engaged in commercial,
industrial or business activities, irrespective of whether it is profit oriented or it is
established for Charitable or religious purposes.

3. Fully non-commercial activities: Accounting Standard will not apply to enterprises only
carrying on the activities which are not of commercial, industrial or business nature (e.g.
an activity of collecting donations and giving them to flood affected people).

4. Partly commercial and non-commercial activities: Accounting Standards are not

applicable to an enterprise only if no part of the activity of such Enterprise is
commercial, industrial or business in nature. Even if a very small proportion of the
activities of an Enterprise is considered to be commercial, industrial or business in
nature, the AS would apply to all its activities including those which are not commercial,
industrial or business in nature.

Conclusion: Refer Principles above, AS is applicable for the Charitable/Religious Organisation

for all its activities.
ACCOUNTING STANDARDS -INTRODUCTION 7
QUESTION 11
Write a short note on NACAS/NFRA

SOLUTION
National Advisory Committee on Accounting Standard (NACAS) – Under section 210A of
Companies Act, 1956, the Central Government by notification has constituted a committee to
advise the Central Government on the formulation and lying down on accounting policies and
accounting standards for adoption by companies or class of companies specified under the
Act, Based on the recommendations of NACAS, the Central Government has notified AS-1 to
AS-7 and AS-9 to AS-29 in December 2006 in the form of Companies (Accounting Standards)
Rules, 2006.

Section 132 of the Companies Act, 2013 provides that a National Financial Reporting Authority
(NFRA) will be constituted and Accounting Standards will be notified by the Central
Government in consultation with National Financial Reporting Authority in place of NACAS.
However, till the NFRA is constituted under new Companies Act, 2013 the Central Government
may prescribe the Standard of Accounting as recommended by the ICAI in consultation with
NACAS constituted under section 210A of the Companies Act, 1956. The Central Govt. has
reconstituted the NACAS in September 2015 till the NAFRA comes in force.

Status of the Accounting Standards issued by the Institute of Chartered Accountants of India
.
Number of the Title of the Accounting Date from which Entity to which
Accounting Standard mandatory applicable.
Standard (AS) (accounting periods
commencing on or
after)
AS-1 Disclosure of Accounting 1.4.1993 All
Policies
AS-2 Valuation of Inventories 1.4.1999 All
AS-3 Cash Flow Statement 1.4.2001 Level-1 and Non-
SMC
AS-4 Contingenices and Events 1.4.1998 All
Occurring after the Balance
Sheet Date
AS-5 Net Profit or Loss for the 1.4.1996 All
Period. Prior Period Items
and Changes in Accounting
Policies
AS-6 Depreciation Accounting 1.4.1995 All
AS-7 (Revised) Construction Contracts 1.4.2002 All
AS-8 Withdrawn and included in - -
AS-26
AS-9 Revenue Recognition 1.4.1993 All
AS-10 Accounting for Fixed Assets 1.4.1993 All
AS-11 (Revised The Effects of Changes in 1.4.2003 All
2003) Foreign Exchange Rates
AS-12 Accounting for Govt. Grants 1.4.1994 All
AS-13 Accounting for Investments 14.1995 All
AS-14 Accounting for 1.4.1995 All
8 ACCOUNTING
Amalgamations
AS-15 (Revised Employees benefit 1.4.2006 All
2005)
AS-16 Borrowing Costs 1.4.2000 All
AS-17 Segment Reporting 1.4.2001 Level-1 and Non-
SMC
AS-18 Related Party Disclosure 1.4.2001 Level – I, II and all
companies
AS-19 Leases 1.4.2001 All
AS-20 Earning Per Shares 1.4.2001 All
AS-21 Consolidated Financial 1.4.2001 See Note-1
Statements
AS-22 Accounting for Taxes on 1.4.2001 For Listed
Income Companies
1.4.2002 Companies other
than listed
1.4.2006 All
AS-23 Accounting for Investment in 1.4.2002 See Note-I
Associates in Consolidated
Financial Statements
AS-24 Discontinuing operations 1.4.2004 Level-I, II, and all
companies.
AS-25 Interim Financial Reporting 1.4.2002 Note-2
AS-26 Intangible Assets 1.4.2003 All
AS-27 Financial Reporting of 1.4.2002 See Note-I
Interests in Joint Ventures
AS-28 Impairment of Assets 1.4.2004 Level-I )and all
1.4.2006 Level-II )companies
1.4.2006 Level-III
AS-29 Provisions, Contingent 1.4.2004 All
liabilities and Contingent
Assets
AS-30 Financial Instruments – WITHDRAWN Non-SME
Recognition and
Measurement
AS-31 Financial Instruments – WITHDRAWN Non-SME
Presentation
AS-32 Financial Instruments – WITHDRAWN Non-SME
Disclosures

Note 1 : AS-21, AS-23 and AS-27 (relating to consolidated financial statements) are required
to be complied with by an entity if the entity, pursuant to the requirements of a statute/regulator
or voluntarily, prepares and presents consolidated financial statements.

Note 2: If an entity is required or elect to prepare and present an interim financial report, it
should comply with this standard.
APPLICATION OF ACCOUNTING STANDARDS 9

ACCOUNTING STANDARDS: BASICS

APPLICATION OF ACCOUNTING STANDARDS
CONCEPT 1: Applicability of Accounting Standards to Non-Corporate Entities

For the purpose of applicability of accounting standards entitles are classified into three
categories by the ICAI, however this classification is not applicable to companies covered by
classification made by Companies (Accounting Stands) Rules, 2006.

Level I Entities - Non-corporate entities which fall in any one or more of the following
categories, at the end of the relevant accounting period, are classified as Level I entities

(i) All commercial, industrial and business reporting entities, whose turnover (excluding
other income) exceeds rupees fifty crore in the immediately preceding accounting
year.
(ii) All commercial, industrial and business reporting entities having borrowings,
(including public deposits) in excess of rupees ten crore at any time during the
immediately preceding accounting year.

Level II Entities (SMEs) -Non corporate entities which are not Level I entities but fall in any
one or more of the following categories are classified as Level II entities from the accounting
year commencing on or after April 01, 2012:

(i) All commercial, industrial and business reporting entities, whose turnover )excluding
other income) exceeds rupees one crore but does not exceed rupees fifty crore in
the immediately preceding accounting year.

(ii) All commercial, industrial and business reporting entities having borrowings
(including public deposits) in excess of rupees one crore but not in excess of rupees
ten crore at any time during the immediately preceding accounting year.

Level III Entities (SMEs) –Non-corporate entities which are not covered under Level I and
Level II are considered as Level III entities.

Applicability of Accounting Standard to Level I – All the 29 Accounting Standards are fully
applicable to Level-I entities except AS 21, 23, and 27, unless the relevant regulations require
compliance with these three standards.

Applicability of Accounting Standard to Levels II and III entities (SME) – For the purpose
of applicability of accounting standard to Level0II enterprises the case can be divided into
three categories:

• Accounting standards fully applicable.

• Accounting standards applicable but relaxation from certain disclosure requirements.
• Accounting Standards not applicable.
10 ACCOUNTING

Accounting Standards fully applicable – AS-1, AS-2, AS-4, AS-5, AS-6, AS-7, AS-9, AS-10,
AS-11, AS-12, AS-13, AS-14, AS-15, AS-16, AS-22, AS-26 and AS-28.

AS-28, “Impairment of Assets” is applicable:

- For Level-I entities w.e.f. 1.4.2004

- For Level-II entities w.e.f. 1.4.2006 and
- For Level-III entities w.e.f. 1.5.2008

Accounting Standards applicable but relaxation from certain disclosures requirements – AS-19,
AS-20 and AS-29.

Accounting Standards not applicable – AS-3, AS-17, AS-18 and AS-24, AS-21, AS-23, AS-25
and AS-27 are not applicable because of existing regulation in India.

Note: Consequent upon the issue of Companies (Accounting Standards) Rules, 2006, the
applicability of the Accounting Standards as announced by the Institute of Chartered
Accountants mentioned above is only for the entities other than companies. For the companies
the applicability of Accounting Standards is as per Companies (Accounting Standards) Rules,
2006 as detailed in para

CONCEPT 2: Applicability of Accounting Standard to Co-operative Societies:

The Institute of Chartered Accountants of India has explained that the Accounting Standards
issued by the Institute shall apply in respect of financial statements of co-operative societies,
which carry on commercial, industrial or business activities, and are subject to the attest
function of the members of the Institute.

Accounting Standards made mandatory by the Institute as specified in the respective

standards or made mandatory by separate announcement, are also mandatory in respect of
co-operative societies.

The Institute of Chartered Accountants of India has further clarified that even if a very small
proportion of the activities of a co-operative society is considered to be commercial, industrial
or business in nature, then it cannot claim exemption from the application of Accounting
Standards. The Accounting Standards would apply to all its activities including those, which
are not commercial, industrial or business in nature.

By this the members of the Institute of Chartered Accountants of India who are appointed as
auditors of the co-operative societies have the responsibility to qualify their reports in case the
relevant accounting standards are not followed in the preparation and presentation of the
financial statements of the co-operative societies.

CONCEPT 3: Applicability of Accounting Standards to Charitable Entities

Accounting Standard apply to commercial, industrial or business enterprises. Therefore, they

do not apply to purely charitable entities, however, if charitable entity is also engaged in
business or commercial activity (howsoever insignificant) then accounting standards would
apply to its entire activity, charitable and non-charitable.
APPLICATION OF ACCOUNTING STANDARDS 11
CONCEPT 4: Applicability of Accounting Standard to partnership and proprietorship

The preface to the statement of Accounting Standard clarified that the Accounting Standards
are issued “for use in the presentation of general purpose financial statements issued to the
public by such commercial, industrial or business enterprises, as may be specified by the
Institute from time to time and subject to the attest function of its members. The term “General
Purpose Financial Statements” includes balance sheet, statement of profit and loss and other
statements and explanatory notes, which form part thereof. Thus, compliance with accounting
standards is required to be examined by an auditor in an audit of financial statements of
individuals and non-corporate enterprises (viz. sole, proprietary concerns, partnership firms,
societies registered under Societies Registration Act, Trusts, Hindu undivided families, and
association of persons). Therefore, Accounting Standards are applicable not only to limited
companies but also to partnership firms or proprietorships.

CONCEPT 5: Applicability of Accounting Standards for Companies

The Central Govt. in exercise of powers under section 211(3C) of the Companies Act, 1956
notified the Companies (Accounting Standards) Rules, 2006 in the Official Gazette w.e.f.
accounting period commencing on or after 7.12.2006 (now deemed to be Accounting Standard
as specified under section 133 of the Companies Act, 2013):

• The rules provide that Accounting Standards 1 to 7 and 9 to 29 recommended by the

Institute of Chartered Accountants of India shall be the “Accounting Standards”
(referred to as the “Notified Accounting Standards”) for the purpose of section 129(1)
and Section 143(3) (e) of the Companies Act, 2013.
• The notified accounting standards for the most part, are a verbatim reproduction of the
Accounting Standards as issued by the Institute of Chartered Accountants of India.
• All the 30 Accounting Standards Interpretations issued by Institute of Chartered
Accountants of India have been incorporated at the relevant places by way of
explanation except Accounting Standards Interpretations 11, 12, 27 and 29.
• The notified Accounting Standards are mandatory for all companies and their auditors
except as exempted/relaxed for SMCs.
• Exemptions/relaxations to Small and Medium Companies (SMCs) have been given.

The definition of SMCs is much simpler than the definition of SMEs given by Institute of
Chartered Accountants of India (which involved classifying enterprises in Level-I Enterprises,
Level-II Enterprises and Level-III Enterprises).

Transitional Provision under Rule 7 of Chapter IX of the new Companies Act, 2013 provides
the standards of accounting as specified under the Companies Act, 1956 (I of 1956) shall be
deemed to be the accounting standards until accounting standards are specified by the Central
Government under section 133.

Applicability for specified companies – Indian Accounting Standards (abbreviated as Ind

AS) are another set of accounting standards notified by the Ministry of Corporate Affairs,
Government of India which are converged with International Financial Reporting Standards
(IFRS). These accounting Standards are formulated by Accounting Standards Board of
Institute of Chartered Accountants of India. Now India will have two sets of accounting
standards viz. existing Accounting Standards under Companies (Accounting Standards) Rules,
2006 and IFRS converged Indian Accounting Standards (Ind AS). The Ind AS are named
12 ACCOUNTING
and numbered in the same way as the corresponding IFRS. The MCA has notified 39 Ind AS
as Companies (Indian Accounting Standards) Rules, 2015 with following roadmap of
implementation:

Phase-I 1st April 2015 or thereafter: Voluntary Basis for all companies (with
Comparatives).
Ist April 2016 : Mandatory Basis
(a) Companies listed/in process of listing on Stock Exchanges in
India or Outside India having net worth > INR 5 Billion.
(b) Unlisted Companies having net worth > INR 5 Billion.
(c) Parent, Subsidiary, Associate and J.V. of above.
Phase-II Ist April 2017 : Mandatory Basis
(a) All companies which are listed/or in process of listing inside or outside
India on Stock Exchange not covered in Phase I (other than companies
listed on SME Exchanges).
(b) Unlisted companies having net worth of INR 2.5 Billion or more.
(c) Parent, Subsidiary, Associate and J.V. of above.
Companies listed on SME exchange not required to apply Ind AS
Once Ind ASs are applicable, an entity shall be required to follow the Ind AS for
all the subsequent financial statements.

Companies not covered by the above roadmap shall continue to apply existing Accounting
Standards notified in Companies (Accounting Standards) Rules, 2006.

Small and Medium Companies (SMCs) – Small and Medium Companies (SMCs) has been
defined as in rule 2(f) of Companies (Accounting Standards) Rules, 2006 issued under
Companies Act 1956, as per the rule, company which satisfies all the following five conditions
as at the end of the accounting period shall be called SMC:

(a) the equity debt securities of the company are not listed or are not in the process of
listing of any stock exchange, whether in India or outside India.
(b) the company is not a bank or financial institution or insurance company.
(c) the company’s turnover (excluding other income) does not exceed Rs. 50 Crores in
the immediately preceding accounting year.
(d) the company does not have borrowing (including public deposits) exceeding Rs. 10
Crores at any time during the immediately preceding accounting year and
(e) the company is not a holding company or subsidiary of a non-SNC.

Enterprise – Rule 2(e) has given the new definition of “enterprise” which means a company
as defined in section 3 of the Companies Act, 1956. Wherever the word “enterprise” has been
used in notified accounting standards this will means company registered under Companies
Act.

Exemptions/relaxations to SMCs – The SMCs are given the following relaxation in

complying the notified accounting standards -

• SMCs need not to disclose the segment reporting as per AS-17. As per section 2(40)
of Companies Act, 2013, AS-3 is not mandatory for one person company, small
company (Sec. 2(85) and dormant company.
APPLICATION OF ACCOUNTING STANDARDS 13

• The SMCs have been given following relaxation as regards AS-15 “Employee
Benefits”.

- SMCs need not comply paras 11 to 16 of AS-15 to extent they deal with recognition
and measurement of short-term accumulated compensating absences.
- Discounting the amount payable after 12 months of balance sheet as regards defined
contribution plans and termination benefits.
- Recognition, measurement and disclosure principles in respect of defined benefit
plans and other long-term employee benefits plan. However, such enterprises should
provide and disclose the accrued liability in respect of defined benefit plan and other
long-term employee benefit plan as per actuarial valuation based on projected unit
credit method and discount rate based on yield on Government bonds.

• SMCs need not disclose diluted EPS as per AS-20 “Earning Per Share”.

• SMCs need not comply with disclosure requirements regarding operating leases of
sub-paras (b) & (d) of para 46 and sub-paras(a), (b) & (e) of para 25 of AS-19 “Leases”
and sub-paras(a) & (f) of para 37 and sub-paras (c) (e) & (f) of para 22 of AS-19
regarding disclosure for finance lease by the lessor and lessee respectively.

• Value in use has been differently defined for SMCs which provides and alternate to
calculate value in use based on a reasonable estimate of future cash flows.

• SMCs are exempt from disclosure requirements of paras 66 and 67 of AS-29 regarding
provisions and its descriptions.

AS-18 “Related Party Disclosures” will now apply to all companies including SMCs and as no
exemptions/relaxations has been given by Companies (Accounting Standards) Rules, 2006.

Change in Status of the company

(a) From SMC to Non-EMC – Where a company, being an SMC, has qualified for any
exemption or relaxation previously but no longer qualifies for the relevant exemption
or relaxation in the current accounting period, the relevant standards or
requirements become applicable from the current period and the figures for the
corresponding period of the previous accounting period need not be revised merely
by reason of its having ceased to be an SMC. The fact that the company was an
SMC in the previous period and it has availed of the exemptions or relaxations
available to SMC shall be disclosed in the notes to the financial statements.
(b) From Non-SMC to SMC- An existing company, which was previously not an SMC
and subsequently becomes an SMC, shall not be qualified for exemption or
relaxation in respect of accounting standards available to an SMC until the company
remains as SC for two consecutive accounting periods.

QUESTION 1
Examine whether the following Companies can be classified as SMC as per Companies (AS)
Rules, 2006.

(a) A Pvt. Ltd. a Subsidiary of a Multinational Company listed on London Stock Exchange.
It has a Turnover of Rs. 12 Crores, and Borrowings of Rs. 5 Crores.
14 ACCOUNTING
(b) B Pvt. Ltd. which has a Turnover of Rs. 45 Crores, other Income of Rs. 7 Crores, and
Bank Borrowings of Rs. 9 Crores.

(c) C Ltd., which has appointed Merchant Bankers to prepare a Red Herring Prospectus for
the purpose of filling the same with the Securities Exchange Board of India.

Conclusion:
Company Status Reason
The Multinational Company is a Listed Company is not a SMC.
A Pvt. Ltd Non-SMC Hence, its Subsidiary A Pvt. Ltd. is not a SMC. Turnover and
Borrowings of A Pvt. Ltd. are not relevant in this regard.
Turnover (excluding Other Income) does not exceed Rs. 50
B Pvt. Ltd. SMC Crores, and Borrowings does not exceed Rs. 10 Crores. Hence, it
is an SMC.
C Ltd. Non-SMC It is in the process of listing and hence a Non-SMC.

QUESTION 2
Hari Ltd. with a Turnover of Rs. 35 Lakhs and Borrowings of Rs. 10 Lakhs during any time
of the previous year, wants to avail of the exemptions available in adoption of AS
applicable for Companies for the financial year. Advise the Management the exemptions
available under Companies (AS) Rules, 2006.

Conclusion:
Hari Ltd. is a SMC and is eligible for the exemption/relaxations as given in the previous
question.

QUESTION 3
A Company which satisfies the conditions of a SMC as per Companies (AS) Rules, 2006,
has represented that it does not require to give disclosures required by AS-3 Cash Flow
Statements and AS-18 Related Party Disclosures in its Financial Statements. Comment.

Conclusion:
AS-3 is not applicable to SMC. However AS-18 is applicable and required disclosures are to
be given.

QUESTION 4
A Company was classified as Non-SMC in 2011-12. In 2012-13, it has been classified as
SMC. The Management desires to avail the exemption or relations available to SMCs in
2012-13. However, the Accountant of the Company does not agree with the same, Give
your views.

Conclusion:
The Company is not eligible for exemption/relaxation available to SMC’s, until the Company
remains as an SMC for two consecutive accounting periods. The Accountant’s view is
correct

Disclosure by SMC – Companies (Accounting Standards) Rules, 2006 provides that SMC
should make the following disclosures by way of notes to accounts:
APPLICATION OF ACCOUNTING STANDARDS 15

• The SMC which does not disclose certain information pursuant to the exemptions or
relaxations given to its shall disclose the fact that it is an SMC and has complied with
the accounting standards insofar as they are applicable to an SMC on the following:

“The company is an SMC as defined in the general instructions in respect of

accounting standards notified under the Companies Act. Accordingly the
company has complied with the accounting standards as applicable to an SMC.”

• If an SMC opts not to avails of the exemptions or relaxations available to an SMC in

respect of any but not all of accounting standards, it shall disclose the standard(s) in
respect of which it has availed the exemptions or relaxations.
• If an SMC desires to disclose the information not required to be disclosed pursuant to
the exemptions or relaxations available to the SMCs, it shall disclose that information in
compliance with the relevant accounting standards.
• The SMC may opt for availing certain exemptions or relaxations from compliance with
the requirements prescribed in an accounting standard provided that such a partial
exemptions or relaxations and disclosures shall not be permitted to mislead any person
or public.
16 ACCOUNTING
BASIC KNOWLEDGE ON APPLICATION OF IND-AS 17

BASIC KNOWLEDGE ON APPLICATION OF IND-AS

Government of India - Commitment to IFRS Converged Ind AS

In July 2014, the Finance Minister of India at that time, Shri Arun Jaitelyji, in his Budget Speech,
announced an urgency to converge the existing accounting standards with the International
Financial Reporting Standards (IFRS) through adoption of the new Indian Accounting
Standards (Ind AS) by the Indian companies from the financial year 2015-16 voluntarily and
from the financial year 2016-17 on a mandatory basis.
Pursuant to the above announcement, various steps have been taken to facilitate the
implementation of IFRS-converged Indian Accounting Standards (Ind AS). Moving in this
direction, the Ministry of Corporate Affairs (MCA) has issued the Companies (Indian
Accounting Standards) Rules, 2015 vide Notification dated February 16, 2015 covering the
revised roadmap of implementation of Ind AS for companies other than Banking companies,
Insurance Companies and NBFCs and Indian Accounting Standards (Ind AS). As per the
Notification, Indian Accounting Standards (Ind AS) converged with International Financial
Reporting Standards (IFRS) shall be implemented on voluntary basis from 1st April, 2015 and
mandatorily from 1st April, 2016.
With a view to provide a stable platform to the Indian entities for smoother and effective
implementation of Ind ASs it has been decided to converge early by notifying certain Ind ASs
corresponding to the IFRSs issued by the IASB such as IFRS 9, Financial Instruments (effective
from January 01, 2018), IFRS 14, Regulatory Deferral Balance (effective from January 01, 2016),
IFRS 15, Revenue from Contracts with Customers (Effective from January 01, 2017).

Roadmap∗ for Implementation of Indian Accounting Standards(Ind AS): A

Snapshot

1stApril 2015 or there after : Voluntary Basis for all companies (with Comparatives)

•
For Companies other than banks, NBFCs and Insurance Companies
st
Phase I 1 April 2016: Mandatory Basis
(a) Companies listed/in process of listing on Stock
Exchanges in India or Outside India having net worth
>INR 5 Billion
(b) Unlisted Companies having net worth >INR 5 Billion
(c) Parent, Subsidiary, Associate and J.V. of Above
Phase II 1stApril2017: Mandatory Basis
(a) All companies which are listed/or in process of listing
inside or outside India on Stock Exchanges not covered
in Phase I (other than companies listed on SME
Exchanges)
(b) Unlisted companies having net worth INR 5 Billion >
18 ACCOUNTING
INR 2.5 Billion
(c) Parent, Subsidiary, Associate and J.V. of Above
 Companies listed on SME exchange not required to apply Ind AS.
 Once Ind ASs are applicable, an entity shall be required to follow the Ind AS for all
the subsequent financial statements.
 Companies not covered by the above roadmap shall continue to apply existing
Accounting Standards notified in Companies (Accounting Standards) Rules,
2006.

List of Ind AS vis-a-vis IFRS and AS

Ind AS IFRS Title of Ind AS / IFRS AS / GN AS / GN Title

101 1 First Time Adoption - -

of Indian Accounting
Standards
102 2 Share Based Guidance Guidance Note on
Payment Note 18 Employee Share-based
103 3 Business 14 P t for
Accounting
Combinations
104 4 Insurance Contracts - -
105 5 Non-current Assets 24 Discontinuing Operations
Held for Sale and
Discontinued
Operations
106 6 Exploration for and Evaluation of Guidance Guidance Note on
Mineral Resources Note 15 Accounting for Oil and Gas
Producing Activities
107 7 Financial 32 Financial
Instruments: Disclosures
Disclosures
108 8 Operating Segments 17 Segment Reporting
109 9 Financial Instruments 30 Financial
Recognition and
110 10 Consolidated 21 Measurement
Consolidated
Financial Statements Statements
111 11 Joint Arrangements 27 Financial Reporting of
in Joint Ventures
112 12 Disclosure of - -
Interests in Other
Entities
113 13 Fair Value - -
Measurement
114 14 Regulatory Deferral Guidance Accounting for Rate
Accounts Note Activities
115 15 Revenue from 7 Construction Contracts
Contracts with 9 Revenue Recognition
Customers
BASIC KNOWLEDGE ON APPLICATION OF IND-AS 19

1 1 Presentation of 1 Disclosure of Accounting

Financial Statements
2 2 Inventories 2 Valuation of Inventories
7 7 Statement of Cash 3 Cash Flow Statements
Flows
8 8 Accounting Policies, 5 Net Profit or Loss for the
Changes in Prior period Items and
Accounting Estimates in Accounting Policies
and Errors
10 10 Events after the 4 Contingencies and
Reporting Period Occurring After the Balance
12 12 Income Taxes 22 Sh t
Accounting for Taxes on
16 16 Property, Plant and 6 Depreciation Accounting,
Equipment 10 Accounting for Fixed Assets
17 17 Leases 19 Leases
19 19 Employee Benefits 15 Employee Benefits
20 20 Accounting for 12 Accounting for
Government Grants Grants
and Disclosure of
Government Assistance
21 21 The Effects of 11 The Effects of
Changes in Foreign Foreign Exchange Rates
Exchange Rates
23 23 Borrowing Costs 16 Borrowing Costs
24 24 Related Party Disclosures 18 Related Party Disclosures
27 27 Separate Financial Statements - -
28 28 Investment in 23 Accounting for
Associates and Joint Associates in
Ventures Financial Statements
29 29 Financial Reporting - -
in Hyperinflationary
Economies
32 32 Financial 31 Financial
Instruments: Presentation
Presentation
33 33 Earnings per Share 20 Earnings per Share
34 34 Interim Financial Reporting 25 Interim Financial Reporting
36 36 Impairment of Assets 28 Impairment of Assets
37 37 Provisions, 29 Provisions, Contingent
Contingent Liabilities and Contingent Assets
and Contingent Assets
38 38 Intangible Assets 26 Intangible Assets
40 40 Investment Property 13 Accounting for Investments
41 41 Agriculture - -
20 ACCOUNTING

Benefits o
ACCOUNTING STANDARD -11 21

ACCOUNTING STANDARD 11
FOREIGN EXCHANGE TRANSACTIONS
QUESTION NO 1
Compute the Loss/Gain for the financial year ending 31st March 20X1 and 20X2 from the
following:-

Raw Materials imported on 1st Jan.20X1 Rate of Exchange Rs.55 Per USD
USD 10,000
Financial Year ending on 31st March 20X1 Rate of Exchange Rs. 54 per USD
Date of Actual Payment 7th July 20X1 Rate of Exchange Rs. 53 Per USD

The Chief Accountant of Company passed an entry on 31st March 20X1, adjusting the
cost of Raw Material Consumed for the difference between Rs.55 and Rs. 53 per USD.
Discuss whether this treatment is justified.

SOLUTION
The Raw Material Purchase should be recorded at the Transaction Rate, i.e. USD = Rs.55 =
Rs 5,50,000. The treatment of Exchange Differences will be as under:-

Purchase of Goods for Financial Year Ending Payment to Supplier

10,000 USD
Transaction Date 1st Jan.20X1 Balance Sheet Date Settlement Date 7th July
31st March 20X1
USD = Rs. 55.00 USD = Rs. 54.00 USD = Rs. 53.00

Exchange Diff. = Rs.1.00 Per USD (Gain) Exchange Diff. = Rs.1.00 Per USD (Gain)
(due to Reporting) i.e.Rs.10,000 (due to Settlement) i.e. Rs. 10,000
Credited to P&L A/c. for the Credited to P&L A/c. in next FY i.e.
year ending 31st March 20X1 after 31st March 20X1
Conclusion: For the year ended 31st March 20X1, the gain of Rs. 10,000 should be separately
credited to P&L A/c. as an Exchange Difference and disclosed as required under AS-11, and
Schedule III which requires specific disclosure of Net Gain/Loss on Foreign Currency
Transaction and Translation. It should not be adjusted to the Cost of Materials Consumed.

QUESTION NO 2
Rudra Ltd. exported goods for USD 2,00,000 in February (Exchange Rate Rs. 54.38). The
amount was received in June (Exchange Rate Rs. 54.43). The Company closes its books of
accounts on 31st March every year. The Exchange Rate on 31st March current year was Rs.
54.50. Find out the Exchange Fluctuation Gain/Loss on the Balance Sheet date, and on the
date of receipt.

SOLUTION
Export of Goods USD 2,00,000 Financial Year Ending Receipt from Customer
Transaction Date=February Balance Sheet Date= Settlement Date= June
March
USD = Rs. 54.38 USD = Rs. 54.50 USD = Rs. 54.43
22 ACCOUNTING
Exchange Diff. = Rs.0.12 Per USD (Gain) Exchange Diff. = Rs.0.07 Per USD (Loss)
(due to Reporting) i.e.Rs.24,000 (due to Settlement) i.e. Rs. 14,000
Credited to P&L A/c. for the Debited to P&L A/c. in next FY i.e.
year ending 31st March after 31st March

QUESTION NO 3
Ambikapati Ltd. imported certain stock worth USD 60,000 on 30th June when 1 USD = Rs.
54.00. The payment is made on 31st December when 1 USD = Rs.55.40. The Stock is in hand
and lying unsold as on 30th September when the Company closes its accounts. Give Journal
Entries under AS-11, if the rate on the Balance Sheet date was 1 USD = Rs. 53.85.

SOLUTION

Date Particulars Dr.(Rs.) Cr. (Rs.)

30th June Purchases A/c. Dr. 32,40,000
(Transaction To Vendor/Foreign Supplier A/c. 32,40,000
Date) (Being import of raw materials, recorded at spot rate,
i.e. USD 60,000x Rs.54.00)
30th Sept. Vendor/Foreign Supplier A/c. Dr. 9,000
(FY end) To Profit and Loss A/c. (Exchange Rate 9,000
Difference)
(Being translation of payable, i.e. monetary item at
the Closing Rate and recognition of gain due to
exchange difference (60,000 x (54.00 – 53.85)
th
30 Sept. Closing stock A/c. Dr. 32,40,000
(FY end) To Trading A/c. 32,40,000
(Being Stock, non-monetary item, carried at Fair
Value, presumed equal to Rs.32.40 Lakhs, i.e. cost)
Next FT Vendor/Foreign Supplier A/c. Dr. 32,31,000
31st Dec. Profit & Loss A/c. (Exch. Rate Diff.) Dr. 93,000
(Settlement To Bank A/c. 33,24,000
Date) (Being payment made to Vendor at Rs.55.40 x USD
60,000, the difference due to settlement (Rs. 53.85 –
Rs.55.40) x USD 60,000, being loss transferred to
P&L A/c.)

QUESTION NO 4
Tejas Ltd. borrowed US $ 5,00,000 on 1st Jan. 2013 which will be repaid (settled) as on 30th
June 2013. The Company prepares its Financial Statements ending on 31st March 2013.
Assume that Exchange Rate between Reporting Currency (Rupee) and Foreign Currency (US
$) on different dates are as under:-

1st Jan. 2013 : 1 US $ = Rs. 54.00 31st March 2013 30th June 2013
1 US $ = Rs.54.50 1 US $ = Rs.54.75

(a) Calculate the Borrowing in reporting currency to be recognised in the books on above
mentioned dates. Also show the Journal Entries for the same.

(b) If Borrowings was repaid (settled) on 28th Feb. 2013 (Take Exchange Rate 1 US $ =
Rs. 54.20) what entry should be passed in such case?
ACCOUNTING STANDARD -11 23
SOLUTION
Date Particulars Dr.(Rs.) Cr. (Rs.)
1. 1 Jan. Bank A/c. Dr. 2,70,00,000
2013 To Foreign Currency Loan Borrowing 2,70,00,000
(5,00,000 USD at 54)
(Being Foreign Currency Loan at 54 per USD,
spot rate)
2. 31 Profit & Loss A/c. (Exchange Rate Diff.) 2,50,000
Mar (5,00,000 x (54.50 – 54) Dr.
2013 To Foreign Currency Loan Borrowings 2,50,000
(Being Foreign Currency Monetary Item, i.e. Loan
reported using Closing Rate of Rs.54.50),
Carrying Amount of Loan = Rs.272,50,000,
difference being loss due to reporting difference,
written off to P&L)
3A. 30 Jun Foreign Currency Loan Borrowings Dr. 2,72,50,000
2013 Profit & Loss A/c. (Exchange Rate Difference) 1,25,000
(5,00,000 x (54.75 – 54.50)Dr

To Bank A/c. (5,00,000 x 54.75) 2,73,75,000

(Being Foreign Currency Loan settled at 54.75
per USD, difference being exchanged loss on
settlement, written off to P&L A/c.)
If Loan repaid (settled) on 28th Feb.2013:
3B. 28 Foreign Currency Loan Borrowings Dr. 2,70,00,000
Feb Profit & Loss A/c. (Exchange Rate Difference) 1,00,000
2013 (5,00,000 x (54.20 – 54.00)Dr 2,71,00,000
(Being Foreign Currency Loan settled at 54.20
per USD, difference being exchanged loss on
settlement, written off to P&L A/c.)

QUESTION NO 5
Adhiram Ltd. purchased Fixed Assets costing Rs. 3,144 Lakhs on 1st April (beginning of
a Financial year) and the same was fully financed by Foreign Currency Loan in U.S. Dollars
repayable in four equal annual intalments. Exchange Rate at the time of purchase was 1 USD
Rs. 52.40. The first instalment was paid at the end of that financial year, when 1 USD fetched
Rs. 55.40. The entire loss on exchange was included in Cost of Goods Sold of normal
business operations. The Company provides depreciation on Fixed Assets at 20% on WDV
basis. Show the correct accounting treatment relating to items which are to appear in the
Financial Statements.

SOLUTION
The correct accounting treatment relating to P&L and B/S items is as under:-

Amount of Foreign Currency Loan = Rs.3,144 Lakhs + Rs.52.40 = USD 60,00,000

Amount of First Instalment paid = USD 60,00,000 +4 Years = USD 15,00,000
on 31st March (Yr-end)
Amount to be reported at Balance = USD 45,00,000 x Rs.55.40 = Rs. 2,493 Lakhs
Sheet Date
24 ACCOUNTING
Exchange differences to be accounted for the year ending 31st March are : -

Due to Settlement :First Instalment (Rs.55.40 – Rs.52.40) x 1,50,000 = Rs. 45 Lakhs (Loss)
Due to Reporting : Balance Due (Rs.55.40 – Rs. 52.40) x 45,00,000= Rs.135 Lakhs (Loss)
Total Amount Debited to P&L Account = Rs. 180 Lakhs (Loss)
Depreciation to be charged to P&L Account = Rs.2,493 Lakhs at 20% = Rs. 498.6 Lakhs
Carrying Amount of Asset in Balance = 2,493 Lakhs – Rs.498.6 Lakhs = Rs.1,994.4 Lakhs
Sheet (WDV)

Note: The Exchange Difference as above should not be included in Cost of Goods Sold. It
should be shown separately.

QUESTION NO 6
Margabandhu Ltd. acquired a machine on 2nd April 2010 costing USD 2,00,000. The
Suppliers agreed to the following terms of payment: On 2nd April 2010 - 50% down payment
on 3rd April 2011 – 25% and on 2nd April 2012 - 25%.

The Company depreciates Machinery at 10% on SLM Basis. Assume Exchange Rates on
various dates of payments as –

2nd April 2010 – Rs. 48.80 31st March 2011 - Rs. 47.50
3rd April 2011 - Rs. 47.41 31st March 2012 - Rs. 51.16
2nd April 2012 – Rs. 51.77 31st March 2013 – Rs. 54.39

Show the extracts of relevant entries in the P&L A/c. for the year ending 31st March 2011, 2012
and 2013 and the Balance Sheet on that date, showing necessary workings.

SOLUTION

1. Machinery Account : Gross Block and Depreciation be shown under Fixed Assets in the
Balance Sheet.

Financial Year ending 31st March 2011 31st March 2012 31st March 2013
Gross Block at WDV 2,00,000 x 48.80 = 87,84,000 78,08,000
97,60,000
Less: Depreciation at 9,76,000 9,76,000 9,76,000
10%
Net Block at WDV 87,84,000 78,08,000 68,32,000

Note: No adjustments will be made in the carrying amount of Fixed Assets/ Depreciation due to
exchange differences, since the Fixed Assets constitutes a Non-Monetary item.

2. Foreign Currency Loan Account: To be shown in the Liability side of the Balance Sheet.

Financial Year ending 31st March 2011

Particulars Rs. Particulars Rs.
To Bank – Down pymt – USD 1,00,000 x 48,80,000 By Assets A/c. – Cost 97,60,000
48.80
To P&L A/c. – Exchange Diff. on Closing USD 2,00,000 x 48.80
Balance 1,30,000
ACCOUNTING STANDARD -11 25
(48.80 – 47.50) x USD 1,00,000
To balance c/d – USD 1,00,000 x 47.50
47,50,000
Total 97,60,000 Total 97,60,000

Financial Year ending 31st March 2012

Particulars Rs. Particulars Rs.
To Bank – USD 50,000 x 23,70,500 By Balance b/d 47,50,000
47.41
To P&L A/c. – Exchange Diff. in USD 1,00,000 x 47.50
Settlement 4,500
(47.50 – 47.41) x USD 50,000 By P&L A/c. – Exch Diff. on
To balance c/d – USD 50,000 x Clg. Bal. 1,83,000
51.16 25,58,000 (51.16 - 47.50) x USD 50,000
Total 49,33,000 Total 49,33,000
st
Financial Year ending 31 March 2013
Particulars Rs. Particulars Rs.
To Bank – USD 50,000 25,88,500 By Balance b/d 25,58,000
x 51.77 USD 50,000 x 51.16
By P&L A/c. – Each Diff. in Settlement 30,500
(51.77 – 51.16) x USD 50,000
Total 25,88,500 Total 25,88,500

Note: The rate on 31st March 2013 is not relevant since the loan is fully cleared/ settled by that
date.

P&L Account: The Exchange Differences noted in the Loan Liability A/c. shall be
debited/credited to the P&L A/c. for each of the years. Depreciation will also be
charged. The summary is as under:-

Financial Year ending 31st March 2011 31st March 2012 31st March 2013
Depreciation Debt 9,76,000 Debit 9,76,000 Debit 9,76,000
Exchange Differences Credit 1,30,000 Credit 1,78,500 Debit 30,500
(Net)
QUESTION NO 7
Shoolapani Ltd. imported a machine on 04.01.2008 for Euros 12,000, on deferred
payment basis, payment in six equal annual intalments at every financial year end,
commencing from 31.03.2008 onwards. Use AS-11, provisions and determine the exchange
differences and carrying amounts of the liability at the end of each financial year, if the
following exchange rates are given. Take One Euro equals Indian Rupees on -

04.01.2008 31.03.2008 31.03.2009 31.03.2010 31.03.2011 31.03.2012 31.3.2013

64.0900 63.0900 62.0800 60.5600 63.2400 68.3404 70.1005

SOLUTION
1. Computation of carrying Amounts of Liability
Financial Year ending EURO Amount due Closing Rate Carrying Amount in
Rs.
31st March 2008 10,000 63.0900 6,30,900
26 ACCOUNTING
31st March 2009 8,000 62.0800 4,96,640
31st March 2010 6,000 60.5600 3,63,360
31st March 2011 4,000 63.2400 2,52,960
31st March 2012 2,000 68.3403 1,36,681
31st March 2013 Nil 70.1005 Nil

2. Computation of Exchange Differences

Fin. Year ending Due to Settlement Due to Reporting
31st March 2008 2,000 X (64,0900-63,0900)= 2,000 Gain 10,000x(64,0900-63000) =
10,000 Gain
31st March 2009 2,000 X (63,0900-62.0900)= 2,020 Gain 8,000x(63,0900 – 62,0800) =
8,080 Gain
31st March 2010 2,000 X (62,0800-60,5600)= 3,040 Gain 6,000x(62.0800 – 60,5600) =
9,120 Gain
31st March 2011 2,000 X (60,5600-63,2400)= 5,360 Loss 4,000 x (60,5600 – 63,2400)
= 10,720 Loss
31st March 2012 2,000 X (63,2400-68,3403)= 10,000 Loss 2,000 x (63.2400 – 68,3403)
= 10,200 Loss
31st March 2013 2,000 X (68,3403-70,1005)= 3,520 Loss NIl

Note: Exchange Differences Gain is credited to P&L, while loss is debited to P&L.

QUESTION NO 8
Shiva Ltd. is a Company engaged in manufacture of Nuclear Power Stations. The
Company usually resorts to long term Foreign Currency borrowings for its fund requirements.
The Company had on 1stApril2009, borrowed U.S. $100 Million from Global Fund Consortium
based in Washington, USA. The funds were used by Shiva Ltd. for purposes other than
acquiring Depreciable Capital Assets. The Loan carries an interest rate of 3% on Reducing
Balance, and is repayable in two installments, the first one due on 31st March 2014, and the
next on 31st March 2015. The interest due on the Loan has been paid in full on 31st March of
each year. The Exchange Rate on the date of borrowing was 1 US $ = Rs. 43.

SOLUTION
The accounting treatments followed by the Company for the subsequent three years with
exchange rates prevailing in those date were as under:-
Year Ended Exchange Rate Accounting Treatment

31st March 2010 1 US $ = Rs.45 Forex Loss of Rs.20 Crores charged to

Profit and Loss Account.
31st March 2011 1 US $ = Rs.47 Forex Loss of Rs.20 Crores charged to
Profit and Loss Account.
31st March 2012 1 US $ = Rs.54 Forex Loss of Rs.70 Crores charged to
Profit and Loss Account.

Note: Interest Payments were charged to Profit and Loss Account of each year at
transaction value on payment dates.
Shiva Ltd. is in the process of finalizing its accounts for the year ended 31st March 2013,
and requires your advise under AS-11 on the validity of accounting treatment. Assume
that the Exchange Rates on 31st March 2013, 31st March 2014 and 31st March 2015 will
ACCOUNTING STANDARD -11 27
be Rs. 55, Rs. 56 and Rs. 57 respectively. You are required to show the accounting
treatment for these financial years also.
The treatment under AS-11 is as under:-
Fin. Year ending Due to Due to Reporting
Settlement
31st March 2010 Nil USD 100 Million x (43-45) = Rs.20 Crores Loss
st
31 March 2011 Nil USD 100 Million x (45-47) = Rs.20 Crores Loss
31st March 2012 Nil USD 100 Million x (47-54) = Rs.70 Crores Loss
st
31 March 2013 Nil USD 100 Million x (54-55) = Rs.10 Crores Loss
31st March 2014 USD 50 Million x (55- USD 100 Million x (50-51) = Rs.5 Crores Loss
56)= Rs. 5 Crores
31st March 2015 USD 50 Million x (56- NIL
57)= Rs. 5 Crores
Interest Payments should be charged to Profit and Loss Account of each year at the
Transaction Value on payment dates.

QUESTION NO 9
Amaresh bought a Forward Contract for three months of USD 1,00,000 on 1st
December 20X1 at 1 USD = Rs. 52.10 when the Exchange Rate was 1 USD = Rs.52.02. On
31st December 20X1, when he closed his books, the Exchange Rate was 1 USD = Rs. 52.15.
On 31st January 20X2, he decided to sell the Contract at Rs.52.18 per Dollar. Show how the
profits from the Contract will be recognized in the books. Give the full accounting treatment
assuming that the above transaction is on ‘non-speculative basis”.

Also discuss the accounting treatment, if the above transaction is on “speculative basis”, on
the assumption that on 31st December 20X2, the 2 months Forward Rate is 1 USD = Rs. 53.

SOLUTION
Situation A : If the above Forward Contract has been entered on “non-speculative” basis.
S.No. Particulars Dr.(Rs.) Cr. (Rs.)
1st Foreign Currency Receivable A/c.(1,00,000 USD x 52,02,000
Dec. Rs.52.02 Spot Rate) Dr.
20X1 Forward Contract Deferred Premium A/c.
(1,00,000 USD x (Rs.52.10 – Rs. 52.02) Dr. 8,000
To Forward Contract Payable A/c. 52,10,000
(1,00,000 USD x Rs.52.10 Fwrd Rate)
(Being 3 months Forward Contract entered into for 1,00,000
USD)
st
31 Foreign Currency Receivable A/c. Dr. 13,000
Dec. (1,00,000 USD x (Rs.52.15-Rs.52.02)
20X1 To Profit and Loss A/c. 13,000
(Being re-statement of FC Receivable to Reporting Date
Rate, gain adjusted)
31st Profit and Loss A/c. Dr. 2,667
Dec. To Forward Contract Deferred Premium A/c.
20X1 (Being the amortization of Forward Contract Premium Rs. 2,667
8,000 for 3 months, now transferred to P&L proportionately
for 1 month period)
st
31 Forward Contract Payable A/c. Dr. 52,10,000
28 ACCOUNTING
Jan. Bank A/c. (1,00,000 USD x Dr. 8,000
20X2 (Rs.52.18-Rs.52.10)
To Foreign Currency Receivable A/c. 52,15,000
To Profit and Loss A/c. (difference Gain adjusted) 3,000
(Being settlement of Forward Contract)
31st Profit and Loss A/c. Dr. 5,333
Jan. To Forward Contract Deferred Premium A/c. 5,333
20X2 (Being the amortization of balance Forward Contract
Premium)
(STUDENTS ARE ADVISED TO PASS ENTRIES AS WE PASSED IN CLASS: CA
PARVEEN JINDAL)

Situation B: If the above Forward Contract has been entered on “speculative” basis.

S.No. Particulars Dr.(Rs.) Cr. (Rs.)

31st Foreign Contract Asset Receivable A/c.(1,00,000 USD x 90,000
Dec. Rs.53.00-Rs.52.10) Dr.
20X1 To Profit and Loss A/c. 90,000
(Being adjustment of difference between Contract Forward
Rate and B/s Date Rate of Forward Contract for remaining
maturity period, Gain credited to P&L)
31st Profit and Loss A/c. (balancing figure) Dr. 82,000
Jan. Bank A/c. (1,00,000 USD x (Rs.52.18 – Rs.52.10) 8,000
20X2 To Forward Contract Asset Rec’ble A/c. (reversal of B/s
recognised amt) 90,000
(Being settlement of Forward Contract, loss adjusted to
P&L A/c)

QUESTION NO 10
On 1st February 2013, an Indian Company sold goods to an American Company at an
Invoice Price of USD 20,000 when the Spot Market Rate was 1 USD = Rs.54.10. Payment was
to be made in three months time, namely by 1st May 2013.

To avoid the risk of Foreign Exchange fluctuations, the Indian Exporter acquired a Forward
Contract to sell USD 20,000 at Rs. 53.90 per USD on 1st May 2013.

The Indian Company’s accounting year ended on 31st March 2013, and the Spot Rate on this
date was Rs. 53.20 per USD. The Spot Rate on 1st May 2013, the date by which the money
was due from the American Buyer, was Rs.56 per USD.

Show the accounting entries in the books sof the Indian Exporter at the relevant period of time.
.
SOLUTION
Journal Entries in the books of Indian Exporter (assumed as SME)
S.No. Particulars Dr.(Rs.) Cr. (Rs.)
01.02.13 Sundry Debtors (American Company) A/c. Dr. 10,82,000
To Sales A/c. 10,82,000
(Being Sales recorded at Rs.10,82,000 (USD 20,000 x
Rs. 54.10)
01.02.13 Forward (Rs.) Contract Receivable A/c. Dr. 10,78,000
ACCOUNTING STANDARD -11 29
(USD 20,000 x Rs. 53.90)
Deferred Discount A/c. Dr. 4,000
(USD 20,000 x Rs. 0.20)
To Forward ($) Contract Payable A/c. 10,82,000
(USD 20,000 x Rs. 54.10)
(Being Translation Loss USD 20,000 x (Rs.54.10-
Rs.53.20) by re-statement of Debtors, Difference
between Rates on Date of Transaction and Reporting
Date)
31.03.13 Profit & Loss A/c. Dr. 18,000
To Sundry Debtors (American Company) A/c. 18,000
(Being Translation Loss USD 20,000 x (Rs.54.10-
Rs.53.20) by re-statement of Debtors, Difference
between Rates on Date of Transaction and Reporting
Date)
31.03.13 Forward ($) Contract Payable A/c. Dr. 18,000
To Profit and Loss A/c. 18,000
(Being Translation Loss USD 20,000 x (Rs.54.10-
Rs.53.20) as less Rupees becoming payable to
Exchange Dealer based on Spot Rate at year end)
31.03.13 Discount A/c. Dr. 2,666
To Deferred Discount A/c. 2,666
(Being proportionate discount (2/3rd of Rs.4,000)
charged as Discount Expense)
01.05.13 Bank A/c. (USD 20,000 x 56,000) Dr. 11,20,000
To Sundry Debtors A/c.(USD 20,000xRs.53.20) 10,64,000
To Profit and Loss A/c.(USD 20,000axRs.2.80) 56,000
(Being actual receipt of money from the Buyer recorded)
01.05.13 Forward ($) Contract Payable A/c. Dr. 10,64,000
(USD 20,000 x Rs. 53.20)
Profit and Loss A/c. (USD 20,000 x Rs.2.80) 56,000
To Bank A/c. (USD 20,000xRs. 56.00) 11,20,000
(Being delivery of 20,000 USD against Forward Contract
at Spot Rate on 1st May)
01.05.13 Bank A/c. Dr. 10,78,000
To Forward (Rs.) Contract Receivable A/c. 10,78,000
(Being Forward Contract Settled)
01.05.13 Discount A/c. Dr. 1,334
To Deferred Discount A/c. 1,334
(Being balance amount of Discount recognized/
transferred to P&L)

QUESTION NO 11
Kapali Ltd. purchased a Plant for USD 20,000 on 31st December 2012, payable after 4
months. The Company entered into a Forward Contract for 4 months at Rs.54.85 per USD.
On 31st December 2012, the Exchange Rate was Rs.53.50 per USD.

