Test Series: October, 2020

MOCK TEST PAPER

FINAL (NEW) COURSE
PAPER 1: FINANCIAL REPORTING
ANSWERS
1. (a) Consolidated Balance Sheet of PN Ltd. and its subsidiary SR Ltd. as on 31 March 2020
Particulars Note No. `
I. Assets
(1) Non-current assets
(i) Property, Plant & Equipment 1 26,83,200
(ii) Goodwill 2 89,402
(2) Current Assets
(i) Inventories 3 5,34,800
(ii) Financial Assets
(a) Trade Receivables 4 3,11,300
(b) Cash & Cash equivalents 5 70,100
Total Assets 36,88,802
II. Equity and Liabilities
(1) Equity
(i) Equity Share Capital 6 15,60,000
(ii) Other Equity 7 11,39,502
(2) Non-controlling Interest (W.N.3) 5,07,300
(3) Current Liabilities
(i) Financial Liabilities
(a) Trade Payables 8 2,12,400
(b) Short term borrowings 9 2,69,600
Total Equity & Liabilities 36,88,802
Notes to accounts
`
1. Property, Plant & Equipment
Land & Building (4,68,000 + 5,61,600 + 3,12,000) 13,41,600
Plant & Machinery (W.N.5) 13,41,600 26,83,200
2. Goodwill (W.N.4) 89,402
3. Inventories
PN Ltd. 3,74,400
SR Ltd. (1,13,600 +46,800) 1,60,400 5,34,800
4. Trade Receivables
PN Ltd. 1,86,500
SR Ltd. 1,24,800 3,11,300
5. Cash & Cash equivalents
PN Ltd. 45,200
SR Ltd. 24,900 70,100

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 8. Trade Payables
PN Ltd. 1,46,900
SR Ltd. (34,300 + 31,200) 65,500 2,12,400
9. Short-term borrowings
PN Ltd. 2,49,600
SR Ltd. 20,000 2,69,600
Statement of Changes in Equity:
6. Equity share Capital
Balance at the beginning of the Changes in Equity share Balance at the end of
reporting period capital during the year the reporting period
` ` `
15,60,000 0 15,60,000
7. Other Equity
Reserves & Surplus Total
Capital Retained Other
reserve Earnings Reserves
` ` ` `
Balance at the beginning of the reporting 0 9,36,000 9,36,000
period
Total comprehensive income for the year 0 1,78,400 1,78,400
Dividends 0 (52,416) (52,416)
Total comprehensive income attributable to 0 77,518 77,518
parent (W.N.2)
Gain on Bargain purchase 0 0
Balance at the end of reporting period 2,03,502 9,36,000 11,39,502
Working Notes:
1. Adjustments of Fair Value
The Plant & Machinery of SR Ltd. would stand in the books at ` 4,44,600 on
 4,21,200 
1 October 2019, considering only six months’ depreciation on `   = 4,68,000;
 90% 
total depreciation being ` 4,68,000 ×10% × 6 = 23,400 . Being the fair value of the asset
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` 6,24,000, there is an appreciation to the extent of ` 1,79,400 (` 6,24,000 – ` 4,44,600).
Acquisition date profits of SR Ltd. `
Reserves on 1.4.2019 3,12,000
Profit& Loss Account Balance on 1.4.2019 93,600
Profit for 2019-2020: Total [`2,55,800-(93,600-74,880)]x 6/12 i.e.
` 1,18,540 upto 1.10.2019 1,18,540
Total Appreciation 5,07,000*
Total 10,31,140
Holding Co. Share (70%) 7,21,798
NCI 3,09,342

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 *Appreciation = Land & Building ` 3,12,000 + Inventories ` 46,800+ Plant & Machinery
` 1,79,400 –Trade Payables (` 31,200) = ` 5,07,000
2. Post-acquisition profits of SR Ltd. `
Profit after 1.10.2019 [2,55,800 - (93,600-74,880)] x 6/12 1,18,540
Less:10% depreciation on `6,24,000 for 6 months less depreciation already
charged for 2 nd half of 2019-2020 on `4,68,800 (ie 31,200-23,400) (7,800)
Total 1,10,740
Share of holding Co. (70%) 77,518
Share of NCI (30%) 33,222
3. Non-controlling Interest `
Par value of 1872 shares 1,87,200
Add:30% Acquisition date profits [(10,31,140 – 74,880) x 30%] 2,86,878
30% Post-acquisition profits [W.N.2] 33,222
5,07,300
4. Goodwill `
Amount paid for 4,368 shares 12,48,000
Less : Par value of shares 4,36,800
Acquisition date profits-share of PN Ltd. (W.N.1) 7,21,798 (11,58,598)
Goodwill 89,402
5. Value of Plant & Machinery: `
PN Ltd. 7,48,800
SR Ltd. 4,21,200
Add: Appreciation on 1.10.2019 1,79,400
6,00,600
Add: Depreciation for 2nd half charged on pre-revalued value 23,400
Less: Depreciation on ` 6,24,000 for 6 months (31,200) 5,92,800
13,41,600
6. Consolidated Profit & Loss account `
PN Ltd. (as given) 1,78,400
Less: Dividend (52,416) 1,25,984
Share of PN Ltd. in post-acquisition profits (W.N.2) 77,518
2,03,502
(b) Costs incurred in creating computer software, should be charged to research & development
expenses when incurred until technical feasibility/asset recognition criteria have been established
for the product. Here, technical feasibility is established after completion of detailed program
design.
In this case, ` 5,30,000 (salary cost of ` 1,50,000, program design cost of ` 3,00,000 and coding
and technical feasibility cost of ` 80,000) would be recorded as expense in Profit and Loss since
it belongs to research phase.
Cost incurred from the point of technical feasibility are capitalised as software costs. But the
conference cost of `60,000 would be expensed off.

