1

ACCOUNTING STANDARDS
Unit-II
Overview of Accounting Standards
AS – 1
Disclosure of Accounting Policies
Questions For Practice
Q.1. In the books of m/s Prashant Ltd. closing inventory as on 31.03.2015 amounts To
₹ 1,63,000 ( on the basis of FIFO method).
The company decides to change from FIFO method to weighted average method
for ascertaining the cost of inventory from the year 2014-15. On the basis of
weighted average method, closing inventory as on 31.03.2015 amounts to ₹
1,47,000. Realisable value of the inventory as on 31.03.2015 amounts to ₹
1,95,000.
Discuss disclosure requirement of change in accounting policy as per AS-1.
HINT:
Provision: AS-1 Disclosure of Accounting Policies
Analysis and conclusion: In the given case M/s. Prashant Ltd. changes valuation
of inventory from FIFO to weighted average. Therefore, the firm should disclose in
its financial statements:
(i) There is a change in valuation of inventory – from FIFO to weighted
average.
(ii) The reason why such change is to be made – A change in valuation of
inventory better reflects the consumption pattern of inventory.
(iii) The effect of such damage in the financial statement – The change in
policy has reduced current profit and value of inventory by ₹ 16,000.
Q.2. ABC Ltd. was making provision for non-moving inventory based on issues for the
last 12 months up to 31.3.2016. The company wants to provide during the year
ending 31.3.2017 based on Technical evaluation:
Total value of inventory ₹ 100 Lakhs
Provision required based on 12 months issue ₹ 3.5 Lakhs
Provision required based on technical evaluation ₹ 2.5 Lakhs
Does this amount to change in accounting policy? Can the company change the
method of provision?
Hint:
 Decision of making provision does not amount to change in accounting
policy.
 Change in the amount of required provision of non-moving inventory
from ₹ 3.5 lakhs to ₹ 2.5 lakhs is not material.

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 Disclosure can be made for such change in the following lines by way
of notes to accounts:
“The company has provided for non-moving inventories on the basis of
technical evaluation unlike preceding years. Had the same method
been followed as in the previous year, the profit for the year and the
corresponding effect on the year end net assets would have been
lower by ₹ 1 lakh.”
Q.3. Kumar Ltd. had made a rights issue of shares in 2017. In the offer document to its
members, it had projected a surplus of ₹ 40crores during the accounting year to
end on 31stMarch, 2017. The draft results for the year, prepared on the hitherto
followed accounting policies and presented for perusal of the board of directors
showed a deficit of ₹ 10 crores. The board in consultation with the managing
director, decided not to provide for “after sales expenses” during the warranty
period. Till the last year, provision at 2% of sales used to be made under the
concept of “matching of costs against revenue” and actual expenses used to be
charged against the provision. The board now decided to account for expenses as
and when actually incurred. Sales during the year total to ₹600 crores.
As chief accountant of the company, you are asked by the managing director to
draft the notes on accounts for inclusion in the annual report for 2016-2017.
Hint:
Provision: AS-1 Disclosure of Accounting Policies [Any change in accounting
policies which has material effect should be disclosed – Amount or Fact]
Analysis and conclusion: The notes on accounts should properly disclose the
change and its effect.
Notes to accounts:
So far, the company has been providing 2% of sales for meeting “after sales
expenses during the warranty period. With the improved method of
production, the probability defects occurring in the products has reduced
considerably. Hence, the company has decided not to make provision for such
expenses but to account for the same as and when expenses are incurred. Due
to this change, the profit for the year is increased by ₹ 12 crores than would
have been the case if the old policy were to continue.

PREVIOUS YEAR QUESTIONS

Q.1. What are the three fundamental accounting assumptions 8ealized88 by
Accounting Standard (AS) 1? Briefly describe each one of them. [May-13](4M)
Hint: There are 3 fundamental accounting assumptions:
(i) Going Concern
(ii) Accrual Basis of accounting
(iii) Consistency

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Q.2. In the books of M/s Prashant Ltd., closing as on 31.03.2015 amounts to ₹

1,63,000(on the basis of FIFO method). The company decides to change from FIFO
method to weighted average method for ascertaining the cost of inventory from
the year 2014-15. On the basis of weighted average method, closing inventory as
on 31.03.2015 amounts to ₹ 1,47,000. Realizable value of the inventory as on
31.03.2015 amounts to ₹ 1,95,000.
Discuss disclosure requirement of change in accounting policy as per AS-1.
[Nov-15](5M)
Hint: Refer answer of Question no. 1 of UNIT-II (Question for practice)

Q.3. ABC Financial Services Ltd. is engaged in the business of financial services and is
undergoing tight liquidity position, since most of the assets of the company are
blocked in various claims/petition in a special Court. ABC Financial Services Ltd
has accepted Inter-Corporate Deposits (ICDs) and it is making its best efforts to
settle the dues. There were claims at varied rates of interest, from lenders, from
the due date of ICDs to the date of repayment. The company has provided interest,
as per the terms of the contract till the due date and a note for non-provision of
interest from the due date of repayment was mentioned in financial statements.
On account of uncertainties existing regarding the determination of the amount
and in the absence of any specific legal obligation at present as per the terms of
contracts, the company considers that these claims are in the nature of ‘’claims
against the company not acknowledged as debt”, and the same has been disclosed
by way of a note in the accounts instead of making a provision in the Profit and
Loss Account.
State whether the treatment done by the company is correct or not as per
relevant Accounting Standard. [May-17](5M)
Hint:
Provision: AS-1 Disclosure of Accounting Policies [Explain the concept of
Conservatism & Accrual]
Analysis: From the facts given in question, it is apparent that the company has an
obligation to pay because of the overdue interest amount. Thus, in the given case,
ABC Financial Services Ltd. should make provision for interest from the due date
of ICDs to date of repayment even though the amount cannot be determined.
Thus, it should represent only a best estimate in the light of available information.
Conclusion: Thus, the treatment done by the company is not correct as per AS-1.

Q.4. HIL Ltd was making provision for non-moving stocks based on no issues having
occurred for the last 12 months upto 31.03.2017. The company now wants to
make provision based on technical evaluation during the year ending 31.03.2018.
Total value of stock - ₹ 120 lakhs
Provision required based on technical evaluation - ₹ 3.00 lakhs
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Provision required based on 12 months no issues - ₹ 4.00 lakhs

You are requested to discuss the following points in the light of Accounting
Standard (AS)-1:
(i) Does this amount to change in accounting policy?
(ii) Can the company change the method of accounting? [Nov-18](5M)
Hint:
(i) No.
(ii) Change in the amount of required provision of non-moving inventory
from ₹ 4 lakhs to ₹ 3 lakhs is not material.
Disclosure can be made for such change in the following lines by way
of notes to accounts:
“The company has provided for non-moving inventories on the basis of technical
evaluation unlike preceding years. Had the same method been followed as in the
previous year, the profit for the year and the corresponding effect on the year end
net assets would have been lower by ₹ 1 lakh.”

AS-2
VALUATION OF INVENTORY
QUESTIONS FOR PRACTICE
Q.1. The company deals in three products, A, B and C, which are neither similar nor
interchangeable. At the time of closing of its account for the year 2016-17, the
historical cost and net realizable value of the items of closing stock are
determined as follows:
Items Historical Cost (₹ In lakhs) Net Realisable Value (₹ In lakhs)
A 40 28
B 32 32
C 16 24
What will be the value of closing stock?
Ans. Closing stock will be valued at ₹ 76 lakhs.

Q.2. X Co. Limited purchased goods at the cost of ₹ 40 lakhs in October 2016. Till
March 2017, 75% of the stocks were sold. The company wants to disclose stock at
₹ 10 lakhs. The expected sale value is ₹ 11 lakhs and a commission at 10% on sale
is payable to the agent. Advise what is the correct closing stock to be disclosed as
at 31.3.2017?
Ans. Stock valued at ₹ 9,90,000.

Q.3. In a production process, normal waste is 5% of input. 5,000 MT of input were put
in process resulting in wastage of 300 MT. Cost per MT of input is ₹ 1,000. The
entire quantity of waste is on stock at the year end. State with reference to
Accounting Standard, how will you value the inventories in this case?
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Ans. value of inventory = 49,47,368.

Q.4. You are required to value the inventory per kg of finished goods consisting of:
Particulars ₹ Per kg.
Material cost 200
Direct labour 40
Direct variable 20
overhead
Fixed production charges for the year on normal working capacity of 2 lakh kgs is ₹
20 lakhs. 4,000 kgs of finished goods are in stock at the year end.
Ans. value of finished goods = ₹ 10,80,000.

Q.5. On 31st March 2017, a business firm finds that cost of a partly finished unit is Rs
530. The unit can be finished in 2017- 18 by an additional expenditure of ₹ 310.
The finished unit can be sold for ₹ 750 subject to payment of 4% brokerage on
selling price. The firm seeks your advice regarding the amount at which the
unfinished unit should be valued as at 31st March, 2017 for preparation of final
accounts. Assume that the partly finished unit cannot be sold in semi-finished
form and its NRV is zero without processing it further.
Ans. value of inventory = ₹ 410

Q.6. On the basis of information given below, find the value of inventory (by
periodic inventory method) as per AS 2, to be considered while preparing the
Balance Sheet as on 31stMarch, 2017 on weighted Average Basis.
Details of Purchases:
Date of purchase Unit (Nos.) Purchase cost per unit (₹)
01-03-2017 20 108
08-03-2017 15 107
17-03-2017 30 109
25-03-2017 15 107
Details of issue of Inventory:
Date of Issue Unit (Nos.)
03-03-2017 10
12-03-2017 20
18-03-2017 10
24-03-2017 20
Net realizable value of inventory as on 31stMarch, 2017 is ₹ 107.75 per unit.
You are required to compute the value of Inventory as per AS 2.
[MTP March 2019]
Ans. Value of inventory to be considered while preparing Balance Sheet as on 31st
March, 2017 is, Cost (₹ 2,160) or NRV (₹ 2,155) whichever is lower i.e. ₹ 2,155.
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Q.7. Omega Ltd. has a normal wastage of 4% in the production process. During the
year 2016 -17, the Company used 12,000 MT of raw material costing ₹ 150 per
MT. At the end of the year 630 MT of wastage was ascertained in stock. The
accountant wants to know how this wastage is to be treated in the books.
You are required to compute the amount of normal and abnormal loss and
treatment thereof in line with AS 2 “Valuation of inventories”. [MTP Oct 2018]
Ans. Amount of ₹ 23,437.50 will be charged to Profit and Loss Account.

Q.8. On 31stMarch 2017, a business firm finds that cost of a partly finished unit on
that date is ₹ 530. The unit can be finished in 2017-18 by an additional
expenditure of ₹ 310. The finished unit can be sold for ₹ 750 subject to payment
of 4% brokerage on selling price. The firm seeks your advice regarding the
amount at which the unfinished unit should be valued as at 31stMarch, 2017 for
preparation of final accounts. Assume that the partly finished unit cannot be sold
in semi-finished form and its NRV is zero without processing it further.
[RTP MAY 2019]

Ans. Value of inventory as at 31 st March, 2017 - ₹ 410.

PREVIOUS YEAR QUESTIONS

Q.1. What are the items that are to be excluded in determination of the cost of
inventories as per AS-2? [May-08](4M)
Ans. (a) Abnormal amounts of wasted materials, labour or other production cost.
(b) Storage costs, unless those costs are necessary
(c) Administrative Overheads
(d) Selling and distribution costs.

Q.2. From the following data, find out value of inventory as on 30.04.2009 using
(a) LIFO method, and
(b) FIFO method:
1. 01.04.2009 Purchased 10 units @ ₹ 70 per unit
2. 06.04.2009 Sold 6 units @ ₹ 90 per unit
3. 09.04.2009 Purchased 20 units @ ₹ 75 per unit
4. 18.04.2009 Sold 14 units @ ₹ 100 per unit. [Nov-09](2M)
Ans. As per LIFO method – ₹ 730, as per FIFO method – ₹ 750

Q.3. Raw materials inventory of a company includes certain material purchased at ₹

100 per kg. The Price of the material is on decline and replacement cost of the
inventory at the year end is ₹ 75 per kg. It is possible to convert the material into
finished product at conversion cost of ₹125.
Decide whether to make the product or not to make the product, if selling price is
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(i) ₹175 and

(ii) ₹ 225.
Also find out the value of inventory in each case. [May-10](4M)
Ans. (i) When the selling price be ₹ 175 – It is not better to make the product.
(ii) When the selling price be ₹ 225 – It is better to make the product.

Q.4. HP is leading distributor of petrol. A detail inventory of petrol in hand is taken

when the books are closed at the end of each month. At the end of month
following information is available:
Sales ₹ 47,25,000
General overheads cost ₹ 1,25,000
Inventory at beginning 1,00,000 liters @ ₹ 15/- per liter
Purchases:
June 1 - Two lakh liters @ ₹ 14.25
June 30 - One lakh liters @ ₹ 15.15
Closing inventory is 1.30 lakh litre.
Compute the following by the FIFO as per AS-2:
(i) Value of Inventory on June 30.
(ii) Amount of cost goods sold for June.
(iii) Profit/Loss for the month of June. [Nov-10](5M)
Ans. (i) ₹ 19,42,500 (ii) ₹ 39,22,500 (iii) ₹ 6,77,500

Q.5. Best Ltd. deals in five products, P, Q, R, S and T which are neither similar nor
interchangeable. At the time of closing of its accounts for the year ending 31st
March 2011, the historical cost and net realizable value of the items of the closing
stock are determined as follows:
Items Historical Cost(in Net realizable
₹) value(in ₹)
P 5,70,000 4,75,000
Q 9,80,000 10,32,000
₹ 3,16,000 2,89,000
S 4,25,000 4,25,000
T 1,60,000 2,15,000
What will be the value of closing stock for the year ending 31st March, 2011 as per
As-2 ‘’Valuation of inventories”? [May-11](4M)
Ans. ₹ 23,29,000

Q.6. From the following information ascertain the value of stock as on 31st march,
2012:
₹
Stock as on 01.04.2011 28,500
Purchases 1,52,500
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Manufacturing Expenses 30,000

Selling Expenses 12,100
Administration Expenses 6,000
Financial Expenses 4,300
Sales 2,49,000
At the time of valuing stock as on 31 March, 2011 a sum of ₹ 3,500 was written
st

off on particular item, which was originally purchased for ₹ 10,000 and was sold
during the year of ₹ 9,000. Barring the transaction relating to this item, the gross
profit earned during the year was 20% on sales.
Ans. ₹ 12,500 Nov-12](4M)

Q.7. On 31st March 2013 a business firm finds that cost of a partly finished unit on that
date is ₹ 530. The unit can be finished in 2013-14 by an additional expenditure ₹
310. The Finished unit can be sold for ₹ 750 subject to payment of 4 % brokerage
on the selling price. The firm seeks your advice regarding:-
(i) The amount at which the unfinished unit should be valued as at 31 st March,
2013 for preparation of final accounts and
(ii) The desirability or otherwise of producing the finished unit. May-13](4M)
Ans. Value of Inventory - ₹ 410
Incremental cost ₹310 (cost to complete) is less than incremental revenue ₹720
(₹750 - ₹730). The enterprise will therefore decide to finish the unit for sale at ₹
750.
Note: The aforesaid solution is based on assumption that partly finished unit
cannot be sold in semi-finished form and its NRV is Zero without processing it
further.

Q.8. Capital Cables Ltd has a normal wastage of 4% in the production process. During
the year 2013-14 the company used 12,000 MT of raw material costing ₹ 150 per
MT.
At the end of the year 630 MT of wastage was in stock. The Accountant wants to
know how this wastage is to be treated in the books.
Explain in the context of AS 2 the treatment of normal loss and abnormal loss and
also find out the amount of abnormal loss if any. [Nov-14](5M)
Ans. ₹ 23,437.50 will be charged to the Profit and Loss Account.

AS-3
CASH FLOW STATEMENTS
QUESTIONS FOR PRACTICE
Q.1. Classify the following activities as (a) Operating Activities, (b) Investing Activities,
(c) Financing Activities (d) Cash Equivalents.
(a) Purchase of machinery.
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(b) Proceeds from issuance of equity share capital

(c) Cash sales.
(d) Proceeds from long-term borrowings.
(e) Proceeds from trade receivables.
(f) Cash receipts from trade receivables.
(g) Trading commission received.
(h) Purchase of investment.
(i) Redemption of preference shares.
(j) Cash purchases.
(k) Proceeds from sale of investment
(l) Purchase of goodwill.
(m) Cash paid to supplier
(n) Interim dividend paid on equity shares.
(o) Wages and salaries paid.
(p) Proceed from sale of patents.
(q) Interest received on debentures held as investment.
(r) Interest paid on long-term borrowings.
(s) Office and administration expenses paid
(t) Manufacturing overheads paid.
(u) Dividend received on shares held as investments.
(v) Rent received on property held as investment.
(w) Selling and distribution expenses paid.
(x) Income tax paid
(y) Dividend paid on preference shares.
(z) Underwritings commission paid.
(aa) Rent paid.
(bb) Brokerage paid on purchase of investments.
(cc) Bank overdraft
(dd) Cash credit
(ee) Short-term deposits
(ff) Marketable securities
(gg) Refund of income tax received.
Ans. (a) Operating Activities: c, e, f, g, j, m, o, s, t, w, x, aa&gg.
(b) Investing Activities: a, h, k, l, p, q, u, v, bb &ee.
(c) Financing Activities: b, d, i, n, r, y, z, cc & dd.
(d) Cash Equivalents: ff.

Q.2. X Ltd. purchased debentures of ₹ 10 lacs of Y Ltd., which are redeemable within
three months. How will you show this item as per AS 3 while preparing cash flow
statement for the year ended on 31st March, 2017?
Ans. ‘Cash Equivalents’
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Q.3. Classify the following activities as per AS 3 Cash Flow Statement:

(i) Interest paid by financial enterprise
(ii) Tax deducted at source on interest received from subsidiary company
(iii) Deposit with Bank for a term of two years
(iv) Insurance claim received towards loss of machinery by fire
(v) Bad debts written off
Ans. Operating Activities: (i) [(v) Bad debts written off – non cash item, adjusted from
net profit/loss under indirect method]
Investing Activities: (ii) (iii) [(iv) insurance claim – Extraordinary item]

Q.4. Following is the cash flow abstract of Alpha Ltd. for the year ended 31st March,
2017:
Inflows ₹ Out flows ₹
Opening balance: Payment for Account
Cash 10,000 Payables 90,000
Bank 70,000 Salaries and wages 25,000
Share capital – shares issued 5,00,000 Payment of overheads 15,000
Collection on account of Trade 3,50,000 Fixed assets acquired 4,00,000
Receivables
Debentures redeemed 50,000
Sale of fixed assets 70,000 Bank loan repaid 2,50,000
Taxation 55,000
Dividends (including 1,00,000
dividend distribution
tax) Closing balance:
Cash 5,000
Bank 10,000
10,00,000 10,00,000
Prepare Cash Flow Statement for the year ended 31 March, 2017 in accordance
st

with AS 3.
Ans. Net cash generated from operating activities - ₹ 1,65,000
Net cash used in investment activities – (₹ 3,30,000)
Net cash generated from financing activities - ₹ 1,00,000

Q.5. Prepare Cash Flow from Investing Activities of M/s. Creative Furnishings Limited
for the year ended 31-3-2017.
Particulars ₹
Plant acquired by the issue of 8% Debentures 1,56,000
Claim received for loss of plant in fire 49,600
Unsecured loans given to subsidiaries 4,85,000
Interest on loan received from subsidiary 82,500
companies
Pre-acquisition dividend received on investment 62,400
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made
Debenture interest paid 1,16,000
Term loan repaid 4,25,000
Interest received on investment 68,000
(TDS of ₹ 8,200 was deducted on the above interest)
Book value of plant sold (loss incurred ₹ 9,600) 84,000
Ans. Cash used in investing activities [before extra ordinary item]: (₹ 1,97,700)
Net cash used in investing activities [after extra ordinary item]: (₹ 1,48,100)

PREVIOUS YEAR QUESTIONS

Q.1. In case a manufacturing company:
(i) List the items of “inflows” of cash receipts from operating activities;
(ii) List the items of “outflows” of investing activities. [May-98](4M)
Ans. Inflows of cash receipts from operating activities: Rendering of services, sale
of goods, Refund of income-tax, Royalties, fees, commission and other revenues.
Outflow of investing activities: Acquiring of fixed assets, advances and loans to
third parties, acquisition of shares, warrants or debt instruments of other
enterprises and interest in joint ventures.
Q.2. What are the main features of the cash flow statement? Explain with special
reference to AS3? [Nov-99](5M)
Ans. features of cash flow statement (as per AS-3)
(i) Deals with provisions of information about the historical changes in cash
and cash equivalents of an enterprise during the stated period from
operating, investing and financing activities.
(ii) Cash flow from operating activities can be reported using either Direct
Method or Indirect Method
(iii) This statement enhances the comparability of the operating performances.
(iv) An enterprise must disclose the components of cash and cash equivalent
with reconciliation of amounts in its cash flow statement
(v) Listed companies are required to comply with AS-3.

Q.3. Define briefly the classification of activities, as suggested in Accounting Standard

3, to be used for preparing a cash flow statement. Give two examples of each class
of activities. [May-01](4M)
Ans. According to AS-3 the cash flow statement must report cash flows by:-
(a) Operating Activities [Ex. Cash receipt from sale of goods and payment to
supplier of goods]
(b) Investing Activities [Ex. Payment made on acquiring building of business
and cash from sale of furniture]
(c) Financing Activities [Ex. Cash proceed from issue of share and cash paid to
redeem shares]

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Q.4. Classify the following activities as per AS-3 Cash Flow Statement:
(i) Interest paid by financial enterprise
(ii) Dividend paid
(iii) Tax deducted at source on interest received from subsidiary company
(iv) Deposit with bank for a term of two years
(v) Insurance claim received towards loss of machinery by fire
(vi) Bad debts written off
Which activity does the purchase of business falls under and whether netting off
of aggregate cash flow from disposal and acquisition of business units is possible?
[May-16](4M)
Ans. Operating Activities: (i) [(vi) Bad debts written off – non cash item, adjusted
from net profit/loss under indirect method]
Investing Activities: (iii) (iv) [(v) insurance claim – Extraordinary item]
Financing Activities: (ii)
 Purchase of business falls under cash flow from investing activities or
investing activities (as the case may be)
 No cash flow from Disposal and acquisition of business.

Q.5. Classify the following activities as-

(i) Operating activities,
(ii) Investing activities
(iii) Financing activities and
(iv) Cash Equivalents.
(a) Cash receipts from Trade Receivables
(b) Marketable Securities
(c) Purchase of investment
(d) Proceeds from long term borrowings
(e) Wages and salaries paid
(f) Bank overdraft
(g) Purchase of Goodwill
(h) Interim Dividend paid on equity shares
(i) Short term Deposits
(j) Underwriting commission paid. [May-18](5M)
Ans. Operating Activities: (a) (e)
Investing Activities: (a)(b)(c)(d) (g) (i)
Financing Activities: (d) (f) (h) (j)
Cash Equivalents: (b)

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AS 4
CONTINGENCIES AND EVENTS OCCURRING
AFTER THE BALANCE SHEET DATE
Q.1. A company deals in Petroleum products. The sale price of petroleum is fixed by
the Government. After the balance sheet date, but before the finalization of the
company’s accounts, the government unexpectedly increased the price
retrospective. Can the company accounts for additional revenue at the close of
this year?
Ans. As per As-4, the unexpected increase in the sale price of petrol by the Government
after the balance sheet date be regarded as an adjusting events as it doesn’t
represent a condition existing as on the balance sheet date. Hence (due to
increase in sale price) should be recognized only in the subsequent year with
proper disclosure.

Q.2. A company follows April-march as its financial year. The company recognize
cheques dated 31st March or before, received after the balance sheet date but
before approval of FS by debiting cheques in hand a/c & crediting debtors a/c.
The cheques in hand are shown in the balance sheet as an item of Cash & Cash
equivalents. All cheques in hand are presented to ban in the months of April & are
also realized in the same months in normal courses after deposit in the Bank.
What treatment is correct as per As-4?
Ans. Even if the cheques bear the date 31st March or before, the cheques received after
31st March do not represent any condition existing as on 31st March. It means, it
is not an asset under the control of the entity as on the balance sheet date. Hence,
there is no situation / condition exists as on 31st march.
Considering the above points, collection of cheques after the balance sheet date is
NOT an adjusting event. So recognising these as cheques in hand is not consistent
with AS-4. Moreover, the collection of cheques after the balance sheet date does
not represent any material change or commitments affecting the financial
position of the enterprise and therefore no disclosure in the Director’s Report are
necessary.

Q.3. (Need to have little knowledge of AS 7) Company entered into a construction

contract to lay a pipeline before 31/03/2018. Financial statements for that year
were finalized on 15/05/2018. While doing grounding work it met a rocky
substance for which it had to the incur an additional Rs. 50 crore on 16/05/2018.
Should company make provision? If yes, in which year should it be making 2017-
18 or 2018-19?
Ans. The company’s financial statement was finalized on 15/05/2018. But it
discovered that it has to expend an additional Rs. 50 crore only on 16/05/2018,
therefore it does not amount to an event occurring after the balance sheet date.
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The company has to make a provision in the financial year 2018-19 i.e. in the next
financial year.

Q.4. A limited Company closed its accounting year on 30.06.2017 and the accounts for
that period were considered and approved by the board of directors on 20th
August, 2017. The company was engaged in laying pipe line for an oil company
deep beneath the earth. While doing the bring work on 01.09.2017, it has met a
rocky surface for which it was estimated that there would be an extra cost to the
tune of Rs. 80 lakhs. You required to state with reasons, how the event would be
dealt with in the financial statements for the year ended 30.06.2017.
Ans. In this case incidence, which was expected to push up cost, became evident after
the date of approval of the accounts. So, it is not ‘event occurring after the
balance sheet date’. However, this may be mentioned in the Report of Approving
Authority i.e. Board of Directors’ report.

Q.5. (Read this after AS 29) IAS Ltd has received a demand notice on 15/06/2018
for Rs. 78 lakh from the excise dept in respect of duty payable for several years.
This Financial Statement were approved on 31/08/2018. In July, 2018, it
deposited Rs. 16 lakh and appealed for Rs. 62 lakh. Company is expecting to bring
down Rs. 62 lakh claim to Rs. 27 lakh only (based on its advocate’s opinion). How
should the company deal with the situation in the financial statements of 2017-
18?
Ans. Since the demand already existed as on the balance sheet date, and later the
Company received the notice, it becomes an adjusting event and the company has
to make a provision for Rs. 43 lakh (27 +16).
(As the company has already deposited Rs. 16 lakh in the subsequent year hence
it should make a provision for the same as of 31/03/2018 and the remaining
claim which is a probate outflow Rs. 27 lakh also to be provided).
The remaining amount of Rs. 35 lakh (62-27 lakh) should be disclosed a
contingent liability as per AS 29.

