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CA FINAL NEW COURSE (Nov 2021)

GROUP I – PAPER 1
FINANCIAL REPORTING
(Series 2)
Time Allowed: - 3 Hours Maximum Marks: 100

This paper comprises 6 questions. Question No. 1 is compulsory. Attempt

any 4 questions out of the remaining 5 questions.

Marks
1 (a) On 30th September, 20X1 Entity A issues 2.5 shares in exchange for each 16
ordinary share of Entity B. All of Entity B’s shareholders exchange their shares
in Entity B. Therefore, Entity A issues 150 ordinary shares in exchange for all
60 ordinary shares of Entity B.
The fair value of each ordinary share of Entity B at 30th September, 20X1 is ₹
40. The quoted market price of Entity A’s ordinary shares at that date is ₹ 16.
The fair values of Entity A’s identifiable assets and liabilities at 30th September,
20X1 are the same as their carrying amounts, except that the fair value of
Entity A’s non-current assets at 30th September, 20X1 is 1,500.
The statements of financial position of Entity A and Entity B immediately before
the business combination are:
Entity A Entity B
(legal parent, accounting (legal subsidiary,
acquiree) accounting acquirer)
Current assets 500 700
Non-current assets 1,300 3,000
Total assets 1,800 3,700
Current liabilities 300 600
Non-current liabilities 400 1,100
Total liabilities 700 1,700
Shareholders’ equity
Retained earnings 800 1,400
Issued equity
100 ordinary shares 300
60 ordinary shares 600
Total shareholders’ 1,100 2,000

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 equity

Total liabilities and 1,800 3,700

shareholders’ equity
Assume that Entity B’s earnings for the annual period ended 31st December,
20X0 were 600 and that the consolidated earnings for the annual period ended
31st December, 20X1 were 800. Assume also that there was no change in the
number of ordinary shares issued by Entity B during the annual period ended
31st December, 20X0 and during the period from 1st January, 20X1 to the date
of the reverse acquisition on 30th September, 20X1.
Calculate the fair value of the consideration transferred measure goodwill and
prepare consolidated balance sheet as on September 30, 20x1. Also compute
Earnings per share as on December 30, 20x1.

1 (b) QA Ltd. had on 1st April, 20X1 granted 1,000 share options each to 2,000 4
employees. The options are due to vest on 31st March, 20X4 provided the
employee remains in employment till 31st March, 20X4.
On 1st April, 20X1, the Directors of Company estimated that 1,800 employees
would qualify for the option on 31st March, 20X4. This estimate was amended to
1,850 employees on 31st March, 20X2 and further amended to 1,840 employees
on 31st March, 20X3.
On 1st April, 20X1, the fair value of an option was ₹ 1.20. The fair value increased
to ₹ 1.30 as on 31st March, 20X2 but due to challenging business conditions, the
fair value declined thereafter. In September, 20X2, when the fair value of an option
was ₹ 0.90, the Directors repriced the option and this caused the fair value to
increase to ₹ 1.05. Trading conditions improved in the second half of the year and
by 31 st March, 20X3 the fair value of an option was ₹1.25. QA Ltd. decided that
additional cost incurred due to repricing of the options on 30th September, 20X2
should be spread over the remaining vesting period from 30th September, 20X2 to
31st March, 20X4.
The Company has requested you to suggest the suitable accounting treatment for
these transaction as on 31st March, 20X3.

2 (a) Entity A (an INR functional currency entity) enters into a USD 1,000,000 sale 10
contract on 1 January 20X1 with Entity B (an INR functional currency entity)
to sell equipment on 30 June 20X1.
Spot rate on 1 January 20X1: INR/USD 45
Spot rate on 31 March 20X1: INR/USD 57
Three-month forward rate on 31 March 20X1: INR/USD 45
Six-month forward rate on 1 January 20X1: INR/USD 55
Spot rate on 30 June 20X1: INR/USD 60
Assume that this contract has an embedded derivative that is not closely
related and requires separation. Please provide detailed journal entries in the
books of Entity A for accounting of such embedded derivative until sale is
actually made.

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2 (b) A Lessor enters into a 10-year lease of equipment with Lessee. The equipment 10
is not specialised in nature and is expected to have alternative use to Lessor at
the end of the 10-year lease term. Under the lease:
 Lessor receives annual lease payments of ₹ 15,000, payable at the end of
the year
 Lessor expects the residual value of the equipment to be ₹ 50,000 at the
end of the 10-year lease term
 Lessee provides a residual value guarantee that protects Lessor from the
first ₹ 30,000 of loss for a sale at a price below the estimated residual
value at the end of the lease term (i.e., ₹ 50,000)
 The equipment has an estimated remaining economic life of 15 years, a
carrying amount of ₹ 1,00,000 and a fair value of ₹ 1,11,000
 The lease does not transfer ownership of the underlying asset to Lessee
at the end of the lease term or contain an option to purchase the
underlying asset
 The interest rate implicit in the lease is 10.078%.
How should the Dealer Lessor account for the same in its books of accounts?

