INTERMEDIATE

ACCOUNTING

CHAPTERS: 1, 2, 3

TEST PAPER - 1 Marks-30

SUGGESTED ANSWERS Duration- 50 MINS

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Question 1:
C Ltd. had following assets. Calculate depreciation for the year ended 31st March,
2020 for each asset as per AS 10 (Revised):
(i) Machinery purchased for ` 10 lakhs on 1st April, 2015 and residual value after
useful life of 5 years, based on 2015 prices is ` 10 lakhs.
(ii) Land for ` 50 lakhs.
(iii) A Machinery is constructed for ` 5,00,000 for its own use (useful life is 10 years).
Construction is completed on 1st April, 2019, but the company does not begin
using the machine until 31st March, 2020.
(iv) Machinery purchased on 1st April.2017 for ` 50,000 with useful life of 5 years
and residual value is NIL. On 1st April, 2019, management decided to use this
asset for further 2 years only.
(8 Marks)
Solution:
Computation of amount of depreciation as per AS 10

(i) Machinery purchased on 1/4/15 for ` 10 lakhs (having residual Nil

value of ` 10 lakhs)
Reason: The company considers that the residual value, based on
prices prevailing at the balance sheet date, will equal the cost.
Therefore, there is no depreciable amount and depreciation is correctly
zero.
(ii) Land (50 lakhs) (considered freehold) Nil
Reason: Land has an unlimited useful life and therefore, it is not
depreciated.
(iii) Machinery constructed for own use (` 5,00,000/10) 50,000
Reason: The entity should begin charging depreciation from the date
the machine is ready for use i.e. 1st April,2019. 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.
(iv) Machinery having revised useful life 15,000
Reason: The entity has charged depreciation using the straight-line
method at ` 10,000 per annum i.e (50,000/5 years). On 1st April,2019
the asset's net book value is [50,000 – (10,000 x 2)] i.e. ` 30,000. The
remaining useful life is 2 years as per revised estimate. The company
should amend the annual provision for depreciation to charge the
unamortized cost over the revised remaining life of 2 years.
Consequently, it should charge depreciation for the next 2 years at
` 15,000 per annum i.e. (30,000 / 2 years).

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 Question 2:

Mr. Raj gives the following information relating to items forming part of inventory as on
31-3-2021. His factory produces Product X using Raw material A.
(i) 600 units of Raw material A (purchased @ 120). Replacement cost of raw
material A as on 31-3-2021 is 90 per unit.
(ii) 500 Units of partly finished goods in the process of producing X and cost incurred
till date 260 per unit. These units can be finished next year by incurring additional
cost of 60 per unit.
(iii) 1500 units of finished Product X and total cost incurred 320 per unit. Expected
selling price of Product X is 300 per unit.

Determine how each item of inventory will be valued as on 31-3-2021. Also

calculate the value of total inventory as on 31-3-2021.
(6 Marks)

Solution:

As per AS 2 (Revised) “Valuation of Inventories”, materials and other supplies held for
use in the production of inventories are not written down below cost if the finished
products in which they will be incorporated are expected to be sold at cost or above cost.
However, when there has been a decline in the price of materials and it is estimated
that the cost of the finished products will exceed net realisable value, the materials are
written down to net realisable value. In such circumstances, the replacement cost of the
materials may be the best available measure of their net realisable value. In the given
case, selling price of product X is 300 and total cost per unit for production is 320.
Hence the valuation will be done as under:
(i) 600 units of raw material will be written down to replacement cost as market value
of finished product is less than its cost, hence valued at 90 per unit.
(ii) 500 units of partly finished goods will be valued at 240 per unit i.e. lower of cost
(260) or Net realisable value 240 (Estimated selling price 300 per unit less
additional cost of 60).
(iii) 1,500 units of finished product X will be valued at NRV of 300 per unit since it is
lower than cost 320 of product X.
Valuation of Total Inventory as on 31.03.2021:
Units Cost( ) NRV / Value = units x cost or
Replacement NRV whichever is
cost less ( )

Raw material A 600 120 90 54,000

Partly finished goods 500 260 240 1,20,000
Finished goods X 1,500 320 300 4,50,000
Value of Inventory 6,24,000

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Question 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 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.
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.
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 recognise other than temporary decline as per AS
13 (Revised).
(5 Marks)

Solution:

