PAPER – 1: ACCOUNTING

PART – I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY

A. Applicable for May, 2023 examination
I. Relevant Legislative Amendments
The Central Government has amended Companies (Specification of definition details)
Rules, 2014, through the Companies (Specification of definition details) Amendment
Rules, 2022 vide Notification G.S.R. 700(E) dated 15th September, 2022.
Amendment in definition of Small Company:
In the Companies (Specification of definition details) Rules, 2014, in Rule 2, in sub -
rule (1), for clause (t), the following clause shall be substituted, namely: -
“(t) For the purposes of sub-clause (i) and sub-clause (ii) of clause (85) of section 2
of the Act, paid up capital and turnover of the small company shall not exceed rupees
four crore and rupees forty crore respectively.”.
II. 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 (18 of 2013), the Central Government made amendments in
Schedule III (Division I) to the said Act, vide MCA Notification dated 24 th March, 2021,
applicable with effect from 1 st day of April, 2021. These amendments have been
incorporated in Annexure “Schedule III to the Companies Act” to chapter 4 of
September, 2021 Edition. The students are advised to refer the link
https://resource.cdn.icai.org/66494bos53751-cp4-annex.pdf for the revised content.
III. Criteria for classification of Non-Company entities for applicability of
Accounting Standards
The Council, at its 400th meeting, held on March 18-19, 2021, revised the criteria
relating to applicability of Accounting Standards issued by The Institute of Chartered
Accountants of India (ICAI), to Non-company entities (Enterprises). The scheme for
applicability of Accounting Standards to Non-company entities shall come into effect
in respect of accounting periods commencing on or after April 1, 2020. For the
purpose of applicability of Accounting Standards, Non-company entities are classified
into four categories, viz., Level I, Level II, Level III and Level IV. Level I entities are
large size entities, Level II entities are medium size entities, Level III entities are small
size entities and Level IV entities are micro entities. Level IV, Level III a nd Level II
entities are referred to as Micro, Small and Medium size entities (MSMEs). The terms
‘Small and Medium Enterprise’ and ‘SME’ used in Accounting Standards shall be read
as ‘Micro, Small and Medium size entity’ and ‘MSME’ respectively. Level I entities
are required to comply in full with all the Accounting Standards. However, certain

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exemptions/relaxations have been provided to Level II, Level III and Level IV Non -
company entities.
The revised criteria for classification of Non-Company entities reg. applicability of
Accounting Standards has been incorporated in the revised chapter 3 unit 1 of
September, 2021 Edition of the Study Material. The students are advised to refer the
link https://resource.cdn.icai.org/66492bos53751-cp3-u1.pdf for the revised content.
NOTE: September, 2021 Edition of the Study Material on Paper 1 Accounting is applicable
for May, 2023 Examination. The students who have editions prior to September, 2021 may
refer the uploaded chapters for the revised content.

B. Not applicable for May, 2023 examination

Non-Applicability of Ind AS for May, 2023 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 May, 2023 Examination.

PART – II: QUESTIONS AND ANSWERS

QUESTIONS

Preparation of Balance Sheet of a Company

1. On 31st March 2022, Hari Ltd. provides you the following particulars:
Particulars Debit ` Credit `
Equity Share Capital (Face value of ` 100 each) 12,50,000

Call in Arrears 1,250

Land & Building 6,87,500
Plant & Machinery 6,56,250
Furniture 62,500
General Reserve 2,62,500
Loan from State Financial Corporation 1,87,500
Inventory:
Raw Materials 62,500
Finished Goods 2,50,000 3,12,500

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Provision for Taxation 1,60,000

Trade Receivables 2,50,000
Advances 53,375
Profit & Loss Account 1,08,375
Cash in Hand 37,500
Cash at Bank 3,08,750
Unsecured Loan (Long-term) 1,51,250
Trade Payables 2,50,000
The following additional information is also provided:
(i) 2,500 Equity shares were issued for consideration other than cash.
(ii) Debtors of ` 65,000 (included in trade receivables) are due for more than 6 months.
(iii) The cost of the assets were:
Building ` 7,50,000, Plant & Machinery ` 8,75,000 and Furniture ` 78,125
(iv) The balance of ` 1,87,500 in the Loan Account with State Finance Corporation is
inclusive of ` 9,375 for Interest accrued but not due. The loan is secured by
hypothecation of Plant & Machinery.
(v) Balance at Bank includes ` 2,500 with Global Bank Ltd., which is not a Scheduled
Bank.
You are required to prepare the Balance sheet of Hari Ltd. as on 31 st March, 2022 as per
Schedule III to the Companies Act, 2013.
Managerial remuneration
2. Omega Ltd. provides the following information as on 31st March, 2022:
Liabilities `
Authorized capital:
50,000, 14% preference shares of `100 50,00,000
5,00,000 Equity shares of `100 each 5,00,00,000
5,50,00,000
Issued and subscribed capital:
38,750, 14% preference shares of ` 100 each fully paid 38,75,000
2,70,000 Equity shares of ` 100 each, ` 80 paid-up 2,16,00,000
Share suspense account 45,00,000
Reserves and surplus:

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Capital reserves (` 2,50,000 is revaluation reserve) 4,38,750

Securities premium 1,12,500
Secured loans:
15% Debentures 1,46,25,000
Unsecured loans:
Public deposits 8,32,500
Cash credit loan from SBI (short term) 2,96,250
Current Liabilities:
Trade Payables 7,76,250
Assets:
Investment in shares, debentures, etc. 1,75,25,000
Profit and Loss account (Dr. balance) 34,25,000
Share suspense account represents application money received on shares, the allotment
of which is not yet made. You are required to compute effective capital as per the provisions
of Schedule V if Omega Ltd is non-investment company. Would your answer differ if
Omega Ltd. is an investment company?
Cash Flow Statement
3. Following is the Balance Sheet of Fox Ltd. You are required to prepare cash flow statement
using Indirect Method.
Particulars Note 31st March,2021 31st March,2020
No. (`) (`)
(I) Equity and Liabilities
1. Shareholders’ Funds
(a) Share capital 1 5,60,000 3,00,000
(b) Reserve and Surplus 2 35,000 25,000
2. Current Liabilities
(a) Trade payables 1,50,000 60,000
(b) Short-term provisions 8,000 5,000
(Provision for taxation)
Total 7,53,000 3,90,000

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(II) Assets
1. Non-current assets
(a) Property, Plant and 3,50,000 1,80,000
Equipment
2. Current assets
(a) Inventories 1,20,000 50,000
(b) Trade receivables 1,00,000 25,000
(c) Cash and cash equivalents 1,05,000 90,000
(d) Other current assets 78,000 45,000
Total 7,53,000 3,90,000
Notes to Accounts
Particulars 31st March,2021 (`) 31st March,2020
(`)
1. Share capital
(a) Equity share capital 4,10,000 2,00,000
(b) Preference share capital 1,50,000 1,00,000
5,60,000 3,00,000
2. Reserve and surplus
Surplus in statement of profit and loss at the 25,000
beginning of the year
Add: Profit of the year 20,000
Less: Dividend (10,000)
Surplus in statement of profit and loss at the 35,000 25,000
end of the year
Additional Information:
1. Dividend paid during the year ` 10,000
2. Depreciation charges during the year ` 40,000.
Profit/Loss prior to Incorporation
4. M/s New Venture, who was carrying on business from 1 st June, 2021 gets itself
incorporated as a company on 1 st October, 2021. The first accounts are drawn upto
31st March 2022. The gross profit for the period is ` 1,20,000.
Following information is given :
(a) General Expenses are ` 24,000.

