PAPER – 1: ACCOUNTING

ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY

FOR NOVEMBER 2020 EXAMINATION

A. Applicable for November, 2020 examination

I. Amendments in Schedule III (Division I) to the Companies Act, 2013
In exercise of the powers conferred by sub-section (1) of section 467 of the
Companies Act, 2013), the Central Government made the following amendments in
Division I of the Schedule III with effect from the date of publication of this notification
in the Official Gazette:
(A) under the heading “II Assets”, under sub-heading “Non-current assets”, for the
words “Fixed assets”, the words “Property, Plant and Equipment” shall be
substituted;
(B) in the “Notes”, under the heading “General Instructions for preparation of
Balance Sheet”, in paragraph 6,-
(I) under the heading “B. Reserves and Surplus”, in item (i), in sub- item (c),
the word “Reserve” shall be omitted;
(II) in clause W., for the words “fixed assets”, the words “Property, Plant and
Equipment” shall be substituted.
II. Amendments in Schedule V to the Companies Act, 2013
In exercise of the powers conferred by sub-sections (1) and (2) of section 467 of the
Companies Act, 2013, the Central Government hereby makes the following
amendments to amend Schedule V.
In PART II, under heading “REMUNERATION”, in Section II - ,
(a) in the heading, the words “without Central Government approval” shall be
omitted;
(b) in the first para, the words “without Central Government approval” shall be
omitted;
(c) in item (A), in the proviso, for the words “Provided that the above limits shall be
doubled” the words “Provided that the remuneration in excess of above limits
may be paid” shall be substituted;
(d) in item (B), for the words “no approval of Central Government is required” the
words “remuneration as per item (A) may be paid” shall be substituted;
(e) in Item (B), in second proviso, for clause (ii), the following shall be substituted,
namely:-
“(ii) the company has not committed any default in payment of dues to any bank

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or public financial institution or non-convertible debenture holders or any other

secured creditor, and in case of default, the prior approval of the bank or public
financial institution concerned or the non-convertible debenture holders or other
secured creditor, as the case may be, shall be obtained by the company before
obtaining the approval in the general meeting.";
(f) in item (B), in second proviso, in clause (iii), the words “the limits laid down in”
shall be omitted;
In PART II, under the heading “REMUNERATION”, in Section III, –
(a) in the heading, the words “without Central Government approval” shall be
omitted;
(b) in first para, the words “without the Central Government approval” shall be
omitted;
(c) in clause (b), in the long line, for the words “remuneration up to two times the
amount permissible under Section II” the words “any remuneration to its
managerial persons”, shall be substituted;
III. Notification dated 13th June, 2017 to exempt startup private companies from
preparation of Cash Flow Statement as per Section 462 of the Companies
Act 2013
As per the Amendment, under Chapter I, clause (40) of section 2, an exemption has
been provided to a startup private company besides one person company, small
company and dormant company. Accordingly, a startup private company is not
required to include the cash flow statement in the financial statements.
Thus the financial statements, with respect to one person company, small company,
dormant company and private company (if such a private company is a start-up), may
not include the cash flow statement.
IV. Amendment in Higher Education Cess as per Finance Act, 2018
The rate of DDT is 15% excluding surcharge of 12% plus secondary and higher
education cess is 4%* (revised as per Finance Act, 2018). This revised effective rate
17.472% (that is, 15% plus surcharge@12% plus health and education cess @4%)
will be considered for computation of corporate dividend tax in preparation of
Financial Statements of companies.
*Earlier this was 3%.
V. Amendment in AS 11 “The Effects of Changes in Foreign Exchange Rates”
In exercise of the powers conferred by clause (a) of sub-section (1) of section 642 of
the Companies Act, 1956, the Central Government, in consultation with National
Advisory Committee on Accounting Standards, hereby made the amendment in the
Companies (Accounting Standards) Rules, 2006, in the "ANNEXURE", under the

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 PAPER – 1 : ACCOUNTING 3

heading "ACCOUNTING STANDARDS" under "AS 11 on The Effects of Changes in

Foreign Exchange Rates", for the paragraph 32, the following paragraph shall be
substituted, namely :-
"32. An enterprise may dispose of its interest in a non-integral foreign operation
through sale, liquidation, repayment of share capital, or abandonment of all, or part
of, that operation. The payment of a dividend forms part of a disposal only when it
constitutes a return of the investment. Remittance from a non-integral foreign
operation by way of repatriation of accumulated profits does not form part of a
disposal unless it constitutes return of the investment. In the case of a partial disposal,
only the proportionate share of the related accumulated exchange differences is
included in the gain or loss. A write-down of the carrying amount of a non-integral
foreign operation does not constitute a partial disposal. Accordingly, no part of the
deferred foreign exchange gain or loss is recognized at the time of a write-down".
VI. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (reg.
Issue of Bonus Shares)
A listed company, while issuing bonus shares to its members, must comply with the
following requirements under the SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2018:
Regulation 293 - Conditions for Bonus Issue
Subject to the provisions of the Companies Act, 2013 or any other applicable law, a
listed issuer shall be eligible to issue bonus shares to its members if:
(a) it is authorized by its articles of association for issue of bonus shares,
capitalization of reserves, etc.: Provided that if there is no such provision in the
articles of association, the issuer shall pass a resolution at its general body
meeting making provisions in the articles of associations for capitalization of
reserve;
(b) it has not defaulted in payment of interest or principal in respect of fixed deposits
or debt securities issued by it;
(c) it has not defaulted in respect of the payment of statutory dues of the employees
such as contribution to provident fund, gratuity and bonus;
(d) any outstanding partly paid shares on the date of the allotment of the bonus
shares, are made fully paid-up;
(e) any of its promoters or directors is not a fugitive economic offender.
Regulation 294 - Restrictions on a bonus issue
(1) An issuer shall make a bonus issue of equity shares only if it has made
reservation of equity shares of the same class in favour of the holders of
outstanding compulsorily convertible debt instruments if any, in proportion to the

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convertible part thereof.