Q.6. In Raj Co. Ltd., theft of cash of Rs. Lakhs by the ashier in January, 2018 was
detected in May, 2018. The accounts of the company were not yet approved by the
Board of Directors of the company. Whether the theft to cash has to be adjusted in
the accounts of the company for the year ended 31.03.2018. Decide. ( PCC May
2010, May 2007, IPCC May 2012)
Ans. Though the theft, by the cashier Rs. 2,00,000, was detected after the balance sheet
date (before approval of financial statements) but it is an additional information
materially affecting the determination of the cash amount relating to conditions
existing at the balance sheet date. Therefore, it is necessary to make the necessary

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adjustments in the financial statements of the company for the year ended 31st
March, 2018 for recognition of the loss amounting to Rs. 2,00,000.

Q.7. With reference to AS 4, state whether the following events will be treated as
contingencies, adjusting events or non-adjusting events occurring after balance
sheet date in case of company which follows April to March as its financial year.
(i) A major fire has damaged the assets in a factory on 5th April, 5 days after the
year end. However, the assets are fully insured and the books have not been
approved by the Directors.
(ii) A Suit against the company’s advertisement was filed by a party on 10th
April, 10 days after the year end claiming damages or Rs. 20 lakh.
(iii) It sent a proposal to purchase an immovable property for Rs. 30 lakhs in
March. The book value of the property is Rs. 20 lakh as on year end date.
However, the deed was registered as on 15th April.
(iv) The terms and conditions for acquisition of business of another company
have been decided by March and But the financial resources were arranged
in April and amount invested was Rs. 40 lakh.
(v) Theft of cash of Rs. 2 lakh by the cashier on 31st March but was detected the
next day after the financial statement have been approved by the Direction.
(IPCC May 2016 & CA Inter July 2019)
Ans As per As 4__
(i) Fire has occurred after the balance sheet date and also the loss is totally
insured. Therefore, the event becomes immaterial and event is non-adjusting
in nature.
(ii) The contingency is restricted to conditions existing at the balance sheet date.
However, in the given case, suit was filed against the company’s
advertisement by a party on 10th April for amount of Rs. 20 lakh. Therefore,
it does not fit into the definition contingency had hence is a non-adjusting
evens.
(iii) In the given case, proposal for deal of immovable property was sent before
the closure of the books of accounts. This is a non-adjusting event as only the
proposal was sent and no agreement was affected in the month of March i.e.
before the balance sheet date.
(iv) As the term and conditions of acquisition of business of another company
had been decided by the end of March, acquisition of business is an adjusting
event occurring after the balance sheet date. Adjustment to assets and
liabilities is required since the event affects the determination and the
condition of the amounts stated in the financial statements for the financial
year ended on 31st March.

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(v) Since the financial statements have been approved before detection theft by
the cashier of Rs. 2,00,000, it becomes a non-adjusting event and no
disclosure is required in the BOD report.

Q.8. During the year 2017-2018, Raj Ltd. was sued by a competitor for Rs. 15 lakhs for
infringement of a trademark. Based on the advice of the company’s legal counsel,
Raj Ltd. Provided for a sum of Rs. 10 lakhs in its financial statement for the year
ended 31st March, 2018. On 18th May, 2018 the Court decided in favour of the
party alleging infringement of the trademark and ordered Raj Ltd. To pay the
aggrieved party a sun of Rs. 14 lakhs. The financial statements were prepared by
the company’s management on 30th April 2018, and approved by the Board on
30th May, 2018. Comment.
Ans. As per AS 4, adjustment to assets and liabilities are required for events occurring
after the balance sheet date that provide additional information materially
affecting the determination of the amounts relating to conditions existing at the
balance sheet date.
In the given case, since Raj Ltd. Was sued by a competitor for infringement of a
trademark during the year 2017-18 for which the provision was also made by it,
the decision of the Court on 18th May, 2018, for payment of the penalty will
constitute as an adjusting event because it is an event occurred before
approval of the financial statement. Therefore, Raj Ltd. should adjust the
provision upward by Rs. 4 lakhs to reflect the award decreased by the Court to be
paid by them to its competitor.

Q.9. Surya Limited follows the financial year from April to March. It has provided the
following information.
(i) A suit against the Company's Advertisement was filed by a party on 5th
April, 2021, claiming damages of 5 lakhs.
(ii) Company sends a proposal to sell an immovable property for 45 lakhs in
March 2021. The book value of the property is 30 lakhs as on year end date.
However, the Deed was registered on 15th April, 2021.
(iii) The terms and conditions for acquisition of business of another company
have been decided by the end of March 2021, but the financial resources
were arranged in April 2021. The amount invested was 50 lakhs.
(iv) Theft of cash amounting to 4 lakhs was done by the Cashier in the month of
March 2021 but was detected on the next day after the Financial Statements
have been approved by the Directors.
Keeping in view the provisions of AS-4, you are required to state with
reasons whether the above events are to be treated as Contingencies,
Adjusting Events or Non-Adjusting Events occurring after Balance Sheet
date. (EXAM JUL-21)
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Ans.
(i) Suit filed against the company is a contingent liability but it was not existing
as on date of balance sheet date as the suit was filed on 5th April after the
balance sheet date. As per AS 4, 'Contingencies' is restricted to conditions or
situations at the balance sheet date, the financial effect of which is to be
determined by future events which may or may not occur. However, it may
be disclosed with the nature of contingency, being a contingent liability.
This event does not pertain to conditions on the balance sheet date. Hence,
it will have no effect on financial statements and will be a non-adjusting
event.
(ii) In this case, no adjustment to assets and liabilities is required as the event
does not affect the determination and the condition of the amounts stated in
the financial statements for the year ended 31st March, 2021. There was
just a proposal before 31st March, 2021 and hence sale cannot be shown in
the financial statements for the year ended 31st March, 2021.
Sale of immovable property is an event occurring after the balance sheet
date and is a non-adjusting event.
(iii) In the given case, terms and conditions for acquisition of business were
finalized before the balance sheet date and carried out before the closure of
the books of accounts but transaction for payment of financial resources
was effected in April, 2021.
Hence, it is an adjusting event and necessary adjustment to assets and
liabilities for acquisition of business is necessary in the financial statements
for the year ended 31st March 2021.
(v) Only those events which occur between the balance sheet date and the date
on which the financial statements are approved, may indicate the need for
adjustments to assets and liabilities as at the balance sheet date or may
require disclosure.
In the given case, as the theft of cash was detected after approval of
financial statements, no adjustment is required. Hence it is non-adjusting
event.

Q.10. As per the provision of AS 4, you are required to state with reason whether the
following transactions are adjusting event or non-adjusting event for the year
ended 31.03.2021 in the books of NEW Ltd. (accounts of the company were
approved by board of directors on 10.07.2021):
1. Equity Dividend for the year 2020-21 was declared at the rate of 7% on
15.05.2021.
2. On 05.03.2021, 53,000 cash was collected from a customer but not
deposited by the cashier. This fraud was detected on 22.06.2021.

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3. One building got damaged due to occurrence of fire on 23.05.221. Loss was
estimated to be 81,00,000. (EXAM DEC-21)
Ans.(i) If dividends are declared after the balance sheet date but before the
financial statements are approved, the dividends are not recognized as a
liability at the balance sheet date because no obligation exists at that time
unless a statute requires otherwise. Such dividends are disclosed in the
notes. Thus, no liability for dividends needs to be recognized in financial
statements for financial year ended 31st March, 2021 and declaration of
dividend is non-adjusting event.
(ii) As per AS 4 'Contingencies and Events occurring after the Balance Sheet
Date' an event occurring after the balance sheet date may require
adjustment to the reported values of assets, liabilities, expenses or incomes
if such events relate to conditions existing at the balance sheet date. In the
given case, fraud of the accounting period is detected after the balance sheet
date but before approval of the financial statements, it is necessary to
recognize the loss. Thus loss amounting Rs.53,000
should be adjusted in the accounts of the company for the year ended 31st
March, 2021 as it is adjusting event.
(iii) AS 4 states that adjustments to assets and liabilities are not appropriate for
events occurring after the balance sheet date, if such events do not relate to
conditions existing at the balance sheet date. The damage of one building
due to fire did not exist on the balance sheet date i.e. 31.3.2021. Therefore,
loss occurred due to fire is not to be recognized in the financial year 2020-
2021 as it is non-adjusting event.
However, according to the standard, unusual changes affecting the existence or
substratum of the enterprise after the balance sheet date may indicate a need to
consider the use of fundamental accounting assumption of going concern in the
preparation of the financial statements. As per the information given in the
question, the fire has caused major destruction; therefore, fundamental
accounting assumption of going concern would have to be evaluated. Considering
that the going concern assumption is still valid, the fact of fire together with an
estimated loss of 81 lakhs should be disclosed in the report of the approving
authority for financial year 2020-21 to enable users of financial statements to
make proper evaluations and decisions

Q.11. MN Limited operates its business into various segments. Its financial year ended
on 31st March, 2022 and financial statements were approved by their approving
authority on 15th June, 2022. The following material events took place:
(i) On 7th April, 2022, a fire completely destroyed a manufacturing plant of the
entity. It was expected that the loss of 15 crores would be fully covered by
the insurance company.
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(ii) A claim for damage amounting to 12 crores for breach of patent had been
received by the entity prior to the year end. It is the director's opinion,
backed by legal advice that the claim will ultimately prove to be baseless.
But it is still estimated that it would involve a considerable expenditure on
legal fees.
(iii) A major property was sold (it was included in the balance sheet at €
37,50,000) for which contracts had been exchanged on 15th March, 2022.
The sale was completed on 15th May, 2022 at a price of € 39,75,000.
You are required to state with reasons, how each of the above items should be
dealt with in the financial statements of MN Limited for the year ended 31st
March, 2022 as per AS 4. (EXAM NOV 22)
Ans.
Treatment as per AS 4 'Contingencies and
Events Occurring After the Balance Sheet Date'
(i) The event is a non-adjusting event since it occurred after the year-end and
does not relate to the conditions existing at the year-end. However, it is
necessary to consider the validity of the going concern assumption having
regard to the extent of insurance cover. Also, since it is said that the loss
would be fully recovered by the insurance company, the fact should be
disclosed by way of note in the financial statements.
(ii) On the basis of evidence provided, the claim against the company will not
succeed. Thus, 12 crores should not be provided in the account but should
be disclosed by means of a contingent liability with full details of the facts as
per AS 29. Provision can be made for legal fee expected to be incurred to the
extent that they are not expected to be recovered if the amount can be
ascertained.
The sale of property should be treated as an adjusting event since contracts had
been exchanged prior to the year-end. The effect of the sale would be reflected in
the financial statements ended on 31.3.2022 and the profit on sale of property ₹
2,25,000 would be considered.

AS 5
NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN
ACCOUNTING POLICIES
Q.1. There is a sales tax demand or Rs. 2.5 crore relating to previous years, against
which the company has gone on appeal for Rs. 2 crore. State how the matter will
be with in financial statements ?
Ans. The undisputed part of sales tax liability of Rs. 0.5 crore should be considered as
actual liability and adequately provided for as a prior period item. The disputed
part of tax on which appeal has been filed by the company may be disclosed as
contingent liability as per As 29. (Refer AS 20 for further discussion)
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Q.2. Goods were destroyed by fire worth Rs. Lakh in September and claim was lodged
in October, but no entry was recorded in the books for insurance claim during the
year of fire. Later in the next year, company received the claim of only Rs. 3.50
lakh. What will be treatment? Is it a prior period item? (CA Inter 2018)
Ans. In the given situation, it is clearly a case of error in preparation of financial
statements. Hence claim received in the next financial year is a period item should
be separately disclosed in P&L for the year ended 31st March, 2018.
(As Per ICAI suggested answer)
If the entry is not recorded due to uncertainty of income in the current year, it is
not a prior period item and it should be considered as an exceptional item
considering the materiality of the transaction. (Alternative view)

Q.3. Company had taken a Group Insurance policy. During the year 2017-18, due to
mistake of Insurance Company less premium, which insurance company is
demanding now to pay. Is it prior period time?
Ans. Prior period items are income or expenses which arise in the current period as a
result of errors or omissions in the preparation of the financial statements of one
or more periods. In the given case, the company did not have any information as
on the balance sheet date and it is the mistake insurance company. Hence it does
not amount to prior period item in the entity’s FS and it should be disclosed as
insurance expense.

Q.4. Closing stock for the year ending on 31.03.2018 is Rs.50,000 which includes tock
damaged in the fire in 2016-17. On 31.03.2017, the estimate net realisable value
of damaged stock was Rs. 12,000. The revised estimate of net realisable value of
damaged goods amounting to Rs. 4,000 has been included in closing stock of Rs.
50,000 as on 31.03.2018. Find the value of closing stock to be shown in Profit and
Loss account for the year 2017-18 (IPCC May 2013)
Ans. The fall in estimated net realisable value of damaged stock Rs. 8,000 is the effect
of change in accounting estimate. As per As 5, the effect of a change in accounting
estimate should be classified using the same classification in the statement of P&L
as was used previously for the estimate. Thus, the value of closing stock for the
year 2017-18 will be as follows:
Rs.
Closing Stock (including damaged goods) 50,000
Less : Revised value of damaged goods (4,000)
Closing stock (excluding damaged goods) 46,000

Q.5. Give the examples on each of the following items:

(i) Change in Accounting Policy
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(ii) Change in Accounting Estimate

(iii) Extra Ordinary Items.
Ans.
(i) Examples of Changes in Accounting Policy:
(a) Change of Valuation model of fixed assets from Cost model to
Revaluation model and vice-versa.
(b) Change in cost formula in measuring the cost of inventories.
(ii) Examples of Changes in Accounting Estimates:
(a) Changes in estimate of provision for doubtful debts on sundry
debtors.
(b) Change in estimate to provision for doubtful debts on sundry debtors
(iii) Examples of Extraordinary items:
(a) Loss due to earthquakes /fire/strike
(b) Attachment of property of the enterprise by government
(iv) Examples of Prior period itmes:
(a) Applying incorrect rate of depreciation in one or more
Prior periods.
(b) Omission to account for income or expenditure in one or
More prior periods.

Q.6. (CA Inter – Jan 2021 )

State whether the following items are examples of change in Accounting
Policy/Change in Accounting Estimates / Extraordinary items / Prior period
items / Ordinary Activity:
(i) Actual bad debts turning out to be more than provisions.
(ii) Change from Cost model to Revaluation model for measurement of carrying
amount of PPE.
(iii) Government grant receivable as compensation for expenses incurred in
previous accounting period.
(iv) Treating operating lease as finance lease.
(v) Capitalisation of borrowing cost on working capital.
(vi) Legislative changes having long-term retrospective application.
(vii) Change in the method of depreciation from straight line to WDV.
(viii) Government grant becoming refundable.
(ix) Applying 10% depreciation instead of 15% on furniture.
(x) Change in useful life of fixed assets.
Ans.
Classification of given items is as follows:
Sr. No. Particulars Remarks
1. Actual bade debts turning out to be Change in Accounting Estimates
more provision
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2. Change from Cost model to Change in Accounting policy

Revaluation model for measurement
of carrying amount of PPE
3. Government grant receivable as Extra- ordinary Items
compensation for expenses incurred
in previous accounting period
4. Treating operating lease as finance Prior- Period Items
lease.
5. Capitalisation of borrowing cost on Prior-period Items (as interest on
working capital working capital loans is not eligible
for capitalization)
6. Legislative change having long-term Ordinary Activity
retrospective application
7. Change in the method of depreciation Change in Accounting Estimates
from straight line to WDV
8. Government grant becoming Extra-ordinary Items
refundable
9. Applying 10% depreciation instead of Prior-period Items
15% on furniture
10. Change in useful life of fixed assets Change in Accounting Estimates

Q.7. TQ Cycles Ltd. is in the manufacturing of bicycles, a labour intensive

manufacturing sector. In April 2022, the Government enhanced the minimum
wages payable to workers with retrospective effect from the 1st January, 2022.
Due to this legislative change, the additional wages for the period from January
2022 to March 2022 amounted to 30 lakhs. The management asked the Finance
manager to charge 30 lakhs as prior period item while finalizing financial
statements for the year 2022-23. Further, the Finance manager is of the view that
this amount being abnormal should be disclosed as extra-ordinary item in the
Profit and loss account for the financial year 2021-22.
Discuss with reference to applicable Accounting Standards.
(EXAM MAY 22)
Ans. As per AS 5 "Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies" prior period items are income or expenses which arise in the
current period as a result of errors or omissions in the preparation of the financial
statements of one or more prior periods. The term does not include other
adjustments necessitated by circumstances which though related to prior periods,
are determined in the current period.
It is given that revision of wages took place in April, 2022 with retrospective
effect from 1st January, 2022. Therefore, wages payable for the period from
1.01.2022 to 31.3.2022 cannot be taken as an error or omission in the preparation
of financial statements and hence this expenditure cannot be taken as a prior
period item. The full amount of wages payable to workers will be treated as an

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expense of current year and it will be charged to profit & loss account for the year
2022-23 as normal expenses.
It may be mentioned that additional wages is an expense arising from the
ordinary activities of the company. Such an expense does not qualify as an
extraordinary item. Therefore, finance manager is incorrect in treating increase as
extraordinary item. However, as per AS 5, when items of income and expense
within profit or loss from ordinary activities are of such size, nature or incidence
that their disclosure is relevant to explain the performance of the enterprise for
the period, the nature and amount of such items should be disclosed separately.
Therefore, additional wages liability of 30 lakhs should be disclosed separately in
the financial statements of TQ Cycles Ltd. for the year ended 31st March, 2023.

Q.8. The Accountant of Shiva Limited had sought your opinion with relevant reasons,
whether the following transactions will be treated as change in Accounting
Policies or change in Accounting Estimates for the year ended 31st March, 2021.
Please advise him in the following situations in accordance with the provisions of
AS 5:
(i) Provision for doubtful debts was created @3% till 31st March, 2020. From
the Financial year 2020-2021, the rate of provision has been changed to 4%.
(ii) During the year ended 31st March, 2021, the management has introduced a
formal gratuity scheme in place of ad-hoc ex-gratia payments to employees
on retirement.
(iii) Till 31st March, 2020 the furniture was depreciated on straight line basis
over a period of 5 years. From the Financial year 2020-2021, the useful life
of furniture has been changed to 3 years.
(iv) Management decided to pay pension to those employees who have retired
after completing 5 years of service in the organization. Such employees will
get pension of 20,000 per month. Earlier there was no such scheme of
pension in the organization.
(v) During the year ended 31st March 2021, there was change in cost formula
in measuring the cost of inventories. (EXAM NOV 22)
Ans.(i) In the given case, company has created 3cer% provision for doubtful debts
till 31st March, 2020. Subsequently from 1st April, 2020, the company
revised the estimates based on the changed circumstances and wants to
create 4% provision. Thus, change in rate of provision of doubtful debt is
change in estimate and is not change in accounting policy. This change will
affect only current year.
(ii) As per AS 5 "Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies", the adoption of an accounting policy for
events or transactions that differ in substance from previously occurring
events or transactions, will not be considered as a change in accounting
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policy. Introduction of a formal retirement gratuity scheme by an employer

in place of ad hoc ex-gratia payments to employees on retirement is a
transaction which is substantially different from the previous transaction,
will neither be treated as change in an accounting policy nor change in
accounting estimate.
(iii) Change in useful life of furniture from 5 years to 3 years is a change in
accounting estimate and is not a change in accounting policy.
(iv) Adoption of a new accounting policy for events or transactions which did
not occur previously should not be treated as a change in an accounting
policy. Hence the introduction of new pension scheme is neither a change in
accounting policy nor a change in accounting estimate.
(v) Change in cost formula used in measurement of cost of inventories is a
change in accounting policy.

AS 7
CONSTRUCTION CONTRACTS
Q.1. From the following date, show the extract of profit & Loss as it would appear in
the books of a contractor following AS-7.
(Rs. In lakhs)
Contract Price (fixed) 480.00
Contract Cost incurred till date 300.00
Estimated Cost to complete 200.00
Ans. (Rs. In lakhs)
Calculation of estimated total cost
Cost incurred till date 300.00
Estimated cost to completion 200.00
Estimated total cost of completion for 500.00
100 % project
Percentage of completion [300/500×100] 60 %

Revenue to be recognized [480×60%] 288.00

As per AS-7, when it is probable that estimated total costs exceed total revenue,
the expected loss should be recognized as an expense in P &L immediately –
Percentage. Completion is not to be applied.
Therefore
Total foreseeable loss (500-480) 20.00
Less: Loss for current year (300-288) (12.00)
Expected loss to be recognized as per AS -7 8.00
Profit and Loss statement
Particulars Rs. Particulars Rs.
To construction 300 By contract price 288
costs
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To Estimated loss 8 By Net loss 20

308 308

Q.2. A construction contractor has a fixed price contract for Rs. 9,000 lack to build a
bridge in 3 year time frame. A summary of some of the financial data is a under.
(Amount Rs. In lack)
Year 1 Year 2 Year 3
Initial Amount for revenue agreed in contract 9,000 9000 9,000
Variation in Revenue (+) - 200 200
Contracts costs incurred up to reporting date 2093 6168 8100
Estimated profit for whole contract 950 1000 1000

 Include Rs.100 lacks for standard stored at the site to be used in year 3 to
complete the work.
 Excludes Rs.100 lacks for standard material brought forward from year 2.
The variation in cost and revenue in year 2 has been approved by customer.
Computer year wise amount of revenue, expenses, contract cost to complete and
profit or loss to be recognized in the Statement of profit and Loss as per AS-7
(revised)
Ans. Calculation of % completion
Year 1 Year 2 Year 3
Revenue after considering variations 9,000 9,200 9,200
Less: Estimated profit for whole 950 1,000 1,000
contract
Estimated total cost of the contract (A) 8,050 8,200 8,200
Actual cost incurred up to the reporting 2093 6068 8,200
date (B)
(6,168-100) (8,100+100)
Degree of Completion (B/A) 26% 74% 100%

The amounts of revenue, expenses and profit recognized in the P&L in three years
are shown below:
UP to the Recognized in Recognized
reporting date prior years in CY
Year 1
Revenue ( 9,000×26%) 2340 - 2,340
Expenses ( 8,050×26%) 2093 - 2,093
Profit 247 - 247
Year 2 2,340 4,468
Revenue (9,200×74%) 6,808 2093 3,975
Expenses (8,200×74%) 6,068
Profit 740 247 493

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Year 3
Revenue (9,200×100%) 9,200 6,808 2,392
Expenses (8,200×100%) 8200 6,068 2,132
Profit 1000 740 260

Q.3. A firm of contractor obtained a contract for construction of bridges across river
Revathi. The following details are available in the records kept for the year ended
on 31st March, 2017.
( Rs. In lakhs)
Total Control Price 1,000
Work Certified 500
Work not Certified 105
Estimated further Cost to Completion 495
Progress Payment Received 400
To be Received 140

The firm seeks your advice and assistance in the presentation of accounts keeping
in view the requirements of AS-7 issued by your institute.
Ans.
(a) Amount of foreseeable loss (Rs. In Lakhs)
Total cost of construction (500+105+495) 1,100
Less: Total contract price (1,000)

Total foreseeable loss to recognized as 100

expense

According As-7, when it is probable that total contract costs will exceed total
contract revenue, the expected loss should be recognized as an expense
immediately.
(b) Contract work-in progress i.e. cost incurred (Rs. In Lakhs)
to date are Rs. 605 lakhs
Work certified 500
Work not certified 105

605

This is 55% (605/1,100×100) of total cost of construction.

(C) Proportion of total contract value recognized as revenue: 55% of Rs. 1,000
lakhs = Rs. 550 lakhs
(d) Amount due from/to customers = (Contract Costs + Recognized profits –
Reecognised Losses) – (Progress payments received + Progress payments to
be received)
= (605 +Nill – 100) – (400 + 140) Rs. In lakhs
= [505 -540] Rs. In lakhs
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Amount due to customers = Rs. 35 lakhs

The amount of Rs. 35 lakhs will be shown in the balance sheet as liability.
(e) The relevant disclosures under AS-7 are given below:
Rs. In lakhs
Contract revenue 550
Contract expenses 605
Recognized profits less recognized losses (100)

Progress billings Rs. (400+140) 540

Retentions (billed but not received from 140
contractee)

Gross amount due to customers 35

Q.4. Rajendra undertook a contract Rs. 20,00,000 on an arrangement that 80% of the
value of work done, as certified by the architect of the contractee should be paid
immediately and that the reaming 20% be retained until the Contract was
completed.
In year 1, the amounts expended were Rs. 8,60,000, the work was certified for Rs.
8,00,000 and 80% of this was paid as agreed. It was estimated that future
expenditure to complete the Contract would be Rs. 10,00,000.
In Year 2, the amounts expended were Rs. 4,75,000. Three-fourth of the work
under contract was certified as done by December 31st and 80% of this was
received accordingly. It was estimated that future expenditure to complete the
Contract would be Rs. 4,00,000.
In year 3, the amounts expended were Rs. 3,10,000 and on June 30th, the whole
Contract was completed.
Show how contract revenue would be recognized in the P & L A/c of Mr. Rajendra
each year. ( CA Inter –Nov 2020)
Ans. Note: Calendar year has been considered as accounting year
Year 1 Rs.
Actual expenditure 8,60,000
Future estimated expenditure 10,00,000
Total Expenditure 18,60,000
% of work completed = 8,60,000/18,60,000 * 100 = 46.24%
Revenue to recognized = 20,00,000 ×46.24% Rs. 9,24, 800
Year 2
Actual expenditure 4,75,000
Future Expenditure 4,00,000
Expenditure incurred in Year 1 8,60,000
17,35,000
% of work completed = (4,75,000+ 8,60,000 - /17,35,000 * 100 = 76.95%
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Revenue to be recognized (cumulative) = 20,00,000 × 76.95% = 15,39,000

Less: Revenue recognized in Year 1 = ( 9,24,800)
Revenue to be recognized in Year 2 Rs. 6,14,200
Year 3
Whole contract got completed therefore total contract value less revenue
recognized up to year 2 will be amount of revenue to be recognize in year 3 i.e.
20,00,000 – 15,39,000 (9,24,800 + 6,14,200) = Rs. 4,61,000.