How will you recognize the Profit or Loss on the Forward Contract in the books of Kapali
Ltd. for the year ended 31st March 2013? (Journal Entries are not required).
30 ACCOUNTING
SOLUTION
Particulars Rs.
1. Value at the rate prevailing at the inception of Forward Contract 10,70,000
(USD 20,000 x 53.50)
2. Value at the Forward Rate (USD 20,000 x 54.85) 10,97,000
3. Total Loss on entering into the Forward Contract = arising at inception for 4 27,000
months Contract Period
4. Loss to be recognised for the year ended 31st March 2013, i.e. 20,250
for 3 months = 27,000 x ¾

QUESTION NO 12
Due to fall in the value of rupee against dollar, the foreign exchange loan taken to import
certain fixed assets has been settled at an amount, which is considerably higher than the
rupee amount at which the loan was originally recorded. The difference has been adjusted in
the cost of the fixed assets. The depreciation has been recalculated on the basis of the
increased cost from the date of the acquisition of the fixed assets and the arrears of
depreciation have been charged to the profit and loss account of the year.

(Ans: Not correct difference in exchanging adjusted in cost of fixed assets presuming that the
transaction is entered into before 1.4.2004).

QUESTION NO 13
How would you deal with the following foreign exchange transactions on the annual
accounts for the year ending March 31, 2002?

• Insight India Ltd. imports a Plant & Machinery on 31st July, 2001 on deferred payment
basis for US $ 200000. On March 31, 2002 the exchange rate, which was rs. 38 per
dollar on 31st July, 2001, has gone up to Rs. 42.

(Ans: Rs. 800000 to be included in fixed assets as the transaction is entered before 1.4.2004).

QUESTION NO 14
AD Softex India Ltd. imports certain stock worth US $ 600000 on 15th Aug., 2009 at
which date the exchange rate is Rs.46 per dollar. The payment are made on March 31, 2010.
When the exchange rate is Rs. 47.10 per dollar. The stock is in hand as on 31st March 2002.

(Ans: Rs. 660000 debited to P&L Account)

QUESTION NO 15
Almaz Impex Ltd. obtains a long term foreign exchange loan of US $ 20,00,000 on 2nd
Sept., 2006 when the exchange rate is Rs. 44.50 per dollar. On 31st March 2007, the
exchange rate has gone up to Rs. 47.40 per dollar.

(Ans: Rs. 58 Lakhs debited in P&L Account).

QUESTION NO 16
The account of a foreign branch is incorporated in the head office books at a standard
rate and a resultant notional profit is credited to the head office profit & loss account.

(Ans: Not correct)

ACCOUNTING STANDARD -11 31
QUESTION NO 17
AD Softex India Ltd. imported goods worth US $ 5,00,000 from a US based company
ACS Inc. on 12.8.2009 when the exchange rate was 1 US $= 43.90. AD Softex India Ltd.
agreed to pay its creditors in four equal instalments falling on 12.9.2009, 12.10.2009,
12.11.2009 and 12.12.2009. The exchange rates on the settlement dates were 43.80, 44.60,
44.90 and 45.60 respectively. Prepare ledger accounts of ACS Inc. in books of AD Softex
India Ltd. and calculate net exchange fluctuation loss/gain.

(Ans: Loss of Rs. 412.500 Dr. to Profit and Loss Account).

QUESTION NO 18
Almaz Impex Ltd. an Indian Company took a foreign currency loan of US $ 5,00,000 @
10% p.a. on 1.1.2009. Interest is payable half-yearly with an instalment for principal of US $
50,000. The company closes books of account as on 31st March every year. Exchange rates
are :-
1.1.2009 42.25
31.3.2009 42.50
31.6.2009 42.90
31.12.2009 43.90
31.3.2010 43.50

Prepare loan account of the company and calculate the exchange fluctuation loss/gain for the
financial year ended on 31.3.2009 and 31.3.2010 respectively.
(Ans: Loss – Rs. 1,25,000 (31.3.2009): Loss – Rs. 4,95,000 (31.3.2010)

QUESTION NO 19 CA NOV 2014 5 Marks

Stem Ltd. purchased a Plant for US$ 30,000 on 30th November 2013, payable after 6 months.
The Company entered into a forward contract for 6 months @ rs.62.15 per Dollar. On 30th
November 2013, the Exchange Rate wass.60.75 per Dollar. How will you recognize the Profit
or Loss on Forward Contact in the books of Stem Ltd. for the year ended 31st March 2014?

SOLUTION
The treatment under AS-11 is as under:-
Particulars s.
1. Value at the rate prevailing at the inception of forward Contract 18,22,500
30,000 $ x 60.75
2. Value at the forward rate 30,000 $ x 62.15 18,64,500
3. Total Loss on entering into forward contract = arising at inception for 42,000
6 months contract (1-2)
4. Loss to be recognized for the year ended 31st March 2014 28,000
i.e .for 4 months = 42000 x 4/6
Interest Payments should be charged to Profit and Loss Account of each year at the
Transaction Value on payment dates.
QUESTION NO 20 CA NOV.2014 4 Marks
What are the indicators of Non-Integral Foreign Operation (NFO)?
SOLUTION
The indicators of a Non-Integral Foreign Operation are –
32 ACCOUNTING
1. Autonomy: While the reporting enterprise may control of foreign operation, the
activities of the foreign operation are carried out with a Significant degree of
autonomy from those of the reporting enterprise.

2. Transaction Pattern: Transactions with the reporting enterprise are not a high
proportion of the foreign operation’s activities.

3. Financing: The activities of the foreign operation are financed mainly from its own
operations or local borrowings rather than from the reporting enterprise.

4. Expenditure in Local Currency: Costs of Labour Material and other components of

the foreign operation’s products or services are primarily paid or settled in the local
currency rather than in the reporting currency.

5. Sales Pattern: The foreign operation’s sales are mainly in currencies other than the
reporting currency.

6. Effect of Cash Flows: Cash Flows of the reporting enterprise are insulated from the
day-to-day activities of the foreign operation rather than being directly affected by
the activities of the foreign operation.

7. Prices of Products Sales Pries for the foreign operation’s products are not primarily
responsible on a short term basis to changes in exchange rates but are determined
more by local competition or local government regulation, and

8. Local Market: “There is an active local sales market for the foreign operation’s
products, although there might be significant amounts of exports.

The appropriate classification for each operation can be established from factual information
and proper judgement, based on the indicators listed above.
ACCOUNTING STANDARD -11 33

IND AS 21: FOREIGN CURRENCY TRANSACTIONS

Major Changes in Ind AS 21 vis-à-vis Notified AS 11
(i) Forward Exchange Contracts and other similar Financial Instruments: Ind AS 21 excludes from its
scope forward exchange contracts and other similar financial instruments, which are treated in
accordance with Ind AS 109. The existing AS 11 does not such exclude accounting for such contracts.
(ii) Exchange Differences arising on Translation of Certain Long-term Monetary Items from Foreign
Currency to Functional Currency: Existing AS 11, gives an option to recognise exchange differences
arising on translation of certain long-term monetary items from foreign currency to functional currency
directly in equity, to be transferred to profit or loss over the life of the relevant liability/asset if such items
are not related to acquisition of fixed assets. Where such items are related to acquisition of fixed assets,
the foreign exchange differences can be recognised as part of the cost of the asset.
Ind AS 21 does not give the above option. However, Ind AS 21 does not apply to long - term foreign
currency monetary items recognised in the financial statements before the beginning of the first Ind AS
financial reporting period as per the previous GAAP, i.e. AS 11. However, as provided in Ind AS 101,
such an entity may continue to apply the accounting policy so opted for such long-term foreign currency
monetary items as per the previous GAAP.
(iii) Approach for Translation: The existing AS 11 is based on integral foreign operations and non-
integral foreign operations approach for accounting for a foreign operation, whereas Ind AS 21 is based
on the functional currency approach. However, in Ind AS 21 the factors to be considered in determining
an entity‘s functional currency are similar to the indicators in existing AS 11 to determine the foreign
operations as non-integral foreign operations. As a result, despite the difference in the term, there are
no substantive differences in respect of accounting of a foreign operation.
(iv) Presentation Currency: As per Ind AS 21, presentation currency can be different from local currency
and it gives detailed guidance in this regard, whereas the existing AS 11 does not explicitly state so.
34 ACCOUNTING
ACCOUNTING STANDARD -12 35

ACCOUNTING STANDARD 12

ACCOUNTING FOR GOVERNMENT GRANTS

CONCEPT 1: APPLICABILITY & NATURE

With effect from 01.04.1994

Levels of Enterprises Companies (AS) Rules, Enterprises – Other than
2006 Companies
All types of Companies I, II & III

CONCEPT 2: Scope and Definitions

(Para 1 & 2)
1. Scope : AS-12 provides for the accounting treatment of Government Grants, which
are also called Subsidies, Cash incentives, Duty Drawbacks etc.
2. Types: Grants can be – (a) Capital or Revenue and (b) Monetary or Non- Monetary.
3. Exclusions: AS-12 specifically excludes –
(a) Special problems that arise in accounting for Government Grants in Financial
Statements, reflecting the effects of changing prices or in supplementary
information of a similar nature,
(b) Government assistance other than in the form of Government Grants, and
(c) Government participation in the ownership of the enterprise.

4. Sales Tax Exemption provided for products produced by an Enterprise is not

considered as a Government Grant. (As per EAC opinion).

Definitions (para 3):

1. Government refers to Government Agencies and similar bodies, whether local, national
or international.

2. Government Grants are assistance by Government, in cash or kind to an enterprise, for

past or future compliance with certain conditions. They exclude – (a) those forms of
Government assistance which cannot reasonably have a value placed upon them and
(b) transactions with Government which cannot be distinguished from the normal trading
transactions of the enterprise.

QUESTION NO 1
Proper accounting of Govt. Grants by an Entity is significant for preparation of the
Financial Statements, Why? (Para 4).

SOLUTION
1. Proper accounting of Government Grants received by an enterprise is significant for
preparation of the Financial Statements for two reasons viz. –
36 ACCOUNTING
(a) If a Government Grant has been received, an appropriate method of accounting
thereof is necessary.
(b) It is desirable to give an indication of the extent to which the enterprise has
benefited from such Grant during the reporting period.
2. This facilitates comparison of the Enterprise’s Financial Statements with those of prior
periods, i.e. intra-firm comparison & trend analysis) and with those of other enterprises
(i.e. inter-firm comparison).

CONCEPT 3: Approaches for Accounting of Grants

The two approaches for accounting of Government Grants are –

1. Capital Approach : The Grant is treated as part of Shareholder’s Funds.

2. Income Approach: The Grant is taken to Income over one or more periods.

(Para 5.2 & 5.3)

For Capital Approach Against Capital Approach

(i.e. Against Income Approach) (i.e. For Income Approach)
1. Promoter’s Contribution: 1. Matching: Government Grants are rarely
(a) Many Government Grants are in the gratuitous. They are earned through
nature of Promoter’s Contribution, i.e. compliance with the attached conditions
they are granted based on the total and meeting the envisaged obligations.
investment in an undertaking, or by Hence, they should be regarded as
way of contribution towards its total Income and matched with the associated
capital outlay and no repayment is costs, which the Grant is intended to
ordinarily expected. compensate.
2. Subsidy Nature: Since Income Tax and
(b) Therefore, they should be credited other taxes are charges against Income,
directly to Shareholder’s Funds. it is logical to deal also with Government
Grants in the P&L Statement. Also,
2. Gratuitous Receipts: As the Grants are Government Grants are an extension of
not earned, but provided by fiscal policies.
Government and there are no related 3. Correlation: If Grants are credited to
costs to the Enterprise, it cannot be Shareholder’s Funds, no correlation is
credited to the Profit & Loss done between the accounting treatment
Statement. of the Grant and the accounting
treatment of the expenditure to which the
Grant relates.

Which is the best accounting method of Government Grants? (Para 5.4 – 5.6)

1. Nature: The accounting for Government Grants should be based on the nature of the
relevant Grant, as under:-

(a) Capital: Grants that have the characteristics similar to those of Promoter’s
Contribution should be treated as part of Shareholders’ Funds.
(b) Revenue: Income Approach maybe appropriate for Revenue-related Grants, (i.e.
which are not similar to Promoter’s Contribution).
ACCOUNTING STANDARD -12 37
2. Matching:
(a) When ‘Income Approach’ is followed, the Government Grants may be recognised
in the Profit and Loss Statement on a systematic and rational basis over the
periods necessary, to match them with the related costs.
(b) Where the periods over which an enterprise recognizes the costs or expenses
related to a Government Grant are readily ascertainable Grants in recognition of
specific expenses are taken to income in the same period as the relevant
expenses.

3. Accrual: Income Recognition of Government Grants on a receipt basis is not in

accordance with the accrual accounting assumption laid down in AS-1. Hence, such
Grants should be accounted for on accrual basis.

CONCEPT 4: RECOGNITION OF GRANT

(Para 6, 13)
Recognition: Government Grants are recognised only when there is reasonable assurance
that –

1. the enterprise will comply with the conditions attached to them, and
2. the Grant will be received.

However, the mere receipt of a Grant is not necessarily a conclusive evidence that conditions
attaching to the Grant have been or will be fulfilled.

Non-Monetary Government Grants. (Para 7,17).

When Government Grants are received in the form of assts such as Land, Plant and
Equipments etc. free of cost, then, such Assets should be entered in the Books of Accounts at
Nominal Value. Explain.
If Government Grants are in the form of non-monetary assts (e.g. land or other resources,
given at concessional rates), such assets may be recorded at their Cost of Acquisition, i.e. at
the Concessional Value.

When these assets are received free of cost, it is recorded at a Nominal Value (say Rs.100) for
the purposes of identification and control).

QUESTION NO 2
Krithivasa Ltd. received an area of Land, free of cost, from the Government. This amount is
not recorded at all. The Company argues that – (a) No money has been spent by the
Company on its acquisition, and (b) Land is not a depreciable assets, Comment.

SOLUTION
1. Principle: Non-Monetary Grants/Assets received free of cost, are recorded at a Nominal
Value (say Rs.100) for the purposes of identification and control) . Whether it is
depreciable or non-depreciable is not relevant in this regard.

2. Conclusion: As per AS-12, the above Land should be recorded at a Nominal Value (say
Rs.100), for identification and control purposes. Hence, the Company’s stand is not in
accordance with AS-12.
38 ACCOUNTING
Grants related to specific Fixed Assets. (Para 8,14)

1. Conditions: An Enterprise qualifying for Grants related to specific Fixed Assts should
satisfy –

(a) A Primary condition as to purchase, construct or otherwise acquire such assts, and

(b) Other conditions restricting the type of location of the assets or periods during
which they are to be acquired of Grants)

2. Methods of presentation: There are two methods of presentation of Grants (or the
appropriate portions of Grants) related to specific depreciable Fixed Assts in Financial
Statements. They are :-

Asset Cost Reduction Method Deferred Income Method

(a) Grant is shown as a deduction from Gross (a) Grant is treated as Deferred Income and
Value of the related asst in arriving at its is recognised in the Profit & Loss
Book value. Statement on a systematic and rational
(b) The Grant is indirectly recognised in the basis over the useful life of the asset.
P&L Statement over the useful life of a (b) The allocation to income is usually made
depreciable asset, by way of a reduced over the periods and in the proportions
depreciation charge. of depreciation charged on related
(c) Where the Grant equals the whole, or assets.
virtually the whole of the cost of the (c) The Deferred Income balance is
asset, the asset is shown in the Balance disclosed in the Balance Sheet
Sheet at a Nominal Value (say Rs.100). separately, under an appropriate head.

QUESTION NO 3
Ram Ltd. purchased a Machinery for Rs.1.00 Crore. The State Government granted the
Company a subsidy of Rs.40 Lakhs to meet partial cost of Machinery. The Company credited
the Subsidy received from the State Government to its Profit and Loss Account for the year
ended 31st March. Comment on the above.

SOLUTION
The Central Government sanctioned Rs. 20 Lakhs as Grant to Aayush Hospital for the
purchase of certain Equipments and paid Rs. 10 Lakh as advance. Aayush Hospital
took Rs. 10 Lakh as income in the Profit & Loss Account for the year. As an Auditor,
how would react to the above situation?

1. Principle: Where a Government Grant is received towards a specific depreciable Fixed

Asset, it should be accounted for either under Cost Reduction Method or Deferred
Income Method.

2. Conclusion: The accounting treatment of the Company, i.e. crediting P&L A/c. is
incorrect.
ACCOUNTING STANDARD -12 39
QUESTION NO 4
Haribhakti Ltd. acquired the Fixed Asset of Rs. 100 Lakhs on which it received a Grant
of Rs. 10 Lakhs. What will be the cost of the Fixed Assets as per AS-12 and how it will be
disclosed in the Financial Statements?

SOLUTION
Principle: Where a Government Grant is received towards a specific depreciable Fixed
Assets, it should be accounted for either under Cost Reduction Method or Deferred
Income Method. The accounting will be as under:-

1. Asset Reduction Method: Cost Rs. 100 Lakhs Less Grant Rs. 10 Lakhs = Rs. 90 Lakhs
will be the Carrying Amount, and written off over its useful life.
2. Deferred Income Method: Rs. 10 Lakhs in Deferred Income Account shall be shown in
Balance Sheet separately under an appropriate head. A portion of this Rs. 10 Lakhs
will be credited to P&L A/c. every year, over the useful life of the asset.

QUESTION NO 5
. Gowripathi set up a new factory in the backward area and purchased Plant for Rs. 500
Lakhs for the purpose. Purchases were entitled for the CENVAT credit of Rs.10 Lakhs and
also the Government agreed to extend 20% Subsidy for Backward Area Development.
Determine the Depreciable Value of the asset.

SOLUTION
Particulars Rs. Lakhs
Cost of the Plant 500
Less: CENVAT Credit available (10)
Balance 490
Less: Subsidy at 20% of Rs.490 Lakhs (98)
Depreciable Value of the Plant 392

Note: Asset Cost Reduction Method has been adopted in the above case.

QUESTION NO 6
Gowri Shankar Ltd. purchased a special machinery on 1st April of a Financial year, for
Rs. 25 Lakhs. It received a Government Grant for 20% of the Price. The machine has an
effective life of 10 years. Advise the Company of the accounting treatment(s)
SOLUTION
Under AS-12, where the Grant relates to a specific depreciable Fixed Asset, the Company can
follow any of the following accounting methods, as illustrated below:-
Particulars Cost Reduction Method Deferred Income Method
1. Original Cost of Machinery Rs. 25 Lakhs Rs. 25 Lakhs
2. Scarp Value of Asset Nil Nil
3. Specific Grant Received Rs. 5 Lakhs (reduced from Rs. 5 Lakhs (treated as
cost). Deferred Income)
4. Depreciable Value (1)-(2)-(3) Rs. 20 Lakhs Rs. 25 Lakhs
5. Useful Life of Machinery 10 Years 10 Years
6. Depreciation provided p.a. Rs. 2 Lakhs Rs. 2.5 Lakhs
(4) ÷ (5)
7. Other Income credited to P&L Not applicable (3) ÷ (5) Rs. 0.5 Lakhs
A/c. every year
40 ACCOUNTING
Note: The balance in the Deferred Income Account shall be shown in the Balance Sheet
separately as ‘Deferred Government Grants’ under an appropriate head.

QUESTION NO 7
Kripanidhi Ltd. purchased a Fixed Asset for Rs. 75 Lakhs, which has an estimated
useful life of 5 years, with the Salvage Value of Rs. 7,50,000. On Purchase of the Asset, the
Government have the Company a grant of Rs. 15 Lakhs. Pass the necessary journal entries
in the books of the Company for the first two years.
SOLUTION
Journal Entries under Asset Cost Reduction Method (Rs. in Lakhs)

Year Particulars Dr. Cr.

1 Machinery A/c. Dr. 75.00
To Bank A/c. 75.00
(Being Machinery Purchased)
Bank A/c. Dr. 15.00
To Machinery A/c. 15.00
(Being Government Grant received and credited to Fixed Asset
A/c.)
Depreciation A/c. (Cost 75 (-) Grant 15 (-) Salvage Dr. 10.50
Value 7.5) ÷ 5 Years 10.50
To Machinery A/c.
(Being Depreciation Charged on Straight Line Method on Cost
net of Grant & SV)
Profit & Loss A/c. Dr. 10.50
To Depreciation A/c. 10.50
(Being Depreciation transferred to P&L A/c.)
2. Depreciation A/c. Dr. 10.50
To Bank A/c. 75.00
(Being Depreciation charged on Straight line method)
Profit & Loss A/c. Dr. 10.50
To Depreciation A/c. 10.50
(Being Depreciation transferred to P&L A/c.)
Journal Entries under Deferred Income Method (Rs. in Lakhs)
Year Particulars Dr. Cr.
1 Machinery A/c. Dr. 75.00
To Bank A/c. 75.00
(Being Machinery Purchased)
Bank A/c. Dr. 15.00
To Machinery A/c. 15.00
(Being Government Grant received as Deferred Income)
Government Grants Deferred Income A/c. (15 Lakhs ÷ 5 3.00
years) 3.00
To Profit & Loss A/c.
(Being Grant Portion for this year, considered as Income in P&L
A/c).
Depreciation A/c. (Cost 75 (-) Salvage Value 7.5) 13.50
÷ 5 Years 13.50
ACCOUNTING STANDARD -12 41
To Machinery A/c.
(Being Depreciation Charged on Straight Line Method on Cost
net of Grant & SV)
Profit & Loss A/c. Dr. 13.50
To Depreciation A/c. 13.50
(Being Depreciation transferred to P&L A/c.)
2. Government Grants Deferred Income A/c. (15 Lakhs ÷ 5 Years) 3.00
To Profit & Loss A/c. 3.00
(Being Grant portion for this year, considered as Income in P&L
A/c.)
Depreciation A/c. Dr. 13.50
To Machinery A/c. 13.50
(Being Depreciation charged on Straight line method)
Profit & Loss A/c. Dr. 13.50
To Depreciation A/c. 13.50
(Being Depreciation transferred to P&L A/c.)

QUESTION NO 8
Bhava Limited purchased a Machinery for Rs. 25,00,000 which has an Estimated Useful
Life of 10 years and a Salvage Value of Rs. 5,00,000. On Purchase of the Assets, the Central
Government pays a Grant for Rs. 5,00,000. Pass the Journal Entries with narrations in the
books of the Company for the first year, treating Grant as Deferred income.

SOLUTION
Journal Entries under Deferred Income Method (Rs. in Lakhs)

Year Particulars Dr. Cr.

1 Machinery A/c. Dr. 25.00
To Bank A/c. 25.00
(Being Machinery Purchased)
2 Bank A/c. Dr. 5.00
To Government Grants Deferred Income A/c. 5.00
(Being Government Grant received and retained as Deferred
Income)
3. Government Grants Deferred Income A/c. (5 Lakhs ÷ Dr 0.50
10 years) 0.50
To Profit & Loss A/c.
(Being Grant Portion for this year, considered as Income in P&L
A/c.)
4. Depreciation A/c. (Cost 25 (-) Salvage Value Dr. 2.00
5) ÷ 10 Years 2.00
To Machinery A/c.
(Being Depreciation Charged on Straight Line Method on Cost
net of Grant & Salvage value)
5. Profit & Loss A/c. Dr. 2.00
To Depreciation A/c. 2.00
(Being Depreciation transferred to P&L A/c.)
42 ACCOUNTING
QUESTION NO 9
Madhukar Ltd. purchased a Machinery costing Rs.250 Lakhs on 1st January 2009. The
Company charges WDV Depreciation on the asset. The asset has an estimated life of 15
years with a scrap value of Rs. 25 Lakhs. The Company received Government Grant to the
extent of 50% of the cost of the asset. As per the terms and conditions of the Grant, 50% of
the products of the Company are to be supplied to Government Agencies for the first 5 years,
at a price 20% below the Average Market Price. Average Market Prices of the product for the
five accounting years 2009, 2010, 2011, 2012 and 2013 are Rs. 300, Rs. 320, Rs. 340, Rs.
360 and Rs. 380 respectively.

SOLUTION
1. Grant Apportionment:

(a) Even if the Grant is given as % on the cost of Machinery, the major condition for
availing the Grant is that 50% of the products are to be sold to Government Agencies at
a subsidized rate of 20% below the Average Market Price.
(b) Hence, the Grant can be regarded as given partly as compensation for subsidized
sales and partly towards cost of Machinery. So both paras 14 and 15 of AS-12 are
attracted.
(c) So, the total Grant of Rs. 125 Lakhs (50% of Rs. 250 Lakhs) has to be first apportioned
towards - (i) Revenue, i.e. Compensation towards Subsidized Sales, and (ii) Capital,
i.e. balance towards Cost of Machinery.

2. Compensation towards Subsidised Sales = Treatment of Revenue Grant:

Year Total Units Sold Units sold to Price Reduction i.e. Total Price
= Capacity x utilization Govt. Price x 20% Reduction –
Agencies Credited to P&L
A/c.
(1) (21) (3)=(2) x 50% (4) (5)=(3) x (4)
2009 1,00,000x50% = 50,000 units 25,000 units Rs.300 x 20% = Rs. 60 Rs.15,00,000
2010 1,00,000x60% = 60,000 units 30,000 units Rs.320 x 20% = Rs. 64 Rs.19,20,000
2011 1,00,000x60% = 60,000 units 30,000 units Rs.340 x 20% = Rs. 68 Rs.20,40,000
2012 1,00,000x70% = 70,000 units 35,000 units Rs.360 x 20% = Rs. 72 Rs.25,20000
2013 1,00,000x80% = 80,000 units 40,000 units Rs 380 x 20% = Rs. 76 Rs.30,40,000
Total Rs. 1,10,20,000

Treatment: The above amounts will be credited to the P&L Account for each of the first five
years.

3. Grant relating to Machinery = Total Grant Amount – Allocated as Revenue Grant (as
above).
= Rs. 1,25,00,000 – Rs. 1,10,20,000 = Rs. 14,80,000

This Grant of Rs. 14,80,000 is treated as Deferred Income and thereafter distributed
over the period in which depreciation is debited to the P&L Account, in the proportion of
depreciation. The credit to the P&L Account will be made systematically over the useful
life of the asset, in the ratio of depreciation.
ACCOUNTING STANDARD -12 43
4. Calculation of Depreciation for first five years:

Rate of Depreciation = 1 – Life Scrap Vale = 1 - 15 25 = 1-0.8577 =

Original cost 250
0.1423 or 14.23%
Year 2009 2010 2011 2012 2013
Opening WDV 2,50,00000 2,14,42,500 1,83,91,232 1,57,74,160 1,35,29,497
Depreciation at 35,57,500 30,51,268 26,17,072 22,44,663 19,25,247
14.23%
Closing WDV 2,14,42,500 1,83,91,232 1,57,74,160 1,35,29,497 1,16,04,250

Total Depreciation provided over 15 years Useful Life = Depreciable Value = Rs.2,5,00,000

5. Treatment of Capital Portion of Grant (apportionment based on Depreciation)

Year Computation Credit to P&L A/c. (Rs.)

2009 Rs.14,80,000 x (35,57,500 ÷ 2,25,00,000) 2,34,004
2010 Rs.14,80,000 x (30,51,268 ÷ 2,25,00,000) 2,00,706
2011 Rs.14,80,000 x (26,17,072 ÷ 2,25,00,000) 1,72,145
2012 Rs.14,80,000 x (22,44,663 ÷ 2,25,00,000) 1,47,649
2013 Rs.14,80,000 x (19,25,247 ÷ 2,25,00,000) 1,26,638

Grants related to Non-Depreciable Assets. (Para 8,14)

1. No Obligation/Costs: Grants related to Non-Depreciable assts are credited to Capital

Reserve, as there is usually no change to income in respect of such assets. Grants
which do not entail future obligations of the enterprise are also treated in this
manner, i.e. credit to Capital Reserve.

2. Future Obligations/Costs:

(a) When the Grant related to a Non-Depreciable Asset requires fulfillment of

certain obligations, the Grant is credited to Income over the same period over
which the cost of meeting such obligations is charged to Income.
(b) The Deferred Income balance is disclosed in the Balance Sheet separately,
with a description as ‘Deferred Government grants’, under an appropriate head.

Grants related to Revenue (Para 9, 15)

1. Recognition: Government Grants related to revenue should be recognized on a

systematic basis in the Profit and Loss Statement over the periods necessary to match
them with the related costs, which they are intended to compensate.

2. Presentation: Grants related to revenue are presented -

(a) As a Credit in the Profit and Loss Statement, either separately or generally as
‘Other Income’ or
(b) As a Deduction in reporting the related expense.

3. Arguments for and against the Methods of Presentation:

44 ACCOUNTING

Arguments for Credit (Against Deduction) Arguments for Deduction (Against Credits)
(a) Netting off Income and Expense items (a) The Expense has been incurred only
is considered inappropriate. because of the Grant. Hence, it is
(b) Separation of the Grant from the appropriate to deduct the same.
related expense aids comparison with (b) Presentation of the expense without
other expenses not affected by a setting off the Grant may give misleading
Grant. results on the nature of expense incurred.

QUESTION NO 10
Nalanda University has received the following Grants during a year -

(a) From Ministry of Human Resources to be used for AIDS Research – Rs. 45,00,000,
which includes Rs. 3,00,000 to cover indirect Expenses incurred in administering the
Grant.
(b) From a Reputed Trust to be used to set up a Centre to conduct seminars on AIDS
related maters from time to time – Rs. 35,00,000.
(c) Donations from a well-wisher – Rs. 5,00,000 worth of equipments to be used for AIDS
Research.
During the year, the University spent Rs. 32,25,000 of the Government Grant and incurred Rs.
3,00,000 as Overhead Expenses. Rs. 28,00,000 were spent from the Grant received from the
Trust. Show the necessary Journal Entries.

SOLUTION

Year Particulars Dr.(Rs.) Cr.(Rs.)

1 Bank A/c. Dr. 45,00,000
To Government Grants A/c. 45,00,000
(Being Govt. Grant for AIDS Research including Rs.3
Lakhs for indirect expenses thereof)
2 Bank A/c. Dr. 35,00,000
To Government From Trust A/c. 35,00,000
(Being Grant received to set up a Centre to conduct
seminars on AIDS related matters)
3. Fixed Assets (AIDS related) A/c. Dr. 100
To Capital Research A/c. 100
(Being equipment worth Rs.5 Lakhs donated by ..
Recorded at nominal value for control)
4. AIDS Related Expenses A/c. Dr. 35,25,000
Seminar/Centre Related Expenses A/c. 28,00,000
To Bank A/c. 63,25,000
(Being AIDS/Grant related expenditure incurred including
OH Expenses)
5. Government Grants A/c. Dr. 35,25,000
Grants from Trusts A/c. Dr. 28,00,000
To Profit & Loss A/c. 63,25,000
(Being Grants transferred to P&L Account to the extent of
expenditure incurred thereto)
ACCOUNTING STANDARD -12 45
Note: In the P&L A/c. the credit of Rs. 63,25,000 may be shown generally as Other Income or
specifically as “Grant Income” Alternatively, the expenses could be netted off against the
Grants transferred to P&L A/c.

Grants in the Nature of Promoters Contribution (Para 10,16).

1. The Government Grants may be in the nature of Promoters’ Contribution i.e. -

(a) they are given with reference to the Total Investment in an undertaking or
(b) by way of contribution towards its Total Capital Outlay, (e.g. Central Investment
Subsidy Scheme).

2. Such Grants are not ordinarily expected to be repaid. Hence, they are treated as
capital Reserve, and as part of Shareholders’ Funds which cannot be distributed as
dividend or considered as Deferred Income.

QUESTION NO 11
Santosh Ltd. has received a Grant of Rs. 8 Crores from the Government for setting up a
Factory in a backward area. Out of this Grant, the Company distributed Rs. 2 Crores as
Dividend. Also, Santosh Ltd. received land free of cost from the State Government but it has
not recorded at all in the books as no money has been spent. In the light of AS-12, examine,
whether the treatment of both the Grants is correct.

SOLUTION

1. Rs. 8 Crores is in the nature of Promoter’s Contribution, and hence should be

transferred to Capital Reserve. Its distribution as Dividend is inappropriate.

2. Land received free of cost, being Non-Monetary Grant, should be recorded at Nominal
Value (Rs.100 or Rs 1,000).

QUESTION NO 12
A few days after the beginning of the year, Siva Ltd. acquired assets for R.500 Lakhs on
which it received a Government Grant of 10%. Give the treatment.

SOLUTION

1. Promoter’s Contribution: As per para 10 of AS-12, Government Grants take the nature of
Promoters’ Contribution, if they are given (a) with reference to the Total Investment in an
undertaking, or (b) by way of contribution towards its Total Capital Outlay, (e.g. Central
Investment Subsidy Scheme).

2. Analysis: In the instant case, the Grants are provided by reference to the Total
Investment, but are related to Fixed Assets. If the Assts are similar and have the same
rate of depreciation, the Company may adopt either the – (a) Asset Cost Reduction
Method, or (b) Deferred Income Method, for such Grant.

3. Conclusion: In the absence of information as to the nature & type of assts, it may be
appropriate to treat the Grant as Capital Reserve, in accordance with Para 10.
46 ACCOUNTING
CONCEPT 5: Accounting for Refund of Government Grants

When certain conditions are not fulfilled, the Government Grants should be refunded. A Grant
that becomes refundable is treated as an Extra-ordinary Item.

1. Revenue Grants: The amount refundable in respect of a revenue item is applied first
against any unamortized Deferred Credit remaining in respect of the Grant. Any
excess of Grant refundable over the Deferred Credit or when there is no Deferred
Credit, it is immediately charged to the P&L Statement.

2. Promoters’ Contribution: Where a Grant in the nature of Promoters’ Contribution

becomes refundable, in part or in full, the relevant amount recoverable by the
Government is deducted from Capital Reserve.

3. Specific Fixed Assets: The amount refundable in respect of a specific Fixed Asset is
recorded –

(a) by increasing the Book Value of the asset, (wherein the depreciation on the Revised
Book Value is provided prospectively over the residual life of the asset), or
(b) by reducing the Capital Reserve or the Deferred Income balance, as appropriate, by
the amount refundable.

QUESTION NO 13
Supriya Ltd. received a grant of Rs. 2,500 Lakhs from the Government during the last
accounting year for welfare activities to be carried on by the Company for its Employees. The
Grant prescribed conditions for its utilization. However, during the current year, it was found that
the conditions of Grants wee not complied with and the Grant had to be refunded to the
Government in full. Explain the accounting treatment, under AS-12.

SOLUTION

1. The above Grant is in the nature of Revenue Grant, since it is for welfare activities for its
Employees. Therefore, when received, it should have been credited to P&L Account.
2. Therefore, in the event of refund, the amount refunded should be debited to P&L account.
3. Such debt should be shown as an Extra Ordinary item in the P&L Statement.

QUESTION NO 14
Three years ago, Sankara Ltd. had received Subsidy of Rs. 25 Lakhs from Government
by way of contribution towards its Total Capital Outlay. However, due to non-fulfilment of some
specified conditions. Rs. 16 Lakhs was recovered by the Government during the current
accounting year. Discuss the accounting treatment.

SOLUTION
Principle: Where a Grant, which is in the nature of Promoter’s Contribution becomes
refundable to the Government, in part or in full, due to non-fulfillment of some specified
conditions, the relevant amount recoverable by the Government is reduced from the Capital
Reserve.

Conclusion: In the above case, the amount of Rs. 16 Lakhs should be reduced from the Capital
Reserve. The balance in the Capital Reserve will be Rs. 9 Lakhs.
ACCOUNTING STANDARD -12 47
QUESTION NO 15
Neelakanta Ltd. purchased a Machinery for Rs. 40 Lakhs (Useful Life 4 years and
Residual value Rs. 8 Lakhs). Government Grant received is Rs. 16 Lakhs. Due to non-
compliance of certain condition, the Grant become refundable in 3rd year to the extent of Rs. 12
Lakhs. Show the Journal Entry to be passed at the time of refund of Grant and the value of the
Fixed Assets, if (a) the Grant is credited to Fixed Assets (b) the Grant is credited to Deferred
Grant A/c.

SOLUTION
A. If Grant is credited to Fixed Assets (i.e. Assets Cost Reduction Method)

Particulars Dr. (Rs.) Cr.(Rs.)

Fixed Assets A/c. Dr. 12,00,000
To Bank A/c. 12,00,000
(Being Grant refunded to the Government on non-
compliance of related conditions, and Cost of the Asset
thereby increased) (See Note below)

* Depreciation p.a. = Cost 40 Lakhs – Grant 16 Lakhs – Residual Value 8 Lakhs

4 Years Useful Life

= Rs. 4,00,000 p.a.

• WDV of Asset before the above Journal Entry = Cost Rs.40,00,000 less Grant Credited at
inception Rs. 16,00,000 less Depreciation of Rs. 4,00,000 for 2 years = Rs.16,00,000
• Carrying Book Value of Asset after above Journal Entry = Rs.16,00,000 + Rs.12,00,000 =
Rs. 28,00,000

B. If Grant is credited to Deferred Grant A/c. (i.e. Deferred Income Method)

Particulars Dr. (Rs.) Cr.(Rs.)

Deferred Government Grant A/c. Dr. 8,00,000
Profit and Loss A/c. Dr. 4,00,000
To Bank A/c. 12,00,000
(Being Grant refunded to Government, and excess
provided from Profit & Loss A/c).

• Depreciation p.a. under Deferred Income Method =

Cost 40 Lakhs – Grant 16 Lakhs – Residual Value 8 Lakhs
4 Years Useful Life

= Rs. 8,00,000 p.a.

• WDV of Asset at beginning of year 3 = Cost Rs.40,00,000 less Depreciation of Rs.
8,00,000 for 2 years = Rs.24,00,000
• Balance of Deferred Grant at the end of 2 years Rs.16,00,000 – (Rs.4,00,000 x 2 years)
= Rs. 8,00,000
• There will not be any change in the Carrying Amount of the Asset.
48 ACCOUNTING
Note: The above solution has been given directly based on AS-12, without considering
provisions of AS-10.
However, on a combined reading of AS-10 and AS-12, it is suggested that in Situation A
(Asset Cost Reduction Method), the Refund should not be debited to Fixed Assets A/c.
beyond Rs. 8 Lakhs, being the difference in WDV between the two Methods i.e. (Rs.
24,00,000 – Rs. 16,00,000). The Excess Refund of Rs. 4 Lakhs (Refund Rs. 12,00,000 less
Adjusted in Cost of Fixed Assets Rs. 8,00,000 as above) should be charged to P&L A/c. due
to the following reasons –

(a) The Refund does not increase the cost of the asset beyond the actually incurred cost.
Such Refund also does not result in any additional benefit from the Asset. It is penal in
nature for non-compliance with conditions relating to the Grant.

(b) Deferred Income Method and Asset Reduction Method are practically revenue neutral,
i.e. whichever method a Company chooses, the net effect on P&L will be the same.
Refund of Grant should also be revenue neutral. Therefore, Net Carrying Amount under
both cases should reflect the same balance.

QUESTION NO 16
Srikanta Ltd. received a specific grant of Rs. 30 Lakhs for acquiring the Plant of Rs.150
Lakhs during 2010-11 having useful life of 10 years. The Grant received was credited to
Deferred Income in the Balance Sheet. During 2013-14, due to non-compliance of conditions
laid down, for the grant, the Company had to refund the whole grant to the Government Balance
in the Deferred Income on that date was Rs. 21 Lakhs and Written Down Value of Plant was Rs.
105 Lakhs.

(1) What should be the treatment of the refund of the grant and the effect on cost of the Fixed
Assets and the amount of depreciation to be charged during the year 2013-14 in Profit and
Loss Account?

(2) What should be the treatment of the Refund. If Grant was deducted from the Cost of the
Plant during 2010-11 assuming Plant Account showed the balance of Rs. 84 Lakhs as on
01.04.2013?

SOLUTION
A. If Grant is credited to Fixed Assets (i.e. Asset Cost Reduction Method)

Particulars Dr. (Rs.) Cr.(Rs.)

Fixed Assets A/c. Dr. 30,00,000
To Bank A/c. 30,00,000
(Being Grant refunded to the Government on non-compliance of related
conditions, and Cost of the Asset thereby increased) (See Note below)

• WDV of Asset on 01.04.2014 before the above Journal Entry (given) Rs. 84 Lakhs = Cost
Rs. 150 Lakhs less Grant Credited at inception Rs. 30 Lakhs less Total Depreciation for 3
years. So, Total Depreciation for 3 years = 150 – 30 – 84 = Rs. 36 Lakhs.

• From the information relating to Asset cost (net of Grant) and Useful Life, it can be
inferred that the Company is recognizing Depreciation on Straight line basis for 10 years
useful life. So, Depreciation p.a. = Rs. 12 Lakhs
ACCOUNTING STANDARD -12 49
• Carrying Book value of Asset after above Journal Entry = 84 + 30 = Rs. 114 Lakhs, to be
depreciated over the balance useful life of 7 years. So, Depreciation p.a. = 114 ÷ 7 = Rs.
16.29 Lakhs. (Also see Note below).

B. If Grant is credited to Deferred Grant A/c. (i.e. Deferred Income Method)

Particulars Dr. (Rs.) Cr.(Rs.)
Deferred Government Grant A/c. Dr.(given) 21,00,000
Profit and Loss A/c. Dr.(balancing figure) 9,00,000
To Bank A/c. 30,00,000
(Being Grant refunded to Government, and excess provided from Profit
& Loss A/c).
Note: There will not be any change in the carrying Amount of the Asset.
Depreciation will be charged on the same basis as charged in the
earlier years.

• WDV of Asset on 01.04.2014 (given) Rs. 105 Lakhs = Cost Rs. 150 Lakh less Total
Depreciation for 3 years. Hence, Total Depreciation for 3 years = 150 – 105 = Rs. 45
Lakhs. Also, Grant credited to P&L (as Income) for 3 years = 30-21 = Rs. 9 Lakhs. On a
combined reading of the above, it is inferred that the Company is recognizing
Depreciation and Grant Income on straight line basis for 10 years useful life.

• Depreciation to be charged p.a. for balance useful life = Rs. 45 Lakhs ÷ 3 years = Rs. 15
Lakhs p.a.

Note: The above solution has been given directly based on AS-12, without considering
provisions of AS-10.
However, on a combined reading of AS-10 and AS-12, it is suggested that in Situation A
(Asset Cost Reduction Method), the Refund should not be debited to Fixed Assets A/c.
beyond Rs. 21 Lakhs, being the difference in WDV between the two Methods i.e. (105-84).
The Excess Refund of Rs. 9 Lakhs (Refund Rs. 30 Lakhs less Adjusted in Cost of Fixed
Assets Rs. 21 Lakhs as above) should be charged to P&L A/c. due to the following reasons –

(c) The Refund does not increase the cost of the asset beyond the actually incurred cost.
Such Refund also does not result in any additional benefit from the Asset. It is penal in
nature for non-compliance with conditions relating to the Grant.

(d) Deferred Income Method and Asset Reduction Method are practically revenue neutral,
i.e. whichever method a Company chooses, the net effect on P&L will be the same.
Refund of Grant should also be revenue neutral. Therefore, Net Carrying Amount under
both cases should reflect the same balance.

QUESTION NO 17
Markandeya Ltd. applied for a Government Grant for purchase of a special machinery.
The machinery costs Rs. 80 Lakhs and the Grant was Rs. 30 Lakhs. The Machinery has a
useful life of 10 years and the Company follows SLM Depreciation. The Grant was promptly
received but certain conditions regarding production were attached to it. Four years later, an
amount of Rs. 4 Lakhs become refundable to the Government since the Company did not
adhere to the conditions imposed earlier. Explain the accounting treatment.
50 ACCOUNTING
SOLUTION
1. Where Asset Cost Reduction Method is followed:
(a) Original cost of the Machinery Rs. 80 Lakhs
(b) Government Grant reduced from cost Rs. 30 Lakhs
(c) Depreciable Amount of Machinery (a-b) Rs. 50 Lakhs
(d) Usefull Life 10 Years
(e) Depreciation per annum (c ÷ d) Rs. 5 Lakhs
(f) Accumulated Depreciation for four years Rs. 20 Lakhs (rs. 5 Lakhs x 4 years)
(g) Book Value of the asset in fourth year Rs.30 Lakhs (Rs. 50 Lakhs – Rs.20
Lakhs)
(h) Add back: Amount of Refundable Grant Rs. 4 Lakhs
(i) Revised Book Value of Machinery (g + h) Rs. 34 Lakhs
(j) Balance Useful Life 10-4 = 6 years
(k) Depreciation to be provided for next 6 years 34÷ 6=Rs.5.67 Lakhs per annum

2. Where Deferred Income Method is followed:

(a) Original cost of the Machinery Rs. 80 Lakhs
(b) Usefull Life 10 Years
(c) Depreciation per annum Rs.8 Lakhs
(d) Government Grant treated as Deferred income Rs. 30 Lakhs
(e) Amount allocated/credited to P&L A/c. every Rs. 3 Lakhs (Rs. 30 Lakhs 10 ÷
year years)
(f) Total Amount credited to P&L for our years Rs. 12 Lakhs
(g) Balance in Deferred Income Account for Rs.18 Lakhs (Rs. 30 Lakhs – Rs.12
4th year Lakhs)
(h) Less: Grant Refundable – now adjusted Rs. 4 Lakhs
(i) Revised Balance in Deferred Income Account Rs. 12 Lakhs
(j) Amount to be credited to P&L for next 6 years Rs. 2 Lakhs (Rs.12 Lakhs 6 ÷
years)
Note: Depreciation amount for the next 6 years will not be affected in this case.

QUESTION NO 18
A Fixed Asset is purchased for Rs. 20 Lakhs. Government Grant received towards it is R.
8 Lakhs. Residual value is Rs. 4 Lakhs and useful life is 4 years. Assumed SLM Depreciation.
Asset is shown net of Grant. After 1 years, Grant becomes refundable to the extent of Rs. 5
Lakhs due to non-compliance with conditions. Pass Journal Entries.
SOLUTION
Particulars Dr. (Rs.) Cr. (Rs.)
1. Fixed Assets A/c. Dr. 20,00,000
To Bank A/c. 20,00,000
(Being Purchased of Fixed Asset
for Rs.20,00,000
2. Bank A/c. Dr. 8,00,000
To Fixed Asset A/c. 8,00,000
(Being Grant recorded as reduction from
Cost of Asset)
3. Depreciation A/c. Dr. 2,00,000
To Fixed Asset A/c. 2,00,000
ACCOUNTING STANDARD -12 51
(Being Depreciation for year of acquisition,
under SLM before Grant Refund) (Note 1)
4. Fixed Assets A/c. Dr. 5,00,000
To Bank A/c. 5,00,000
(Being grant refunded to Government on
non-compliance of related conditions and cost
of the asset thereby increased).
5. Depreciation A/c. Dr 3,66,667
To Fixed Assets A/c. 3,66,667
(Being depreciation charged on Fixed Assets under
SLM after Grant Refund( Note 2)

Note: 1. Depreciation (before Grant Refund) =

= Cost 20,00,000 (–) Grant 8,00,000 – Residual Value 4,00,000
4 Years Useful Life
= Rs. 2,00,000
2. Depreciation (after Grant Refund) =
= WDV 10,00,000 (–) Grant 5,00,000 – Residual Value 4,00,000
Balance Useful Life 3 Years
= Rs. 3,66,667

QUESTION NO 19
Swayambu Ltd. received a revenue Grant from the State Government amounting to Rs.
45 Lakhs during the last accounting year. The Grant was given subject to certain conditions to
be fulfilled by the Company over a nine-year period. During the current accounting year, the
entire amount of Rs. 45 Lakhs became refundable, as the conditions attached to it could not be
fulfilled. The Company had already recognized Rs. 5 Lakhs in the P&L A/c. of the previous
year. The Company wants to write-off Rs. 45 Lakhs, being the Grant refundable over a period
of 5 years. Discuss whether the above treatment is proper.

SOLUTION
1. Unamortised Deferred Credit/Income = Rs. 45 Lakhs – Rs. 5 Lakhs = Rs. 40 Lakhs,
whereas Refund Amount = Rs. 45 Lakhs.
2. The Refund Amount should first be adjusted against Unamortised Deferred Credit of Rs.
40 Lakhs. The balance of Rs. 5 Lakhs should be charged to the P&L Account in the year in
which it became refundable as an Extra ordinary item.
3. Deferral and write-off over a future period is not in accordance with AS-12.

QUESTION NO 20
Six years earlier, Mrithyunjaya Ltd. had received a Grant of Rs. 50 Lakhs from a State
Government towards installation of Pollution Control Machinery on fulfillment of certain
conditions. The Company, however, failed to comply with the said conditions and consequently
was required to refund the said amount during the current year. The Company debited the said
amount to its Machinery in the current year on payment of the same. It also re-worked the
depreciation for the said machinery from the date of its purchase and passed necessary
adjusting entries in the current year to incorporate the retrospective impact of the same.
Comment on the above.
52 ACCOUNTING
SOLUTION
1. Principle: AS-12 requires that the amount refundable in respect of a Government Grant
related to a specific Fixed Asset is recorded – (a) by increasing the Book Value of the
Asset, or (b) reducing the Capital Reserve or the Deferred Income balance, as
appropriate, by the amount refundable.
2. Analysis & Conclusion: If the Book Value of the asset is increased, depreciation on the
Revised Book Value of the Plant and Machinery is proper. However, the adjustment of
depreciation with retrospective effect is improper, and violates both AS-6 and AS-12.