(2) The equity shares so reserved for the holders of fully or partly compulsorily
convertible debt instruments, shall be issued to the holder of such convertible
debt instruments or warrants at the time of conversion of such convertible debt
instruments, optionally convertible instruments, warrants, as the case may be,
on the same terms or same proportion at which the bonus shares were issued.
(3) A bonus issue shall be made only out of free reserves, securities premium
account or capital redemption reserve account and built out of the genuine
profits or securities premium collected in cash and reserves created by
revaluation of fixed assets shall not be capitalized for this purpose.
(4) Without prejudice to the provisions of sub-regulation (3), bonus shares shall not
be issued in lieu of dividends.
(5) If an issuer has issued Superior Voting Right (SR) equity shares to its promoters
or founders, any bonus issue on the SR equity shares shall carry the same ratio
of voting rights compared to ordinary shares and the SR equity shares issued in
a bonus issue shall also be converted to equity shares having voting rights same
as that of ordinary equity shares along with existing SR equity shares.]
Regulation 295 - Completion of a bonus issue
(1) An issuer, announcing a bonus issue after approval by its board of directors and
not requiring shareholders’ approval for capitalization of profits or reserves for
making the bonus issue, shall implement the bonus issue within fifteen days
from the date of approval of the issue by its board of directors: Provided that
where the issuer is required to seek shareholders’ approval for capitalization of
profits or reserves for making the bonus issue, the bonus issue shall be
implemented within two months from the date of the meeting of its board of
directors wherein the decision to announce the bonus issue was taken subject
to shareholders’ approval.
Explanation:
For the purpose of a bonus issue to be considered as ‘implemented’ the date of
commencement of trading shall be considered.
(2) A bonus issue, once announced, shall not be withdrawn.
VII. Companies (Share Capital and Debentures) Amendment Rules, 2019 – reg.
Debenture Redemption Reserve
In exercise of the powers conferred by sub-sections (1) and (2) of section 469 of the
Companies Act, 2013 (18 of 2013), the Central Government made the Companies
(Share Capital and Debentures) Amendment Rules, 2019 dated 16th August, 2019 to
amend the Companies (Share Capital and Debentures) Rules, 2014. As per the

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Companies (Share Capital and Debentures) Amendment Rules, under principal rules,
in rule 18, for sub-rule (7), the following sub-rule shall be substituted, namely: -
“(7) The company shall comply with the requirements with regard to Debenture
Redemption Reserve (DRR) and investment or deposit of sum in respect of
debentures maturing during the year ending on the 31st day of March of next year, in
accordance with the conditions given below:-
(a) Debenture Redemption Reserve shall be created out of profits of the company
available for payment of dividend;
(b) the limits with respect to adequacy of Debenture Redemption Reserve and
investment or deposits, as the case may be, shall be as under;-
(i) Debenture Redemption Reserve is not required for debentures issued by
All India Financial Institutions regulated by Reserve Bank of India and
Banking Companies for both public as well as privately placed debentures;
(ii) For other Financial Institutions within the meaning of clause (72) of section
2 of the Companies Act, 2013, Debenture Redemption Reserve shall be as
applicable to Non –Banking Finance Companies registered with Reserve
Bank of India.
(iii) For listed companies (other than All India Financial Institutions and Banking
Companies as specified in sub-clause (i)), Debenture Redemption Reserve
is not required in the following cases - (A) in case of public issue of
debentures – A. for NBFCs registered with Reserve Bank of India under
section 45-IA of the RBI Act, 1934 and for Housing Finance Companies
registered with National Housing Bank; B. for other listed companies; (B)
in case of privately placed debentures, for companies specified in sub-
items A and B.
(iv) for unlisted companies, (other than All India Financial Institutions and
Banking Companies as specified in sub-clause (i)) -
(A) for NBFCs registered with RBI under section 45-IA of the Reserve
Bank of India Act, 1934 and for Housing Finance Companies
registered with National Housing Bank, Debenture Redemption
Reserve is not required in case of privately placed debentures.
(B) for other unlisted companies, the adequacy of Debenture Redemption
Reserve shall be ten percent. of the value of the outstanding
debentures;
(v) In case a company is covered in item (A) or item (B) of sub-clause (iii) of
clause (b) or item (B) of sub-clause (iv) of clause (b), it shall on or before
the 30th day of April in each year, in respect of debentures issued by a
company covered in item (A) or item (B) of sub clause (iii) of clause (b) or

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 6 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

item (B) of sub-clause (iv) of clause (b), invest or deposit, as the case may
be, a sum which shall not be less than fifteen per cent., of the amount of
its debentures maturing during the year, ending on the 31st day of March
of the next year in any one or more methods of investments or deposits as
provided in sub-clause (vi):
Provided that the amount remaining invested or deposited, as the case may
be, shall not at any time fall below fifteen percent. of the amount of the
debentures maturing during the year ending on 31st day of March of that
year.
(vi) for the purpose of sub-clause (v), the methods of deposits or investments,
as the case may be, are as follows:— (A) in deposits with any scheduled
bank, free from any charge or lien; (B) in unencumbered securities of the
Central Government or any State Government; (C) in unencumbered
securities mentioned in sub-clause (a) to (d) and (ee) of section 20 of the
Indian Trusts Act, 1882; (D) in unencumbered bonds issued by any other
company which is notified under sub-clause (f) of section 20 of the Indian
Trusts Act, 1882:
Provided that the amount invested or deposited as above shall not be used
for any purpose other than for redemption of debentures maturing during
the year referred above.
(c) in case of partly convertible debentures, Debenture Redemption Reserve shall
be created in respect of non-convertible portion of debenture issue in
accordance with this sub-rule.
(d) the amount credited to Debenture Redemption Reserve shall not be utilized by
the company except for the purpose of redemption of debentures.”
NOTE: Chapter 8 “Redemption of Debentures” of the Intermediate Paper 1:
Accounting Study Material (Module II) has been revised and uploaded on the BoS
Knowledge Portal of the Institute’s website. It is advised to refer the updated chapter
uploaded on the BoS Knowledge Portal of the Institute’s website at the link:
https://resource.cdn.icai.org/55831bos45229cp8.pdf.
B. Not applicable for November, 2020 examination
Non-Applicability of Ind AS for November, 2020 Examination
The Ministry of Corporate Affairs has notified Companies (Indian Accounting Standards)
Rules, 2015 on 16 th February, 2015, for compliance by certain class of companies. These
Ind AS are not applicable for November, 2020 Examination.

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Exclusion of Accounting Standards and topics from the Curriculum of Accounting

w.e.f. May, 2020 Examination
The following topics/ sub-topics/ Accounting Standards have been excluded from the
Curriculum of Accounting:
 Application of Accounting Standards: AS 4; AS 5; AS 17 and AS 22;
 Accounting for Tax: Concept of deferred tax asset and deferred tax liability in line with
AS 22 under Company Accounts;
 Dissolution of partnership firms including piecemeal distribution of assets;
Amalgamation of partnership firms; Conversion of partnership firm into a company
and Sale to a company; Issues related to accounting in Limited Liability Partnership.
NOTE: July 2019 Edition of the Study Material on Paper 1 Accounting is applicable for Nov
2020 Examination.