3 (a) A parent purchased an 80% interest in a subsidiary for ₹ 1,60,000 on 1 April 8

20X1 when the fair value of the subsidiary’s net assets was ₹ 1,75,000. Goodwill
of ₹ 20,000 arose on consolidation under the partial goodwill method. An
impairment of goodwill of ₹ 8,000 was charged in the consolidated financial
statements to 31 March 20X3. No other impairment charges have been recorded.
The parent sold its investment in the subsidiary on 31 March 20X4 for ₹
2,00,000. The book value of the subsidiary’s net assets in the consolidated
financial statements on the date of the sale was ₹ 2,25,000 (not including
goodwill of ₹ 12,000). When the subsidiary met the criteria to be classified as
held for sale under Ind AS 105, no write down was required because the
expected fair value less cost to sell (of 100% of the subsidiary) was greater than
the carrying value.
The parent carried the investment in the subsidiary at cost, as permitted by Ind AS
27.
Calculate gain or loss on disposal of subsidiary in parent’s separate and
consolidated financial statements as on 31st March 20X4.

3 (b) Pluto Ltd. has purchased a manufacturing plant for ₹ 6 lakhs on 1st April, 20X1. 8
The useful life of the plant is 10 years. On 30th September, 20X3, Pluto
temporarily stops using the manufacturing plant because demand has
declined. However, the plant is maintained in a workable condition and it will
be used in future when demand picks up.
The accountant of Pluto ltd. decided to treat the plant as held for sale until the
demands picks up and accordingly measures the plant at lower of carrying
amount and fair value less cost to sell.

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 Also, the accountant has also stopped charging the depreciation for the rest of
period considering the plant as held for sale. The fair value less cost to sell on
30th September, 20X3 and 31st March, 20X4 was ₹ 4 lakhs and ₹ 3.5 lakhs
respectively.
The accountant has performed the following working:

Carrying amount on initial classification

as held for sale
Purchase Price of Plant 6,00,000
Less: Accumulated dep (6,00,000/ 10 (1,50,000) 4,50,000
Years) x 2.5 years
Fair Value less cost to sell as on 30th 4,00,000
September, 20X3
The value will be lower of the above two 4,00,000

Balance Sheet extracts as on 31st March, 20X4

Assets
Current Assets
Other Current Assets
Assets classified as held for sale 3,50,000

Analyse whether the above accounting treatment made by the accountant is in

compliance with the Ind AS. If not, advise the correct treatment alongwith the
necessary workings.

3 (c) Due to immense loss to Nepal in the recent earthquake, one FMCG Company 4
undertakes various commercial activities with considerable discounts and
concessions at the related affected areas of Nepal for a continuous period of 3
months after earthquake. In the Financial Statements for the year 20X1-X2, the
Management has shown the expenditure incurred on such activity as expenditure
incurred to discharge Corporate Social Responsibility.
State whether the treatment done by the management of management is correct.
Explain with reasons.

4 (a) On 1 January 20X0, XYZ Ltd. issues 10 year bonds for ₹ 1,000,000, bearing 8
interest at 10% (payable annually on 31st December each year). The bonds are
redeemable on 31 December 20X9 for ₹ 1,000,000. No costs or fees are
incurred. The effective interest rate is therefore 10%. On 1 January 20X5 (i.e.
after 5 years) XYZ Ltd. and the bondholders agree to a modification in
accordance with which:
 the term is extended to 31 December 2011,
 interest payments are reduced to 5% p.a.,
 the bonds are redeemable on 31 December 2011 for ₹15,00,000; and
 legal and other fees of ₹ 1,00,000 are incurred.
XYZ Ltd. determines that the market interest rate on 1 January 20X5 for

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 borrowings on similar terms is 11%.

4 (b) On 1 April 20X1, the fair value of the assets of XYZ Ltdʼs defined benefit plan 8
were valued at ₹ 20,40,000 and the present value of the defined obligation
was ₹ 21,25,000. On 31st March, 20X2 the plan received contributions from XYZ
Ltd amounting to ₹ 4,25,000 and paid out benefits of ₹ 2,55,000. The current
service cost for the financial year ending 31 March 20X2 is ₹ 5,10,000. An
interest rate of 5% is to be applied to the plan assets and obligations. The fair
value of the planʼs assets at 31 March 20X2 was ₹ 23,80,000, and the present
value of the defined benefit obligation was ₹ 27,20,000. Provide a reconciliation
from the opening balance to the closing balance for Plan assets and Defined
benefit obligation. Also show how much amount should be recognised in the
statement of profit and loss, other comprehensive income and balance sheet?

4 (c) An asset is sold in 2 different active markets at different prices. An entity 4

enters into transactions in both markets and can access the price in those
markets for the asset at the measurement date.
In Market A:
The price that would be received is ₹ 26, transaction costs in that market are ₹
3 and the costs to transport the asset to that market are ₹ 2.
In Market B:
The price that would be received is ₹ 25, transaction costs in that market are ₹ 1
and the costs to transport the asset to that market are ₹ 2.
You are required to calculate:
(i) The fair value of the asset, if market A is the principal market, and
(ii) The fair value of the asset, if none of the markets is principal market.