Q.5. The following data is provided for M/s. Raj Construction Co.
(i) Contract Price - 85 lakhs
(ii) Materials issued - 21 Lakhs out of which Materials costing 4 Lakhs is still
lying unused at the end of the period.
(iii) Labour Expenses for workers engaged at site - 16 Lakhs (out of which 1
Lakh is still unpaid)
(iv) Specific Contract Costs - 5 Lakhs
(v) Sub-Contract Costs for work executed - 7 Lakhs, Advances paid to sub-
contractors -74 Lakhs
(vi) Further Cost estimated to be incurred to complete the contract - 35 Lakhs
You are required to compute the Percentage of Completion, the Contract Revenue
and Cost to be recognized as per AS-7. (EXAM JUL-21)
Ans. Computation of contract cost
Rs. Lakh Rs. Lakh
Material cost incurred on the contract (net of closing stock) 21.4 17
Add: Labour cost incurred on the contract (including 16
outstanding amount)
Specified contract cost given 5
Sub-contract cost (advances should not be considered) 7
Cost incurred (till date) 45
Add: further cost to be incurred 35
Total contract cost 80

Percentage of completion = Cost incurred till date/Estimated total cost =

=45,00,000/ 80,00,000
= 56.25%
Contract revenue and costs to be recognized
Contract revenue (85,00,000x56.25% ) = 47,81,250
Contract costs = 45,00,000

Q.6. Fisher Construction Co. obtained a contract for construction of a commercial

complex. The following details are available in records of a company for the year
ended 31st March, 2023: (EXAM MAY 23)

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Particulars Amount in lakhs

Total contract price 24000
Work certified 12500
Work not certified 2500
Estimated further cost to completion of work 17500
Progress payment received 11000
Progress payment to be received 3000
Applying the provisions of AS 7, you are required to compute:
(i) Profit/Loss for the year ended 31st March, 2023
(ii) Contract work in progress at the end of financial year 2022-2023 (iii)
Revenue to be recognized out of the total contract value (iv) Amount due
from/ to customers as at the year end
Ans.

AS 9
REVENUE RECOGNITION
Q.1. A claim lodged with the Railways in March 2014 for loss of goods of Rs. 2,00,000
had been passed for payment in March 2017 for Rs. 1,50,000. No journal entry
was recorded in the books of the company, when the claim was lodged. Advise
Durga Limited about the treatment of the above in the financial statements for the
year ended on 31st March, 2017.
Ans. As 9 states that ‘where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any claim, revenue
recognition is postponed to the extent of uncertainty involve’ and it is appropriate
to recognize only when reasonable certainty exists.
In the given case, it may be assumed that ability of claim was not certain in the
earlier period and hence it is accounted as income in the year in which it is
received (i.e. Certainty in receipt). So the amount of Rs. 1, 50,000 should be
recognized in March 2017. It I NOT prior period item NOT an extraordinary item
as per AS 5. It may require separate disclosure as per AS 5.

Q.2. Moon limited sold goods worth Rs. 6,50,000 to M/s Star and Compnay. M/s Star
and Company asked for trade discount of Rs. 53,000 which was agreed by Moon
Limited. The sales were effected and goods were dispatched. After receiving,
goods worth Rs. 67,000 were found defective, which were returned immediately
by M/s Star and Company. It made the payments of Rs. 5,30,000 to Moon Limited.
Accountant of the the company booked the sales for Rs. 5,30,000. Discuss the
accounting treatment given by the accountant with reference to AS 9.
(IPCC May 2011, may 2013)
Ans. As per AS, 9, revenue is the gross inflow of cash, receivable or other consideration
arising in the course of the ordinary activities of an enterprise from the sale of

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goods etc. However, as per illustrative appendix of AS 9, trade discounts and

volume rebates given should be deducted in determining revenue.
Revenue from sales should be recognized at the time of transfer of significant
risks and rewards. If the delivery of the sales is not subject to approval from
customers, then the transfer or significant risks and reward would take palace
when the sale is effected and goods are dispatched. Accordingly, Moon Ltd should
record the sales at Rs.
5,97,000 (i.e. Rs. 6,50,000 – 53,000) and goods returned worth Rs. 67,000 is to be
recorded in the form of sales return. Therefore, the contention of the accountant
to took the sales for Rs. 5,30,000 is not correct.

Q.3. Sarita Publications publishes a monthly magazine on the 15th of every month. It
sells advertising space in the magazine to advertisers on the terms of 80% sale
value payable in advance and the balance within 30 days of the release of the
publication. The sale of space for the March 2018 issue was made in February
2018. The magazine was published on its scheduled date. It received Rs. 2,40,000
on 10.3.2018 and Rs. 60,000 on 10.4.2018 for the March 2018 issues.
Discuss in the context of AS 9 the amount or revenue to be recognizd and the
treatment if the publication is delayed till 02.04.2018? (IPCC Nov. 2014)
Ans. As per AS 9, in a transaction involving the rendering of services, performance
should be measured either under the completed service contact method of under
the proportionate completion method as the service is performed, whichever
relates the revenue to the work accomplished.
In the given case, income accurse when the related advertisement appears before
public. The advertisement service would be considered as performed on the day
advertisement is seen by Public and hence revenue is revenue is recognized on
that date i.e. 15.03.2018 in the given case.
Hence, Rs, 3,00,000 (Rs. 2,40,000 + Rs. 60,000) is recognized as income in March,
2018. The terms of payment are not relevant for considering the date on which
revenue is to be recognized. Rs. 60,000 is treated as amount receivable as on
31.03.2018 and Rs. 2,40,000 will be treated as payment received against the sale.
However, if the publication is delayed till 02.04.2018, revenue recognition will
also be delayed till the advertisements get published in the magazine, in that case
revenue of Rs. 3,00,000 will be recognized for the year ended 31.03.2019 after
the magazine is published as an advance from advertisement as on 31.03.2018.

Q.4. A manufacturing co. has the following stages of production and sale in
manufacturing fine paper rolls:
Date Activity Costs to date NRV Rs.
(Rs.)
15.01.16 Raw Material 1,00,000, 80,000
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20.01.16 Pulp (WIP 1) 1,20,000 1,20,000

27.01.16 Rough & Thick paper 1,50,000 1,80,000
(WIP 2)
15.02.16 Fine paper rolls 1,80,000 3,50,000
20.02.16 Ready for sale 1,80,000 3,50,000
15.03.16 Sale agreed and invoice 2,00,000 3,50,000
raised
02.04.16 Delivered and paid for 2,00,00 3,50,000
Explain the stage on which you think revenue will be generated and state how
much would be net profit for year ending 31.03.16 on this product according to
AS 9. (IPCC Nov. 2 016)
Ans. As per AS 9, revenue from sale of goods is recognized only when significant risks
and rewards related to ownership are transferred to the buyer and no uncertainty
in ultimate collection at the time of sales.
Thus sale will be recognized only when the following two conditions are satisfied:
(i) The sale value is fixed and determinable.
(ii) Property of the goods is transferred to the customer.
Both these conditions are satisfied only on 15-03-16 when sales are agreed upon
at a price and goods are allocated for delivery purpose through invoice. The
amount of the net profit Rs. 1,50,000 (3,50,000 – 2,00,000) would be recognized
in the books for the year ending 31-03-16.

Q.5. Given the following information of Rainbow Ltd.

(i) On 15th November, goods worth 5,00,000 were sold on approval basis. The
period of approval was 4 months after which they were considered sold.
Buyer sent approval for 75% goods sold upto 31st January and no approval
or disapproval received for the remaining goods till 31st March.
(ii) On 31st March, goods worth 2,40,000 were sold to Bright Ltd. but due to
refurnishing of their show-room being underway, on their request, goods
were delivered on 10th April.
(iii) Rainbow Ltd. supplied goods worth 6,00,000 to Shyam Ltd. and
concurrently agrees to re-purchase the same goods on 14th April.
(iv) Dew Ltd, used certain assets of Rainbow Ltd. Rainbow Ltd. received 7.5
lakhs and 12 as interest and royalties respectively from Dew Ltd. during the
year 2020-21.
(v) On 25th December, goods of 4,00,000 were sent on consignment basis of
which 40% of the goods unsold are lying with the consignee at the year-end
on 31st March.
In each of the above cases, you are required to advise, with valid reasons, the
amount to be recognized as revenue under the provisions of AS-9.
(EXAM DEC-21)

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Ans.(i) As per AS 9 "Revenue Recognition", in case of goods sold on approval basis,

revenue should not be recognized until the goods have been formally
accepted by the buyer or the buyer has done an act adopting the transaction
or the time period for rejection has elapsed or where no time has been
fixed, a reasonable time has elapsed. Therefore, revenue should be
recognized for the total sales amounting * 5,00,000 as the time period for
rejecting the goods had expired.
(ii) The sale is complete but delivery has been postponed at buyer's request.
The entity should recognize the entire sale of 2,40,000 for the year ended
31st March.
(iii) Sale/repurchase agreements i.e. where seller concurrently agrees to
repurchase the same goods at a later date, such transactions that are in
substance a financing agreement, the resulting cash inflow is not revenue as
defined and should not be recognized as revenue. Hence no revenue to be
recognized in the given case.
(iv) Revenue arising from the use by others of enterprise resources yielding
interest and royalty should be recognized when no significant uncertainty
as to measurability or collectability exists. The interest should be
recognized on time proportion basis taking into account the amount
outstanding and rate applicable. The royalty should be recognized on
accrual basis in accordance with the terms of relevant agreement.
(v) 40% goods lying unsold with consignee should be treated as closing
inventory and sales should be recognized for 2,40,000 (60% of 4,00,000). In
case of consignment sale revenue should not be recognized until the goods
are sold to a third party.

Q.6. Indicate in each case whether revenue can be recognized and when it will be
recognized as per AS-9. (EXAM NOV 22)
(i) Delivery is delayed at buyer's request but buyer takes title and accepts
billing.
(ii) Instalment Sales.
(iii) Trade discounts and volume rebates.
(iv) Insurance agency commission for rendering services.
(v) Advertising commission
Ans.(i) Delivery is delayed at buyer's request and buyer takes title and accepts
billing: Revenue should be recognized notwithstanding that physical
delivery has not been completed so long as there is every expectation that
delivery will be made. However, the item must be on hand, identified and
ready for delivery to the buyer at the time the sale is recognized rather than
there being simply an intention to acquire or manufacture the goods in time
for delivery.
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(ii) Instalment sales: When the consideration is receivable in instalments,

revenue attributable to the sales price exclusive of interest should be
recognized at the date of sale. The interest element should be recognized as
revenue, proportionately to the unpaid balance due to the seller.
(iii) Trade discounts and volume rebates: Trade discounts and volume rebates
received are not encompassed within the definition of revenue, since they
represent a reduction of cost. Trade discounts and volume rebates given
should be deducted in determining revenue.
(iv) Insurance agency commissions for rendering services: Insurance agency
commissions should be recognized on the effective commencement or
renewal dates of the related policies.
(v) Advertising commission: Revenue should be recognized when the service is
completed. For advertising agencies, media commissions will normally be
recognized when the related advertisement or commercial appears before
the public and the necessary intimation is received by the agency, as
opposed to production commission, which will be recognized when the
project is completed.

Q.7. Toy Ltd. is engaged in manufacturing toys. They provide you the following
information as on 31 March, 2023:
(i) On 15th January, 2023, Toys worth 5,00,000 were sent to A Ltd. on
consignment basis of which 25% Toys unsold were lying with A Ltd. as on
31st March, 2023.
(ii) Toys worth 2,25,000 were sold to S Ltd. on 25th March, 2023 but at the
request of S Ltd., these were delivered on 15th April, 2023.
(iii) On 1st November, 2022, toys worth 3,50,000 were sold on approval basis.
The period of approval was 4 months after which they were considered
sold. Buyer sent approval for.75% goods upto 31st December, 2022 and no
approval or disapproval received for the remaining goods till 31st March,
2023.
You are required to advise the accountant of Toy Ltd., the amount to be
recognised as revenue in above cases in the context of AS-9. (EXAM MAY 23)
Ans.

AS –10
PROPERTY, PLANT AND EQUIPMENT
QUESTIONS FOR PRACTICE
Q.1. Entity A, a supermarket chain, is renovating one of its major stores. The store will
have more available space for in store promotion outlets after the renovation and
will include a restaurant. Management is preparing the budgets for the year after

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the store reopens, which include the cost of 34ealized3434 and the expectation of
a 15% increase in sales resulting from the store renovations, which will attract
new customers. State whether the 34ealized3434 cost will be 34ealized343434 or
not.
Ans. The expenditure in remodeling the store will create future economic benefits (in
the form of 15% of increase in sales) and the cost of remodeling can be measured
reliably, therefore, it should be 34ealized343434.

Q.2. Entity A has an existing freehold factory property, which it intends to knock down
and redevelop. During the redevelopment period the company will move its
production facilities to another (temporary) site. The following incremental costs
will be incurred:
(a) Setup costs of ₹ 5,00,000 to install machinery in the new location.
(b) Rent of ₹ 15,00,000
(c) Removal costs of ₹ 3,00,000 to transport the machinery from the old
location to the temporary location.
Can these costs be 34ealized343434 into the cost of the new building?
Ans. The costs to be incurred by the company are in the nature of costs of relocating or
34ealized34343434 operations of the company and do not meet the requirement
of AS-10 (Revised) and therefore, cannot be 34ealized343434.

Q.3. Entity A, which operates a major chain of supermarkets, has acquired a new store
relocation. The new location requires significant renovation expenditure.
Management expects that the renovations will last for 3 months during which the
supermarket will be closed.
Management has prepared the budget for this period including expenditure
related to construction and remodeling costs, salaries of staff who will be
preparing the store before its opening and related utilities costs. What will be the
treatment of such expenditures?
Ans. Management should 34ealized3434 the costs of construction and remodeling the
supermarket.

Q.4. An amusement park has a ‘soft’ opening to the public, to trial run its attractions.
Tickets are sold at a 50% discount during this period and the operating capacity is
80%. The official opening day of the amusement park is three months later.
Management claim that the soft opening is a trial run necessary for the
amusement park to be in the condition capable of operating in the intended
manner. Accordingly, the net operating costs incurred should be
34ealized343434. Comment.
Ans. The net operating costs should not be capitalized, but should be recognized in the
Statement of Profit and loss.
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Q.5. Entity A exchanges surplus land with a book value of ₹ 10,00,000 for cash of ₹
20,00,000 and plant and machinery valued at ₹ 25,00,000. What will be the
measurement cost of the assets received?
Ans. The plant and machinery would be recorded at ₹ 25,00,000.

Q.6. Entity A exchanges car X with a book value of ₹ 13,00,000 and a fair value of ₹
13,25,000 for cash of ₹ 15,000 and car Y which has a fair value of ₹ 13,10,000.
The transaction lacks commercial substance of as the company’s cash flows are
not expected to change as a result of the exchange. It is in the same position as it
was before the transaction. What will be the measurement cost of the assets
received?
Ans. The entity recognizes the assets received at the book value of car X.
Therefore, it recognizes cash of ₹ 15,000 and car Y as PPE with a carrying
value of ₹ 12,85,000.

Q.7. Entity A is a large manufacturing group. It owns a number of industrial buildings,

such as factories and warehouses and office buildings in several capital cities. The
industrial buildings are located in industrial zones, whereas the office buildings
are in central business districts of the cities. Entity A’s management want to apply
the revaluation model as per AS 10 (Revised) to the subsequent measurement of
the office buildings but continue to apply the historical cost model to the
industrial buildings.
State whether this is acceptable under AS 10 (Revised) or not with reasons?
Ans. The different measurement models can be applied to these classes for
subsequent measurement.

Q.8. Entity A has a policy of not providing for depreciation on PPE capitalized in the
year until the following year, but provides for a full year’s depreciation in the year
of disposal of an asset. Is this acceptable?
Ans. The policy of Entity A is not acceptable.

Q.9. Entity A purchased an asset on 1st January 2013 for ₹ 1,00,000 and the asset had
an estimated useful life of 10 years and a residual value of nil.
On 1st January 2017, the directors review the estimated life and decide that the
asset will probably be useful for a further 4 years
Calculate the amount of depreciation for each year, if company charges
depreciation on Straight Line basis.
Ans. Amount of depreciation for next 4 years: ₹ 15,000 p.a.

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Q.10. Entity B constructs a machine for its own use. Construction is completed on 1 st
November 2016 but the company does not begin using the machine until 1st
March 2017. Comment.
Ans. The company should begin charging depreciation from the date the machine
is ready for use – that is, 1st November, 2016. The fact that the machine was
not used for a period after it was ready to be used is not relevant in
considering when to begin charging depreciation.

Q.11. Entity B manufactures industrial chemicals and uses blending machines in the
production process. The output of the blending machines is consistent from year
to year and they can be used for different products.
However, maintenance costs increase from year to year and a new generation of
machines with significant improvements over existing machines is available every
5 years Suggest the depreciation method to the management.
Ans. The straight-line depreciation method should be adopted, because the
production output is consistent from year to year.

Q.12. Entity A carried plant and machinery in its books at ₹ 2,00,000. These were
destroyed in a fire. The assets were insured ‘New for Old’ and were replaced by
the insurance company with new machines that cost ₹ 20,00,000. The machines
were acquired by the insurance company and the company did not receive ₹
20,00,000 as cash compensation. State, how Entity A should account for the same?
Ans. Entity A should account for loss in Statement of Profit and Loss on
derecognitionof the carrying value of plant and machinery and should
separately recognize a receivable and gain in the income statement.

Q.13. Mohan Ltd. purchased an asset on 1stJanuary 2013 for ₹ 5,00,000 and the asset
had an estimated useful life of 5 years and a residual value of nil. On 1stJanuary
2017, the directors review the estimated life and decide that the asset will
probably be useful for a further 4 years.
You are required to compute the amount of depreciation for each year, if company
charges depreciation on Straight Line basis. [MTP April, 2019]
Ans. Depreciation for next 4 years: ₹ 25,000 p.a.

Q.14. Preet Ltd. is installing a new plant at its production facility. It has incurred these
costs:
1. Cost of the plant (cost per supplier’s invoice plus taxes) ₹ 50,00,000
2. Initial delivery and handling costs ₹ 4,00,000
3. Cost of site preparation ₹ 12,00,000
4. Consultants used for advice on the acquisition of the ₹ 14,00,000
plant
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5. Interest charges paid to supplier of plant for deferred ₹ 4,00,000

credit
6. Estimated dismantling costs to be incurred after 7 years ₹ 6,00,000
7. Operating losses before commercial production ₹ 8,00,000
Please advise Preet Ltd. on the costs that can be 37ealized373737in accordance
with AS 10(Revised).
Ans. ₹ 86,00,000.

PREVIOUS YEAR QUESTIONS

Q.1. Mention four Assets, where AS-10 is not applicable. [Nov-08](2M)
Ans. AS-10 does not apply to-
(i) Biological assets related to agricultural activity other than bearer
plants. This standard applies to bearer plants but it does not apply to
the produce on bearer plants; and
(ii) Wasting assets including mineral rights, expenditure on the
exploration for and extraction of minerals, oil, natural gas and similar
non-regenerative resources.
However this AS applies to PPE used to develop or maintain the assets
prescribed in (i) & (ii) above.

Q.2. What is the accounting entry to be passed as per AS-10 for the following
situations:
(a) Increase in value of PPE by ₹ 50,00,000 on account of revaluation.
(b) Decrease in the value of PPE by ₹ 30,00,000 on account of revaluation.
[May-08](2M)
Ans.
Particulars L.F. Dr. (₹) Cr. (₹)
(a) PPE A/c Dr. 50,00,000
To Revaluation Reserve A/c 50,00,000
(Being the increase in value of fixed asset
due to upward revaluation)
(b) Profit and Loss A/c Dr. 30,00,000
To PPE A/c 30,00,000
(Being the decrease in net book value of
fixed asset due to downward revaluation.)
Assumption: Both the above instances are independent of each other and
revaluation is done for 1st time.

Q.3. A company acquired a machine on 1.4.2006 for ₹ 5,00,000. The company charged
depreciation up to 2008-09 on straight line basis with estimated working life of
10 years and scrap value of ₹ 50,000. From 2009-10, the company decided to
change depreciation method at 20% on reducing balance method. Compute the
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amount of depreciation to be debited to Profit and Loss A/c for the year 2009-10.
[May-10](2M)
Ans. ₹ 73,000

Q.4. During the current year 2009-10 M/s L&C Ltd. made the following expenditure
relating to its plant and machinery:
₹
General repairs 4,00,000
Repairing of Electric Motors 1,00,000
Partial Replacement of parts of Machinery 50,000
Substantial improvements to the electrical writing system
Which will increase efficiency of the plant and machinery 10,00,00
What amount should be capitalized according to AS-10? [May-10](4M)
Ans. ₹ 10,00,000.

Q.5. Carrying amount of a machine is ₹1,00,000 (Historical cost less depreciation). The
machine is expected to generate ₹ 25,000 net cash flow for 5 years. The net
realizable value (or net selling price) of the machine on current date is ₹ 85,000.
The enterprises required rate of earning is 10% p.a. State the value at which the
enterprises should carry its machine. The Present value factors at 10% are 0.909,
0.826, 0.751, 0.683 and 0.621 at the end of first, second, third, fourth and fifth
year respectively. [May-11](4M)
Ans. ₹ 94,750

Q.6. In the Trial Balance of M/s Sun Ltd. as on 31-03-2011, balance of machinery
appears ₹ 5, 60,000. The company follows rate of depreciation on machinery @
10% p.a. On scrutiny it was found that a machine appearing in the books on 1-4-
2010 at ₹ 1,60,000 was disposed of on 30-9-2010 at ₹ 1,35,000 in part exchange
for a new machine costing ₹ 1,50,000.
You are required to calculate:
(i) Total depreciation to be charged in the Profit & Loss A/c.
(ii) Loss on exchange of machine
(iii) Book value of machinery in Balance Sheet as on 31-3-2011. [Nov-11](5M)
Ans. (i) ₹ 55,500 (ii) ₹ 17,000 (iii) 5,02,500

Q.7. M/s. Tiger Ltd. Allotted 7500 equity shares of ₹ 100 each fully paid up to Lion Ltd.
in consideration for supply of a special machinery. The shares exchanged for
machinery are quoted at National Stock Exchange (NSE) at ₹ 95 per share, at the
time of transaction. In the absence of fair market value of the machinery acquired,
how the value of the machinery would be recorded in the books of Tiger Ltd?
Ans. ₹ 7,12,500 [Nov-11](4M)

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Q.8. M/s Progressive Company Limited has charged depreciation for the year ended
on 31st March, 2012, in respect of a spare bus purchased during the financial year
2011-12 and kept ready by the company for use as a stand-by, on the ground that
it was not actually used during the year. Sate your views with reference to
Accounting Standard 10 “Property, Plant and Equipment”.
Further during the year company made additions to its factory by using its one
workforce, at a cost of ₹ 4,50,000 as wages and materials. The lowest estimate
from an outside contractor to carry output the same work was ₹ 6,00,000.
The directors contend that, since they are fully entitled to employ an outside
contractor, it is reasonable to debit the Factory Building Account with ₹6,00,000.
Comment whether the directors’ contention is right in view of the provisions of
Accounting Standard 10? [May-12](5M)
Ans. Only ₹ 4,50,000 should be debited to the factory building account not ₹
6,00,000. Hence the contention of the directors of the company is not
justifiable.

Q.9. A computer costing₹60,000 is depreciated on straight line basis, assuming 10

years working life and nil residual value, for three years. The estimate of
remaining useful life after third year was reassessed at 5 years. Calculate
depreciation as per the provisions of Accounting Standard 10 “Property, Plant and
Equipment.” [May-12](4M)
Ans. ₹ 8,400 per annum

Q.10. PQR Ltd. constructed a fixed asset and incurred the following expenses on its
construction:
₹
Materials 16,00,000
Direct Expenses 3,00,000
Total Direct Labour
(1/5th of the total labour time was chargeable to the 6,00,000
construction)
Total Office & Administrative Expenses 9,00,000
(4% is chargeable to the construction)
Depreciation on assets used for the construction of
15,000
this asset
Calculate the cost of the fixed asset. [Nov-12](4M)
Ans. ₹ 19,91,000. [It is assumed that 4% of office and administrative expenses
are specifically attributable to construction of a fixed asset.]

Q.11. Amna Ltd. contracted with a supplier to purchase a specific machinery to be

installed in Department A in two months time. Special foundations were required
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for the plant, which were to be prepared within this supply lead time. The cost of
site preparation and laying foundations were ₹ 47,290.These activities were
supervised by a technician during the entire period, who is employed for this
purpose of ₹ 15,000 per month. The Technician’s services were given to
Department A by Department B, which billed the services at ₹ 16,500 per month
after adding 10% profit margin.
The machine was purchased at ₹ 52,78,000. GST was charged at 18% on the
invoice. ₹18,590 transportation charges were incurred to bring the machine to
the factory. An Architect was engaged at a fee of ₹ 10,000 to supervise machinery
installation at the factory engaged at a fee of ₹10,000 to supervise machinery
installation at the factory premises. Also, payment under the invoice was due in 3
months. However, the Company made the payment in 2nd month. The company
operates on Bank Overdraft @ 11%. Ascertain the amount at which the asset
should be capitalized under AS-10.
Ans. ₹ 63,33,920 [Nov-13](5M)

Q.12. On 01.04.2010 a machine was acquired at ₹ 4,00,000. The machine was expected
to have a useful life of 10 years. The residual value was estimated at 10% of the
original cost. At the end of the 3rd year, an attachment was made to the machine at
a cost of ₹ 1,80,000 to enhance its capacity. The attachment was expected to have
a useful life 10 years and zero terminal value. During the same time the original
machine was revalued upwards by ₹ 90,000 and remaining useful life was
reassessed at 9 years and residual value was reassessed at NIL.
Find depreciation for the year, if-
(i) Attachment retains its separate identify.
(ii) Attachment becomes integral part of the machine. [May-14](5M)
Ans. (i) ₹ 60,444 (ii) ₹ 62,444.

Q.13. In the books of Optic Fiber Ltd., Plant and Machinery stood at ₹ 6,32,000 on
1.4.2013. However, on scrutiny it was found that machinery worth ₹ 1,20,000 was
included in the purchases on 1.6.2013. On 30.6.2013 the company disposed a
machine having books value of ₹ 1,89,000 on 1.4.2013 at ₹ 1,75,000 in part
exchange of a new machine costing ₹ 2,56,000. The company charges depreciation
@ 20% WDV on Plant and Machinery.
You are required to calculate:
(i) Depreciation to be charged to P/L
(ii) Book value of Plant and Machinery A/c as on 31.3.2014
(iii) Loss on exchange of Machinery. [Nov-14](5M)
Ans. (i) ₹ 1,56,450 (ii) ₹ 6,72,000 (iii) ₹ 4,550

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Q.14. From the following information state the amount to be capitalized as per AS-10.
Give the explanations for your answers.
₹ 5 lakhs as routine repairs and ₹ 1 lakh on partial replacement of a part of a
machine.
₹10 lakhs on replacement of part of a machinery which will improve the efficiency
of a machine. [Nov-14](4M)
Ans. ₹ 10 lakhs incurred on replacement of a part of machinery should be
capitalized.