PART – II: QUESTIONS AND ANSWERS

QUESTIONS

Preparation of Financial Statements of Companies

1. On 31st March, 2020, Om Ltd. provides to you the following ledger balances after preparing
its Profit and Loss Account for the year ended 31st March, 2020:
Credit Balances
`
Equity shares capital (fully paid shares of ` 10 each) 1,05,00,000
General Reserve 21,84,000
Loan from State Finance Corporation 15,75,000
(Secured by hypothecation of Plant & Machinery - Repayable
within one year ` 3,00,000)
Loans: Unsecured (Long term) 12,70,500
Sundry Creditors for goods & expenses
(Payable within 6 months) 21,00,000
Profit & Loss Account 10,50,000
Provision for Taxation 12,25,350
199,04,850

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Debit Balances :
`
Calls in arrear 10,500
Land 21,00,000
Buildings 30,75,000
Plant and Machinery 55,12,500
Furniture & Fixture 5,25,000
Inventories : Finished goods 21,00,000
Raw Materials 5,25,000
Trade Receivables 21,00,000
Advances: Short-term 4,48,350
Cash in hand 3,15,000
Balances with banks 25,93,500
Patents & Trade marks 6,00,000
199,04,850
The following additional information is also provided in respect of the above balances:
(i) 6,30,000 fully paid equity shares were allotted as consideration for land & buildings.
(ii) Cost of Building ` 42,00,000
Cost of Plant & Machinery ` 73,50,000
Cost of Furniture & Fixture ` 6,56,250
(iii) Trade receivables for ` 5,70,000 are due for more than 6 months.
(iv) The amount of Balances with Bank includes ` 27,000 with a bank which is not a
scheduled Bank and the deposits of ` 7,50,000 are for a period of 9 months.
(v) Unsecured loan includes ` 3,00,000 from a Bank and ` 1,50,000 from related
parties.
You are not required to give previous year figures. You are required to prepare the Balance
Sheet of the Company as on 31st March, 2020 as required under Schedule III of the
Companies Act, 2013.
Managerial Remuneration
2. Kartik Ltd. is a non-investment company and has been incurring losses for the past few
years. The company provides the following information for the current year:
(` in lakhs)
Paid up equity share capital 270
Paid up Preference share capital 45

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Reserves (including Revaluation reserve ` 22.5 lakhs) 337.5

Securities premium 90
Long term loans 90
Deposits repayable after one year 45
Application money pending allotment 1620
Accumulated losses not written off 45
Investments 405
Kartik Ltd. has only one whole-time director, Mr. Kumar. You are required to calculate the
amount of maximum remuneration that can be paid to him as per provisions of the
Companies Act, 2013, if no special resolution is passed at the general meeting of the
company in respect of payment of remuneration.
Cash Flow Statement
3 Prepare Cash Flow Statement of Light Ltd. for the year ended 31 st March, 2020, in
accordance with AS 3 (Revised) from the following Summary Cash Account:
Summary Cash Account
` in '000 ` in '000
Balance as on 01.04.2019 315
Receipts from Customers 24,894
Sale of Investments (Cost ` 1,35,000) 153
Issue of Shares 2,700
Sale of Fixed Assets 1,152
29,214
Payment to Suppliers 18,306
Purchase of Investments 117
Purchase of Fixed Assets 2,070 ,
Wages & Salaries 621
Selling & Administration Expenses 1,035
Payment of Income Tax 2,187
Payment of Dividends 720
Repayment of Bank Loan 2,250
Interest paid on Bank Loan 450 (27,756)
Balance as on 31.03.2020 1,458

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 10 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

Profit/Loss prior to Incorporation

4. Green Ltd. took over a running business with effect from 1 st April, 2019. The company was
incorporated on 1 st August, 2019. The following summarized Profit and Loss Account has
been prepared for the year ended 31.3.2020:
` `
To Salaries 72,000 By Gross profit 4,80,000
To Stationery 7,200
To Travelling expenses 25,200
To Advertisement 24,000
To Miscellaneous trade expenses 56,700
To Rent (office buildings) 39,600
To Electricity charges 6,300
To Director’s fee 16,800
To Bad debts 4,800
To Commission to selling agents 33,000
To Debenture interest 4,500
To Interest paid to vendor 6,300
To Selling expenses 37,800
To Depreciation on fixed assets 14,400
To Net profit 1,31,400
4,80,000 4,80,000
Additional information:
(a) Sales ratio between pre and post incorporation periods was 1:3.
(b) Rent of office building was paid @ ` 3,000 per month up to September, 2019 and
thereafter it was increased by ` 600 per month.
(c) Travelling expenses include ` 7,200 towards sales promotion. Travelling expenses
are to be allocated between pre and post incorporation periods on time basis.
(d) Depreciation include ` 900 for assets acquired in the post incorporation period.
(e) Purchase consideration was discharged by the company on 30 th September, 2019 by
issuing equity shares of ` 10 each.
You are required to prepare Statement showing calculation of profits and allocation of
expenses between pre and post incorporation periods.

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Accounting for Bonus Issue

5. Following is the extract of the Balance Sheet of Madhu Ltd.as at 31 st March, 2020
`
Authorized capital:
45,000 12% Preference shares of ` 10 each 4,50,000
6,00,000 Equity shares of ` 10 each 60,00,000
64,50,000
Issued and Subscribed capital:
36,000 12% Preference shares of ` 10 each fully paid 3,60,000
4,05,000 Equity shares of ` 10 each, ` 8 paid up 32,40,000
Reserves and surplus:
General Reserve 5,40,000
Capital Redemption Reserve 1,80,000
Securities premium (collected in cash) 1,12,500
Profit and Loss Account 9,00,000
On 1st April, 2020, the Company has made final call @ ` 2 each on 4,05,000 equity shares.
The call money was received by 20 th April, 2020. Thereafter, the company decided to
capitalize its reserves by way of bonus at the rate of one share for every four shares held
by utilizing the balance of profit and loss account to the minimum extent.
You are required to prepare necessary journal entries in the books of the company and
prepare the relevant extract of the balance sheet as on 30 th April, 2020 after bonus issue.
Right Issue
6. Omega company offers new shares of ` 100 each at 25% premium to existing shareholders
on the basis one for five shares. The cum-right market price of a share is ` 200.
You are required to calculate the (i) Ex-right value of a share; (ii) Value of a right share?
Redemption of Preference Shares
7. The following are the extracts from the Balance Sheet of Hari Ltd. as on 31st March, 2020:
Share capital: 75,000 Equity shares of `10 each fully paid – `7,50,000; 2,250 10%
Redeemable preference shares of `100 each fully paid – ` 2,25,000.
Reserve & Surplus: Capital reserve – `1,50,000; General reserve –` 1,50,000; Profit and
Loss Account – `1,12,500.
On 1st April 2020, the Board of Directors decided to redeem the preference shares at
premium of 10% by utilization of reserves.
You are required to prepare necessary Journal Entries including cash transactions in the
books of the company.