QUESTION NO 21
Shivam Ltd. acquired a Fixed Asset for Rs. 50,00,000. The estimated useful life of the
asset is 5 years. The salvage value after useful life was estimated at Rs. 5,00,000. The State
Government gave a grant of Rs. 10,00,000 to encourage the asset acquisition. At the end of the
second year, the subsidy of the State Government became refundable. What is the Fixed Asset
value after refund of Grant/Subsidy to the State Government but before amortising the asset
value at the end of the second year?

SOLUTION
Particulars Rs.
Original Cost of Fixed Assets 50,00,000
Less: State Government Grant received (10,00,000)
40,00,000
Less: Amount to be written off in the first year (40,00,000– 5,00,000) ÷ 5 years (7,00,000)
33,00,000
Add: Refund of State Government Grant. 10,00,000
Value of Fixed Assets, at the end of the 2nd year, after refund but 43,00,000
before depreciation.

QUESTION NO 22
On 1st April 2010, Sundaram Ltd. received a Government Grant of Rs. 300 Lakhs for
acquisition of a Machinery costing Rs. 1,500 Lakhs. The Grant was credited to the cost of the
Asset. The life of the Machinery is 5 years. The Machinery is depreciated at20% on WDV basis.
The Company had to refund the Grant in May 2013 due to non-fulfillment of certain conditions.
How you would deal with the refund of Grant?

SOLUTION
Particulars Rs. Lakhs
Original Cost of the Machinery 1,500
Less: Government Grant (Reduced from Cost) (300)
Depreciable Cost as on 1.4.2009 1,200
Less: Depreciation for 2010-11(Rs.1,200 x 20%) (240)
WDV on 1.4.2011 960
Less: Depreciation for 2011-12 (Rs. 960 x 20%) (192)
WDV on 1.4.2012 768
Less: Depreciation for 2012-13 (Rs. 78 x 20%) (154)
WDV on 1.4.2013 614
Add: Refundable Government Grant 300
Revised Book Value of Machinery 914
Balance Useful Life 2 Years
Depreciation to be provided for the next 2 years (Rs.914 ÷ 2 Years) 457
ACCOUNTING STANDARD -12 53
CONCEPT 6: Disclosure Requirements
AS-12 requires disclosure of –

1. The accounting policy adopted for Government Grants, including the methods of
presentation in the Financial Statements.
2. The nature and extent of Government Grants recognised in the Financial Statements,
including Grants of non-monetary assets given at a concessional rate or free of cost.

QUESTION NO 23
A Steel Manufacturing Company has a turnover of Rs, 45 Crores and Net Tax Profit of
Rs. 6 Crores. The company’s financial year ends on 31st March. The Company’s policy is to
treat Grants received in respect of Fixed Assets as Deferred income and to deduct all Grants
identified as relating to specific revenue expenditure against that expenditure. All other Grants
recognized are credited to P&L Account. Answer the following questions:-

A. During the year the Company received a Grant from the Defence Department of
Government of India for Rs.3,00,000 towards the cost of new equipment. The
equipment has an estimated useful economic life of 10 years and cost Rs. 7,00,000.
The Company policy is to depreciate all depreciable Fixed Assets by the Straight Line
Method.
B. During the year, the Company spent Rs. 70,000 on training in respect of which it is due
to receive Government Grant of 50%. The Grant formalities have been completed but
payment is not expected until mid-June of the next year.
C. In October, a Grant of Rs. 40,000 was received from the Government in recognition of
the high quality that the Company’s production had maintained over the five years,
which had ended on 31st March, the previous accounting year.

SOLUTION
Situation A : The Government Grant has been received relating to specific Fixed Assets.
There are two methods for dealing with the Grant in the books:-
Particulars Asset Cost Reduction Deferred Income
Method Method
1. Original Cost of Equipment Rs.7,00,000 Rs.7,00,000
2. Specific Grant Received Rs. 3,00,000 Rs. 3,00,000
(reduced from Cost)
3. Depreciable Value (1)-(2) Rs. 4,00,000 Rs. 7,00,000
4. Useful Life of Machinery 10 Years 10 Years
5. Depreciation Provided p.a. (3)- (4) Rs. 40,000 Rs. 70,000
6. Other Income credited to P&L A/c. Not Applicable (2) ÷ (4) Rs.30,000
every year

Note: The balance in the Deferred Income Account shall be shown in the Balance Sheet
separately with a description, as ‘Deferred Government Grants’ under the appropriate head.

Situation B : The Government Grant to be received can be shown either as income or as

deduction from Training Expenses. As the Grant has not been received till the year end, it has
to be shown as Receivable.
Situation C : This is not a Grant related to specific Fixed Asset or for conditions to be complied
in future. This Grant should be credited to P&L Account in the year of receipt only.
54 ACCOUNTING
QUESTION NO 24 NOV 2014 4 Marks
Samrat Limited has set up its business in a designated backward area which entitles the
Company for subsidy of 25% of the total investment from Government of India. The Company
has invested Rs. 80 Crores in the eligible investments. The Company is eligible for the Subsidy
and has received Rs. 20 Crores from the Government in February 2014. The Company wants
to recognize the said Subsidy as its Income to improve the bottom line of the Company. Do
you approve the action of the Company in accordance with the Accounting Standards?

SOLUTION
1. The Government Grants may be in the nature of Promoters’ Contribution, i.e.
(a) they are given with reference to the Total Investment in an undertaking, or
(b) by way of contribution towards its total Capital Outlay, (e.g. Central
Investment Subsidy Scheme).
2. They cannot be shown as income in the Profit and Loss Account. Such Grants are not
ordinarily expected to be repaid. Hence, they are treated as Capital Reserve, and as part of
Shareholders’ Funds which cannot be distributed as dividend or considered as Deferred
Income.

3. Only Grants which are not revenue in nature can be capitalized. The correct treatment is to
credit the Subsidy to Capital Reserve.

QUESTION NO 25 CA MAY 2014 4 Marks)

Explain in brief the treatment of Refund of Government Grants in line with AS-12 in the
following three situations:
(i) When Government Grant is related to Revenue.
(ii) When Government Grant is related to Specific Fixed Assets.
(iii) When Government Grant is in the nature of Promoter’s Contribution.

QUESTION NO 26 CA FINAL NOV 2015 4 MARKS

A Ltd. has set up its business in a designated backward area with an investment of
Rs.200 Lakhs. The Company is eligible for 25% subsidy and has received Rs.50 Lakhs from
the Government. Explain the treatment of the Capital Subsidy received from the Government
in the books of the Company.

SOLUTION
The Government Grants may be in the nature of Promoters’ Contribution i.e. -
(a) they are given with reference to the Total Investment in an undertaking, or
(b) by way of contribution towards its Total Capital Outlay,(e.g. Central Investment
Subsidy Scheme).

2. Such Grants are not ordinarily expected to be repaid. Hence, they are treated as Capital
Reserve, and as part of Shareholders’ Funds which cannot be distributed as dividend or
considered as Deferred Income.

3. Subsidy received in this case, is not in relation to specific Fixed Assets or in relation to
revenue, Hence, it should not be treated as Deferred Income or as an Item of Revenue.
The correct treatment is to credit the Subsidy to capital Reserve.
ACCOUNTING STANDARD -12 55

IND AS 20: GOVT. GRANTS

Major Changes in Ind AS 20 vis-à-vis IAS 20 Not Resulting in Carve Outs
1. Non-Monetary Grant: IAS 20 gives an option to measure non-monetary government grants either at their
fair value or at nominal value. Ind AS 20 requires measurement of such grants only at their fair value.
Thus, the option to measure these grants at nominal value is not available under Ind AS 20.
2. Grant related to Assets: IAS 20 gives an option to present the grants related to assets, including non-
monetary grants at fair value in the balance sheet either by setting up the grant as deferred income or by
deducting the grant in arriving at the carrying amount of the asset. Ind AS 20 requires presentation of
such grants in balance sheet only by setting up the grant as deferred income. Thus, the option to present
such grants by deduction of the grant in arriving at the carrying amount of the asset is not available
under Ind AS 20.
3. Presentation of Grants Related to Income: IAS 20 requires presentation of grants related to income in
the separate income statement. This requirement is not provided in Ind AS 20 consequential to the
removal of option regarding two statement approach in Ind AS 1.Ind AS 1 requires that the components of
profit or loss and components of other comprehensive income shall be presented as a part of the
statement of profit and loss.
Major Changes in Ind AS 20 vis-à-vis Notified AS 12
(i) Government Assistance which does not fall within the Definition of Government Grants: Ind AS 20
deals with the other forms of government assistance which do not fall within the definition of government
grants. It requires that an indication of other forms of government assistance from which the entity has
directly benefited should be disclosed in the financial statements. However, AS 12 does not deal with
such government assistance.
(ii) Grant in respect of Non Depreciable Assets: AS 12 requires that in case the grant is in respect of non-
depreciable assets, the amount of the grant should be shown as capital reserve which is a part of
shareholders‘ funds. It further requires that if a grant related to a non-depreciable asset requires the
fulfilment of certain obligations, the grant should be credited to income over the same period over which
the cost of meeting such obligations
is charged to income. AS 12 also gives an alternative to treat such grants as a deduction from the cost of
such asset.
As compared to the above, Ind AS 20, is based on the principle that all government grants would
normally have certain obligations attached to them and these grants should be recognised as income
over the periods which bear the cost of meeting the obligation. It, therefore, specifically prohibits
recognition of grants directly in the shareholders‘ funds .

(iii) Government Grants in the Nature of Promoters Contribution: AS 12 recognises that some
government grants have the characteristics similar to those of promoters‘ contribution. It requires that
such grants should be credited directly to capital reserv e and treated as a part of shareholders‘ funds.
Ind AS 20 does not recognise government grants of the nature of promoters‘ contribution. As stated at (ii)
above, Ind AS 20 is based on the principle that all government grants would normally have certain obl
igations attached to them and it, accordingly, requires all grants to be recognised as income over the
periods which bear the cost of meeting the obligation.
(iv) Valuation of Non-monetary Grants given Free or at a Concessional Rate: AS 12 requires that
government grants in the form of non-monetary assets, given at a concessional rate, should be
accounted for on the basis of their acquisition cost. In case a non-monetary asset is given free of cost,
it should be recorded at a nominal value. Ind AS 20 requires to value non-monetary grants at their fair
value, since it results into presentation of more relevant information and is conceptually superior as
compared to valuation at a nominal amount.
56 ACCOUNTING
(v) Accounting for Grant Related to Assets including Non-monetary Grant: Existing AS 12 gives an
option to present the grants related to assets, including non-monetary grants at fair value in the balance
sheet either by setting up the grant as deferred income or by deducting the grant from the gross value of
asset concerned in arriving at its book value. Ind AS 20 requires presentation of such grants in balance
sheet only by setting up the grant as deferred income. Thus, the option to present such grants by
deduction of the grant in arriving at its book value is not available under Ind AS 20.
(vi) Government Assistance: Ind AS 20 includes Appendix A which deals with Government Assistance—No
Specific Relation to Operating Activities.
(vii) Loans at Concessional Rate: Ind AS 20 requires that loans received from a government that have a
below-market rate of interest should be recognised and measured in accordance with Ind AS 109 (which
requires all loans to be recognised at fair value, thus requiring interest to be imputed to loans with a
below-market rate of interest) whereas AS 12 does not require so.
ACCOUNTING STANDARD -16 57

ACCOUNTING STANDARD-16
ACCOUNTING FOR BORROWING COSTS
With effect from 01.04.2000
Levels of Enterprises Companies (AS) Rules, Enterprises – Other than
2006 Companies
All types of Companies I,II & III

CONCEPT 1: What is the objective and scope of AS-16

AS-16 should be applied in accounting for Borrowing Costs.
This AS, however, does not deal with the actual or imputed cost of Owners’ Equity, including
Preference Share Capital not classified as a liability.
CONCEPT 2: What do you understand by the term Borrowing Costs
Briefly indicate the items which are included in the expression “Borrowing Cost” as explained in AS-
16.

Borrowing Costs are interest and other costs incurred by an enterprise in connection with the
borrowing of funds, Borrowing Costs may include:-

1. Interest and Commitment Charges on Bank Borrowings and other short-term and long term
borrowings.
2. Amortisation of discounts or premiums relating to borrowings.
3. Amoritsation of ancillary costs incurred in connection with the arrangement of borrowings.
4. Finance Charges in respect of assets acquired under Finance Leases or under other similar
arrangements, and
5. Exchange Differences arising from Foreign Currency Borrowings, to the extent that they are
regarded as an adjustment to Interest Costs.

CONCEPT 3:What is a Qualifying Asset? Give examples.

Qualifying Asset is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale.
Examples of Qualifying Assets Exclusions from Qualifying Assets
* Manufacturing Plants. * Assets that are ready for their intended
* Power Generation Facilities use/sale when acquired.
* Inventories that require a substantial * Inventories that are routinely manufact-
period of time to bring them to a ured or otherwise produced to large
saleable condition, and quantities on a respective basis over a
* Investment Properties short period of time.
* Investments other than Investment
Properties.

EXAMPLE (Q.ASSETS)
Hari Ltd. is a Holding Company of Shiv Ltd. Shiv Ltd. is going to start a new project estimated to
cost Rs. 20 Crores. For this, Hari Ltd. made an investment of Rs. 10 Crores in the Shares of Shiv
Ltd. by borrowing the same from Financial Institutions at 10% p.a. As on 31st March, the project was
not completed. The Directors of Hari Ltd. want to capitalize the interest on Borrowing upto 31st
March, amounting to Rs. 1 Crore and add it to the cost of investments. Comments.
58 ACCOUNTING
SOLUTION
In the above case, Interest of Rs. 1 Crore should not be capitalized since Investment in the Shares
of Shiv Ltd. by Hari Ltd. is not a Qualifying Asset at all. Also, such interest cost is not incurred by
‘acquisition’ of the Investments.
EXAMPLE (Q.ASSESTS)
A Firm produces its finished products in a peak season of five to six months in a year. No
production takes place during the reset of the year. However sales takes place throughout the year
and therefore large inventories need to be carried resulting in interest burden. Can this interest be
included in the valuation of Finished Goods?

SOLUTION
1. Para 12 of AS-2 specifically excludes Costs in determining the value of Inventories. Also,
under AS-16, Assets that are ready for their intended use/sale when acquired are
specifically excluded from Qualifying Assets.
2. The Inventories which are large in quantity on a repetitive basis over a short period of time,
are not qualifying Assets. Hence, in the instant case, the interest costs are not includible in
Asset Cost.
3. Interest Expense relating to the period during which Finished Goods are held in stock after
its production should be recognized as an expense in the period in which it is incurred.

CONCEPT 4: For purposes of AS-16 what is meant by Substantial Period of time? (ASI-1)
SOLUTION
1. Case-wise: What constitutes a ‘substantial period of time” primarily depends on the facts
and circumstances of each case. The time that an asset takes technologically and
commercially, to get ready for its intended use or sale should be considered in this regard.
2. Time taken for intended use/sale: The following assets ordinarily take 12 months or more to
get ready for their intended use or sale, unless the contrary is provided by the enterprise –
(a) Assets that are constructed or otherwise produced for an enterprise’s own use.
(b) Assets constructed under major capital expansions, and
(c) Assets intended for sale or lease that are constructed or otherwise produced as
discrete projects, e.g. Ship Building.
3. Inventories: Inventories are said to involve substantial period of time, when time is the
major factor in brining about a change in their condition, e.g. maturing of liquor for longer
periods.
4. Conclusion: A period of twelve months is considered as substantial period of time unless a
shorter or longer period can be justified on the basis of facts and circumstances of each
case.

CONCEPT 5: How are Borrowing Costs recognized?

SOLUTION
Total Borrowing Cost
Capitalized Expensed Off
Direct Attribution: Borrowing costs that are directly attributable to –
(a) Acquisition (b) Construction Other Borrowing Costs
(c) Production of a Qualifying Asset should be
be capitalized as part of the cost of that
asset. (See Conditions Below)
ACCOUNTING STANDARD -16 59
1. Conditions: Borrowing Costs are capitalized when -
(a) It is probable that they will result in future economic benefits to the enterprise, and
(b) the costs can be measured reliably.

2. Amount of Capitalisation: The amount of Borrowing Costs eligible for capitalization should be
determined as per AS-16. Other Borrowing Costs should be recognized as an expense in the
period in which they are incurred.

EXAMPLE:
Hari Ltd. has purchased a Ship during the year on deferred payment basis, payable over next 10
years. The Company has computed the interest payable over these 10 years and debited
Suspense A/c. Every year. 1/10th of the same is written off to P&L Account, treating the same as
Deferred Revenue Expenditure Comment.

SOLUTION
1. Analysis: In the instant case, the Ship is ready for use, but payment to the Supplier/ Vendor is
deferred over a period of 10 years. Hence, this interest payable is not eligible for capitalization as
Borrowing Costs.
2. Conclusion: Other Borrowing Costs, which are not capitalized in accordance with AS-16, should
be charged to the P&L A/c. Hence, the Company’s policy to defer the same and write off over ten
years is not proper.
Note: As per ICAI’s Statement on Treatment of Interest o Deferred Payments, Interest Payable
during the period of construction or installation of Fixed Assets can be capitalized. However,
Interest payable on Fixed Assets purchased on a deferred credit basis or on monies borrowed for
acquisition of assets should not be capitalized after such assets are put to use.

EXAMPLE:
Lakshmipathi Ltd. borrowed Rs. 40,00,000 for purchase of Machinery on 01.06.20X1. Interest on
Loan is 9% p.a. The Machinery was put to use fro 01.01.20X2. Pass Journal Entry for the year
ended 31.03.20X2 to record the Borrowing Cost of the Loan as per AS-16.

SOLUTION
Notes and Assumptions:
1. The Machinery purchased was not ready for its intended use on the date of acquisition. It
was ready for intended use only on the date on which it was put to use. Hence, the
Machinery is a “Qualifying Asset” for the period of 7 months from 01.06.20X1 to 01.01.20X2.
2. Six months is assumed to be “substantial period of time” for the asset under consideration.
3. Hence, Interest Cost for the period of construction i.e. from 01.06.20X1 to 01.01.20X2 is
capitalized as part of the asset. The amount to be capitalized = Rs. 40,00,000 x 9% x 7/12 =
Rs. 2,10,000
Particulars Dr. (Rs) Cr. (Rs.)
Interest A/c. Dr. 3,00,000
To Interest Payable A/c. 3,00,000
(Being total Interest accrued for year, i.e.
Rs. 40,00,000 x 9% x 10/12)
Machinery A/c. Dr. 2,10,000
To Interest A/c. 2,10,000
(Being Amount of Interest capitalized as per AS-16)
60 ACCOUNTING
Interest Payable A/c. Dr. 3,00,000
To Bank A/c. 3,00,000
(Being Total Interest on Loan paid)
Profit & Loss A/c. Dr. 90,000
To Interest A/c. 90,000
(Being Balance amount of Interest debited to Profit
and Loss A/c.)

CONCEPT 6: What Borrowing Costs are eligible for Capaitalization?

What is the treatment of interest Cost on General and Specific Borrowings?

1. Conditions for Capitalisation: Borrowing Costs can be capitalized under the following
conditions:-
(a) They are directly attributable to the Acquisition, Construction or Production of a
Qualifying Assets, and
(b) The asset should take a substantial period of time to get ready for its intended use or
sale.
2. The amount of borrowing costs eligible for capitalization is determined as under:-
Nature Borrowed Specifically (Para 10) Borrowed Generally (Para 12)
Situation When an Enterprise borrows funds When the financing activity of an
specifically for the purpose of enterprise is coordinated or when a
obtaining a particular Qualifying range of debt instruments are used to
Asset. borrow funds at varying rates of interest
with a specific Qualifying Asset.
Direct The Borrowing Costs that directly Identification of a direct relationship
Attribution relate to that Qualifying Asset can between particular borrowings and a
be readily identified. Qualifying Asset requires exercise of
Judgement.
Amount to Actual Borrowing Costs on that The amount of Borrowing Costs eligible
be Borrowing during the period. for capitalization should be determined
capitalized Less: Income on the temporary by applying a Capitalisation Rate to the
Investment of those borrowing expenditure on that asset. (See Note
if any below)

Note: Use of Capitalisation Rate:

• Capitalization Rate should be the Weighted Average of the Borrowing Costs

applicable to the borrowings that are outstanding during the period, other than
borrowings made specifically for the purpose of obtaining a Qualifying Asset.
• The amount of Borrowing costs capitalized during a period should not exceed the
amount of Borrowing Costs incurred during that period.

CONCEPT 7: How do you treat excess of Carrying Amount of Qualifying Asset over its
Recoverable Amount, if any?

1. Write off: When the Carrying Amount or the expected ultimate cost of the Qualifying
Asset exceeds its Recoverable Amount or Net Realisable Value, the Carrying Amount
ACCOUNTING STANDARD -16 61
is written down or written off in accordance with the requirements of other Accounting
Standards.

2. Reversal of Write off: In certain circumstances, the amount of the write-down or write-
off is written back in accordance with those other Accounting Standards.

CONCEPT 8: When can an enterprise commence to capitalise the Borrowing Costs?

What conditions are to be satisfied for commencement of capitalization of

Borrowing Costs?

Captalisation of Borrowing Costs as part of the Cost of a Qualifying Asset should

commence only when all the following conditions are satisfied-

1. The expenditure is being incurred for – (a) acquisition (b) construction (c)
production of a Qualifying Asset.
2. Borrowing Costs are being incurred, and
3. Activities that are necessary to prepare the asset for its intended use or sale,
(including any technical or administrative work prior to the commencement of
physical construction but excluding such activities during which no production or
development takes place) are in progress.

CONCEPT 9: Write Short notes on Expenditure on Qualifying Asset

1. Eligible Amount: Expenditure on a Qualifying Asset includes only such expenditure

resulting in – (a) Payment of Cash, (b) Transfers of other Assets, or (c) the
assumption of interest-bearing liabilities. Only these expenditure items are eligible for
capitalization of Borrowing Costs.
2. Reductions: From the eligible amount, any – (a) Progress Payments Received, and (b)
Grants Received in connection with the asset (e.g. Government Grants under AS-12),
should be deducted.
3. Apply Capitalisation Rate: The Average Carrying Amount of the asset during a period,
including Borrowing Costs previously capitalised, is normally a reasonable
approximation of the expenditure to which the Capitalisation Rate is applied in that
period.

CONCEPT 10: Explain with an example the nature of Activities in Progress so as to

capitalise Borrowing Costs

1. Condition: For capitalizing Borrowing Costs, the activities necessary to prepare the
assets for its intended use or sale should be in progress.
2. Nature of Activities: The activities should be necessary to prepare the asset for its
intended use. Eligible Activities:-

Include Exclude
(a) Direct Activities relating to/encompassing physical Activities during which the asset is
construction merely held and when no production
(b) Support Activities, e.g. technical/ administrative or development takes place.
work prior to commencement of physical construction.
62 ACCOUNTING
3. Example: Borrowing costs incurred while land is under development are capitalised
during the period in which activities related to development are undertaken. Borrowing
Costs incurred while Land acquired for building purposes is held without any
associated development activity will not qualify for capitalization.

EXAMPLE:
Can the Borrowing Cost incurred on loan borrowed for construction of building on Land be
capitalized when the Land has been acquired but no construction has been stated yet?

Refer Principles given above. The Borrowing Cost for the period in which Land is merely held,
and no activity for the construction of building has been started, cannot be capitalized.

CONCEPT 11:When should Capitalisation be suspended?

Write short notes on Suspension of Capitalisation of Borrowing Costs.

Suspension of Capaitalisation:
(a) Capitalisation of Borrowing Costs should be suspended during extended periods in
which active development is interrupted.

(c) Such costs are costs of holding partially completed assets, and do not qualify for
capitalization.

CONCEPT 11: CESSATION OF CAPITALISATION

When a qualifying asset becomes ready for use or sale, we should permanently stop
capitalization of interest. It can also be said that interest can not be capitalized after the
completion of activities.

CONCEPT 12: What are the disclosure requirements of AS-16?

The Financial Statements should disclose –

1. the accounting policy adopted for Borrowing Costs, and
2. the amount of Borrowing Costs capitalised during the period

CONCEPT 13: SUMMARY OF EXPERT ADVISORY OPINIONS IN AS-16

Land not Qualifying Asset: Interest on loan taken for the purpose of Now 2005
constructing building cannot be capitalized as borrowing cost since Land CA Journal
is not a Qualifying Asset. The fact that acquisition of land is an integral Page 730
part of development of a property, would not make it a Qualifying Asset
since each of the asset necessary for the project should be considered
separately for the purpose of deciding whether it constitutes a ‘Qualifying
Asset’ for AS-16 purposes. ‘Land and Building’ in any case are
considered separate assets.
Capitalization/Decapitalization of Exchange Loss/Gain: Foreign Jun 2008
Exchange Loss/Gain on the Foreign Currency Loan can be CA Journal
capitalized/adjusted against the cost only to the extent specified in Para Page 2002
4(e) of aS-16. Any excess Exchange Loss/ Gain should be
expensed/treated as Income in the P&L A/c.
Delay due to Operational & Marketing Hurdles: Where assets are ready
for use, but there are initial operational hurdles in new locations and the
ACCOUNTING STANDARD -16 63
business moves very slowly, and it takes a long time to get a sizeable Aug. 2011
number of customers and consolidate the business, Borrowing Costs CA Journal
incurred during such period (due to delays as explained above) should Page 265
not be capitalized. Only if the Borrowing Costs relate to a ‘Qualifying
Asset’ and meet the conditions in AS-16, they should be capitalized.
Common Fixed Assets constructed for a Project under Progress:
• Cost of a Composite Plant can be capitalized when parts of
the Plant are ready for its intended use, to the extent they Mar 2013
are related to the other plant which is ready for commercial CA Journal
production. Page 1402
• Technical Estimate can be used for determining the cost of
the related portion of the Composite Plant which is to be
capitalized.
Where funds are generally borrowed (and not specific projects), and
unutilized Loan Funds are kept in the general pool of funds for various May 2013
purposes, Interest on such loan portion which is not utilized for specific CA Journal
project, should be expensed off in the P&L A/c. Page 1733

QUESTION NO 1 (PROGRESS PAYMENT)

Given below are some relevant data as regards a construction contract.
Rs. In
lacs
Expenditure incurred till 31.3.2000 450
Interest cost capitalized for the year 1999-2000 @ 12% p.a. 24
Amount specifically borrowed till 31.3.2000 200
Assets transferred to construction during 2000-01 100
Cash payments during 2000-01 78
Progress payment received 300
New borrowings during 2000-01 @ 12% 200
The company intends to capitalize total borrowing cost of Rs.48 lacs. Is it possible to do that as
per AS16?

QUESTION NO 2 (CESSATION IN PARTS)

Given below are expenses incurred in three phases of a project relating to construction
of a captive power plant: (Rs.)
Phase 1 Phase 2 Phase 3 Total
Cash payments 500000 700000 500000
Transfer of assets 500000 200000 300000
Total 1000000 900000 800000 2700000
Money borrowed at the rate of 12% per annum is Rs.2200000.
The phase 1 is complete. How should the company capitalize borrowing costs?

QUESTION NO 3
Borrowing cost on the loans taken specifically to construct captive power plant is being
capitalized even after the commencement of commercial production. The management argues
that the borrowing cost is attributable solely and exclusively captive power plant and therefore
should be capitalized. Give comment
64 ACCOUNTING
QUESTION NO 4 (C.A.FINAL MAY 1996) (DEFINITION OF Q.ASSETS)
Parveen jindal Limited obtained term loan during the year ended 31st March, 2002 itd
uses extent of Rs.650lacs for modernization and development of its factory. Building worth
Rs.120lacs were completed and plant and machinery worth ts.350lacs were installed by 31st
March, 2002. A sum of Rs.70 lacs has been advanced for Assets the installation of which is
expected in the following year. Rs.110lacs have been utilized for working capital requirements.
Interest paid on the loan of Rs.650lacs during the year 2001-2002 amounted to Rs.58.50lacs.
How should the interest amount be treated in the Accounts of the company.
QUESTION NO 5 (CAPITALISATION RATE)
C Limited has made the following capital expenditure in an expansion programme
commencing from 1.6.2001:-
Project Remarks Amount Status
A Specific 34,00,00,000 Completed on 31.12.01
borrowings used
Rs.24,00,00,000 Completed on 30.11.01
B Specific 20,00,00,000
borrowing used
Rs.6,00,00,000
C 4,00,00,000 Under construction
D. 4,00,00,000 Completed on 28.2.01
E 8,00,00,000 Under construction

Details of borrowings:
Rs.20,00,00,000 11% Debentures issued on 1.7.99 redeemable in four equal installments
commencing from 1.7.2001.
Rs.15,00,00,000 14% secured working capital loan taken on 1.4.01 and Rs.5,00,00,000 was
paid on 31.12.2001
Rs.30,00,00,000 14% specific borrowings for projects A and B taken on 1.5.2001
$6,000,000 8% foreign currency loan taken on 1.6.2001 Exchange rate as of that date was
US$1= Rs.43.00. The exchange rate as of March 31, 2001 was US$1= Rs.46.5. Average
exchange rate= Rs.45/-
calculate the amount of borrowing costs to the capitalized during the year 2001-2002
QUESTION NO 6 (C.A.FINAL NOV.2002) (DEFINITION OF Q.ASSETS)
R Ltd. has borrowed Rs.25 crores from financial institution during the financial year
2001-02. These borrowings are used to invest in shares of A Ltd , a subsidiary company,
which is implementing a new project estimated to cost 50 crores. As on 31st march,2002 since
the said project was not yet complete, the directors of R ltd, resolved to capitalize the interest
on the borrowings amounting to Rs.3 crores and add it to the cost of investments. As a
statutory auditor, please comment.

QUESTION NO 7 (C.A.FINAL MAY 2003)(DATE WISE CAPITALISATION)

XYZ Ltd. Has undertaken a profit for expansion of company of capacity as per the following details;
Plan (RS.) Actual (RS.)
April 2002 2,00,000 2,00,000
May 2002 2,00,000 3,00,000
June 2002 10,00,000 ---
July 2002 1,00,000 ---
August 2002 2,00,000 1,00,000
September 2002 5,00,000 7,00,000
ACCOUNTING STANDARD -16 65
The company pays to its bankers at the rate of 12% p.a., interest being debited on a monthly
basis. During the half year company had Rs.10 lakhs overdraft upto 31st July, surplus cash in
August and again overdraft of over Rs.10 lakhs from 01-09-2002. The company had a strike
during June and hence could not continue the work during June. Work was again commenced
on 1st July and all the works were completed on 30th September. Assume that expenditure
were incurred on 1st Day of each month. Calculate:
1. Interest to be capitalized
2. Give reasons wherever necessary.

QUESTION NO 8 (CAPITALISATION RATE)

The British Company Limited made the following borrowings:

Amount Date on which Amount Objective for amount Related

borrowed borrowing is (Rs. In lacs) borrowed expenses
made (in lacs)
15%Debentures 1.1.2001 400 General 1.00
10%Term loan 1.4.2001 200 Specific to acquisition of 2.00
plant and machinery
General
12%Term loan 1.11.2001 300 2.50
15% Debentures and 12% Term loans were raised for the entire project and 10% Term loan
were raised for financing plant and machinery. Qualifying Assets for General Borrowings are:
(Rs. In Lacs)
Factory shed 100
Plant and Machinery 900
Other fixed assets 100
-----
1100
-----
Show how the allocation of Borrowing costs for specific loan as well as general loans to the
qualifying assets.

QUESTION NO 9
G company has incurred an amount of Rs.80 lakhs as borrowing cost during the year
ended 31.12.2002 calculated as under:
Amount borrowed Date on which borrowing is made Amount Interest
(Rs. In lacs)
14%Debentures 1.12.2001 200 28
12%Term loan 1.12.2001 300 36
16%Term loan 1.10.2002 400 16

The 16% secured loan has been specifically raised for construction of factory building. The
estimated cost being Rs.6 crores. The plant is likely to be completed in two years. The other
qualifying assets in which these funds have been utilized are:
Plant 1 200Lacs 18months
Internal roads 100Lacs 14 months
Plant 11 100Lacs 20 months
Compute the amount of borrowing costs to be capitalized for the year ended 31.3.2002.
66 ACCOUNTING
QUESTION NO 10
ICS& company is a sugar company. Due to the regulations by Central Government, the
company cannot decide the quantity to be sold in the market. It is regulated on the basis of
release orders issued by the Central government on a monthly basis. Because of the seasonal
nature of production, the company has to carry large inventories throughout the year. The
average holding period of the sugar stock is generally 12-15 months. In the years when there
is surplus stock of sugar, the government creates a buffer stock and reimburses the carrying
charges to the sugar factories, for the inventory to be carried by the sugar mill, which includes
interest. Sweet & company incurs high interest costs since borrowings are required to meet the
large demand for the working capital and payment to sugarcane producers. Interest costs are
the second largest item in the Profit and Loss account of the company next to raw material
consumed. Can interest be capitalized under AS 16 as a part of inventory.

QUESTION NO 11
The main object of a company is to undertake plantation activities, raising of teak and
other forestry operations. It takes about 10 to 15 years for the teak trees to grow. The company
has issued Debentures for the fund to meet all the expenses. The company included all cost of
planetary and interest paid in the valuation of stock of teak. Give comment.

QUESTION NO 12 (C A FINAL NOV 2005)

In may, 2004 speed Ltd. took a bank loan to be used specifically for the construction of
a new factory building. The construction was completed in January 2005 and the building was
put to its use immediately thereafter. Interest on the actual amount used for construction of the
building till its completion was Rs.18 lakhs, whereas the total interest payable to the bank on
the loan for the period till 31st March,2005 amounted to Rs.25 lakhs. Can Rs.25 lakhs be
treated as a part of the cost of factory building and thus be capitalized on the plea that the loan
was specifically taken for the construction of factory building.

QUESTION NO 13 (EXPECTED COST OF COMPLETION)

A fixed asset is in the construction period. Actual costs incurred till date and expected costs to
complete along with borrowings and planned borrowings are given below:
(Rs. in lacs)
Year Actual Estimated Money specifically Planned borrowings
borrowed
1 100 60
2 100 60
3 80 40
4 60 40
5 50 30
Borrowed funds costs @ of 12% per annum. Determine the estimated cost of the asset at the
end of 5th year.
QUESTION NO 14
Advise X Ltd. on the weighted average cost of borrowing and the interest cost to be
capitalized based on the following:
Total borrowings and interest of X Ltd. for year ending 31.3.2003 are as follows:
Borrowings Date of borrowing Amount (‘000) Interest (‘000)
18% Bank loan 1.5.2001 1,000 180
14% debentures 1.10.2002 2,000 140
16% term loan 1.7.2002 3,000 360
Total 6,000 680
ACCOUNTING STANDARD -16 67
Qualifying assets in which these borrowed funds are utilized are:
Assets Rs.(‘000) Period
Factory shed 2,500 12 months
Plant 1 1,500 9 months
Plant 2 1,000 7 months
QUESTION NO 15
X Ltd. borrowed Rs.10 crores on 1.1.1999 @12% per annum because of decline in
interest rate, the company agreed to charge 10% per annum with effect from the accounting
year 2002. the loan is repayable on bullet basis on 31.12.2005. The restructuring package
includes a clause that states a payment of Rs.30 lacs on 31.12.2006 as a partial compensation
of loss of interest. Should this additional interest be treated as accrued during 2006?
QUESTION NO 16
X Ltd. commenced construction of a dam on BOLT scheme in Jan 2001. The
construction of dam was completed in May 2002. Examine whether X Ltd. can capitalize
borrowing costs incurred during the period.

QUESTION NO 17
Determine the dates from which capitalization should cease
Building A Stage of completion
Completed in full in march
Building B Completed in full in April but not accessible until Building C is completed.
Building C Completed in December

Building D Completed in June but got electricity connection and was ready for intended use
in July.

QUESTION NO 18 (C A FINAL MAY 2001)

What do you understand by the term Borrowing costs? Briefly indicate the items
Which are included in the expression “Borrowing cost” as explained in AS-16.

ANSWER:
Borrowing costs are interest and other costs incurred by an enterprise In connection with the
borrowing of funds. Borrowing costs may include:
(a) Interest and commitment charges on bank borrowing and short term and long term
borrowings.
(b) Amortization of discounts or premiums relating to borrowings.
(c) Amortization of ancillary costs incurred in connection with the arrangement of
borrowings.
(d) Finance charges in respective of assets acquired under finance leases or under other
similar arrangements
(e) Exchange differences arising from foreign currency borrowings to the extent that they
are regarded as an adjustment to interest costs.

QUESTION NO 19
Jindal Ltd. had purchased during the year a ship on deferred payment basis, payable
over next 10 years. The company has computed the interest payable over these 10 years and
debited interest suspense account. Every year 1/10th of the same written off to profit and loss
account and treating the same as deferred revenue expenditure. Comment.
68 ACCOUNTING
ANSWER:
As per para 6 of AS-16, the borrowing cost that are directly attributable to the acquisition,
construction or production of qualifying asset should be capitalized as part of the cost of that
asset.
In the instant case the ship is ready for use but payment to the supplier or vendor is deferred
over a period of 10years. Hence this interest payable is not eligible for capitalization as
borrowing cost under AS-16.
AS-16 requires that other borrowing costs, which are not capitalized in accordance with AS-16,
should be charged to the profit and loss account. Hence the company’s policy to deferred the
same and write off over 10 years is not proper.
Also as per statement on treatment of interest on deferred payments, interest payable during
the period of construction or installation of fixed assets can be capitalized. However, interest
payable on fixed assets purchased on a deferred credit basis or own monies borrowed for
acquisition of assets should not be capitalized after such assets are put to use.

QUESTION NO 20 (C A FINAL MAY 2000)

The notes to accounts of Sharma Ltd. for the year ended 31st March includes the
following “interest on bridge loan from bank and financial institutions and on debentures
specifically obtained for the company’s fertilizer project amounting to Rs.1,80,80,000 has been
capitalized during the year, which includes approximately Rs.1,70,33,465 capitalized in respect
of the utilization of loan and debentures money for the said purpose”. Is the treatment correct?
Briefly comment

ANSWER:
For specific borrowing, amount to be capitalized = actual borrowing cost on that borrowing
during the period less income on the temporary investment of those borrowings, if any. Hence
the amount of capitalized borrowing cost can not exceed actual interest cost.
For general borrowing and use of Capitalization rate, AS-16 provides the amount of borrowing
costs Capitalized during a period should not exceed the amount of Borrowing cost incurred
during that period.
The given case is one of specific Borrowings for fertilizer project and hence the Capitalized
Borrowing cost is restricted to the actual amount of interest expenditure that is Rs.1,70,33,465.
Capitalization of Rs.1,80,80,000 has resulted in over statement of profit and assets by
Rs.10,46,535.
Hence the company’s policy is not in accordance with AS-16.

QUESTION NO 21
Jindal Ltd. borrowed Rs.12Crores for its capital expansion which lasted for 18 months.
The relevant borrowing rate was 12.5%. During this period the company invested the
temporary surplus funds at 4.5% on short term basis and earned an interest of 25lakhs Which
was offered as miscellaneous income in the profit and loss account. The company has
Capitalized the entire interest cost and added to its plant and machinery. Is this correct?

ANSWER:
For specific borrowing, amount to be capitalized = actual borrowing cost on that borrowing
during the period less income on the temporary investment of those borrowings, if any.
In the above case, the correct accounting treatment will be:
Actual borrowing cost (12crores*12.5%*18months) =2.25Crores
Less: interest on temporary investment =0.25Crores
Borrowing cost to be Capitalized under As-16 =2.00Crores
ACCOUNTING STANDARD -16 69
The company’s treatment in crediting the amount of 0.25crores as miscellaneous income is not
proper. This amount should be used to reduce the amount of Borrowing cost eligible for
Capitalization.

QUESTION NO 22 (C A FINAL NOV 2001 AUDITING)

When should Capitalization be suspended? Write short note on suspension of
capitalization of Borrowing cost.

QUESTION NO 23 (C A PE-II NOV 2002)

When is capitalization stopped? When should capitalization of Borrowing cost cease as
per AS-16?

QUESTION NO 24 (C A FINAL NOV 2003)

Kapil Ltd. purchased machinery from Parveen Ltd. on 30.09.2001. The price was
Rs.370.44 lakhs after charging 8% sales tax and giving a trade discount of 2% on the quoted
price. Transport charges were 0.25% on the quoted price and installation charges 1% on the
quoted price.
A loan of Rs.30 lakhs was taken on the trial from the bank on which interest at 15% per annum
was to be paid. Expenditure incurred on the trial run was materials Rs.35,000, wages
Rs.25,000 and overheads Rs.15,000.
The machinery was redy for use on 1.12.2001, but it was actually put to use only on 1.5.2002.
Find out the cost of the machine and suggest the accounting treatment for the expenses
incurred in the interval between the dates 1.12.2001 to 1.05.2002. the entire loan amount
remained unpaid on 1.5.2002.

ANSWER:
Particulars Computations Rs. in lakhs
Quoted price (370.44/108*100)*100/98 3,50.000
Less: discount 2% 2% of 3,50.000 7.000
Net price 3,43.000
Add: sales tax 8% 8% of 3,43.000 27.440
Add: Transportation 0.25% on quoted price of 3,50.000 0.875
Add: installation 1.00% of quoted price of 3,50.000 3.500
Add: trial run expense Material+ wages+ OH=0.35+0.25+0.15 0.750
Add: Borrowing cost 300*15%*2/12(30.9.2001 to 1.12.2001) 7.500
Total cost of asset 383.065
• Capitalization of Borrowing costs should cease when substantially all the activities
necessary to prepare the qualifying asset for its intended use are complete. In the
above case, this period ends on 1-12-2001 when the asset was ready for use.
• Other Borrowing costs (i.e, not capitalized under As-16) should be written off as an
expense in the profit and loss account. Hence the interest for the period 1.12.2001 and
1.5.2002 on Rs.300 lakhs, amounting to Rs.18.75 lakhs should be expensed off.

QUESTION NO 25
Sadaanand Ltd. has obtained Institutional Term Loan of Rs. 580 Lakhs for modernization and
renovation of its Plant & Machinery. Plant & Machinery acquired under the modernization scheme
and installation completed on 31st March amounted to Rs. 406 Lakhs. Rs. 58 Lakhs has been
advanced to Suppliers for additional assets and the balance loan of Rs. 116 Lakhs has been utilized
for Working Capital purpose. The accountant is in a dilemma as to how to account for the total
70 ACCOUNTING
interest of Rs. 52.20 Lakhs incurred during the year, on the entire Institutional Term Loan of Rs. 580
Lakhs. Give your view.

SOLUTION
Effective Interest Rate - 52.20 Lakhs = 9%. The treatment for the Total Interest of
580.00 Lakhs
Rs.52.20 Lakhs is as under:-

Purpose/Utilisation Loan Amt. Interest Amount Accounting Treatment

Plant & Machinery Rs. 406 Lakhs Rs. 406 x 9% Added to Cost of Plant
purchased under = Rs. 36.54 Lakhs and Machinery as per
modernization AS-16.
scheme
Advance to Suppliers Rs. 58 Lakhs Rs. 58 x 9% Kept in Interest
for additional assets = Rs. 5.22 Lakhs Suspense A/c.
(Capital WIP A/c.) till
the date of acquisition/
installation of additional
assets & capitalized
later on asset creation.
Working Capital Rs. 116 Lakhs Rs. 116 x 9% Written off to P&L A/c.
= Rs. 10.44 Lakhs as Expense, as per
AS-16
Total Rs. 580 Lakhs Rs. 52.20 Lakhs

QUESTION NO 26
Harihara Limited obtained a Loan for Rs. 70Lakhs on 15th April 20X1 from a Nationalised Bank to be
utilized as under:
Particulars Rs.
Construction of Factory Shed 25,00,000
Purchase of Machinery 20,00,000
Working Capital 15,00,000
Advance for Purchase of Truck 10,00,000
In March 20X2, Construction of the Factory Shed was completed and Machinery which was ready
for its intended use installed. Delivery of Truck was received in the next Financial year. Total
Interest RS. 9,10,000 charged by the Bank for the Financial year ending 31.03.20X1. Show the
treatment of Interest under AS-16.

SOLUTION
Effective Interest Rate = 9.10 Lakhs = 13%. The treatment for the Total Interest of
70.00 Lakhs
Rs. 9.10 Lakhs is as under:-

Purpose/ Utilisation Loan Amt. Interest Amount Accounting Treatment

Construction of Factory Rs. 25 Lakhs Rs. 25 x 13% Added to Cost of
Shed = Rs. 3.25 Lakhs Factory Shed as per
AS=16.
Purchase of Machinery Rs. 20 Lakhs Rs. 20 x 13% Added to Cost of
= rs. 2.60 Lakhs Machinery as per AS=16
ACCOUNTING STANDARD -16 71
Working Capital Rs. 15 Lakhs Rs. 15 x 13% Written off to P&L A/c.
= Rs. 1.95 Lakhs as Expense, as per
AS-16
Advance to Supplier for Rs. 10 Lakhs Rs. 10 x 13% Kept in Interest
Purchase of Truck = Rs. 1.30 Lakhs Suspense A/c. (Capital WIP A
till the date of
acquisition/installation of
Truck & capitalized later
on asset creation.
(Assumed as Qualifying
Asset)
Total Rs. 70 Lakhs Rs. 9.10 Lakhs

QUESTION NO 27
On 1st April, Aruna Construction Ltd. obtained a loan of rs. 32 Crores to be utilized as under:-
Particulars Rs. in Particulars Rs. in
Crores Crores
Construction of Sea link across 2 25.00 Working Capital 2.00
cities (work was held up totally Purchase of Vehicles 0.50
for a month during the year due Advance for Tools/Cranes, etc. 0.50
to high water levels) Purchase of Technical know- 1.00
how
Purchase of Equipment’s and 3.00
Machineries
Total Interest charged by the Bank for the relevant financial year in Rs. 80 Lakhs. Show the
treatment of Interest by Aruna Construction Ltd. under AS-16.

SOLUTION
Effective Interest Rate = 80.00 Lakhs = 2.5%. The treatment for the Total Interest of
3,200.00 Lakhs
Rs. 80 Lakhs is as under:-

Note: Interest Amount = Loan Amount = 2.5% Both Amounts in Rs. Lakhs

Purpose/Utilisation Loan Amt. Interest Accounting Treatment

Amount
1. Construction of Sea- 2,500 62.50 Added to Cost of Asset (It is
Link across two cities assumed that during temporary
suspension, some Administrative
Activities were carried on)
(Refer Q.No.27)
2. Purchase of Equipments 300 7.50 Added to Cost of Equipments
& M/c. and Machineries
3. Working Capital 200 5.00 Written off to P&L A/c. as
Expense. as per AS-16
4. Purchase of Vehicles 50 1.25 Debited to P&L A/c. (Assumed
immediate delivery taken and it
is ready for use and hence not
a Qualifying Asset)
72 ACCOUNTING
5. Advance for Tools/Cranes 50 1.25 Kept in Interest Suspense A/c.
etc. (Capital WIP A/c) till the date of
acquisition/installation of the
Assets & capitalized later.
(Assumed as Qualifying Asset)
6. Purchase of Technical 100 2.50 Added to the cost of Intangibles.
Know-how
Total Borrowing Cost 3,200.00 80.00

QUESTION NO 28
Hariram Iron and Steel Ltd. is establishing an Integrated Steel Plant consisting of four phases.
It is expected that the full Plant will be established over several years but Phase I and Phase II will
be started as soon as they are completed.
Following are the details of work done on different phases of the Plant during the current year (in
Rs.)
Particulars Phase I Phase II Phase III Phase IV
Cash expenditure 20,00,000 35,00,000 25,00,000 40,00,000
Plant purchased 28,00,000 40,00,000 30,00,000 48,00,000
Total Expenditure 48,00,000 75,00,000 55,00,000 88,00,000
Total Exp. of all Phases 2,66,00,000
Loan Taken at 16% 2,40,00,000

During the current year, Phases I and II have become operational. Find out the total amount to
be capitalized and to be expensed during the year.

SOLUTION
S.No. Particulars Amount Rs.
1. Interest Expense on Loan (Assuming that Loan is taken on the 38,40,000
first day of the financial period concerned, and the work of asset
creation had started on that date) = Rs. 2,40,00,000 at 16%
2. Total Cost of Phases I and II (Rs. 48,00,000 + Rs. 75,00,000) 1,23,00,000
3. Total Cost of Phases III and IV (Rs. 55,00,000 + Rs.88,00,000) 1,43,00,000
4. Total Cost of all 4 Phases 2,66,00,000
5. Total Loan 2,40,00,000
6. Proportionate Loan used for Phases I and II
2,40,00,000 x 1,23,00,000 1,10,97,744
2.66.00,000
7. Proportionate Loan used for Phases IIII and IV
2,40,00,000 x 1,43,00,000 1,29,02,256
2.66.00,000
8. Interest on Loan used for Phases I & II, based on Proportionate 17,75,639
Loan Amount = 1,10,97,744 at 16%
9. Interest on Loan used for Phases III & IV based on Proportionate 20,64,361
Loan Amount = 1,29,02,256 x 16%

Accounting Treatment: Interest of Rs. 17,75,639 relating to Phases I and II should be

capitalized (in the ratio of Asset Costs 48:75), and added to respective Assets in Phases I and
II. Interest of Rs. 20,64,361 relating to Phases III and IV should be held in Capital work in
ACCOUNTING STANDARD -16 73
Progress till asset construction work is completed, and thereafter capitalized in the ratio of cost
of assets. No part of the interest Expense should be written off to P&L A/c. during the year.

QUESTION NO 29
The Notes to Accounts of Gopal Ltd. for the year ended 31st March includes the following –
“Interest on Bridge Loan from Banks and Financial Institutions and on Debentures specifically
obtained for the Company’s Fertilizer Project amounting to Rs. 1,80,80,000 has been
capitalized during the year, which includes approximately Rs. 1,70,33,465 capitalised in
respect of the utilization of Loan and Debenture Money for the said purpose” is the treatment
correct? Briefly comment.