Q.15. Versatile Ltd. purchased Machinery for ₹ 4,80,000 (inclusive of GST of ₹ 40,000).
Input Tax credit is available for the GST paid. The Company incurred the following
other expenses for installation.
Particulars ₹
Cost of preparation of site for installation 21,000
Total labour charge (200 out of the total 600 man hours worked,
were spent for installation of the Machinery) 66,000
Spare parts and tools consumed in installation 6,000
Total salary of supervisor( time spent for installation was 25%
24,000
of the total time worked)
Total administrative expenses (1/10 relates to the plant
32,000
installation)
Test run and experimental production expenses 23,000
Consultancy charge to architect for plant set up to 9,000
Depreciation on assets used for the installation 12,000
The machine was ready for use on 15 January but was used from 1st February.
th

Due to this delay further costs ₹ 19,000 were incurred. Calculate the value at
which the plant should be capitalized. [May-15](4M)
Ans. ₹ 5,42,200.

Q.16. A machinery with a useful life of 6 years was purchased on 1st April, 2012 for ₹
1,50,000. Depreciation was provided on straight line method for first three years
considering a residual value of 10% of cost.
In the beginning of fourth year the company reassessed the remaining useful life
of the machinery at 4 years and residual value was estimated at 5% of original
cost.
The accountant recalculated the revised depreciation historically and charged the
difference to profit & loss A/c. You are required to comment on the treatment by
account and calculate the depreciation to be charged for the fourth year.
[Nov-15](5M)
Ans. ₹ 18,750

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Q.17. Hema Ltd purchased a machinery on 1.04.2008 for ₹ 15,00,000. The company
charged straight line depreciation based on 15 years working life estimate and
residual value ₹ 3,00,000. At the beginning of the 4th year, the company by way of
systematic evaluation revalued the machinery upward by 20% of net book value
as on date and also re-estimated the useful life as 7 year and scrap value as nil.
The increase in net book value was credited to revaluation reserves. Depreciation
(on SLM basis) later on was charged to Profit & Loss Account. At the beginning of
8th year the company decided to dispose off the machinery and estimated the
realizable value to ₹ 2,00,000.
You are required to ascertain the amount to be charged to Profit & Loss Account
at the beginning of 8th year with reference to AS-10. [Nov-16](5M)
Ans. ₹ 3,40,000.

Q.18. ABC Ltd is installing a new plant at its production facility. It provides you the
following information:
Cost of the plant (cost as per supplier’s invoice) ₹ 31,25,000
Estimated dismantling costs to be incurred after 5 years ₹ 2,50,000
Initial Operating losses before commercial production ₹ 3,75,000
Initial delivery and handling costs ₹ 1,85,000
Cost of site preparation ₹ 4,50,000
Consultants used for advice on the acquisition of the ₹ 6,50,000
plant
Please advise ABC Ltd on the costs that can be capitalized for plant in accordance
with AS-10: Property, Plant & Equipment. [Nov-17](5M)

Ans. ₹ 46,60,000

Q.19. Neon Enterprise operates a major chain of restaurants located in different cities.
The company has acquired a new restaurant located at Chandigarh. The new
restaurant requires significant renovation expenditure. Management expects that
the renovations will last for 3 months during which the restaurant will be closed.
Management has prepared the following budget for this period-
Salaries of the staff engaged in preparation of restaurant
₹ 7,50,000
before its opening-
Construction and remodeling cost of restaurant- ₹ 30,00,000
Ans. Salaries of the staff (i.e. ₹ 7,50,000) should be charged to P&L A/c.
Construction and remodeling cost of restaurant (i.e. ₹ 30,00,000) should be
considered part of the asset.

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AS –11
THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
QUESTIONS FOR PRACTICE

Q.1. Kalim Ltd. borrowed US $ 4,50,000 on 01/01/2016, which will be repaid as on

31/07/2016. Kalim Ltd. prepares financial statement ending on 31/03/2016.
Rate of exchange between reporting currency (INR) and foreign currency (USD)
on different dates are as under:
01.01.2016- 1 US $= ₹ 48.00
31.03.2016- 1US $= ₹ 49.00
31.07.2016- 1 US $= ₹ 49.50
Pass the necessary journal entries to represent the above transaction as per AS-
11.
Ans.
Particulars L.F. Dr. (₹) Cr. (₹)
Bank A/c Dr. 2,16,00,000
To Foreign Loan A/c 2,16,00,000
Foreign Exchange difference A/c Dr. 4,50,000
To Foreign Loan A/c 4,50,000
[4,50,000 × (49-48)]
Foreign Exchange difference A/c Dr. 2,25,000
[₹ 4,50,000 × (49.5-49)] 2,20,50,000
Foreign Loan A/c Dr.
To Bank A/c 2,22,75,000

Q.2. Opportunity Ltd. purchased an equipment costing ₹ 24,00,000 on 1.4.2015 and

the same was fully financed by foreign currency loan (US Dollars) payable in four
annual equal installments. Exchange rates were 1 Dollar = ₹ 60.00 and ₹ 62.50 as
on 1.4.2015 and 31.3.2016 respectively. First installment was paid on 31.3.2016.
The entire difference in foreign exchange has been 43ealized434343. You are
required to state that how these transactions would be accounted for.
Ans. exchange differences = ₹ 1,00,000 should be charged to Profit and Loss Account.

Q.3. A business having the Head Office in Kolkata has a branch in UK. The following is
the trial balance of branch as at 31.03.2016:
Account Name Amount in £
Dr. Cr.
Fixed Assets (Purchased on 01.04.2013) 5,000
Debtors 1,600
Opening Stock 400
Goods received from Head Office Account 6,100
(Recorded in HO books as ₹ 4,02,000)
Sales 20,000
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Purchases 10,000
Wages 1,000
Salaries 1,200
Cash 3,200
Remittances to Head Office (Recorded in HO books as ₹ 2,900
1,91,000)
Head Office Account (Recorded in HO books as ₹ 4,90,000) 7,400

Creditors 4,000
Closing stock at branch is £ 700 on 31.03.2016.
Depreciation @ 10% p.a. is to be charged on fixed assets.
Prepare the trial balance after been converted in Indian Rupees.
Exchange rates of Pounds on different dates are as follows:
01.04.2013 – ₹ 61; 01.04.2015 – ₹ 63 & 31.03.2016 – ₹ 67
Ans. Total of Trial Balance - ₹ 20,58,000.
Exchange Rate Difference - ₹ 20,200 (Dr.)

Q.4. Rau Ltd. purchased a plant for US $ 1,00,000 on 1st February 2016, payable after
three months. Company entered into a forward contract for three months @ ₹
49.15 per dollar. Exchange rate per dollar on 01st Feb was ₹ 48.85. How will you
44ealized44 the profit or loss on forward contract in the books of Rau Ltd?
Ans. Loss of ₹ 20,000 [(30,000/3) × 2] to be recognized in the year 2016-17 and
rest ₹ 10,000 will be recognized in the following year.

Q.5. Mr. A bought a forward contract for three months of US$ 1,00,000 on 1st
December at 1 US$ = ₹ 47.10 when exchange rate was US$ 1 = ₹ 47.02. On 31st
December when he closed his books exchange rate was US$1= ₹ 47.15. On 31st
January, he decided to sell the contract at ₹ 47.18 per dollar. Show how the profits
from contract will be 44ealized4444 in the books.
Ans. Total profit - ₹ 8,000 will be recorded in the Profit and Loss Account.

Q.6. A Ltd. purchased fixed assets costing ₹ 3,000 lakhs on 1.1.2016 and the same was
fully financed by foreign currency loan (U.S. Dollars) payable in three annual
equal installments. Exchange rates were 1 Dollar = ₹ 40.00 and ₹42.50 as on
1.1.2016 and 31.12.2016 respectively. First installment was paid on 31.12.2016.
The entire difference in foreign exchange has been 44ealized444444. You are
required to state, how these transactions would be accounted for
Ans. Exchange difference = ₹ 187.50 lakhs.

Q.7. Assets and liabilities and income and expenditure items in respect of foreign
branches (integral foreign operations) are translated into Indian rupees at the
prevailing rate of exchange at the end of the year. The resultant exchange
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differences in the case of profit, is carried to other Liabilities Account and the
Loss, if any, is charged to revenue. Comment?
Ans. The financial statements of an integral foreign operation (for example, dependent
foreign branches) should be translated using the principles and procedures
described in AS 11. The individual items in the financial statements of a foreign
operation are translated as if all its transactions had been entered into by the
reporting enterprise itself.
Individual items in the financial statements of the foreign operation are
translated at the actual rate on the date of transaction. For practical reasons, a
rate that approximates the actual rate at the date of transaction is often used, for
example, an average rate for a week or a month may be used for all transactions
in each foreign currency during the period. The foreign currency monetary items
(for example cash, receivables, and payables) should be reported using the
closing rate at each balance sheet date. Non-monetary items (for example, fixed
assets, inventories, investments in equity shares) which are carried in terms of
historical cost denominated in a foreign currency should be reported using the
exchange date at the date of transaction. Thus the cost and depreciation of the
tangible fixed assets is translated using the exchange rate at the date of purchase
of the asset if asset is carried at cost. If the fixed asset is carried at fair value,
translation should be done using the rate existed on the date of the valuation.
The cost of inventories is translated at the exchange rates that existed when the
cost of inventory was incurred and 25ealized2525 value is translated applying
exchange rate when 25ealized2525 value is determined which is generally
closingrate.
Exchange difference arising on the translation of the financial statements of
integral foreign operation should be charged to profit and loss account.
Exchange difference arising on the translation of the financial statement of
foreign operation may have tax effect which should be dealt as per AS 22
‘Accounting for Taxes on Income’.
Thus, the treatment by the management of translating all assets and liabilities;
income and expenditure items in respect of foreign branches at the prevailing
rate at the year end and also the treatment of resultant exchange difference is
not in consonance with AS11.

PREVIOUS YEAR QUESTIONS

Q.1. Explain “monetary item” as per Accounting Standard 11. How are foreign
currency monetary items to be recognized at each Balance Sheet date?
Classify the following as monetary or non- monetary item:
(i) Share Capital
(ii) Trade Receivables
(iii) Investment
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(iv) Fixed Assets [May-13](4M)

Ans. (i) – Non Monetary (ii)- Monetary (iii)- Non-monetary (iv)- Non-monetary

Q.2. With reference to AS-11, define the following :

(i) Integral Foreign Operation.
(ii) Non-integral Foreign Operation. [Nov-16](4M)
Ans. (i) Integral Foreign Operation: It is a foreign operation, the activities of
which are an integral part
of those of the reporting enterprise a foreign operation that is integral to
the operations of the reporting enterprise carries on its business as if it
were an extension of the reporting enterprise’s operation.
(ii) Non-Integral Foreign Operation: It is a foreign operation that is not an
integral foreign operation when there is a change between in the exchange
rate between the reporting currency and the local currency. There is a little
or no direct impact of the present and future cash flow from operations of
either the non-integral foreign operation or the reporting enterprise the
change in the exchange rate affects the reporting enterprise’s net
investment in the non-integral foreign operation rather than the individual
monetary and non-monetary items held by the non-integral foreign
operation.

Q.3.
Exchange
Rate
Goods purchased on 1.1.2007 of $ 10,000 ₹45
Exchange rate on 31.3.2007 ₹44
Date of actual payment 7.7.2007 ₹43
Ascertain the loss/gain for financial year 2006-07and 2007-08, also give their
treatment as per AS-11. [Nov-08](4M)
Ans. ₹ 10,000 gain – Credited to P&L for the year 2006-07
₹ 10,000 gain – Credited to P&L for the year 2007-08

Q.4. Sterling Ltd purchased a plant for US $ 20,000 on 31st December, 07 payable after
4 months. The company entered into a forward contract for 4 months @ ₹ 48.85
per dollar. On 31st December, 07, the exchange rate was ₹ 47.50 per dollar.
How will you recognize the profit or loss on forward contract in the books of
Sterling Limited for the year ended 31st March, 2008? [Nov-09](2M)
Ans. Loss for the period 1st January, 2008 to 31st March, 2008 = ₹ 20,250
Balance loss of ₹ 6,750 for the month of April, 2008.

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Q.5. Sunshine Company Ltd imported raw material worth US Dollars 9,000 on 25th
February, 2011, when the exchange rate was ₹ 44 per US Dollar. The transaction
was recorded in the books at the above mentioned rate. The payment for the
transaction was made on 10th April, 2011, when the exchange rate was ₹ 48 per
US Dollar. At the year end 31st March, 2011, the rate of exchange was ₹ 49 per US
Dollar.
The chief Accountant of company passed an entry on 31st March, 2011 adjusting
the cost of raw material consumed for the difference between ₹ 48 and ₹ 44 per
US Dollar. Discuss whether this treatment is justified as per the provisions of AS-
11 (Revised). [Nov-11](4M)
Ans. The difference of ₹ 5(49-44) per us dollar i.e. ₹ 45,000 will be shown as an
exchange loss in P&L for the year ended 31st March, 2011.
In the subsequent year on settlement date: Exchange Gain of ₹ 9000
(Difference from balance sheet date to settlement)
Hence, accounting treatment is incorrect.

Q.6. Beekay Ltd. purchased fixed assets costing to ₹ 5,000 lakhs on 01.04.2012 payable
in foreign currency (US $) on 05.04.2013. Exchange rate of 1 US $ = ₹ 50.00 and ₹
54.98 as on 01.04.2012 and 31.03.2013 respectively.
The company also obtained a soft loan of US$ 1 lakh on 01.04.2012 payable in
three annual equal installments. First installment was due on 01.05.2013. You are
required to state, how these transactions would be accounted for in the books of
accounts ending 31st March, 2013. [Nov-13](5M)
Ans. (1) Exchange difference on fixed assets
Loss due to exchange difference amounting ₹ 498 lakhs will be 47ealized474747
and added in the carrying value of the fixed assets.
(2) Soft loan exchange difference
Exchange difference between reporting currency and foreign currency: ₹ 4.98
lakhs
₹ 1.66 lakhs (₹ 4.98 lakh/3) is to be charged in P&L for the year ended 31 st March,
2013.
Balance in FCMITD A/c = ₹ 3.32 lakhs.

Q.7. Stem Ltd. purchased a Plant for US$ 30,000 on 30th November, 2013 payable after
6 months. The company entered into a forward contract for 6 months @ ₹ 62.15
per dollar. On 30th November, 2013, the exchange rate was ₹ 60.75 per dollar.
How will you recognize the profit or Loss on forward contract in the books of
Stem Ltd. for the year ended 31st March, 2014? [Nov-14](5M)
Ans. Loss to be 47ealized4747 for the year ended 31st March, 2014 = ₹ 28,000
𝟒
[₹42,000× ]
𝟔

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Q.8. Explain briefly the accounting treatment needed in following cases as per AS-11
as on 31.3.2015.
(i) Sundry Debtors include amount receivable from Umesh ₹ 5,00,000
recorded at the prevailing exchange rate on the date of sales, transaction
recorded at US$ 1= ₹ 58.50.
(ii) Long term loan taken a U.S. Company, amounting to ₹ 60,00,000. It was
recorded at US$ 1= ₹ 55.60, taking exchange rate prevailing at the date of
transaction.
UD $ 1 = ₹ 61.20 on 31.3.2015 [Nov-15](5M)
Ans. (i) Foreign Exchange gain - ₹ 23,077 (Credited to P&L), (ii) Loss on exchange
transaction - ₹ 6,04,317 (Debited to Foreign exchange account).

Q.9. Shan Builders Ltd has borrowed a sum of US $ 10,00,000 at the beginning of
Financial Year 2014-15 for its residential project at LIBOR+3%. The interest is
payable at the end of the Financial year. At the time of availment, exchange rate
was ₹ 56 per US $ and the rate as on 31st March, 2015 was ₹ 62 per US$. If Shan
Builders Ltd borrowed the loan in India Rupee equivalent, the pricing of loan
would have been 10.50%. Compute Borrowing Cost and Exchange Difference for
the year ending 31st March, 2015 as per applicable accounting Standards.
(Applicable LIBOR is 1%) [Nov-15](5M)
Ans. Borrowing Cost: ₹ 58.80 lakhs, Exchange Difference: ₹ 26 lakhs

Q.10. M/s Power Track Ltd. purchased a plant for US $ 50,000 on 31st October, 2015
payable after 6 months. The Company entered into a forward contract for 6
months @ ₹ 64.25 per Dollar. On 31st October, 2015 the exchange rate was ₹
61.50 per Dollar.
You are required to recognize the profit or loss on forward contact in the books of
the company for the year ended 31st March, 2016. [May-16](5M)
Ans. Total Loss into forward contract: ₹ 1, 37,500
Loss for the period 1st November, 2015 to 31st March, 2016: ₹ 1,14,583.33

Q.11. ABC Ltd. borrowed US$ 5,00,000 on 01/01/2017, which was repaid as on
31/07/2017. ABC Ltd prepares financial statement ending on 31/03/2017. Rate
of Exchange between reporting currency(INR) and foreign currency(USD) on
different dates as under:
01/01/2017 - 1 US $ = ₹ 68.50
31/03/2017 - 1 US $ = ₹ 69.50
31/07/2017 - 1 US $ = ₹ 70.00
You are required to pass necessary journal entries in the books of ABC Ltd as per
AS-11. [May-18](5M)
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Ans.
Date Particulars L.F. Dr. (₹) Cr. (₹)
2017
1 Jan, Bank A/c Dr. 3,42,50,000
To Foreign Loan A/c 3,42,50,000
31 Foreign Exchange difference A/c Dr. 5,00,000
March To Foreign Loan A/c 5,00,000
01 July Foreign Exchange difference A/c Dr. 2,50,000
Foreign Loan A/c Dr. 3,47,50,000
To Bank A/c 3,50,00,000
Q.12.
(i)ABC Ltd an Indian Company obtained long term loan from WWW private
Ltd, a U.S. company amounting to ₹ 30,00,000. It was recorded at US$ 1= ₹
60.00, taking exchange rate prevailing at the date of transaction. The
exchange rate on the balance sheet date (31.03.2018) was US$ 1 = ₹ 62.00.
(ii) Trade receivable includes amount receivable from Preksha Ltd, ₹ 10,00,000
recorded at the prevailing exchange rate on the date of sales, transaction
recorded at US$ 1= ₹ 59.00. The exchange rate on balance sheet date
(31.03.2018) was US$ 1=₹ 62.00.
You are required to calculate the amount of exchange difference and also explain
the accounting treatment needed in the above two cases as per AS 11 in the books
of ABC Ltd. [Nov-18](5M)
Ans. Exchange difference Loss - ₹ 1,00,000
Treatment: Credit Loan A/c and Debit FCMITD A/c or Profit and Loss A/c By
₹ 1,00,000.
Exchange difference Gain - ₹ 50,847.456
Treatment: Credit Profit and Loss A/c and Debit Trade Receivables A/c By ₹
50,847.456

Q.13. AXE Ltd purchased fixed assets costing $ 5,00,000 on 1st Jan. 2018 from an
American company M/s M&M Limited. The amount was payable after 6 months.
The Company entered into forward contract on 1st January 2018 for five months
@ ₹ 62.50 per dollar. The exchange rate per dollar was as follows:
On 1st January,2018 ₹ 60.75 per
dollar
On 31 March,2018
st ₹ 63.00 per
dollar
You are required to state how the profit or Loss on forward contract would be
recognized in the books of AXE Ltd for the year ending 2017-18, as per the
provisions of AS 11. [Nov-18](5M)
Ans. Loss to be 49ealized4949 in 2017-18 - ₹ 5,25,000
Loss to be 49ealized4949 in 2018-19 - ₹ 3,50,000

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Q.14.
Exchange Rate per $
Goods purchase on 1.1.2017 for
₹ 75
US$ 15,000
Exchange rate on 31.3.2017 ₹ 74
Date of actual payment 7.7.2017 ₹ 73
You are required to ascertain to ascertain the loss/gain for financial years 2016-
17 and 2017-18, also give their treatment as per AS 11. [RTP]
Ans. ₹ 15,000 gain – Credited to P&L for the year 2016-17
₹ 15,000 gain – Credited to P&L for the year 2017-18

AS –12
ACCOUNTING FOR GOVERNMENT GRANTS
QUESTIONS FOR PRACTICE

Q.1. Santosh Ltd. has received a grant of ₹ 8 crores from the Government for
setting up a factory in a backward area. Out of this grant, the company
distributed ₹ 2 crores as dividend. Also, Santosh Ltd. received land free of cost
from the State Government but it has not recorded it at all in the books as no
money has been spent. In the light of AS-12 examine, whether the treatment
of both the grants is correct.
Ans. The treatment of both the elements of the grant is incorrect.

Q.2. Top &Top Limited has set up its business in a designated backward area which
entitles the company to receive from the Government of India a subsidy of 20% of
the cost of investment. Having fulfilled all the conditions under the scheme, the
company on its investment of ₹ 50 crore in capital assets received ₹ 10 crore from
the Government in January, 2017 (accounting period being 2016-2017). The
company wants to treat this receipt as an item of revenue and thereby reduce the
losses on profit and loss account for the year ended 31st March, 2017. Keeping in
view the relevant Accounting Standard, discuss whether this action is justified or
not.
Ans. The accounting treatment desired by the company is not proper.

Q.3. A fixed asset is purchased for ₹ 20 lakhs. Government grant received towards it is
₹ 8 lakhs. Residual Value is ₹ 4 lakhs and useful life is 4 years. Assume
depreciation on the basis of Straight Line method. Asset is shown in the balance
sheet net of grant. After 1 year, grant becomes refundable to the extent of ₹ 5
lakhs due to non-compliance with certain conditions. Pass journal entries for first
two years.
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Amount:
1st Year
(i) Debit Fixed Assets A/c and Credit Bank A/c by ₹ 20 lakhs.
(ii) Debit Bank A/c and Credit Fixed Assets A/c by ₹ 8 lakhs.
(iii) Debit Depreciation A/c and Credit fixed assets A/c by ₹ 2 lakhs.
2nd Year
(i) Debit Fixed Assets A/c and Credit Bank A/c by ₹ 5 lakhs.
(ii) Debit Depreciation A/c and Credit fixed assets A/c by ₹ 3.67 lakhs.

Q.4. On 1.4.2014, ABC Ltd. received Government grant of ₹ 300 lakhs for acquisition of
machinery costing ₹ 1,500 lakhs. The grant was credited to the cost of the asset.
The life of the machinery is 5 years. The machinery is depreciated at 20% on
WDVbasis. The Company had to refund the grant in May 2017 due to non-
fulfillment of certain conditions.
How you would deal with the refund of grant in the books of ABC Ltd.?
Ans. The amount refundable in respect of grant – Recorded by increasing the
book value of asset.

Q.5. A Ltd. purchased a machinery for ₹ 40 lakhs. (Useful life 4 years and residual
value ₹ 8 lakhs) Government grant received is ₹ 16 lakhs.
Show the Journal Entry to be passed at the time of refund of grant in the third
year and the value of the fixed assets, if:
(a) The grant is credited to Fixed Assets A/c.
(b) The grant is credited to Deferred Grant A/c.
Ans. (a) The grant is credited to Fixed Assets A/c:
Journal Entry- Debit Fixed Asset A/c and Credit Bank A/c by ₹ 16,00,000.
Value of fixed assets after refund of Grant - ₹ 32,00,000.
(b) The grant is credited to Deferred Grant A/c:
Journal Entry- Debit Deferred Grant A/c by ₹ 8 lakhs and Debit P&L A/c by
₹ 8 lakhs and Credit Bank A/c by ₹ 16 lakhs
Value of fixed assets - ₹ 24,00,000.

Q.6. Ram Ltd. purchased machinery for ₹ 80 lakhs. (useful life 4 years and residual
value ₹ 8 lakhs). Government grant received is ₹ 32 lakhs. Show the Journal Entry
to be passed at the time of refund of grant and the value of the fixed assets in
the third year and the amount of depreciation for remaining two years, if the
grant is credited to Deferred Grant A/c. [MTP]
Ans. If the grant is credited to Deferred grant A/c
Journal Entry: DebitDeferred Grant A/c by ₹ 16,00,000, Debit P&L A/c by ₹
16,00,000 and Credit Bank A/c by Rs. 32,00,000.
Value of fixed asset after refund: ₹ 44,00,000.
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The amount of depreciation for remaining 2 years: ₹ 18,00,000 p.a.

Q.7. Viva Ltd. received a specific grant of ₹ 30 lakhs for acquiring the plant of ₹ 150
lakhs during 2014- 15 having useful life of 10 years. The grant received was
credited to deferred income in the balance sheet and was not deducted from the
cost of plant. During 2017-18, due to non-compliance of conditions laid down for
the grant, the company had to refund the whole grant to the Government. Balance
in the deferred income on that date was ₹ 21 lakhs and written down value of
plant was ₹ 105 lakhs. What should be the treatment of the refund of the grant
and the effect on cost of the fixed asset and the amount of depreciation to be
charged during the year 2017-18 in profit and loss account? [RTP May 2019]
Ans. The amount refundable in respect of grant – Recorded by reducing the
deferred income balance and excess amount shall be charged to P&L A/c.
There will be no effect on cost of asset and amount of depreciation will be
same as in the earlier years.

PREVIOUS YEAR QUESTIONS

Q.1. How Government grant relating to specific fixed asset is treated in the books as
per AS-12? [May-07](2M)
Ans. As per AS-12 ‘Accounting for Government Grants’, Government grant relating
to specific fixed asset is treated as follows:
(i) Government grants related to specific fixed assets should be presented in
the balance sheet by showing the grant as deduction from the gross value of
the fixed assets concerned in arriving at their book value.
(ii) When the grant related to a specific fixed asset equal to the whole, or
virtually the whole, of the cost of the asset, the asset should be shown in the
balance sheet at a nominal value.
(iii) Alternatively, government grants related to depreciable fixed assets may be
treated as deferred income which should be recognized in the profit and
loss statement on a systematic and rational basis over the useful life of the
asset, i.e. such grants should be allocated to income over the periods and in
the proportions in which depreciation on those assets is charged.
(a) Grant related to non-depreciable assets are credited to capital reserve
under this method, as there is usually no charge to income in respect
of such assets.
(b) But, when a grant related to a non-depreciable asset requires the
fulfillment of certain obligations, the grant is credited to income over
the same period over which the cost of certain obligations to charged
to income.
(c) Any diferred income is suitably disclosed in the balance sheet pending
its apportionment to profit and loss account.
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Q.2. How would you record a non-monetary grant received from the Government as
per As-12? [May-08](2M)
Ans. (i) If given at concessional rate – Usual to account for such assets at their
acquisition cost.
(ii) If given free of cost – Recorded at Nominal Value.