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Redemption of Debentures
8. XYZ Ltd. has issued 1,000, 12% convertible debentures of ` 100 each redeemable after a
period of five years. According to the terms & conditions of the issue, these debentures
were redeemable at a premium of 5%. The debenture holders also had the option at the
time of redemption to convert 20% of their holdings into equity shares of ` 10 each at a
price of ` 20 per share and balance in cash. Debenture holders amounting ` 20,000 opted
to get their debentures converted into equity shares as per terms of the issue. You are
required to calculate the number of shares issued and cash paid for redemption of ` 20,000
debenture holders.
Investment Accounts
9. (a) In 2018, Royal Ltd. issued 12% fully paid debentures of ` 100 each, interest being
payable half yearly on 30th September and 31 st March of every accounting year. On
1st December, 2019, M/s. Kumar purchased 10,000 of these debentures at ` 101
(cum-interest) price. On 1st March, 2020 the firm sold all of these debentures at
` 106 (cum-interest) price.
You are required to prepare Investment (Debentures) Account in the books of M/s.
Kumar for the period 1st December, 2019 to 1st March, 2020.
(b) Mr. X acquires 200 shares of a company on cum-right basis for ` 60,000. He
subsequently receives an offer of right to acquire fresh shares in the company in the
proportion of 1:1 at ` 105 each. He does not subscribe but sells all the rights for
` 15,000. The market value of the shares after their becoming ex-rights has also gone
down to ` 50,000. What should be the accounting treatment in this case?
Insurance Claim for loss of stock
10. Shyam’s godown caught fire on 29th August, 2020, and a large part of the stock of goods
was destroyed. However, goods costing ` 54,000 could be salvaged. The trader provides
you the following additional information:
`
Cost of stock on 1st April, 2019 3,55,250
Cost of stock on 31st March, 2020 3,95,050
Purchases during the year ended 31st March, 2020 28,39,800
Purchases from 1st April, 2020 to the date of fire 16,55,350
Cost of goods distributed as samples for advertising from 1st April, 2020 to
20,500
the date of fire
Cost of goods withdrawn by trader for personal use from 1st April, 2020
to the date of fire 1,000
Sales for the year ended 31st March, 2020 40,00,000

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Sales from 1st April, 2020 to the date of fire 22,68,000

Shyam had taken the fire insurance policy for ` 2,50,000 with an average clause.
Calculate the amount of the claim that will be admitted by the insurance company. Consider
that the rate of gross profit up to date of fire is same as that of previous accounting year.
Hire Purchase Transactions
11. X purchased three cars from Y on hire purchase basis, the cash price of each car being `
2,00,000. The hire purchaser charged depreciation @ 20% on diminishing balance method.
Two cars were seized by on hire vendor when second installment was not paid at the end
of the second year. The hire vendor valued the two cars at cash price less 30%
depreciation charged under diminishing balance method. The hire vendor spent ` 10,000
on repairs of the cars and then sold them for a total amount of ` 1,70,000.
You are required to compute: (i) Agreed value of two cars taken back by the hire vendor
and book value of car left with the hire purchaser and (ii) Profit or loss to hire purchaser
on two cars taken back by the hire vendor.
Departmental Accounts
12. Department X sells goods to Department Y at a profit of 50% on cost and to Department Z
at 20% on cost. Department Y sells goods to Department X and Z at a profit of 25% and
15% respectively on sales. Department Z charges 30% profit on cost to Department X and
40% profit on sale to Y.
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 48,000
Transfer from Department Y 50,000 82,000
Transfer from Department Z 52,000 56,000
Calculate the unrealized profit of each department and also total unrealized profit.
Accounting for Branches
13. M & S Co. of Lucknow has an integral foreign branch in Canberra, Australia. At the end of
31st March 2020, the following ledger balances have been extracted from the books of the
Lucknow office and the Canberra branch.
Lucknow office Canberra Branch
( ` In thousand) (Aust. Dollars in thousand)
Dr. Cr. Dr. Cr.
Capital 1,500

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 14 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

Reserves & Surplus 1,500

Land 500
Buildings (Cost) 1,000
Buildings - Accumulated Dep. 200
Plant and Machinery (Cost) 2,500 200
Plant and Machinery -
Accumulated Dep. 600 130
Debtors/Creditors 280 200 60 30
Stock as on 1- 4-2019 100 20
Branch Stock Reserve 4
Cash & Bank Balances 10 10
Purchases/Sales 240 520 20 123
Goods sent to Branch 100 5
Managing Partner's Salary 30
Wages and Salaries 75 45
Rent 12
Office Expenses 25 18
Commission Receipts 256 100
Branch/HO Current Account 120 7
4,880 4,880 390 390
You are required to convert the Branch Trial Balance given above into rupees by using the
following exchange rates:
Opening rate 1 A $ = ` 50
Closing rate 1 A $ = ` 53
Average rate 1 A $ = ` 51.00
for Fixed Assets 1 A $ = ` 46.00
Accounts from Incomplete Records
14. The following is the Balance Sheet of Manish and Suresh as on 1 st April, 2019:
Liabilities ` Assets `
Capital Accounts: Building 1,00,000
Manish 1,50,000 Machinery 65,000
Suresh 75,000 Stock 40,000

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Creditors for goods 30,000 Debtors 50,000

Creditors for expenses 25,000 Bank 25,000

2,80,000 2,80,000
They give you the following additional information:
(i) Sales and purchases for the year ended 31 st March, 2019 were ` 3,00,000 and `
2,40,000 respectively. an and d
(ii) Stock level is maintained uniformly in value throughout all over the year.
(iii) Depreciation on machinery is charged @ 10%, Depreciation on building @ 5% in the
current year.
(iv) Sales in the current year will increase by 43.75% in volume.
(v) Rate of gross profit remains the same.
(vi) Business Expenditures are ` 50,000 for the year and all expenditures are paid in
cash.
(vii) All sales and purchases are on credit basis and there are no cash purchases and
sales.
You are required to prepare Trading and Profit and Loss Account for the year ended
31.03.2020.
Framework for Preparation and Presentation of Financial Statements
15. (a) With regard to financial statements name any four.
(i) Users
(ii) Qualitative characteristics
(iii) Elements
Accounting Standards
(b) What are the issues, with which Accounting Standards deal?
AS 1 Disclosure of Accounting Policies
16. (a) What are the three fundamental accounting assumptions recognized by Accounting
Standard (AS) 1? Briefly describe each one of them.
AS 2 Valuation of Inventories
(b) A Limited is engaged in manufacturing of Chemical Y for which Raw Material X is
required. The company provides you following information for the year ended
31st March, 2020.