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 6 INTERMEDIATE EXAMINATION: MAY 2023

(b) Director's Fees is ` 24,000 p.a.

(c) Incorporation Expenses ` 4,000.
(d) Rent upto 31st December, 2021 was ` 6,000 p.a., after which it was increased to
` 8,000 p.a.
(e) Salary of the Manager, who upon incorporation of the company was made a director,
is ` 12,000 p.a. His remuneration as director is included in the above figure of fees
to the directors.
(f) Advertisement Expenses of ` 5,000 pertains to the incorporated company.
(g) Bad debts` 4,000.
Give statement showing pre and post incorporation profit. The net sales are ` 20,00,000,
the monthly average of which, for the first four months is one-half of that of the remaining
period. The company earned a uniform profit. Interest and tax may be ignored.
Accounting for Bonus Issue
5. Following items appear in the Trial Balance of Satish Limited as on 31 st March, 2022:
Particulars Amount
9,000 Equity shares of ` 100 each 9,00,000
Capital Reserves (including ` 80,000 being profit on sale of plant) 1,80,000
Securities Premium 80,000
Capital Redemption Reserve 60,000
General Reserve 2,10,000
Profit and Loss Account (Cr. Balance) 1,30,000
The company decided to issue bonus shares to equity shareholders at the rate of 1 share
for every 3 shares held. Company decided that there should be the minimum reduction in
free reserves. Pass necessary Journal Entries in the books of Satish Ltd.
Issue of Right Shares
6. A company having 1,00,000 shares of ` 10 each as its issued share capital, and having a
market value of ` 46, issues rights shares in the ratio of 1:10 at an issue price of
` 31. Pass journal entry for issue of right shares.
Redemption of Preference Shares
7. (a) The Board of Directors of a Company decided to issue minimum number of equity
shares of ` 9 to redeem ` 2,50,000 preference shares. The maximum amount of
divisible profits available for redemption is ` 1,50,000. Calculate the number of shares
to be issued by the company to ensure that the provisions of Section 55 are not
violated. Also determine the number of shares if the company decides to issue shares
in multiples of ` 50 only.

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(b) Make Ltd. had 6,000, 14% Redeemable Preference Shares of ` 100 each, fully paid
up. The company had to redeem these shares at a premium of 10%.
It was decided by the company to issue the following:
(i) 50,000 Equity Shares of ` 10 each at par,
(ii) 2,000 12% Debentures of ` 100 each.
The issue was fully subscribed and all amounts were received in full. The payment
was duly made. The company had sufficient profits. Show Journal Entries in the books
of the company.
Redemption of Debentures
8. Alfa Ltd. (listed company) issued ` 3,00,000 5% Debentures on 30 th September 20X0 on
which interest is payable half yearly on 31st March and 30th September. The company has
power to purchase debentures in the open market for cancellation thereof. The following
purchases were made during the year ended 31st December, 20X2 and the cancellati on
were made on the same date. On 31 December 20X0, investments had been made for the
purpose of redemption were ` 45,000.
1st March 20X2 - ` 50,000 nominal value purchased for ` 49,450 ex-interest.
1st September 20X2 - ` 40,000 nominal value purchased for ` 40,250 cum-interest.
You are required to draw up the following accounts for the year ended 31st December, 20X2:
(i) Debentures Account; and
(ii) Own Debentures (Investment) Account.
Ignore taxation. Interest to be rounded off to the nearest rupee on the higher side.
Investment Accounts
9. Remo Ltd. held on 1st April, 2021, 1000 9% Government Securities at ` 90,000 (Face Value
of Security ` 100 each). Three month's interest had accrued on the above date. On 1 st
May, the company purchased the same Government Securities of the face value of
` 80,000 at ` 95 cum-interest. On 1 st June, ` 60,000 face value of the security was sold
at ` 94 cum-interest. Interest on the security was paid each year on 30 th June and
31st December and was credited by the bank on the same date. On 30 th September,
` 40,000 face value of the Govt. securities were sold at ` 97 cum-interest. On
1st December, the company purchased the same security ` 10,000 at par ex-interest. On
1st March, the company sold ` 10,000 face value of the government securities at ` 95 ex-
interest.
You are required to draw up the 9% Government Security Account in the books of Remo
Limited. FIFO method shall be followed.
Calculation shall be made to the nearest rupee or multiple thereof.

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Insurance Claim for loss of stock

10. A fire occurred in the premises of M/s Star & Sons on 21 st March 2022. The concern had
taken Insurance Policy of ` 75,000 which was subject to average clause. From the books
of accounts, the following particulars are available relating to the period 1st April 2021 to
March 21st 2022 :
(i) Stock as on April 1st 2021 ` 1,50,500
(ii) Purchases (including purchase of ` 40,000 for which purchase
invoices had not been received from suppliers, though goods
have been received in godown) ` 3,17,000
(iii) Cost of goods distributed as, samples for advertising
from April 1 st 2021 to the date of fire, included in above purchases ` 32,000
(iv) Sales (excluding goods sold on approval basis
having sale value ` 35,000) ` 4,55,000
Approval has been received for goods before the date of fire.
(v) Purchase return ` 15,000
(vi) Wages (including salary of Manager ` 10,000) ` 65,000
(vii) Average Rate of Gross Profit @ 20% on sales
(viii) Cost of goods salvaged ` 12,000
You are required to calculate the amount of claim to be lodged to Insurance Company.
Hire Purchase Transactions
11. The following particulars relate to hire purchase transactions:
(i) R (hire purchaser) purchased three machineries from S on hire purchase system.
The cash price of each machinery being ` 3,00,000.
(ii) The hire purchaser charged depreciation @ 20% on written down value method.
(iii) Two machineries were seized by hire vendor when second installment was not paid
at the end of the second year. The hire vendor valued the two machineries at cash
price less 30% depreciation charge for each of the years under written down value
method.
(iv) The hire vendor spent ` 15,000 on repairs of the machineries and then sold them for
a total amount of ` 2,55,000.
You are required to compute:
(1) Agreed value of two machineries taken back by the hire vendor.
(2) Book value of one machine left with the Hire purchaser.