Q.3. Siva Ltd received a grant of ₹ 1,500 lakhs during the last accounting year (2009-
10) from Government for welfare activities to be carried on by the company for its
employees. The grant prescribed conditions for its utilization. However during the
year 2010-11, it was found that the conditions of the grant were not complied
with and the grant had to be refunded to the Government in full. Elucidate the
current accounting treatment with reference to the provisions of AS-12.
[May-11](4M)
Ans. The amount of refund of grant of ₹ 1,500 lakhs should be charged to the
profit and loss account in the year 2010-11 as an extraordinary item.

Q.4. Explain the treatment of Refund of Government Grants as per Accounting

Standard-12. [Nov-11](4M)
OR
Explain in brief the treatment of Refund of Government Grants in line with AS 12
in the following three situations:
(i) When Government Grant is related to revenue
(ii) When Government Grant is related to specific fixed assets
(iii) When Government Grant is in the nature of Promoter’s contribution.
[May 2014](4M)
Ans.
Cases Treatment
Grant is related Diferred credit account Amount of government grant
to revenue has a balance refundable will be adjusted
against unamortized deferred
credit balance remaining in
respect of grant.
No deferred credit Amount of government grant
account balance exists refundable will be charged to
Profit and Loss A/c.
Grant is related At the time of receipt of Increase the book value of the
to specific fixed the amount of asset.
assets government grant
reduced the cost of asset
At the time of receipt of Reduce the capital reserve or
the amount of unamortized balance of
government grant was deferred grant account as
credited to “Deferred appropriate.
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Grant Account”
Grant is in the nature of Promoter’s Reduced from capital reserve.
Contribution

Q.5. X Ltd. received a revenue grant of ₹ 10crores during 2006-07 from Government
for welfare activities to be carried on by company for its employees. The grant
prescribed the conditions for utilization.
However during the year 2008-09, it was found that the prescribed conditions
were not fulfilled and the grant should be refunded to the Government.
State how this matter will have to be dealt with in the financial statements of X
Ltd: for the year ended 2008-09. [Nov-09](2M)
Ans. The amount of refund of grant of ₹ 10 crores should be charged to the profit
and loss account in the year 2008-09 as an extraordinary item.

Q.6. Santosh Ltd. has received a grant of ₹ 8 crores from the Govt. for setting up a
factory in backward area. Out of this grant, the company distributed ₹ 2 crores as
dividend. Also, Santosh Ltd. received land free of cost from the State Government
but it has not recorded it at all on the books as no money has been spent. In the
light of AS 12, examine, whether the treatment of both the grant is correct.
[May-10](2M)
Ans. The treatment of both the grant is incorrect according to AS-12.

Q.7. ABC Ltd purchase a machinery for ₹ 25,00,000 which has estimated useful life of
10 years with salvage value of ₹ 5,00,000. On purchase of assets Central
Government pay a grant for ₹ 5,00,000. Pass the journal entries with narrations in
the books of the company for the first year, treating grant as deferred income.
[May-12](5M)
Ans. Journal Entries
1. Debit Machinery A/c and Credit Bank A/c by ₹ 25,00,000.
2. Debit Bank A/c and Credit Deferred Govt. Grant A/c by ₹ 5,00,000.
3. Debit Depreciation A/c and Credit Machinery A/c by ₹ 2,00,000.
4. Debit P&L A/c and Credit Depreciation Account by Rs. 2,00,000.
5. Debit Deferred Government Grant A/c and Credit P&L A/c by Rs. 50,000.

Q.8. M/s. A Ltd has set up its business in a designated backward area with an
investment of ₹ 200 Lakhs. The Company is eligible for 25% subsidy and has
received ₹ 50 Lakhs from the Government.
Explain the treatment of the capital subsidy received from the Government in the
Books of the company. [May-15](4M)
Ans. Rs. 50 lakhs shall be 54ealized5454 as Capital Reserve and to be written off
over a period of time as expenditure incurred.
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Q.9. M/s ABC Ltd. purchased fixed assets for ₹ 50,00,000. Government grant received
towards it is 20%. Residual value is ₹ 8,00,000 and useful life is 8 years. Assumed
depreciation is on the basis of Straight Line method. Asset is shown in the Balance
Sheet net of grant. After one year, Grant becomes refundable to the extent of ₹
7,00,000 due to non-compliance of certain conditions.
Pass Journal entries for 2nd year in the books of the company. [May-16](5M)
Ans. During 2nd Year:
1. Debit Fixed Assets A/c and Credit Government Grant A/c by Rs. 7,00,000.
2. Debit Government Grant A/c and Credit Bank A/c by Rs. 7,00,000.
3. Debit Depreciation A/c and Credit Fixed Assets A/c by Rs. 5,00,000.
4. Debit P&L A/c and Credit Depreciation A/c by Rs. 5,00,000.

Q.10. Ram Ltd. purchased machinery for ₹ 80 lakhs (useful life 4 years and residual
value ₹ 8 lakhs). Government grant received is ₹ 32 lakhs. Show the Journal Entry
to be passed at the time of refund of grant and the value of the fixed assets in the
third year and the amount of depreciation for remaining two years, if
(i) The grant is credited to Fixed Assets A/c.
(ii) The grant is credited to Deferred grant A/c [May-17](5M)
Ans. (i) If the grant is credited to Fixed Assets A/c
Journal Entry: Debit Government Grant A/c and Credit Bank A/c by Rs.
32,00,000.
Value of fixed asset after refund: ₹ 60,00,000.
The amount of depreciation for remaining 2 years: ₹ 26,00,000 p.a.
(ii) The grant is credited to Deferred grant A/c
Journal Entry: DebitDeferred Grant A/c by ₹ 16,00,000, Debit P&L A/c by ₹
16,00,000 and Credit Bank A/c by Rs. 32,00,000.
Value of fixed asset after refund: ₹ 44,00,000.
The amount of depreciation for remaining 2 years: ₹ 18,00,000 p.a.

Q.11. On 01.04.2014, XYZ Ltd. received government grant of ₹ 100 Lakhs for an
acquisition of new machinery costing ₹ 500 Lakhs. The grant was received and
credited to the cost of the asset. The life span of the machinery is 5 years. The
machinery is depreciated at 20% on WDV method. The company had to refund
the entries grant in 2nd April, 2017 due to non-fulfillment of certain conditions
which was imposed by the time of approval of grant.
How do you deal with the refund of grant to the government in the books of XYZ
Ltd., as per As 12? [May-18](5M)
Ans. Depreciation @20% on the revised book value amounting ₹ 304.80 lakhs is
to be provided prospectively over the residual useful life of the asset.

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Q.12. A specific Government grant of ₹ 15lakhs was received by UBS Ltd. for acquiring
the Hi-tech Dairy plant of ₹ 95 lakhs during the year 2014-15. Plant has useful life
of 10 years. The grant received was credited to deferred income in the balance
sheet. During 2017-18 due to non-compliance of conditions laid down for the
grant, the company had to refund the whole grant to the Government. Balance in
the deferred income on that date was ₹ 10.50 lakhs and written down value of
plant was ₹ 66.50 lakhs.
(i) What should be the treatment of the refund of the grant and the effect on
the cost of plant and the amount of depreciation to be charged during the
years 2017-18 in profit & loss account?
(ii) What should be the treatment of the refund, if grant was deducted from the
cost of the plant during 2014-15 assuming plant account showed the
balance of ₹ 56 lakhs as on 1.4.2017?
You are required to explain in the line with provisions of AS 12. [RTP]
Ans. (i) The amount refundable in respect of grant – Recorded by reducing the
deferred income balance and excess amount shall be charged to P&L A/c.
There will be no effect on cost of asset and amount of depreciation- ₹ 9.5
lakhs. (ii) The amount refundable in respect of grant – Recorded by
increasing the book value of asset. Book value of plant shall be increased by
₹ 15 lakhs and amount of depreciation - ₹ 10.14 lakhs presuming
depreciation is charged on SLM.

AS –13
ACCOUNTING FOR INVESTMENTS
QUESTIONS FOR PRACTICE

Q.1. An unquoted long term investment is carried in the books at a cost of ₹ 2 lakhs.
The published accounts of the unlisted company received in May, 2017 showed
that the company was incurring cash losses with declining market share and the
long term investment may not fetch more than ₹ 20,000. How will you deal with
this in preparing the financial statements of R Ltd. for the year ended 31st March,
2017?
Ans. Investment should be carried in the F.S. at cost and provision for diminution
should be made to reduce the carrying amount of long term investment to ₹
20,000.

Q.2. X Ltd. On 1-1-2017 had made an investment of ₹ 600 lakhs in the equity shares of
Y Ltd. of which 50% is made in the long term category and the rest as temporary
investment. The 56ealized5656 value of all such investment on 31-3-2017
became ₹ 200 lakhs as Y Ltd. lost a case of copyright. From the given market

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conditions, it is apparent that the reduction in the value is not temporary in

nature. How will you 57ealized57 the reduction in financial statements for the
year ended on 31-3-2017?
Ans. Carrying Value of temporary investment = ₹ 100 lakhs and reduction of ₹ 200
lakhs will be charged to P&L.
Carrying Value of Long term investment = ₹ 100 lakhs and reduction of ₹ 200 will
also be charged to P&L.

Q.3. ABC Ltd. wants to re-classify its investments in accordance with AS 13 (Revised).
Decide and state on the amount of transfer, based on the following information:
(a) A portion of current investments purchased for ₹ 20 lakhs, to be reclassified
as long term investment, as the company has decided to retain them. The
market value as on the date of Balance Sheet was ₹ 25 lakhs.
(b) Another portion of current investments purchased for ₹ 15 lakhs, to be
reclassified as long term investments. The market value of these
investments as on the date of balance sheet was ₹ 6.5 lakhs.
(c) Certain long term investments no longer considered for holding purposes,
to be reclassified as current investments. The original cost of these was ₹ 18
lakhs but had been written down to ₹ 12 lakhs to 57ealized57 other than
temporary decline as per AS 13 (Revised).
Ans. (a) The transfer to long term investments should be carried at cost i.e. ₹
20lakhs.
(b) The transfer to long term investments should be carried in the books
at the market value i.e. ₹6.5 lakhs.
(c) Re-classified current investment should be carried at ₹12 lakhs.

Q.4. Paridhi Electronics Ltd. has current investment (X Ltd.’s shares) purchased for ₹
5 lakhs, which the company wants to reclassify as long term investment on
31.3.2018. The market value of these investments as on date of Balance Sheet
was ₹ 2.5 lakhs. How will you deal with this as on 31.3.18 with reference to AS-
13? [RTP]
Ans. The transfer to long term investment should be made at cost of ₹ 2.50
lakhs and the loss of ₹ 2.50 lakhs should be charged to P&L.

PREVIOUS YEAR QUESTIONS

Q.1. Mention two categories of investment defined by AS 13 and also State their
valuation principles. [Nov-08](2M)
Ans. (a) Current investments (b) Long term investments

Q.2. M/s Innovative Garments Manufacturing Company Ltd. invested in the shares of
another company on 1st October, 2011 at a cost of ₹ 2,50,000. It also earlier
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purchase Gold of ₹ 4,00,000 and Silver of ₹ 2,00,000 on 1st March, 2009.

Market value as on 31st march, 2012 of above investments are as follows:
₹
Shares 2,25,000
Gold 6,00,000
Silver 3,50,000
How above investments will be shown in the books of accounts of M/s Innovative
Garments Manufacturing Company Limited for the year ending 31st March, 2012
as per the provisions of Accounting Standard 13 “Accounting for Investments”?
[May-12](5M)
Ans. (a) Investment in Shares –
Intention to hold for short-term period = ₹ 2,25,000,
Intention to hold for long-term period = ₹ 2,50,000
Investment in Gold and Silver shall continue to be shown at cost, though their
realizable values have increased.

Q.3. Blue-chip Equity investments Ltd., wants to re-classify its investments in

according with AS-13. You are requested to show the amount at which the
following investment will be reclassified. Also state reasons justifying such
amount.
(i) Long term investments in Company A, costing ₹ 8.5 lakhs are to be re-
classified as current. The company had reduced the value of these
investments to ₹ 6.5 lakhs to recognize a permanent decline in value. The
fair value on date of transfer is ₹ 6.8 lakhs.
(ii) Long term investment in Company B, costing ₹ 7 lakhs are to be re-classified
as current. The fair value on date of transfer is ₹ 8 lakhs and book value is ₹
7 lakhs.
(iii) Current investment in Company C, costing ₹ 10 lakhs are to be re-classified
as long term as the company wants to retain them. The market value on
date of transfer is ₹ 12 lakhs.
(iv) Current investment in Company D, costing ₹ 15 lakhs are to be re-classified
as long term. The market value on date of transfer is ₹ 14 lakhs.
[Nov-14](5M)
Ans. (i) ₹ 6.5 lakhs (ii) ₹ 7 lakhs (iii) ₹ 10 lakhs (iv) ₹ 14 lakhs

Q.4. M/s Active Builder Ltd. invested in the shares of another company on 31st
October, 2015 at a cost ₹ 4,50,000. It also earlier purchased Gold of ₹ 5,00,000 and
silver of ₹ 2,25,000 on 31st March, 2013. Market values as on 31st March, 2016 of
the above investments are as follows:
Shares ₹ 3,75,000; Gold ₹ 7,50,000 and Silver ₹ 4,35,000.

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How will the above investments be shown in the books of account of M/s Active
Builders Ltd. for the year ending 31st march, 2016 as per the provision of As-13?
[May-16](5M)
Ans. M/s Active Builders should disclose the investments as below as on
31/03/2016:
Gold: 5,00,000; Silver: ₹ 2,25,000; Shares: ₹ 3,75,000.

Q.5. How you will deal with following in the financial statement of the Paridhi
Electronics Ltd. as on 31.3.16 with reference to AS-13?
(i) Paridhi Electronics Ltd. invested in the shares of another unlisted company
on 1st May, 2012 at a cost of ₹ 3,00,000 with the intention of holding more
than a year. The published accounts of unlisted company received in Jan
2016 reveals that the company has incurred cash losses with decline
market share and investment of Paridhi Electronics Ltd. may not fetch more
than ₹ 45,000.
(ii) Also Paridhi Electronics Ltd. has current investment (X Ltd.’s shares)
Purchased for ₹ 5 lakhs, which the company wants to reclassify as long term
investment. The market value of these investments as on date of Balance
Sheet was ₹ 2.5 lakhs. [Nov-16](5M)
Ans. (i) Investment should be carried in the F.S. at cost and provision for
diminution should be made to reduce the carrying amount of long
term investment to ₹ 45,000.
(ii) Reclassification will be made at ₹ 2.5 lakhs.

AS 14
ACCOUNTING FOR AMALGAMATION
Q.1. Give the journal entry to be passed for accounting unrealized profit on stock,
under amalgamation. (june 2009)
Ans. For amalgamation in the nature of Merger
General Reserve / Profit & Loss a/c Dr.
To Stock a/c (Stock Reserve a/c)
(Being amount adjusted for unrealized profit o stock)
For amalgamation in the nature of purchase
Goodwill / Capital Reserve a/c Dr.
To Stock a/c (Stock Reserve a/c)
(Being adjustment for unrealized profit on stock)

Q.2. X Co. Ltd having share capital of Rs. 50 lakh divided into equity shares of Rs. 10
each was taken over by Y Co. Ltd. X Co. Ltd. has General Reserve of Rs. 10,00,000
and Profit and Loss a/c Cr. Rs. 5,00,000. Y Co. Ltd. issued 11 equity shares of Rs.
10 each shares of X Co. Ltd,
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How the journal entry would be passed in the books of Y Co. For the shares issued
the ‘Pooling of interest method’ of amalgamation. (IPCC – Nov. 2009)
Ans.
Journal Entries In the books of y Co. Ltd.
Rs. Rs.
1. Business Purchase a/c Dr. (50 lakh ×11) 55,00,000
To Liquidator of X Co. Ltd 55,00,000
(Being business of X Co. Ltd purchased)

2. Assets a/c (Note 1 ) Dr. 65,00,000

To Business purchase a/c 55,00,000
To General Reserve a/c (10,000 – 5,00,000) (Note 2) 5,00,000
To P & L a/c 5,00,000
(Being assets and R & S taken over
3. Liquidator of X co. Ltd a/c Dr. 55,00,000
To Equity Share Capital a/c 55,00,000
(Being purchase consideration discharged through
equity shares of Y Co. Ltd.)

Note 1: Assets will be equal to Rs. 50,00,000 + Rs. 10,00,000 + Rs. 5,00,000
= Rs. 65,00,000
Note 2: Purchase Consideration Rs. 55,00,000
Less Share Capital of X Co. Ltd Rs. 50,00 ,000
To be adjusted from General Reserve Rs. 5,00,000

Q.3. Moon Limited is absorbed by Sun Limited; the consideration, being the takeover
of liabilities, the payment of cost of absorption not exceeding 10,000 (actual cost
9000); the payment of 9% Debentures of 50,000 at a premium of 20% through
8% debentures issued at a premium of 25% of face value; the payment of 18 per
share in cash; allotment of two 11% preference shares of 10/- each and one
equity share of 10/- each at a premium of 30% fully paid for every three shares in
Moon Limited respectively.
The number of shares of the vendor company is 1,50,000 of 10/- each fully paid.
Calculate purchase consideration as per AS-14. (EXAM DEC-21)
Ans. As per AS 14 "Accounting for Amalgamations", the term consideration has been
defined as the aggregate of the shares and other securities issued and the
payment made in the form of cash or other assets by the transferee company to
the shareholders of the transferor company.
Purchase consideration will be :
Rs. Form
Equity shareholders:
1,50,000 x 18 27,00,000 cash
1,50,000 × 2/3 × 10 10,00,000 11% Pref. shares
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1,50,000 × 1/3 x 13 6,50,000 Equity shares

43,50,000
Note:
1. According to AS 14, 'consideration' excludes the any amount payable to
debenture- holders. The liability in respect of debentures of vendor
company will be taken by transferee company, which will then be settled by
issuing new debentures.
2. Liquidation expenses will also not form part of purchase consideration.

Q.4. Star Limited agreed to take over Moon Limited on 1st April, 2022. The terms and
conditions of takeover were as follows:
(i) Star Limited issued 70,000 Equity shares of 100 each at a premium of 10
per share to the equity shareholders of Moon Limited.
(ii) Cash payment of ₹1,25,000 was made to the equity shareholders of Moon
Limited.
(iii) 25,000 fully paid Preference shares of 70 each issued at par to discharge the
preference shareholders of Moon Limited.
You are required:
(i) to give the meaning of "consideration for the amalgamation' as per AS-14,
and
(ii) Calculate the amount of purchase consideration. (EXAM NOV 22)
Ans. Consideration for the amalgamation means the aggregate of the shares and other
securities issued and the payment made in the form of cash or other assets by the
transferee company to the shareholders of the transferor company.
Computation of Purchase consideration Rs. Form
For Preference Shareholders of Moon 17,50,000 25,000
Ltd. (25,000 × 70) Preference
For equity shareholders of Moon Ltd. 77,00,000 70,000
(70,000 ** 110) Equity shares of Star Ltd.
1,25,000 Cash
Total Purchase consideration 95,75,000

AS –16
BORROWING COSTS
QUESTIONS FOR PRACTICE

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Q.1. X Ltd. began construction of a new building on 1st January, 2016. It obtained ₹ 1
lakh special loan to finance the construction of the building on 1st January, 2016 at
an interest rate of 10%. The company’s other outstanding two non-specific loans
were:
Amount Rate of Interest
₹ 5,00,000 11%
₹ 9,00,000 13%
The expenditures that were made on the building project were as follows:
₹
January 2016 2,00,000
April 2016 2,50,000
July 2016 4,50,000
December 2016 1,20,000
Building was completed by 31st December, 2016. Following the principles
prescribed in AS 16 ‘Borrowing Cost,’ calculate the amount of interest to be
62ealized626262 and pass one Journal Entry for 62ealized62626262 the cost and
borrowing cost in respect of the building.
Ans. average accumulated exp. = 6,22,500.
Average interest rate other than for specific borrowings = 12.285 %
Avg. Accumulated exp. = 74,189.
Total exp. To be 62ealized626262 for building = 10,94,189.

Q.2. PRM Ltd. obtained a loan from a bank for ₹ 50 lakhs on 30-04-2016. It was
62ealized as follows:
Particulars Amount (₹ in lakhs)
Construction of a shed 50
Purchase of a machinery 40
Working Capital 20
Advance for purchase of 10
truck
Construction of shed was completed in March 2017. The machinery was installed
on the date of acquisition. Delivery of truck was not received. Total interest
charged by the bank for the year ending 31-03-2017 was ₹ 18 lakhs. Show the
treatment of interest.
Ans. Borrowing cost to be capitalized = ₹ 7.5 lakhs, Interest to be Debited P&L
A/C = 10.5 lakhs

Q.3. The company has obtained Institutional Term Loan of ₹ 580 lakhs for
62ealized62626262n and renovation of its Plant & Machinery. Plant & Machinery
acquired under the 62ealized62626262n scheme and installation completed on
31st March, 2017 amounted to ₹ 406 lakhs, ₹ 58 lakhs has been advanced to
suppliers for additional assets and the balance loan of ₹ 116 lakhs has been

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63ealized for working capital purpose. The Accountant is on a dilemma as to how

to account for the total interest of ₹ 52.20 lakhs incurred during 2016-2017 on
the entire Institutional Term Loan of ₹ 580lakhs.
Ans. Assumption – It is assumed that the modernization and renovation of P&M will
take substantial period of time. The nature of additional assets has also been
considered as qualifying asset.
Interest to be capitalized: ₹ 41.76 lakhs
Interest to be charged to profit and loss account: ₹ 10.44 lakhs

Q.4. Take Ltd. has borrowed ₹ 30 lakhs from State Bank of India during the financial
year 2016 – 2017. The borrowings are used to invest in shares of Give Ltd., a
subsidiary company of Take Ltd., which is implementing a new project, estimated
to cost ₹ 50 lakhs. As on 31st March, 2017, since the said project was not complete,
the directors of Take Ltd. resolved to capitalize the interest accruing on
borrowings amounting to ₹ 4 lakhs and add it to the cost of investments.
Comment?
Ans. Investment in Shares cannot be considered as qualifying asset, therefore,
the directors of Take Ltd. cannot 63ealized6363the borrowing cost as part
of cost of investment.

Q.5. Omega Limited has borrowed a sum of US $ 10,00,000 at the beginning of

Financial Year 2016 - 17 for its residential project at 4 %. The interest is
payable at the end of the Financial Year. At the time of availment exchange rate
was ₹ 56 per US $ and the rate as on 31stMarch, 2017 was ₹ 62 per US $. If Omega
Limited borrowed the loan in India in Indian Rupee equivalent, the pricing of
loan would have been 10.50%.
You are required to compute Borrowing Cost and exchange difference for the
year ending 31stMarch, 2017 as per applicable Accounting Standards.
[MTP March, 2019]
Ans. Borrowing Cost = Rs. 58.80 lakhs and Exchange difference = Rs. 26 lakhs

Q.6. Zen Bridge Construction Limited obtained a loan of ₹ 64 crores to be utilized as

under:
(i) Construction of Hill link road in Kedarnath ₹ 50 crores
(ii) Purchase of Equipment and Machineries ₹ 6 crores
(iii) Working Capital ₹ 4 crores
(iv) Purchase of Vehicles ₹ 1crore
(v) Advances for tools/cranes etc. ₹ 1crore
(vi) Purchase of Technical Know how ₹ 2 crores
(vii) Total Interest charged by the Bank for ₹ 1.6 crores

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the year ending 31stMarch, 2018

Show the treatment of Interest according to Accounting Standard by Zen Bridge
Construction Limited. [RTP]
Ans. Interest to be capitalized - ₹ 1.25 cr
Interest to be charged to Profit & Loss A/c - ₹ 0.35 crores.

PREVIOUS YEAR QUESTIONS

Q.1. Write short note on ‘Suspension of Capitalization’ in context of Accounting
Standard 16. [May-16](4M)
Ans. As per AS-16 Borrowing Cost is suspension of capitalization are as follows:
(a) When all activities necessary to prepare the qualifying asset for its intended
use or sale are in progress then capitalization of borrowing costs should
continue during the period in which active development is in progress.
(b) When all the activities necessary to prepare the qualifying asset for its
intended use or sale are interrupted then capitalization of borrowing costs
should be suspended during extended periods in which active development
is interrupted.
(c) When all the activities necessary to prepare the qualifying asset for its
intended use or sale are complete then capitalization of borrowing costs
should cease completion of active development.

Q.2. Enumerate two points which financial statement should disclose in respect of
“Borrowing Costs” as per AS-16. [May-09](2M)
Ans. (a) The accounting policy adopted for borrowing costs and (b) The amount
of borrowing costs capitalized during the period.

Q.3. Briefly indicate the items which are included in the expressions “Borrowing Cost”
as per AS-16. [Nov-09](2M)
Ans. (1) Interest and commitment charges on bank borrowings and other short
term and long term borrowings, (2) Amortisation of discounts or premiums
relating to borrowings. (3) Amortisation of ancillary costs incurred in
connection with the arrangement of borrowings.

Q.4. An Industry borrowed ₹ 40,00,000 for purchase of machinery on 1.6.2007.

Interest on loan is 9% per annum. The machinery was put to use from 1.1.2008.
Pass journal entry for the year ended 31.3.2008 to record the borrowing cost of
loan as per AS-16. [May-08](2M)
Ans. Journal Entry:
1. Debit Machinery A/c and Credit Loan A/c by ₹ 2,10,000.
2. Debit Interest on Loan A/c and Credit Loan A/c by ₹ 90,000.
3. Debit Profit & Loss A/c and Credit Interest on Loan A/c by ₹ 90,000.
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Q.5. Axe Limited began construction of a new plant on 1st April, 2008 and obtained a
special loan of ₹ 4,00,000 to finance the construction of the plant. The rate of
interest on loan was 10% The expenditures that were made on the project of
plant were as follows: [Nov-09](5M)
₹
1 April, 2008
st 5,00,000
1 August, 2008
st 12,00,000
1st January, 2009 2,00,000
The company’s other outstanding non- specific loan was ₹ 23,00,000 at an interest
rate of 12%.
The construction of the plant was completed on 31st March, 2009.
You are required to-
(i) Calculate the amount of interest to be capitalized as per the provisions of
AS-16 “Borrowing Cost”.
(ii) Pass a journal entry for capitalizing the cost and borrowing cost in respect
of the plants.
Ans. (i) ₹ 20,54,000 (ii) Debit Plant A/c and Credit Bank A/c by ₹ 20,54,000.