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 16 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

` Per unit
Raw Material X
Cost price 400
Freight Inward 40
Replacement cost 320
Chemical Y
Material consumed 440
Direct Labour 120
Variable Overheads 80

Additional Information:
(i) Total fixed overhead for the year was ` 4,00,000 on normal capacity of 25,000
units.
(ii) Closing balance of Raw Material X was 1,000 units and Chemical Y was 2,400
units.
You are required to calculate the total value of closing stock of Raw Material X and
Chemical Y according to AS 2, when Net realizable value of Chemical Y is ` 600 per
unit.
AS 10 Property, Plant and Equipment
17. Omega Ltd. contracted with a supplier to purchase machinery which is to be installed in its
one department in three months' time. Special foundations were required for the machinery
which were to be prepared within this supply lead time. The cost of the site preparation
and laying foundations were ` 1,40,000. These activities were supervised by a technician
during the entire period, who is employed for this purpose at ` 45,000 per month.
The machine was purchased at ` 1,58,00,000 and ` 50,000 transportation charges were
incurred to bring the machine to the factory site. An Architect was appointed at a fee of
` 30,000 to supervise machinery installation at the factory site.
You are required to ascertain the amount at which the Machinery should be capitalized
under AS 10.
AS 11 The Effects of Changes in Foreign Exchange Rates
18. (a) Classify the following items as monetary or non-monetary item:
Share Capital
Trade Receivables
Investment in Equity shares

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Fixed Assets.
(b)
Exchange Rate per $
Goods purchased on 1.1.2019 for US $ 15,000 ` 75
Exchange rate on 31.3.2019 ` 74
Date of actual payment 7.7.2019 ` 73
You are required to ascertain the loss/gain to be recognized for financial years 2018-
19 and 2019-20 as per AS 11.
AS 12 Accounting for Government Grants
19. (a) How would you treat the following in the accounts in accordance with AS 12
'Government Grants'?
(i) ` 35 Lakhs received from the Local Authority for providing Medical facilities to
the employees.
(ii) ` 100 Lakhs received as Subsidy from the Central Government for setting up a
unit in notified backward area.
AS 13 Accounting for Investments
(b) A Ltd. on 1-1-2020 had made an investment of ` 600 lakhs in the equity shares of B
Ltd. of which 50% is made in the long term category and the rest as temporary
investment. The realizable value of all such investment on 31-3-2020 became ` 200
lakhs as B Ltd. lost a case of copyright. How will you recognize the reduction in the
value of the investment in the financial statements for the year ended on 31-3-2020
as per AS 13 considering this downfall in the value of shares as non-temporary?
AS 16 Borrowing Costs
20. (a) Vital Limited borrowed an amount of `150 crores on 1.4.2019 for construction of boiler
plant @ 10% p.a. The plant is expected to be completed in 4 years. Since the
weighted average cost of capital is 13% p.a., the accountant of Vital Ltd. capitalized
` 19.50 crores for the accounting period ending on 31.3.2020. Due to surplus fund
out of `150 crores, an income of ` 1.50 crores was earned and credited to profit and
loss account. Comment on the above treatment of accountant with reference to
relevant accounting standard.
(b) When capitalization of borrowing cost should cease as per Accounting Standard 16?
Explain in brief.

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 18 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

SUGGESTED ANSWERS/HINTS

1.. Om Ltd.
Balance Sheet as on 31st March, 2020
Particulars Notes Figures at the end of
current reporting period
(`)
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 1,04,89,500
b Reserves and Surplus 2 32,34,000
2 Non-current liabilities
a Long-term borrowings 3 25,45,500
3 Current liabilities
a Trade Payables 21,00,000
b Other current liabilities 4 3,00,000
c Short-term provisions 5 12,25,350
Total 1,98,94,350
Assets
1 Non-current assets
a Property, Plant and Equipment 6 1,12,12,500
b Intangible assets (Patents & Trade
Marks) 6,00,000
2 Current assets
a Inventories 7 26,25,000
b Trade receivables 8 21,00,000
c Cash and cash equivalents 9 29,08,500
d Short-term loans and advances 4,48,350
Total 1,98,94,350
Notes to accounts
`
1 Share Capital
Equity share capital

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 PAPER – 1 : ACCOUNTING 19

Issued, subscribed and called up

10,50,000 Equity Shares of ` 10 each 1,05,00,000
(Out of the above 6,30,000 shares
have been issued for consideration
other than cash)
Less: Calls in arrears (10,500) 1,04,89,500
Total 1,04,89,500
2 Reserves and Surplus
General Reserve 21,84,000
Surplus (Profit & Loss A/c) 10,50,000
Total 32,34,000
3 Long-term borrowings
Secured
Term Loans
Loan from State Finance Corporation
(` 15,75,000 less ` 3,00,000)
(Secured by hypothecation of Plant
and Machinery) 12,75,000
Unsecured
Bank Loan 3,00,000
Loan from related parties 1,50,000
Others 8,20,500 12,70,500
Total 25,45,500
4 Other current liabilities
Loan Instalment repayable within one
year 3,00,000
5 Short-term provisions
Provision for taxation 12,25,350
6 Property, Plant and Equipment
Land 21,00,000
Buildings 42,00,000
Less: Depreciation (11,25,000) 30,75,000
Plant & Machinery 73,50,000
Less: Depreciation (18,37,500) 55,12,500

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 20 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

Furniture & Fittings 6,56,250

Less: Depreciation (1,31,250) 5,25,000
Total 1,12,12,500
7 Inventories
Raw Material 5,25,000
Finished goods 21,00,000
26,25,000
8 Trade receivables
Debts outstanding for a period
exceeding six months 5,70,000
Other Debts 15,30,000
Total 21,00,000
9 Cash and cash equivalents
Cash at bank with Scheduled Banks 25,66,500
including Bank deposits for period of 9
months amounting ` 7,50,000
with others 27,000 25,93,500
Cash in hand 3,15,000
Total 29,08,500
2. Calculation of effective capital and maximum amount of monthly remuneration
(` in lakhs)
Paid up equity share capital 270
Paid up Preference share capital 45
Reserve excluding Revaluation reserve (337.5- 22.5) 315
Securities premium 90
Long term loans 90
Deposits repayable after one year 45
855
Less: Accumulated losses not written off (45)
Investments (405)
Effective capital for the purpose of managerial remuneration 405
Kartik Ltd. is incurring losses and no special resolution has been passed by the company
for payment of remuneration. Effective capital of the company is less than 5 crores,

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maximum remuneration payable to the Managing Director should be @

` 60,00,000 per annum. (Revaluation reserve and application money pending allotment
are not included while computing effective capital of Kartik Ltd.)
3. Cash Flow Statement of Light Ltd. for the year ended 31 st March, 2020
Cash flows from operating activities (` ’000) (` ’000)
Cash receipts from customers 24,894
Cash payments to suppliers (18,306)
Cash paid to employees (621)
Other cash payments (for Selling & Administrative expenses) (1,035)
Cash generated from operations 4,932
Income taxes paid (2,187)
Net cash from operating activities 2,745
Cash flows from investing activities
Payments for purchase of fixed asset (2,070)
Proceeds from sale of fixed assets 1,152
Purchase of investments (117)
Sale of investments 153
Net cash used in investing activities (882)
Cash flows from financing activities
Proceeds from issuance of share capital 2,700
Bank loan repaid (2,250)
Interest paid on bank loan (450)
Dividend paid (720)
Net cash used in financing activities (720)
Net increase in cash and cash equivalents 1,143
Cash and cash equivalents at beginning of period 315
Cash and cash equivalents at end of period 1,458
4. Statement showing calculation of profits for pre and post incorporation periods
for the year ended 31.3.2020
Particulars Pre-incorporation Post- incorporation
period period
` `
A. Gross profit (1:3) 1,20,000 3,60,000