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(3) Profit or loss to hire purchaser on two machineries taken, back by the hire vendor.
(4) Profit or loss on machineries repossessed, when sold by the hire vendor.
Departmental Accounts
12. 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, 2022:
Particulars Deptt. A Deptt. B
` `
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 ` 7,50,000 and you are also
supplied with the following information:
(i) Closing stock of Department A ` 6,00,000 including goods from Department B for
` 1,20,000 at cost to Department A.
(ii) Closing stock of Department B ` 12,00,000 including goods from Department A for
` 1,80,000 at cost to Department B.
(iii) Opening stock of Department A and Department B include goods of the value of
` 60,000 and ` 90,000 taken from Department B and Department A respectively at
cost to transferee departments.
(iv) The gross profit is uniform from year to year.
Accounting for Branches
13. PQR has a branch at Houston (USA). Business of the Branch is carried out subst antially
independent by way of accumulating cash and other monetary items, incurring expenses,
generating income and arranging borrowing in its local currency. The trial balance of the
Branch as at 31 st March, 2022 is as follows:
US$
Particulars Debit Credit
Office equipment (Cost) 56,400
Opening Accumulated Depreciation (Office equipment) 5,400
Furniture and Fixtures (Cost) 36,000
Opening Accumulated Depreciation 6,840
(Furniture and Fixtures)
Opening Stock as on 1 st April, 2021 24,500

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Purchases 96,500
Sales 1,76,250
Salaries 4,250
Carriage inward 256
Rent, Rates & Taxes 956
Trade receivables 12,560
Trade payables 8,650
Cash at bank 2,540
Cash in hand 500
Head office Account _______ 37,322
Total 2,34,462 2,34,462
Following further information are given:
(i) Salaries outstanding as on 31st March, 2022 is US$ 600.
(ii) Depreciate office equipment and furniture & fixtures @ 10% at written down value.
(iii) Closing stock as on 31st March, 2022 is US $, 24,650.
(iv) You are informed that the Head office is showing receivable from the Branch as
` 23,75,614 as on 31 st March, 2022. No transaction in respect of the Branch is
pending in Head office.
(v) Office equipment (cost) includes one office equipment of US $ 2,400 purchased on
1/04/2021.
(vi) One furniture of carrying value of US $ 450 as on 01/04/2021 (cost: US $ 500 and
Accumulated depreciation: US $ 50) has been sold for US $ 405 on 31/03/202 2 to
Mr. M at no profit no loss. Mr. M has not paid the amount till the finalization of branch
account. No entry has been passed for this sale of furniture in the above trial balance.
(vii) The rate of exchange on different dates are:
Date 1 US $ is equivalent to
1st April, 2021 ` 64
31st December, 2021 ` 70
31st March, 2022 ` 75
Average for the year ` 72
You are required to prepare the trial Balance after incorporating adjustments given and
converting US $ into rupees.

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Accounts from Incomplete Records

14. The following information relates to the business of ABC Enterprises, who requests you to
prepare a Trading and Profit & Loss A/c for the year ended 31 st March, 2022 and a Balance
Sheet as on that date.
(a) Assets and Liabilities as on:
in `
1.4.2021 31.3.2022
Furniture 60,000 63,500
Stock 80,000 70,000
Sundry Debtors 1,60,000 ?
Sundry Creditors 1,10,000 1,50,000
Prepaid Expenses 6,000 7,000
Outstanding Expenses 20,000 18,000
Cash in Hand & Bank Balance 12,000 26,250
(b) Cash transaction during the year:
(i) Collection from Debtors, after allowing discount of ` 15,000 amounted to
` 5,85,000.
(ii) Collection on discounting of Bills of Exchange, after deduction of discount of
` 1,250 by bank, totalled to ` 61,250.
(iii) Creditors of ` 4,00,000 were paid ` 3,92,000 in full settlement of their dues.
(iv) Payment of Freight inward of ` 30,000.
(v) Amount withdrawn for personal use ` 70,000.
(vi) Payment for office furniture ` 10,000.
(vii) Investment carrying annual interest of 6% were purchased at ` 95 (200 shares,
face Value ` 100 each) on 1st October 2021 and payment made thereof.
(viii) Expenses including salaries paid ` 95,000.
(ix) Miscellaneous receipt of ` 5,000.
(c) Bills of exchange drawn on and accepted by customers during the year amounted to
` 1,00,000. Of these, bills of exchange of ` 20,000 were endorsed in favour of
creditors. An endorsed bill of exchange of ` 4,000 was dishonoured.
(d) Goods costing ` 9,000 were used as advertising material.
(e) Goods are invariably sold to show a gross profit of 20% on sales.

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(f) Difference in cash book, if any, is to be treated as further drawing or introduction of

capital by proprietor of ABC enterprises.
(g) Provide at 2% for doubtful debts on closing debtors.
Framework for Preparation and Presentation of Financial Statements
15. A Ltd. has entered into a binding agreement with Gamma Ltd. to buy a custom -made
machine ` 1,00,000. At the end of 20X1-X2, before delivery of the machine, A Ltd. had to
change its method of production. The new method will not require the machine ordered
and it will be scrapped after delivery. The expected scrap value is nil.
You are required to advise the accounting treatment and give necessary journal entry in
the year 20X1-X2.
AS 1 “Disclosure of Accounting Policies”
16. (a) In the books of Rani Ltd., closing inventory as on 31.03.2022 amounts to ` 1,75,000
(valued on the basis of FIFO method).
The Company decides to change from FIFO method to weighted average method for
ascertaining the costs of inventory from the year 2021-22. On the basis of weighted
average method, closing inventory as on 31.03.2022 amounts to ` 1,59,000.
Realizable value of the inventory as on 31.03.2022 amounts to ` 2,07,000.
Discuss disclosure requirements of change in accounting policy as per AS 1.
AS 2 Valuation of Inventories
(b) An enterprise ordered 20,000 KG of certain material at ` 110 per unit. The purchase
price includes GST ` 12 per KG, in respect of which full input tax credit (ITC) is
admissible. Freight incurred amounted to ` 1,17,600. Normal transit loss is 2%. The
enterprise actually received 19,500 KG and consumed 18,000 KG of the material.
(i) You are required to calculate cost of material per KG;
(ii) Allocation of material cost.
AS 10 Property, Plant and Equipment
17. Star Limited purchased machinery for ` 6,80,000 (inclusive of GST of ` 40,000). Input
credit is available for entire amount of GST paid. The company incurred the following other
expense for installation.
`
Cost of preparation of site for installation 21,200
Total Labour charges 56,000
(200 out of the total of 500 men hours worked,
were spent on installation of the machinery)

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Spare parts and tools consumed in installation 5,000