Q.6. Rohini Ltd has obtained loan from an Institution for ₹ 500 lakhs for
modernization and renovating its Plant and Machinery. The installation of Plant
and machinery was completed on 31.3.2009 amounting to ₹ 320 lakhs and ₹ 50
lakhs advanced to suppliers of addition assets and the balance of ₹ 130 lakhs has
been utilized for working capital requirements. Total interest paid for the above
loan amounted to ₹ 65 lakhs during 2008-09. You are required to state how the
interest on institution loan is to be accounted for in the year 2008-09.
[May-10](2M)
Ans. Interest to be capitalized - ₹ 48.10 lakhs
Interest to be charged to Profit and Loss A/c - ₹ 16.90 lakhs

Q.7. On 1st April 2009 Amazing Construction Ltd. obtained a loan of ₹ 32crores to be
utilized as under:
(i) Construction of sea link across two cities: : ₹ 25crore
(Work was held up totally for a month during the year due to high water
levels)
(ii) Purchase of equipment and machineries : ₹ 3crores
(iii) Working capital : ₹ 2crores
(iv) Purchase of vehicles : ₹ 50,00,000
(v) Advance for tools/cranes etc. : ₹ 50,00,000
(vi) Purchase of technical know-how : ₹ 1crore
(vii) Total interest charged by the bank for the year ending 31st March 2010 : ₹
80,00,000
Show the treatment of interest by Amazing Construction Ltd. [Nov-10](4M)
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Ans. Interest to be capitalized - ₹ 62,50,000

Interest to be charged to Profit and Loss A/c - ₹ 17,50,000

Q.8. On 25th April, 2010 Neel Ltd obtained a loan from the bank for ₹ 70 lakhs to be
utilized as under:
₹ in lakhs
Construction of factory shed 28
Purchase of Machinery 21
Working Capital 14
Advance for purchase of truck 7
In March 2011, construction of shed was completed and machinery installed.
Delivery of truck was not received. Total interest charge by the bank for the year
ending 31st March, 2011 was ₹ 12 lakhs. Show the treatment of interest under
Accounting Standard-16. [Nov-11](5M)
Ans. Interest to be capitalized - ₹ 4, 80,000
Interest to be charged to Profit and Loss A/c - ₹ 7, 20,000

Q.9. Raj & Co. has taken a loan of US $ 20,000 at the beginning of the financial year for
a specific project at an interest rate of 6% per annum, payable annually. On the
day of taking loan, the exchange rate between currencies was ₹ 48 per 1 US $. The
exchange rate at the closing of the financial year was ₹ 50 per 1 US $. The
corresponding amount could have been borrowed by the company in Indian
Rupee at an interest rate of 11% per annum. Determine the treatment of
borrowing cost in the books of accounts. [Nov-13](4M)
Ans. Total borrowing cost = ₹ 1,00,000.

Q.10. Suhana Ltd. issued 12% secured debentures of ₹100 lakhs on 01.05.2013, to be
utilized as under:
Amount(₹ in lakhs)
Construction of factory building 40
Purchase of Machinery 35
Working Capital 25
In March 2014, Construction of the factory building was completed and
machinery was installed and ready for its intended use. Total interest on
debentures for the financial year ended 31.03.2014 was ₹ 11, 00,000.
During the year 2013-14, the company had invested idle funds out of money
raised from debentures in bank’s fixed deposit and had earned an interest of ₹
2,00,000.
Show the treatment of interest under Accounting Standard 16 and also explain
nature of assets. [May-14](5M)
Ans. Interest to be capitalized - ₹ 3, 60,000
Interest to be charged to Profit and Loss A/c - ₹ 5, 40,000

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Q.11. M/s. Ayush Ltd. began construction of new building on 1st January, 2014. It
obtained ₹ 3 lakh special loan to finance the construction of the building on 1 st
January, 2014 at an interest rate 12% p.a. The Company’s other outstanding two
non- specific loans were:
Amount Rate of interest
₹ 6,00,000 11% p.a.
₹ 11,00,000 13% p.a.
The expenditures that were made on the building project were as follows:
Amount ₹
January, 2014 3,00,000
April, 2014 3,50,000
July, 2014 5,50,000
December, 2014 1,50,000
Building was completed on 31st December, 2014. Following the principles
prescribed in As 16 ‘Borrowing Cost’, calculate the amount of interest to be
capitalized and pass one Journal Entry for capitalizing the cost and borrowing in
respect of the building. [May-15](5M)
Ans. (i) Average Accumulated Expenses: ₹ 8, 50,000 (ii) Average Interest Rate:
12.29% (iii) Amount to be capitalized: ₹ 14, 53,595 (iv) Journal Entry: Debit
Building A/c and Credit Bank A/c by ₹ 14,53,595.

Q.12. M/s. Zen Bridge Construction Limited obtained a loan of ₹ 64 crores to be utilized
as under:
(i) Construction of Hill Link road in Kedarnath: :₹ 50crores
(Work was held up totally for 1 month during the year due to heavy rain
which are common in the geographic region involved)
(ii) Purchase of equipment and Machineries :₹ 6crores
(iii) Working Capital :₹ 4crores
(iv) Purchase of vehicles :₹ 1crores
(v) Advances for tools/cranes etc. :₹ 1crores
(vi) Purchase of Technical Know–how :₹ 2crores
(vii) Total Interest charged by the Bank for the year ending 31st March,2016 :₹
1.6crores
Show the treatment of Interest according to Accounting Standard by M/s. Zen
Bridge Construction Limited. [Nov-16](5M)
Ans. Interest to be capitalized - ₹ 1.25 cr
Interest to be charged to Profit & Loss A/c - ₹ 0.35 crores.

Q.13. A company incorporated in June 2017, has setup a factory within a period of 8
months with borrowed funds. The construction period of the assets had reduced
drastically due to usage of technical innovations by the company. Whether
interest on borrowings for the period prior to the date of setting up the factory

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should be capitalized although it had taken less than 12 months for the asset to
get ready for use. You are required to comment on the necessary treatment with
reference to AS 16. [RTP]
Ans. As per AS-16 ‘Borrowing Cost’: a qualifying asset is an asset that necessarily
takes a substantial period of time to get ready for its intended use or sale.
Explanation: What constitutes a substantial period of time primarily depends on
the facts and circumstances of each case. Ordinarily, 12 months = Substantial
period of time unless a shorter period can be justified on the basis of facts and
circumstances of the each case.
Under present circumstances where construction period has reduced drastically
due to technical innovation, the 12 months period should at best be looked at as a
benchmark and not as a conclusive yardstick.
Hence, if the factory is constructed in 8 months then it shall be considered as a
qualifying asset. The interest on borrowings for the same shall be capitalized
although it has taken less than 12 months for the asset to get ready to use.

AS 17
SEGMENT REPORTING
Q.1. Prepare a segmental report for publication in Diversifiers Ltd. from the following
details of the com. (CA Final – RTP)
Rs. (‘000)
Forging Shop Division
Sales to Bright Bar Division 4,575
Other Domestic Sales 90
Export Sales 6,135
10,800
Bright Bar Division
Sales to Fitting Division 45
Export Sales to Rwanda 300
345
Fitting Division
Export Sales to Maldives 270

Particular Head Forging Bright Bar Fitting

Office Shop Division Division
Rs. (‘000) Division Rs. (‘000) Rs. (‘000)
Rs. (‘000)
Pre-tax operating 240 (12)
result 30
Head office cost 72 36
reallocated 36
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Interest costs 6 2
8
Fixed assets 180
75 300 60
Net current 135
assets 72 180 60
Long-term 30 180
liabilities 57 15

Ans.
Diversifiers Ltd. Segmental Report
Particulars Divisions Inter
Segment Consolidated
Eliminations Total
Forging Bright Fitting
Shop Bar
SEGMENT REVENUE
SALES: -

DOMESTIC 90 - - - 90
EXPORT 6,135 300 270 = 6,705
EXTERNAL SALES 6,225 300 270 - 6,795
INTER-SEGMENT 4,575 45 - 4,620 -
SALES

10,800 345 270 4,620 6,795

TOTAL REVENUE

Particulars Divisions Inter Segment

Eliminations Consolidated
Total
Forging Bright Fitting
Shop Bar
SEGMENT REUSLT 240 30 (12) 258
(GIVEN)
HEAD OFFICE (144)
EXPENSES 114
OPERATING PROFIT (16)
INTEREST EXPENSE 98
PROFIT BEFORE TAX
INFORMATION IN
RELATION TO 300 60 180 - 540
ASSETS
AND LIABILITIES:
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FIXED ASSETS
NET CURRENT 180 60 135 375
ASSETS
SEGMENT ASSETS 480 120 315 - 915
UNALLOCATED - 147
CORPORATE ASSETS
(75+72)
TOTAL ASSETS 1,062
SEGMENT 30 15 180 - 225
LIABILITIES
UNALLOCATED 57
CORPORATE
LIABILITIES
TOTAL LIABILITIES 282

Sales Revenue by Geographical Market

Home Export Sales Export To Export To (Rs ‘000)
sales (By Forging Rwanda Maldives Consolidated
Shop Division) Total
EXTERNAL 90 6,135 300 270 6,795
SALES

Q.2. Jaya Krishna Ltd. has ten segments. The share of revenue, Profit/Loss and Assets
of each of these ten segments is given below. The company has identified
segments H, I and J for reporting. Comment on the adequacy of reporting,
assuming there are no Inter-Segment revenues.
Segments Revenue Profit/Loss Assets
A,B,C,D,E,F,G, 5% each = 35% 5 each = 35% 8% each = 56%
H,I 20 each = 40% 25% each = 50% 20% each = 40%
J 25% 15% 4%
Ans. As per 75% Revenue Principal of As 17, if total external revenue attributable to
reportable segments constitute less 75% of the Total Enterprise Revenue,
additional segments should be identified as Reportable segments, even if they do
not meet the 10% thresholds, until at least 75% of total enterprise revenue is
included in reportable segments.
In the given case, the total external Revenue attributable to Reportable segments
H, I and J = 20% + 20% + 25% = 65%. Since this is less than 75%, at least two
more segments out of the remaining A,B,C, D, E, F, and G need to be identified as
Reporting Segments.

Q.3. XYZ Ltd. has 5 business segments. Profit/Loss of each of the segments for the year
ended 31st March, 2022 has been provided below. You are required to identify

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from the following whether reportable segments or not reportable segments, on

the basis of "profitability test" as per AS-17. 9 (EXAM MAY 22)
segment Profit (loss) Rs. In lakhs
A 225
B 25
C (175)
D (20)
E (105)
Ans.
As per AS 17 'Segment Reporting', a business segment or geographical segment
should be identified as a reportable segment if:
Its segment results whether profit or loss is 10% or more of:
 The combined result of all segments in profit; i.e. Rs.250 Lakhs or
 The combined result of all segments in loss; i.e. Rs.300 Lakhs
Whichever is greater in absolute amount i.e. Rs.300 Lakhs.
Operating Segment Absolute amount of Profit or Reportable Segment
Loss (In lakhs) Yes or No
A 225 YES
B 25 NO
C 175 YES
D 20 NO
E 105 YES

On the basis of the profitability test (result criteria), segments A, C and E are
reportable segments (since their results in absolute amount is 10% or more of
300 lakhs i.e. 30 lakhs).
Q.4. The Accountant of X. Ltd. provides the following data regarding its five segments:
Particulars A B C D E Total (in Crore)
Segment Assets 50 20 15 10 5 100
Segment Results 85 10 10 15 5 75
Segment Revenue 250 50 40 60 30 430
The accountant is of the opinion that segment 'A' alone should be reported.
Is he justified in his view? Examine his opinion in the light of provisions of AS-17
Segment Reporting. (EXAM MAY 23)
Ans.

AS 18
RELATED PARTY DISCLOSURES
Q.1. In the consolidated Financial Statements of a Group, would an Entity that has
significant influence over a Subsidiary be considered a Related Party?

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Ans. As 18 does not require disclosure of transaction between Members of a Group in

their Consolidated Financial Statements (CFs), since the CFS provides
information on the group as a whole.

Q.2. A firm of father and son is receiving Rs. 2 lakh towards job work done for XYZ Ltd.
during the year ended 31-03-2014. The total job work changes paid by XYZ Ltd
during the year are over Rs. 50 lakh. The father is a Managing director of XYZ Ltd.
having substantial holding. The MD total the auditor that since he is not involved
in the activities of the firm and since the amount paid to it is insignificant; there is
not need to disclose the transaction. He further contended that such a payment
made in the last year was not disclosed . IS MD correct in his approach?
Ans. As per AS 18 – point (e) – An Entity will be related party to the reporting entity
when individuals discussed in point (C) or (d) are able to exercise significant
influence on it. As per point (d) – Key management personal and their relatives
are related parties and they generally exercise significant influence.
In the given case, the father is a Managing director (Key management person) &
holding substantial interest in the entity, hence he will be related party under
points (C) & (d). The same person is a partner in the firm – so obviously he can
influence the firm as well. Through the father, the firm & XYZ became related
parties as per the AS. All related party transaction should be disclosed
irrespective of the materiality and arm’s length price.

Q.3. Bhanu Ltd is a 100% subsidiary of Agni Ltd. which of the following are
considered as Related Party Transactions for purpose of Consolidated Financial
Statement?
(a) Salary paid to Employees of Bhanu Ltd.
(b) Loans given to Employees of Agni Ltd.
(c) Inter – company sales between Agni Ltd and Bhanu Ltd.
(d) Loan given b Bhanu Ltd to Managing Director of Agni Ltd.
(e) Transfer of asset by Agni Ltd to Bhanu Ltd.
Ans.
Situation Whether Related Party Transaction or not,
for CFS
(a) Salary paid to Employee of  Salaries and Loans given to
Bhanu Ltd. employees are in the course of
(b) Loans given to normal dealing of business and and
Employees of Agni Ltd. employees are not considred as
Related Party for an Enity.
(c) Inter-company sales between  Holding and Subsidiary Compnaies
Agni Ltd and Bhanu Ltd. are Related Parties.
 In the Consolidated Financial
statement, holding and subsidiary
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companies are treated as ONE entity.

Hence, No disclosure is required for
Inter-Consolidated Financial
Statements.
(d) Loan given by Bhanu  If the MD can exercise significant
Ltd to Managing Director of influence or control (Generally
Agni Ltd. through voting power) on subsidiary
(e) Transfer of asset by Agni Ltd  Since, holding and subsidiary
to Bhanu Ltd. companies are related parties.
Transfer of asset by Holding
Company Agni Ltd to its Subsidiary
Bhanu Ltd will be considered as
Related Party Transaction in
standalone financial statements but
not in consolidated Financial
statements.

Q.4. A Ltd owns 30% of the Equity Capital of B Ltd., B Ltd in turn owns 35% of the
Equity Capital of C Ltd, and 40% of Equity Capital in D Ltd. Answer the following
question –
(1) Is B Ltd a Related Party to A Ltd? (2) Is C Ltd a Related Party to A Ltd? (3)
Are C Ltd and D Ltd Related Parties?
Ans.
1. As per AS 18, Associated and joint Ventures of the Reporting Entity are Related
Parties. Since A Ltd holds more than 20% of the voting party power in B Ltd, by
virtue of this, it has substantial interest and significant influence in B Ltd. So, B
Ltd is an Associate, and hence it is a Related Party to A Ltd.
2. An Associate of an Associate is not a Related party because A Ltd. cannot
exercise significant influence on C Ltd. This kind of relationship is possible
only in the case of a Holding company, a Subsidiary of a Subsidiary (Sub –
Subsidiary) also becomes a Related Party.
3. C Ltd and D Ltd are Co-Associates. No one exercise neither control nor
significant influence over the other – hence there is no relationship between
these two as per AS 18, it is possible in over the other – hence there is no
relationship between these two as per AS 18. It is possible in in the case of Co-
Subsidiaries become Related Parties because of common control.

Q.5. Khushi Ltd. enters into an agreement with Mr. Happy for running a business for a
fixed amount payable to the later every year. The contract States the day to day
management of the business will be handled by Mr. Happy, while all the financial
and operating policy decision are taken by the Board of directors of the company.
Mr. Happy does not own any voting power in Khsuhi Ltd. Is this related party
transaction as per AS 18? (CA Inter – July 2021)
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Ans.
As per AS 18, key management personnel are the one who has authority and
responsibility in planning, directing and controlling the activities of the entity.
In the given case, Mr. Happy is responsible only for running the business i.e. day
to day management. But Board of directors are responsible to take all operating
and financial policy decisions. Hence, we cannot conclude that Mr. Happy as key
managerial personnel. Hence the amount of salary paid is not related party
transaction.
Q.6. Shri Bhanu a relative of key management personnel received remuneration of
3,50,000 for his services in the company for the period from 1st April, 2020 to
30th June, 2020. On 1st July, 2020, he left the service. You are required to suggest
how the above transactions will be treated as at the closing date i.e. on 31st
March, 2021 for the purposes of AS 18- Related Party Disclosures.
(EXAM JUL-21)
Ans. According to AS 18 on 'Related Party Disclosures', parties are considered to be
related if at any time during the reporting period one party has the ability to
control the other party or exercise significant influence over the other party in
making financial and/or operating decisions.
Hence, Shri Bhanu, a relative of key management personnel should be identified
as related party for disclosure in the financial statements for the year ended
31.3.2021 as he received remuneration for his services in the company for the
period from 1st April,2020 to 30th June,2020.

Q.7. Answer the following with respect to AS-18: (EXAM MAY 23)
(i) ABC Ltd. sold goods of 2,00,000 to its associate company for the 1st quarter
ending 30.06.2022. After that the related party relationship ceased to exist.
However, goods were supplied to any other ordinary customer. Decide
whether transactions of the entire year have to be disclosed as related party
transaction.
(ii) If the majority of directors of Arjun Ltd. constitute the majority of the Board
of another Company Bheem Ltd. in their individual capacity as professionals
(and not by virtue of their being Directors in Arjun Ltd.). Are both the
companies related?
(iii) Asha Ltd. sells all the manufactured furniture of 1,00,00,000 to Sasha Ltd. as
per agreement. Sasha Ltd. is the only customer to Asha Ltd. In the financial
statements, Asha Ltd. wants to present Sasha company as a related party.
Comment on the disclosure requirement.
Ans.

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AS -19
LEASES
Q.1. X Ltd. Sold JCB Machine having WDV of Rs. 50 Lakh to Y Ltd for Rs. 60 Lakh and
the same JCB was leased back by Y Ltd to X Ltd. The lease is operating lease.
Comment according to relevant Accounting Standard if
(i) Sale price of Rs. 60 Lakh is equal to fair value
(ii) Fair value is Rs. 50 Lakh and sale price is Rs. 45.
(iii) Fair value is Rs. 55 Lakh and sale price is Rs. 62 lakh
(iv) Fair value is Rs. 45 Lakh and sale price is Rs. 48 Lakh
(CA Inter May 2018 & Jan 2021)
Ans. According to As 19, the following will be the treatment in the given situations:
(i) When the sale price of Rs. 60 lakh is equal to fair value, X Ltd. should
immediately recognize the profit of Rs. 10 lakh (i.e. 60 -50) in its books.
(ii) When the fair value of leased JCB machine is Rs. 50 lakh & sale price is Rs.
45 lakh, then loss of Rs. lakh (50-45) to be immediately recognized by X Ltd.
I its books provided the loss is not compensated by future lease payments.
(iii) When fair value is Rs. 55 lakh & sale price is 62 lakh, profit of 5 lakh (55-50)
is to be immediately recognized by X Ltd. in its books and balance profit of
Rs. lakh (48-45) should be amortized/ deferred over the lease period.
(iv) When fair value is Rs. 45 lakh & sales price is Rs. 48 lakh, then the loss of Rs.
5 (55-45) to be immediately recognized by X Ltd. in its books and profit of
Rs. 3 lakh (48-45) should be amortised/ deferred over the lease period.

Q.2. An equipment having expected useful life of 5 years, is leased for 3 years. Both
cost and the fair value of the equipment are Rs. 6,00,000. The amount will be paid
in 3 equal installments and at the termination of the lease, the lessor will get back
the equipment. The unguaranteed residual value at the end of 3rd year is Rs.
60,000. The IRR of the investment is 10%. The present value of annuity factor of
Rs. due at the end of 3rd year at 10% IRR is 2.4868. The present value of Rs. 1 due
at the end of 3rd year at a 10% rate of interest is 0.7513. State with reason
whether the lease constitutes a finance lease and also compute the unearned
finance income. (IPCC – Nov. 2014)
Ans.
(i) Determination of Nature of Lease
It is assumed that the value of leased equipments is equal to the present
value of minimum lease payments.
Present value of residual value at the end of 3rd year = Rs. 60,000×0.7513 =
Rs. 45,078
Present value of lease payments = 6,00,000 – Rs. 45,078 = Rs. 5,54,922
The percentage of the present value of lease payments to fair value of the
equipment is (Rs. 5,54,922/ Rs. 6,00,000) ×100 = 92.487%.
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Since, it substantially covers the major portion of the lease payments, the
lease constitutes finance lease.
(ii) Calculation of Unearned Finance Income
Annual lease payment = Rs. 5,54,922/2.4868 = Rs. 2,23,147 (approx)
Gross investment in the lease = Total minimum lease payment +
unguaranteed residual value = ( Rs. 2,23,147 ×3) + 60,000 = Rs. 6,69,441 +
Rs. 60,000 = Rs. 7,29,441
Unearned finance income = Gross investment – Present value of
minimum lease payments and unguaranteed residual value = Rs. 7,29,441 –
Rs. 6,00,000 = Rs. 1,29,441

Q.3. Lessee Ltd. took a machine on lease from Lessor Ltd., the fair value being Rs.
7,00,000. The economic life of the machine as well as the lease term is 3 years. At
the end of each year Lessee Ltd. pay Rs. 3,00,000. The Lessee has guaranteed a
residual value of Rs. 22,000 on expiry of the lease to the lessor. However, Lessor
Ltd., estimates that the residual value of the machinery will be only Rs. 15,000.
The implicit rate of return is 15% p.a. and present value factors at 15% are 0.869,
0.657 at the end of first, second and third year respectively. Calculate the value of
machinery to be considered by Lessee Ltd. and the finance changes in each year.
Ans. As per AS 19, the lessee should recognize the lease as an asset and a liability at the
inception of a finance lease. Such recognition should be at an amount equal to the
fair value of the leased asset at the inception of the lease. However, if the fair
value of the leased asset exceeds the present value of minimum lease payment
from the standpoint of the lessee, the amount recorded as an asset and liability
should be the present value of minimum lease payment from the standpoint of the
lessee.
Value of machinery
In the given case, fair value of the machinery is Rs. 7,00,000 and the net present
value of minimum lease payments is Rs. 6,99,054 (WN #1). A the present value of
the machine is less than the fair value of the machine, he machine will be
recorded at a value of Rs. 6,99,054.
Calculation of finance charges for each year

Year Finance Payment Reduction in Outstanding

Charges outstanding liability
liability
Rs. Rs.
1st year - - - 6,99,054
beginning
End of 1st 1,04,858 3,00,000 1,95,142 5,03,912
year
End of 2nd 75,587 3,00,000 2,24,413 2,79,499
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year
End of 3rd 41,925 3,00,000 2,58,075 (WN#2)
year 21,424

WN #1: Present value of minimum lease payments:

Annual lease rental × PV factor + Present value of guaranteed residual value
= Rs. 3,00,000× (0.869 + 0.756 + 0.657) + Rs. 22,000 ×(0.657) = Rs. 6,84,600 + Rs.
14,454 = Rs. 6,99,054.
WN#2: The difference between this figure and guaranteed residual value (Rs.
22,000) is due to approximation in computing the interest rate implicit in the
lease.
Q.4. A machine was given on 3 years operating lease by a dealer of the machine for
equal annual lease rentals to yield 30% profit margin on cost of 2,25,000.
Economic life of the machine is 5 years and output from the machine is estimated
as 60,000 units, 75,000 units, 90,000 units, 1,20,000 units and 1,05,000 units
consecutively for 5 years. Straight line depreciation in proportion of output is
considered appropriate. You are required to compute the following as per AS-19.
(EXAM DEC-21)
(i) Annual Lease Rent
(ii) Lease Rent income to be recognized in each operating year and
(ii) Depreciation for 3 years lease
Ans.
(i) Annual lease rent
Total lease rent
= 130% of 2,25,000 x Output during lease period/ Total output
= 130% of 2,25,000 x (60,000 +75,000+ 90,000)/(60,000+ 75,000 + 90,000
+ 1,20,000+ 1,05,000)
= 2,92,500 x 2,25,000 units/4,50,000 units = 1,46,250
Annual lease rent = 1,46,250/3=48,750
(ii) Lease rent Income to be recognized in each operating year Total lease rent
should be recognized as income in proportion of output during lease
period, i.e. in the proportion of 60,000 75,000: 90,000 or 4:5:6
Hence income recognized in years 1, 2 and 3 will be as:
Year 1 € 39,000,
Year 2 * 48,750 and
Year 3 * 58,500.
(iii) Depreciation for three years of lease
Since depreciation in proportion of output is considered appropriate, the
depreciable amount 2,25,000 should be allocated over useful life 5 years in
proportion of output, i.e. in proportion of 60:75: 90: 120: 105.
Depreciation for year 1 is 30,000, year 2 = 37,500 and year 3 = 45,000.
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Q.5. What are the disclosures requirements for operating leases by the lessee as per
AS-19? (EXAM MAY 22)
Ans. As per AS 19, lessees are required to make following disclosures for operating
leases:
(a) the total of future minimum lease payments under non-cancelable
operating leases for each of the following periods:
(i) not later than one year;
later than one year and not later than five years;
(iii) later than five years;
(b) the total of future minimum sublease payments expected to be received
under non- cancelable subleases at the balance sheet date;
(c) lease payments recognised in the statement of profit and loss for the period,
with separate amounts for minimum lease payments and contingent rents;
(d) sub-lease payments received (or receivable) recognised in the statement of
profit and loss for the period;
(e) a general description of the lessee's significant leasing arrangements
including, but not limited to, the following:
(i) the basis on which contingent rent payments are determined;
(ii) the existence and terms of renewal or purchase options and
escalation clauses; and
(iii) restrictions imposed by lease arrangements, such as those concerning
dividends, additional debt, and further leasing.
Note: The Level II and Level III non-corporate entities (and SMCs) need not make
disclosures required by (a), (b) and (e) above.