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 22 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

Less: Salaries (1:2) 24,000 48,000

Stationery (1:2) 2,400 4,800
Advertisement (1:3) 6,000 18,000
Travelling expenses (W.N.3) 6,000 12,000
Sales promotion expenses (W.N.3) 1,800 5,400
Misc. trade expenses (1:2) 18,900 37,800
Rent (office building) (W.N.2) 12,000 27,600
Electricity charges (1:2) 2,100 4,200
Director’s fee 16,800
Bad debts (1:3) 1,200 3,600
Selling agents commission (1:3) 8,250 24,750
Debenture interest 4,500
Interest paid to vendor (2:1) (W.N.4) 4,200 2,100
Selling expenses (1:3) 9,450 28,350
Depreciation on fixed assets (W.N.5) 4,500 9,900
B. 1,00,800 2,47,800
Pre-incorporation profit (A less B) 19,200
Post-incorporation profit (A less B) 1,12,200
Working Notes:
1. Time Ratio
Pre incorporation period = 1 st April, 2019 to 31st July, 2019 i.e. 4 months
Post incorporation period is 8 months; Time ratio is 1: 2.
2. Rent
`
Rent for pre-incorporation period (` 3,000 x 4) 12,000 (pre)
Rent for post incorporation period
August,2019 & September, 2019 (` 3,000 x 2) 6,000
October,2019 to March,2020 (` 3,600 x 6) 21,600 27,600 (post)
3. Travelling expenses and sales promotion expenses
Pre Post
` `
Traveling expenses ` 18,000 (i.e. ` 25200 -
` 7200) distributed in 1:2 ratio 6,000 12,000

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Sales promotion expenses ` 7,200 distributed in

1:3 ratio 1,800 5,400
4. Interest paid to vendor till 30 th September, 2019
Pre Post
` `
Interest for pre-incorporation period ` 6,300x 4/6 4,200

Interest for post incorporation period i.e. for

August, 2019 & September, 2019 = ` 6,300x 2/6 2,100

5. Depreciation
Pre Post
` `
Total depreciation 14,400
Less: Depreciation exclusively for post incorporation period 900 900
13,500
Depreciation for pre-incorporation period (13,500x4/12) 4,500
Depreciation for post incorporation period (13,500x8/12) ____ 9,000
4,500 9,900
5. Journal Entries in the books of Madhu Ltd.
` `
1-4-2020 Equity share final call A/c Dr. 8,10,000
To Equity share capital A/c 8,10,000
(For final calls of ` 2 per share on
4,05,000 equity shares due as per
Board’s Resolution dated….)
20-4-2020 Bank A/c Dr. 8,10,000
To Equity share final call A/c 8,10,000
(For final call money on 4,05,000
equity shares received)
Securities Premium A/c Dr. 1,12,500
Capital redemption reserve A/c Dr. 1,80,000
General Reserve A/c Dr. 5,40,000

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 24 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

Profit and Loss A/c (b.f.) Dr. 1,80,000

To Bonus to shareholders A/c 10,12,500
(For making provision for bonus issue
of one share for every four shares
held)
Bonus to shareholders A/c Dr. 10,12,500
To Equity share capital A/c 10,12,500
(For issue of bonus shares)
Extract of Balance Sheet as at 30 th April, 2020 (after bonus issue)
`
Authorized Capital
45,000 12% Preference shares of ` 10 each 4,50,000
6,00,000 Equity shares of ` 10 each 60,00,000
Issued and subscribed capital
36,000 12% Preference shares of ``10 each, fully paid 3,60,000
5,06,250 Equity shares of ` 10 each, fully paid 50,62,500
(Out of the above, 1,01,250 equity shares @ ` 10 each were issued by
way of bonus shares)
Reserves and surplus
Profit and Loss Account 7,20,000
6. Ex-right value of the shares
= (Cum-right value of the existing shares + Rights shares x Issue Price) / (Existing
No. of shares + No. of right shares) = (` 200 X 5 Shares + ` 125 X 1 Share) /
(5 + 1) Shares = ` 1,125 / 6 shares = ` 187.50 per share.
Value of right = Cum-right value of the share – Ex-right value of the share
= ` 200 – ` 187.50 = ` 12.50 per share.
7. In the books of Hari Limited
Journal Entries
Date Particulars Dr. (`) Cr. (`)
2020
April 1 10% Redeemable Preference Share Capital Dr. 2,25,000
A/c
Premium on Redemption of Preference Dr. 22,500

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 PAPER – 1 : ACCOUNTING 25

Shares
To Preference Shareholders A/c 2,47,500
(Being the amount payable on redemption
transferred to Preference Shareholders
Account)
Preference Shareholders A/c Dr. 2,47,500
To Bank A/c 2,47,500
(Being the amount paid on redemption of
preference shares)
General Reserve A/c Dr. 1,50,000
Profit & Loss A/c Dr. 75,000
To Capital Redemption Reserve A/c 2,25,000
(Being the amount transferred to Capital
Redemption Reserve Account as per the
requirement of the Act)_________________
Profit & Loss A/c Dr. 22,500
To Premium on Redemption of 22,500
Preference Shares A/c
(Being premium on redemption charged to
Profit and Loss A/c)
Note: Capital reserve cannot be utilized for transfer to Capital Redemption Reserve.
8.
Number of debentures
Debenture holders opted for conversion (20,000 /100) 200
Option for conversion 20%
Number of debentures to be converted (20% of 200) 40
Redemption value of 40 debentures at a premium of 5%
[40 x (100+5)] ` 4,200
Equity shares of ` 10 each issued on conversion
[` 4,200/ ` 20 ] 210 shares
Calculation of cash to be paid : `
Number of debentures 200
Less: number of debentures to be converted into equity shares (40)
160

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Redemption value of 160 debentures (160 × ` 105) ie. ` 16,800.