Total salary of supervisor 26,000
(Time spent for installation was 25% of the total time worked)
Total technical expense 34,000
(1/10 relates to the plant installation)
Test run and experimental production expenses 18,000
Consultancy charges to architect for plant set up 11,000
Depreciation on assets used for installation 12,000
The machine was ready for use on 15.01.2021 but was used from 01.02.2021. Due to this
delay further expenses of ` 8,900 were incurred. Calculate the value at which the plant
should be capitalized in the books of Star Limited.
AS 11 The Effects of Changes in Foreign Exchange Rates and AS 16 Borrowing Costs
18. ABC Builders Limited had borrowed a sum of US $ 15,00,000 at the beginning of Financial
year 2020-21 for its residential project at London Interbank Offered Rate (LIBOR) + 4 %.
The interest is payable at the end of the Financial Year. At the time of availing the loan,
the exchange rate was ` 72 per US $ and the rate as on 31 st March, 2021 was ` 76 per
US $. If ABC Builders Limited borrowed the loan in Indian Rupee equivalent, the pricing of
loan would have been 9.50%. Compute Borrowing Cost and exchange difference for the
year ending 31st March, 2021 as per applicable Accounting Standards. (Applicable LIBOR
is 1%).
AS 12 Accounting for Government Grants
19. (a) Hygiene Ltd. had received a grant of ` 50 lakh in 2012 from a State Government
towards installation of pollution control machinery on fulfilment of certain conditions.
The company, however, failed to comply with the said conditions and consequently
was required to refund the said amount in 2022. The company debited the said
amount to its machinery account in 2022 on payment of the same. It also reworked
the depreciation for the said machinery from the date of its purchase and passed
necessary adjusting entries in the year 2022 to incorporate the retrospective impact
of the same. State whether the treatment done by the company is correct or not.
AS 13 Accounting for Investments
(b) Gowtham Limited invested in shares of another company (with the intention to hold
the shares for short-term period) on 30 th November, 2021 at a cost of ` 4,25,000. It

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also earlier purchased Gold of ` 8,00,000 and Silver of ` 3,50,000 on 31st March,
2019.
Market values as on 31st March, 2022, of the above investments are as follows:
Shares ` 3,50,000
Gold ` 10,25,000
Silver ` 5,10,000
You are required to explain how will the above investments be shown (individually
and in total) in the books of account of Gowtham Limited for the year ending 31st
March, 2022 as per the provisions of AS 13.
AS 16 Borrowing Costs
20. Expert Limited issued 12% secured debentures of ` 100 lakhs on 01.06.2021. Money
raised from debentures to be utilized as under:
Intended Purpose Amount ` in lakhs
Construction of factory building 40
Working Capital 30
Purchase of Machinery 15
Purchase of Furniture 2
Purchase of truck 13

Additional Information:
(i) Interest on debentures for the Financial Year 2021-2022 was paid by the Company.
(ii) During the year, the company invested idle fund of ` 5 lakhs (out of the money raised
from debentures) in Bank's fixed deposit and earned interest of ` 50,000.
(iii) In March, 2022 construction of factory building was not completed (it is expected that
it will take another 6 months).
(iv) In March 2022, Machinery was installed and ready for its intended use.
(v) Furniture was put to use at the end of March 2022.
(vi) Truck is going to be received in April, 2022.
You are required to show the treatment of interest as per AS 16 in respect of borrowing
cost for the year ended 31 st March, 2022 in the Books of Expert Limited.

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SUGGESTED ANSWERS

1. (a) Hari Ltd.

Balance Sheet as on 31 st March, 2022
Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 12,48,750
b Reserves and Surplus 2 3,70,875
2 Non-current liabilities
Long-term borrowings 3 3,29,375
3 Current liabilities
a Trade Payables 2,50,000
b Other current liabilities 4 9,375
c Short-term provisions 5 1,60,000
Total 23,68,375
Assets
1 Non-current assets
Property, Plant & Equipment (PPE) 6 14,06,250
2 Current assets
a Inventories 7 3,12,500
b Trade receivables 8 2,50,000
c Cash and cash equivalents 9 3,46,250
d Short-term loans and advances 53,375
Total 23,68,375
Notes to accounts
`
1 Share Capital
Equity share capital
Issued & subscribed & called up

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12,500 Equity Shares of ` 100 each

(of the above 2,500 shares have been issued for
consideration other than cash) 12,50,000
Less: Calls in arrears (1,250) 12,48,750
Total 12,48,750
2 Reserves and Surplus
General Reserve 2,62,500
Surplus (Profit & Loss A/c) 1,08,375
Total 3,70,875
3 Long-term borrowings
Secured Term Loan
State Financial Corporation Loan 1,78,125
(1,87,500–9,375)
(Secured by hypothecation of Plant and
Machinery)
Unsecured Loan 1,51,250
Total 3,29,375
4 Other current liabilities
Interest accrued but not due on loans (SFC) 9,375
5 Short-term provisions
Provision for taxation 1,60,000
6 PPE
Land and Building 7,50,000
Less: Depreciation (62,500) 6,87,500
Plant & Machinery 8,75,000
Less: Depreciation (2,18,750) 6,56,250
Furniture & Fittings 78,125
Less: Depreciation (15,625) 62,500
Total 14,06,250
7 Inventories
Raw Materials 62,500
Finished goods 2,50,000
Total 3,12,500

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 PAPER – 1 : ACCOUNTING 17

8 Trade receivables
Outstanding for a period exceeding six months 65,000
Other Amounts 1,85,000
Total 2,50,000
9 Cash and cash equivalents
Cash at bank
with Scheduled Banks 3,06,250
with others (Global Bank Ltd.) 2,500 3,08,750
Cash in hand 37,500
Total 3,46,250
2. Computation of effective capital:
Where Omega Where Omega
Ltd.is a non- Ltd.is an
investment investment
company company
Paid-up share capital —
38,750, 14% Preference shares 38,75,000 38,75,000
2,70,000 Equity shares 2,16,00,000 2,16,00,000
Capital reserves 1,88,750 1,88,750
Securities premium 1,12,500 1,12,500
15% Debentures 1,46,25,000 1,46,25,000
Public Deposits 8,32,500 8,32,500
(A) 4,12,33,750 4,12,33,750
Investments 1,75,25,000
Profit and Loss account (Dr. balance) 34,25,000 34,25,000
(B) 2,09,50,000 34,25,000
Effective capital (A–B) 2,02,83,750 3,78,08,750
3. Fox Ltd.
Cash Flow Statement for the year ended 31 st March, 2021
` `
Cash flows from operating activities
Net Profit (35,000 less 25,000) 10,000

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 18 INTERMEDIATE EXAMINATION: MAY 2023