AS – 20
EARNINGS PER SHARE
Q.1. Govardhan Ltd. has equity capital of Rs. 20,00,000 consisting of fully paid equity
shares of Rs. 10 each. The net profit for the year 2017-18 was Rs. 30,00,000. It
has issued 18,000, 10% convertible debentures of Rs. 50 each. Each debenture is
convertible into five equity shares. The tax rate applicable is 30%. Compute the
diluted earnings.
Ans. Hints
Rs. 30,63,000

Q.2. In April, 2004, a Limited Company issued 1,20,000 equity shares of Rs. 100 each.
Rs. 50 per share was called up on that date which was paid by all shareholders.
The remaining Rs. 50 was called up on 01.09.2017. All shareholder paid the sum
in September, 2017, except one shareholder having 24,000 hares. The net profit
for the year ended 31.03.2018 is Rs. 2,64,000 after dividend on preference shares
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and dividend distribution tax of Rs. 64,000. Compute basic EPS for the year ended
31.03.2018as per AS 20. (CA Inter May 2018)
Ans.
Basic earnings per share (EPS) =
Net profit attributable to equity shareholders
Weighted average number of equity share outstanding the year
Rs.2,26,000
= = Rs. 3
88,000 shares (ascalculated in workingnote)
Working Note
Calculation of weighted average number of equity shares
Date Number of Nominal value Amount paid
Shares of shares
01-04-2017 1,20,000 100 50
01-09-2017 96,000 100 100
24,000 100 50

As per As 20, partly paid equity shares are treated as a fraction of equity share to
the extent that they were entitled to participate in dividends relative to a fully
paid equity share during the reporting period. Assuming that the party paid
shares entitled to participate in the dividends to the extent amount paid, weighted
average number of shares will be calculated as:
Shares
1 5
1,20,000 × × = 25,000
2 12
7
96,000 × = 56,000
12
1 7
24,000 × × = 7,000
2 12
88,000 shares
Q.3. Computer adjusted earning per share and basic earning per share based on the
following information:
Net profit 2016-17 Rs. 11,40,000
Net Profit 2017-18 Rs. 22,50,000
No. of equity shares outstanding Rs. 5,00,000
Until 31st December 2017, Bonus issue on 1st January, 2018, 1 equity share for
each equity share outstanding as at 31st December, 2017
Ans. Earnings per share
Basic EPS 2016-17 = Rs. 11,40,000/5,00,000 shares = Rs. 2.28
Basic EPS 2017 -18 = Rs. 22,50,000 / 10,00,000 shares = Rs. 2.25
Adjusted / Restated EPS 2016-17 = Rs. 11,40,000 / 10,00,000
shares = Rs. 1.14
Since the bonus issue is an issue for NO consideration, the issue is treated as if it
had occurred prior to the beginning of the year 2016-17, the earlier period
reported.

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Q.4. XYZ Ltd. had issued 30,000, 15% convertible debentures of Rs. 100 each on 1 st
April, 2014. The debentures are due for redemption on 1st March, 2017. The terms
of issue of debentures provided that they were redeemable at a premium of 5%
and also conferred option to the debentures holders to convert 20% of their
holding into equity shares (Nominal Value Rs. 100) at a price of Rs. 15 per shares.
Debenture holders holding 2500 debentures did not exercise the option. Calculate
the number of equity shares to be allotted to the Debenture holder exercising the
option to the maximum.
Ans. Calculation of number of equity shares allotted to the debentures holder
No. of debentures
Total number of debentures 30,000
Less: Debenture holders not opted for conversion (2,500)
27,500
Option for conversion 20%
Number of debentures for conversion
(27,500×20) 5,500
100
Redemption value at premium of 5% (5,500× Rs. 5,77,500
Rs. 105)
Number of equity shares to be allotted Rs.
5,77,500 38,500 shares
Rs.15

Q.5. "At the time calculating diluted earnings per share, effect is given to all dilutive
potential equity shares that are outstanding during the period". Comment and
also calculate the basic and diluted earnings per share for the year 2020-21 from
the following information: (EXAM DEC-21)
(i) Net profit after tax for the year 64,12,500
(ii) No. of equity shares outstanding 15,00,000
(iii) No. of 9% convertible debentures of 100 issued on 1st July, 2020 75,000
(iv) Each debenture is convertible into 8 Equity Shares
(v) Tax relating to interest expenses 35%
Ans. In calculating diluted earnings per share, effect is given to all dilutive potential
equity shares that were outstanding during the period." As per AS 20 'Earnings
per Share', the net profit or loss for the period attributable to equity shareholders
and the weighted average number of shares outstanding* during the period
should be adjusted for the effects of all dilutive potential equity shares for the
purpose of calculation of diluted earnings per share.
Basic EPS for the year 2020-21=64,12,500/15,00,000 = 4.275 or * 4.28
Computation of diluted earnings per share for year 2020-21
𝑨𝒅𝒋𝒖𝒔𝒕𝒆𝒅 𝒏𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒇𝒐𝒓 𝒕𝒉𝒆 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒚𝒆𝒂𝒓
𝑾𝒆𝒊𝒈𝒉𝒕𝒆𝒅 𝒂𝒗𝒆𝒓𝒂𝒈𝒆 𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒆𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒔
Adjusted net profit for the current year will be (64,12,500 5,06,250 - 1,77,188) =
67,41,562
No. of equity shares resulting from conversion of debentures:
6,00,000 Shares (75,000 × 8)
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Weighted average no. of equity shares used to compute diluted EPS:

(15,00,000 X12/12+ 6,00,000X9/12)
= 19,50,000 Shares
Diluted earnings per share: (67,41,562/19,50,000) = * 3.46
Working Note:
Interest expense for 9 months 75,00,000×9% *9/12 = 5,06,250
Tax expense 35% on interest is ₹1,77,188 (5,06,250 x 35%)
Q.6. NAT, a listed entity, as on 1st April,2021 had the following capital structure:
10,00,000 Equity Shares having face value of 1 each 10,00,000
10,00,000 8% Preference Shares having face value of 10 each 1,00,00,000
During the year 2021-2022, the company had profit after tax of 90,00,000
On 1st January, 2022, NAT made a bonus issue of one equity share for every 2
equity shares outstanding as at 31st December, 2021.
On 1st January, 2022, NAT issued 2,00,000 equity shares of 1 each at their full
market price of 7.60 per share.
NAT's shares were trading at 8.05 per share on 31st March, 2022.
Further it has been provided that the basic earnings per share for the year ended
31st March,2021 was previously reported at 62.30.
You are required to:
(i) Calculate the basic earnings per share to be reported in the financial
statements of NAT for the year ended 31st March,2022 including the
comparative figure, in accordance with AS-20 Earnings Per Share.
(ii) Explain why the bonus issue of shares and the shares issue at full market
price are treated differently in the calculation of the basic earnings per
share? (EXAM MAY 22)
Ans. (i) Calculation of Basic Earnings per share for the year ended 31 March, 2022
including the comparative figure:
(a) Earnings for the year ended 31st March, 2021 EPS x Number of shares
outstanding during 2020-2021
= 62.30 x 10,00,000 equity shares
= 6,23,00,000
(b) Adjusted Earnings per share after taking into consideration bonus issue
Adjusted Basic EPS = Earnings for the year 2020-2021 / Total outstanding
shares + Bonus issue
= 6,23,00,000/(10,00,000+ 5,00,000)
= 6,23,00,000/ 15,00,000
= * 41.53 per share
(c) Basic EPS for the year 2021-2022
Basic EPS = Total Earnings - Preference Shares Dividend) / (Total shares
outstanding at the beginning + Bonus issue + weighted average of the
shares issued in January, 2022)
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=(90,00,000 (1,00,00,000 x 8% ) / (10,00,000+ 5,00,000+ (2,00,000 x

3/12))
=82,00,000/ 15,50,000 shares
= * 5.29 per share
Q.7. The following information is provided to you:
Net profit for the year 2022: 72,00,000
Weighted average number of equity shares outstanding
during the year 2022: 30,00,000 shares
Average Fair value of one equity share during the year
2022: 25.00
Weighted average number of shares under option during
the year 2022: 6,00,000 shares
Exercise price for shares under option during the year
2022: 20.00
You are required to compute Basic and Diluted Earnings Per Share as per AS 20.
(EXAM NOV 22)
Ans. Computation of Basic earnings per share
Earnings Shares Earnings/
Share
Net profit for the year 2022 72,00,000
Weighted average no. of shares during year 2022 30,00,000
Basic earnings per share (72,00,000/30,00,000) 2.40
Computation of Diluted earnings per share
Earnings Shares Earnings/
Share
Net profit for the year 2022 72,00,000
Weighted average no. of shares during year 2022 30,00,000
Number of shares under option 6,00,000
Number of shares that would have been issued at
fair value
(6,00,000 x 20.00)/25.00 (4,80,000)
Diluted earnings per share 72,00,000 31,20,000 2.31(app)
Note: The earnings have not been increased as the total number of shares has been
increased only by the number of shares (1,20,000) deemed for the purpose of the
computation to have been issued for no consideration.
To the extent that partly paid shares are not entitled to participate in dividends during
the reporting period they are considered the equivalent of options.

AS 22
ACCOUNTING FOR TAXES ON INCOME
Q.1. A company, ABC Ltd., prepares its accounts annually on 31st March. On 1st April,
2016, it purchase a machine at a cost of Rs. 1,50,000. The machine has a useful life

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of three years and an expected scrap value of zero. Although it is eligible for a
100% first year deprecation allowance for tax purposes, the straight line method
is considered appropriate for accounting purposes. ABC Ltd. has profits before
depreciation and taxes of Rs. 2,00,000 each year and the corporate tax rate is 40
per cent each year. Compute the amount of deferred tax asset/ liability
Ans. The purchase of machine at a cost of Rs. 1,50,000 in 2016 gives rise to a tax saving
of Rs. 60,000. If the cost of the machine is spread over three years of its life for
accounting purposes, the amount of the tax saving should also be spread over the
same period as shown below:
Statement of Profit and Loss
(For the three years ending 31st March, 2016, 2017, 2018)
(Rupees in thousand )

2016 2017 2018

Profit before depreciation and taxes 200 200 200
Less: Depreciation for accounting 50 50 560
purposes
Profit before taxes 150 150 150
Less: Tax expense
Current tax
0.40 (200 – 150) 20
0.40 (200) 80 80
Deferred tax
Tax effect of timing differences 40
originating during the year 0.40 (150
– 50)
Tax effect of timing differences (20) (20)
reversing during the year 0.40 (0-50)
Tax expense 60 60 60
Profit after tax 90 90 90
Net timing differences 100 50 0
Deferred tax liability 40 20 0
In 2016, the amount of depreciation allowed for tax purposes exceeds the amount
of depreciation charged for accounting purposes by Rs. 1,00,000 and , therefore,
taxable income is lower than the accounting income. This gives rise to a deferred
tax liability of Rs. 40,000. In 2017 and 2018, accounting income is lower than
taxable income because the amount of depreciation changed for accounting
purposes exceeds the amount of depreciation allowed for tax purposes by Rs.
50,000 each year. Accordingly, deferred tax liability is reduced by Rs. 20,000 each
in both the years. As may be seen, tax expense is based on the accounting income
of each period.
In 2016, the profit and loss account is debited and deferred tax liability account is
credited with the amount of tax liability account is debited and profit and loss
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account is credited with amount of tax on the reversing timing difference of Rs.
50,000.
The following Journal entries will be passed:
Year 2016
Profit and Loss A/c Dr. 20,000
To Current tax A/c 20,000
(Being the amount of taxes payable for the year
20× 1 provided for)
Profit and Loss A/c Dr. 40,000
To Deferred tax A/c 40,000
(Being the deferred tax liability created for
originating timing difference of Rs. 1,00,000)
Year 2017
Profit and Loss A/c Dr. 80,000
To Profit and Loss A/c 80,000
(Being the amount to taxes payable for the year
20× 2 provided for)
Deferred tax A/c Dr. 20,000
To Profit and Loss A/c 20,000
(Being the deferred tax liability adjusted for
reversing timing difference of Rs. 50,000)
Year 2018
Profit and Loss A/c Dr. 80,000
To Current tax A/c 80,000
(Being the amount of taxes payable for the year
2018 provided for)
Deferred tax A/c Dr. 20,000
Profit and Loss A/c 20,000
(Being the deferred tax liability adjusted for
reversing timing difference of Rs. 50,000)

In the year 2016, the balance of deferred tax account i.e., Rs. 40,000 would be
sown separately from the current ax payable for the year. In Year 2017, the
balance of deferred tax account would be Rs. 20,000 and be shown separately
from the current tax payable for the year 2016. In Year 2018, the balance of
deferred tax liability account would be nil.

Q.2. The following particulars are stated in the balance sheet of M/s Exe Ltd. as on
31.03.2016: Deferred Tax liability (Cr.) = Rs. 20 Lakh; Deferred Tax Assets (Dr.)
= Rs. 10 Lakh.
The following transactions were reported during the year 2016-17:
(1) Deprecation – As per Books = Rs.50 Lakh; Deprecation – for Tax purposes =
Rs.30 Lakh.
There were no additions to Fixed Assets during the year.
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(2) Items disallowed in 2015-16 and allowed for Tax purposes in 2016-17 = Rs.
10 Lakh.
(3) Interest to Financial Institutions accounted in the Books on accrual basis,
but actual payment was made on 30.09.2017 = Rs. 20 Lakh.
(4) Donation to Private Trust made in 2016-17 = Rs. 10 Lakh
(5) Share Issue Expenses allowed u/s 35D of the IT Act, 1961 for the year 2016-
17 ( 1/10th of Rs. 50 Lakh incurred in 2012-2013) = Rs.5 Lakh.
(6) Repairs to Plant and Machinery Rs. 100 Lakh was spread over all the period
2016-17 and 2017-18 equally in the books. However, the entire expenditure
was allowed for IT purposes.
If Tax rate = 50%, Indicate clearly the impact of above items in terms of DTL/DTA
and the balances of DTL / DTA as on 31.03.2017
( CA Inter – Jan 2021 & July 2021)
Ans.
Transactions Analysis Nature of Effect Amount
difference
Difference in Generally, Responding Reversal of DTL Rs. 20
depreciation written down timing lakh ×
value method difference 50% = Rs.
of 10 lakh
Deprecation
is adopted
under IT Act
which leads
to higher
depreciation
in earlier
years of
useful life of
the asset in
comparison
to later years.
Disallowances, Tax payable Responding Reversal of DTA Rs. 10
as per IT Act, for the earlier timing lakh ×
of earlier year was difference 50% =
years higher on this Rs. lakh
account.
Interest to It is allowed Not applicable Not
financial as deduction applicable
institutions under section
43B of the IT
Act, if the
payment is
made before
the due date
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of filing the
return of
income (i.e.
31st October,
2017).
Donation to Not an Permanent Not applicable Not
private trusts allowable difference applicable
expenditure
under IT Act.
Share issue Due to Responding Reversal of DTA Rs. 5 lakh
expense disallowance timing × 50% =
of full difference Rs. 2.5
expenditure lakh
under IT Act,
tax payable in
the earlier
year was
higher
Repairs to Due to Originating Increase in DTL Rs. 50
plant and disallowance timing lakh ×
Machinery of full Difference 50% = Rs.
expenditure 25 lakh
under IT Act,
tax payable of
the current
year will be
less.

Dr. Deferred Cr.

tax liability
a/c
In lakhs In lakhs
31.03.2017 To P&L 10.00 01.04.2016 By bal b/d 20.00
(Dep)

To bal c/d 35.00 By P & L 25.00

(repairs to
plant)
45.00 45.00
01.04.2017 By bal b/d 35.00

Dr. Deferred Cr.

tax asset
a/c
In lakhs In lakhs

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01.04.2016 To bal b/d 10.00 31.03.2017 By P &L

Items
disallowed
in
2015-16
and
allowed
as per IT 5.00
Act in
2016-2017
share issue 2.50
expenses
By bal c/d 2.50
10.00 10.00
01.04.2017 To bal b/d 2.50

Q.3. Z Ltd. presents the following information for the year ending 31/03/2016 and
31/03/2017 from which you are required to calculate the Deferred Tax
Asset/Liability and state how the same should be dealt with as per relevant
accounting standard.
31-03- 31-03-
2016 2017
Depreciation 4,010.10 4,023.54
Unabsorbed carry forward business loss and 2,016.60 4,1110.00
depreciation allowance
Disallowance under Section 43-B of Income Tax Act, 518.35 611.45
1961
Deferred Revenue Expenses 4.88 -
Provision for Doubtful Debts 282.51 294.35

Z Ltd. had incurred a loss of Rs. 504 lakh for the year ending 31/03/2017 before
providing for Current Tax of Rs. 26.00 lakh.
Ans. It is assumed that entity has virtual certainty supported by convincing evidence
that future taxable Income, hence we are recognising deferred tax asset on
unabsorbed losses and depreciation;
In the absence of information, it is assumed that depreciation as per accounting
books is equal to depreciation as per tax records;

DTA/DTL will be computed as under (we assumed tax rate is 35%)

Particulars 31-03-2016 (Rs.) 31-03-2017 (Rs.)
Deferred tax asset arises from the
following
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Carried Forward Business Loss and 4,110.00

Depreciation Allowance 2,016.60
Disallowance under Section 43-B of Income 611.45
Tax Act, 1961 518.35

Provision for Doubtful Debts 294.35

282.51
2,817.46 5015.80
Q.4. The following information is furnished in respect of Mohit Limited for the year
ending 31st March, 2022.
(i) Depreciation as per accounting records 56,000
Depreciation for income tax records 38,000
The above depreciation does not include depreciation on new addition.
(ii) A new machinery purchased on 1st April, 2021 costing 24,000 on which
100% depreciation in allowed in the 1st Year for income tax purpose,
whereas straight line method of depreciation is considered appropriate for
accounting purpose with a life estimation of 4 years.
(ii) The company has made a profit of ₹1,28,000 before depreciation and taxes.
(iv) Donation to private trust during the year is 15,000 (not allowed under
Income tax laws.)
(v) Corporate tax is 40%.
Prepare relevant extract of statement of Profit & Loss for the year ending
31st March, 2022. Also show the effect of the above items on Deferred Tax
Liability/Assets as per AS 22. (EXAM NOV 22)
Ans. Statement of profit and Loss for the year ended 31st March, 2022 (An Extract)
Profit before taxes and depreciation 1,28,000
Less: Depreciation (56,000+ 6,000) 62,000
Profit before tax 66,000
Less: Current tax (W.N) (32,400)
Deferred Tax Nil
Profit after tax 33,600
Working Note:
Computation of taxable income
Profit before taxes and depreciation 1,28,000
Less: Depreciation (38,000+ 24,000) (62,000)
66,000
Add : donation* 15,000
81,000
Current tax (40%) 32,400
Note: The profit of * 1,28,000 given in the question is before depreciation and
taxes. It has been considered that this amount is after making adjustment of
donation amounting 15,000.
Impact of various items in terms of deferred tax liability/deferred tax asset

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Transactions Nature of Effect Amount

difference
(1) Difference in depreciation Timing Reversal Rs.18,000 (56,000-38,000)
(old machinery) difference of DTL × 40% = (+) 7,200

(2) Depreciation on machinery Timing Creation Rs.18,000 (24,000-6,000) x

new difference of DTL 40%
=(-) 7,200
(3) Donation to private trusts Permanent Not -
difference applicable
Net Effect of Deferred Tax NIL

AS – 24
DISCONTINUING OPERATIONS
Q.1. Qu Ltd. is in the business of manufacture of Passenger cars and commercial
vehicles. The company is working on a strategic plant to shift from the Passenger
car Segment over the coming 5 years However, no specific plans have been drawn
up for sale of neither the division nor its assets. As part of its plan it will reduce
the production of passenger cars by 20% annually. It also plans to commence
another new factory for the manufacture of commercial vehicles and transfer of
employees in a phased manner.
(a) You are required to comment if mere gradual phasing out in itsel can be
considered as a ‘Discontinuing Operation’ within the meaning of As 24.
(b) If the company passes a resolution to sell some of the assets in the passenger
car division and also to transfer few other assets of the passenger car division
to the new factory, does this trigger the application of AS 24?
(c) Would your answer to the above the different if the company resolves to sell
the assets of the Passenger Car Division in a phased but time bound manner?
(CA Inter – July 2021)

Ans. Mere gradual phasing is not considered as discontinuing operation as defined by

AS 24. (Refer the standard for examples of activities that do not necessarily satisfy
the criteria)
Considering the wording and definition of discontinuing operation.
(a) No. The company’s strategic plan has no final approval from the Board
through a resolution and no specific time bound activities like shifting of
Assets and employees and above all the new segment commercial vehicle
production line and factory has started.
(b) No. The resolution is silent about stoppage of the Car segment in definite
time period. Though, some assets’ sales and transfer proposal was passed

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through a resolution to the new factory, closure road map and new segment
starting road map is missing. Hence, AS 24 will not be applicable.
(c) Yes. Phased and time bound programme resolved in the Board clearly
indicates the closure of the passenger car segment in a definite time frame
and clear road map. Hence, this action will attract AS 24 compliance.
Q.2. Changeover Ltd. is in the business of making cell phones. During the year ended
31.3.2002, it made 1,00,000 units of GSM phones and 50,000 units of CDMA
phones. In the current year, the company has gradually cut down the production
of GSM phones and is utilizing the spare capacity released for manufacturing
CDMA phones. During the last quarter of 2016-17, not even a single unit of GSM
phones has been produced whereas 60,000 units of CDMA phones were
manufactured in the same period. Should it be treated as a discontinuing
operations?
Ans. Mere gradual phasing is not considered as discontinuing operation as defined by
AS 24. (Refer the standard for examples of activities that do not necessarily satisfy
the criteria). Hence this is not treated as discontinuing operation.

Q.3. Rohini Limited is in the business of manufacture of passenger cars and

commercial vehicles. The Company is working on a strategic plan to close the
production of passenger cars and to produce only commercial vehicles over the
coming 5 years. However, no specific plans have been drawn up for sale of neither
the division nor its assets. As part of its prospective plan it will reduce the
production of passenger cars by 20% annually. It also plans to establish another
new factory for the manufacture of commercial vehicles and transfer surplus
employees in a phased manner. You are required to comment:
(i) If mere gradual phasing out in itself can be considered as a 'discontinuing
operation' within the meaning of AS-24.
(ii) If the Company passes a resolution to sell some of the assets in the
passenger car division and also to transfer few other assets of the passenger
car division to the new factory, does this trigger the application of AS-24?
(iii) Would your answer to the above be different if the Company resolves to sell
the assets of the passenger car division in a phased but time bound manner?
(EXAM JUL-21)
Ans. (I) As per AS 24, a discontinuing operation is a component of an enterprise:
(a) that the enterprise, pursuant to a single plan, is:
(i) disposing of substantially in its entirety, such as by selling the
component in a single transaction or by demerger or spin-off of
ownership of the component to the enterprise's shareholders; or
(ii) disposing of piecemeal, such as by selling off the component's assets
and settling its liabilities individually; or
(iii) terminating through abandonment; and
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(b) that represents a separate major line of business or geographical area of

operations; and
(c) that can be distinguished operationally and for financial reporting
purposes.
Mere gradual phasing out is not considered as discontinuing operation as
defined under AS 24, 'Discontinuing Operations'. Examples of activities that
do not necessarily satisfy criterion of the definition, but that might do so in
combination with other circumstances, include:
(a) Gradual or evolutionary phasing out of a product line or class of service;
(b) Shifting of some production or marketing activities for a particular line of
business from one location to another; and
(c) Closing of a facility to achieve productivity improvements or other cost
savings.
In this case, it cannot be considered as Discontinuing Operation as per AS-
24 as the company's strategic plan has no final approval from the board
through a resolution and there is no specific time bound activities like
shifting of assets and employees. Moreover, the new segment i.e.
commercial vehicle production line in a new factory has not started.
(II) No, the resolution is silent about stoppage of the car segment in definite
time period. Though, sale of some assets and some transfer proposal were
passed through a resolution to the new factory, but the closure road map
and new segment starting roadmap are missing.
Hence, AS 24 will not be applicable and it cannot be considered as
discontinuing operation.
(III) Yes, phased and time bound program resolved in the board clearly indicates
the closure of the passenger car segment in a definite time frame and will
constitute a clear roadmap.
Hence, this action will attract compliance of AS 24 and it will be considered
as Discontinuing Operation as per AS-24.

AS - 26
INTANGIBLE ASSETS
Q.1. How is the software for internal use accounted for as per AS 26?
Ans. Appendix A to AS 26, lays down the following procedure for accounting of
software acquired for internal use:-
 The cost of a software acquired for internal use should be recognised as an
asset if it meets the prescribed recognition criteria.
Recognition criteria:-
 An intangible asset should be recognised if, and only if:

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(a) Inflow of probable future economic benefits that are attributable to

the asset; and
(b) The cost of the asset can be measured reliably.
 The cost of software purchased for internal use comprises its purchase
price, including any import duties and other taxes (other than those
subsequently recoverable by the enterprise from the taxing authorities) and
any directly attributable expenditure on making the software ready for use.
 Any trade discounts and rebates are deducted in arriving at the cost. If it is
bought as part of “Amalgamation in the nature of purchase”, by way of
government grant and exchange of assets - it should be considered
appropriately as explained in the standards.
 An enterprise should assess the probability of future economic benefits
using reasonable and supportable should assess the probability of future
economic benefits using reasonable and supportable assumption that
represent best estimate of the set of economic conditions that will exist over
the useful life of the asset.

Q.2. As an Auditor of a Company how would you react to the following situation?
Rs. 5 lakh paid by a Pharma Co., to the Legal Advisor defending the patent of a
product is treated as a Capital Expenditure.
Ans. Defending legal expenses doesn’t give any additional future economic benefits to
the entity. Hence it should be treated as revenue expenditure and it should be
changed to P&L in the year in which it is incurred.

Q.3. Himalaya Ltd. in the past three years spent Rs. 75 lakh to develop a Drug to treat
‘HIV’, which was charged to P&L since they did since they did not meet AS 26
criteria for capitalization. In the current year approval of the concerned
Government Authority has been received. The Company wishes to capitalize Rs.
75 lakh by disclosing it as a prior period item. Is it correct? Give reason for your
views.
Ans. As per As 26, any expenditure on an intangible item that was initially recognised
as an expense in the previous year/in interim financial reports - should NOT be
capitalised as an intangible asset at a later date. It means once changed to P&L
cannot be capitalised.
In the given case, the company wants capitalise the expense which was charged
to P&L., which is NOT correct as per AS 26. Hence it should NOT be capitalised.