9. (a) Investment Account in the books of M/s Kumar
for the period from 1st December 2019 to 1st March, 2020
(Scrip: 12% Debentures of Royal Ltd.)
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
Value (`) Value (`)
(`) (`)
1.12.2019 To Bank A/c 10,00,000 20,000 9,90,000 1.03.2020 By Bank A/c 10,00,000 50,000 10,10,000
(W.N.1) (W.N.2)
1.3.2020 To Profit &
loss A/c 30,000 20,000
10,00,000 50,000 10,10,000 10,00,000 50,000 10,10,000

Working Notes:
(i) Cost of 12% debentures purchased on 1.12.2019 `
Cost Value (10,000 `101) = 10,10,000
Less: Interest (10,000 x 100 x12% x 2/12) = (20,000)
Total = 9,90,000
(ii) Sale proceeds of 12% debentures sold on 1st March, 2020 `
Sales Price (10,000 `106) = 10,60,000
Less: Interest (10,000 x 100 x12% x 5/12) = (50,000)
Total = 10,10,000
(b) As per AS 13, where the investments are acquired on cum-right basis and the market value
of investments immediately after their becoming ex-right is lower than the cost for which
they were acquired, it may be appropriate to apply the sale proceeds of rights to reduce
the carrying amount of such investments to the market value. In this case, the amount of
the ex-right market value of 200 shares bought by X immediately after the declaration of
rights falls to `50,000. In this case, out of sale proceeds of ` 15,000, ` 10,000 may be
applied to reduce the carrying amount to bring it to the market value `50,000 and ` 5,000
would be credited to the profit and loss account.
10. Memorandum Trading Account for the period 1st April, 2020 to 29th August 2020
` `
To Opening Stock 3,95,050 By Sales 22,68,000
To Purchases 16,55,350 By Closing stock (Bal. fig.) 4,41,300

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Less: Advertisement (20,500)

Drawings (1,000) 16,33,850
To Gross Profit [30% of
Sales] [W N] 6,80,400
27,09,300 27,09,300

Statement of Insurance Claim

`
Value of stock on date of fire 4,41,300
Less: Salvaged Stock (54,000)
stock destroyed 3,87,300
Application of Average Clause
Amount of Insurance claim= ` 3,87,300/ 4,41,300 X 2,50,000 = ` 2,19,409 (rounded off)
Working Note:
Trading Account for the year ended 31 st March, 2020
` `
To Opening Stock 3,55,250 By Sales 40,00,000
To Purchases 28,39,800 By Closing stock 3,95,050
To Gross Profit 12,00,000
43,95,050 43,95,050
Rate of Gross Profit in 2019-2020
Gross Pr ofit
100 = 12,00,000/40,00,000 x 100 = 30%
Sales
11.
`
(i) Price of two cars = ` 2,00,000 x 2 4,00,000
Less: Depreciation for the first year @ 30% 1,20,000
2,80,000
30
Less: Depreciation for the second year = ` 2, 80,000 x 84,000
100
Agreed value of two cars taken back by the hire vendor 1,96,000
Cash purchase price of one car 2,00,000

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 28 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

Less: Depreciation on ` 2,00,000 @20% for the first year 40,000

Written drown value at the end of first year 1,60,000
Less: Depreciation on ` 1,60,000 @ 20% for the second year 32,000
Book value of car left with the hire purchaser 1,28,000
(ii) Book value of one car as calculated above 1,28,000
Book value of Two cars = ` 1,28,000 x 2 2,56,000
Value at which the two cars were taken back, calculated in (i) 1,96,000
above
Hence, loss to hire purchaser on cars taken back by hire vendor
= ` 2,56,000 – ` 1,96,000 = ` 60,000
12. Calculation of unrealized profit of each department and total unrealized profit
Dept. X Dept. Y Dept. Z Total
` ` ` `
Unrealized Profit of:
Department X 75,000 x 50/150 48,000 x 20/120
= 25,000 = 8,000 33,000
Department Y 50,000 x .25 82,000 x .15
= 12,500 = 12,300 24,800
Department Z 52,000 x 30/130 56,000 x 40/100
= 12,000 = 22,400 34,400
92,200
13. M & S Co. Ltd.
Canberra, Australia Branch Trial Balance
As on 31st March 2020
($ ‘thousands) (` ‘thousands)
Dr. Cr. Conversion Dr. Cr.
rate per $
Plant & Machinery (cost) 200 ` 46 9,200
Plant & Machinery 130 ` 46 5,980
(Accumulated Dep. )
Debtors/Creditors 60 30 ` 53 3,180 1,590

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Stock (1.4.2019) 20 ` 50 1,000

Cash & Bank Balances 10 ` 53 530
Purchase / Sales 20 123 ` 51 1,020 6,273
Goods received from H.O. 5 Actual 100
Wages & Salaries 45 ` 51 2,295
Rent 12 ` 51 612
Office expenses 18 ` 51 918
Commission Receipts 100 ` 51 5,100
H.O. Current A/c 7 Actual 120
18,855 19,063
Foreign Exchange Loss (bal.
fig.) 208
390 390 19,063 19,063

14. Trading and Profit and Loss account for the year ending 31st March, 2020
Particulars ` Particulars `
To Opening Stock 40,000 By Sales 4,31,250
To Purchases 3,45,000 By Closing Stock 40,000
To Gross Profit c/d (20% on
sales) 86,250
4,71,250 4,71,250
To Business Expenses 50,000 By Gross Profit b/d 86,250
To Depreciation on:
Machinery 6,500
Building 5,000 11,500
To Net profit 24,750
86,250 86,250
Working Note:
`
(i) Calculation of Rate of Gross Profit earned during previous year
A Sales during previous year 3,00,000
B Purchases 2,40,000

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 30 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

C Cost of Goods Sold (` 40,000 + ` 2,40,000 – ` 40,000) 2,40,000

D Gross Profit (A-C) 60,000
E ` 60,000 20%
Rate of Gross Profit x 100
` 3,00,000
(ii) Calculation of sales during current year `
A Cost of goods sold during previous year 2,40,000
B Add: Increases in volume @ 43.75 % 1,05,000
C Cost of goods sold during Current Year 3,45,000
D Add: Gross profit @ 25% on cost (20% on sales) 86,250
E Sales for current year [C+D] 4,31,250
15. (a) (i) Users of financial statements:
Investors, Employees, Lenders, Supplies/Creditors, Customers, Government &
Public
(ii) Qualitative Characteristics of Financial Statements:
Understandability, Relevance, Comparability, Reliability & Faithful Representation
(iii) Elements of Financial Statements:
Asset, Liability, Equity, Income/Gain and Expense/Loss
(b) Accounting Standards deal with the issues of (i) Recognition of events and
transactions in the financial statements, (ii) Measurement of these transactions and
events, (iii) Presentation of these transactions and events in the financial statements
in a manner that is meaningful and understandable to the reader, and (iv) Disclosure
requirements.
16. (a) Accounting Standard (AS) 1 recognizes three fundamental accounting assumptions.
These are as follows:
(i) Going Concern: The financial statements are normally prepared on the
assumption that an enterprise will continue its operations in the foreseeable
future and neither there is intention, nor there is need to materially curtail the
scale of operations.
(ii) Consistency: The principle of consistency refers to the practice of using same
accounting policies for similar transactions in all accounting periods unless the
change is required (i) by a statute, (ii) by an accounting standard or (iii) for more
appropriate presentation of financial statements.
(iii) Accrual basis of accounting: Under this basis of accounting, transactions are
recognised as soon as they occur, whether or not cash or cash equivalent is
actually received or paid.