Add: Dividend 10,000

Provision for tax 8,000
Net profit before taxation and extraordinary items 28,000
Adjustments for:
Depreciation 40,000
Operating profit before working capital changes 68,000
Increase in trade receivables (75,000)
Increase in inventories (70,000)
Increase in other current assets (33,000)
Increase in trade payables 90,000 (88,000)
Cash used in operating activities (20,000)
Less: Tax paid* (5,000)
Net cash used in operating activities (25,000)
Cash flows from investing activities
Purchase of PPE (2,10,000)
Net cash used in investing activities (2,10,000)
Cash flows from financing activities
Issue of equity shares for cash 2,10,000
Issue of preference shares 50,000
Dividends paid (10,000)
Net cash generated from financing activities 2,50,000
Net increase in cash and cash equivalents 15,000
Cash and cash equivalents at beginning of period 90,000
Cash and cash equivalents at end of period 1,05,000

*Provision for tax of last year considered to be paid in the current year.
Working Note:
`
Property, plant and equipment acquisitions
W.D.V. at 31.3.2021 3,50,000
Add back:
Depreciation for the year 40,000
3,90,000

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 PAPER – 1 : ACCOUNTING 19

Less: W.D.V. at 31.12.2020 1,80,000

Acquisitions during 2020-2021 2,10,000
4.
Particulars Basis Pre- Post- Total
incorporation incorporation
period period
` ` `
Gross Profit Sales Ratio 30,000 90,000 1,20,000
Less: General expenses Time Ratio 9,600 14,400 24,000
Director’s fee Actual --- 12,000 12,000
Incorporation expenses Actual --- 4,000 4,000
Rent W.N.2 2,000 3,500 5,500
Manager’s salary Actual 4,000 --- 4,000
Advertisement expenses Post --- 5,000 5,000
Bad Debts Sales Ratio 1,000 3,000 4,000
Pre-incorporation Profit
transferred to Capital Reserve
Post-incorporation Profit 13,400 48,100 61,500
transferred to P/L Account

Working Notes:
1. Calculation of sales ratio `
Let the average monthly sales of first four months = 100
Next six months = 200
Total sales of first four months = 100 x 4 = 400
Total sales of next six months = 200 x 6 = 1,200
Ratio of sales = 400 : 1,200 = 1:3
2. Rent
Till 31st December, 2021, rent was ` 6,000 p.a., i.e. ` 500 p.m.
So, pre-incorporation rent = ` 500 x 4 = ` 2,000
Post incorporation rent = (` 500 x 3) + (8,000 x 3/12) = ` 3,500.
3. Time Ratio
Pre-incorporation period = 1 st June, 2021 to 30th Sept, 2021 = 4 months
Post-incorporation = 1 st October, 2021 to 31st March, 2022 = 6 months
= 4 months: 6 months
Thus, time ratio is 2:3

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 20 INTERMEDIATE EXAMINATION: MAY 2023

5. Journal Entries in the Books of Satish Ltd

Particulars Debit (`) Credit (`)
Capital Redemption Reserve A/c Dr. 60,000
Securities Premium A/c Dr. 80,000
Capital Reserve A/c Dr. 80,000
General Reserve A/c * Dr. 80,000
To Bonus to Shareholders 3,00,000
(Being issue of one bonus shares for every 3 shares
held, by utilization of various Reserves, as per
Board’s resolution dated ………………)
Bonus to Shareholders A/c Dr. 3,00,000
To Equity Share Capital A/c 3,00,000
(Being capitalisation of profit)
*Note: Instead of general reserve, Profit and Loss Account may also be used.
6. The entry at the time of subscription of right shares by the existing shareholders will be:
Bank A/c Dr. 3,10,000
To Equity Share Capital A/c 1,00,000
To Securities Premium A/c 2,10,000
(Being issue of 10,000 right shares @ ` 31 offered)
7. (a) Nominal value of preference shares ` 2,50,000
Maximum possible redemption out of profits ` 1,50,000
Minimum proceeds of fresh issue ` 2,50,000 – 1,50,000 = ` 1,00,000
Proceed of one share =`9

Minimum number of shares = 1,00,000 = 11,111.11 shares

9
As fractional shares are not permitted, the minimum number of shares to be issued
is 11,112 shares.
If shares are to be issued in multiples of 50, then the next higher figure which is a
multiple of 50 is 11,150. Hence, minimum number of shares to be issued in such a
case is 11,150 shares.

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 PAPER – 1 : ACCOUNTING 21

(b) In the books of Make Ltd.

Journal Entries
Date Particulars Dr. (`) Cr. (`)
Bank A/c Dr. 5,00,000
To Equity Share Capital A/c 5,00,000
(Being the issue of 5,00,000 equity shares
of ` 10 each at par as per Board’s
resolution No……dated…..)
Bank A/c Dr. 2,00,000
To 12% Debenture A/c 2,00,000
(Being the issue of 2,000 Debentures of
` 100 each as per Board’s Resolution
No…..dated……)
Profit & Loss A/c Dr. 1,00,000
To Capital Redemption Reserve A/c 1,00,000
(Being the amount transferred to Capital
Redemption Reserve Account as per the
requirement of the Act)
12% Redeemable Preference Share Dr. 6,00,000
Capital A/c
Premium on Redemption of Preference Dr. 60,000
Shares A/c
To Preference Shareholders A/c 6,60,000
(Being the amount payable on redemption
transferred to Preference Shareholders
Account)
Preference Shareholders A/c Dr. 6,60,000
To Bank A/c 6,60,000
(Being the amount paid on redemption of
preference shares)
Profit & Loss A/c Dr. 60,000
To Premium on Redemption of 60,000
Preference Shares A/c
(Being the adjustment of premium on
redemption against Profits & Loss
Account)

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 22 INTERMEDIATE EXAMINATION: MAY 2023

Working Note:
Amount to be transferred to Capital Redemption Reserve Account
Face value of shares to be redeemed 6,00,000
Less: Proceeds from new issue (5,00,000)
Total Balance 1,00,000
8. Alfa Ltd.
Debentures Account
20X2 ` 20X2 `
March 1 To Own Debentures 49,450 Jan 1 By Balance b/d 3,00,000
March 1 To Profit on cancellation
(50,000-49,450) 550
Sep 1 To Own Debentures
(Note 3) 39,416
Sep 1 To Profit on cancellation
(40,000-39,416) 584
Dec 31 Balance c/d 2,10,000
3,00,000 3,00,000
Own Debentures (Investment) Account
Nominal Interest Cost Nominal Interest Cost
Cost Cost `
` ` ` ` `
20X2 20X2
March To Bank 50,000 1,042 49,450 March By Debentures 50,000 - 49,450
1 (W.N. 1) 1 A/c
Sep 1 To Bank 40,000 834 39,416 Sep 1 By Debentures 40,000 - 39,416
(W.N. 2 & 3) A/c
- - Dec. By P&L A/c 1,876 -
31
90,000 1,876 88,866 90,000 1,876 88,866

Working notes:
1. 50,000 x 5% x 5/12 = 1,042
2. 40,000 x 5% x 5/12 = 834
3. 40,250 – 834 = 39,416