Q.4. M Ltd. launched a project for producing ‘product A’ in Nov. 2015. The company
incurred Rs. 30 lakh towards Research and Development expenses up to 31st
March, 2017. Due to unfavorable market condition the management feels that it is
not possible to manufacture and sell the product in the market for the coming
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years: The management hence wants to defer the expenditure write off to future
years.
Advise the company as per the applicable AS.
Ans. As per AS 26, expenditure on research should be recognised as an expense when
it is incurred. An intangible asset arising from development (or from the
development phase of an internal Project) should be recognized if and only if, an
enterprise can demonstrate all of the conditions specified in the standard. An
intangible assets (arising from development) should be changed to P&L. When no
future economic benefit are expected from its use. Therefore, the management
cannot defer the expenditure and write off to future years. Hence the company is
required to spend the entire amount of Rs. 30 lakh in the Profit and Loss account
of the year ended 31st March, 2017.

Q.5. A company acquired for its internal use a software costing Rs. 10 lakh on
28.01.2017 from USA for US $ 1,00,000. The exchange rate on that date was Rs. 52
per USD. The seller allowed trade discount @ 5%. The other expenditure was:
(i) Import Duty: 20%
(ii) Purchase Tax: 10%
(iii) Entry Tax: 5% (Recoverable later from tax department)
(iv) Installation expenses: Rs. 25,000
(v) Profession frees for Clearance from Customs: Rs. 20,000
Computer the cost of Software to be capitalized.
(IPCC Nov. 2012 & CA Inter – Jan 2021)
Ans.
Calculation of cost of software (intangible asset)
acquired for internal use
Purchase cost of the software $ 1,00,000
Less: Trade discount @ 5% ($ 5,000)

$ 95,000

Cost in Rs. (US $ 95,000× Rs. 52) 49,40,000

Add: Import duty on cost @ 20% (Rs.) 9,88,000

59,28,000
Purchase tax @ 10% (Rs.) 5,92,800
Installation expenses (Rs.) 25,000
Profession fee for clearance from customs (Rs.) 20,000
Cost of the software to be capitalised (Rs.) 65,65,800

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Note: since entry tax has been mentioned as a recoverable / refundable tax, it is
not included as part of the cost of the asset.

Q.6. NDA Corporation is engaged in research on a new process design for its product.
It had incurred an expenditure of Rs. 530 lakh on research up to 31st March, 2017.
The development of the process began on 1st April, 2017 and Development phase
expenditure was Rs. 360 lakh up to 31st March, 2018 which meets assets
recognition criteria.
From 1st April, 2018, the company will implement the new process design which
will result in after tax saving of Rs. 80 lakh per annum for the next five years.
The cost of capital of company is 10%. Explain
1. According treatment for research expenses
2. Cost of internally generated intangible assets AS 26
3. The amount of amortization of the assets. (The present value of annuity factor of
Rs. 1 for 5 years @ 10% = 3,7908) (IPCC Nov. 2010 & IPCC Nov. 2013)

Ans. (Advanced level – students should learn this at CA – Final level) I would like
to discuss this as it is asked in the PY exams)
(i) Research Expenditure – the total expenditure on research of new process
design for its product Rs. 530 lakh should be changed to P&L as expense in
2016-17.
(ii) Cost of internally generated intangible asset – As the development
expenditure meets the recognition criteria it should be recognised as an
asset at its fair value. (Based on the information given in the question –
Fair value can be computed by discounting the future cash flows by
applying the present value annuity factor).
Future net cash inflows per annum (Savings) = Rs. 80 lakh p.a.
Present value of future cash inflows (fair value) = Rs. 80 lakh × 3,7908 = Rs.
303.26 lakh.
This is the value the entity can recover from the intangible asset over asset
over its life, so it is reasonable to recognize the asset at Rs. 303.26 lakh even
though the entity actually spent Rs. 360 lakh. Hence the entity should
charge the difference of Rs. 56.74 lakh (360 – Rs. 303.26) immediately in
the CY (2017-18)
(iii) Amortisation – The company can amortize Rs. 303.26 lakh over a period of
five years by charging Rs. 60.65 lakh p.a. from the financial year 2018-19
onwards.

Q.7. Sunny Ltd, is developing a new production process. During the financial year
ended 31st March 2017, the company has incurred total expenditure of Rs. 40 lakh
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on the process. On 1st December, 2016, the process has met the norms to be
recognized as ‘intangible assets’ and the expenditure incurred till that date is Rs.
16 lakh. During the financial year ending on 31st March, 2018, the company has
further incurred Rs. 70 lakh. The recoverable amount as on 31st March, 2018 of
the process is estimated to Rs. 62 lakh. You are required to work out:
(IPCC- May 2015 & CA Inter Nov 2020)
(i) Expenditure to be charged to P&L for the FYs 31st March, 2017 & 31st March,
2018. (ignore deprecation )
(ii) Carrying amount of the ‘Intangible asset’ as at 31st March, 2017 and 31st
march, 2018.
Ans. As per the standard, development expense should be capitalised only when the
entity is able to demonstrate the conditions mentioned. The expense incurred till
date of satisfying the conditions should be changed to P&L. For FY 2016-17
Total development expense incurred during the year = Rs. 40 lakh. Out of this Rs.
16 lakh incurred till date of meeting the norms, hence this amount should be
charged to P&L and the remaining Rs. 24 lakh should be capitalised as intangible
asset under development (WIP). So the carrying amount of intangible asset
under development as on 31st March, 2017 is Rs. 24 lakh.

For FY 2016-17
The development expense incurred during the financial year = Rs. 70 lakh. It
should capitalise the total expense to the intangible asset. Hence the carrying
amount of after this will be Rs. 94 lakh (Rs. 24 lakh + Rs. 70 lakh).
As per the Standard an intangible asset which is underdevelopment should for
impairment at every financial year end and if there exists any impairment loss, it
should be recognised as expense in P&L.
Impairment loss is the excess of Carrying amount over the recoverable amount. In
the given case, the carrying amount Rs. 94 lakh and whereas the recoverable
amount is Rs. 62 lakh. Hence the impairments loss is Rs. 32 lakh (Rs. 94 lakh – Rs.
62 lakh) shold be charged to P &L.,
Hence the carrying amount of intangible asset at 31st March, 2018 is Rs. 62 lakh.

Q.8. As per provisions of AS-26, how would you deal with the following situation?
(1) Rs. 23,00,000 paid by a manufacturing company to the legal advisor for
defending the patent of a product is treated as a capital expenditure.
(2) During the year 2018-19, a company spent Rs. 7,00,000 for publicity and
research expense on one of its new consumer product which was marketed
in the same accounting year but proved to be a failure.
(3) A company spent Rs. 25,00,000 in the past three years to develop a product,
these expenses were charged to profit and loss account since they did not
meet AS-26 criteria for capitalization. In the current year approval of the
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concerned authority has been received. The company wishes to capitalize

Rs. 25,00,000 by disclosing it as a prior itme.
(4) A company with a turnover or Rs. 200 crores and an annual advertising
budget of Rs. 50,00,000 had taken up for the marketing of a new product by
a company. It was estimated that company would have turnover of Rs. 20
crore from the new product.
The company had debited to its Profit & Loss Account the total expenditure of Rs.
50,00,000 incurred on extensive special initial advertisement campaign for the
new product. (CA Inter – Nov 2019)
Ans. As per AS 26, subsequent expenditure on an intangible asset should be capitalised
(i.e. added to the cost of intangible asset) when
(a) It is probable that the expenditure will enable the asset to generate future
economic benefits in excess of its originally assessed standard of
performance; and
(b) Expenditure can be measured and attribute to the asset reliably.
Otherwise, it should be charged to P&L as an expense.
(i) In the given case, the legal expenses to defend the patent of a product
amounting to Rs. 23,00,000 should not be capitalized as it does not
increase the future economic benefits from the patent and hence, it
should be changed to Profit and Loss Statement.
(ii) Future economic benefits inflows are not probable from research and
advertisement. The company is required to expense the entire amount
of Rs. 7,0,00,000 in the Profit and Loss account for the year ended 31 st
March, 2019.
(iii) As per AS 26, expenditure on an intangible item that was initially
recognized as an expense by a reporting enterprise in previous annual
financial statements should not be recognized as part of the cost of an
intangible asset at a later date. Thus, the company cannot capitalize the
amount of Rs. 25,00,000 and it should be recognized as expense.
(iv) Expenditure of Rs. 50,00,000 on advertising and promotional activities
should always be changed to Profit and Loss Statement. Hence, the
company has done the correct treatment by debiting the sum of Rs. 50
lakhs to Profit and Loss Account.

Q.9. Surgical Ltd, is developing a new production process of surgical equipment.

During the financial year ended 31st March 2020 the total expenditure incurred
on the process was 67 lakhs. The production process met the criteria for
recognition as an intangible asset on 1st January 2020. Expenditure incurred till
this date was 35 lakhs.
Further expenditure incurred on the process for the financial year ending 31st
March 2021 105 lakhs. As on 31st March 2021, the recoverable amount of
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technique embodied in the process is estimated to be 89 lakhs. This includes

estimates of future cash outflows and inflows.
Under the provisions of AS 26, you are required to ascertain:
(i) The expenditure to be charged to Profit and Loss Account for the year
ended 31st March 2020;
(ii) Carrying amount of the intangible asset as on 31st March 2020;
(iii) Expenditure to be charged to Profit and Loss Account for the year ended
31st March 2021;
(iv) Carrying amount of the intangible asset as on 31st March 2021.
(EXAM DEC-21)
Ans. As per AS 26 'Intangible Assets'
(i) Expenditure to be charged to Profit and Loss account for the year
ended 31.03.2020
Rs.35 lakhs is recognized as an expense because the recognition criteria
were not met until 1st January 2020. This expenditure will not form part of
the cost of the production process recognized as an intangible asset in the
balance sheet.
(ii) Carrying value of intangible asset as on 31.03.2020
At the end of financial year, on 31st March 2020, the production process
will be recognized (i.e. carrying amount) as an intangible asset at a cost of *
32 (67-35) lacs (expenditure incurred since the date the recognition criteria
were met, i.e., from 1st January 2020).
(iii) Expenditure to be charged to Profit and Loss account for the year
ended 31.03.2021
(in lacs)
Carrying Amount as on 31.03.2020 32
Expenditure during 2020-2021 105
Book Value 137
Recoverable Amount (89)
Impairment loss 48
Rs.48 lakhs to be charged to Profit and loss account for the year ending
31.03.2021.
(iv) Carrying value of intangible asset as on 31.03.2021
(in lacs)
Book Value 137
Less: Impairment loss (48)
Carrying amount as on 31.03.2021 89

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AS – 29
PROVISIONS,CONTINGENT LIABILITIES AND CONTINGENT ASSETS

Q.1. The government introduces a number of changes to the Income-tax Act and rules
during the year. Rama Ltd. it is into tax advisory services. As there are many
changes, it has to retrain its concerned department employees in order to ensure
continued compliance with Income-tax Rules. The training cost amounts to Rs.
50,000. As on the balance sheet date NO training took place. Should the entity
recognize any provision?
Suggested Answer
Provision can be recognised only when it satisfied three conditions as per AS 29,
let us test the same for the given case.
Present obligation as a result of a past obligating event – There is NO
obligation for the entity to pay anybody as on the balance sheet date, as no
training took place in the financial year. In the given situation, the entity can skip
the expenditure by its future decision;
Conclusion – As it is not satisfying the conditions, NO provision is recognised.

Q.2. A company is in a dispute involving allegation of infringement of patents by a

competitor company who is seeking damage of a huge sum of Rs. 900 lakh. The
directors are of the opinion that the claim can be successfully resisted by the
company. How would you deal with the same in the annual accounts of the
company? (IPCC Nov. 2016)
Ans. As per 29, a provision should be recognised when it satisfies the three conditions
discussed above.
In the given situation, since, the directors of the company are of the opinion that
the claim can be successfully resisted by the company therefore there will be no
outflow of the resources. The company will disclose the same as contingent
liability by way of the following note:
“Litigation is in process against the company relating to a dispute with a
competitor who alleges that the company has infringed patents and is seeking
damages of Rs. 900 lakh. However, the directors are of the opinion that the claim
can be successfully resisted by the company.”
Q.3. An airline is required by law to overhaul its aircraft once in every five years. The
pacific Airlines which operate aircrafts does not provide any provision as
required by law in its final accounts. Discuss with reference to relevant
Accounting Standard 29. (IPCC May 2012)
Ans. In the given case, there is no present obligation, therefore no provision is
recognized as per As 29.
The cost of overhauling aircraft is not recognized as provision because it is a
future obligation and the incurring of the expenditure depends on the company’s
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decision to continue operating the aircraft. Even a legal requirement to overhaul

does not required the company to make a provision for the cost of overhaul
because there is no present obligation to overhaul the aircrafts. Further, the
enterprise can avoid the future expenditure by its future action, for example by
selling the aircraft.
However, an obligation might arise to pay fines or penalties under the legislation
after completion of five years. Assessment of probability of incurring fines and
penalties depends upon the provisions of the legislation and the stringency of the
enforcement regain. A provision should be recognized for the best estimate of any
fines and penalties if airline continues to operate aircrafts for more than five
years.
Q.4. X Ltd. has its financial year ended 31.03.209, fifteen law suits outstanding, none of
which has been settled by the time the accounts are approved by the directors.
The directors have estimated the probable outcomes as below:

Result Probability Amount of Loss

Rs.
For first tencases:
Win 0.6 --------
Loss-low damages 0.3 90,000
Loss-high damages 0.1 2,00,000
For remaining five
cases:
Win 0.5 --------
Loss-low damages 0.3 60,000
Loss-high damages 0.2 1,00,000

The directors believe that the outcome of each case is independent of the outcome
of all the others. Estimate the amount of contingent loss and state the accounting
treatment of such contingent loss.
(PCC May 2010 & Nov. 2017)
Ans. According to AS 29 ‘Provision, Contingent Liabilities and Contingent Assets’,
contingent liability should be disclosed in the financial statements if following
conditions are satisfied:
(i) There is a present obligation arising out of past event but not recognized as
provision.
(ii) It is not probable that an outflow of resources embodying economic benefits
will be required to settle the obligation.
(iii) The possibility of an outflow of resources embodying economic benefits is
also remote.
(iv) The amount of the obligation cannot be measured with sufficient reliability
to be recognized as provision.

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In this case, the probability of winning first 10 cases is 60% and for remaining five
cases is 50%. In other words, probability of losing the cases is 40% and 50
respectively. According to AS 29, we make a provision if the loss is probable. As
the loss does not appear to be probable and the probability or possibility of an
outflow or resources embodying economic benefits is not remote rather there is
reasonable possibility of loss, therefore, disclosure by way of note of contingent
liability amount may be calculated as under:
Expected loss in first ten cases = [ Rs. 90,000 × 0.3 + Rs. 2,00,000 × 0.1] ×10
= [Rs. 27,000 + Rs. 20,000] ×10 = Rs. 47,000 ×10 = Rs. 4,70,000
Expected loss in remaining five cases = [Rs. 60,000 ×0.3 + Rs. 1,00,000 ×0.2] ×5
= [Rs. 18,000 + Rs. 20,000] ×5 = Rs. 38,000 ×5 = Rs. 1,90,000
Total contingent liability = Rs. 4,70,000 + Rs. 1,90,000 = Rs. 6,60,000.
Q.5. An engineering goods company provides after sales warranty for 2 years to its
customers. Based on past experience, the company has the following policy for
making provision for warranties on the invoice amount, on the remaining
balance warranty period:
Less than 1 year: 2% provision
More than 1 year: 3% provision
The company has raised invoices as under:
Invoice Date Amount
19-01-2017 40,000
29-01-2018 25,000
15-10-2018 90,000
Calculate the provision to be made for warranty under As 29 as at 31-03-2018
and 31-03-2019. Also compute amount to be debited to P &L for the year ended
31-03-2019. (IPCC May 2013, 2018 & CA Inter Nov 2019)
Ans.
Provision to be made for warranty under As 29
As at 31st March, 2018 = (Rs. 40,000 ×2%) + (Rs. 25,000×3%) = Rs. 800 + Rs.
750 = Rs. 1,550
As at 31st March, 2019 = (Rs. 25,000 ×2%) + (Rs. 90,000×3%) = Rs. 500 + Rs.
2,700 = Rs. 3,200

Amount debited to P&L for year ended 31st March, 2019

Balance of provision required as on 3,200
31.03.2019
Less: Opening Balance as on (1,550)
01.04.2018
Amount debited to P&L 1,650
Note: No provision will be made on 31st March, 2019 in respect of sales amounting to
Rs. 40,000 made on 19th January, 2017 as the warranty period of 2 years has already
expired.

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Q.6. M/ S. Shishir Ltd., a public Sector Company provides cosultancy and engineering
services to its clients. In the year 2014-15, the Government set up a commission
to decide about the pay revision. The pay will be revised with respect from 01-
01-2012 based on the recommendation of the commission. The company makes
the provision of Rs. 1250 lakh for pay revision in the financial year 2014-15 on
the estimated basis as the report of the commission is yet to come. As per the
contracts with client on cost plus job, the billing is done on the actual payment
made to the employees and allocated to jobs based on hours booked by these
employees on each job.
The company discloses through notes on accounts:
“Salaries and benefits include the provision of Rs. 1250 lakh in respect of pay
revision. The amount chargeable from reimbursable jobs will be billed as per the
contract when the actual payment is made.”
The Accountant feels that the company should also book/ recognize the income
by Rs. 1250 lakh in profit & Loss Account as per the terms of the contract.
Otherwise, it will be the violation of matching concept & understatement of profit.
Comment on the opinion of the Accountant with reference to relevant Accounting
Standards.
Ans. As per As 29, where some or all of the expenditure required to settle a provision is
expected to be reimbursed by another party, the reimbursement should be
recognized when, and only when, it is virtually certain that reimbursement will be
received if the enterprise settles the obligation. The reimbursement should be
treated as a separate asset. The amount recognized for the reimbursement should
not exceed the amount of the provision.
Accordingly, potential loss to an enterprise may be reduced or voided because a
contingent liability is matched by a related counter-claim or claim against a third
party. In such cases, the amount of the provision is determined after taking into
account the probable recovery under the claim if no significant uncertainty as to
its measurability or collectability exists.
In this case, the provision of salary to employees of Rs. 1,250 lakh will be
ultimately collected from the client, as per the terms of the contract. Therefore,
the liability of Rs. 1,250 lakh is matched by the counter claim from client. Hence,
the provision for salary for employees should be matched with the reimbursable
asset to be claimed from the client. It appears that the whole amount of Rs. 1,250
lakh is recoverable from client and there is no significant uncertainty about the
collection. Hence, the net change to P&L account should be nill.
The opinion of the account regarding recognition of income of Rs. 1,250 lakh is
not as per AS 29 and also the concept of prudence will not be followed if Rs. 1,250
lakh is simultaneously recognized as income. Rs. 1,250 lakh is not the revenue at
present but only reimbursement of claim for which an asset is created. However
the accountant is correct to the extent as that non-recognition of Rs. 1,250 lakh as
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income will result in the understatement of profit. To avoid this, in the statement
of profit and loss, expense relating to provision may be presented net of the
amount recognized for reimbursement.

Q.7. EXOX Ltd. is in the process of finalizing its accounts for the year ended 31st March,
2017. The company seeks your advice on the following:
(i) The Company’s sales tax assessment for assessment year 2014-15 has been
completed on 14th February, 2017 with a demand of Rs. 2.76 crore. The
company paid the entire due under protest without prejudice to its right of
appeal. The Company files its appeal before the appellate authority wherein
the grounds to its right of appeal. The Company files its appeal before the
appellate authority wherein the grounds of appeal cover tax on additions
made in the assessment order for a sum of Rs. 2.10 crore.
(ii) The Company has entered into a wage agreement in May, 2017 whereby the
labour union has accepted a revision in wage from June, 2016. The
agreement provided that the hike till May. 2017 will not be paid to the
employees but will be settled to them the time of retirement.
The company agrees to deposits the arrears in the Government Bods by
September, 2017.
Ans.
(i) Since the company is not appealing against the addition of Rs. 0.66 crore,
the same should be provided for in its accounts for the year ended o 31 st
March, 2017. The amount paid under protest can be kept under the heading
‘Loans & Advance’ and disclosed along with the contingent liability of 2.10
crore.
(ii) The arrears for the period from June, 2016 to march, 2017 are required to
be provided for in the accounts of the company for the year ended on 31 st
March, 2017.

Q.8. With the reference to AS 29, how would you deal with the following in the Annual
Accounts it to remove of the company at the Balance Sheet date:
(i) The company operates an offshore oilfield where its licensing agreement
requires it to remove the oil rig at the end of production and restore the
seabed. Eighty-five percent of the eventual costs relate to the removal of the
oil rig and restoration of damage caused by building it, and fifteen percent
arise through the extraction of oil. At the balance sheet date, rig has been
constructed but no oil has been extracted.
(ii) The government introduces a number of changes to the taxation laws. As a
result of these changes, the company will need to train a large proportion of
its accounting and legal workforce in order to ensure continued

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compliances with tax law regulations. At the balance sheet date, no

retraining of staff has taken places. (CA Inter – Nov 2020)
Answer
(i) The construction of the oil rig creates an obligation under the terms of the
license to remove the rig and restore the seabed and is thus an obligating
event. At the balance sheet date, however, there is no obligation to rectify
the damage that will be caused by extraction of the oil. An outflow of
resources embodying economic benefits in settlement is probable. Thus, a
provision is recognized for the best estimated of 85% of the eventual costs
that relate to the removal of the oil rig and restoration of damage caused by
building it. These costs are included as part of the cost of the oil rig.
However, there is no obligation to rectify the damage that will be
Caused by extraction of oil, as no oil has been extracted at the balance sheet
date. So, no provision is required for the cost of extraction of oil at balance
sheet date. 15% of costs that arise through the extraction of oil are
recognized as a liability when the oil extracted.
(ii) As per AS 29, a provision for restructuring costs is recognized only when
the recognition criteria for provisions are met. A restructuring provision
does not include costs as of retaining or relocating continuing staff.
The expenditures of training the staff related to the future conduct of the
business and are not liabilities for restructuring at the balance sheet date.
Such expenditures are recognized on the same basis as if they arose
independently of a restructuring. At the balance sheet date, no such
expenditures has been incurred hence no provision is required.
Q.9. Alloy Fabrication Limited is engaged in manufacturing of iron and steel rods. The
company is in the process of finalisation of the accounts for the year ended 31st
March, 2022 and needs your advice on the following issues in line with the
provisions of AS-29:
(i) On 1st April, 2019, the company installed a huge furnace in their plant. The
furnace has a lining that needs to be replaced every five years for technical
reasons. At the Balance Sheet date 31st March, 2022, the company does not
provide any provision for replacement of lining of the furnace.
(ii) A case has been filed against the company in the consumer court and a
notice for levy of a penalty of 50 Lakhs has been received. The company has
appointed a lawyer to defend the case for a fee of 5 Lakhs. 60% of the fees
have been paid in advance and rest 40% will be paid after finalization of the
case. There are 70% chances that the penalty may not be levied.
(EXAM MAY 22)
Ans.
(i) A provision should be recognized only when an enterprise has a present
obligation arising from a past event or obligation. In the given case, there is
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no present obligation but a future one, therefore no provision is recognized

as per AS 29. The cost of replacement of lining of furnace is not recognized
as a provision because it is a future obligation. Even a legal requirement
does not require the company to make a provision for the cost of
replacement because there is no present obligation. Even the intention to
incur the expenditure depends on the company deciding to continue
operating the furnace or to replace the lining.
(ii) As per AS 29, an obligation is a present obligation if, based on the evidence
available, its existence at the balance sheet date is considered probable, i.e.,
more likely than not. Liability is a present obligation of the enterprise
arising from past events, the settlement of which is expected to result in an
outflow from the enterprise of resources embodying economic benefits.
In the given case, there are 70% chances that the penalty may not be levied.
Accordingly, Alloy Fabrication Ltd. should not make the provision for
penalty. The matter is disclosed as a contingent liability unless the
probability of any outflow is regarded as remote.
However, a provision should be made for remaining 40% fees of the lawyer
amounting Rs.2,00,000 in the financial statements of financial year 2021-
2022.
Q.10. At the end of the financial year ending on 31st March, 2022, a company finds that
there are twenty law suits outstanding which have not been settled till the date of
approval of accounts by the Board of Directors. The possible outcome as
estimated by the Board is as follows:
Particulars Probability Rs.
In respect of five cases (Win) 100% -
Next ten cases (Win) 50% -
Lose (Low damages) 40% 12,00,000
Lose (High damages) 10% 20,00,000
Remaining five cases Win 50% -
Lose (Low damages) 30% 10,00,000
Lose (High damages) 20% 21,00,000
Outcome of each case is to be taken as a separate entity. Ascertain the amount of
contingent loss and the accounting treatment in respect thereof as per AS - 29.
(EXAM NOV 22)
Ans. According to AS 29 (Revised) 'Provisions, Contingent Liabilities and Contingent
Assets', contingent liability should be disclosed in the financial statements if
following conditions are satisfied:
(i) There is a present obligation arising out of past events but not recognized
as provision.
(ii) It is not probable that an outflow of resources embodying economic benefits
will be required to settle the obligation.

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(iii) The possibility of an outflow of resources embodying economic benefits is

not remote.
(iv) The amount of the obligation cannot be measured with sufficient reliability
to be recognized as provision.
In this case, the probability of winning of first five cases is 100% and hence,
question of providing for contingent loss does not arise. The probability of
winning of next ten cases is 50% and for remaining five cases is 50%. As per AS
29 (Revised), we make a provision if the loss is probable. As the loss does not
appear to be probable and the possibility of an outflow of resources embodying
economic benefits is remote, therefore disclosure by way of note should be made.
For the purpose of the disclosure of contingent liability by way of note, amount
may be calculated as under:
Expected loss in next ten cases
= 40% of 12,00,000+ 10% of 20,00,000
= 4,80,000+ 2,00,000
= 6,80,000
Expected loss in remaining five cases
= 30% of 10,00,000+ 20% of 21,00,000
= 3,00,000+ 4,20,000
= 7,20,000
To disclose contingent liability on the basis of maximum loss will be highly
unrealistic. Therefore, the better approach will be to disclose the overall expected
loss of 1,04,00,000 (6,80,000 × 10+ 7,20,000 × 5) as contingent liability.

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