SOLUTION
The given case is one of Specific Borrowings for Fertilizer Project and hence the capitalized
Borrowing Cost should be restricted to the actual amount of interest expenditure i.e. Rs.
1,70,33,465. Capitalisation of Rs. 180,80,000 has been resulted in over-statement of profits
and assets by Rs. 10,46,535.

QUESTION NO 30
Guha Limited borrowed an amount of Rs. 150 Crores on 1st April, for construction of
Boiler Plant at 11% p.a. The Plant is expected to be completed in 4 years. The Weighted
Average Cost of Capital is 13% p.a. The Accountant of Guha Ltd. capitalized interest of Rs.
19.50 Crores for the accounting period ending on 31st March. Due to Surplus Funds out of Rs.
150 Crores, an income Rs. 3.50Crores was earned and credited to P&L A/c. comment.

SOLUTION
1. Capitalization based on the Weighted Average Cost of Capital 13% is not proper in the
above case, since the above is a case of Specific Borrowings.
2. Income received on Temporary Investments should be reduced from the Borrowing Cost
and should not be credited to Profit & Loss A/c. The correct treatment is as under:-
Actual Interest Cost = Rs. 150 Crores x 11% Rs. 16.50 Crores
Less: Income from Temporary Investments Rs. 3.50 Crores
Borrowing Costs to be Capitalised under AS-16 Rs. 13.00 Crores

QUESTION NO 31
Parasuram Ltd. had the following borrowings during a year in respect of capital
expansion.
Plant Cost of Asset Remarks
Plant P Rs. 100 Lakhs No Specific Borrowings.
Plant Q Rs. 125 Lakhs Bank Loan of Rs. 65 Lakhs at 10%.
Plant R Rs. 175 Lakhs 9% Debentures of Rs. 125 Lakhs were
issued
In addition to the above specific borrowings, the Company had obtained Term Loans from two
Banks – (1) Rs. 100 Lakhs at 10% from Corporation Bank and (2) Rs. 110 Lakhs at 11.50%
from Canara Bank, to meet its capital expansion requirements. What is the amount of
Borrowing Costs to be capitalized in each of the above Plants ?
74 ACCOUNTING
SOLUTION
1. Computation of Actual Borrowing Costs incurred during the year:
Source Loan Amount Interest Rate Interest Amount
Bank Loan Rs. 65.00 Lakhs 10.00% Rs. 6.50 Lakhs
9% Debentures Rs.125.00 Lakhs 9.00% Rs. 11.25 Lakhs
Term Loan from Rs. 100.00 Lakhs 10.00% Rs. 10.00 Lakhs
Corporation Bank
Term Loan from Canara Bank Rs. 110.00 Lakhs 11.50% Rs. 12.65 Lakhs
Total Rs. 400.00 Lakhs Rs. 40.40 Lakhs
Specific Borrowings included in Rs. 190.00 Lakhs Rs. 17.75 Lakhs
above
2. Weighted Average Capitalisation Rate for General Borrowings =
Total Interest Less Interest on Specific Borrowings
Total Borrowings Less Specific Borrowings
= 40.40 - 17.75 = 22.65 = 10.79%
400-190 210
3. Capitalisation of Borrowing Costs under AS-16 will be as under:-
Plant Borrowing Loan Amount Interest Rate Interest Amount Cost of Asset
P General Rs. 100 Lakhs 10.79% Rs. 10.79 Lakhs Rs. 110.79 Lakhs

Q Specific Rs. 65 Lakhs 10.00% Rs. 6.50 Rs. 137.97 Lakhs

General Rs. 60 Lakhs 10.79% Rs. 6.47Lakhs
R Specific Rs. 125 Lakhs 9.00% Rs.11.25 Rs. 191.64 Lakhs
General Rs. 50 Lakhs 10.79% Rs. 5.39
Total Rs. 400 Lakhs Rs. 40.40 Lakhs
Note: The amount of Borrowing Costs capitalized should not exceed the actual interest cost.

QUESTION NO 32
Madhav Limited began construction of a New Plant on 1st April 2013 and obtained a
special Loan of Rs. 8 Lakhs at 10% p.a. to finance the construction of the Plant. The
expenditure that was made on the project of Plant construction was as -
On 01.04.2014 Rs. 10,00,000 On 01.08.2014 : Rs. 24,00,000 On 01.01.2014 Rs.4,00,000

The Company’s other outstanding Non-Specific Loan was Rs. 46,00,000 at an interest of 12%
p.a. The construction of Plant was completed on 31.03.2014. Compute the amount of interest
to be capitalized.

SOLUTION
Computation of Interest Amount to be capitalized
Date Amount Spent Computation Interest
(Rs.) Amount (Rs)
01.04.2013 10,00,000 Rs. 8,00,000 from Specific Loan = Rs. 80,000
8,00,000 x 10%
Rs. 2,00,000 from Non Specific Loan =
24,000
Rs.2,00,000 x 12%
01.08.2013 24,00,000 From Non Specific Loan Rs. 2400,000 x 12% 1,92,000
x 8/12
ACCOUNTING STANDARD -16 75
01.01.2014 4,00,000 From Non Specific Loan Rs.4,00,000 x 12% x 12,000
3/12
Total 38,00,000 3,08,000

Total Amount Capitalized = Cost Incurred Rs. 38,00,000 + Interest capitalized under
AS – 16 Rs. 308,000 = Rs. 41,08,000.

QUESTION NO 33
The Borrowings Profile of Shriram Pharma Ltd. set up for the manufacture of
antibiotics at Navi Mumbai is as under:-
Date Description Amount Purpose of Borrowings Incidental
Borrowed Expenses
1ST Jan 15% Demand Loan Rs. 60.00 Acquisition of Fixed 8.33%
Lakhs Assets
st
1 July 14.5% Term Loan Rs. 40.00 Acquisition of Plant & 5.0%
Lakhs Machinery
1st Oct. 14% Bonds Rs. 50.00 Acquisition of Fixed 8.00%
Lakhs Assets

The Incidental Expenses consists of Commission and Service Charges for arranging the loans
and are paid after rounding off to the nearest Lakh.

Fixed Assets considered as Qualifying Assets are as under:-

Sterile Manufacturing Shed Rs. 10,00,000
Plant and Machinery (Total) Rs. 90,00,000
Other Fixed Assets Rs. 10,00,000
The Project is completed on 31st Dec. and is ready for commercial production. Show the
capitalization of Borrowing costs.
SOLUTION
1. Computation of Total Borrowing Cost (Rs. in Lakhs)
Loan Type Amount O/s Interest Incidental Total Cost
Period Cost
15% Demand 60.00 12 `60x12/12 x 15% 60x8.33% 14.00
Loan months = 9.00 = 5.00
14.5% Term 40.00 6 months 40x6/12x14.5% = 40 x 5% = 4.90
Loan 2.90 2.00
14% Bonds 50.00 3 Months 50 x 3/12 x 14% = 50 x 8% = 5.75
1.75 4.00
Total 24.65
Note: Incidental Expenses are in the nature of Financing/Interest Cost, and is hence eligible
for capitalization under AS-16.
2. Computation of Capitalization Rate
(a) Computation of weighted Average General Borrowings
Loan Type Date Amount Cumulative Period Product
Amount outstanding
st
15% Demand Loan 1 Jan 60.00 60.00 9 months 540.00
14% Bonds 1st Oct. 50.00 110.00 3 Months 330.00
Total 870.00
76 ACCOUNTING
Weighted Average General Borrowings = 870 Lakhs = Rs. 72.50 Lakhs
12 months
(b) Capitalization Rate

Capitalization Rate = Borrowing Cost on General Borrowings =

Weighted Average General Borrowings

24.65 Lakhs – 4.90 Lakhs = 19.75 Lakhs = 27.24%

72.50 Lakhs 72.50 Lakhs

3. Computation of Borrowing Costs to be capitalized

Asset Amount Nature of Borrowing Borrowing Total
Spent Cost Borr.
Cost
Specific General Specific General
Sterile 10,00,000 - 10,00,000 - 10L x 27.24% 2,72,400
Mfg. Shed = 2,72,400
Plant & 90,00,000 40,00,000 50,00,000 4,90,000 50 L x 18,52,000
Machinery 27.24% =
13,62,000
Other 10,00,000 - 10,00,000 -- 10Lx27.24% 2,72,400
Fixed = 2,72,400
Assets
Borrowing Cost Capitalized 23,96,800
Note:
• In the absence of details regarding actual date of incurrence of expenditure on
Qualifying Assets, it is assumed that all sums have been incurred on 1st January.
Borrowing Costs should be capitalized by applying the Capialization Rate on the
amount and the period so incurred.
• Balance of Rs. 68,200 of Borrowing Cost (Total Rs. 24,65,000 – Capitalized Rs.
23,96,800) will be expensed off during the year, by debiting P&L A/c.

QUESTION NO 34 (PARA 4 E ON EXCHANGE DIFFERENCE)

Harkishan Ltd. took a loan of USD 20,000 at6% p.a.on 1st April for a specific capital
expansion project. The interest was payable annually. The Exchange Rate at the date of the
loan was 1 USD = Rs. 52.00. However, the Company could have taken a corresponding
Rupee Loan from Banks at 12% p.a. on that date. At the end of the year, the Exchange Rate
was 1 USD = Rs. 55.00 How will you treat the Borrowing Costs and Exchange Differences in
the above case?
Analyse the impact of the following changes independently. What would be the
accounting treatment if the Rupees Loan were to carry interest at 14% p.a.? What will be the
treatment if the Exchange Rate at the year end was 1 USD = Rs.53.00?
SOLUTION
S.No. Particulars Situation 1 Situation 2 Situation 3
Interest at12% Interest at 1 USD =
14% Rs.53.00
1. Interest on Local $ 20,000 x $ 20,000 x $ 20,000 x
Currency Borrowings Rs.52 x 12% Rs.52 x 14% Rs.52 x 12% =
= Rs.1,24,800 = Rs.1,45,600 Rs.1,24,800
ACCOUNTING STANDARD -16 77
2. Interest on Foreign $ 20,000x6% $ 20,000 x 6% $ 20,000 x 6%
Currency Borrowings x Rs.55 = x Rs.55 = x Rs.53 = Rs.
Rs.66,000 Rs.66,000 63,600
3. Interest Difference Rs. 58,800 Rs. 79,600 Rs. 61,200
between Foreign &
Local Currency
Borrowings = (1) – (2)
4. Exchange Difference $ 20,000 x $ 20,000 x $ 20,000 x
in Principal repayable (55-52) = (55-52) = (53-52) = Rs.
at the end of the year Rs.60,000 Rs.60,000 20,000
5. Further Amt. to be Rs. 58,800 Rs. 60,000 Rs. 20,000
treated as Borrowing
Costs = (3) or (4),
whichever is less.
6. Exchange Difference Rs. 1,200 Nil Nil
to be taken to P&L /c.
as per AS-11 = (4) –
(5)
7. Borrowing Costs under Rs. 1,24,800 Rs. 1,26,000 Rs. 83,600
AS-16 = (2)+(5)

QUESTION NO 35
Srivats Co-operative Society Ltd. has borrowed a sum of US $ 12.50 Million at the
commencement of the Financial year 2012-13 for its Solar Energy Project at LIBOR (London
Interbank Offered Rate of 1%) + 4% Interest is payable at the end of the respective financial
year. The Loan was availed at the then rate of RS. 52 to the Dollar while the rate as on 31st
March 2013, is Rs. 55 to the US Dollar. Had the Company borrowed the Rupee equivalent in
India, the interest would have been 11%. Compute. Borrowing Cost, also showing the amount
of Exchange Difference as per AS.

SOLUTION
S.No Particulars Result
1. Interest Payable if Borrowed in INR = Rs. 71.50
(USD 12.50 Million x Opening Exchange Rate Rs. 52 x INR Loan Million
Interest Rate 11%)
2. Interest Actually Paid in Foreign Currency = Rs. 34.38 Millions
Foreign Currency Loan USD 12.50 Million x
Closing Exchange Rate Rs. 55 x USD Interest Rate 5%
3. Notional Savings in Interest due to Foreign Currency Borrowings Rs. 37.12 Millions
= (1-2)
4. Change in Carrying Amount of Principal due to Exchange Rate
Difference = Rs. 37.50 Millions
(Closing Exchange Rate Rs. 55 Less Opening Exchange Rate
Rs.52) x USD 12.5 Millions
Note: Since Closing Rate > Opening Rate, there is an Increase in
Carrying Amount in this ase.
5. Further Amount to be treated as Borrowing Cost = Least of (3) Rs. 37.12 Millions
and (4)
6. Aggregate Borrowing Cost as per AS-16 = Actual Interest as per Rs. 71.50 Millions
(2) + Additional in (5)
78 ACCOUNTING
7. Exchange Rate Less to be Recognized in Statement of P&L = (4- Rs. 5.62 Millions
5)

QUESTION NO 36
Kaladhar Ltd. dealing in timber finds it advantageous to store selected grades of timber for a
prolonged period in order to improve their quality. It desires to include an actual interest cost of
holding the timber as part of the value of unsold timber in inventory, and consult syou in order to
determine whether in your opinion, such a method of valuation would be fair and reasonable and in
accordance with generally accepted accounting principles. Give your opinion with reasons.
Would your answer be different if the Company did not actually incur any interest charges for
holding the timber but desired to include notional interest charges which could be imputed to the
Company’s own Paid-up Capital and Reserves which are invested in holding the timber for
maturity?
SOLUTION
1. Meaning of Cost: As per generally accepted accounting principles, interest charges are
usually excluded in determining the cost of Closing Stock. As per AS-2 an item of
expenditure will constitute “cost’ if it is incurred in bringing the inventories to the present
location and condition. Also AS-2 states that Storage Costs are to be excluded in the
valuation of inventory unless these are necessary in the production process, prior to a
further production stage.
2. Nature of Interest: Para 12 of AS -2 specifically reads “Interest and other Borrowing Costs
are usually considered not relating to bringing the inventories to their present location and
condition and are, therefore, usually, not included the cost of inventories”

3. Nature of Timber: Timber is a maturing product and it usually gains in quality and value if
stored for a longer period. Hence, interest paid on funds necessary to hol the timber stock
for a prolonged period contributes to the brining of the stock to its present condition of
improved quality.

4. AS-16: Also, Para 5 of aS-16 identifies inventories which require a substantial period of
time to bring them to saleable condition as a Qualifying Asset, and permits capitalization of
Borrowing Costs directly attributable to asset as part of the Cost of the Asset.

5. Conclusion: The Company’s contention to include actual interest cost of holding the timber
in valuing the stock, appears to be fair and reasonable, but should be judged with reference
to AS-2 and AS-16. The Auditor should also consider the consistency of the basis of
valuation of stocks including the mode of determination of cost.

6. Imputed Interest: Imputed Interest on the basis of the value of Paid-up Capital and
Reserves or on any other basis is not an expenditure incurred. To include an item in the
value of Closing Stock, (on the historic cost system), the item should represent an
expenditure actually incurred and must not be a notional one. Therefore, inclusion of
notional interest in valuing the Closing Stock of timber cannot be considered to be fair,
reasonable or in conformity with generally accepted accounting principles.

QUESTION NO 37
Assume NDA Limited begins construction on a new building on 1st January, 2004. In
addition, NDA Limited obtained a Rs. 1 Lakh loan to finance the construction of the building on
1st January, 2004 at an annual interest rate of 10%. The company’s other outstanding debt
ACCOUNTING STANDARD -16 79
during 2004 consists of two loans of Rs. 6 Lakhs and Rs. 8 Lakhs with interest rates of 11%
and 13% respectively. Expenditures that were made on the building project were as follows:

January 2004 200000

April 2004 300000
July 2004 400000
December 2004 120000

Compute the cost to be capitalized including borrowing cost

Solution

Step 1
Computation of average accumulated expenses

Rs. 200,000 x 12/12 (January – December) = Rs. 200,000

Rs. 300,000 x 9/12 (April – December) = Rs. 225,000
Rs. 400,000 x 6/12 (July-December) = Rs. 200,000
Rs. 120,000 x 1/12 (December) = Rs. 10,000
Rs. 1020,000 Average Accumulated Expenses = Rs. 635,000

Step 2
Compute the average interest rate based on the other outstanding debt of the entity other than
specific borrowings:

600,000 x 11% = Rs. 66,000

800,000 x 13% = Rs. 104,000
_________ _____________
1,400,000 Rs. 170,000
__________ _____________

Average interest rate : Rs. 170,000/1,400,000 = 12.14%

Step 3
Compute the interest on average accumulated expenses

Average Accumulated Expenses (AAE) Interest to be capitalized

(based on AAE)
100,000 (Specific borrowings) x 10% = 10,000
535,000 (635,000 – 100,000) x 12.14% 64,950
635,000 74,950

Step 4
Compute actual interest costs incurred during the year.
100,000 x 10% = Rs. 10,000
600,000 x 11% = Rs. 66,000
800,000 x 13% = Rs. 104,000
____________
Total Rs. 180,000
____________
80 ACCOUNTING
Amount to be capitalized is Rs. 74,950 which is not more than actual interest of Rs. 180,000
(Amt. in Rs.)
Building Account Dr. 1094950
To Cash 1094950

QUESTION NO 38
On 30-04.2003 JLC Ltd. obtained a loan from the bank for Rs. 50 Lakhs to be utilized as
under:

Construction of a shed Rs. 20 Lakhs

Purchase of Machinery Rs. 15 Lakhs
Working Capital Rs. 10 Lakhs
Advance for Purchase of truck Rs. 5 Lakhs

In March, 2004 construction of shed was completed and machinery installed, Delivery of truck
was not received. Total interest charged by the bank for the year ending 31.03.2004 was Rs. 9
Lakhs. Show the treatment of interest under AS-16.

Solution: As per AS-16 borrowing cost (interest) should be capitalized if borrowing cost is
directly attributable to the acquisition, construction or production of qualifying assets. In other
words, asset acquired must be qualifying asset and borrowing cost should be directly
attributable to the acquisition, construction or production of qualifying asset.

In the question Rs. 50 Lakhs borrowed from Bank was utilized for –

Construction of a shed Rs. 20 Lakhs

Purchase of Machinery Rs. 15 Lakhs
Working Capital Rs. 10 Lakhs
Advance for Purchase of truck Rs. 5 Lakhs

Out of these four payments only construction of a shed of Rs. 20 Lakhs is a qualifying asset as
per AS-16, other three payments are not for the qualifying asset. Therefore, borrowing cost
attributable to the construction of a shed should only be capitalized which will be equal to Rs. 9
Lakhs x 20/50 =Rs. 3.6 Lakhs

The balance of Rs. 5.4 Lakhs (Rs. 9 Lakhs – Rs. 3.6 Lakhs) should be expensedand debited
to Profit and Loss Account.

QUESTION NO 39
X LTD. made the following borrowings:

Borrowings Date of Amount Purpose Related

Borrowing (Rs.) Expenses
15% Term Loan 01.01.2004 6,00,000 General 50,000
14.5% Term Loan 01.07.2004 4,00,000 Specific to 20,000
acquisition of
Plant & M/c.
14% Term Loan 01.10.2004 5,00,000 General 40,000

Qualifying assets for borrowing are:

ACCOUNTING STANDARD -16 81
Factory Shed 1,00,000
Plant & Machinery 9,00,000
Other Fixed Assets 1,00,000
__________
11,00,000
___________

Assume that project is ready for commercial production as on 01.01.2005. How the borrowing
cost should be capitalized?

Solution:
Specific borrowing cost to be capitalized (in respect of Plant & Machinery of Rs. 400,000)

Interest from 01.07.2004 to 31.12.2004

400,000 x 14.5/100/x6/12 = 29,000
Related expenses 20,000
49,000

Weighted Average borrowing cost for general borrowings:

15% Term Loan 6,00,000 x 15/100 x 12/12 = 90,000

Related Expenses 50,000
_________
Total (A) 1,40,000
_________

14% Term Loan 5,00,000 x 14/100 x 3/12 = 17,500

Related Expenses 40,000
________
Total (B) 57,500
________

Total Borrowing Cost (A+B) = 1,97,500

Total average outstanding borrowings
= (6,00,000 x 12 + 5,00,000 x 3)/12 = 7,25,000

Weighted average borrowing cost = (Total borrowing cost/Total average outstanding x 100)

= 1,97,500/7,25,000 x 100 = 27.24%

Allocation of General borrowing fund

Item Cost Incurred Specific Borrowings Net of specific
borrowing

Factory Shed 1,00,000 NIL 1,00,000

Plant & Machinery 9,00,000 4,00,000 5,00,000
Other Fixed Assets 1,00,000 NIL 1,00,000
82 ACCOUNTING

IND-AS: 23
CAPITALISATION OF BORROWING COST
(NOT IN COURSE BUT ONLY FOR KNOWLEDGE)
Core Principle
―Borrowing costs‘ that are directly attributable to the
acquisition, construction or production of a qualifying asset form
part of the cost of that asset.

Other borrowing costs are recognised as an expense.

Scope
• An entity shall apply this Standard in accounting for borrowing costs.
• The Standard does not deal with the actual or imputed cost of equity, including preferred capital not
classified as a liability (Irredeemable Preferred Capital).
An entity is not required to apply the Standard to borrowing costs directly attributable to the acquisition,
construction or production of:

A qualifying asset measured at fair value {For example: A biological asset}

Inventories that are manufactured, or otherwise produced, in large

quantities on a repetitive basis

Borrowing Costs
Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds.
Borrowing costs may include:
1. interest expense calculated using the effective interest method as described in Ind AS 39
‘Financial Instruments: Recognition and Measurement’;
2. finance charges in respect of finance leases recognised in accordance with Ind AS 17
‘Leases’; and
3. exchange differences arising from foreign currency borrowings to the extent that they are regarded as an

Finance Charge in
respect of
Finance Lease
Interest Expense using Exchange
Effective Interest difference on
Methodas per Ind AS39 Foreign Currency

Borrowing
Costs
ACCOUNTING STANDARD -16 83

adjustment to interest costs.

Interest Expense
from External
Borrowings

Amortisation of
Discounts or Interest Expense
premium relatingto Using Effective
borrowings Interest Method
as per Ind AS 39

Amortisation of
Ancillary Costs

Exchange Difference
With regard to exchange difference required to be treated as borrowing cost, the manner of arriving at the
adjustments stated therein shall be as follows:
(i) the adjustment should be of an amount which is equivalent to the extent to which the exchange loss does
not exceed the difference between the cost of borrowing in functional currency when compared to the
cost of borrowing in a foreign currency.
(j) where there is an unrealised exchange loss which is treated as an adjustment to interest and
subsequently there is a realised or unrealised gain in respect of the settlement or translation of the same
borrowing, the gain to the extent of the loss previously recognised as an adjustment should also be
recognised as an adjustment to interest.
Qualifying Asset
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale.
Depending on the circumstances, any of the following may be qualifying assets:

Intangible
Assets
Power
Manufacturing generation
Plants Facilities

Qualifying Investment
Inventories Asset Properties
84 ACCOUNTING

Financial assets, and inventories that are manufactured, or otherwise produced, over a short period
of time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired
are not qualifying assets.
Recognition
Principle 1: An entity shall capitalise borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset as part of the cost of that asset.
Principle 2: An entity shall recognise other borrowing costs as an expense in the period in which it
incursthem.

Specifi CASEI
Borrowin
Genera CASEII

CASE: I To the extent that an entity borrows funds specifically for the purpose of obtaining a qualifying asset,
the entity shall determine:
The amount of borrowing costs eligible for capitalisation as the actual borrowing costs incurred on that
borrowing during the period less any investment income on the temporary investment of those borrowings
CASEII: To the extent that an entity borrows funds generally and uses them for the purpose of obtaining a
qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalisation by applying
a capitalisation rate to the expenditures on that asset.
The capitalisation rate shall be the weighted average of the borrowing costs applicable to the borrowings of the
entity that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining
a qualifying asset.
The amount of borrowing costs that an entity capitalises during a period shall not exceed the
amount of borrowing costs it incurred during that period.

Commencement of Capitalisation
An entity shall begin capitalising borrowing costs as part of the cost of a qualifying asset on the
commencement date.
The commencement date for capitalisation is the date when the entity first meets ALL of the following
conditions:
(a) it incurs expenditures for the asset;
(b) it incurs borrowing costs; and
it undertakes activities that are necessary to prepare the asset for its intended use or sale.
Suspension of Capitalisation
An entity shall suspend capitalisation of borrowing costs during extended periods in which it suspends active
development of a qualifying asset.
An entity may incur borrowing costs during an extended period in which it suspends the
activities necessary to prepare an asset for its intended use or sale. Such costs are costs of
holding partially completed assets and do not qualify for capitalisation.
Exception:
1. An entity does not normally suspend capitalising borrowing costs during a period when it carries out
substantial technical and administrative work.
ACCOUNTING STANDARD -16 85
2. An entity also does not suspend capitalising borrowing costs when a temporary delay is a necessary part
of the process of getting an asset ready for its intended use or sale.

For example: Capitalisation continues during the extended period that high water levels
delay construction of a bridge, if such high water levels are common during the construction
period in the geographical regioninvolved.
Cessation of Capitalisation
An entity shall cease capitalising borrowing costs when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete.
Disclosures
An entity shall disclose
(a) the amount of borrowing costs capitalised during the period; and
(b) the capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation.
Major Change in Ind AS 23 vis-à-vis IAS 23 Not Resulting in Carve Out
Exchange Difference: IAS 23 provides no guidance as to how the adjustment for exchange differences arising
from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs (as
prescribed in paragraph 6(e)) is to be determined. Ind AS 23 provides guidance in this regard.
Major Changes in Ind AS 23 vis-à-vis Notified AS 16
(i) Qualifying Asset measured at Fair Value: Ind AS 23 does not require an entity to apply this standard to
borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset
measured at fair value, for example, a biological asset whereas the existing AS 16 does not provide for
such scope relaxation.
(ii) Applicability to Inventories: Ind AS 23 excludes the application of this Standard to borrowing costs
directly attributable to the acquisition, construction or production of inventories that are manufactured, or
otherwise produced, in large quantities on a repetitive basis whereas existing AS 16 does not provide for
such scope relaxation and is applicable to borrowing costs related to all inventories that require
substantial period of time to bring them in saleable condition.
(iii) Inclusion as Borrowing Costs: As per existing AS 16, Borrowing Costs, inter alia, include thefollowing:
• interest and commitment charges on bank borrowings and other short-term and long-term
borrowings;
• amortisation of discounts or premiums relating to borrowings;
• amortisation of ancillary costs incurred in connection with the arrangement of borrowings;
Ind AS 23 requires to calculate the interest expense using the effective interest rate method as described in
Ind AS 109Certain items therein have been deleted, as some of those components of borrowing costs are
considered as the components of interest expense calculated using the effective interest rate method.
(iv) Explanation of Substantial Period of Time: Existing AS 16 gives explanation for meaning of‗ substantial
period of time‘ appearing in the definition of the term‗ qualifying asset‘. This explanation is not included in
Ind AS 23.
(v) Reporting in Hyper inflationary Economies: Ind AS 23 provides that when Ind AS 29, ‗Financial
Reporting in Hyper inflationary Economies’, is applied, part of the borrowing costs that compensates for
inflation should be expensed as required by that Standard (and not capitalized in respect of qualifying
assets). The existing AS 16 does not contain a similar clarification because at present, in India, there is no
Standard on‗ Financial Reporting in Hyperinflationary Economies’.
(vi) Borrowings of the Parent and its Subsidiaries for Computing Weighted Average: Ind AS 23
specifically provides that in some circumstances, it is appropriate to include all borrowings of the parent
and its subsidiaries when computing a weighted average of the borrowing costs while in other
86 ACCOUNTING
circumstances, it is appropriate for each subsidiary to use a weighted average of the borrowing costs
applicable to its own borrowings. This specific provision is not there in the existing AS 16.
(vii) Disclosure of Capitalisation Rate: Ind AS 23 requires disclosure of capitalization rate used to determine
the amount of borrowing costs eligible for capitalization. The existing AS 16 does not have this disclosure
requirement.

QUESTION NO 40
Dhangar Ltd. has a cattle field which serves the company milk, wool etc. The livestock is
carried at Fair value. The Opening fair value of livestock is Rs. 54,40,000. The closing fair
value Rs.67,33,000. Out of which Rs. 2,00,000 worth was purchased during the year. Fresh
borrowings were taken at the beginning of the year to buy livestock. The total borrowings by
the year end was Rs. 22,00,000 @ 12%. Calculate the borrowing cost as per IAS-23 and
comment.

Solution: Ind AS-23 is not applicable on Assets carried at fair value. It is applicable on those
assets which are carried at cost less depreciation. Also further the assets should be qualifying
assets. In the present case the entire BC of Rs. 2,64,000 is charged to profit/loss account. BC
should not be capitalized on biological assets.

QUESTION NO 41
Hyper Ltd is engaged in development of properties and further sell it in the open market. The
development process takes substantial period of time. It has financed its inventories by taking
loan from Yekoshore Development Bank £ 75 million. The economy is under hyper inflationary
situation. The interest rate is 32%. The inflation is 200%. You are required to calculate the
borrowing cost attributable towards the capitalization of asset as per IAS-23.

Solution: Ind AS-23 : In case of Hyperinflationary situation the borrowing costs relate to the
inflationary element is charged to income statement and not to be capitalized.

Accordingly the effective (real element of) interest = 32% / 200% - 16%.
BC requires capitalization = 75 x 16% = £ 12 million.
BC charged to P/L = 75 x 32% - 12 = £ 12 million.
ACCOUNTING STANDARD -17 87

ACCOUNTING STANDARD-17
SEGMENT REPORTING
Scope and Objective
Nowadays a company cannot survive running with single product. Diversification is a
necessity in today’s market, to secure itself from the attacks and counter attacks of the
competitors on any product. Specially in a multi product company or a company operating in
different geographical areas traditional method of financial disclosures to the shareholders
could not depict the complete picture regarding the risk and returns. Hence, there arises a
need for segmental reporting.

The significance of Segment Reporting is as under:

• Evaluation and understanding of the overall performance of the Company.

• Identification of loss making and profit making units.
• How various products/various areas are exposed to various risk and returns.
• To effectively assess the underlying risks and returns of an enterprises and make more
informed decisions relating to the enterprise.
• To know the return on Capital employed for a segment.
• The shareholders can make correct decisions based on the segmental performance
reported to them.

Types of segments
i) Business Segment:

If a company is dealing in various products/services having different risk-return

profile then we say that the enterprise is having Business segments. A BS is a
distinguishable component of an enterprise that is engaged in providing an individual
product or service or a group of related products or services and that is subjected to
risks and returns that are different from those of other business segments. A
coaching classes is running 3 divisions Commerce, Science and School. Risk and
returns of individual division might be different. This is an example of Business
Segment.
Factors to be considered for BS:

i) Nature of product ii) Different process involved iii) Type or class of customers,
iv) Methods of distribution, v) Nature of regularity environment (laws, regulations).

Meaning of Risks and rewards:

If a segment includes two products having different risks and rewards factors then
they are two different segments. For Example: Risk and rewards profile of doing
Broking business is different compared to trading on one’s own account; therefore
they fail under two different segments.

The two factors are very important in the context of interpreting ‘risks and rewards’
under AS-17 for defining BS. The word significant which is added before the term
risks and rewards is very important. The risk and reward of doing business in jeans
88 ACCOUNTING
would not be significantly different compared to doing business in shirts. Also
manufacturing chairs and tables carry similar risks and returns. If we take the
example of hair oil and cooking oil, they would fall under two different segments,
because their nature is different, the production process is different, the customers
are different, channels are different.

ii) Geographical Segment:

If a Company is providing products/services catering geographically exposed to

different risk and returns then it is a Geographical segment. Again Geographical
Segment is divided as per Location of Assets and Location of Customers.

Geographical Segment can be within a region or within a city, within a country or

scattered in different countries.

Factors to be considered for GS:

(i) Economic and political conditions, (ii) Proximity between operations (iii) Special
risks involved. (iv) Currency risks (v) Exchange control risks.

Advantage of having geographical segment:

Shehnaaz Global products has been in the business of beauty products. The
products were sold in Asia, London and France. Previously the business was doing
well. However, in the last three years there has been a decline in the profitability of
the company. The Company is not able to know the exact reason for the decline in
the profitability because the company use to prepare a consolidate income
statement (combining all the locations). After preparing segment wise profit and loss
statement, the company came to know that the sales in France was declining in the
last few years. Now the company can take corrective actions based on this
information.

SOME DEFINITIONS

i) Reportable Segment: An enterprise may be engaged in ‘n’ number of products/areas.

But only some of the segments need to be compulsorily disclosed in the financial
statements. Such mandatory disclosed segments are known as Reportable Segment.

ii) Segment Revenues: If represents revenue of a particular segment.

Segment Revenue = (Direct revenues from outside customers + Inter segment sales +
Allocated income). As segment revenue includes allocable income the basis for sharing
common income between the segments can be agreed between the segments, internal
MIS, transfer-pricing policy.

What about other income: Other income should be included as a part of segment
revenue if they do not fall under the exclusion definition (discussed below) and if it is
essentially operating in nature. For Example: Export incentives are price subsidies for
achieving exports which is indirectly a component of export turnover and should be
included in segment revenue. Some times segment assets are idle, and these may be
ACCOUNTING STANDARD -17 89
used to earn rentals. Such income would be operating income and consequently form
part of segment revenue.

Exclusions: (i) Income like interest, dividend earned unless the operations of the
segment are primarily of a financial nature; (ii) Gains on sale of investments; (iii)
Extraordinary items.

iii) Enterprise Revenues:

Enterprise Revenue = Revenues from eternal customers only as reported in profit and
loss account.

iv) Segment Expenses: It represents expenses of a particular segment.

Segment Expenditure =(Direct expenses related to the unit + Expenses incurred on

dealing with other department +Allocated expenses). It excludes (i) interest expense, (ii)
Capital loss on Sale of Investments, (iii) Corporate expenses like selling and distribution
expenses, office expenses (iv) Tax expenses (v) Extraordinary items.

Why interest is not included in segment expenses: As per ASI-22, interest expense
relating to overdrafts/other borrowings identified to a particular segment should not be
included as a part of segment expense unless the operations of the segment is of
financial nature or unless interest is included as a part of cost of inventories as per AS-
16. Segment results are net of operating results rather than net of financing.

v) Segment Result: (Segment Revenue – Segment Expenses)

vi) Segment Assets: Segment’s own assets used for its operating activities + Allocable
assets including allocable Goodwill. For Example: Milk powder purchased to make
chocolates is a segment asset if not consumed before the reporting period for the Dairy
product segment. Segment revenue generally includes debtors, inventories, advances,
fixed assets.

If item of expense (say depreciation) is included in P&L A/c. for a particular segment, then the
corresponding asset will also go to that segment assets head.

vii) Segment Liabilities: Segment’s own operating liabilities + Share of Common liabilities.
It excludes; (i) Provision for Taxes (ii) Liabilities incurred at Head Office level for
general purpose.

vii) Segment Accounting Policies: AS-1 prescribes accounting policies at the total company
level as a whole. But segment accounting policies are specific accounting policies for
the concerned segment to be reported. Even accounting policies at the enterprise level
may be passed on (allocated to) the segment. For ex. If all the segments use one
particular Asset commonly then, depreciation charged on the enterprise level will be
allocated to different segments.

Examples of segment policies:

Policies relating to (i) Basis of allocation of revenues/expenses between segments,
(ii) Transfer pricing policies.
90 ACCOUNTING
Identification of Segments:

Identification of Segments mostly depends upon the Organizational and Management

structure. The internal financial reporting to the BOD and CEO provides the best evidence for
the basis of identification of segments.

Deciding between Primary or Secondary Segments

If an enterprise has both business as well as geographical segment then the question arises
as to which is primary and which is secondary segment. This is because the intensity of
disclosures being low for secondary segments and high in the case of primary segments.
Following points are worth noting for such differentiation:

1) Largely it depends upon the information provided by the internal financial reporting
to the BOD and CEO.
2) The important factor for differentiation is “dominant source and nature of risks and
return”.
3) If risks and returns of enterprises are largely affected by the products and services
then business segment will be the primary reporting segment. Here business
segment is the dominant factor.
4) If risks and returns of an enterprise are largely affected by the operations in different
areas then geographical segment will be the primary reporting segment Here
geographical segment is the dominant factor.
5) If suppose the risks and returns of both the business as well as geographical
segment is equally dominant then business segment will be primary segment.

However, if confusion arises as to differentiation between primary and secondary

segment, one has to undertake the facts and circumstances of the case. Ultimately the
financial disclosure should depict true and fair view.

Segment in CFS

There is no such rule that a subsidiary company would constitute a reportable segment.
Segments reportable in the stand-alone financial statements may not be reported at the CFS
level. If there are similar segments in parent and subsidiary then they are treated as one
segment for CFS purpose. Example: If HO and Subsidiary have a common segment say
FMCG, then they are merged of the CFS level.

Reportable Segments
An enterprise may be engaged in ‘n’ number of products/areas. But only some of the
segments need to be compulsorily disclosed in the financial statements. Such mandatory
disclosed segments are known as Reportable Segment.

However following are the tests applied to decide the Reportable Segment:

Test 1: REVENUE TEST

As per Revenue test Reportable Segment is :

Segment Revenue > 10% (Total Revenue of all segments)

ACCOUNTING STANDARD -17 91
Test 2 : RESULT TEST
As per Revenue test Reportable Segment is :

Segment Result > 10% of Higher of (Total Results of profitable segments OR Total Results of
loss making segments) Loss making segments will be considered in absolute terms.

Test 3: ASSETS TEST

As per Revenue test Reportable Segment is :

Segment Assets > 10% (Total Segment Assets)

ADDITIONAL CONDITIONS TO BE CONSIDERED

(1) 75% TEST
As per 75% test Reportable Segment is :

If External Revenue of Reportable Segments < 75% (Enterprise Revenue), then

Add more and more segments such that:
External Revenue of Reportable Segments > 75% (Enterprise Revenue)

(2) MANAGEMENTS CHOICE:

As per Management Test Reportable Segment is :

If any of the above tests are not satisfied then management at its discretion choose Reportable
Segment.

(3) If ‘X’ is a Reportable Segment last year, then ‘X’ will continue to be a Reportable
Segment every year irrespective of the above tests gets satisfied or not.

What about Non-Reportable Segments?

Non-Reportable Segments are not reported as such but they are shown as reconciling
segments.

• Disclosure Requirements

Two styles of formats are required for reporting purposes:

Primary Reporting Format

Every enterprises has to report the following as Primary Reporting:

1) Revenue items:
a) Revenues from external customers b) Inter-segment Revenues. c)
Depreciation/impairments/amortizations d) Non-cash expenses other than ‘c’
above e) Segment Results.

2) Balance Sheet Items:

a) Total Carrying amounts of Segment assets b) Total amounts of Segment
Liabilities c) Tangible and Intangible assets acquired.
92 ACCOUNTING
3) Other Items:
a) Reconciliation between (Different Segments Vs. Whole Enterprise’s) of
Segment Revenues/Results/Assets/Liabilities.
Secondary Reporting Format
(i) If Business Segment is Primary Segment: Then Geographical segment will be
Secondary. Following is to be reported by the Secondary Segments:

• Segment Revenues form external customers of geographical segment of only those

segments who’s External Revenues is 10% > Total Enterprises Revenues.
• Carrying amount of segment assets, of those segment assets whose assets > total
assets of geographical segments.
• Tangible and intangible assets acquired.

(ii) If Geographical Segment is Primary Segment: Then Business will be Secondary.

Following is to be reported by the Secondary Segments.

• Segment Revenues from external customers of business segment of only those

segments whose External Revenue is 10% > Total Enterprises Revenues.
• Carrying amount of segment assets, of those segment assets whose assets is 10 > total
assets of business segments.
• Tangible and Intangible assets acquired.

(iii) If Geographical Segment based on location of assets is Primary Segment: Then

Geographical Segment based on location of customers will be Secondary.

Following is to be reported by the Secondary Segments:

• Segment Revenues from external customers of business segment of only those
segments who’s External Revenues is 10% > Total Enterprises Revenues.

(iv) If Geographical Segment based on location of customers is Primary Segment: Then

Geographical Segment based on location of assets will be Secondary.
Following is to be reported by the Secondary Segments:

• Carrying amount of segment assets, of those segment assets whose assets is 10% >
total assets of business segments.
• Tangible and Intangible assets acquired.

Other Optional Disclosures

1. Transfer pricing basis.

2. Changes in segment accounting policies.
3. For Business Segments types of products and services.
4. Composition of each Geographical Segment.
Additional disclosures required in respect of secondary segments.
In addition to reporting the aforementioned segment information in respect of primary
segments, enterprises are required to make additional disclosures in respect of secondary
segments. The disclosure required depends on type of primary segment. The principal
disclosure requirements are as below:
ACCOUNTING STANDARD -17 93
Where primary segments are business segments (Para 48)
a) segments revenue from external customers by geographical area based on the
geographical location of its customers, for each geographical segment whose
revenue from sales to external customers is 10% or more of enterprise revenue;
b) the total carrying amount of segment assets by geographical location of assets, for
each geographical segment whose segment assts are 10% or more of the total
assets of all geographical segment; and
c) the total cost incurred during the period to acquire segment assets that are expected
to be used during more than one period (tangible and intangible fixed assets) by
geographic allocation of assets, for each geographical segment whose segment
assets are 0% or more of the total assets of all geographical segments.
Where Primary segments are geographical segments (Para 49).
Where primary segment is geographical segment (whether based on location of assets or
location of customers), the following segment information should be disclosed for each
business segment whose revenue from sales to external customers is 10% or more of the total
assets of all business segments:

a) segment revenue from external customers;

b) the total carrying amount of segment assets; and
the total cost incurred during the period to acquire segment assets that are expected
to be used during more than one period (tangible and intangible fixed assets).

Where Primary segments are geographical segments based on location of assets (Para 50).
If locations of customers are different from location of assets, in addition to disclosures
required pursuant to paragraph 49 above, an enterprise is required to report revenue from
sales to external customers for each customer-based geographical segment whose revenue
from sales to external customers is 10% more of enterprise revenue.
Where Primary segments are geographical segments based on location of customers (Para
51).

If location of assets are different from location of customers, in addition to disclosures required
pursuant to paragraph 49 above, an enterprise is required to report the following segment
information for each asset based geographical segment whose revenue from sales to external
customers is 10% or more of enterprise revenue or whose segment assets is 10% or more of
total enterprise assets.
a) the total carrying amount of segment assets by geographical location of the assets, and
b) The total cost incurred during the period to acquire segment assets that are expected to
be used during more than one period (tangible and intangible fixed assets) by location of
the assets.
Some Examples of Segmental Disclosure (For Your Knowledge)

Name of the Co. Industry Segments

Dabur India Ltd. Pharma FMCG
Ayurvedic products
Others
SAIL Steel Geographical segment
Bhilai Steel Plant
94 ACCOUNTING
Durgapur Steel Plant
Rourkela Steel Plant
Bokaro Steel Plant
IISCO Steel Plant
Alloy Steel Plant
Salem Steel Plant
Visvesaraya Steel Plant
Others
Indian Hotels Ltd. Hotel Hotel Services
Air Catering
Lifetree IT Primary reporting
Convergence Business segment Software products, Software
Ltd. development products, Software maintenance
Secondary reporting
Geographical segment
India
Europe
South Asia
Other part of the world
Tata Chemical Fertilizers and Inorganic Chemical
Ltd. Chemical Fertilizers

Barclays PLC Banking UK Banking

Barklay Card
Barklays Capital
Barclays Wealth
Retail and Commercial Banking
Insurance activities
HO and other operations
Axis Bank Banking Treasury
Corporate Banking
Retail Banking
Others
Tech Mahindra IT and technical Telecom Service provider
services Telecom equipment manufacturer
BPO
Others
Sonata Software IT Geographical Segment
Domestic Services (Sales and Services)
International Services (Sales and Services)
Religare Ltd. Financial Services Investments and Finance
Financial Advisory Services
Broking
Support Services Fees
Custodian Fees
Life Insurance
ITC Conglomerate Tobacco
Hotels
Agri products
Toilet products
ACCOUNTING STANDARD -17 95
QUESTION NO 1
Rajesh Ltd. has ten segments. The share of revenue, profit/loss and assets of each of
these ten segments is given below. The company has identified segments H,I and J for
reporting. Comment o the adequacy of reporting, assuming there are no inter segment
revenues.
Segments Revenues Profit (Loss) Assets

A,B,C,D,E,F,G, 5% each=35% 5% each=35% 8%each=56%

H,I, 20% each=40% 25% each=50% 20% each=40%
J 25% 15% 4%

QUESTION NO 2
Information relating to five segments of Sharma Ltd. is as under: (Rs. in lakhs)

Segment A B C D E Total

Segment revenue 150 200 200 50 300 900

Segment results 50 (70) 80 10 (25) 45
Segment assets 40 65 140 20 35 200

The company wishes to know which of the segments need to be reported. Advise.

QUESTION NO 3
ICS Ltd. has the following business / geographical segments. Examine which of these are reportable
Segments under AS-17. (information in Rs.’000)

Segments Revenue Profit and loss Assets

A 9,600 1,750 4,100

B 300 180 450
C 100 70 450

QUESTION NO 4
Larson Ltd. has eight Segments A,B,C,D,E,F,G and H. The following information is available in relation to
these Segments. (information in Rs. lakhs)

Particulars A B C D E F G H Total

Segment
Revenue:

External
Nil 510 30 20 30 100 40 70 800
Internal
200 120 60 10 nil nil 10 nil 400

Total
revenue
200 630 90 30 30 100 50 70 1200

Segment
result:
96 ACCOUNTING
profit(Loss)

10 (180) 30 (10) 16 (10) 10 14 (120)

Segment
Assets
45 141 15 33 9 15 15 27 300

Identify which of the above constitute reportable Segment if you were informed that A,B,C and E were the
reported Segments in the last financial year.

QUESTION NO 5 (C A FINAL MAY 2002 AUIDITING)

Following is the data regarding six Segments of Garg Ltd. (Rs in lakhs)

Segment A B C D E Total

Segment revenue 150 310 40 30 40 30

Segment results 25 (95) 5 5 (5) 15
Segment assets 20 40 15 10 10 5

The finance director is of the view that it is sufficient that Segments A and B alone are reported. Advice.
QUESTION NO 6
From the following information of Kristen Ltd. having two primary Segments, prepare a statement
classifying the same under appropriate heads: (Rs. in lakhs)

Particulars Segment Alpha Segment Beta Others

Segment revenue 27,100 3,280

(See note)
Segment profit 4,640 (197)
Capital expenditure 1,300 16
Non cash expense 114 16
excluding depreciation
Liabilities
3,430 770 2,200
Assets
19,450 2,700 6,550
Depreciation
110 15

Dividend income 285

Interest expenses 35
Tax provision 1675
Note: Segment revenue for Alpha includes inter Segment revenue of 50.

QUESTION NO 7 (C A FINAL NOV 2000)

V Ltd. group has three divisions A,B and C. Details of their turnover, results and net assets are given
below (in Rs.’000) prepare a Segmental report.
Division A:
(a) Sales to division B Rs.3050
(b) Local sales Rs.60
(c) Export sales Rs.4090
Division B:
(a) sales to division C Rs.30
ACCOUNTING STANDARD -17 97
(b) export sales to Europe Rs.200
Division C:
(a) Export sales to USA Rs.180
Other information:

Particulars Head office A B C

Profit or loss before tax 160 20 (8)

Re allocated cost from Head office 48 24 24

Interest costs 4 5 1

Fixed assets 50 200 40 120

Net current assets 48 120 40 90

Long term liabilities 38 20 10 120

QUESTION NO 8 (C A FINAL MAY 2005)

Prepare a Segmental report for publication in Diversifiers Ltd. fro the following details of the company’
Segment three divisions and he head office.
Rs.’000

Forging shop division

Sales to Bright Bar division 4,575

Other domestic sales 90

Export sales 6,135

10,800

Bright Bar division:

Sales to fitting division 45

Export sales to Rwanda 300

345

Fitting division:

Export sales to Maldives 270

98 ACCOUNTING
Particulars Head office Forging Bright bar Fitting
shop division division
division
Rs.’000 Rs.’000
Rs.’000

Pre tax operating results 240 30 (12)

Head office cost reallocated 72 36 36

Interest costs 6 8 2

Fixed assets 75 300 60 180

Net current assets 72 180 60 135

Long term liabilities 57 30 15 180

QUESTION NO 9
Following details are given for Cheer Ltd. for the year ended 31.3.2003:
Rs.‘000 Rs. ‘000

Sales:

Food products 5650

Plastic and packaging 625

Health and scientific 345

Others 162 6782

Expenses:

Food products 3335

Plastic and packaging 425

Health and scientific 222

Others 200 4182

General corporate expenses 562

Income from investments 132

Interest expenses 65

Identifiable Assets:

Food products 7320

Plastic and packaging 1320

Health and scientific 1050

Others 665 10355

General corporate Assets 722

ACCOUNTING STANDARD -17 99
Other information:
(a) Inter Segment sales are as below:
a. Food products 55000
b. Plastic and packaging 72000
c. Health and scientific 21000
d. Others 7000
(b) Operating profit included Rs.33000 on inter Segment sales.
(c) Information about inter Segment expenses are not available.
You are required to prepare a statement showing financial information about Cheer Ltd. operations in different
industry segments.

QUESTION NO 10
Microtech Ltd. produces batteries for scooters, cars, trucks and specialized batteries for
invertors and UPS. Are these products different business segments or a part of the same
business segment.

Solution: As per AS-17 segments are identified based on different risk/rewards factors. The
company is basically producing batteries. But the batteries are further meant for (i) auto/vehicle
and (ii) invertors/ UPS mostly useful for household purposes i.e. indoors. The risk and rewards
in auto and invertors are significantly different. Auto batteries are affected by governed policy,
road conditions, number of accidents etc. and batteries for invertors/UPS depends upon
number of power suppliers, standard of living corporate use or household use etc. Hence there
are two business segments for Microtech Ltd. ‘Auto batteries’ and ‘batteries for invertors/UPS’.