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 PAPER – 1 : ACCOUNTING 23

9. In the Books of Remo Ltd.

9% Government Securities (Investment) Account
Particulars Face Interest Cost Particulars Face Interest Cost
Value Value
2021 ` ` ` 2021 ` ` `
April 1 To Balance June 1 By Bank
b/d 1,00,000 2,250 90,000 A/c 60,000 2,250 54,150
May 1 To Bank June 30 By Bank
A/c 80,000 2,400 73,600 A/c - 5,400 -
June 1 To P&L A/c - - 150 Sept. 30 By Bank A/c
40,000 900 37,900
Sept. To P & L A/c - - 1,900 Dec. 31 By Bank A/c - 4,050 -
30
Dec. 1 To Bank Mar.1 By Bank
A/c 10,000 375 10,000 2022 A/c 10,000 150 9,500
Mar. 1 To P&L A/c - - 300 Mar. 31 By Balance
2022 2022 c/d 80,000 1,800 74,400
Mar. To P&L A/c
31, (Transfer) - 9,525 -
2022
1,90,000 14,550 1,75,950 1,90,000 14,550 1,75,950

Working Notes:
1. Interest accrued on 1 st April 2021 = `1,00,000 x 9% x 3/12 = ` 2,250
2. Accrued Interest on 800 units as on 01.05.2021 = ` 80,000 x 9/100 x 4/12 = ` 2,400
3. Cost of Investment for purchase on 01.05.2021 = ` 76,000 - ` 2,400 = ` 73,600
4. Accrued Interest on 600 units as on 01.06.2021 = ` 60,000 x 9/100 x 5/12 = ` 2,250
5. Profit on Securities sold on 1 st June = ` 54,150 (56,400 – 2,250)- ` 54,000 (60,000 x
90,000/1,00,000) = ` 150
6. Interest received on 30.06.2021 = `1,20,000 x 9/100 x 6/12 = ` 5,400
7. Accrued Interest on 400 units as on 30.09.2021 = ` 40,000 x 9/100 x 3/12 = ` 900
8. Cost of 400 Govt. Securities sold on 30.09.2021 = 40,000 x 90,000/1,00,000 =
` 36,000
9. Profit on securities sold on 30 th September = `37,900 (38,800-900) - ` 36,000 =
` 1,900
10. Accrued Interest on 1.12.2021 = ` 10,000 x 9/100 x 5/12 = ` 375
11. Interest received on 31.12.2021 = ` 90,000 x 9/100 x 6/12 = ` 4,050
12. Accrued Interest on 100 units as on 01.03.2022 = ` 10,000 x 9/100 x 2/12 = ` 150

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 24 INTERMEDIATE EXAMINATION: MAY 2023

13. Cost of 100 Govt. Securities sold on 01.03.2022 = ` 10,000 x 73,600/80,000 =

` 9,200
14. Profit on securities sold on 01.03.2022 = ` 9,500 - ` 9,200 = ` 300
15.
Calculation of closing balance: Units `
Securities in hand remained in hand at 31/3/2022
From original holding (1,00,000 – 60,000 – 40,000) -
Purchased on 1st May (80,000 – 10,000) 70,000 64,400
Purchased on 1 st December 10,000 10,000
80,000 74,400
10. Memorandum Trading Account for the period 1 st April, 2021 to 21st March, 2022
` `
To Opening Stock 1,50,500 By Sales 4,90,000
(4,55,000 + 35,000)
To Purchases 3,17,000
Less: Returns (15,000) By Closing Stock (Bal. fig.) 83,500
Goods distributed as
samples (32,000) 2,70,000
To Wages 55,000
To Gross Profit 98,000
(20% of Sales)
5,73,500 5,73,500
Statement of Insurance Claim
`
Value of stock destroyed by fire 83,500
Less: Salvaged Stock 12,000
Loss of stock 71,500
Note: Since policy amount is less than vale of stock on date of fire, average clause will
apply. Therefore, claim amount will be computed by applying the formula.
Insured Value
Claim = x Loss suffered
Total Cost
Claim amount = ` 71,500 x 75,000/ 83,500 = ` 64,222 (rounded off)

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 PAPER – 1 : ACCOUNTING 25

11.
`
(i) Price of two machines = ` 3,00,000 x 2 6,00,000
Less: Depreciation for the first year @ 30% 1,80,000
4,20,000
30
Less: Depreciation for the second year = ` 4,20,000 x
100 1,26,000
Agreed value of two machines taken back by the hire vendor 2,94,000
(ii) Cash purchase price of one machine 3,00,000
Less: Depreciation on ` 3,00,000 @20% for the first year 60,000
Written drown value at the end of first year 2,40,000
Less: Depreciation on ` 2,40,000 @ 20% for the second year 48,000
Book value of machine left with the hire purchaser 1,92,000
(iii) Book value of one machine as calculated above 1,92,000
Book value of Two machines = ` 1,92,000 x 2 3,84,000
Value at which the two machines were taken back, calculated in 2,94,000
(i) above
Hence, loss to hire purchaser on machine taken back by hire
vendor (`3,84,000 – ` 2,94,000) ` 90,000
(iv) Profit or loss on machines repossessed when sold by hire
vendor
Sale proceeds 2,55,000
Less: Value at which machines were taken back 2,94,000
Repairs 15,000 (3,09,000)
Loss on resale 54,000

12. Departmental Trading Account for the year ended on 31 st December, 2022
Particulars A B Particulars A B
` ` ` `
To Opening Stock 3,00,000 2,40,000 By Sales 60,00,000 90,00,000
To Purchases 39,00,000 54,60,000 By Closing Stock 6,00,000 12,00,000
To Gross Profit 24,00,000 45,00,000
66,00,000 1,02,00,000 66,00,000 1,02,00,000

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 26 INTERMEDIATE EXAMINATION: MAY 2023

General profit and loss account of Beta for the year ended on 31 st December, 2022
Particulars Amount Particulars Amount
` `
To General expenses  7,50,000 By Stock reserve (opening stock)
To Stock reserve (Closing Dept. A 30,000
Stock)
Dept. A 60,000 Dept. B 36,000
Dept. B 72,000 By Gross Profit
To Net Profit 60,84,000 Dept. A 24,00,000
____ Dept. B 45,00,000
69,66,000 69,66,000

Working Notes:
Dept. A Dept. B
1. Percentage of Profit 24,00,000/60,00,000 x 100 45,00,000/90,00,000 x 100
40% 50%
2. Opening Stock 60,000 x 50% = 30,000 90,000 X 40% = 36,000
reserve
3. Closing Stock 1,20,000 x 50%=60,000 1,80,000 x 40% = 72,000
reserve
13. In the books of PQR
Trial Balance (in Rupees) of Houston (USA) Branch – Non Integral
foreign operation
as on 31 st March, 2022
Dr. Cr. Conversi Dr. Cr.
on
US $ US $ rate ` `
Office Equipment 56,400 75 42,30,000
Depreciation on Office 10,500 75 7,87,500
Equipment (Accumulated)
(5,400+5,100)
Depreciation 8,016 75 6,01,200


General expenses have not been allocated to individual department and are charged to General Profit
and Loss Account.