As per AS 13 (Revised), where investments are reclassified from current to long-

term, transfers are made at the lower of cost and fair value at the date of transfer.
(1) In the first case, the market value of the investment is ` 25 lakhs, which is higher than
its cost i.e. ` 20 lakhs. Therefore, the transfer to long term investments should be
carried at cost i.e. ` 20 lakhs.
(2) In the second case, the market value of the investment is ` 6.5 lakhs, which is lower
than its cost i.e. ` 15 lakhs. Therefore, the transfer to long term investments should be
carried in the books at the market value i.e. ` 6.5 lakhs. The loss of ` 8.5 lakhs should
be charged to profit and loss account.
As per AS 13 (Revised), where long-term investments are re-classified as current
investments, transfers are made at the lower of cost and carrying amount at the date
of transfer.

(3) In the third case, the book value of the investment is ` 12 lakhs, which is lower than its
cost i.e. ` 18 lakhs. Here, the transfer should be at carrying amount and hence this re-
classified current investment should be carried at 12 lakhs.

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Question 4:
Shan Builders Limited has borrowed a sum of US $ 10,00,000 at the beginning of
Financial Year 2019-20 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 31st March, 2020 ` 62 per US $. If Shan Builders Limited
had 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 31st March, 2020 as per applicable
Accounting Standards.
(5 Marks)

Solution:
(i) Interest for the period 2019-20
= US $ 10 lakhs x 4% × ` 62 per US $ = ` 24.80 lakhs
(ii) Increase in the liability towards the principal amount
= US $ 10 lakhs × ` (62 - 56) = ` 60 lakhs
(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 10 lakhs × ` 56 x 10.5% = ` 58.80 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency
borrowing = ` 58.80 lakhs - ` 24.80 lakhs = ` 34 lakhs.
Therefore, out of ` 60 lakhs increase in the liability towards principal amount, only
` 34 lakhs will be considered as the borrowing cost. Thus, total borrowing cost
would be ` 58.80 lakhs being the aggregate of interest of ` 24.80 lakhs on foreign
currency borrowings plus the exchange difference to the extent of difference
between interest on local currency borrowing and interest on foreign currency
borrowing of ` 34 lakhs. Hence, ` 58.80 lakhs would be considered as the
borrowing cost to be accounted for as per AS 16 “Borrowing Costs” and the
remaining ` 26 lakhs (60 - 34) would be considered as the exchange difference to
be accounted for as per AS 11 “The Effects of Changes in Foreign Exchange
Rates”.

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 Question 5:
A trader commenced business on 01/01/20X1 with 12,000 represented by 6,000
units of a certain product at 2 per unit. During the year 20X1 he sold these units at
3 per unit and had withdrawn 6,000. Let us assume that the price of the product at
the end of year is 2.50 per unit. In other words, the specific price index applicable
to the product is 125.
Current cost of opening stock = (12,000 /100) x 125 = 6,000 x 2.50 = 15,000
Current cost of closing cash = 12,000 (18,000 – 6,000)
Opening equity at closing current costs = 15,000
Closing equity at closing current costs = 12,000
Retained Profit = 12,000 – 15,000 = (-) 3,000
The negative retained profit indicates that the trader has failed to maintain his
capital. The available fund of 12,000 is not sufficient to buy 6,000 units again at
increased price of 2.50 per unit. The drawings should have been restricted to
3,000 (6,000 – 3,000). Had the trader withdrawn 3,000 instead of 6,000, he would
have left with 15,000, the fund required to buy 6,000 units at 2.50 per unit.

The expenditures that were made on the building project were as follows:

You are required to compute the Capital maintenance under all three bases ie.
(i) Costs, (ii) Current purchasing power and (iii) Physical capital maintenance.

(6 Marks)

Solution:
Financial Capital Maintenance at historical costs

Closing capital (At historical cost) 12,000

Less: Capital to be maintained
Opening capital (At historical cost) 12,000
Nil (12,000)
Introduction (At historical cost)
Retained profit Nil

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 Financial Capital Maintenance at current purchasing power

Closing capital (At closing price) 12,000

Less: Capital to be maintained
14,400
Opening capital (At closing price)
Nil (14,400)
Introduction (At closing price)
(2,400)
Retained profit/(loss)

Physical Capital Maintenance

Closing capital (At current cost) ( 4,800 units) 12,000

Less: Capital to be maintained
15,000
Opening capital (At current cost) (6,000 units)
Nil (15,000)
Introduction (At current cost)
Loss resulting in non-maintenances of capital (3,000)

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