QUESTION NO 11
If by applying the 10% thresholds, one reportable segment is identified but there are 5
other business/geographical segments which do not meet individually any of the 10%
thresholds what should the enterprise do in this case.

Solution: In such case the decision regarding reportable segment lies with the management.
As per TEST 5 (Management Choice) if any of the previous tests are not satisfied then
management as its discretion choose reportable segment. Such segments are disclosed
under unallocated column.

QUESTION NO 12
M Ltd. Group has three divisions A, B and C. Details of their turnover, results and net
assets are given below:
Rs. (‘000)
Division A
Sales to B 3050
Other Sales (Home) 60
Export Sales 4090
7200

Division B
Sales to C 30
Export Sales to Europe 200
230
Division C
Export Sales to America 180
100 ACCOUNTING
Head Division
Office
A B C
Rs. (‘000) Rs.(‘000) Rs. (‘000) Rs. (‘000)
Operating Profit or Loss before Tax 160 20 (8)
Re-allocated cost from Head Office 48 24 24
Interest Costs 4 6 1
Fixed Assets 59 200 40 120
Net Current assets 48 120 40 90
Long term liabilities 38 20 10 120

* Long term liabilities does not include interest bearing liabilities.

Prepare a Segmental Report for publication in M Ltd. Group.
(Final C.A. Nov. 2000 & May 2005) (8 Marks)
Solution:
M Ltd.
Segmental Report
Division Inter-Segment Consolidated
A B C Eliminations Total
Segment Revenue
Sales:
Domestic 60 - - - 60
Export 4,090 200 180 - 4,470

External Sales 4,150 200 180 - 4,530

Inter-Segment Sales 3,050 30 - (3,080) --

Total Revenue 7,200 230 180 (3,080) 4,530

Segment result (given) 160 20 (8) 172

Head Office expenses (96)
Operating Profit 76
Interest expenses (10)
Net Profit 66
Other Information
Fixed assets 200 40 120 360
120 40 90 250
Segment Assets 320 80 210 610

Unallocated corporate
Assts 98
Segment liabilities 20 10 120 150
ACCOUNTING STANDARD -17 101
Sales Revenue by Geographical Market

Home Sales Export Sales Export to Export to Consolidated

Europe America Total
60 4090 200 180 4,530

QUESTION NO 13
Segment revenue does not include the following: (1) Indirect income like interest,
dividend, Rent etc. (ii) Capital Gains on Sale of Assets (iii) Extraordinary items.

Determine whether other items, such as export incentives, lease rent, interest from
customers, can form part of segment revenue as per AS-17.

Solution:

Export incentives & Interest from customers: Both are part of operating income. Hence such
operating receipts has to be a part of segment revenue.

Lease Rent: A Company may engage in leasing when it is profitable. In addition to the sale of
goods. For example. An automobile company may be engaged both in selling the cars as well
as leasing the car. In that case leasing may be treated as a separate segment.

QUESTION NO 14
Superb Ltd. is a multinational company having registered office in Mumbai. The
following details are available from the books and other records of the company for the year
ended 31st March, 2014:
Rs.(‘000) Rs. (’000)
Sales:
Domestic 7,625
Europe 1,676
America 2,325
Australia 766 12,392
Inter-unit sales between geographic areas (not included above)
Domestic 523
Europe
Operating Profit:
Domestic
Europe
America 1,262
Australia 344 5,943
Other Items:
General corporate expenses 362
Interest expenses 274
Income from Investment 166
Identifiable assets:
Domestic 10,620
Europe 5,635
America 3,205
Australia 1,560 21,020
102 ACCOUNTING

General corporate assets 750

Investments 675
Operating profit includes Rs. (‘000) 62 on Inter-geographical segment sales.
Prepare a statement showing financial information about the operations of Superb Ltd. in
different geographical segments.
Solution: Information about Superb Ltd.’s Operations in Different Geographical Segments.
Geographical Segments
(Fig. in Rs.’000)
Item Domestic Europe America Australia Inter-Area Consolidated
Eliminations figs.
Revenues:
Sales to
unaffiliated
Customers 7,625 1,676 2,325 766 12,392
Inter Unit
Sales
between 523 760 (1,283)
geographic
areas
Total 8,148 2,436 2,325 766 (1,283) 12,392
Revenue
Item Domestic Europe America Australia Inter-Area Consolidated
Eliminations figs.
Operating
Profit 3,575 762 1,262 344 5,943
Other
Items: (362)
General
Expenses
Interest (274)
expenses
Income
from 165
Investments
Net Profit 5,472
Assets
Identifiable
to
geographic 10,620 5,635 3,205 1,560 21,020
al area

General 750
corporate
assets

Investments 675
Total assets 22,445
ACCOUNTING STANDARD -17 103
QUESTION NO 15
The management of Airways Ltd. provides you the information related to one of its
segment. You are required to calculate Segment assets from the given information Plant,
Property, equipments = Rs. 24,00,000, investments = Rs. 7,00,000, Loans to employees = Rs.
4,00,000. Accounts receivable =Rs. 5,00,000. DTA = Rs. 45000
Solution: Segment assets = 24,00,000 +7,00,000 + 5,00,000 =Rs. 36,00,000.
Segment assets includes the operating assets employed for the operations of the
segments. Any loan even to employees also should not be considered segment assets.
QUESTION NO 16
A multinational enterprise by the name of Torrential International has business activities
located in three segments. The relevant details are as follows:
Allocation of net income and net assets
Location Relevant Percentage for Allocation of:
Revenue & Costs Assets & Liabilities (See note 2)
% %
Europe 60 40
North America 20 40
Asia 20 20
• The allocation percentage to be applied to revenue and cost for net of inter-group
revenue (see note 3).
1. Details relating to head office
The head office procures all necessary finance for the enterprise’s activities and
allocates this finance to operating units through current accounts. Some costs, assets
and liabilities relate solely to head office and cannot be allocated to segments on a
rational basis. These amounts are as follows:
• Operating costs of Rs. 80 Lakhs at 31st March 2015
• Non current financial assets
• Bank balance of Head Office is Rs. 140 Lakhs at 31st March 2015.
• All liabilities except trade payables.
2. Inter group revenues – year to 31st March 2015
Selling Inter Group Inter-Group Sales made to
Segment Sales
Europe North America Asia
Rs. ‘000 Rs.’000 Rs.’000 Rs.’000
Europe 16,000 11,200 4,800
North America 12,800 8,800 4,000
Asia 10,400 5,600 4,800
Total 14,400 16,000 8,800
Extracts from the consolidated financial statements of Torrential International for the
year ended 31st March 2015:
104 ACCOUNTING
Statement of Comprehensive Income – year ended 31st Mach 2015
Rs.’000
Revenue 532,000
Cost of Sales (249,600)
Gross Profit 282,400
Distribution Costs (79,200)
Administrative expenses (94,400)
Profit from operations 1,08,800
Income from Investments 4,800
Finance Costs (20,000)
Profit before tax 93,600
Income tax expenses (22,400)
Profit after tax 71,200
Non Controlling interest (64,00)
Net Profit for the period 64,800
Statement of Financial position as at 31st March 2015
Rs.’000 Rs.’000
Assets
Non-Current Assets
Property, Plant & Equipment 272,000
Financial Assets 40,000 312,000
Current Assets
Inventories 60,000
Trade receivables 83,200
Bank Balances 19,200 162,400
474,400
Equity and Liabilities
Capital and Reserves
Issued Capital 120,000
Accumulated profits 144,000 264,000

Non-current liabilities
Interest bearing borrowings 112,000
Deferred Tax 28,800 1,40,800

Current Liabilities
Trade and other payables 56,000
Short term borrowings 13,600 69,600
474,400

Required: Prepare a segment report for Torrential International for the year ended 31st March,
2015 that complies with AS-17.
ACCOUNTING STANDARD -17 105
Solution:
Segment report for Torrential International
Amount in Rs.’000

Europe North America Asia Total

REVENUE
External Sales (60:20:20) 319,200 106,400 106,400 532,000
Inter-Segment Sales 16,000 12,800 10,400 39,200
Total Revenue 335,200 119,200 116,800 571,200
RESULT
Segment Result (W1) 71,680 20,160 24,960 116,800
Unallocated corporate expenses (8,000)
(H O Operating Cost)
Profit from operations 1,08,800
Investment income 4,800
Finance cost (20,000)
Income taxes (22,400)
Non controlling interest __(6,400)
Net Profit 64,800

OTHER INFORMATION
Segment assets (WZ) 168160 168,160 84,080 420,400
Unallocated corporate assets 54,000
(40,000 + 14,000)
Consolidated assets 474,400
Segment liabilities (W3) 22,400 22,400 11,200 56.000
Unallocated corporate Liabilities 154,400
(140,800+13,600*)

Consolidated liabilities 210,400

* Total bank balance – amount allocated to segments =Rs. 19,200 – Rs. 5,2000 = Rs.14,000
(000)

Working (all figures in Rs.’000)

W 1 Segment result
Europe North America Asia Total
Segment Revenue 335,200 118,200 116,800 571,200
Segment Cost (249,120) (83,040) (83,040) (415,200)
External*
Inter-Group (Note 2 to (14,400) (16,000) (8,800) (39,200)
question)
Segment Result 71,680 20,160 24,960 116,800

* Total operating costs (excluding Inter-group items) are 423,200 (249,600 + 79,200 + 94,400)

Head Office costs are 8,000

So costs to be allocated are 415,200 in the ratio (60:20:20)

106 ACCOUNTING
W2 : Segment Assets all allocated in the ratio 40:40:20
Europe North America Asia
Property, Plant & equipment (272,000) 108,800 108,800 54,400
Inventories (60,000) 24,000 24,000 12,000
Trade receivables (83,2000 33,280 33,280 16,640
Bank Balance (5,200) 2,080 2,080 1,040
168,160 168,160 84,080

W3: Segment liabilities all allocated in the ratio 40:40:20

Europe North America Asia

Trade Payable (56,000) 22,400 22,400 11,200

QUESTION NO 17
From the following information of a Company having two primary segments, prepare a statement
classifying the same under appropriate heads.

Particulars A (Rs. in B (Rs. in Particulars (Rs. in

Lakhs) Lakhs) Lakhs)

Segment Revenue 27,050 3,280 Dividend Income 285

Inter Segment Revenue 50 - Interest Expenses 35
Segment Profit 4,640 Loss 107 Tax Provision 1,675
Capital Expenditure 1,300 16
Non-Cash Exp. (excl. Dep.) 114 16
Segment Liabilities 3,430 770 Other Liabilities 2,200
Segment Assets 19,450 2,700 Other Assets 6,550
Depreciation on Assets 110 15

Particulars A (Rs. in Lakhs) B (Rs. in Lakhs) Total (Rs. in Lakhs)

I. Segment Revenue 27,050 3,280 30,330
Inter Segment Revenue 50 - 60
Sub Total 27,100 3,280 30,380
Less: Inter Segment Revenue (50)
Total 30,330
II. Segment Result 4,640 (197) 4,443
Interest Expenses (35)
Dividend Income 285
Tax Provision (1,675)
Profit after Tax 3,018
III. Other Information
(a) Segment Assets 19,450 2,700 22,150
Unallocated Assets 6,550
(b) Segment Liabilities 3,430 770 5,200
Unallocated Liabilities 6,400
(c) Capital Expenditure 1,300 16 1,316
(d) Depreciation 110 75 185
Non Cash Expenses 114 16 130
ACCOUNTING STANDARD -17 107

SUMMARY OF Expert Advisory Committee OPINIONS IN AS-17

Transfer Price for Segment Reporting purposes: The price that is actually used in Jul 2010
the books of accounts to reflect the transaction between different segments and the CA Journal
price that is used to reflect Segment Results for the purpose of Segment Reporting
Page 183
under AS-17 should be the same. Such inter segment transfers can be priced in any
manner at the choice of the Company.
Disclosure of Income Tax Expense/Assets, Interest Expense and Borrowings, etc
in the Segment Report prepared under Consolidated Financial Statements:
• Tax Assets/Expense cannot be included in segment Assets/Segment Expenses
respectively. However, if the Company so desires, it may disclose the
performance of each Segment after Income Tax Expense and Income Tax
Asset, as additional information relating to these segments, separately.
• Interest Expense incurred by Subsidiaries (which are treated as Segments
under CFS) cannot be included in the Segment Expense. However, if the April 2011
Company so desires, it may disclose such details separately as additional CA Journal
information, without affecting the “Segment Result”.
Page 1496
• Borrowing/Loans, even though specifically raised by each Subsidiary (which are
treated as Segments under CFS) cannot be included in the computation of
“Segment Liabilities”. However, these may be shown separately as additional
information, separate from “Segment Liabilities”.
Different Market Segments: Where a Company deals in selling standardized
products to a large number of customers, (constituting about 3% of Turnover) and
made-to-order customized products to a small set of customers (constituting about 97%
Oct. 2011
of Turnover), the company shall evaluate whether or not such business segments
constitute Reportable Segments, by applying the Risks andReturns Criterion, and CA Journal
apply AS-17 accordingly. Page 561
108 ACCOUNTING

IND AS -108
OPERATING SEGMENT
(NOT IN COURSE, GIVEN FOR KNOWLEDGE ONLY)
Core Principle
An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial
effects of the business activities in which it engages and the economic environments in which it operates.
Accordingly, the objective of segment reporting is to provide financial information on the different business
activities that an entity engages in and the different economic environments under which it operates to help
users of financial statements to:
(a) better understand the entity’s performance;
(b) better assess its prospects for future net cash flows;
(c) make more informed judgments about the entity as a whole.
Scope
This Accounting Standard shall apply to companies to which Indian Accounting Standards (Ind AS) notified
under the Companies Act apply.
If an entity that is not required to apply this Ind AS chooses to disclose information about segments that does not
comply with this Ind AS, it shall not describe the information as segment information.
If a financial report contains both the consolidated financial statements of a parent that is within the scope of
this Indian Accounting Standard as well as the parent’s separate financial statements, segment information is
required only in the consolidated financial statements.
Operating Segments
An operating segment is a component of an entity:
(a) that engages in business activities from which it may earn revenues and incur expenses
(b) whose operating results are regularly reviewed by the entity’s chief operating decision maker to make
decisions about resources to be allocated to the segment and assess its performance, and
(c) for which discrete financial information is available.
An operating segment may engage in business activities for which it has yet to earn revenues,
for example, start-up operations may be operating segments before earning revenues. Not
every part of an entity is necessarily an operating segment or part of an operating segment.
For example: A corporate headquarters or some functional departments may not earn revenues or may earn
revenues that are only incidental to the activities of the entity and would not be operating segments. For the
purposes of this Ind AS, an entity’s post-employment benefit plans are not operating segments.
Reportable Segments
An entity shall report separately information about each operating segment that:
(a) has been identified or results from aggregating two or more of segments, and
(b) exceeds the quantitative thresholds as specified in the standard.
ACCOUNTING STANDARD -17 109
Aggregation Criteria
Operating segments often exhibit similar long-term financial performance if they have similar economic
characteristics.

Type or
class of
Nature of customers Methods
production used to
processes distribute

Nature of Nature of
Aggregation
product and regulatory
criteria
services environment

Quantitative Thresholds
An entity shall report separately information about an operating segment that meets any of the following
quantitative thresholds:
(a) Its reported revenue, including both sales to external customers and intersegment sales or transfers, is
10 per cent or more of the combined revenue, internal and external, of all operating segments.
(b) The absolute amount of its reported profit or loss is 10 per cent or more of the greater, in absolute amount,
of
(i) the combined reported profit of all operating segments that did not report a loss and
(ii) the combined reported loss of all operating segments that reported a loss.
(c) Its assets are 10 per cent or more of the combined assets of all operating segments.
Note:
1. Operating segments that do not meet any of the quantitative thresholds may be considered reportable,
and separately disclosed, if management believes that information about the segment would be useful to
users of the financial statements.
2. An entity may combine information about operating segments that do not meet the quantitative thresholds
with information about other operating segments that do not meet the quantitative thresholds to produce a
reportable segment only if the operating
segments have similar economic characteristics and share a majority of the aggregation criteria listed in
paragraph 12.
3. If the total external revenue reported by operating segments constitutes less than 75 per cent of the
entity’s revenue, additional operating segments shall be identified as reportable segments (even if they
do not meet the criteria in paragraph 13) until at least 75 per cent of the entity’s revenue is included in
reportable segments.
General Information
The Standard requires an entity to report a measure of operating segment profit or loss and of segment assets.
It also requires an entity to report a measure of segment liabilities and particular income and expense items if
such measures are regularly provided to the chief operating decision maker. It requires reconciliations of total
reportable segment revenues, total profit or loss, total assets, liabilities and other amounts disclosed for
reportable segments to corresponding amounts in the entity’s financial statements.
The Standard requires an entity to report information about the revenues derived from its products or services
(or groups of similar products and services), about the countries in which it earns revenues and holds assets,
and about major customers, regardless of whether that information is used by management in making
operating decisions. However, the Standard does not require an entity to report information that is not prepared
110 ACCOUNTING
for internal use if the necessary information is not available and the cost to develop it would be excessive.
The Standard also requires an entity to give descriptive information about the way the operating segments were
determined, the products and services provided by the segments, differences between the measurements used
in reporting segment information and those used in the entity’s financial statements, and changes in the
measurement of segment amounts from period to period.
Major Change in Ind AS 108 vis-à-vis IFRS 8 Not Resulting in Carve Out
Paragraph 2 of IFRS 8 requires that the standard shall apply to :
a) the separate or individual financial statements of an entity:
i. whose debt or equity instruments are traded in a public market (a domestic or foreign stock
exchange or an over-the-counter market, including local and regional markets),or
ii. that files, or is in the process of filing, its financial statements with a securities commission or other
regulatory organisation for the purpose of issuing any class of instruments in a public market; and
b) the consolidated financial statements of a group with a parent:
i. whose debt or equity instruments are traded in a public market (a domestic or foreign stock
exchange or an over-the-counter market, including local and regional markets),or
ii. that files, or is in the process of filing, the consolidated financial statements with a securities
commission or other regulatory organisation for the purpose of issuing any class of instruments in
a public market.
The above have been deleted in the Ind AS 108 as the applicability or exemptions to the Indian Accounting
Standards are governed by the Companies Act and the Rules made there under.
Major Changes in Ind AS 108 vis a vis Notified AS 17
(i) Identification of Segments: Identification of segments under Ind AS 108 is based on ‘management
approach’ i.e. operating segments are identified based on the internal reports regularly reviewed by the
entity’s chief operating decision maker. Existing AS 17 requires identification of two sets of segments; one
based on related products and services, and the other on geographical areas based on the risks and
returns approach. One set is regarded as primary segments and the other as secondary segments.
(ii) Basis of Measurement for Amounts to be Reported in Segments: Ind AS 108 requires that the
amounts reported for each operating segment shall be measured on the same basis as that used by the
chief operating decision maker for the purposes of allocating resources to the segments and assessing its
performance. Existing AS 17 requires segment information to be prepared in conformity with the
accounting policies adopted for preparing and presenting the financial statements. Accordingly, existing
AS 17 also defines segment revenue, segment expense, segment result, segment assets and segment
liabilities.
(iii) Aggregation Criteria: Ind AS 108 specifies aggregation criteria for aggregation of two or more segments
and also requires the related disclosures in this regard. Existing AS 17 does not deal specifically with this
aspect.
(iv) Single Reportable Segment: An explanation has been given in the existing AS 17 that in case there is
neither more than one business segment nor more than one geographical segment, segment information
as per this standard is not required to be disclosed. However, this fact shall be disclosed by way of
footnote. Ind AS 108 requires certain disclosures even in case of entities having single reportable
segment.
(v) Interest Expense: An explanation has been given in the existing AS 17 that interest expense relating to
overdrafts and other operating liabilities identified to a particular segment should not be included as a part
of the segment expense. It also provides that in case interest is included as a part of the cost of
inventories and those inventories are part of segment assets of a particular segment, such interest should
be considered as a segment expense. These aspects are specifically dealt with keeping in view that the
definition of ‘segment expense’ given in AS 17 excludes interest. Ind AS 108 requires the separate
ACCOUNTING STANDARD -17 111
disclosures about interest revenue and interest expense of each reportable segment, therefore, these
aspects have not been specifically dealt with.
(vi) Disclosures: Ind AS108 requires disclosures of revenues from external customers for each product and
service. With regard to geographical information, it requires the disclosure of revenues from customers in
the country of domicile and in all foreign countries, non-current assets in the country of domicile and all
foreign countries. It also requires disclosure of information about major customers. Disclosures in existing
AS 17 are based on the classification of the segments as primary or secondary segments. Disclosure
requirements for primary segments are more detailed as compared to secondary segments.

QUESTION NO 18
Rek for Fontry Ltd. has 2 products making servers and making other software. Most of the risk
and reward factors are common. But the CODM wants to classify them as segment. Comment
as per AS-17 and Ind AS-108.

Solution: AS-17 Business or Geographical Segments are decided by risk and reward profile/
features. Accordingly servers and other software are Segments.

Ind AS-108: Ind AS-108 requires identification of ‘operating segments’ based on internal
management reports that are regularly reviewed by the entity’s “chief operating decision
maker” for the purposes of allocating resources to the segments and assessing their
performance. If as per the CODM the 2 products are 2 segments then yes the entity should
follow Segment reporting. Also one should check the 10% criteria.
112 ACCOUNTING
DEPARTMENTAL ACCOUNTS 113

DEPARTMENTAL ACCOUNTS

QUESTION NO 1 (MAY 1986 & 1993) (CROSS TRANSFERS)

Telarad & co. has two Departments A and B. From the following particulars prepare
Departmental trading account and consolidated trading account for the year ending 31st march
1993:
Department A Department B
Rs. Rs.
Opening stock (at cost) 1,00,000 60,000
Purchases 4,60,000 3,40,000
Carriage 10,000 10,000
Wages 60,000 40,000
Sale (excluding inter-transfers) 7,00,000 5,60,000
Purchased goods transferred:
By B to A 50,000
By A to B 40,000
Finished goods transferred:
By B to A 1,75,000
By A to B 2,00,000
Return of finished goods:
By B to A 50,000
By A to B 35,000
Closing stock:
Purchased goods 22,500 30,000
Finished goods 1,20,000 70,000
Purchased goods have been transferred at their respective Departmental purchase cost and
finished goods at Departmental market price. 20% of the finished stock (closing) at each
Department represented finished goods received from the other Department.

QUESTION NO 2 (MAY 1994)(SIMPLE CASE OF CONTENT RATIO)

Green & co. has two Departments P & Q. Department P sells goods to Department Q at
normal selling prices. From the following particulars prepare Departmental trading and Profit
and Loss account for the year ended 31.3.1994 and also ascertain the net Profit to be
transferred to the Balance Sheet:

Particulars Department P Department Q

Rs. Rs.
Opening stock 1,00,000 NIL
Purchases 23,00,000 2,00,000
Goods from department P -- 7,00,000
Wages 1,00,000 1,60,000
Traveling expenses 10,000 1,40,000
Closing stock at cost to the 5,00,000 1,80,000
department 23,00,000 15,00,000
Sales 20,000 16,000
Printing and stationary
114 ACCOUNTING
The following expenses incurred for both the Departments were not apportioned
between the Departments:
(a) Salaries Rs.270000.
(b) Advertisement expenses Rs. 90000.
(c) General expenses Rs.800000
(d) Depreciation @ 25 % on the machinery value of Rs.48000.
Advertisement expenses are to be apportioned in the turnover ratio; Salaries in 2:1 ratio
and Depreciation in 1:3 ratio between the Departments P and Q. General expenses are to be
apportioned in 3:1 ratio.

QUESTION NO 3 (NOV 2001)(MANAGER COMMISSION)

Department X sells goods to Department Y at a Profit of 25% on cost and to
Department Z at 10% Profit on cost. Department Y sells goods to X and Z at a Profit of 15%
and 20% on sales, respectively. Department z charges 20% and 25% Profit on cost to
Department X and Y respectively.
Department Managers are entitled to 10 % commission on net Profit subject to
unrealized Profit on Departmental sales being eliminated. Departmental Profits after charging
managers commission, but before adjustment of unrealized Profit are as under:
Department X 36000
Department Y 27000
Department Z 18000
Stocks lying at different Departments at the end of the year are as under:
Department X Department Y Department Z
Rs. Rs. Rs.
Transfer from Department X -- 15,000 11,000
Transfer from Department Y 14,000 -- 12,000
Transfer from department Z 6,000 5,000 --
Find out the correct Departmental Profits after charging managers commission.

QUESTION NO 4
A firm has two Departments, Timber and Furniture. Furniture was made by the firm itself out of
timber supplied by Timber Department at its usual selling price. From the following figures,
prepare Departmental trading and profit and loss account for the year 2002:
Timber Furniture
Opening stock (1.1.2002) 3,00,000 50,000
Purchases 20,00,000 15,000
Sales 22,00,000 4,50,000
Transfer to furniture Department 3,00,000 -
Expenses: Manufacturing - 60,000
Selling 20,000 6,000
Closing stock 2,00,000 60,000
The stocks in the furniture Department may be considered as consisting 75% of timber and
25% other expenses. Timber Department earned gross profit at the rate of 20% in 2001.
General expenses of the business as a whole came to Rs.1,00,000.

ANSWER:
TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING ON 31.12.2002
Particulars Timber Furniture Particulars Timber Furniture
Department Department Department Department
To opening 3,00,000 50,000 By sales 22,00,000 4,50,000
DEPARTMENTAL ACCOUNTS 115
stock 20,00,000 15,000 By transfer 3,00,000 -
To purchases - 3,00,000 By closing stock 2,00,000 60,000
To transfer - 60,000
To 4,00,000 85,000
manufac.exp.
To gross profit
27,00,000 5,10,000 27,00,000 5,10,000
To selling exp. 20,000 6,000 By gross profit 4,00,000 85,000
To net profit 3,80,000 79,000
4,00,000 85,000 4,00,000 85,000

GENERAL PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING 31.12.2002
Particulars Rs. Particulars Rs
To stock reserve 7,200 By net profit:
(closing stock) 1,00,000 (3,80,000+79,000) 4,59,000
To general expenses 3,59,300 By stock reserve 7,500
To net profit (opening stock)
--------------------- ----------------------
4,66,500 4,66,500
Working notes:
Calculation of stock reserve:
(on opening stock of furniture)

75% of stock is Timber i.e, portion of timber included in furniture= 50,000*75/100=37,500

stock reserve=37500*20/100=7500
(on closing stock of furniture)

G.P.ratio of timber Department:= 4,00,000/25,00,000*100=16%

Stock reserve=60,000*75%*16%=7,200

QUESTION NO 5 (PARTNERSHIP MIXED WITH DEPARTMENTAL)

Messrs D, B and R carried on a business of Drapers and Tailors in Delhi; D was in-
charge of Department “A” dealing in cloth, B of Department “B” for selling garments and R of
Department “C” the tailoring section. It had been agreed that each of the three partners would
receive 75% of the Profits disclosed by the accounts of the Department of which he was in
charge and he balance of the Profits would be shared in the proportion: D ½, B ¼ and R ¼ .
The following is the Trading and Profit and Loss Account of the firms for the six months ended
March 31, 1999.
Trading and Profit and Loss Account
Rs. Rs. Rs. Rs.
To Opening By Sales:
stock: Cloth (A) 1,80,000
Cloth (A) 37,890 Ready-made
Ready-made Garments (B) 1,30,000
Garments (B) 24,000 81,890 Tailoring Jobs (C) 90,000 4,00,000
Tailoring Jobs 20,000 By Discount
(C) received 800
To Purchase: By Closing stock:
116 ACCOUNTING
Cloth (A) 1,40,700 Cloth (A) 45,100
Ready-made Ready-made
Garments (B) 80,600 Garments (B) 22,300
Tailoring Jobs 44,400 2,65,700 Tailoring Jobs (C) 21,600 89,000
(C) [Including
To Salaries & 48,000 Rs.5,700 for
Wages goods transferred
To Advertising 2,400 from department
To Rent 10,800 (A)]
To Discount 1,200
allowed
To Sundry exp. 12,000
To Depreciation 750
on Furniture and
Fittings
Net profit 67,060

4,89,800 4,89,800
After consideration of the following prepare Departmental accounts and Profit and Loss
appropriation account:
(i) Cloth of the value of Rs.10700 and other goods of the value of Rs.600 were
transferred at selling price by Departments A and B respectively to Department C.
(ii) Cloth and garments are sold in the show- room. Tailoring work is carried out in the
workshop.
(iii) The details of salaries and wages were as follows:
(a) General office 50%, show room 25% and 25 % for the workshop, which is for
tailoring.
(b) Allocate general office Expenses, in the proportion of 3:2:1 among the
Departments A, B, C.
(c) Distribute show-room expenses in the proportion of 1:2 between Departments A
and B.
(iv) The workshop rent is Rs.1000 per month. The rent of the general office and show
room is to be divided equally between Department A and B.
(v) Depreciation charges are to be allocated equally amongst the three Departments.
(vi) All other expenses are to be allocated on the basis of turnover.
(vii) Discounts received are to be credited to the three Departments as follows: A:
Rs.400; B: Rs.250; C: Rs.150.
(viii) The opening stock of Department C does not include any goods transferred from
Department A.

QUESTION NO 6 (MAY 1989) (MARK UP ACCOUNTS)

Southern store Limited is a retail store operating two Departments. The company
maintains a memorandum stock account and memorandum mark up account for each of the
Departments. Supplies issued to the Departments are debited to the memorandum stock
account of the Department at cost plus the mark up and Departmental sales are credited to
this account. The mark up on supplies issued to the Departments is credited to the mark up
account for the Department. When it is necessary; to reduce the selling price below the normal
selling price, i.e., cost plus mark up, the reduction (mark down) is entered in the memorandum
stock account and in the mark up account. Department Y has a mark up of 33-1/3 % on cost
and Department Z 50% on cost.
DEPARTMENTAL ACCOUNTS 117
The following information has been extracted from the records of southern store LTD.
for the year ended 31st December 1988:
Department Department
Y Z
Stock 1st January 1988, at cost 24,000 36,000
Purchases 1,62,000 1,90,000
Sales 2,10,000 2,85,000

(i) The stock of Department Y at 1st January 1988 includes goods, on which the selling
price has been marked down by Rs.510. These goods were sold in January 1988 at
the reduced price.
(ii) Certain goods purchased in 1988 for Rs.2700 for Department Y, were transferred
during the year to Department Z, and sold for Rs.4050. Purchases and sales are
recorded in the purchases of Department Y and the sales of Department Z
respectively, but no entries in respect of the transfer have been made.
(iii) Goods purchased in 1988 were marked down as follows:
Department Y Department Z
Cost 8,000 21,000
Mark down 800 4,100
At the end of the year there were some items in the stock of Department Z, which
had been marked down to Rs.2300. With this exception all goods marked down in
1988 were sold during the year at the reduced prices.
(iv) During stock taking at 31st December 1988 goods, which had cost Rs.240 were
found to be missing in Department Y. It was determined that the Loss should be
regarded as irrecoverable.
(v) The closing stock in both Departments is to be valued at cost for the purpose of the
annual accounts.
You are requested to prepare for each Department for the year ended 31st December 1988:

(a) A Trading Account

(b) A Memorandum stock Account and,
(c) A Memorandum Mark up Account.

QUESTION NO 7 (MAY 1990) (UNIFORM GP RATIO)

The following purchases were made during the year 1989 by a business house having
three Departments:

Department A 1000 units

Department B 2000 units
Department C 2400 units
At a total cost of Rs.1,00,000

Stock on 1st January 1989 were:

Department A 120 units
Department B 80 units
Department C 152 units
The sales during, 1989 were:
Department A 1020 units at Rs.20 each
118 ACCOUNTING
Department B 1920 units at Rs.22.50 each
Department C 2496 units at Rs.25 each
The rate of gross Profit is the same in each case. Prepare Departmental Trading account for
the year 1989.

QUESTION NO 8 (CHAIN TRANSFERS)

Complex Limited has 3 departments A, B, and C. the following information is provided:
A B C
Rs. Rs. Rs.
Opening stock 3,000 4,000 6,000
Consumption of direct 8,000 12,000 -
materials 5,000 10,000 -
Wages 4,000 14,000 8,000
Closing stock - - 34,000
Sales

Stock of each department is valued at cost to the department concerned, stocks of A

department are transferred to B at a margin of 50% above departmental cost, stocks of B
department are transferred to C department at a margin of 10% above departmental cost.
Other expenses were:
Salaries 2,000
Printing and stationary 1,000
Rent 6,000
Interest paid 4,000
Depreciation 3,000
Allocate expenses in the ratio of departmental gross profit. Opening figures of reserves
for unrealized profits on departmental stock were:
Department B Rs.1,000
Department C Rs.2,000
Prepare departmental trading and Profit and Loss account for the year ending March
31, 1999.

QUESTION NO 9(NOV 2002) (UNIFORM GP RATIO)

Shankar is earning uniform rate of gross profit in all the three departments he is
handling. Following are the relevant details:-
Department A 15000 packets
Department B 20000 packets
Department C 15000 packets
The total cost to purchases came to Rs.6,00,000.
Sales:-
Department A 16,000 packets at Rs.20 per packet
Department B 22,000 packets at Rs.15 per packet
Department C 17,000 packets at Rs.10 per packet
Details of opening stock:
Department A 4,000 packets
Department B 5,000 ,,
Department C 4,000 ,,
You are required to prepare the trading account for the three departments in a columnar form.
Working required:
(i) Calculation of gross profit for each department assuming no stock situations.
DEPARTMENTAL ACCOUNTS 119
(ii) Department wise purchase price and value and
(iii) Valuation of opening and closing stocks.

QUESTION NO 10 (APPLICATION OF GP RATIO ON NORMAL SELLING PRICE)

A Limited has three departments X, Y, and Z. from the following particulars given by A
Limited, compute:-
(i) The value of stock as on 31st March 1999 and
(ii) The departmental results
1. X Y Z
Rs. Rs. Rs.
Stock (opening) 12,000 18,000 6,000
Purchases 73,000 62,000 24,000
Actual sales 86,250 79,700 37,300
Gross profit on normal selling price 20% 25% 33.333%
2. During the year certain goods were sold at a discount given below and these discounts were
reflected in the values of sale stated above:-
X Y Z
Sales at normal selling price 5,000 1,500 500
Sales at actual price 3,750 1,200 300
(Ans:- closing stock: X=15,000, Y= 20,000, Z= 5,000)
profit of X=16,250, Y=19,700, Z=12,300)

QUESTION NO 11(NOV 2004)(CHAIN TRANSFER)

FGH Ltd. has three departments I.K.J. The following information is provided for the year
ended 31.3.2004:
I J K
Rs Rs Rs
Opening stock 5,000 8,000 19,000
Opening reserve for unrealized profit -- 2,000 3,000
Material consumed 16,000 20,000 --
Direct Labour 9,000 10,000 --
Closing stock 5,000 20,000 5,000
Sales -- -- 80,000
Area occupied (Sq. mtr.) 2,500 1,500 1,000
No. of employees 30 20 10
Stocks of each department are cost to the department concerned. Stocks of I are
transferred to J at cost plus 20% and stocks of J are transferred to K at a Gross Profit of 20%
on sales. Other common expenses are Salaries and Staff Welfare Rs18,000 Rent Rs6,000.
Prepare Departmental Trading, Profit and Loss Account for the year ending 31.3.2004.
120 ACCOUNTING
ANSWER:
DEPARTMENTAL TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED
31.3.2004
PARTICULRS I (Rs.) J (Rs.) K(Rs.) PARTICULRS I (Rs.) J (Rs.) K(Rs.)
To opening By internal
stock 5,000 8,000 19,000 transfer 30,000 60,000 -
To materials 16,000 20,000 - By sales - - 80,000
To D.Labour 9,000 10,000 - By closing
To Internal - 30,000 60,000 stock 5,000 20,000 5,000
trans. 5,000 12,000 6,000
To gross 35,000 70,000 85,000 35,000 70,000 85,000
profits
PARTICULRS I (Rs.) J (Rs.) K(Rs.) PARTICULRS I (Rs.) J (Rs.) K(Rs.)
To salaries 9,000 6,000 3,000 By gross 5,000 12,000 6,000
(30:20:10) profits 7,000 - -
To Rent 3,000 1,800 1,200 By net loss
(Area)
To net profits 4,200 1,800

12,000 12,000 6,000 12,000 12,000 6,000

GENERAL P & L ACCOUNT

Particulars Rs Particulars Rs
To net loss 7,000 By net profit (J+K) 6,000
To stock reserve By stock reserve (J+K) 5,000
J 1,667
K 1,333
To net profit 1,000
--------------------- ----------------------
11,000 11,000

WORKING NOTES:
(1) Calculation of gross profit:
Department I Department J
Opening stock 5,000 8,000
Materials and labours 25,000 30,000
-------------------------- --------------------------
30,000 38,000
Less: Closing Stock (5,000) (20,000)
Add transfer - 30,000
------------------------- -------------------------
Total cost of sales 25,000 48,000
Gross profit:
25,000*1/5 5,000 -
48,000*1/4 - 12,000
DEPARTMENTAL ACCOUNTS 121
(2) Stock Reserve J
Cost 30,000
Transfer from I 30,000
Closing stock 20,000
Proportion of stock 20,000*30,000/60,000=10,000
Stock reserve 10,000*20/120=1,667

(3) Stock reserve K

Stock transferred from J 5,000
Less: profit 20% (1,000)
----------
Cost of J 4,000
Proportion of stock 4000*30,000/60,000=2,000
Stock reserve 2,000*20/120=333
Total reserve = 1,000+333=1333

(4) Salaries and welfare exp have been allocated on the basis of number of employees and
rent has been allocated on the basis of area occupied.

(STOCK RESERVE CAN ALSO BE COMPUTED ALTERNATIVELY 1000 & 2000)

QUESTION NO 12 (PREVIOUS YEAR GP RATIO)

Snow white Ltd. has two departments- cloth and Readymade clothes. Ready made
Clothes are made by the firm itself out of cloth supplied by the cloth department iat its usual
selling price. From the following figures, prepare departmental trading and profit and loss
account for the year ended 31st March:
Cloth Readymade
department clothes
st
Opening stock on 1 April 3,00,000 50,000
Purchases 20,00,000 15,000
Sales 22,00,000 4,50,000
Transfer to readymade clothes department 3,00,000 -
Manufacturing expenses - 60,000
Selling expenses 20,000 6,000
st
Closing stock on 31 March 2,00,000 60,000
The stock in the readymade clothes department may be considered as consisting of 75% cloth
and 25% other expenses. The cloth department earned gross profit at the rate of 15% during
the previous year. General expenses of the business as a whole came to Rs.1,10,000.

QUESTION NO 13
THE trading and profit and loss account of Gopa kishore for the year ending 31st March
is as under:
Purchases Rs. Sales Rs.
-Transistors 1,60,000 -Transistors 1,75,000
-Tape recorders 1,25,000 -Tape recorders 1,40,000
-Spare parts for repairs 80,000 -Spare parts for repairs 35,000
Salaries and wages 48,00 stock on 31st March:
Rent 10,800 transistors 60,100
122 ACCOUNTING
Sundry expenses 11,000 tape recorders 20,300
Net profit 40,200 spare parts for repairs 44,600
4,75,000 4,75,000
Prepare departmental accounts for each of the three departments A, B and C mentioned
above after taking into consideration the following :
(a) transistors and tape recorders are sold at the showroom. Servicing and repairs
are carried out at workshop.
(b) Salaries and wages comprise as follows:
i. Show room 3/4th and
ii. Workshop 1/4th
iii. It was decided to allocate the showroom salaries and wages in ratio 1:2
between department A and B.
(c) Workshop rent is Rs.500 per month. Showroom rent is to be divided equally
between departments A and B.
(d) Sundry expenses are to be allocated on the basis of the turnover of each
department.

QUESTION NO 14 (SAME TO SAME AS QUESTION NO.5)

Samsare co, a firm has three departments L, M, and N which are under the charge of
the partners X, Y and Z respectively. The following consolidated profit and loss account is
given below:
Particulars Rs. Particulars Rs.
To opening stocks (note 1) 81,890 By sales (note 7) 4,00,000
To purchases (note 2) 2,65,700 By closing stocks(note 89,000
To salaries and wages 48,000 8) 800
(note 3) 10,800 By discounts received
To rent expenses(note 4) 14,400 (note10)
To selling expenses(note 5) 1,200
To discount allowed(note 5) 750
To depreciation (note 6) 67,060
To net profit for the year 4,89,800 4,89,800
From the above account and following additional information, prepare the departmental profit
and loss account for the year ended 31st march:
(a) Break up of opening stock department wise is : L Rs.37890, M Rs.24000 and N
Rs.20000
(b) Total purchases were as under : L Rs.140,700, M Rs.80,600 and N Rs.44,400
(c) Salaries and wages include Rs.12,000 wages of department N. The balances salaries
should be apportioned to the three departments as 4:4:1
(d) Rent is to be apportioned in the ratio of floor space which as to 2:2:5
(e) Selling expenses and discount allowed are to be apportioned in the ratio of turnover.
(f) Depreciation on assets should be equally charged to the three departments.
(g) Sales made by three departments were: L Rs.1,80,000, M Rs.1,30,000 and N
Rs.90,000.
(h) Break up of closing stock department wise is : L Rs.45,100, M Rs.22,300 and N
Rs.21,600. The closing stock of department N includes Rs.5700 goods transferred from
department L. however, opening stock does not include any goods transferred from
other departments.
(i) Departments L and M sold goods worth Rs.10,700 and Rs.600 respectively to
department N.
(j) Discounts received are traceable to departments : L Rs.400, M Rs.250 and N Rs.150.
DEPARTMENTAL ACCOUNTS 123
(k) Partners are to share profits as under :
a. 75% of the profits of the departments L, M and N to the respective partner
incharge
b. balance profits tobe credited as 2:1:1.
QUESTION NO15 (MARK UP ACCOUNTS)
Fairways Ltd. is a retail organization with several departments. Goods supplied to each
department are debited to a memorandum, departmental stock account at cost plus a fixed
percentage (mark up) to give the normal selling price. The mark up is credited to memorandum
departmental mark up account. Any reduction in selling prices (mark down) required
adjustment in the stock account and in mark up account. The mark up for department A for the
last three years has been 40%.
Figures relevant to Department A for the year ended 30th june 2002 were as follows:
Stock on 1st July,2001 at cost Rs.80,000
Purchases at cost Rs.1,80,000
Sales Rs.3,20,000
It is further ascertained that:
(a) The goods purchased in the period were marked down by Rs.1400 from a cost of
Rs.16000. Marked down stock costing Rs.4000 remained unsold on 30th June 2002.
(b) Stock shortages at the year end, which had cost Rs.1200 were to be written off.
(c) Stock at 1st July 2001 including goods costing Rs.8200 had been sold during the year
and had been marked down in the selling price by Rs.740. the remained stock had been
sold during the year.
(d) The departmental closing stock is to be valued at cost subject to adjustments for
markup and markdown.
You are required to prepare:
(a) A departmental trading account for A department for the year ended june 2002 in head
office books.
(b) A memorandum stock for the year
(c) A memorandum mark up account for the year
QUESTION NO 16 (PRODUCTION DEPARTMENTS WITH SERVICE DEPTT.)
MOON Ltd. has three departments. They are “cloth stitching department” “selling
department “ and “General administration deparments”. Cloth department transfer its goods to
selling department 20% profit on cost. From the following details, prepare departmental trading
account and profit and loss account for the year ended 31st December 2002;
Cloth stitching Selling
department department
Opening stock 1.,20,000 80,000
Purchases 5,00,000 -
Wages and other expenses 1,25,000 25,000
Closing stock 45,000 95,000
Sales - 11,05,000
The expenses of general administration department are as follows:
Manager salary @ 1000 per month
Clerk’s salary (2 no.) Rs.600 per month each
Maintenance expenses Rs 9600
Apportioned general department expenses equally to the cloth stitching and selling
department.
124 ACCOUNTING
QUESTION NO 17 (CHAIN TRANSFERS)
Calculate stock reserve A,B and C are three departments:
Content Ratio Profit Ratio Closing Stock
A Nil ¼ of sales 15,000
B 2/10 1/5 of cost 22,000
C 5/15 not available 40,000
Assume A sales to B sales to C.

QUESTION NO 18 (PROBLEM WITHOUT STOCK RESERVE)

From the following trial balance prepare departmental trading and profit and loss account for
the year ending 31.03.2004:
Rs (in ‘000)
st
Stock 1 April 2003 Department A 1,700
Department B 1,450
Purchases Department A 3,540
Department B 3,020
Sales Department A 6,080
Department B 5,125
Wages Department A 820
Department B 270
Rent, Rates and taxes and - 939
Insurance - 360
Sundry expenses - 300
Salaries - 210
Lighting and Heating - 222
Discounts allowed - 65
Discounts received - 368
Advertising - 234
Carriage inward - 300
Furniture and fitting - 2100
Machinery - 606
Sundry Debtors - 1,860
Sundry creditors - 4,766
Capital accounts - 450
Drawings - 1,007
Cash at bank

The following further information is available:

a. Internal Transfer of goods from A to B Department Rs.42,000.
b. The items rent, rates and taxes and insurance, sundry expenses, lighting and
heating, salaries and carriage are to be apportioned 2/3 to A department and 1/3
to B Department.
c. Advertising is to be apportioned equally.
d. Discount allowed and received are to apportioned on the basis of Departmental
sales and purchases excluding transfers
e. Depreciation @ 10% per annum on furniture and on machinery is to be charged
(3/4th to A Department and 1/4th to B Department)
f. Services rendered by B Department to A Department are included in wages
Rs.50,000.
DEPARTMENTAL ACCOUNTS 125
g. Stock on 31.3.2004 in A Department was worth Rs.16,74,000 and in B
Department was worth Rs.12,05,000.

ANSWER:
DEPARTMENTAL TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR
ENDING 31.3.2004
Particulars A B A B
Department Department Department Department
To opening 1,700 1,450 By sales 6,080 5,125
stock 3,540 3,020 By transfer 42 50
To purchases 820 270 By closing stock 1,674 1,205
To wages 50 42
To transfer 156 78
To carriage 1,530 1,520
inward
To gross profit
7,796 6,380 7,796 6,380
To salaries 200 100 By gross profit 1,530 1,520
To rent, rates, 626 313 By discount 35 30
taxes and insu. By net loss 126 nil
To sundry exp. 240 120
To lighting, 140 70
heat. 184 184
To advertising
To 158 52
depreciation: 22 8
Machinery 121 101
Furniture nil 602
To discount
To net profit

1,691 1,550 1,691 1,550

QUESTION NO 19 (PROBLEM WITHOUT STOCK RESERVE)

From the following figures prepare accounts to disclose total profit and the profit of the
two Departments, A and B:
Rs
st
Stock 1 April 2003 Department A 15,200
Department B 10,800
Purchases Department A 75,100
Department B 69,800
Sales Department A 1,00,000
Department B 80,000
Salaries Department A 9,000
Department B 8,500
Purchase Returns Department A 1,100
Department B 800
Carriage inward - 2,860
126 ACCOUNTING
Discounts received - 1,430
General salaries - 11,600
Rent, Rates - 6,000
Advertising - 8,100
Insurance - 1,000
General expenses - 5,400
Discounts allowed - 1,800
Accounting charges 500
The following further information is supplied:
1. Goods Transferred from Department A to Department B were Rs.5,000 this has
not yet been recorded.
2. General salaries are to be allocated Equally.
3. Allocate carriage inward and discount received on suitable basis
4. The area occupied is in the ratio of 3:2
5. Insurance premium is for a comprehensive policy, allocation being inconvenient
6. the closing stock of the two Department were A:17,800 and B 15,600
7. Allocate advertising, general expenses and discount allowed in the ratio of sales

ANSWER:
DEPARTMENTAL TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR
ENDING 31.3.2004
Particulars A B A B
Department Department Department Department
To opening 15,200 10,800 By sales 1,00,000 80,000
stock 74,000 69,000 By transfer 5,000 -
To purchases By closing stock 17,800 15,600
less returns 1,480 1,380
To carriage - 5,000
inward 32,120 9,420
To transfer
To gross profit
1,22,800 95,600 1,22,800 95,600
To salaries : By gross profit 32,120 9,420
Departmental 9,000 8,500 By discount 740 690
General 5,800 5,800 By net loss - 13,390
To rent,rates 3,600 2,400
To advertising 4,500 3,600
To general exp. 3,000 2,400
To discount 1,000 800
To net profit 5,960 -
32,860 23,500 32,860 23,500
To net loss 13,390 By net profit 5,960
To insurance 1,000 By net loss to -
To accout. 500 balance sheet 8,930
charges ---------------------------------- ----------------------------------
14,890 14,890
--------------------------------- ----------------------------------
Notes:
1. Carriage inward and discount received have been allocated in the ratio of net
purchase
DEPARTMENTAL ACCOUNTS 127
2. Rent and taxes have been allocated in the ratio of area occupied.