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 PAPER – 1 : ACCOUNTING 27

Furniture and fixtures 35,500 75 26,62,500

(36,000-500)
Depreciation on furniture and 9,661 75 7,24,575
fixtures (Accumulated)
(6,840-50-45 +2,916)
Stock (1st April, 2021) 24,500 64 15,68,000
Purchases 96,500 72 69,48,000
Sales 1,76,250 72 126,90,000
Carriage inward 256 72 18,432
Salaries (4,250+600) 4,850 72 3,49,200
Rent, rates and taxes 956 72 68,832
Salaries payable 600 75 45,000
Head Office A/c 37,322 23,75,614
(given)
Trade receivables 12,560 75 9,42,000
Trade payables 8,650 75 6,48,750
Cash at bank 2,540 75 1,90,500
Cash in hand 500 75 37,500
Mr. M 405 75 30,375
(Receivable for sale of
furniture)
Exchange gain (bal. fig.) 3,75,100
2,42,983 2,42,983 176,46,539 176,46,539
Closing stock 24,650 US$ x ` 75 =`18,48,750.
14. Trading and Profit and Loss Account of ABC enterprise
for the year ended 31st March, 2022
` `
To Opening Inventory 80,000 By Sales 6,08,750
To Purchases 4,56,000 By Closing inventory 70,000
Less: For advertising (9,000) 4,47,000
To Freight inwards 30,000
To Gross profit c/d 1,21,750
6,78,750 6,78,750

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 28 INTERMEDIATE EXAMINATION: MAY 2023

To Sundry expenses 92,000 By Gross profit b/d 1,21,750

To Advertisement 9,000 By Interest on investment 600
To Discount allowed – (20,000 x 6/100 x ½)
Debtors 15,000 By Discount received 8,000
Bills Receivable 1,250 16,250 By Miscellaneous income 5,000
To Depreciation on 6,500
furniture
To Provision for 1,455
doubtful debts
To Net profit 10,145
1,35,350 1,35,350
Balance Sheet as on 31st March, 2022
Liabilities Amount Assets Amount
` ` ` `
Capital as on 1,88,000 Furniture (w.d.v.) 60,000
1.4.2021 Additions during the year 10,000
Less: Drawings (91,000) Less: Depreciation (6,500) 63,500
97,000 Investment 19,000
Add: Net Profit 10,145 1,07,145 Interest accrued 600
Sundry creditors 1,50,000 Closing inventory 70,000
Sundry debtors 72,750
Outstanding 18,000 Less: Provision for doubtful 1,455 71,295
expenses debts
Bills receivable 17,500
Cash in hand and at bank 26,250
Prepaid expenses 7,000
2,75,145 2,75,145
Working Notes:
(1) Capital on 1st April, 2021
Balance Sheet as on 1st April, 2021
Liabilities ` Assets `
Capital (Bal.fig.) 1,88,000 Furniture (w.d.v.) 60,000

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Creditors 1,10,000 Closing Inventory 80,000

Outstanding expenses 20,000 Sundry debtors 1,60,000
Cash in hand and at bank 12,000
Prepaid expenses 6,000
3,18,000 3,18,000
(2) Purchases made during the year
Sundry Creditors Account
` `
To Cash and bank A/c 3,92,000 By Balance b/d 1,10,000
To Discount received A/c 8,000 By Sundry debtors A/c 4,000
To Bills Receivable A/c 20,000 By Purchases A/c 4,56,000
To Balance c/d 1,50,000 (Balancing figure)
5,70,000 5,70,000
(3) Sales made during the year
`
Opening inventory 80,000
Purchases 4,56,000
Less: For advertising (9,000) 4,47,000
Freight inwards 30,000
5,57,000
Less: Closing inventory (70,000)
Cost of goods sold 4,87,000
Add: Gross profit (25% on cost) 1,21,750
6,08,750
(4) Debtors on 31st March, 2022
Sundry Debtors Account
` `
To Balance b/d 1,60,000 By Cash and bank A/c 5,85,000
To Sales A/c 6,08,750 By Discount allowed A/c 15,000
To Sundry creditors A/c By Bills receivable A/c 1,00,000
(bill dishonoured) 4,000 By Balance c/d (Bal.fig.) 72,750
7,72,750 7,72,750

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 30 INTERMEDIATE EXAMINATION: MAY 2023

(5) Additional drawings by proprietors of ABC enterprises

Cash and Bank Account
` `
To Balance b/d 12,000 By Freight inwards A/c 30,000
To Sundry debtors A/c 5,85,000 By Furniture A/c 10,000
To Bills Receivable A/c 61,250 By Investment A/c 19,000
To Miscellaneous income A/c 5,000 By Expenses A/c 95,000
By Creditors A/c 3,92,000
By Drawings A/c
[` 70,000 + ` 21,000) 91,000
(Additional drawings)]
By Balance c/d 26,250
6,63,250 6,63,250
(6) Amount of expenses debited to Profit and Loss A/c
Sundry Expenses Account
` `
To Prepaid expenses A/c 6,000 By Outstanding expenses A/c 20,000
(on 1.4.2021) (on 1.4.2021)
To Bank A/c 95,000 By Profit and Loss A/c 92,000
(Balancing figure)
To Outstanding expenses By Prepaid expenses A/c
A/c (on 31.3.2022) 18,000 (on 31.3.22) 7,000
1,19,000 1,19,000
(7) Bills Receivable on 31st March, 2022
Bills Receivable Account
` `
To Debtors A/c 1,00,000 By Creditors A/c 20,000
By Bank A/c 61,250
By Discount on bills receivable A/c 1,250
By Balance c/d (Balancing figure) 17,500
1,00,000 1,00,000
Note: All sales and purchases are assumed to be on credit basis.