5 (a) KK Ltd. runs a departmental store which awards 10 points for every purchase of ₹ 12
500 which can be discounted by the customers for further shopping with the
same merchant. Each point is redeemable on any future purchases of KK Ltd.’s
products within 3 years. Value of each point is ₹ 0.50. During the accounting
period 2017-2018, the entity awarded 1,00,00,000 points to various customers of
which 18,00,000 points remained undiscounted (to be redeemed till 31st March,
2020). The management expects only 80% of the remaining will be discounted in
future.
The Company has approached your firm with the following queries and has asked
you to suggest the accounting treatment (Journal Entries) under the applicable
Ind AS for these award points:
(a) How should the recognition be done for the sale of goods worth ₹ 10,00,000
on a particular day?
(b) How should the redemption transaction be recorded in the year 2017-
2018? The Company has requested you to present the sale of goods and
redemption as independent transaction. Total sales of the entity is ₹ 5,000
lakhs.

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 (c) How much of the deferred revenue should be recognised at the year-end
(2017- 2018) because of the estimation that only 80% of the outstanding
points will be redeemed?
(d) In the next year 2018-2019, 60% of the outstanding points were discounted
Balance 40% of the outstanding points of 2017-2018 still remained
outstanding. How much of the deferred revenue should the merchant
recognize in the year 2018-2019 and what will be the amount of balance
deferred revenue?
(e) How much revenue will the merchant recognized in the year 2019-2020, if
3,00,000 points are redeemed in the year 2019-2020?

5 (b) PQR Ltd. is the company which has performed well in the past but one of its 8
major assets, an item of equipment, suffered a significant and unexpected
deterioration in performance. Management expects to use the machine for a
further four years after 31st March 20X6, but at a reduced level. The equipment
will be scrapped after four years. The financial accountant for PQR Ltd. has
produced a set of cash-flow projections for the equipment for the next four
years, ranging from optimistic to pessimistic. CFO thought that the projections
were too conservative, and he intended to use the highest figures each year.
These were as follows:
₹ ʼ000
Year ended 31st March 20X7 276
Year ended 31st March 20X8 192
Year ended 31st March 20X9 120
Year ended 31st March 20Y0 114
The above cash inflows should be assumed to occur on the last day of each
financial year. The pre-tax discount rate is 9%. The machine could have been
sold at 31 st March 20X6 for ₹ 6,00,000 and related selling expenses in this regard
could have been ₹ 96,000. The machine had been re valued previously, and at
31 st March 20X6 an amount of ₹ 36,000 was held in revaluation surplus in
respect of the asset. The carrying value of the asset at 31st March 20X6 was ₹
660,000. The Indian government has indicated that it may compensate the
company for any loss in value of the assets up to its recoverable amount.
Calculate impairment loss, if any and revised depreciation of asset. Also suggest
how Impairment loss, if any would be set off and how compensation from
government be accounted for?

6 (a) ABC Ltd. has taken a loan of USD 20,000 on 1st April, 20X1 for constructing a 5
plant at an interest rate of 5% per annum payable on annual basis.
On 1st April, 20X1, the exchange rate between the currencies i.e USD vs Rupees
was ₹ 45 per USD. The exchange rate on the reporting date i.e 31 st March, 20X2 is
₹ 48 per USD.
The corresponding amount could have been borrowed by ABC Ltd from State
bank of India in local currency at an interest rate of 11% per annum as on 1st
April, 20X1.

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 Compute the borrowing cost to be capitalized for the construction of plant by ABC
Ltd.

6 (b) Narayan Ltd. provides you the following information and asks you to calculate 5
the tax expense for each quarter, assuming that there is no difference between
the estimated taxable income and the estimated accounting income:
Estimated Gross Annual Income is 33,00,000 (inclusive of Estimated Capital
Gains of ₹ 8,00,000)
Estimated Income of Quarter I is ₹ 7,00,000, Quarter II is ₹ 8,00,000, Quarter III
(including Estimated Capital Gains of ₹ 8,00,000) is ₹ 12,00,000 and Quarter IV
is ₹6,00,000.
Tax Rates: On Capital Gains 12%
On Other Income: First ₹ 5,00,000 30%
Balance Income· 40%

6 (c) Mac Ltd. purchased goods on credit from Toy Ltd. for ₹ 580 lakhs for export. The 5
export order was cancelled. Mac Ltd. decided to sell the same goods in the local
market with a price discount. Toy Ltd. was requested to offer a price discount of ₹
10%. Toy Ltd. wants to adjust the sales figure to the extent of the discount
requested by Mac Ltd. Discuss whether such a treatment in the books of Toy Ltd.
is justified as per the provisions of the relevant Ind AS.
Also, Toy Ltd. entered into a sale deed for its Land on 15th March, 20X1. But
registration was done with the registrar on 20th April, 20X1. But before
registration, is it possible to recognize the sale and the gain at the balance sheet
date? Give reasons in support of your answer.

6 (d) State the categories defined in the International IR Framework for capitals. 5
Comment whether an organisation has to follow these categories rigidly.

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