QUESTION NO 20
A firm has two Departments, Timber and Furniture. Furniture was made by the firm itself
out of timber supplied by Timber Department at its usual selling price. From the following
figures, prepare Departmental trading and profit and loss account for the year 2002:
Timber Furniture
Opening stock (1.1.2002) 3,00,000 50,000
Purchases 20,00,000 15,000
Sales 22,00,000 4,50,000
Transfer to furniture Department 3,00,000 -
Expenses: Manufacturing - 60,000
Selling 20,000 6,000
Closing stock 2,00,000 60,000
The stocks in the furniture Department may be considered as consisting 75% of timber and
25% other expenses. Timber Department earned gross profit at the rate of 20% in 2001.
General expenses of the business as a whole came to Rs.1,00,000.
ANSWER:
TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING ON 31.12.2002
Particulars Timber Furniture Particulars Timber Furniture
Department Department Department Department
To opening 3,00,000 50,000 By sales 22,00,000 4,50,000
stock 20,00,000 15,000 By transfer 3,00,000 -
To purchases - 3,00,000 By closing stock 2,00,000 60,000
To transfer - 60,000
To 4,00,000 85,000
manufac.exp.
To gross profit
27,00,000 5,10,000 27,00,000 5,10,000
To selling exp. 20,000 6,000 By gross profit 4,00,000 85,000
To net profit 3,80,000 79,000
4,00,000 85,000 4,00,000 85,000
GENERAL PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING 31.12.2002
Particulars Rs. Particulars Rs
To stock reserve 7,200 By net profit:
(closing stock) 1,00,000 (3,80,000+79,000) 4,59,000
To general expenses 3,59,300 By stock reserve 7,500
To net profit (opening stock)
--------------------- ----------------------
4,66,500 4,66,500
Working notes:
Calculation of stock reserve:
(on opening stock of furniture)
75% of stock is Timber i.e, portion of timber included in furniture= 50,000*75/100=37,500
stock reserve=37500*20/100=7500
128 ACCOUNTING
(on closing stock of furniture)
G.P.ratio of timber Department:= 4,00,000/25,00,000*100=16%
Stock reserve=60,000*75%*16%=7,200

QUESTION NO 21 (CA IPCC NOV 2009)

Goods are transferred from Department P to Department Q at a price 50% above cost.
If closing stock of Department Q is Rs. 27,000, compute the amount of stock reserve.
(ANS:9000)

QUESTION NO 22 (CA IPCC MAY 2010) (CROSS TRANSFERS)

Siva Ltd. Has two departments X and Y. from the following particulars prepare
departmental trading accounts and general profit and loss account for the year ending 31st
March, 2009.
Dept. X Dept.
Opening stock (at cost) 80,000 48,000
Purchase 3,68,000 2,72,000
Carriage inward 8,000 8,000
Wages 48,000 32,000
Sales 5,60,000 4,48,000
Purchase goods transferred
By Dept. Y to X 40,000 -
By Dept. X to Y - 32,000
Finished goods transferred
By Dept. Y to X 1,40,000 -
By Dept. X toY - 1,60,000
Return of finished goods
By Dept. Y to X 40,000 -
By Dept. X to Y - 28,000
Closing stock
Purchased goods 18,000 24,000
Finished goods 96,000 56,000
Purchased goods have been transferred mutually at their respective departmental purchase
cost and finished goods at departmental market price and that 25% of the closing finished
stock with each departmental represents finished goods received from the other department.
DEPARTMENTAL ACCOUNTS 129
ANSWER:
GROSS PROFIT: X 1,70,000 Y 1,68,000

QUESTION NO 23 (CA NOV 2010 IPCC) (COMMISSION)

Department X sells goods to Department Y at a profit of 25% on cost and to Department
Z at 10% profit on cost. Department Y sell goods to X and Z at a profit 15% and 20% on sales,
respectively. Department Z charges 20% and 25% profit on cost to Department X and Y,
respectively.
Department Managers are entitled to 10% commission on net profit of before charging such
commission, subject to unrealized profit on departmental sales being eliminated. Departmental
profits after charging Managers’ commission, but before adjustment of unrealized profit are as
under; -
Department X Rs. 54,000
Department Y Rs. 40,500
Department Z Rs. 27,000

Stock lying at different departmental at the end of the year are as under;
Dept. X Dept. Y Dept. Z
Rs. Rs. Rs.
Transfer from Department 22,500 16,500
X
Transfer from Department 21,000 18,000
Y
Transfer from Department 9,000 7,500
Z

Find out the correct department Profits after charging Manager’s Commission.

ANSWER:
Deptt. X 48,600
Deptt. Y 34,425
Deptt. Z 24,300

Examiner Comments: Most of the Candidates failed to give the correct treatment for the
unrealized profit in the concerned department . as a result, department profit and manager’s
commission after unrealized profit was calculated incorrectly.
130 ACCOUNTING
QUESTION NO 24 (CA MAY 2011)
The Z Ltd has three departments and submits the following information for the year
ending on 31st march, 2009.
A B C Total
Rs.
Purchases (Units 5,000 10,000 15,000
Purchases (Amounts) 8,40,000
Sales (Units) 5,200 9,800 15,300
Selling price (per unit) Rs 40 Rs 45 Rs 50
Closing stock (units) 400 600 700
You are required to prepare department trading account of Z Ltd. Assuming that the rate of
Profit on sale is the uniform in each case.
ANSWER: UNIFORM GP RATIO 40%

QUESTION 25 (C A IPCC NOV.11)(8MARKS)

M/s AM Enterprises had two departments. Cloth and Read/made Clothes. The
Readymade clothes were made by the firm itself out of the cloth supplied by the Cloth
Department at its usual selling price. From the following figures, prepare Departmental Trading
and Profit and Loss Account for the year ended 31st March, 2011:
Cloth Readymade
Department Clothes Department
Rs. Rs.
Opening Stock on 1st April, 2010 31,50,000 5,32,000
Purchases 2,10,00,000 1,68,000
Sales 2,31,00,000 47,25,000
Transfer to Readymade Clothes 31,50,000 --
Department
Manufacturing Expenses -- 6,30,000
Selling Expenses 2,10,000 73,500
Rent & Warehousing 8,40,000 5,60,000
Stock on 31st March, 2011 21,00,000 6,72,000
In addition to the above, the following information is made available for necessary
consideration:
(i) The stock in the Readymade Clothes Department may be considered as consisting
of 75% cloth and 25% other expenses.
(ii) The Cloth Department earned a gross profit at the rate of 15% in 2009-10.
(iii) General Expenses of the business as a whole amount to Rs. 10,85,000.
 DEPARTMENTAL ACCOUNTS 131
Answer :
M/s AM Enterprises
Trading and Profit and Loss Account
For the year ended 31st March, 2011
Particulars Cloth Ready Particulars Cloth Ready
Rs. Rs. Rs. Rs.
To Opening stock 31,50,000 5,32,000 By Sales 2,31,00,000 47,25,000
To Purchases 2,10,00,000 1,68,000 By Transfer 31,50,000 ---
To Transfer ‘ -- 31,50,000 By Closing stock 21,00,000 6,72,000
To Mfg. Expenses -- 6,30,000
To Gross profit c/d 42,00,000 9,17,000

2,83,50,000 53,97,000 2,83,50,000 53,97,000

To Selling By Gross Profit 42,00,000 9,17,000
Expenses 2,10,000 73,500 b/d
To Rent & 8,40,000 5,60,000
Warehousing
To Net Profit 31,50,000 2,83,500

42,00,000 9,17,000 42,00,000 9,17,000

GENERAL PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING 31.03.2011
Particulars Rs. Particulars Rs
To stock reserve 80,640 By net profit:
(closing stock) (3150000+283500) 34,33,500
To general expenses 10,85,000 By stock reserve 59,850
To net profit 23,27,710 (opening stock)

--------------------- ----------------------
34,93,350 34,93,350

Working Notes :
1. Calculation of Stock Reserve
Opening Closing
Total 5,32,000 6,72,000
Break Up
75% cloth 3,99,000 5,04,000
25% Other expenses 1,33,000 1,68,000
Stock reserve
132 ACCOUNTING
@ 15% on opening stock 59,850 --
@ 16% on closing stock (refer WN 12) -- 80,640
2. Calculation of Gross Profit %
Opening (given) 0.15 --
Closing

(including dept. trf.) ---- 0.16

QUESTION NO 26 ( NOV 2012 8MARKS)

Department A sells goods to Department B at a Profit of 20% on cost and to
Department C at 15% Profit on cost. Department B sells goods to A and C at a Profit of 10%
and 20% on sales, respectively. Department C charges 15% and 10% Profit on cost to
Department A and B respectively.
Department Managers are entitled to 10 % commission on net Profit subject to
unrealized Profit on Departmental sales being eliminated. Departmental Profits after charging
managers commission, but before adjustment of unrealized Profit are as under:
Department A 36000
Department B 27000
Department C 18000
Stocks lying at different Departments at the end of the year are as under:
Department A Department B Department C
Rs. Rs. Rs.
Transfer from Department A -- 7,200 5,750
Transfer from Department B 19,000 -- 15,000
Transfer from department C 46,00 3,300 --
Find out the correct Departmental Profits after charging managers commission.

ANSWER:COMMISSION=A,B,C=3805,2510,1910
ACCURATE PROFITS=A,B,C=34245,22590,17190
QUESTION NO 27(MAY 2013 4MARKS)
Department A sells goods to Department B at a Profit of 50% on cost and to
Department C at 20% Profit on cost. Department B sells goods to A and C at a Profit of 25%
and 15% on sales, respectively. Department C charges 30% and 40% Profit on cost to
Department A and B respectively.
Stocks lying at different Departments at the end of the year are as under:
Department A Department B Department C
Rs. Rs. Rs.
Transfer from Department A -- 45,000 42,000
Transfer from Department B 40,000 -- 72,000
Transfer from department C 39,000 42,000 --
Find out the correct Departmental Profits after charging managers commission.
ANSWER: STOCK RESERVE=A,B,C=22000,20800,21000
DEPARTMENTAL ACCOUNTS 133
QUESTION NO 28 (MAY2014 8MARKS)
Department P sells goods to Department S at a Profit of 25% on cost and to
Department Q at 15% Profit on cost. Department S sells goods to P and Q at a Profit of 20%
and 30% on sales, respectively. Department Q charges 20% and 10% Profit on cost to
Department P and S respectively.
Department Managers are entitled to 10 % commission on net Profit subject to
unrealized Profit on Departmental sales being eliminated. Departmental Profits after charging
managers commission, but before adjustment of unrealized Profit are as under:
Department P 90000
Department S 60000
Department Q 45000
Stocks lying at different Departments at the end of the year are as under:
Department A Department B Department C
Rs. Rs. Rs.
Transfer from Department P -- 18000 14000
Transfer from Department S 48000 -- 38000
Transfer from department Q 12000 8000 --
Find out the correct Departmental Profits after charging managers commission.

QUESTION 29
M/s Omega is a departmental store having tree departments X,Y and Z. The information
regarding three departments for the year ended 31st March, 2013 are given below :
X Y Z
Rs Rs Rs
Opening Stock 36000 24000 20000
Purchases 132000 88000 44000
Debtors at end 15000 10000 10000
Sales 180000 135000 90000
Closing stock 45000 17500 21000
Value of furniture in each department 20000 20000 10000
Floor space occupied by each department (in sq. ft.) 3000 2500 2000
Number of employees in each Department 25 20 15
Electricity consumed by each department (in units) 300 200 100
The balances of other revenue items in the books for the year are given below:
Amount (Rs)
Carriage inwards 3000
Carriage outwards 2700
Salaries 48000
Advertisement 2700
Discount allowed 2250
Discount received 1800
Rent, Rates and taxes 7500
Depreciation on furniture 1000
Electricity expenses 3000
Labour welfare expenses 2400

You are required to prepare Departmental Trading and Profit and Loss Account for the year
ended 31st March, 2013 after providing provision for Bad Debts at 5%.
134 ACCOUNTING

Solution
In the Books of M/s Omega
Departmental Trading and Profit and Loss Account
for the year ended 31st March, 2013
Particular Deptt. X Deptt. Y Deptt. Z Total Particular Deptt. X Deptt. Y Deptt. Z Total

Rs Rs Rs Rs Rs Rs Rs Rs

To Stock 36,000 24000 20000 80000 By Sales 180000 135000 90000 405000
To Purchase 132000 88000 44000 264000 By Stock 45000 17500 21000 83500
To Carriage Inwards 1500 1000 500 3000
To Gross Profit c/d 55500 39500 46500 141500 225000 152500 11100 488500
2,25,000 152500 111000 488500 By Gross Profit b/d 55500 39500 46500 141500
To Carriage Outwards 1200 900 600 2700 By Discount received
To Electricity 1500 1000 500 3000 900 600 300 1800
To Salaries 20000 16000 12000 48000
To Advertisement 1,200 900 600 2700
To Discount allowed 1000 750 500 2250
To Rent, Rates and Taxes 3000 2500 2000 7500
To Depreciation 400 400 200 1000
To Provision for Bad 750 500 500 1750
Debts
To Labour welfare expenses 1,000 800 600 2400
To Net Profit
26350 16350 29300 72000
56400 40100 46800 143300
56400 40100 46800 143300
DEPARTMENTAL ACCOUNTS 135

Working Note:
Basis of allocation of expenses

Carriage inwards Purchases (3:2:1)

Carriage outwards Turnover (4:3:2)
Salaries No. of Employees (5:4:3)
Advertisement Turnover (4:3:2)
Discount allowed Turnover (4:3:2)
Discount received Purchases (3:2:1)
Rent, Rates and Taxes Floor Space occupied (6:5:4)
Depreciation on furniture Value of furniture (2:2:1)
Labor welfare expenses No. of Employees (5:4:3)
Electricity expense Units consumed (3:2:1)
Debtors balances (3:2:2)
Provision for bad debts

QUESTION 30
M/s X has two departments, A and B. From the following particulars prepare the consolidated
Trading Account and Departmental Trading Account for the year ending 31st December, 2012:

A B
Rs Rs

Opening Stock (at cost) 20,000 12,000

Purchases 92,000 68,000
Sales 1,40,000 1,12,000
Wages 12000 8000
Carriage 2000 2000
Closing Stock:
i,) Purchased goods 4500 6000
(ii) Finished goods 24000 14000
Purchased goods transferred.
by B to A 10000
by A to B 8000
Return of finished goods: 35000 40000
by A to B 1000
by B to A 7000

You are informed that purchased goods have been transferred mutually at their respective
departmental purchase cost and finished goods at departmental market price and that 20% of the
finished stock (closing) at each department represented finished goods received from the other
department.
 136 ACCOUNTING
Solution
M/s X
Departmental Trading A/c for the year ending 31st December, 2012
Deptt. A Deptt. B. Deptt. A Deptt. B.
Rs. Rs Rs. Rs
To Stock 20,000 12,000 By Sales 1,40,000 1,12,000
92,000 68,000 By Purchased 8,000 10,000
To Purchases Goods
transferred

To wages 12,00 8,000 By Finished goods 35,000 40,000

transferred
To Carriage 2,000 2,000 Return of finished 10,000 7,000
To Purchased Goods
Goods transferred 10,000 8,000 By Closing Stock :
To F.G. transferred 40,000 35,000 Purchased Goods 4,500 6,000
To Ret. of finished 7,000 10,000 Finished Goods 24,000 14,000
Goods
To Gross profit c/d 38,500 46,000
To
2,21,500 1,89,00 2,21,50 1,89,000
0 0

Consolidated Trading Account for the year ending 31st December, 2012
To Opening stock 32,000 By Sales 2,52,000
To Purchase 1,60,000
To Wages 20,000 By Closing Stock:
4,000 10,500
To Carriage
2,196 Purchased Goods
To Stock Reserve 82,304 38,000
To Gross Profit c/d Finished Goods

3,00,500 3,00,500

Working note :
Deptt. A Deptt. B.
Closing Stock out of transfer 4,800 2,800
sale 1,40,000 1,12,000
Add: Transfer 35,000 40,000
1,75,000 1,52,000
Less: Returns (7,000) (10,000)
Net Sales Plus Transfer 1,68,000 1,42,000

Rate of Gross profit x 100 = 32.394%

Unrealised Proift 4,800 x 32.394% = 1,555 2,800 x 22.916% = 641

DEPARTMENTAL ACCOUNTS 137
QUESTION 31 (BEST QUESTION ON DEPARTMENTAL COVERING ALL CONCEPTS)
M/s Alpha, has a factory with two manufacturing department 'X' and 'Y' part of the
output of department X is transferred to department Y for further processing and the balance is
directly transferred to selling department. The entire production of department Y is directly
transferred to the selling department. Inter-department stock transfers are made as follows:
X department to Y department at 33-1/3% over department cost.
X department to selling department at 50% over department cost.
Y department to selling department at 25% over departmental cost.
The following information is given for the year ending 31st March, 2013.
Department X Department Y Selling Department
Units Rs Units Rs Units Rs
Opening stock
Finished Goods 60 60,000 20 40000 50 1,28,000
Raw materials - - - - - -
Raw material - 1,82,000 - 20,000 - -
consumed
Labour charges - 70,000 - 32,000 - -
Sales - - - - 120 4,80,00
Closing stock -
Finished 40 - 50 - 60 -
Out of the total transfer by X department 30 units were transferred to selling department, while
the remaining to department Y. per unit material and labour consumption of X department on
production to be transferred directly to the selling department is 300 per cent of the labour and
material consumption on units transferred to Y department. General Administration expenses
Rs 1,80,000.
Prepare Department Profit and Loss Account and General Profit and Loss Account.
QUESTION 32 (MARK UP ACCOUNTS)
Gram Udyog, a retail store, has two department, 'Khadi and Silks' for each of which
stock account and memorandum 'mark up' accounts are kept. All the goods supplied to each
department are debited to the stock account at cost plus a 'Mark-up', which together make-up
the selling price of the goods and in the account of the sale proceeds of the goods are
credited. The amount of 'mark-up' is credited to the departmental mark up account. if the
selling price of any goods is reduced below its normal selling price, the reduction 'marked
down' is adjusted both in the stock account and the departmental 'Mark up' account. The rate
of 'Mark-up' for Khadi Department is 33-1/3% of the cost and for Silks Department it is 50% of
the cost.
The following figures have been taken from the books for the year ended December 31, 2012:
(1) The stock of Khadi on January 1, 2012 included goods the selling price of which had
been marked down by Rs 1,260. These goods were sold during the year at the reduced
prices.
(2) Certain stock of the value of Rs 6,900 purchased for the Khadi Department were
later in the year transferred to the Silks department and sold for Rs 10,350.
As a result though cost of the goods is included in the Khadi Department the sale proceeds
have been credited to the silks Department.
138 ACCOUNTING
(3) During the year 2012 to promote sale the goods were marked down as follow :
Cost Marked down
Khadi 5,600 360
Silk 10,000 2,000
Al the goods marked down, were sold except Silks of the value of Rs 5,000 marked down by
Rs 1,000.
(4) At the time of stock-taking on December 31, 2012 it was discovered that Khadi cloth of
the cost of Rs 390 was missing and it was decided that the amount be written off.
You are required to prepare for both the departments for the year 2012.
(a) The Memorandum stock Account ; and
(b) The Memorandum mark up Account
Solution
Silk Stock Account
2012 Rs 2012 Rs
To balance b/d By Sales A/c 1,25,000
To Cost 18,600 By Mark-up A/c 2,000
Mark-up 9,300 27,900 By Balance c/d 51,350
To Purchase 93,400
Mark-up 46,700 1,40,100
To Khadi A/c 6,900
Mark-up 3,450 10,350
1,78,350 1,78,3500

Silk Mark-up Account

2012 Rs 2012 Rs
To stock A/c 2,000 By Balance 9,300
To Profit & Loss A/c 41,000 b/d 46,700
To balance c/d [ 1/3 of 52, 350) - 1000] 16,450 By Stock A/c 3,450
59,450 By Stock A/c 59450

Working Notes:
Verification of Profit
Sale Rs

Add: Mark down in goods sold Rs 1,25,000

1,000
Gross Profit 1/3 1,26,000
Less: Mark down 42,000
Gross profit as per books ( 1,000)
41,000
DEPARTMENTAL ACCOUNTS 139
Khadi stock Account
2012 Rs Rs 2012 Rs Rs
To Balance b/d By Sales 95,600
( 10, 500+2,240) Silks Deptt.
To Purchase 12,740 6900 9,200
75,900 1,01,200 Mark-up A/c
Markup 2300
25,300 By Loss of 520
390 360
stock A/c 8260
1,13,940 Mark-up A/c 1,13,940
130
By Mark-u/s A/c
By Balance c/d

Khadi Mark-up Account

2012 Rs 2012 Rs
To Stock A/c (transfer) 2,3000 By Balance b/d
To Stock A/c (Re-sale) 130 ( 3,500-1,260) 2240
To Stock A/c (mark down) 360 By Stock A/c 25300
22,685
To Profit & Loss A/c
2,065
To Balance ( 1/4 of Rs 27,540 27,540
8,260)

Working Note:

Rs
Verification of Profit 95,600
Sales as per books 1,620
Add: Mark-down ( 1260+360) 97, 220
Gross profit on fixed selling price @ 25@ on Rs 97, 220 24,305
(1,620)
22,685
140 ACCOUNTING
CONCEPT 15: LATEST EXAMINATION PROBLEMS

QUESTION NO 33 (CA NOV.2016) (8 MARKS)

M/s. Shyam Udyog, a retail store, has two departments, Department X and Department
Y for each of which stock account and memorandum ‘mark-up’ account are kept. All the goods
supplied to each department are debited to the stock account at cost plus a ‘mark-up’, which
together make up the selling price of the goods and in the account the sale proceeds of the
goods are credited. The amount of ‘mark-up’ is credited to the Departmental Mark-up Account.
If the selling price of any goods is reduced below its normal selling price, the reduction ‘marked
down’ is adjusted both in the Stock Account and the Departmental Mark-up Account. The rate
of ‘Markup’ for X Department is 33-1/3% of the cost and for Y Department it is 50% of the cost.

The following figures have been taken from the books for the year ended March, 2016:
Particulars X Y
Deptt. Amount Deptt. Amount
(Rs.) (Rs.)
st
Stock as on April 1 at cost 3,15,000 5,58,000
Purchases 22,77,000 28,02,000
Sales 28,68,000 37,50,000

(1) The stock of Department X on April 1, 2015 included goods the selling price of which
had been marked down by Rs.37,800. These goods were sold during the year at the reduced
prices.

(2) Certain stock of the value of Rs.2,07,000 purchased from the Department X was later
in the year transferred to the Department Y and sold for Rs. 3,10,5000. As a result though cost
of the goods is included in the Department X the sale proceeds have been credited to the
Department Y.

(3) During the year 2015-16 to promote the goods, they were marked down as follows:

Cost Rs. Marked down (Rs.)

Department X 1,68,000 10800
Department Y 3,00,000 60,000
All the goods marked down, were sold except of Department Y of the value of Rs.1,50,000
marked down by Rs. 30,000.
(4) At the time of stock taking on 31st March,2016 it was discovered that cloth of
Department X of the cost of Rs. 11,700 was missing and it was decided that the amount be
written off.
You are required to prepare for both the departments for the year ended 31st March,
2016:
(a) The Memorandum Stock Account; and
(b) The Memorandum Mark-up Account.

You are requested to prepare Branch Account in the Head Office books and also prepare
Chena Swami’s Trading and Profit & Loss Account (excluding branch transactions) for the year
ended 31st March 2016.
DEPARTMENTAL ACCOUNTS 141
ANSWER
(a) Department X Memorandum Stock Account.

2015- Rs. Rs. 2015- Rs. Rs.

16 16
To Balance b/d (3,15,000 By Sales X 28,68,000
+ 105,000 – 37,800) 3,82,200 Deptt. 2,07,000
Mark-up A/c. 69,000 2,76,000
To Purchases 22,77,000 By Loss of
Mark up 7,59,000 30,36,000 Stock A/c. 11,700
Mark-up A/c. 3,900 15,600
By Mark up A/c. 10,800
By Balance c/d. 2,47,800
34,18,200 34,18,200
Department X Memorandum Mark-up Account
2015-16 Rs. 2015-16 Rs.
To Stock A/c.(Transfer) 69,000 By Balance b/d
To Stock A/c. (re-sale) 3,900
To Stock A/c. (markdown) 10,800 (1,05,000 – 37,800) 67,200
To Profit & Loss A/c. 6,80,550 By Stock A/c. 7,59,000
To Balance (1/4 of Rs.2,47,800) 61,950
8,26,200 8,26,200
Working Note:
Verification of Profit Rs.
Sales as per books 28,68,000
Add: Mark-down (37,800 + 10,800) 48,600
___________
29,16,600
___________
Gross Profit on fixed selling price @ 25% on Rs. 29,16,600 7,29,150

Less: Mark down (48,600)

____________
6,80,550
____________
Department Y Memorandum Stock Account
2015-16 Rs. 2015-16 Rs.
To Balance b/d By Sales A/c. 37,50,000
To cost 5,58,000 By Mark-up A/c. 60,000
Mark up 2,79,000 8,37,000 By Balance c/d 15,40,500
28,02,000
Mark up 14,01,000 42,03,000

To x Deptt. A/c. 2,07,000

Mark-up 1,03,500 3,10,500
53,50,500 53,50,500
142 ACCOUNTING
Department Y Memorandum Mark up Account

2015-16 Rs. 2015-16 Rs.

To Stock A/c. 60,000 By Balance b/d 2,79,000

To Profit & Loss A/c. 12,30,000 By Stock A/c. 14,01,000

(28,02,000 x 50%)
To Balance c/d: 4,93,500
(1/3 (15,40,500+30,000)- By Stock A/c. 1,03,500
Rs.30,000)
17,83,500 17,83,500
Working Notes:
Verification of Profit Rs.
Sales 37,50,000
Add: Mark-down in goods sold 30,000
___________
37,80,000
___________
Gross Profit 1/3 12,60,000
Less: Mark down (30,000)
____________
Gross Profit as per books 12,30,000
____________

QUESTION NO 34 (CA MAY 2016) (8MARKS)

There is transfer/sale among the three departments as below:

Department X sells goods to Department Y at a profit of 25% on cost and to Department Z

at20% profit on cost.

Department Y sells goods at a x and Z at a profit of 15% and 20% on sales respectively.
Department Z charges 20% and 25% profit on cost to Department x and Y respectively.

Department Managers are entitled to 10% commission on net profit subject to unrealized profit
on departmental sales being eliminated.
Departmental profits after charging Managers’ commission, but before adjustment of
unrealized profit are as under:

Department X 1,80,000
Department Y 1,35,000
Department Z 90,000
 DEPARTMENTAL ACCOUNTS 143
Stocks lying at different Departments at the end of the year are as under:

Dept. X Dept. Y Dept. Z

Transfer from Department X -- 75,000 57,000
Transfer from Department Y 70,000 - 60,000
Transfer from Department Z 30,000 25,000 --

Find out the correct departmental profits after charging Manager’s commission.

ANSWER
(a) Calculation of Correct Profit
Department X Department Y Department Z
Rs. Rs. Rs.
Profit after charging 1,80,000 1,35,000 90,000
managers’ commission
Add back: Managers’ 20,000 15,000 10,000
commission (1/9)
2,00,000 1,50,000 1,00,000
Less: Unrealized profit on (24,500) (22,500) (10,000)
stock (W.N.)
Profit before Manager’s 1,75,500 1,27,500 90,000
commission
Less: Commission for (17,550) (12,750) (9,000)
Department Manager @ 10%
Departmental Profits after 1,57,950 1,14,750 81,000
manager’s commissioner

Working Note:
Stock lying with
Dept. X Dept. Y Dept.Z Total
Unrealized
Profit of:

Department X 1/5x75,000=15,000 20/120x57,000=9,500 24,500

Department Y 0.15x70,000=10,500 0.20x60,000=12,000 22,500

Department Z 20/120x30,000=5,000 25/125x25,000=5,000 10,000

144 ACCOUNTING
QUESTION NO 35 (CA NOV.2015) (4MARKS)
Sona Ltd. has three departments – P, Q and R. From the following particulars given
below, compute:

(i) The departmental results:

(ii) The value of stock as on 31st December, 2014:

Particulars P Q R
Stock as on 01.01.2014 30,000 45,000 15,000
Purchases 1,60,000 1,30,000 60,000
Actual Sales 1,88,000 1,66,000 93,000
Gross Profit on normal sales price 25% 33% 40%

During the year 2014 some items were sold at discount and these discounts were reflected in
the above sales value. The details are given below:

Particulars P Q R
Sales at normal price 15,000 8,000 6,000
Sales at actual price 11,000 6,000 4,000

SOLUTION
Calculation of Departmental Results:

P (Rs.) Q (Rs.) R (Rs.)

Actual Sales 1,88,000 1,66,000 93,000
Add: Discount (Refer W.N.) 4,000 2,000 2,000
Normal Sale 1,92,000 1,68,000 95,000
Gross Profit % on normal sales 25% 33.33% 40%
Normal gross profit 48,000 56,000 38,000
Less: Discount (4,000) (2,000) (2,000)
Actual gross Profit 44,000 54,000 36,000

Computation of value of stock as on 31st Dec. 2014

.

Departments P Q R
Stock (on 1.1.2014) 30,000 45,000 15,000
Add: Purchase 1,60,000 1,30,000 60,000
1,90,000 1,75,000 75,000
Add: Actual gross Profit 44,000 54,000 36,000
2,34,000 2,29,000 1,11,000
Less: Actual Sales (1,88,000) (1,66,000) (93,000)
Closing Stock as on 31.12.2014 (bal.fig) 46,000 63,000 18,000

Working Note:
Calculation of discount on sales

Departments P Q R
Sales at normal price 15,000 8,000 6,000
Less: Sales at actual price (11,000) (6,000) (4,000)
4,000 2,000 2,000
DEPARTMENTAL ACCOUNTS 145
QUESTION NO 36 (CA MAY 2015) (8MARKS)
M/s. Suman Enterprises has two Departments, Finished Leather and Shoes. Shoes are
made by the Firm itself out of leather supplied by Leather Department at its usual selling price.
From the following figures, prepare Departmental Trading and Profit and Loss Account for the
year ended 31st March, 2014:

Finished Leather Shoes

Department (Rs.) Department
(Rs.)
Opening Stock (As on 01.04.2013) 30,20,000 4,30,000
Purchases 1,50,00,000 2,60,000
Sales 1,80,00,000 45,20,000
Transfer to Shoes Department 30,00,000 -
Manufacturing Expenses - 5,00,000
Selling Expenses 1,50,000 60,000
Rent and Warehousing 5,00,000 3,00,000
Stock on 31.03.2014 12,20,000 5,00,000
The following further information are available for necessary consideration:

(i) The stock in Shoes Department may be considered as consisting of 75% of Leather
and 25% of other expenses.
(ii) The Finished Leather Department earned a Gross Profit @ 15% in 2012-13.
(iii) General expenses of the business as a whole amount to Rs. 8,50,000.

SOLUTION

Departmental Trading and Profit and Loss Account for the year ended
31st March, 2014

Particulars Finished Shoes Total Particulars Finished Shoes Total

Leather (Rs.) (Rs.) Leather (Rs.) (Rs.)
(Rs.) (Rs.)
To Opening 30,20,000 4,30,000 34,50,000 By Sales 1,80,00,000 45,20,000 2,25,20,000
Stock
To 1,50,00,000 2,60,000 1,52,60,000 By Shoes 30,00,000 - 30,00,000
Purchases Deptt.
Transfer
To Transfer 30,00,000 30,00,000 By 12,20,000 5,00,000 17,20,000
from Leather Closing
Deptt. Stock
To Mfd. Exp. 5,00,000 5,00,000
To Gross 42,00,000 8,30,000 50,30,000
Profit c/d
2,22,20,000 50,20,000 2,72,40,000 2,22,20,000 50,20,000 2,72,40,000
To Selling 1,50,000 60,000 2,10,000 By Gross 42,00,000 8,30,000 50,30,000
Expenses Profit b/d
To Rent & 5,00,000 3,00,000 8,00,000
warehousing
To Net Profit 35,50,000 4,70,000 40,20,000
42,00,000 8,30,000 50,30,000 42,00,000 8,30,000 50,30,000
146 ACCOUNTING
General Profit and Loss Account
Particulars Amount (Rs.) Particulars Amount (Rs.)
To General Expenses 8,50,000 By Net Profit 40,20,000
To Unrealized Profit 26,625
(Refer W.N.)
To General net Profit 31,43,375
(Bal. fig.)
40,20,000 40,20,000
Working Note:
Calculation of Stock Reserve
Rent of Gross Profit of Finished leather Department, for the year 2013-14
= Gross Profit x 100 = (42,00,000)/(1,80,00,000 + 30,00,000) x 100 = 20%
Total Sales
Closing Stock of Finished leather in Shoes Department = 75%.
i.e. Rs. 5,00,000 x 75% = Rs. 3,75,000
Stock Reserve required for unrealized profit @ 20% on closing stock.
Rs.3,75,000 x 20% = Rs. 75,000
Stock reserve for unrealized profit included in opening stock of Shoes Dept. @ 15% i.e.
(Res.4,30,000 x 75% x 15%) = Rs. 48,375
Additional Stock Reserve required during the year = Rs. 75,000 – Rs. 468,375 = Rs.26,625
QUESTION NO 37 (CA NOV 2014) (8 MARKS)
Mega Ltd. has two departments, A and B. From the following particulars, prepare
departmental Trading A/c. and General Profit & Loss Account for the year ended 31st March,
2014.

Particulars Amount (Rs.)

Department A Department B
Opening Stock as on 01.04.2013 (at cost) 70,000 54,000
Purchases 3,92,000 2,98,000
Carriage Inward 6,000 9,000
Wages 54,000 36,000
Sales 5,72,000 4,60,000
Purchased Goods Transferred
By Department B to A 50,000
By Department A to B 36,000
Finished Goods Transferred
By Department B to A 1,50,000
By Department A to B 1,75,000
Return of Finished Goods
By Department B to A 45,000
By Department A to B 32,000
Closing Stock
Purchased Goods 24,000 30,000
Finished Goods 1,02,000 62,000
DEPARTMENTAL ACCOUNTS 147
Purchased goods have been transferred mutually at their respective departmental purchase
cost and finished goods at departmental market price and that 30% of the closing finished
stock with each department represents finished goods received from the other department.

SOLUTION
Department Trading Account in the books of Mega Ltd.
for the year ended 31st March, 2014
Particulars Department Department Particulars Department Department
A B A B
To Opening 70,000 54,000 By Sales 5,72,000 4,60,000
Stock By Transfer:
To Purchase 3,92,000 2,98,000 Purchased Good 36,000 50,000
To Carriage 6,000 9,000 Finished Goods 1,30,000 1,18,000
Inward By Closing stock:
To Wages 54,000 36,000 Purchased 24,000 30,000
To Transfers: Goods
Purchased 50,000 36,000 Finished* Goods 1,02,000 62,000
Goods
Finished** 1,18,000 1,30,000
Goods
To Gross 1,74,000 1,57,000
Profit c/d
8,64,000 7,20,000 8,64,000 7,20,000

* Finished goods from other department included inclosing stock.

Particulars Department A (Rs.) Department B (Rs.)

Stock of Finished Goods 1,02,000 62,000
Stock related to other 30,600 18,600
department
(30% of Finished Goods)

** Net transfer of Finished goods by

Department A to B = Rs. (1,75,000 – 45,000) = Rs. 1,30,000

Department B to A = Rs. (1,50,000 – 32,000)= Rs. 1,18,000
Profit and Loss A/c.
For the year ended 31st March, 2014

Particulars Amount Particulars Amount (Rs.)

(Rs.)
To Provision for unrealized By Gross Profit b/d:
Profit including in closing Department A 1,74,000
stock: Department B 1,57,000
Department A (W.N.2) 8,311
Department B (W.N.2) 4,611
To Net Profit 3,18,078
3,31,000 3,31,000
148 ACCOUNTING
Working Notes
1. Calculation of ratio of gross profit margin on sales.

Particulars Department A (Rs.) Department B (Rs.)

Sales 5,72,000 4,60,000
Add: Transfer of Finished 1,75,000 1,50,000
Goods _________ ________
7,47,000 6,10,000

Less: Return of Finished Goods (45,000) (32,000)

_________ _________
7,02,000 5,78,000
_________ _________
Gross Profit
1,74,000 1,57,000
Gross Profit margin = 1,74,000 x 100 = 24.79% 1,57,000 x 100 = 27.16%
7,02,000 5,78,000

2. Unrealized profit included in the closing stock

Department A = 27.16% of Rs. 30,600 (30% of Stock of Finished Goods Rs. 1,02,000) = Rs.
8311.00

Department B = 24.79% of Rs. 18,600 (30% of Stock of Finished Goods Rs. 62,000) =
Rs. 4611.00

QUESTION NO 38(CA MAY 2014) (8MARKS)

Department P sells goods to Department S at a profit of 25% on cost and to
Department Q at a profit of 15% on cost. Department S sells goods to P and Q at a profit of
20% and 30% on sales respectively. Department Q sells goods to P and S at 20% and 10%
profit on cost respectively.
Departmental Managers are entitled to10% commission on net profit subject to unrealized
profit on departmental sals being eliminated. Departmental profits after charging Manager’s
commission, but before adjustment of unrealized profits are as below:

Rs.
Department P 90,000
Department S 60,000
Department Q 45,000
Stock lying at different Departments at the end of the year are as below:

Figures in rs.
DEPARTMENS
p S Q
Transfer from P - 18,000 14,000
Transfer from S 48,000 - 38,000
Transfer from Q 12,000 8,000 --
Find out correct Departmental Profits after charging Managers’ Commission.
DEPARTMENTAL ACCOUNTS 149
SOLUTION
Calculation of correct Departmental Profits
Department P Department S Department Q
(Rs.) (Rs.) (Rs.)
Profit after charging Manager’s 90,000 60,000 45,000
Commission
Add: Manager’s Commission (1/9) 10,000 6,667 5,000
1,00,000 66,667 50,000
Less: Unrealized Profit on Stock (5,426) (21,000) (2,727)
(WN)
Profit Before Manager’s 94,574 45,667 47,273
Commission

Less: Manager’s Commission 10% (9,457) (4,567) (4,727)

Correct Profit after Manager’s 85,117 41,100 42,546
Commission

Working Notes:

Department P Department S Department Q Total

(Rs.) (Rs.) (Rs.) (Rs.)
Unrealized Profit of:

Department P 25/125x18,000 15/115x14,000 5,426

= 3,600 = 1,826

Department S 20/100x48,000 - 30x100x38,000 21,000

=9,600 =11,400

Department Q 20/120x12,000 10/110x8,000 2,727

=2,000 =727

QUESTION NO 39 (CA INTER MAY 2017)(8 MARKS)

(a) The following balances were extracted from the books of Beta. You are required to
prepare Departmental Trading Account and General Profit & Loss Account for the
year ended 31st December, 2016.

Particulars Deptt. A (Rs.) Deptt. B (Rs.)

Opening Stock 3,00,000 2,40,000
Purchases 39,00,000 54,60,000
Sales 60,00,000 90,00,000

General expenses incurred for both the Departments were Rs. 7,50,000 and you are also
supplied with the following information:

(ii) Closing Stock of Department A Rs. 6,00,000 including goods from Department B for
Rs. 1,20,000 at cost to Department A.
150 ACCOUNTING
(iii) Closing Stock of Department B Rs. 12,00,000 including goods for Department A for
Rs. 1,80,000 at cost to Department B.

(iv) Opening stock of Department A and Department B include goods of the value of Rs.
60,000 and Rs.90,000 taken from Department B and Department A respectively at
cost to transferee departments.

(v) The gross profit is uniform from year to year.

BRANCH ACCOUNTS 151

BRANCH ACCOUNTS
PART -1
DEPENDENT BRANCHES
QUESTION NO 1
Buckingham Bros. Bombay have a branch at Nagpur. They send goods at cost to their
branch at Nagpur. However, direct purchases are also made by the branch for which payments
are made at head office. All the daily collections are transferred from the branch to the Head
Office.
From the following, prepare Nagpur branch account in the books of head office:
Opening balances:- 01-01-1998
Imprest Cash 2,000
Sundry debtors 25,000
Stock of transferred goods from Head office 24,000
Stock of direct purchases 16,000
Cash sales 45,000
Credit sales 1,30,000
Direct purchases 45,000
Returns from customers 3,000
Goods sent to branch from H.O 60,000
Transfer from H.O for Petty Cash expenses 4,000
Bad debts 1,000
Discount to customers 2,000
Remittances to H.O
(Received by H.O) 1,65,000
Remittances to H.O
(Not received by H.O) 5,000
Branch Exp directly paid by H.O 30,000
Closing balances: on 31.12.1998
Stock: Direct purchases 10,000
Transfer from H.O 15,000
Debtors ?
Imprest cash ?
QUESTION NO 2
The Bombay trading company invoiced goods to its Delhi branch at cost. Head office
paid all the branch expenses from its bank account except petty cash expenses, which were
met by the Branch. All the cash collected by the branch was banked on the same day to the
credit of the Head office. The following is a summary of the transactions entered into at the
branch during the year ended December 31, 1998.
Stock January 1 7,000
Debtors January 1 12,600
Petty cash January 1 200
Goods sent from H.O 26,000
Goods returned to H.O 1,000
Cash sales 17,500
Credit sales 28,400
152 ACCOUNTING
Allowances to customers 200
Discount to customers 1,400
Bad debts 600
Goods returned by customers 500
Salaries and wages 6,200
Rent and rates 1,200
Sundry expenses 800
Cash received from sundry debtors 28,500
Stock at end of year 6,500
Debtors at the end of year 9,800
Petty cash at end of year 100
Prepare: (a) Branch account (debtors method), (b) Memorandum Branch Trading and
Profit and Loss account to prove the results as disclosed by the branch account and (c) Branch
Stock account, branch Profit and Loss account, Branch debtors and Branch Expenses account
by adopting the stock and debtors Method.

QUESTION NO 3
Harrison Limited, Madras has a branch at New Delhi to which goods are sent @ 20%
above cost. The branch makes both cash and credit sales. Branch expenses are met partly
from H.O and partly by the branch. The statement of expenses incurred by the branch every
month is sent to head office for recording.
Following further details are given for the year ended 31st December 1998.
Cost of goods sent to branch at cost 2,00,000
Goods received by branch till 31.12.1998 at invoice price 2,20,000
Credit sales for the year @ invoice price 1,65,000
Cash sales for the year @ invoice price 59,000
Cash remitted to head office 2,22,500
Expenses paid by H.O 12,000
Bad debts written off 750
Balances as on 1.1.1998
Stock (at cost) 25,000
Debtors 32,750
Cash in hand 5,000
Balance as on 31.12.1998
Stock (at invoice price) 28,000
Debtors 26,000
Cash in hand 2,500
Show the necessary ledger accounts in the books of the head office and determine the
profit and loss of the Branch for the year ended 31st December 1998.

QUESTION NO 4
Sell Well Limited who carried on a retail business opened a branch X on January 1st,
1999 where all sales were on credit basis. All goods required by the branch were supplied from
the Head Office and were invoiced to the branch at 10% above cost. The following were the
transactions:-
Jan’99 Feb’99 March’99
Goods sent to Branch (purchase price) 40,000 50,000 60,000
Sales as shown by the branch monthly 38,000 42,000 55,000
Cash received from debtors and remitted 20,000 51,000 35,000
Returns to H.O (invoice price to Branch) 1,200 600 2,400
BRANCH ACCOUNTS 153
The stock of goods held by the branch on March 31, 1999 amounted to Rs.53,400 at
invoice to branch.
Record these transactions in the Head Office books, showing balances as on 31st
March 1999 and the branch gross profit for the three months ended on that date.
All working should form part of your solution.

QUESTION NO 5
Hindustan Industries Bombay has a branch in Cochin to which office goods are invoiced
at cost plus 25%. The branch sells both for cash and on credit, Branch expenses are paid
direct from head office and the Branch has to remit all cash received into the Head office Bank
account.
From the following details, relating to calendar year 1998, prepare the accounts in the
Head office ledger and ascertain the Branch profit. Branch does not maintain any books of
account but sends weekly returns to the head office.
Goods received from Head office at invoice price 6,00,000
Returns to Head office at invoice price 12,000
st
Stock at Cochin as on 1 Jan, 1998 60,000
Sales in the year-cash 2,00,000
Credit 3,60,000
st
Sundry debtors at cochin as on 1 January 1998 72,000
Cash received from debtors 3,20,000
Discount allowed to debtors 6,000
Bad debts in the year 4,000
Sales returns at cochin branch 8,000
Rent, rates, Taxes at Branch 18,000
Salaries, wages, Bonus at Branch 60,000
Office expenses 6,000
Stock at branch on 31st December 1998 at invoice price 1,20,000

QUESTION NO 6 (NOV 1989)

X Limited Bombay started on 1st January 1988 has two branches at Kanpur and
Lucknow. All goods sold at the Branches are received from the Head office invoiced at cost
plus 25 per cent. All expenses relating to branches are paid by the Head office. All cash
collections are remitted daily to Head-office by the Branches. The following particulars relating
to the year ended 31st December, 1988 have been extracted from the weekly statements sent
by the branches:
Kanpur Lucknow
Rs. Rs.
Credit sales 1,25,200 1,10,000
Cash sales 78,600 85,200
Sales returns 2,300 1,200
Sundry debtors 34,500 23,600
Rent and rates 3,200 4,500
Bad debts 6,000
Salaries 16,000 18,000
General expenses 2,600 1,500
Goods received from H.O 1,50,000 1,25,000
Advertisement 7,500 5,200
st
Stock on 31 December 1988 45,000 35,000
154 ACCOUNTING
You are required to prepare the Branch accounts as they would appear in the books of
the Head office.

QUESTION NO 7 (NOV 1988)

Bombay Traders Limited sends goods its Madras Branch at cost plus 25 per cent. The
following particulars are available in respect of the Branch for the year ended 31st March, 1988.
Opening stock at Branch at cost to Branch 80,000
Goods sent to Branch at invoice price 12,00,000
Loss in Transit at invoice price 15,000
Pilferage at invoice price 6,000
Sales 12,19,000
Expenses 60,000
Closing stock at Branch at cost to Branch 40,000
Recovered from insurance company against loss in transit 10,000
Show ledger accounts in the head office books for:-
(a) Branch stock account
(b) Goods sent to branch account
(c) Branch adjustment account
(d) Branch Profit and Loss account

QUESTION NO 8
New Textiles Limited operates a number of retails shops to which goods are invoiced at
wholesale price, which is cost plus 20%. Shops sell the goods at the list price, which is
wholesale price plus 10%. From the following particulars ascertain the profit or loss for 1997 at
shop no: 143:
Stock at shop on January 1 1997 15,000
Goods invoiced to shop during 1997 1,40,000
Sale at the shop during the year 1,54,770
Goods destroyed by accident (retail value) 660
Expenses at the shop 7,200

QUESTION NO 9
Arnold Limited Delhi trades in Ghee and Oil. It has a branch at Lucknow. The company
dispatches 25 tins of Oil @ Rs.1,000 per tin and 15 tins of Ghee @ Rs.1,500 per tin on 1st of
every month. The branch incurs some expenditure, which is met out of its collections this is in
addition to expenditure directly paid by Head Office.
Following are the other details:
Delhi Lucknow
Rs. Rs.
Purchases Ghee 14,75,000
Oil 29,32,000
Direct expenses 3,83,275
Expenses paid by H.O. 14,250
Sales Ghee 18,46,350 3,42,750
Oil 27,41,250 3,15,730
Collection during the year (including cash 6,47,330
sales)
Remittance by Branch to Head Office 6,13,250
(DELHI)
Balance as on: 1-1-98 31-12-98
BRANCH ACCOUNTS 155
Stock: Ghee 1,50,000 3,12,500
Oil 3,50,000 4,17,250
Debtors 7,32,750
Cash on hand 70,520 55,250
Furniture and fixtures 21,500 19,350
Plant and machinery 3,07,250 7,73,500
(LUCKNOW)
Balance as on: 1-1-98 31-12-98
Stock: Ghee 17,000 13,250
Oil 27,000 44,750
Debtors 75,750 ---
Cash on hand 7,540 12,350
Furniture and fixtures 6,250 5,625
Plant and machinery --- ---
Addition to plant and machinery on 1-1-98 Rs.6,02,750.
Rate of depreciation: Furniture/fittings @ 10% and Plant/machinery @ 15% (already adjusted
in the above figures).
The branch manager is entitled to 10% commission after charging such commission
whereas, the general manager is entitled to 10% commission on overall company profits after
charging such commission. General manager is also entitled to a salary of Rs.2000 p.m.
General expense incurred by the Head Office Rs.24,000.
Prepare the branch account in the head office books and also prepare the company’s
Trading and Profit and Loss account (excluding branch transactions).

QUESTION NO 10 (NOV 1997)

T of Calcutta has a branch at Dibrugarh. The branch does not maintain separate books
of accounts. The branch has the following assets and liabilities on 31st August 1997 and 30th
September 1997:
31st August 1997 30th September 1997
Stock of tea 1,80,000 1,50,000
Advance to suppliers 5,00,000 4,50,000
Bank balance 75,000 1,00,000
Prepaid expenses 10,000 12,000
Outstanding expenses 13,000 11,000
Creditors for purchases 3,00,000 to be ascertained
During the month, Dibrugarh branch:
(a) Received by electronic mail transfer Rs.10,00,000 from Calcutta head office
(b) Purchased tea worth Rs.12,00,000
(c) Sent tea costing Rs.12,30,000 to Calcutta freight of Rs.80,000 being payable at the
destination by the receiver
(d) Spent Rs.25,000 on office expenses
(e) Paid Rs.3,00,000 as advance to suppliers
(f) Paid Rs.6,50,000 to suppliers in settlement of outstanding dues.
In addition, T informs you that the Calcutta office had directly paid Rs.3,50,000 to Dibrugarh
suppliers by cheques drawn on bank accounts in Calcutta during the month.
T informs you that for the purpose of accounting Dibrugarh branch is not treated as an
outsider. He wants you to write the detailed accounts relating to the transactions of the
Dibrugarh branch as would appear in the books of Calcutta head office.
156 ACCOUNTING
QUESTION NO 11 (MAY 2001)
Widespread ltd. invoices goods to its branch at cost plus 20 %. The branch sells goods
for cash as well as on credit. The branch meets its expenses out of cash collected from its
debtors and cash sales and remits the balance of cash to head office after withholding
Rs.10000 necessary for meeting immediate requirements of cash. On 31.3.2000 the assets at
the branch were as follows:

Rs.(‘000)
Cash in hand 10
Trade debtors 384
Stock at Invoice Price 1080
Furniture and Fittings 500
During the accounting year ended 31.3.2001 the invoice price of goods dispatched by
the head office to the branch amounted to Rs.1 crore 32 lakh. Out of the goods received by it
the branch sent back to head office goods invoiced at Rs.72,000. Other transactions at the
branch during the year were as follows: Rs.
(‘000)
Cash sales 9700
Credit sales 3140
Cash collected by branch from credit customers 2842
Cash discount allowed to debtors 58
Returns by customers 102
Bad debts written off 37
Expenses paid by the branch 842
On 1st January 2001 the branch purchased new furniture for Rs.1 lakh for which
payment was made by head office through a cheque.
On 31st March 2001 branch expenses amounting to Rs.6000 were outstanding and cash
in hand was, again Rs.10000. Furniture is subject to depreciation @ 16 % per annum on
diminishing balances method.
Prepare branch account in the books of head office for the year ended 31st March 2001.