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15. A liability is recognised when outflow of economic resources in settlement of a present

obligation can be anticipated and the value of outflow can be reliably measured. In the
given case, A Ltd. should recognise a liability of ` 1,00,000 to Gamma Ltd.
When flow of economic benefit to the enterprise beyond the current accounting period is
considered improbable, the expenditure incurred is recognised as an expense rather than
as an asset. In the present case, flow of future economic benefit from the machine to the
enterprise is improbable. The entire amount of purchase price of the machine should be
recognised as an expense.
Journal entry
Loss on change in production method Dr. 1,00,000
To Gamma Ltd. 1,00,000
(Loss due to change in production method)
Profit and loss A/c Dr. 1,00,000
To Loss on change in production method 1,00,000
(Loss transferred to profit and loss account)
16. (a) As per AS 1 “Disclosure of Accounting Policies”, any change in an accounting policy
which has a material effect should be disclosed in the financial statements. The
amount by which any item in the financial statements is affected by such change
should also be disclosed to the extent ascertainable. Where such amount is not
ascertainable, wholly or in part, the fact should be indicated. Thus Rani Ltd. should
disclose the change in valuation method of inventory and its effect on financial
statements. The company may disclose the change in accounting policy in the
following manner:
“The company values its inventory at lower of cost and net realizable value. Since net
realizable value of all items of inventory in the current year was greater than
respective costs, the company valued its inventory at cost. In the present year i.e.
2021-22, the company has changed to weighted average method, which better
reflects the consumption pattern of inventory, for ascertaining inventory costs from
the earlier practice of using FIFO for the purpose. The change in policy has reduced
current profit and value of inventory by ` 16,000 (1,75,000 – 1,59,000).”
(b) Calculation of Normal cost per Kg.
`
Purchase price (20,000 Kg. x ` 110) 22,00,000
Less: Input Tax Credit (20,000 Kg. x ` 12) (2,40,000)
19,60,000
Add: Freight 1,17,600

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 32 INTERMEDIATE EXAMINATION: MAY 2023

A. Total material cost 20,77,600

B. Number of units normally received = 98% of 20,000 Kg. Kg. 19,600
C. Normal cost per Kg. (A/B) 106
Allocation of material cost
Kg. ` /Kg. `
Materials consumed 18,000 106 19,08,000
Cost of inventory 1,500 106 1,59,000
Abnormal loss 100 106 10,600
Total material cost 19,600 106 20,77,600
Note: Abnormal losses are recognized as separate expense.
17. Calculation of Cost of Plant
Particulars `
Purchase Price Given 6,80,000
Add: Site Preparation Cost Given 21,200
Labour charges (56,000×200/500) Given 22,400
Spare parts 5,000
Supervisor’s Salary 25% of ` 26,000 6,500
Technical costs 1/10 of ` 34,000 3,400
Test run and experimental production Given 18,000
charges
Architect Fees for set up Given 11,000
Depreciation on assets used for installation Given 12,000
Total Cost of Asset 7,79,500
Less: GST credit receivable (40,000)
Value to be capitalized 7,39,500
Note: Further Expenses of ` 8,900 from 15.1.2021 to 1.2.2021 to be charged to profit and
loss A/c as plant was ready for production on 15.1.2021.
18. (i) Interest for the period 2020-21
= US $ 15 lakhs x 5% × ` 76 per US $ = ` 57 lakhs
(ii) Increase in the liability towards the principal amount
= US $ 15 lakhs × ` (76 - 72) = ` 60 lakhs

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 PAPER – 1 : ACCOUNTING 33

(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 15 lakhs × ` 72 x 9.5% = ` 102.60 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency
borrowing = ` 102.60 lakhs less ` 57 lakhs = ` 45.60 lakhs.
Therefore, out of ` 60 lakhs increase in the liability towards principal amount, only
` 45.60 lakhs will be considered as the borrowing cost. Thus, total borrowing cost would
be ` 102.60 lakhs being the aggregate of interest of ` 57 lakhs on foreign currency
borrowings plus the exchange difference to the extent of difference between interest on
local currency borrowing and interest on foreign currency borrowing of ` 45.60 lakhs.
Hence, ` 102.60 lakhs would be considered as the borrowing cost to be accounted for as
per AS 16 “Borrowing Costs” and the remaining ` 14.4 lakhs (60 - 45.60) would be
considered as the exchange difference to be accounted for as per AS 11 “The Effects of
Changes in Foreign Exchange Rates”.
19. (a) As per the facts of the case, Hygiene Ltd. had received a grant of ` 50 lakh in 2012
from a State Government towards installation of pollution control machinery on
fulfilment of certain conditions. However, the amount of grant has to be refunded
since it failed to comply with the prescribed conditions. In such circumstances,
AS 12, “Accounting for Government Grants”, requires that the amount refundable in
respect of a government grant related to a specific fixed asset is recorded by
increasing the book value of the asset or by reducing the capital reserve or the
deferred income balance, as appropriate, by the amount refundable. The Standard
further makes it clear that in the first alternative, i.e., where the book value of the
asset is increased, depreciation on the revised book value should be provided
prospectively over the residual useful life of the asset. Accordingly, the accounting
treatment given by Hygiene Ltd. of increasing the value of the plant and machinery is
quite proper. However, the accounting treatment in respect of depreciation given by
the company of adjustment of depreciation with retrospective effect is improper and
constitutes violation of AS 12.
(b) As per AS 13 (Revised) ‘Accounting for Investments’, for investment in shares - if the
investment is purchased with an intention to hold for short-term period (less than one
year), then it will be classified as current investment and to be carried at lower of cost
and fair value, i.e., in case of shares, at lower of cost (` 4,25,000) and market value
(` 3,50,000) as on 31 March 2022, i.e., ` 3,50,000.
Gold and silver are generally purchased with an intention to hold it for long term period
(more than one year) until and unless given otherwise. Hence, the investment in Gold
and Silver (purchased on 31 stMarch, 2019) should continue to be shown at cost (since
there is no ‘other than temporary’ diminution) as on 31 st March, 2022, i.e., ` 8,00,000
and `3,50,000 respectively, though their market values have been increased.

© The Institute of Chartered Accountants of India

 34 INTERMEDIATE EXAMINATION: MAY 2023

Thus the shares, gold and silver will be shown at ` 3,50,000, ` 8,00,000 and
` 3,50,000 respectively and hence, total investment will be valued at ` 15,00,000 for
the year ending on 31st March, 2022 as per AS 13.
20. According to AS 16 “Borrowing Costs”, a qualifying asset is an asset that necessarily takes
a substantial period of time to get ready for its intended use. As per the Standard,
borrowing costs that are directly attributable to the acquisition, construction or production
of a qualifying asset should be capitalized as part of the cost of that asset. The amount o f
borrowing costs eligible for capitalization should be determined in accordance with this
Standard. Other borrowing costs should be recognized as an expense in the period in
which they are incurred. It also states that to the extent that 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.
Thus, eligible borrowing cost = ` 10,00,000 (100 lakhs x 12% x 10/12) – ` 50,000 =
` 9,50,000
Particulars Nature of assets Interest to be Interest to be
capitalized (`) charged to Profit
& Loss Account
(`)
Construction of factory Qualifying Asset 9,50,000x40/100 NIL
building = ` 3,80,000
Purchase of Machinery Not a Qualifying Asset NIL 9,50,000x15/100
= 1,42,500
Purchase of and Not a Qualifying Asset NIL 9,50,000x2/100
furniture =19,000
Purchase of truck Not a Qualifying Asset NIL 9,50,000x13/100
= 1,23,500
Working Capital Not a Qualifying Asset NIL 9,50,000x30/100
= ` 2,85,000
Total ` 3,80,000 ` 5,70,000

© The Institute of Chartered Accountants of India