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(b) Net Realizable Value of the Chemical Y (Finished Goods) is ` 600 per unit which is
less than its cost ` 656 per unit. Hence, Raw Material is to be valued at replacement
cost and Finished Goods are to be valued at NRV since NRV is less than the cost.
Value of Closing Stock:
Qty. Rate (`) Amount (`)
Raw Material X 1,000 320 3,20,000
Finished Goods Y 2,400 600 14,40,000
Total Value of Closing Stock 17,60,000
Working Note:
Statement showing cost calculation of Raw material X and Chemical Y
Raw Material X `
Cost Price 400
Add: Freight Inward 40
Cost 440
Chemical Y `
Materials consumed 440
Direct Labour 120
Variable overheads 80
Fixed overheads (`4,00,000/25,000 units) 16
Cost 656
17. Calculation of Cost of Machinery
Particulars `
Purchase Price Given 1,58,00,000
Add: Site Preparation Cost Given 1,40,000
Technician’s Salary Specific/Attributable overheads for 3 1,35,000
months (45,000 x3)
Initial Delivery Cost Transportation 50,000
Professional Fees for Architect’s Fees 30,000
Installation
Total Cost of Asset 1,61,55,000
18. (a)
Share capital Non-monetary
Trade receivables Monetary
Investment in equity shares Non-monetary
Fixed assets Non-monetary

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 32 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

(b) As per AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’, all foreign
currency transactions should be recorded by applying the exchange rate on the date
of transactions. Thus, goods purchased on 1.1.2019 and corresponding creditors
would be recorded at ` 11,25,000 (i.e. $15,000 × ` 75)
According to the standard, at the balance sheet date all monetary transactions should
be reported using the closing rate. Thus, creditors of US $15,000 on 31.3.201 9 will
be reported at ` 11,10,000 (i.e. $15,000 × ` 74) and exchange profit of ` 15,000 (i.e.
11,25,000 – 11,10,000) should be credited to Profit and Loss account in the year
2018-19.
On 7.7.2019, creditors of $15,000 is paid at the rate of ` 73. As per AS 11, exchange
difference on settlement of the account should also be transferred to Profit and Loss
account. Therefore, ` 15,000 (i.e. 11,10,000 – 10,95,000) will be credited to Profit
and Loss account in the year 2019-20.
19. (a) (i) ` 35 lakhs received from the local authority for providing medical facilities to the
employees is a grant received in the nature of revenue grant. Such grants are
generally presented as a credit in the profit and loss statement, either separately
or under a general heading such as ‘Other Income’. Alternatively, ` 35 lakhs
may be deducted in reporting the related expense i.e. employee benefit
expenses.
(ii ) As per AS 12 ‘Accounting for Government Grants’, where the government grants
are in the nature of promoters’ contribution, i.e. they are given with reference to
the total investment in an undertaking or by way of contribution towards its total
capital outlay and no repayment is ordinarily expected in respect thereof, the
grants are treated as capital reserve which can be neither distributed as dividend
nor considered as deferred income. In the given case, the subsidy
received from the Central Government for setting up a unit in notified backward
area is neither in relation to specific fixed asset nor in relation to revenue. Thus,
amount of ` 100 lakhs should be credited to capital reserve.
(b) A limited invested ` 600 lakhs in the equity shares of B Ltd. Out of the same, the
company intends to hold 50% shares for long term period i.e. ` 300 lakhs and remaining
as temporary (current) investment i.e. ` 300 lakhs. Irrespective of the fact that
investment has been held by A Limited only for 3 months (from 1.1.2020 to 31.3.2020),
AS 13 lays emphasis on intention of the investor to classify the investment as current
or long term even though the long-term investment may be readily marketable.
In the given situation, the realizable value of all such investments on 31.3.2020 became
` 200 lakhs i.e. ` 100 lakhs in respect of current investment and ` 100 lakhs in respect
of long-term investment.
As per AS 13, ‘Accounting for Investment’, the carrying amount for current investments
is the lower of cost and fair value. In respect of current investments for which an active
market exists, market value generally provides the best evidence of fair value.

© The Institute of Chartered Accountants of India

 PAPER – 1 : ACCOUNTING 33

Accordingly, the carrying value of investment held as temporary investment should be

shown at realizable value i.e. at ` 100 lakhs. The reduction of ` 200 lakhs in the
carrying value of current investment will be charged in the profit and loss account.
Standard further states that long-term investments are usually carried at cost. However,
when there is a decline, other than temporary, in the value of long-term investment, the
carrying amount is reduced to recognize the decline.
Here, B Limited has lost a case of copyright which drastically reduced the realizable
value of its shares to one third which is quiet a substantial figure. Losing the case of
copyright may affect the business and the performance of the company in long run.
Accordingly, it will be appropriate to reduce the carrying amount of long-term investment
by ` 200 lakhs and show the investments at ` 100 lakhs as the downfall in the value of
shares is not temporary. The reduction of ` 200 lakhs in the carrying value of long-term
investment will be charged to the profit and loss account.
20. (a) Para 10 of AS 16 ‘Borrowing Costs’ states that to the extent the funds are borrowed
specifically for the purpose of obtaining a qualifying asset, the amount of borrowing
costs eligible for capitalization on that asset should be determined as the actual
borrowing costs incurred on that borrowing during the period less any income on the
temporary investment of those borrowings. The capitalization rate should be the
weighted average of the borrowing costs applicable to the borrowings of the
enterprise that are outstanding during the period, other than borrowings made
specifically for the purpose of obtaining a qualifying asset. Hence, in the above case,
treatment of accountant of Vital Ltd. is incorrect. The amount of borrowing costs
capitalized for the financial year 2019-20 should be calculated as follows:
Actual interest for 2019-20 (10% of ` 150 crores) ` 15.00 crores
Less: Income on temporary investment from specific
borrowings (` 1.50 crores)
Borrowing costs to be capitalized during year 2019-2020 ` 13.50 crores
(b) Capitalization of borrowing costs should cease when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete.
An asset is normally ready for its intended use or sale when its physical construction
or production is complete even though routine administrative work might still continue.
If minor modifications such as the decoration of a property to the user’s specification,
are all that are outstanding, this indicates that substantially all the activities are
complete. When the construction of a qualifying asset is completed in parts and a
completed part is capable of being used while construction continues for the other
parts, capitalization of borrowing costs in relation to a part should cease when
substantially all the activities necessary to prepare that part for its intended use or
sale are complete.

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