QUESTION NO 12
Sell well Limited has two branches in Cochin and Bangalore. During the year ended 31st
March 1989, goods have been invoiced to the Cochin branch at 20% above cost and to the
Banglore branch at 25% above cost. The branches do not maintain complete books of
accounts but the following figures are available for the year ended 31st March 1989:-
Cochin Bangalore
Rs. Rs.
Opening stock at invoice price 10,000 10,000
Goods sent to branch at cost 50,000 40,000
Amount remitted Branch 80,000 80,000
Amount remitted by Head office 15,000 15,000
Goods returned by branch at invoice price 3,000
Cash as on 1.4.1988 2,000 1,000
Cash as on 31.3.1989 1,000 500
Goods returned by customer at branch at selling 5,000 4,000
price
Expenses at Branch in cash 9,000 3,000
BRANCH ACCOUNTS 157
All sales at the branches are for cash. During the year Cochin branch purchased fixed
assets worth Rs.4,000 and this amount is included in the figure of branch expenses. Cochin
branch transferred to the Bangalore branch stock costing Rs.5000 during the year. The
Bangalore branch remitted Rs.2000 to the Cochin branch also during the year. There was a
closing stock of Rs.24000 valued at invoice price at the Cochin Branch. There was no closing
stock at the Bangalore branch. The branch stock adjustment account in the head office books
showed the following position as on 1st April, 1988:-
For Cochin:-Rs.2500(cr.) For Bangalore-Rs.2,000(cr.)
Prepare branch stock account, branch adjustment account. Goods sent to Branch
account, cash accounts of Branches and Profit and Loss account of branches in the books of
Head office books ignoring depreciation.

QUESTION NO 13 (NOV 1992)

M/s Bright & Co. with its head office in Madras invoiced goods to its branch at Bombay
at 20% less than the catalogue price which is cost plus 50%, with instructions that cash sales
were to be made at invoice price and credit sales at catalogue price. Discount on credit sale at
15 % on prompt payment will be allowed. From the following particulars available from the
branch prepare the branch trading and profit and loss account for the year ended 31st March
1992 in the books of head office, so as to show the actual profit or loss of the branch for the
year 1991-92:
Rs.
Stock 1-4-1991 (invoice price) 12,000
Goods received form head office (invoice price) 1,32,000
Debtors on 1-4-1991 10,000
Sales (cash) 46,000
Sales (credit) 1,00,000
Cash received from debtors 85,635
Discount allowed to debtors 13,365
Expenses at the branch 6,000
Remittance to the head office 1,20,000
Debtors on 31-3-1992 11,000
Cash in hand on 31-3-1992 5,635
Stock on 31-3-1992 (invoice price) 15,000
It was reported that a part of stock at the branch was lost by fire during the year whose
value is to be ascertained and provision should be made for discount to be allowed to debtors
as on 31-3-1992 on the basis of the year’s trend of prompt payment.

QUESTION N0 14 (MAY 1997)

Rahul Limited operates a number of retail outlets to which goods are invoiced at
wholesale price, which is cost plus 25 %. These outlets sells the goods at the retail price,
which is wholesale price plus 20 %.
Following is the information regarding one of the outlets for the year ended 31.3.97:
Rs.
Stock at the outlet 1.4.96 30,000
Goods invoiced to outlet during the year 3,24,000
Gross profit made by the outlet 60,000
Goods lost by fire ?
Expenses of the outlet for the year 20,000
Stock at the outlet 31.3.97 36,000
158 ACCOUNTING
You are required to prepare the following accounts in the books of Rahul Limited for the
year ended 31.3.97:
(a) Outlet stock account
(b) Outlet profit and loss account

QUESTION NO 15
The Empire store Limited invoice goods to their various branches at cost and the
branches sell on credit as well as for cash. For the following details relating to the Bombay
branch, prepare the necessary accounts in the Head Office books:-
Debtors 1st January 1992 26,200
st
Debtors 31 December 1992 31,100
Cash balance 1st January 1992 300
st
Stock, 1 January 1992 15,000
Stock 31st December 1992 13,900
Goods received from Head office 50,800
Cash received from Head office 1,500
Goods returned to Head office 700
Cash sales 33,500
Credit sales 60,000
Allowances to customers 320
Returns from customers 580
Discount allowed to customers 2,400
Bad debts 600
Remittance to Head office 74,900
Rent and rates 1,800
Wages and salaries 6,000
General Trade charges 1,300
Normal loss of goods due to Wastage 1,200
Abnormal loss of goods due to pilferage 3000

QUESTION NO 16
During the year ended 31st December 2002, X & company of Madras sent to their
branch at Bombay goods costing Rs.1,00,000. They used to invoice to the branch at a price
designed to show a gross profit of 33-1/3 per cent on invoice price.
Collections at the branch from debtors amounting to Rs.26,390 were all sent to Head
office. Branch transactions during the year were:-
Cash sales - Rs.1,21,050
Credit sales- Rs.27,600
Goods returned by customers- Rs.300
Goods returned to Head office – Rs.780 (invoice price).
Opening balances:
Stock 2,250
Debtors 1,320
Closing balances:
Stock 2,700
Debtors 2,230
Goods at the branch of Rs.1260 (invoice price) were lost. Insurances Company paid
Rs.730 on the claim. Branch expenses, paid by Head office amount to Rs.36,780.
Show the necessary ledger accounts as would appear in the Head office books
recording the above the transactions relating to branch Profit and Loss account.
BRANCH ACCOUNTS 159
QUESTION NO 17
Atlantic paper products send goods to Bhopal branch at cost plus 20%. You are given
the following particulars:
Opening stock at branch at its cost 5,000
Goods sent to branch at invoice price 20,000
Loss in transit at invoice price 2,500
Theft at invoice price 1,000
Loss in weight (normal) at invoice price 500
Sales 25,500
Expenses 8,000
Closing stock at branch at cost to Branch 6,000
Claim received from the insurance company for loss in transit. 2,000
You are required to prepare in the head office books:
1. Branch stock account.
2. Branch adjustment account
3. Branch Profit and Loss account

QUESTION NO 18
On 1st January 1980 goods costing Rs.132000 were invoiced by Madras Head office to
its branch at Delhi and charged at selling price to produce a gross profit of 25 per cent on the
selling price. At the end of the month the return from Delhi branch showed that the sales were
Rs.150000. Goods invoiced at Rs.1200 to Delhi branch had been returned to Madras Head
office. The closing stock at Delhi branch was Rs.24000 at selling price. Record the above
transactions in Branch stock account in the Head office books and close the said accounts on
31st January 1980.

QUESTION NO 19 (MAY 2006)

Concept & company with its Head office at Mumbai has a branch at Nagpur. Goods are
invoiced to the branch at cost plus 33.33%. The following information is given in respect of the
Branch for the year ended 31.3.2006:
Rs.
Goods send to branch (invoice price) 4,80,000
Stock at branch on 1.4.2005 (invoice price) 24,000
Cash sales 1,80,000
Return of goods by customers to the branch 6,000
Branch expenses paid in cash 53,500
Branch Debtors balance on 1.4.2005 30,000
Discount allowed 1,000
Bad debts 1,500
Collection from Debtors 2,70,000
Branch Debtors cheques returned dishonored 5,000
Stock at branch on 31.3.2006( invoice price) 48,000
Branch Debtors balance on 31..03.2006 36,500
Prepare under the stock and Debtors system the following ledger accounts in the books of the
head office:
(i) Nagpur branch stock account
(ii) Nagpur branch Debtors account
(iii) Nagpur branch adjustment account
Also compute shortage of stock at branch, if any?
160 ACCOUNTING
ANSWER:
Branch Stock Account
Particulars Amount Particulars Amount
To Balance b/d 24,000 By Cash sales 1,80,000
To Goods sent to branch 3,60,000 By Branch Debtors 2,80,000
(cost) (credit sales)
To Branch adjustment 1,20,000 By Branch PL a/c 1,500
(loading) By Branch adjust. 500
To Branch Debtors 6,000 (w.n#1)
By Balance c/d 48,000

5,10,000 5,10,000
Branch Debtors Account
Particulars Amount Particulars Amount
To Balance b/d 30,000 By Discounts 1,000
To Bank (dishonored 5,000 By B. stock 6,000
cheque) (goods returned)
To Branch stock By Bad debts 1,500
(credit sales) 2,80,000 By Bank (collection) 2,70,000
(Balancing Figure)
By Balance c/d 36,500

3,15,000 3,15,000
Branch Adjustment Account
Particulars Amount Particulars Amount
To Branch Stock 5,00 By Stock reserve 6,000
(Shortage) (opening)
To Stock Reserve 12,000 By Branch stock 1,20,000
(closing) (loading on goods)
To Branch profit and loss 1,13,500
account
(Balancing Figure)
1,26,000 1,26,000
Working note:1
Calculation of shortage (invoice price)
Opening stock 24,000
Goods sent to branch 4,80,000
Goods from Debtors (returned) 6,000
Less: Cash sales 1,80,000
Credit sales 2,80,000
Closing stock 48,000
-----------
Shortage (balancing figure) 2,000
Cost of shortage(2,000*100/133.33) 1,500
Loading (2,000*33.33/133.33) 500
BRANCH ACCOUNTS 161
Notes:
(i) Shortage is calculated at invoice price. We have assumed that the shortage is an
abnormal shortage so it should be divided into two break ups of cost and loading.
Cost should be debited to branch profit and loss account and loading in adjustment
account.
(ii) In the question, there is no requirement in relation to calculation of profit, so we have
not prepared the profit and loss account.

QUESTION NO 20 (C A MAY 2010)

Ram Limited of Chennai has a branch at Nagpur to which office, goods are
invoiced at cost plus 25% . the branch makes sales both for cash and on credit.
Branch expenses are paid direct from Head Office and the branch has to remit all cash
received into the head Office bank Account at Nagpur.
From the following details , relating to the year 2009, prepare the accounts in Head
office Ledgr and ascertain branch
Profit. Branch does not maintain any books of accounts , but sends weekly returns to
Head Office :
Rs.
Goods received from Head Office at 1,20,000
invoice price
Returns of head office at invoice price 2,400
Stock at Nagpur Branch on 1.1.2009 12,000
Sale during the year – cash 40,000
Credit 72,000
Debtors at Nagpur Branch 14,400
Cash received from Debtors 64,000
Discounts allowed to debtors 1,200
Bad debts during the year 800
Sales Returns at Nagpur Branch 1,600
Salaries and wages at Branch 12,000
Rent, Rates and taxes at Branch 3,600
Office Expenses at Nagpur Branch 1,200
Stock at Branch on 30.12.2009 at invoice 24,000
price

ANSWER
Branch net profit 7120
162 ACCOUNTING

QUESTION NO 21 (C A MAY 2007)(PE II 16MARKS)

Red and Co. of Mumbai started a branch at Bangalore on 1.4.2006 to which
goods were sent at 20% above cost. The branch makes both cash sales and credit
sales. Branch expenses are met from branch cash and balance money remitted to H.O.
the branch does not maintain double entry books of account and necessary accounts
relating to branch are maintained in H.O. following further details are given for the year
ending on 31.3.2007 :
Rs.
Cost of goods sent to branch 1,00,000
Goods received by branch till 31.3.2007 at 1,08,000
invoice price
Credit sales for the year 1,16,000
Closing debtors on 31.3.2007 41,600
Bad Debts written off during the year 400
Cash remitted to H.O. 86,000
Closing cash on hadn at branch on 4,000
31.3.2007
Cash remitted by H.O. to branch during the 6,000
year
Closing stock in hand at branch at invoice 12,000
price
Expenses incurred at branch 24,000

Draw up the necessary Ledger accounts like branch Debtors Account, branch stock
account , goods sent to branch account, branch cash Account, branch Expenses
Account and branch Adjustments A/c for ascertaining gross profit and branch Profit
and loss a/c for ascertaining branch profit.

ANSWER NET PROFIT Rs. 45,600/-

QUESTION NO 22 (C A NOV 2010)

Following is the information of the Jammu branch of Best Ltd. New Delhi for the
year ending 31st March 2010 from the following:
(1) Goods are invoiced to the branch at cost plus 20%
(2) The sale price is cost plus 50%
(3) Other information:
Rs.
Stock as on 1.4.2009 2,20,000
Goods sent during the year 11,00,000
Sale during the year 12,00,000
Expenses incurred at the branch 45,000
Ascertain (i) the profit earned by the branch during the year (ii) branch stock reserve in
respect of unrealized profit.

ANSWER:
Closing stock 3,60,000 gross profit 1,95,000 net profit 60,000
BRANCH ACCOUNTS 163
QUESTION 23

Fanna Cloth Mills opened a branch at Mumbai on isApril, 2011. The goods were invoiced to
the branch at selling price which was 125% of the cost to the head office.
The following are the particulars of the transactions relating to branch during the year ended
31sf March, 2012:
Rs Rs
Goods sent to branch at cost to head office 4212600
Sales
Cash 1876050
Credit 2661450 4537500
Cash collected from debtors 2355000
Discount allowed to debtors 23550
Returns from debtors 15000
Spoiled cloth in bales written off at invoice 7500
price
Cheques sent to branch for:
Rent
Salaries 108000
Other Expenses 270000
52500 430500

Prepare Branch Account based on invoice price under Debtors method for ascertaining profit
for the year ended 31sf March, 2012.

Solution
Branch Account
Rs Rs Rs Rs
To Good sent to Branch 5265750 Bank
account Sale 1876050
To Bank- Collection from 2355000 4231050
Rent 108000 debtors
Salaries 270000
Other Expenses 52500 430500 Goods sent to 1053150
To Branch Stock Reserve branch
( 7,35,750x25/125) 147150 Account (Loading)
To H.O. Profit and loss ( 52,65,750x25/125)
Account 4504560 Abnormal Loss
- Transfer of profit -Cost of spoiled 6000
cloth
(7,500x100/125)
Balance c/d
Branch Stock 735750
Branch Debtors 267900 1003650
6293850 6293850
 164 ACCOUNTING
Working Notes:
Memorandum Branch Stock Account
To Goods Sent to By Cash- Sale 1876050
Branch By Credit Sales 2661450
Cost 4212600 By Abnormal Loss 7500
Add: Loading @ 25% 1053150 5265750 -spoiled cloth
To Returns from By Balance c\d 735750
Debtors 15000 (Balancing figure )
5280750 5280750

Memorandum Branch Debtors Account

Rs Rs
To Credit Sales 2661450 By Cash collected 2355000
By Discount allowed 23550
______
By Returns 15000
_______ By Balance c/d (Balancing 2,67,900
2661450 figure 2661450

QUESTION 24
LMN is having branch at Mumbai. Goods are invoiced to the branch at 25% profit on
sale. B ranch has been instructed to send all cash daily to head office. All expenses are paid
by head office except petty expenses, which are met by the Branch. From the following
particulars, prepare branch account in the books of head office:

Particular Amounts Particular Amounts

(Rs) (Rs)
Stock as on 1st April, 2013 (Invoice 40000 Discount allowed to debtors 300
price)
Sundry Debtors as on 1st April, 2013 25,000 Expenses paid by head office :
Cash in hand as on 1st April, 2013 1,000 Salary 4,000
Office Furniture as on 1st April, 2013 4,000 Staff Welfare 750
Goods invoiced from head office 1,80,000 Telephone Expenses 1,200
(invoice price) Other Misc. Expenses paid by branch 700
Goods return to head office 6,000 Stock as on 31st March, 2014
(at invoice price) 35,000
Goods return by debtors 1,250 Depreciation to be provided on branch 10% p. a.
cash received from Debtors 65,000 furniture
Cash Sales 1,20,000
Credit sales 70,000
BRANCH ACCOUNTS 165

Answer
In the books of Head office -LMN
Mumbai Branch Account (At invoice price)

Particular Amount Particular Amount

(Rs) (Rs)

To Balance b/d : By Stock Reserve (opening) 10,000

Stock 40,000 By Remittances
Debtors 25,000 Cash Sales 1,20,000
cash in hand 1,000 Cash from Debtors 65,000 1,85,000
Furniture 4,000 By Goods sent to Branch (loading) 45,000
To Goods send to branch 1,80,000 By Good returned by branch
(Returns to HO)
To Goods returned by branch (loading) 1,500 6,000
By Balance c/d:
Stock
To Bank (Expenses paid by Head 35,000
office) Debtors
28,450
Salary 4000 Cash (Rs 1,000- Rs 700)
300
Staff 750 Furniture ( Rs 4,000- Rs 400)
3,600
Telephone 1200
5950
To Stock Reserve (closing)
8750
To profit Transferred to General profit
& Loss A/c 47,150
_____ ______
3,13,350 3,13,350

Working Note :
Debtors Account

Particular Amount (Rs) Particular Amount (Rs)

To Balance b/d 25,000 By Cash A/c 65,000
To Sales A/c (Credit) 70,000 By Sales Return 1,250
______ By Discount allowed 300
95,000 By Balance c/d 28,450
95,000
 166 ACCOUNTING
QUESTION 25 {2011 May [4] (b)}
XYZ Company is having its' branch at Kolkata. Goods are invoiced to the branch at 20%
profit on sale. Branch has been instructed to send all cash daily to head office. All expenses
are paid by head office except petty expenses which are met by the branch manager. from the
following particulars prepare branch account in the books of Head office.

Rs Rs
Stock on 1st April 2010 (invoice 30,000 Discount allowed to debtors 160
price)
Sundry debtors on 1st April, 2010 18,000 Expenses paid by head office :
Cash in hand as on 1st April, 2010 800 Rent 1800
Salary 3200
Office furniture on 1st April, 2010 3,000 Stationary & Printing petty exp. 800
paid by the branch 600
Goods invoiced from the head 1,60,000 Depreciation to be
office ( invoice price)
Goods retrun by debtors 2000 Provided on branch
furniture at 10% p.a.
Goods return by debtors 960 Furniture at 10% p.a.
Cash received from debtors 60,000
Cash sales 1,00,000 Stock on 31st March
Credit sales 60,000 2011 (at invoice price) 28,000

Answer :
In the books of Head Office - XYZ Company
Kolkata branch Account (at invoice)
Particular Amt. (Rs) Particular Amt. (Rs)
To Balance b/d
Stock 30,000 By Stock reserve (Opening ) 6,000
Debtors 18,000 By Remittances:
Cash in hand 800 Cash Sales 1,00,000
Furniture 3,000 Cash from Debtors 60,000 1,60,000
To goods sent to branch 1,6 By Goods sent to branch (loading) 32,000
To Goods returned branch 0000 By goods returned by
(loading ) 400 Branch (Return to H.O.) 2,000
To Bank (expenses paid by By Balance c/d
H.O.) Stock 28,000
Rent 1800 Debtors 16,880
Salary 3200 Cash ( 800-600 ) 200
Stationery & Printing 800 Furniture ( 3,000-300) 2,700
To stock reserve (Closing ) 5,800
 BRANCH ACCOUNTS 167
To Profit transferred to 5,600
General Profit & Loss A/c 24,180

2,47,780 2,47,780

Working Note :
Debtors Account
Rs Rs
To Balance b/d 18,000 By cash account 60,000
To sales account (credit) 60,000 By Sales return account 960
By Discount allowed account 160
By balance c/d 16,880
78,000 78,000

Note : It is assumed that goods returned by branch are at invoice price.

168 ACCOUNTING

PART-2
INDEPENDENT BRANCHES
QUESTION NO 26
Ring Bell Limited Delhi has a branch at Bombay where a separate set of books is used.
The following is the trial balance extracted on 31st December 1998.
Head Office Trial Balance
Rs. Rs.
Share capital (Authorised: 10,000 equity
shares of Rs.100 each)
Issued: 8,000 equity shares 8,00,000
Profit and Loss account 1.1.98 25,310
Interim dividend paid--August 1998 30,000
General reserve 1,00,000
fixed assets 5,30,000
Stock 2,22,470
Debtors and creditors 50,500 21,900
Profit for the year 1998 82,200
Cash balance 62,730
Branch current account 1,33,710
10,29,410 10,29,410
Branch Trial Balance
Rs. Rs.
Fixed assets 95,000
Profit for 1998 31,700
Stock 50,460
Debtors and creditors 19,100 10,400
Cash balance 6,550
Head office current account 1,29,010
1,71,110 1,71,110
The difference between the balances of the current account in the two sets of books is
accounted for as follows:
(a) Cash remitted by the branch on 31st December 1998 but received by the Head office on
1st January 1999—Rs.3,000
(b) Stock stolen in transit from Head office and charged to branch by the Head office but
not credited to Head office in the branch books as the branch manager declined to
admit any liability (not covered by insurance) – Rs.1,700.
Give the branch current account in the Head office books after incorporating branch trial
balance through journal. Also prepare the company’s Balance Sheet as on 31st December
1998.

QUESTION NO 27
Ashwin, a trader commenced business on 1st January 1995 with a Head office and one
branch. Purchases were made exclusively by the Head office where the goods were
processed before sale. There was no loss or wastage.
Only processed goods received from head office were handled by the branch and these
were charged to the branch at processed cost plus 10 per cent.
All sales whether by head office or the branch were at uniform gross profit of 25 per
cent on their respective cost.
BRANCH ACCOUNTS 169
The following Trial Balance as on 31st December 1995 was extracted from the books.
Head office
Branch
Debit Credit Debit Credit
Rs. Rs. Rs. Rs.
Capital 2,20,000
Drawings 25,000
Purchases 19,93,350
Cost of processing 34,650
Sales 14,20,000 6,40,000
Goods sent to branch/
Received by branch 6,51,200 6,40,200
Selling & General expenses 2,24,000 27,000
Debtors/Creditors 2,30,000 5,83,350 92,000 2,400
Branch/H.O. current a/c 2,05,550 1,50,800
Balance at bank 1,62,000 34,000
Total 28,74,550 28,74,550 7,93,200 7,93,200
Further details are:
(a) Goods charged by head office to branch in December 1995 at Rs.11,000, were not
received by the branch until January 1996. A remittance of Rs.43,750 from the branch
to head office in December 1996 is still in transit.
(b) Stock taking at branch disclosed shortage of Rs.5,000 (at selling price).
(c) Cost of unprocessed goods at head office as on 31st December 1995 was Rs.1,80,000.
You are required to prepare in columnar form Profit and Loss account and Balance Sheet
of the head office, branch and the business as whole.

QUESTION NO 28 (NOV.2005)
M/s. Shah & Co. commenced business on 1.4.2004 with a Head office and one branch.
Purchases were made exclusively by the Head office where the goods were processed before
sale. There was no loss or wastage.
Only processed goods received from head office were handled by the branch and these
were charged to the branch at processed cost plus 10 per cent.
All sales whether by head office or the branch were at uniform gross profit of 25 per
cent on their respective cost.
The following Trial Balance as on 31.03.2005 was extracted from the books.
Head office
Branch
Debit Credit Debit Credit
Rs. Rs. Rs. Rs.
Capital 3,10,000
Drawings 55,000
Purchases 19,69,500
Cost of processing 50,500
Sales 12,80,000 8,20,000
Goods sent to branch/
Received by branch 9,24,000 8,80,000
Selling & General expenses 50,000 6,200
Administrative expenses 1,39,000 15,000
Debtors/Creditors 3,09,600 6,01,400 1,13,600 10,800
Branch/H.O. current a/c 3,89,800 2,61,500
170 ACCOUNTING
Balance at bank 1,52,000 77,500
Total 31,15,400 31,15,400 10,92,300 10,92,300
Further details are:
(d) Goods charged by head office to branch in March, 2005 at Rs.44,000, were not
received by the branch until 2.4.2005.
(e) A remittance of Rs.84,300 from the branch to head office was also similarly not received
up to 31.3.2005.
(f) Stock taking at branch disclosed shortage of Rs.20,000 (at selling price).
(g) Cost of unprocessed goods at head office as on 31.03.2005 was Rs.1,00,000.
You are required to prepare in columnar form Profit and Loss account and Balance Sheet
of the head office, branch and the business as whole.

QUESTION NO 29
KP Limited manufactures a range of goods which it sells to wholesale customers only
from its head office. In addition the head office transfers goods to a newly opened branch at
factory cost plus 15%. The branch then sells these goods to the general public on only cash
basis. The selling price to wholesale customers is designed to give a factory profit which
amounts to 30% of the sales value. the selling price to the general public is designed to give a
gross margin (i.e., selling price less cost of goods from head office) of 30% of the sales value.
The company operates from rented premises and leases all other types of fixed assets. The
rent and hire charges for these are include in the overhead costs shown in the trial balances.
From the information given below you are required to prepare for the year ended 31st
December 1998 in columnar form:
(a) A Profit and Loss Account for (i) H.O. (ii) the branch (iii) the entire business.
(b) A Balance Sheet as on 31st December 1998 for the entire business.
Head Office Branch
Rs. Rs. Rs. Rs.
Raw materials purchased 35,000
Direct wages 1,08,500
Factory overheads 39,000
Stock on 1-1-98
Raw material 1,800
Finished goods 13,000 9,200
Debtors 37,000
Cash 22,000 1,000
Administrative salaries 13,900 4,000
Salesmen’s salaries 22,500 6,200
Other administrative &
selling overheads 12,500 2,300
Inter-unit accounts 5,000 2,000
Capital 50,000
Sundry creditors 13,000
Provision for unrealized
profit in stock 1,200
Sales 2,00,000 65,200
Goods sent to branch 46,000
Goods received from H.O. 44,500
3,10,200 3,10,200 67,200 67,200
Notes:
BRANCH ACCOUNTS 171
(a) On 28th December 1998 the branch remitted Rs.1,500 to head office and this has not
yet been recorded in the head office books. Also on the same date, the head office
dispatched goods to the branch invoiced at Rs.1,500 and these too have not yet been
entered into the branch books. It is the company’s policy to adjust items in transit in the
books of the recipient.
(b) The stock of raw materials held at the head office on 31st December 1998 was valued at
Rs.2,300
(c) You are advised that:
(i) There were no stock losses incurred at the head office or at the branch.
(ii) It is the company ‘s practice to value finished goods stock at the head office
at factory cost.
(iii) There were no opening or closing stock of work-in-progress.
(d) Branch employees are entitled to a bonus of Rs.156 under a bilateral agreement.

QUESTION NO 30
AFFIX Limited of Calcutta has a branch at Delhi to which the goods are supplied from
Calcutta but the cost thereof is not recorded in the Head office books. On 31st March 1997 the
Branch Balance Sheet was as follows:
Liabilities Rs. Assets Rs.
Creditors balance 40,000 Debtors balance 2,00,000
Head office 1,68,000 Building Extension A/c
closed by transfer to H.O.
a/c
Cash at bank 8,000
2,08,000 2,08,000
During the six months ending on 30-9-97 the following transactions took place at Delhi.
Rs. Rs.
Sales 2,40,000 Manager’s salary 4,800
Purchases 48,000 Collections from debtors 1,60,000
Wages paid 20,000 Discounts allowed 8,000
Salaries (inclusive of Discount earned 1,200
advance of Rs.2,000) 6,400 Cash paid to creditors 60,000
General expenses 1,600 Building account (further
Fire insurance (paid for one payment) 4,000
year) 3,200 Cash in hand 1,600
Remittance to head office 38,400 Cash at bank 28,000
Set out the head office account in Delhi books and the Branch Balance Sheet as on 30-
9-1997. Also give journal entries in the Delhi books.

QUESTION NO 31
The following trial balances as at 31st December 1997 have been extracted from the
books of Major Limited and its branch at a stage where the only adjustments requiring to be
made prior to the preparation of a Balance Sheet for the undertaking as a whole:
Head Office Branch
Debit Credit Debit Credit
Rs. Rs. Rs. Rs.
Share capital 1,50,000
Sundry fixed assets 75,125 18,901
Sundry current assets 1,21,089 23,715 (Note 3)
Sundry current liabilities 34,567 9,721
172 ACCOUNTING
Stock reserve, 1st Jan. 1997
(Note 2) 693
Revenue account 43,210 10,250
Branch account 31,536
Head office account 22,645
2,28,470 2,28,470 42,616 42,616
Notes:
(1) Goods transferred from head office to the branch are invoiced at cost plus 10% and
both revenue accounts have been prepared on the basis of the prices charged.
(2) Relating to the head office goods held by the branch on 1st January 1997.
(3) Includes goods received from head office at invoice price Rs.4,565.
(4) Goods invoiced by head office to branch at Rs.3,641 were in transit at 31st December
1997 as was also a remittance of Rs.3,500 from the branch.
(5) At 31st December 1997 the following transactions were reflected in the head office
books but unrecorded in the branch books:
(a) The purchase price of lorry, Rs.2,500 which reached the branch on Dec.
25;
(b) A sum received on December 30,1997 from one of the branch debtors
Rs.750.
You are required:
(i) To record the foregoing in the appropriate ledger accounts in both set of books.
(ii) To prepare a Balance Sheet as on 31st December 1997 for the undertaking as a
whole.

QUESTION NO 32 (MAY 1996)

Head office passes adjustment entry at the end of each month to adjust the position
arising out of inter-branch transactions during the month. Form the following inter-branch
transactions in January, 1996, make the entry in the books of Head office:
(a) Bombay branch
(i) Received Goods: Rs.6000 from Calcutta Branch, Rs.4000 from Patna Branch.
(ii) Sent Goods to: Rs.10000 to Patna, Rs.8000 to Calcutta.
(iii) Received B/R: Rs.6000 from Patna
(iv) Sent Acceptance: Rs.4000 to Calcutta, Rs.2000 to Patna.
(b) Madras Branch (Apart from the above):
(v) Received goods: Rs.10000 from Calcutta, Rs.4000 from Bombay.
(vi) Cash sent: Rs.2000 to Calcutta, Rs.6000 to Bombay
(c) Calcutta Branch (apart from the above):
(i) Sent goods to Patna Rs.6000
(ii) Paid B/P: Rs.4000 to Patna, Rs.4000 cash to Patna.

QUESTION NO 33 (MAY 2002)

On 31st March 2000 Kanpur branch submits the following trial balance to its head office
at Lucknow:
Debit balances (Rs. in lacs)
Furniture and equipment 18
Depreciation on furniture 2
Salaries 25
Rent 10
Advertising 6
BRANCH ACCOUNTS 173
Telephone, Postage and Stationary 3
Sundry office expenses 1
Stock on 1.4.1999 60
Goods received from head office 288
Debtors 20
Cash at bank and in hand 8
Carriage inwards 7
--------
448
--------
Credit balances
Outstanding expenses 3
Goods returned to head office 5
Sales 360
Head office 80
-------
448
-------
Additional information:
Stock on 31st March 2000 was valued at Rs.62 lacs on 29th March 2000 the head office
dispatched goods costing Rs.10 lacs to its branch. Branch did not receive these goods before
1st April 2000. Hence the figure of goods received from head office does not include these
goods. Also the head office has charged the branch Rs.1,00,000 for centralized services for
which the branch has no passed the entry.
You are required to:
(i) Pass journal entries in the books of the branch to make the necessary adjustments.
(ii) Prepare final accounts of the branch including balance sheet and
(iii) Pass journal entries in the books of the head office to incorporate the whole of the
Branch Trial Balance.

QUESTION NO 34
A Madras Head office has an independent Branch at Ahmedabad. From the following
particulars, close the books of the Ahmedabad Branch.
Ahmedabad Branch
Trial balance as at 31st December, 2002
Debit balances Amount Credit balances Amount
st
Stock on 1 Jan 2002 8,200 Creditors 2,700
Purchases 12,800 Sales 34,950
Wages 6,550 Head office A/c 14,000
Manufacturing Discount 150
expenses 3,400 Purchase returns 300
Rent 1,700
Salaries 5,500
Debtors 4,000
General expenses 2,000
Goods received from
H.O 7,200
Cash at bank 750

52,100 52,100
174 ACCOUNTING
(a) Closing stock at branch Rs.14,350
(b) The branch fixed assets maintained in H.O books were: machinery Rs.25,000, furniture
Rs.1,000. Depreciation is to be charged at 10 per cent on machinery and 15 per cent on
furniture.
(c) Rent due Rs.150
(d) A remittance of Rs.4000 made by the branch on 28th December, 2002 was received by
the H.O on 4th January 2003.

ANS: Loss Rs.400

QUESTION NO 35
A Calcutta H.O passes one entry at the end of each month to adjust the position arising out
of inter branch transactions during the month, from the following inter-branch transaction in
April 19—make the entries in the books of Calcutta Head office: (give details of working)

(a) Delhi Branch:

a. Received goods from Nagpur Branch Rs.9000 and Ahmedabad Branch Rs.6000.
b. Sent goods to Ahmedabad branch Rs.15,000 and Nagpur Branch Rs.12,000.
c. Received bills receivables from Ahmedabad Branch Rs.9,000.
d. Sent Acceptances to Nagpur Rs.6,000 and Ahmedabad 3,000.

(b) Kanpur Branch: (in addition to the above)

a. Received goods from Nagpur branch Rs.15,000 and Delhi Branch Rs.6,000.
b. Cash sent to Nagpur Branch Rs.3,000 and Delhi Branch Rs.6,000.

(c) Nagpur Branch: (in addition to the above)

a. Sent goods to Ahmedabad Branch Rs.9,000.
b. Received bills receivable from Ahmedabad Branch Rs.9,000.
c. Received cash from Ahmedabad Branch Rs.5000.

QUESTION NO 36
A Bombay merchant opens a new branch in Delhi, which trades independently of the
head office. The transactions of the branch for the year ended 31st March 1990 are as under:
Rs. Rs.
Goods supplied by Head office 2,00,000
Purchases from outsiders:
Credit 1,55,500
Cash 30,000 1,85,500
Sales:
Credit 2,50,500
Cash 46,000 2,96,500
Cash received from customers 3,04,500
Cash paid to creditors 1,42,500
Expenses paid by branch 89,500
Furniture purchased by branch on credit 35,000
Cash received from Head office initially 40,000
Remittance to Head office 1,10,000
Prepare the Branch Final Accounts and the Branch Account in Head office books on
incorporation of the Brach trial balance in the Head office books after taking the following into
consideration:
BRANCH ACCOUNTS 175
(a) The accounts of the branch fixed assets are maintained in the Head office books.
(b) Write off depreciation on furniture at 5 per cent per annum for full year.
(c) A remittance of Rs.20,000 from the branch to head office is in transit.
(d) The branch values its closing stock at Rs.1,20,000.

QUESTION NO 37
Anil and Sunil are partners of a business having head office in Delhi and Branch at
Calcutta. Anil looks after the Delhi office and Sunil books after the Calcutta Branch. Anil is
entitled to 40% of the profits made at Delhi while Sunil is entitled to 30% of the profits at
Calcutta. The balance profits/losses are shared equally.
The following trial balances as on 31st December, 1981 are furnished to you.
DELHI HEAD OFFICE CALCUTTA BRANCH
Dr. Cr. Dr. Cr.
Opening stock at cost 30,000 - 40,000 -
Purchases and returns 1,80,000 10,000 2,75,000 15,000
Goods sent to:
Calcutta - 50,000 - -
Delhi - - - 70,000
Goods received from:
Calcutta 65,000 - - -
Delhi - - 48,000 -
Sales and returns 15,000 3,15,000 20,000 3,70,000
Expenses 28,000 - 39,000 -
Customer accounts 64,000 4,000 71,000 3,000
Suppliers accounts 2,000 32,000 1,000 51,000
Bank account 70,000 - - 6,000
Fixed assets opening
WDV 50,000 - 80,000 -
Calcutta branch A/c - 5,000 - -
Delhi H.O. A/c - - 17,000 -
Capital and drawing :
Anil 30,000 83,000 4,000 35,000
Sunil 5,000 40,000 25,000 70,000
5,39,000 5,39,000 6,20,000 6,20,000

You are informed that:

(a) On 30th December 1981 Delhi head office remitted Rs.5000 by bank draft to Calcutta
branch. The envelope was received by the branch on 2nd January 1982.
(b) Stock at cost on 31st December 1981, was worth:-
a. Rs.46,000 at Delhi and
b. Rs.54,000 at Calcutta
(c) Depreciation is to be provided at 10%.
(d) 10% of the cash expenses relating to the Head office are to be treated as overheads
incurred on behalf of the branch.
(e) You are required to prepare the:-
i. Trading and Profit and Loss account both for the branch and H.O.
ii. Consolidated balance sheet of the firm as on 31st December 1981,
iii. Branch and head office accounts of the respective books.

(Ans:- Net profit:-branch =76,200, Head office=1,00,800. Balance Sheet total=4,37,000

branch and head office accounts balances in the respective books 7200)
176 ACCOUNTING
QUESTION NO 38
Unique products operates from a head office in Cuttack and a branch in Ranchi. The
following trial balance have been extracted from the books of accounts as at 31st March 2000:
HEAD OFFICE RANCHI BRANCH
Dr. Cr. Dr. Cr.
Capital 20,50,000
Cash and bank 77,500 65,000
Debtors and creditors 3,00,000 2,50,000 3,00,000
Operating expenses 14,02,500 1,07,500
Branch current account 8,75,000
Head office account 6,00,000
Bad debt provisions 45,000 12,500
Provision for depreciation 7,00,000 1,50,000
Provision for unrealized profit
Opening stock 20,000
Fixed assets (at cost) 40,000 1,00,000
Drawings 17,50,000 5,00,000
Sales 2,00,000
Goods sent to branch at invoice price 42,50,000 21,85,000
Purchases
19,00,000 18,75,000
45,70,000
92,15,000 92,15,000 29,47,500 29,47,500

Additional information:
(a) Sock at 31st March 2000 are valued at
1. head office Rs.60,000
2. branch Rs.75,000( invoice price)
(b) All goods are invoiced at cost plus 25%.
(c) Fixed assets are depreciated at 10% on costs.
(d) Provisions for bad debts are to be maintained at 5% on debtors.
(e) Goods in transit at invoice price from the head office to the branch at
Rs.25,000
(f) Cash in transit from the branch to the head office Rs.2,50,000.
Prepare, in columnar form, the head office and the branch trading and Profit and Loss
account for the year ended 31st March 2000 and a Balance Sheet for the business as a whole.

(Ans:- H.O= gross profit and net profits =16,00,000 and 52,500)
Branch = Gross profit and net profits= 2,85,000 and 1,25,000)
(Balance total is 22,77,500)

QUESTION NO 39 (NOV 2004)

Give journal entries in the books of Branch A to rectify or adjust the following:
(a) Head office expenses Rs.3,500 allocated to the Branch, but not recorded in the branch
books.
(b) Depreciation of branch assets, whose accounts are kept by the head office not provided
for Rs.1,500.
(c) Branch paid Rs.2,000 as salary to a H.O. Inspector, but the amount paid has been
debited by the branch to salaries account.
(d) H.O collected Rs.10,000 directly from a customer on behalf of the branch, but no
intimation to this effect has been received by the branch
(e) A remittance of Rs.15,000 sent by the branch has not yet been received by the head
office.
(f) Branch A incurred advertisement expenses of Rs.3,000 on behalf of Branch B.
BRANCH ACCOUNTS 177
ANSWER:
JOURNAL ENTRIES

(I) Expenses Account Dr. 3500

To Head Office Account 3500

(ii) Depreciation Account Dr. 1500

To Head office Account 1500
(iii) Head office Account Dr. 2000
To Salaries Account 2000
(iv) Head Office Account Dr. 10000
To Branch Debtors Account 10000
(v) Cash in Transit account Dr. 15000
To Head office Account 15000
(vi) Head office Account Dr. 3000
To bank account 3000
(being expenditure is paid on the direction of head office)

QUESTION NO 40 (MAY 2003)

Show adjustment journal entries in the books of head office at end of April 2003 for
incorporation of inter branch transactions assuming that only head office maintains different
branch accounts in its books:
(A) Delhi branch
a. Received goods from Mumbai: Rs.35,000 and 15,000 from Kolkata
b. Sent goods to Chennai Rs.25,000 and Kolkata Rs.20,000
c. Bills receivables received Rs.20,000 from Chennai
d. Acceptances sent to Mumbai Rs.25,000, Kolkata Rs.10,000

(B) Mumbai Branch (apart from above)

a. Received goods from Kolkata Rs.15,000, Delhi Rs.20,000
b. Cash sent to Delhi RS.15,000 and Kolkata Rs.7,000

(C) Chennai Branch (apart from above)

a. Received goods from Kolkata Rs.30,000
b. Acceptances and cash sent to Kolkata Rs.20,000 and Rs.10,000 respectively

(D) Kolkata Branch (apart from above)

a. Sent to goods to Chennai Rs.35,000
b. Paid cash to Chennai Rs.15,000
c. Acceptances sent to Chennai Rs.15,000

All working should form part of the answer.

178 ACCOUNTING
QUESTION NO 41
The following is the Trial Balance of ICS branch as at 30th june 2002:
Debit Credit
H.O account 32,400
Opening stock 60,000
Purchases 1,78,000
Goods received from H.O 90,000
Sales 3,80,000
Goods supplied to H.O 60,000
Salaries 15,000
Debtors 37,000
Creditors 18,500
Rent 9,600
Office expenses 4,700
Cash in hand and at bank 17,800
Furniture 14,000
---------------------------- ----------------------
4,58,500 4,58,500

Additional information:
(a) Stock on hand was valued at Rs.27,000
(b) The branch account in the head office books on 30th June 2002 stood at Rs.4600 debit
(c) On 28th June 2002, the Head office forwarded goods to the value of Rs.25,000 to the
branch where they were received on 3rd July 2002.
(d) A cash remittance of Rs.12,000 by branch on 24th June was received by H.O on July 1.

Required:
(a) Journal entries necessary to incorporate the above trial balance
(b) The results of trading at branch
(c) ICS branch account in the books of H.O

ANS: 1,09,700

QUESTION NO 42
The head office of Ganpati company and its branch keep their own books prepare own
profit and loss account. The following are the balances appearing in the two sets of the books
as on 31.3.2004 after ascertainment of profits and after making all adjustments except those
referred to below:
Particulars Head office Branch office
Capital - 10,00,000 - -
Fixed assets 3,60,000 - 1,60,000 -
Stock 3,42,000 - 1,07,400 -
Debtors and creditors 78,200 39,600 48,400 19,200
Cash 1,07,400 - 14,200 -
Profit and loss account - 1,46,600 - 30,600
Branch account 2,98,600 - - -
Head office account - - - 2,80,200
Total 11,86,200 11,86,200 3,30,000 3,30,000
BRANCH ACCOUNTS 179
Set out the Balance Sheet of the business as on 31.03.2004 and the journal entries necessary
(in both sets of books) to record the adjustments dealing with the following:
1. On 31.3.2004 the branch had sent a cheque for Rs.10,000 to the head office, not
received by the head office nor credited to the branch till next month.
2. Goods valued at Rs.4400 had been forwarded by the head office to the branch and
invoiced on 30.3.2004 but were not received by the branch nor dealt with in their books
till next month.
3. It was agreed that the branch should be charged with Rs.3000 for administration
services rendered by the head office during the year.
4. Stock stolen in transit from the head office to the branch and charged to the branch by
the head office but not credited to the head office in the branch books as the manager
declined to admit any liability , Rs.4000 (not covered by the insurance)
5. Depreciation of branch assets of which accounts are maintained by head office not
provided for Rs.2500.
6. The balance profits shown by the branch is to be transferred to head office books.

ANSWER:
Balance Sheet Of Ganpati Co. as at 31.03.2004
Liabilities Rs Rs Assets Rs Rs
Capital 10,00,000 Fixed assets:
Add: net profit: Head office 3,60,000
Head office 1,45,600 Branch 1,60,000
Branch 25,100 11,70,700 Less: (2,500) 5,17,500
depreciation
Creditors: Stock: 3,42,000
Head office 39,600 Head office 1,07,400
Branch 19,200 58,800 Branch 4,400 4,53,800
In transit
Debtors: 78,200
Head office 48,400 1,26,600
Branch
Cash: 1,07,400
Head office 14,200
Branch 10,000 1,31,600
------------- In transit --------------
12,29,500 12,29,500
Journal entries in the books of Head office
S.No. Particulars Dr Cr
1. Cash in transit A/c Dr. 10,000
To Branch A/c 10,000
2. Branch A/c Dr. 3,000
To profit and loss a/c 3,000
3. Profit and loss account Dr. 4,000
To Branch A/c 4,000
4. Branch A/c Dr. 2,500
To fixed Assets account 2,500
5. Branch profit and loss account Dr. 25,100
To profit and loss account 25,100
180 ACCOUNTING
HEAD OFFICE PROFIT AND LOSS ACCOUNT
Particulars Amount Particulars Amount
To branch-stock stolen 4,000 By balance b/d 1,46,600
To profit -transferred 1,45,600 By branch- expenses 3,000
------------------ -------------------
1,49,600 1,49,600
Journal entries in the Books of Branch
S.No. Particulars Dr Cr
1. Goods in Transit A/c Dr. 4,400
To Head office A/c 4,400
2. Profit and loss account Dr. 3,000
To Head office a/c 3,000
3. Profit and loss account Dr. 2,500
To head office A/c 2,500
5. Profit and loss account Dr. 25,100
To Head office Account 25,100
(being profit transferred to head office account)
BRANH OFFICE PROFIT AND LOSS ACCOUNT
Particulars Amount Particulars Amount
To head office-expenses 3,000 By balance b/d 30,600
To head office- 2,500
depreciation 25,100
To profit-transferred to ------------------ -------------------
H.O 30,600 30,600

QUESTION NO 43 (C A NOV 2008)(2MARKS)

Goods worth Rs. 50,000 sent by head office but the branch has received till the
closing date goods only Rs. 40,000. Give journal entry in the books of H.O. and branch
for goods in transit.

ANSWER Goods in transit Ac/ Dr. 10,000

To Head Office A/c 10,000

QUESTION NO 44 (C A MAY 2007)(2MARKS)

Alpha & Co. Having head office in Mumbai has a branch in Nagpur. The branch
at Nagpur is an independent branch maintaining separate books of account .on
31.3.2007, it was fund that the goods dispatched by head office for R.s 2,00,000 was
received by the branch only to the extent of Rs. 1,50,000. The balance goods are in
transit. What is the accounting entry to be passed by the branch for recording the
goods in transit, in its books?
BRANCH ACCOUNTS 181

ANSWER
Nagpur branch must include the inventory in its books as goods in transit.
The following journal entry must be made by the branch:
Goods in transit A/c Dr. 50,000
To Head office A/c 50,000
[ Being goods sent by head office is still in transit on the closing date ]

QUESTION 45
Messrs Ramhand & Co., Hydera bad have a branch in Delhi. The Delhi Branch deals not only
in the goods from Head Office but also buys some auxiliary goods and deals in them. They,
however, do not prepare any Profit & Loss Account but close all accounts to the Head Office at
the end of the year and open them afresh on the basis of advice from their Head Office. The
fixed assets accounts are also maintained at the Head Office.
The goods from the Head Office are in voiced at selling prices to give a profit of 20 per cent on
the sale price. The goods sent from the branch to Head Office are at cost. From the following
prepare Branch Trading and Profit & Loss Account and Branch Assets Account in the Head
Office Books.
Trail Balance of the Delhi Branch as on 31-12-2012
Debit Rs Credit Rs
Head office opening balance on 1-1-12 15000 Sales 100000
Goods from H.O 50000 Goods to H.O 3000
Purchase 20000 Head office current A/c 15000
Opening stock Sundry Creditors 3000
( H.O. goods at invoice prices) 4000
Opening stock of other goods 500
Salaries 7000
Rent 3000
Office expenditure 2000
Cash on Hand 500
Cash at Bank 4000
Sundry Debtors 15000
121000 121000

The Branch balances as on 1st January, 2012, were as under: Furniture 5,000 Sundry Debtors
Rs 9,500: Cash 1,000. Creditors 30,000: Stock (HO. goods at invoice price) 4,000; other
goods 500. The closing stock at branch of the head office goods at invoice price is 3,000 and
that of purchased goods at cost is 1,000. Depreciation is to be provided at 10 per cent on
branch assets.
182 ACCOUNTING

Solution
Delhi Branch Trading and Profit & Loss Account
for the year ended 31st Dec., 2012
Rs Rs
To opening Stock By Sales 1,00,000
Head office Goods 3,200 By Goods from Branch 3,000
Other 500 3700 By Closing Stock:
To Goods to Branch 40000 Head Office goods 2,400
To Purchase 20000 Other 1,000 3,400
To Gross profit c/d 42700
1,06,400 1,06,400
To Salaries 7,000 By Gross profit b/d 42,700
To Rent 3000
To office Expenses 2000
To Dep. on furniture @ 10% 500
To Net Profit 42700
30,200
42,700

Branch (Fixed) Assets Account ( In Head office Books)

2012 Rs 2012 Rs
Jan.1 To Balance b/d 5000 Dec. 31 By Delhi Branch A/c 500
(Depreciation )
By Balance c/d 4,500
___ 5000
500
2013 To Balance b/d
Jan.1 4500

Working Notes
Cash/ Bank Account (Branch Books)
Rs Rs Rs
To Balance b/d 1000 By Salaries 7,000
To Debtors By Rent 3000
Sales 1,00,000 By Office Exp. 2000
Opening balance By Creditors 47000
Of Debtors 9,500 By Head Office 32000
1,09,500 (balancing fig).
Less: Closing balance (15,000) By Cash balance 500
94,500 By Bank Balance 4000

95,500 95,500

* Opening Balance + Purchase- Closing balance = payment

Rs 30,000+ Rs 2000- Rs 3,000= Rs 47000
BRANCH ACCOUNTS 183
Trial Balance of Delhi Branch as on 1-1-2012

Dr. Cr.
Rs Rs
Debtors 9500
Cash 1000
Stock H.O. Goods 4000
Others 500 4500
Creditors 30000
Head Office Account 15,000
30,000 30000

Head Office

Rs Rs
To Balance (transfer 15000 By Goods From Head 50000
To Cash 32000 office
To Goods Sent 3000
50000 50000

Credit balance in Head Office Account before this transfer will be 15,000 credit.

Note : Furniture A/c is maintained in head office books it is not a part of either opening or
closing balance.

QUESTION 46 {2005- Nov [3]}

M/s Shahs & Co commenced business on 1.4.2004 with Head office at Mumbai and a
Brach at Chennai, purchases were made exclusively by the Head office, where the goods were
processed before sale. There was no loss or wastage in processing.
Only the processed goods received from Head office were handled by the Branch . The goods
were sent to branch at processed cost plus 10%.
All sales, whether by Head office or by the Branch, were at uniform gross profit of 25% on their
respective cost.
Following is the Trial Balance as on 31.3.2005.
Head office Brach
Dr. Cr. Dr. Cr.
Rs Rs Rs Rs
Capital Rs 3,10,000
Drawings 55,000
Purchase 19,69,500
Cost of processing 50,5000
Sales 12,80,000 8,20,000
Goods sent to Branch 9,24,000
Administrative expenses 1,39,000 15,000
Selling expenses 50,000 6,200
 184 ACCOUNTING
Debtors 3,09,600 1,13,600
Branch Current A/c 3,89,800
Creditors 6,01,400 10,800
Bank Balance 1,52,000 77,500
Head Office Current account 2,61,500
Goods received from H.O. 8,80,000
31,15,400 3,15,400 10,92,300 10,92,300
Following further information is provided:
(i) Goods sent by Head Office to the Branch in March, 2005 of Rs 44,000 were not
received by the Branch till 2.4.2005.
(ii) A remittance of Rs 84,300 sent by the Branch to Head office was also similarly not
received upto 31.3.2005.
(iii) Stock taking at the Branch disclosed a shortage of Rs 20,000 (at selling price to the
branch).
(iv) Cost of unprocessed goods at Head Office on 31.3.2005 was Rs 1,00,000.
Prepare Trading and profit and Loss account in columnar form and Balance sheet
of the business as a whole as at 31.3.2005.
Answer
TRADING P& L A/C
(FOR THE YEAR ENDED 31.3.05)
H.O Brach H.O. Branch
To Purchase 19,69,500 - By Sales 12,80,000 8,20,000
To Cost of Processing 50,500 By Goods sent to 9,24,000 -
To Goods Rec. from H.O. - 8,80,000 Branch -
To Gross Profit c/d 3,40,000 1,48,000 By Closing stock ; 1,00,000
23,60,000 10,28,00 - Unprocessed 56,000 2,08,000
To Admn. Expenses 1,39,000 15,000 - Processed 23,60,000 10,28,000
To Selling Expenses 50,000 6,200 3,40,000 1,48,000
To Stock Reserve 22,909 - 1,26,800 -
To N.P. (Transfer to H.O) - 1,26,800 By Gross profit b/d
To Net Profit 2,54,891 By Branch profit
4,66,800 Nil Nil
4,66,800
BRANCH ACCOUNTS 185
Balance Sheet
( as on 31.3.05 )
Liabilities Amount Assets Amount
Capital 3,10,000 Debtors
Less: Drawing (55,000) H.O. 3,09,600
Add: N.P. 2,54,891 5,09,891 Branch 1,13,600 4,23,200
Bank Balance :
H.O. 1,52,000 2,29,500
Creditors : 6,01,400 6,12,200 Branch 77,500 84,300
H.O. 10,800 Cash in transit
Branch Stock: 56,000 1,56,000
H.O. Processed 1,00,000
Unprocessed 2,08,000
Branch; 44,000
Add: Goods in Transit (22,909) 2,29,091
11,22,091 Less: Stock Reserve 11,22,091

In the books of H.O.

1. Branch A/c
Particulars ` Particulars Rs
To balance b/d 3,89,800 By cash in Transit 84,3000
3,89,800 By Balance c/d 3,05,500
3,89,800 3,89,800

2. In the books of Branch

H.O.A/c
Particulars ` Particulars Rs
To balance c/d 30,5,500 By balance b/d 2,61,500
By Goods in transit 44,000
3,05,500 3,05,500
186 ACCOUNTING
3. Calculation of Closing Stock :

Goods received from H.O. 8,80,000

Less: Cost of Goods Sold
Sales 8,20,000
Less: G.P. ( 1/5 ( 1,64,000) ( 6,56,000)
Less: Cost of Shortage
20,000
Sales Price ( 16,000)
Less: G.P. ( 1/5) ( 4,000) 2,08,000
4. Calculation of G.P. of
H.O
(i) G.P. on sales 2,56,000
12,80,000 x 20%
(ii) Goods Sent to Branch 84,000
9,24,000 x 1/11
5. Calculation of unrealised Profit : 3,40,000

(i) On closing stock at Branch 2,08,000 x 1/11 18,909

(ii) On Goods in Transits 4,000

44,000 x 1/11 22,909

QUESTION 47 {2007 - Nov [ 4] (a)}

Beta Ltd. having office at Mumbai has a branch at Nagpur. The Head office does
wholesale trade only at cost plus 80%. The goods are sent to branch at the wholesale price
viz.., Cost plus 80%. The branch at Nagpur is wholly engaged in retail trade and the goods are
sold at cost to H.O. plus 100%.
Following details are furnished for the year ended 31st march, 2007:
Head Office Branch
Rs Rs
Opening Stock (as on 1.4.2006) 2,25,000 -

Purchases 25,50,000 -
BRANCH ACCOUNTS 187
Goods sent to Brach 9,54,000 -
(Cost to H.O. plus 80%)
Sales 27,81,000 9,50,000
Office expenses 90,000 8,500
Selling expenses 72,000 6,300
Staff Salary 65,000 12,000

You are required to prepare Trading and Profit and Loss Account of the Head Office and
Branch for the year ended 31st March, 2007.

ANSWER:
Trading & P&L A/c of the Branch
Particulars Rs Particulars Rs
To Op Stock - By Sales 9,50,000
To Goods received from 9,54,000 By closing (W.N.-1) 99,000
H.O. 95,000
To Gross Profit c/d 10,49,000 10,49,000
8,500 By Gross Profit b/d 95,000
To Office exp. 6,300
To Selling exp. 12,000
To Staff salary 68,200
To Net profit 95,000 95,000

Trading & P&L A/c the of H.O.

Particulars Rs Particulars Rs
To Opening Stock 2,25,000 By Sales 27,81,000
To purchase 25,50,000 By goods sold to branch 9,54,000
To G.P. c/d 16,60,000 By closing (W.N.-2) 7,00,000
44,35,000 44,35,000
By Gross Profit b/d 16,60,000
To Office expenses 90,000
To selling expenses 72,000
To Staff Salary 65,000
To Branch Stock Revenue 44,000
188 ACCOUNTING
(WN-1)
To Net Profit 13,89,000
16,60,000 16,60,000

Working Notes:
1. Calculation of closing stock of branch:
Rs.
Goods received from head office [ at invoice value ] 9,54,000
Less : Invoice value of goods sold [ 9,50,000 x 180/200] 8,55,000
2. Calculation of closing stock of head office: Rs
Opening stock of head office 2,25,000
Goods purchased by head office 25,50,000
27,75,000
Less: Cost of goods sold
[ ( 27,81,000 + 9,54,000 ) x 100/ 180 ] 20,75,000
7,00,000
3. Calculation of unrealised profit in branch stock : Rs
Branch stock 99,000
Profit included 80% of cost
Therefore , unrealised profit would be = Rs 99,000 x 80/180 Rs 44, 000

QUESTION 48 {2014- May [6] (a)}

Pass necessary Journal entries in the books of an independent Branch of a company,
wherever required, to rectify or adjust the following :
(i) Income of Rs 2,800 allocated to the branch by Head office but not recorded in the
branch books
(ii) Provision for doubtful debts, whose accounts are kept by the Head office, not
provided earlier for Rs 1,000.
(iii) Branch paid Rs 3,000 as salary to a Head Office Manager , but the amount paid has
been debited by the Branch to Salaries Account.
(iv) Branch incurred travelling expenses of Rs 5,000 on behalf of Branches, but not
recorded in the books of Branch.
(v) A remittance of Rs 1,50,000 sent by the branch has not received by Head office on the
date of reconciliation Accounts.
(vi) Head office allocated Rs 75,000 to the branch as Head office expenses, which has
not yet been recorded by the Branch.
(vii) Head office collected Rs 30,000 directly from a branch Customer. The intimation of the
fact has been received by the branch only now.
(viii) Goods dispatched by the Head Office amounting Rs 10,000, but not received by the
Branch till date of reconciliation. The Goods have been received subsequently.
BRANCH ACCOUNTS 189
QUESTION 49 {2011- Nov [1]}
(d) Global Limited has a branch which closes its books of account every year on 31st
March, This is an independent branch which maintains comprehensive books of
account for recording their transactions.
You are required to show journal entries in the books of branch on 31st March, 2011
to rectify or adjust the following :
(i) Head Office allocates Rs 1,35,000 to the branch as head office expenses, which have
not yet been recorded by branch.
(ii) Deprecation of branch fixed assets, whose account are kept by head office in its books,
not yet recorded in the branch books Rs 1,15,000.
(iii) Branch paid Rs 1,40,000 as salary to an official from head office on visit to branch
and debited the amount to its Salaries Account.
(iv) Head office collected Rs 1,30,000 directly from a branch customer on behalf of the
branch, but no intimation was received earlier by the branch.
Now the branch learns about it.
(v) It is learnt that a remittance of Rs 1,50,000 sent by the branch has not been
received by head office till date.

Answer :
In the books of Branch
Journal Entries
S.No. Particulars Dr. (R) Cr. (R)
(i) Head Office Expenses A/c Dr. 1,35,000
To Global Limited (H.O.) A/c
(Being expenses allocated to branch by head 1,35,000
office
(ii) Deprecation a/c Dr. 1,15,000 1,15,000
To Global Limited (H.O.) A/c
(Being depreciation on fixed assets of branch ,
whose account are maintained by head office)
(iii) Global Limited (H.O.) A/c Dr. 1,40,000 1,15,000
To Salaries A/c
(Being the rectification of salary paid, on behalf of
the head office)
(iv) Global Limited (H.O.) A/c Dr. 1,30,000
To Debtors A/c
(Being adjustment of direct collection from branch 1,30,000
debtors, by head office)
190 ACCOUNTING
( v) No. entry shall be passed in the books of Branch but will be shown in the
books of Head office as cash-in-transit.

QUESTION 50 {2012- Nov [1] (c)}

Give Journal Entries in the books of Head office to rectify or adjusted the following :
(i) Goods sent to branch Rs 12,000 stolen during transit, branch manager refused to
accept any liability.
(ii) Branch paid Rs 15,000 as salary to the officer of head office on his visit to the
branch.
(iii) On 28th March, 2012, The H.O. dispatched goods to the branch invoiced at Rs
25,000 which was not received by branch till 31st March, 2012.
(iv) A remittance of Rs 10,000 sent by the branch on 30th March, 2012, received by the
head office on 1st April, 2012.
(v) Head office made payment of Rs 25,000 for purchase of goods by branch and
wrongly debited its own purchase account.

Answer :
(d) In the books head office
Journal entries

Particulars Dr. Cr.

Amount Rs. Amount

(i) Loss of goods due to theft during transit Dr. 12,000 12,000
To Purchase account
(Being goods lost on account of theft during transit.
(ii) Salaries account Dr. 15,000 15,000
To Branch account
(Being salary paid by the branch for H.O. employee)
(iii) No entry in the books of head office for goods sent to 10,000
branch not received by branch till 31st March, 2012.
(iv) Cash in transit account Dr.
To branch account 25,000 25,000
(being remittance by branch not received by 31st
March, 2012)

Assumption : It is assumed that refusal of branch manager ( to accept liability of stolen goods)
is accepted by the Head office. Alternatively, Branch account will be credited on the basis of
assumption that refusal of branch manager is not accepted by the Head office.
BRANCH ACCOUNTS 191

PART-3
FOREIGN BRANCHES
QUESTION NO 51
The New York branch of Fine Textiles Limited, Delhi sent the following Trial Balances
as on 31st December 19X9.
$ $
Fixed assets 1,20,000
Stock 1st January 19X9 56,000
Goods from head office 3,20,000
Sales 4,20,000
Expenses 25,000
Debtors and Creditors 24,000 17,000
Cash at bank 6,000
Head office account 1,14,000
5,51,000 5,51,000
In the head office books the branch account stood as shown below:
New York Branch Account
Debit Credit
Rs. Rs.
To Balance b/d 10,05,000 By Cash 26,08,000
To Goods sent to branch 24,63,000 By Balance c/d 8,60,000
34,68,000 34,68,000
Goods are invoiced to the branch at cost plus 10% and branch has instruction to sell at
invoice price plus 25%. Fixed assets were acquired on 1st January 19X1 when $ 100 = Rs.380.
Rates of exchange were:
1st January 19X9 $ 100 = Rs.760
31st December 19X9 $ 100 = Rs.770
Average $ 100 = Rs.750
Fixed assets have to be depreciated by 10% and the branch manager is entitled to
commission of 5% on the profit of the branch (on invoice price basis).
You are required to convert the branch Trial Balance into rupees and prepare the
Branch Trading and Profit and Loss account and the Branch Account.

QUESTION NO 52
The New York branch of Delhi Export House sent the following Trial Balance as on 31-
12-19X3.
$ $
Debit Credit
Fixed assets 17,500
Loan (taken to purchase fixed assets) 13,000
Depreciation 2,500
Stock 1-1-X3 8,200
Goods from Head office 58,800
Sales 1,05,200
Salaries and wages 15,200
192 ACCOUNTING
Interest 2,880
Cash at bank 1,700
Debtors 21,200
Head Office account 9,780
1,27,980 1,27,980
Fixed assets were purchased on 1-1-X1 when $1 = Rs.25.50, life was estimated to be
10 years. To finance the fixed asset a loan amounting to $ 22,000 was taken @ 18% interest
per annum. Annual loan instalment of 3,000 and interest were payable in every December.
Exchange Rates:
Average of 19X1 $1 = Rs.25.70
31-12-19X1 $1 = Rs.26.10
Average of 19X2 $1 = Rs.26.20
31-12-X2 $1 = Rs.26.40
Average of 19X3 $1 = Rs.36.50
31-12-X3 $1 = Rs.42.20
In the Head office books London Branch account appeared as follows:
London Branch Account
$ Rs. $ Rs.
To Balance b/d 7,000 1,84,800 By Bank 56,020 20,44,730
To Goods 58,800 21,46,200 By Balance 9,780 4,12,716
To P & L a/c 1,26,446
Exchange gain
65,800 24,57,446 65,800 24,57,446
Closing Stock : $ 2,400
You are required to show:
(1) Branch Fixed A/c, (2) Branch Loan A/c, (3) Branch Trial Balance in Rupee Terms,
(4) Branch Profit and Loss A/c (5) Adjustment Entries to incorporate branch balances in the
head office loans.

QUESTION NO 53 (NOV 1999)

An Indian company has a branch at Washington. Its trial balance as on 30th September
1998 is as follows:
Dr. Cr.
US $ US $
Plant and machinery 1,20,000 ------
Furniture and fixtures 8,000 ------
Stock, October 1,1997 56,000 ------
Purchases 2,40,000 ------
Sales ------ 4,16,000
Goods from Indian co. (H.O.) 80,000 ------
Wages 2,000 ------
Carriage inward 1,000 ------
Salaries 6,000 ------
Rent, rates and taxes 2,000 ------
Insurance 1,000 ------
Trade expenses 1,000 ------
Head Office a/c ------ 1,14,000
Trade debtors 24,000 ------
Trade creditors ------ 17,000
BRANCH ACCOUNTS 193
Cash at bank 5,000 ------
Cash in hand 1,000 ------
----------------------------------------
US $ 5,47,000 5,47,000
----------------------------------------
The following information is given:
(i) Wages outstanding-- $ 1000
(ii) Depreciation Plant and Machinery and furniture and fixtures @ 10 % p.a.
(iii) The head office sent goods to branch for Rs.39,40,000.
(iv) The head office shows an amount of Rs.43,00,000 due from branch.
(v) Stock on 30th September 1998 -- $ 52,000.
(vi) There were no in transit items either at the start or at the end of the year.
(vii) On September 1, 1996, when the fixed assets were purchased the rate of
exchange was Rs.38 to one $.
On October 1,1997 the rate was RS.39 to one $.
On September 30,1998 the rate was Rs.41 to one $.
Average rate during the year was Rs.40 to one $.
You are asked to prepare:
(a) Trial Balance incorporating adjustments given under 1 to 4 above, converting dollars
into rupees;
(b) Trading and profit and loss account for the year ended 30th September 1998 and
balance sheet as on that date depicting the profitability and net position of the branch
as would appear in India for the purpose of purpose of incorporating in the main
balance sheet.

QUESTION NO 54 (MAY 1999)

Carlin & Co. has head office at New York (U.S.A.) and branch at Mumbai (India).
Mumbai branch furnishes you with its trial balance as on 31.3.99 and the additional information
given thereafter:
Dr. Cr.
(Rupees in thousand)
Stock on 1.4.1998 300 ------
Purchases and sales 800 1,200
Sundry debtors and creditors 400 300
Bill of exchange 120 240
Wages and salaries 560 ----
Rent, rates and taxes 360 ----
Sundry charges 160 ----
Computers 240 ----
Bank balance 420 ----
New York office A/c ---- 1,620
-----------------------------------
Rs. 3,360 3,360
-----------------------------------
194 ACCOUNTING
Additional information:
(a) Computers were acquired from a remittance of US $ 6000 received from New York
head office and paid to the suppliers. Depreciate computers at 60 % for the year.
(b) Unsold stock of Mumbai branch was worth Rs.4,20,000, on 31.3.1999.
(c) The rates of exchange may be taken as follows:
(i) On 1.4.1998 @ Rs.40 per US $
(ii) On 31.3.1999 @ Rs.42 per US $
(iii) Average exchange rate for the year @ Rs.41 per US $
(iv) Conversion in $ shall be made up to two decimal accuracy.
You are required to prepare in US dollars the revenue statement for the year
-ended 31.3.1999 and the balance sheet as on that date of Mumbai branch as would appear in
the books of New York head office of Carlin & Co. You are informed that Mumbai branch
account showed a debit balance of US $ 39609.18 on 31.3.1999 in New York books and there
were no items pending reconciliation.

QUESTION NO 55 (C A NOV 2009)

DM Ltd. Delhi has a branch in London. London branch is an integral foreign operation of
DM Ltd at the end of the year 31st March, 2009, the branch furnishes the following trial balance
in U.K. Pound :
Particulars
Dr. Cr.
Fixed assets (Acquired on 24,000
1st April, 2005)
Stock as on 1st April, 2008 11,200
Goods from head office 64,000
Expenses 4,800
Debtors 4,800
Creditors 3,200
Cash at bank 1,200
Head Office Account 22,800
Purchase 12,000 96,000
Sale 1,22,000 1,22,000

In head office books, the branch account stood as shown below :

London branch A/c
Dr. Cr.
Particular Amount Rs. Particular Amount Rs.

To Balance b/d 20,10,000 By bank a/c 52,16,000

To Goods sent to 49,26,000 By bank c/d 17,20,000
branch

69,36,000 69,36,000
BRANCH ACCOUNTS 195
The following further information are given:
(a) Fixed assets are to be depreciated @ 10% p.a. straight line basis.
(b) On 31st March , 2008:
Expenses outstanding £400
Prepared expenses £200
Closing stock £ 8,000
(C) Rate of Exchange :
1st April, 2005 - Rs. 70 to £1
st
1 April, 2008 - Rs. 76 to £1
31st April, 2009 - Rs. 77 to £1

AVERAGE RATE
- RS.75 to £1
You are required to prepare:
(1) Trial balance, incorporating adjustments of outstanding and prepaid expenses,
converting U.K. pound into Indian rupees.
(2) Trading and profit and Loss A/c for the year ended 31st march, 2009 and the Balance
sheet as on that date of Londaon branch as would appear in the books of Delhi head
office of DM Ltd.
ANSWER:
Gross profit 11,38,800 Net profit 6,08,200 B/S TOTAL 26,05,400

QUESTION NO 56 (C A MAY 2008)

The Washington branch of XYZ Ltd., Mumbai sent the following trial balance as on 31st
December , 2007:
$ $
Head Office A/c - 22,800
Sales - 84,000
Debtors and Creditors 4,800
3,400
Machinery 24,000 -
Cash at Bank 1,200 -
Stock, 1 January, 2007 11,200 -
Goods from HO 64,000 -
Expenses 5,000 -
1,10,200 1,10,200
In the books of head office, the Branch a/c stood as follows
Washington Branch
A/c
Rs. Rs.
To Balance b/d 810,000 By cash 28,76,000
To goods sent to 29,26,000 By Balances 8,60,000
branch c/d
37,36,000 37,36,000
196 ACCOUNTING
Goods are sent to the branch at cost plus 10% and the branch sell goods at invoice price plus
25% Machinery were acquired on 31st January, 2002.
When $ 1.00 = Rs. 40 .
Rate of Exchange were
1st January 2007 $ 1.00 = Rs. 46
31st December 2007 $ 41.00 – Rs. 48
Average $ 1.00 = Rs. 47
Machinery is depreciated @ 10% and the branch manager is entailed to a commission of 5%
on the profit of the branch after charging such commission.
You are required to:
(i) Prepare the branch trading & Profit & Loss a/c in Dollars
(ii) Convert the trial balance of the branch into Indian Currency and prepare branch
trading & Profit and Loss a/c and the branch a/c in the books of head office.
ANSWER
(I)
Trading and Profit & Loss A/c ( In Dollars)
Particular Rs. Particular Rs.
To Opening Stock 11,200 By Sales 84,000
To Good from H.O. 64,000 By Closing 8,000
Stock
To Goods Profit c/d 16,800
92,000 92,000
To Expenses 5,000 By Gross 16,800
Profit b/d
To Depreciation 24000
To Manager’s Commission 448
To Net Profit c/d 8,952
16,800 16,800
(ii) (a) Converted Trial Balance
Particular Rate per Re. (Dr. (Rs) Cr (Rs.)
Machinery 40 9,60,000
Stock Jan. 1,2007 46 5,15,200
Good from H.O. - 29,26,000
Sales 47 - 39,48,000
Expenses 47 2,35,000 -
Debtors & Creditors 48 2,30,400 163,200
H.O. A/c - - 8,60,000
BRANCH ACCOUNTS 197
Cash at Bank - 57600 -
Difference of Exchange - 47000 -
- 49,71,200 -
Closing Stock $ 8,000 48 3,64,000
(WN 2)

(b) Trading and Profit & Loss Account

Particular Rs. Particular Rs.
To Opening Stock 5,15,200 By sales 39,48,000
To Goods from H.O. 29,26,000 By Closing 3,84,000
Stock
To Gross Profit c/d 8,90,800
43,32,000 43,32,000
To Expenses 2,35,000 By Gross 8,90,000
Profit b/d
To Depreciation @ 10% 96,000
on R.s 9,60,000
To Exchange differences 47,000
To Manger’s Commission 21,504
(WN1)
TO Net Profit c/d 4,91,296
8,90,800 8,90,800
Working Notes
(i) Manager’s Commission = 5/105 of [ 16,800 – ( 5,000 + 2.400) ] = $
448 (approx)
Manager’s Commission in Rs. $448 x 48 = 21,504
(ii) Calculation of
closing stock
Opening stock 11,200
Add: Goods from H.O. 64,000
Less: Cost of Goods Sold ( 67,200)
(at invoice price) [
100/125 x 84,000 ]
Closing Stock 8,000
198 ACCOUNTING
QUESTION 57 {2010- May [ 1]}
On 31st March, 2010, the following Ledger balances have been extracted from the books
of Washington branch office :

Ledger A/c $

Building 180

Stock as on 1.4.2009 26

Cash and bank balances 57

Purchases 96

Sales 110

Commission receipts 28

Debtors 46

Creditors 65

You are required to convert above ledger balances into Indian Rupees .
Use the following rates of exchanges:
Opening Rate $ = 46
Closing Rate $ = 50
Average rate $ = 48
For Fixed Assets $ = 42

Answer :
Conversion of ledger balances ( in Dollars) into Rupees
Particulars $ Rate per $ Amount in
Rs
Building 180 42 7560

Stock as on 01.04.2009 26 46 1196

Cash and bank balances

57 50 2850
Purchases 96 48 4608
Sales 110 48 5280

Commission receipts 28 48 1344

46 50 2300
Debtors
65 50 3250
Creditors
BRANCH ACCOUNTS 199

QUESTION 58 {2012- May [6]}

An Indian company Moon Star Limited has a branch at Verginia (USA0.
The Branch is a non-integral foreign operation of the Indian Company. The trial
balance of the Branch as at 31st March, 2012 is as follows:
US $
Particulars Dr. Cr.
Office Equipments 48,000
Furniture and Fixtures 3,200
Stock (April 1,2011) 22,400
Purchases 96,000
Sales - 1,66,400
Goods sent from H.O. 32,000
Salaries 3,200
Carriage inward 400
Rent, Rates & Taxes 800
Insurance 400
Trade Expenses 400
Head office Account - 45,600
Sundry Debtors 9,600
Sundry Creditors - 6,800
Cash at Bank 2,000
Cash in Hand 400
2,18,800 2,18,800

The following further information are given:

1. Salaries outstanding $ 400.
2. Depreciate office equipment and Furniture & Fixtures @ 10% p.a. at written
down value.
3. The Head office sent goods to Branch for Rs 15,80,000.
4. The Head office shown a amount of Rs 20,50,000 due from Branch .
5. Stock on 31st March, 2012- $ 21, 500.
6. There were no transit items either at the start or at the end of the year.
7. On April, 1,2010 when the fixed assets were purchased the rate of exchange was
Rs 43 to one $ Average rate during the year was Rs 45 to One $.
200 ACCOUNTING

Prepare :
(a) Trial balance incorporating adjustments given converting dollars into rupees.
(b) Trading, profit and loss Account for the year ended 31st March, 2012 and
Balance sheet as on date depicting the profitability and net position of the branch as
would appear in the books of Indian Company for the purpose of incorporating in
the main balance sheet.

Answer
In the books of Moon Star Ld.- an Indian Company
Trial Balance (in Rupees) of Verginia (USA) Branch
as on 31st March, 2012
(a)
Particular Dr. Cr. Conversion Dr. Cr.
US $ US $ rate Rs. Rs.
Office 43,200 50 2160000
Equipment 4,800 50 240000
Depreciation on
office 2,880 50 1,44,000
Equipment 320 50 16,000
Furniture and
fixtures
Depreciation on 22,400 47 10,52,800
Furniture and 96,000 45 43,20,000
fixtures 1,66,400 45 74,88,000
32,000 15,80,000
Stock (1st April, 400 45 18,000
2011) 3600 45 1,62,000
Purchases 400 50 20,000
Sales 800 45 36,000
Goods Sent 400 45 18,000
from H.O. 400 45 18,000
Carriage inward 45600
Salaries ( 3,200 9600 50 480000 20,50,000
BRANCH ACCOUNTS 201

+ 400) 6800 50
Outstanding 2,000 50 1,00,000 3,40,000
salaries 400 50 20,000
Rent rates and
taxes 4,66,800
Insurance
Trade expenses
Head office A/c
Trade debtors
Trade Creditors
Cash at bank
Cash in hand
Exchange gain
(bal. fig.)
2,19,200 2,19,200 1,03,64,800 1,03,64,800

(b)
Trading and profit and Loss Account of Verginia Branch
for the year ended 31st March, 2012
Particular Rs Particular Rs
To Opening Stock 10,52,800 By Sales 74,88,000
To purchase 43,20,000 By Closing stock 10,75,000
To Goods from Head office 15,80,000 ( 21,500 US $ x
To Carriage inward 18,000 50) 85,63,000
To Gross profit c/d 15,92,200 15,92,200
85,63,000
To Salaries 1,62,000
To Rent, rates and taxes 36,000 By Gross profit b/d
To Insurance 18,000
To Trade expenses 18,000
To Depreciation of office equipment 2,40,000
 202 ACCOUNTING

To Depreciation on furniture and

fixtures and fixtures 16,000
To net Profit c/d 11,02,200
15,92,200 15,92,200

Balance Sheet of Verginia Branch

as on 31st march, 2012
Liabilities Rs Rs Assets ` Rs
Head office A/c 20,50,000
Add: Net profit 11,02,200 31,52,200 Office Equipment 24,00,000
Foreign currency Less: Depreciation 2,40,000 21,60,000
Transaction Reserve 4,66,800 Furniture and 1,60,000
Trade Creditors 3,40,000 fixtures 16,000 1,44,000
Outstanding salaries 20,000 Less: Depreciation 10,75,000
Closing stock 4,80,000
Trade debtors 20,000
Cash in hand 1,00,000
Cash at bank
39,79,000 39,79,000

QUESTION 59 {2013- May [6]}

ABCD Ltd . Delhi has a branch in New York, USA, which is an integral foreign
operation of the company. At the end on 31st March, 2013, the following ledger balances have
been extracted from the books of the Delhi office and the New York Branch.
Delhi New York
Particulars (Rs. thousands ) $ thousand
Debit Credit Debit Credit
Share capital 1250
Reserves and Surplus 940
Land 475
Building (cost) 1,000
Buildings Depreciation Reserve 200
Plant & Machinery (cost) 2,000 100
Plant & Machinery Depreciation Reserve 500 20
BRANCH ACCOUNTS 203
Trade receivables/ payables 500 270 60 20
Stock ( 01-04-2012) 250 25
Branch stock Reserve 65
Cash & Bank Balances 125 4
Purchases/ Sales 275 600 25 125
Goods sent to branch 1,500 30
Managing Director's salary 50
Wages & Salaries 100 18
Rent 6
Office Expenses 25 12
Commission receipts 275 100
Branch /H.O. current A/c 800 - - 15
Total 5,600 5,600 280 280

The following information is also available:

(1) Stock as at 31-01-2013
Delhi - Rs 2,00,000
New york - $ 10 (all stock received from Delhi)
(2) Head office always sent goods to the branch at cost plus 25%
(3) Provision is to be made for doubtful debts at 5%
(4) depreciation is to be provided on Building at 10% and on Building at 10% and on plant
and Machinery at 20% on written down values.
You are required.
(a) To convert the Branch Trial balance into rupees, using the following rates of
exchange :
Opening Rate 1$ = Rs 50
Closing rate 1$ = Rs 55
Average rate 1$ = Rs 52
For fixed assets 1$ = Rs 45
(b) To prepare the Trading and Profit & Loss Account for the year ended 31st March , 2013,
showing to the extent possible, Head office result and branch results separately.
 204 ACCOUNTING
ABCD Ltd.
New York Branch Trial Balance
(As on 31st March, 2013)
( $ '000 (Rs '000)
Particular Dr. Cr. Conversion Dr. Cr.
rate per $
Plant & Machinery (cost) 100 Rs 45 4,500
Plant& Machinery Dep. Reserve 20 Rs 45 900
Trade receivable / payable 60 20 Rs 55 3,300 1,100
Stock ( 1.4.2012) 25 Rs 50 1,250
Cash & Bank Balances 4 Rs 55 220
Purchase /sales 25 125 Rs 52 1,300 6,500
Goods received from H.O. 30 1,500
Wages & Salaries 18 Rs 52 936
Rent 6 Rs 52 312
Office expenses 12 Rs 52 624

Commission Receipts 100 Rs 52 5,200

H.O. Current A/c 15 800
13942 14,500
Exchange loss (bal. fig0 558
14500 14,500

(b)
Trading and Profit & Loss Account
for the year ended 31st March, 2013
H.O. Branch Total H.O. Branch Total
To Opening stock 250 1250.00 1500.00 By Sales 6600 6500.00 7,100.00
To Purchase 275 1300.00 1575.00 By Goods Sent to 1500 - 1500.00
To Goods receive from Head - 1500.00 Branch 0.55 200.55
Office 100 936.00 1500.00 Closing stock 200
To wages & salaries 1675 1514.55 1036.00 6,500.55 3800.55
To Gross Profit c/d 2,300 6500.55 3189.00 1514.55 3189.55
- 312.00 8800.55 2300 5200.00 5475.00
To Rent 25 624.00 312.00 By Gross profit b/d 1675
To Office expenses 25 165.00 649.00 By Commission 275 6714.55
To Provision for doubtful debts 380 720.00 190.00 receipt
 BRANCH ACCOUNTS 205
@ 5% 1520 4893.55 1100.00
To Deprecation (W.N.1) 1950 6413.55
To Balance c/d 8664.55 1950 8664.55
558.00 By Balance b/d 64132.55
To Exchange loss 50.00 By Branch stock 64.89
To Managing director's 5870.44 Reserve (W.N.2)
Salary 6478.44 6478.44
To balances c/d

Working Notes:
(1) Calculation of Deprecation (in '000)

Particular H.O.Rs Branch Rs.

Building Cost 1,000

Less: Dep. Reserve (200)
Deprecation @ 10% (A) 800
Plant & Machinery Cost 80
Less: Dep. Reserve 2,000 4500
Depreciation @ 20% (B) (500) (900)
Total Depreciation (A+B) 1,500 3,600
300 720
380 720

(2) Calculation of Additional Branch Stock Reserve (Rs. in ' 000)

Particulars (Rs)

Closing stock of Branch 0.55

Reserve on closing stock ( 0.55 x 1/5)
Less: Branch stock reserve (as on 0.11
1.4.2012)
(65)
Reversal of stock Reserve
(64.89)

QUESTION 60
On 31st December, 2012 the following balances appeared in the books of Chennai Branch of
an English firm having its HO office in New York:
Amount in Rs Amount in Rs
Stock on 1st Jan., 2012 2,34,000
Purchases and Sales 1562500 2343750
206 ACCOUNTING
Debtors and Creditors 765,000 510000
Bills Receivable and Payable 204,000 178500
Salaries and Wages 1,00,000
Rent, Rates and Taxes 1,06,250
Furniture 91,000
Bank A/c 5,68,650

New York Account - 599150

3631400 3631400

Stock on 31st December, 2012 was 6,37,500.

Branch account in New York books showed a debit balance of $13,400 on 31 December, 2012
and Furniture appeared in the Head Office books at $1,750.
The rate of exchange for on 31 December, 2011 was 52 and on 31st December, 2012 was 51.
The average rate for the year was 50.
Prepare in the Head Office books the Profit and Loss a/c and the Balance Sheet of the Branch.

Solution
In the books of English Firm (Head Office in New York)
Chennai Branch Profit and Loss Account
for the year ended 31st December, 2012

$ $

To Opening stock 4500 By Sales 46875

To Purchases 31250 By Closing 12500
To Gross profit c/d 23625 ( 6,37,500/51)
59375
59375
To Salaries 2000 By gross profit
23625
To Rent, rates and taxes 2125
To Exchange translation loss 2000
To Net Profit c/d 17500
23625 23625
BRANCH ACCOUNTS 207
Balance Sheet of Chennai Branch
as on 31st December, 2012

Liabilities $ $ Assets $
Head Office A/c 13400 Furniture 1750
Add: Net Profit 17500 30900 Closing Stock 12500
Trade Creditors 10000 Trade Debtors 15000
Bills Payable 3500 Bills Receivable 4000
Cash at bank 11150
44400 44400

Working Note:
Calculation of Exchange Translation Loss
Chennai Branch Trial Balance (converted in $)
as on 31st December, 2012
Dr. Cr. Conversion Dr. Cr.
Rs Rs Rate ($) ($)
Stock on lst Jan., 2012 234000 52 4500
Purchases & Sales 1562500 2343750 50 31250 46875
Debtors & creditors 765000 510000 51 15000 10000
Bills Receivable and Bills 204000 178500 51 4000 3500
Payable 100000 50 2000
Salaries and wages 106250 50 2125
Rent, Rates and Taxes 91000 1750
Furniture 568650 51 11150
Bank A/c 599150 13400
New York Account 2000
Exchange translation loss
(bat. fig.)
3631400 3631400 73775 73775
208 ACCOUNTING

LATEST PAST EXAMINATION QUESTIONS

QUESTION NO 61 (CA IPCC MAY 17 6 MARKS)
Show Adjustment Journal Entry alongwith working notes in the books of head office at
the end of April, 2017 for incorporation of inter branch transactions assuming that only head
office maintains different branch account in its books:

(A) Delhi Branch:

(i) Received goods from Mumbai Rs. 1,40,000 and Rs. 60,000 from Kolkata.
(ii) Sent goods to Chennai Rs. 1,00,000, Kolkata Rs. 80,000
(iii) Bill receivable received Rs. 80,000 from Chennai.
(iv) Acceptances sent to Mumbai Rs. 1,00,000, Kolkata Rs. 40,000

(B) Mumbai Branch (Apart from the above):

(i) Received goods from Kolkata Rs. 60,000, Delhi Rs. 80,000
(ii) Cash sent to Delhi Rs. 60,000, Kolkata Rs. 28,000

(C) Chennai Branch (Apart from the above):

(i) Received goods from Kolkata Rs. 1,20,000

(ii) Acceptance and cash sent to Kolkata Rs. 80,000 and Rs.40,000 respectively.

(D) Kolkata Branch (Apart from the above)

(i) Sent goods to Chennai Rs. 1,40,000

(ii) Paid cash to Chennai Rs. 60,000
(iii) Acceptance sent to Chennai Rs. 60,000

QUESTION NO 62 (CA IPCC NOV 2016 8 MARKS)

Mr. Chena Swami of Chennai trades in Refined Oil and Ghee. It has a branch at
Salem. He despatches 30 tins of Refined Oil @ Rs. 1,500 per tin and 20 tins of Ghee
Rs.5,000 per tin on 1st of every month. The Branch has incurred expenditure of Rs.45,890
which is met out of its collections; this is in addition to expenditure directly paid by Head
Office.

Following are the other details:

Chennai H.O. Salem B.O.
Amount (Rs.) Amount (Rs.)
Purchases:
Refind Oil 27,50,000
Ghee 48,28,000
Direct Expenses 6,35,800
Expenses paid by H.O. 76,800
Sales:
Refined Oil 24,10,000 5,95,000
Ghee 38,40,500 14,50,000
Collection during the year (including 20,15,000
cash sales)
Remittance by Branch to Head Office 19,50,000
BRANCH ACCOUNTS 209
Chennai H.O. 01.04.2015 31.03.2016
Balance as on Amount (Rs.) Amount (Rs.)
Stock:
Refined Oil 44,000 8,90,000
Ghee 10,65,000 15,70,000
Building 5,10,800 7,14,870
Furniture & Fixtures 88,600 79,740
Salem Branch Office
Balance as on 01.04.2015 31.03.2016
Amount (Rs.) Amount (Rs.)
Stock:
Refined Oil 22,500 19,500
Ghee 40,000 90,000
Sundry Debtors 1,80,000 ?
Cash in Hand 25,690 ?
Furniture & Fixtures 23,800 21,420
Additional Information:
(i) Addition to Building on 01.04.2015 Rs. 2,41,600 by H.O.
(ii) Rate of depreciation : Furniture & Fixtures @ 10% and Building @ 5% (already
adjusted in the above figure)
(iii) The Branch Manage is entitled to 10% commission on overall organizational profits
after charging such commission.
(iv) The General Manager is entitled to a salary of Rs. 20,000 per month.
(v) General expenses incurred by Head Office is Rs. 1,86,000.
You are requested to prepare Branch Account in the Head Office books and also prepare
Chena Swami’s Trading and Profit & Loss Account (excluding branch transactions) for the year
ended 31st March, 2016.
SOLUTION
In the books of Mr. Chena Swami
Salem Branch Account.

Rs. Rs.
To Balance b/d By Bank (Remittance to H.O.) 19,50,000
Opening Stock: To Balance c/d
Ghee 40,000 Closing Stock:
Oil 22,500 Refined Oil 19,500
Debtors 1,80,000 Ghee 90,000
Cash in Hand 25,690 Debtors (W.N.1) 2,10,000
Furniture & Fittings 23,800 Cash on hand (W.N.2) 44,800
To Goods sent to Branch Furniture & Fittings 21,420
A/c.
Refined Oil (30x1500x12) 5,40,000
Ghee (20x5000x12) 12,00,000
To Bank (Expenses paid by 76,800
H.O.)
To Net Profit transferred to 2,26,930
General P&L A/c.
23,25,720 23,35,720
210 ACCOUNTING
Mr. Chena Swami
Trading and Profit and Loss Account for the year
ended 31st March, 2016 (Excluding branch transactions)

Rs. Rs.
To Opening Stock: By Sales:
Refined Oil 44,000 Refined Oil 24,10,000
Ghee 10,65,000
To Purchases: Ghee 38,40,500
Refind Oil 27,50,000
Less: Goods Sent By Closing Stock:
to Branch (5,40,000) 22,10,000 Refined Oil 8,90,000
Ghee 15,70,000
To Ghee 48,28,000
Less: Goods sent
to Branch (12,00,000) 36,28,000

To Direct Expenses 6,35,800

To Gross Profit 11,27,700

87,10,500 87,10,500
To Manager’s Salary 2,40,000 By Gross Profit 11,27,700
To General Expenses 1,86,000 By Branch Profit 2,26,930
To Depreciation transferred
Furniture (88,600-79,740) 8,860
Building
(5,10,800+2,41,600-7,14,780) 37,620
10% (8,82,150x10/100) 80,195
To Net Profit 8,01,955
13,54,630 13,54,630

Working Notes:
(1) Debtors Account

Rs. Rs.
To Balance b/d 1,80,000 By Cash Collections 20,15,000
To Sales made during the year: By Balance c/d (Bal. 2,10,000
Refined Oil 5,95,000 Figure)
Ghee 14,50,000
22,25,000 22,25,000

(2) Branch Cash Account

Rs. Rs.
To Balance b/d 25,690 By Remittance 19,50,000
To Collections 20,15,000 By Exp. 45,980
By Balance c/d (Bal. Figure) 44,800
20,40,690 20,40,690
BRANCH ACCOUNTS 211
Note:

1. Branch managers generally get commission based on the Branch profits and not on
overall organizational profits. The answer given above is on the basis of the information
given in the question and the commission of branch manager is computed as 10% on
overall organizational profits after charging such commission.

2. Since the amount of cash sales was not given specifically in the question, total amount of
cash collections during the year amounting Rs. 20,15,000 has been considered as
collection from Debtors in the above solution.

QUESTION NO 63 (CA IPCC MAY 2016 8 MARKS)

M/s. ABC & Co. has head office at New York (U.S.A.) and branch in Bangalore (India).
Bangalore branch is an integral foreign operation of ABC & Co.

Bangalore branch furnishes you with its trial balance as on 31st March, 2015 and the additional
information given thereafter:

Dr. Cr.
(Rupees in thousands)
Stock on 1st April, 2014 300
Purchases and Sales 800 1,200
Sundry Debtors & Creditors 400 300
Bills of Exchange 120 240
Wages & Salaries 560 -
Rent, Rates & Taxes 360 -
Sundry Charges 160 -
Computers 240 -
Bank Balance 420 -
New York Office A/c. - 1,620
3,360 3,360

Additional Information:
(a) Computers were acquired from a remittance of US $ 6,000 received from New York head
office and paid to the suppliers. Depreciate computers at 60% for the year.
(b) Unsold stock of Bangalore branch was worth Rs. 4,20,000 on 31st March, 2015.
(c) The rates of exchange may be taken as follows:
- On 01.04.2014 @ Rs. 55 per US $
- On 31.03.2015 @ Rs. 60 per US $
- Average exchange rate for the year @ Rs. 58 per US $
- Conversion in $ shall be made up to two decimal accuracy.

You are asked to prepare in US dollars the revenue statement for the year ended 31st March,
2015 and the balance sheet as on that date of Bangalore branch as would appear in the books
of New York head office of ABC & Co. You are informed that Bangalore branch account
showed a debit balance of US $ 29845.35 on 31.3.2015 in New York books and there were no
items pending reconciliation.
212 ACCOUNTING
SOLUTION
M/s. ABC & Co.
Bangalore Branch Trial Balance
in (US $) as on 31st March, 2015

Conversion rate per Dr. US $ Cr. US $

US $ (Rs.) Rs. Rs.
Stock on 1.4.14 55 5,454.55 -
Purchases and sales 58 13,793.10 20,689.66
Sundry debtors and creditors 60 6,666.67 5,000.00
Bills of exchange 60 2,000.00 4,000.00
Wages and salaries 58 9,655.17 -
Rent, rates and taxes 58 6,206.90 -
Sundry Charges 58 2,758.62 -
Computers - 6,000.00 -
Bank Balance 60 7,000.00 -
New York office A/c. - - 29,845.35
59,535.01 59,535.01

Trading and Profit & Loss Account

for the year ended 31st March, 2015

US $ US $
To Opening Stock 5,454.55 By Sales 20,689.66
To Purchases 13,793.10 By Closing Stock 7,000.00
To Wages and Salaries 9,655.17 (Rs.4,20,000/60)
By Gross Loss c/d 1,213.16
28,902.82 28,902.82
To Gross Loss b/d 1,213.16 By Net Loss 13,778.68
To Rent, rates and taxes 6,206.90
To Sundry Charges 2,758.62
To Depreciation on computers 3,600.00
(US $ 6,000x0.6)
13,778.68 13,778.68

Balance Sheet of Bangalore

Branch as on 31st March, 2015
Liabilities US $ Assets US $ US $
New York 29,845.35 Computers 6,000.00
Office A/c. Less: Dep. (3,600,00) 2,400.00
Less:
Net Loss (13,778.68) 16,066.67 Closing Stock 7,000.00

Sundry 5,000.00 Sundry Debtors 6,666.67

Creditors
Bills receivable 2,000.00
Bills Payable 4,000.00
Bank Balance 7,000.00
25,066.67 25,066.67
BRANCH ACCOUNTS 213
QUESTION NO 64 (CA IPCC NOV 2015 12 MARKS)
Raju Industries, Kolkata has a branch in Delhi to which office goods are invoiced at cost
plus 25%. The branch sells both for cash and on credit. Branch expenses are paid direct
from head office, and branch has to remit ash received to the Head Office Bank Account.
From the following details, relating to calendar year 2014, prepare the accounts in the
Head Office Ledger ascertain the Branch Profit, Branch does not maintain any books of
account, but sends weekly returns to Head Office.

Particulars Amount in Rs.

Goods received from Head Office at Invoice Price 6,00,000
Returns to Head Office at Invoice Price 12,000
Stock at Delhi as on 1st Jan. 2014 60,000
Sales during the year – Cash 1,80,000
- Credit 3,80,000
Sundry Debtors at Delhi as on 1st Jan. 2014 72,000
Discount allowed to debtors 8,000
Bad Debts in the year 6,000
Sales returns at Delhi Branch 6,000
Rent, Rates, Taxes at Branch 16,000
Salaries, Wages, Bonus at Branch 62,000
Office Expenses 6,000
Stock at Branch on 31st December, 2014 1,20,000

SOLUTION
Delhi Branch Stock Account

Particulars Rs. Particulars Rs.

To Balance b/d 60,000 By Goods sent to branch A/c. 12,000
(Returns)
To Goods sent to branch A/c. 6,00,000 By Bank A/c. (Cash Sales) 1,80,000
To Branch Debtors A/c. 6,000 By Branch debtors A/c. 3,80,000
(Returns) (Credit sales)
To Branch adjustment A/c. 26,000 By Balance c/d 1,20,000
(Surplus over invoice price)
6,92,000 6,92,000

Delhi Branch Adjustment Account

Particulars Rs. Particulars Rs.
To Stock reserve – 20% of 24,000 By Delhi Branch stock A/c. 26,000
Rs.1,20,000 (Closing Stock)
By Stock reserve – 20% of 12,000
To Branch profit & loss A/c. 1,31,600 Rs.60,000 (Opening Stock)

By Goods sent to branch A/c. 1,17,600

– 20% of Rs. 5,88,000
1,55,600 1,55,600
214 ACCOUNTING
Branch Expenses Account
Particulars Rs. Particulars Rs.
To Bank A/c. (Rent, rates & 16,000 By Branch profit and loss A/c. 84,000
taxes) (Transfer)

To Bank A/c.(Salaries & 62,000

Wages)
To Bank A/c.(Office exp.) 6,000
84,000 84,000

Branch Debtors Account

Particulars Rs. Particulars Rs.

To Balance b/d 72,000 By Bank A/c. 4,32,000
To Branch stock A/c. 3,80,000 By Branch profit and loss A/c. 14,000
(Bad debts and discount)
By Branch stock A/c. (Sales 6,000
returns)
4,52,000 4,52,000

Goods sent to Branch Account

Particulars Rs. Particulars Rs.

To Branch Stock A/c. 12,000 By Branch Stock A/c. 6,00,000
To Branch Adjustment A/c. 1,17,600
To Purchases A/c. 4,70,400
6,00,000 6,00,000

Branch Profit & Loss Account

Particulars Rs. Particulars Rs.

To Branch expenses A/c. 84,000 By Branch adjustment A/c. 1,31,600
To Branch debtors A/c. 8,000
(Discount)

* In the absence of information about closing balance of Branch debtors A/c. and cash
received from debtors closing balance of debtors is assumed as nil and balancing figure is
considered as cash received from debtors.
To Branch debtors A/c. (Bad 6,000
Debts)

To Net Profit (transferred to 33,600

Profit & Loss A/c)
1,31,600 1,31,600