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 In this situation, direct cost after establishment of technical feasibility of ` 3,00,000 and testing
cost of ` 90,000 will be capitalised.
The cost of software capitalised is = ` (3,00,000 + 90,000) = ` 3,90,000.
2. (a) Carrying amount of asset on 31 March 2020 = ` 6,60,000
Calculation of Value in Use
Year ended Cash flow Discount factor @ 9% Amount
` `
31st March, 2021 2,76,000 0.9174 2,53,202
31st March, 2022 1,92,000 0.8417 1,61,606
31st March, 2023 1,20,000 0.7722 92,664
31st March, 2024 1,14,000 0.7084 80,758
Total (Value in Use) 5,88,230
Calculation of Recoverable amount
Particulars Amount (`)
Value in use 5,88,230
Fair value less costs of disposal (6,00,000 – 96,000) 5,04,000
Recoverable amount 5,88,230
(Higher of value in use and fair value less costs of disposal)
Calculation of Impairment loss
Particulars Amount (`)
Carrying amount 6,60,000
Less: Recoverable amount (5,88,230)
Impairment loss 71,770
Calculation of Revised carrying amount
Particulars Amount (`)
Carrying amount 6,60,000
Less: Impairment loss (71,770)
Revised carrying amount 5,88,230
Calculation of Revised Depreciation:
Revised carrying amount – Residual value
Remaining life = (5,88,230 - 0) / 4 = ` 1,47,058 per annum
Set off of Impairment loss:
The impairment loss of ` 71,770 must first be set off against any revaluation surplus in relation to
the same asset. Therefore, the revaluation surplus of ` 36,000 is eliminated against impairment
loss, and the remainder of the impairment loss ` 35,770 (` 71,770 – ` 36,000) is charged to
profit and loss.

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 Treatment of Government compensation:
Any compensation by government would be accounted for as such when it becomes receivable.
At this time, the government has only stated that it may reimburse the company and therefore
credit should not be taken for any potential government receipt.
(b) Reconciliation of Plan assets and Defined benefit obligation
Plan Assets Defined benefit
obligation
` `
Fair value/present value as at 1 st April 2019 20,40,000 21,25,000
Interest @ 5% 1,02,000 1,06,250
Current service cost 5,10,000
Contributions received 4,25,000 -
Benefits paid (2,55,000) (2,55,000)
Return or gain (assets) (balancing figure) 68,000 -
Actuarial Loss (balancing figure) - 2,33,750
Closing balance as at 31 March 2020 23,80,000 27,20,000
In the Statement of Profit and loss, the following will be recognized:
`
Current service cost 5,10,000
Net interest on net defined liability (` 1,06,250 – ` 1,02,000) 4,250

Defined benefit re-measurements recognized in Other Comprehensive Income:

`
Loss on defined benefit obligation (2,33,750)
Gain on plan assets 68,000
(1,65,750)
In the Balance sheet, the following will be recognized :
`
Net defined liability (` 27,20,000 – ` 23,80,000) 3,40,000
(c) (i) At the time of initial recognition
`
Liability component
Present value of 5 yearly interest payments of ` 40,000, discounted at
12% annuity (40,000 x 3.605) 1,44,200
Present value of ` 5,00,000 due at the end of 5 years, discounted at
12%, compounded yearly (5,00,000 x 0.567) 2,83,500
4,27,700
Equity component
(` 5,00,000 – ` 4,27,700) 72,300
Total proceeds 5,00,000
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 Note: Since ` 105 is the conversion price of debentures into equity shares and not the
redemption price, the liability component is calculated @ ` 100 each only.
Journal Entry
` `
Bank Dr. 5,00,000
To 8% Debentures (Liability component) 4,27,700
To 8% Debentures (Equity component) 72,300
(Being Debentures are initially recorded a fair value)
(ii) At the time of repurchase of convertible debentures
The repurchase price is allocated as follows:
Carrying Fair Value Difference
Value @ 12% @ 9%
` ` `
Liability component
Present value of 2 remaining yearly
interest payments of ` 40,000, discounted
at 12% and 9%, respectively 67,600 70,360
Present value of ` 5,00,000 due in 2
years, discounted at 12% and 9%,
compounded yearly, respectively 3,98,500 4,21,000
Liability component 4,66,100 4,91,360 (25,260)
Equity component 72,300 33,640* 38,660
Total 5,38,400 5,25,000 13,400

*(5,25,000 – 4,91,360) = 33,640

Journal Entries
` `
8% Debentures (Liability component) Dr. 4,66,100
Profit and loss A/c (Debt settlement expense) Dr. 25,260
To Bank A/c 4,91,360
(Being the repurchase of the liability component recognised)
8% Debentures (Equity component) Dr. 72,300
To Bank A/c 33,640
To Reserves and Surplus A/c 38,660
(Being the cash paid for the equity component recognised)
3. (a) Paragraph 42 of Ind AS 103 provides that in a business combination achieved in stages, the acquirer
shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and
recognise the resulting gain or loss, if any, in profit or loss or other comprehensive income, as
appropriate. In prior reporting periods, the acquirer may have recognized changes in the value of its
equity interest in the acquiree in other comprehensive income. If so, the amount that was recognised
in other comprehensive income shall be recognised on the same basis as would be required if the
acquirer had disposed of directly the previously held equity interest.

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 Applying the above, Deepak Ltd. records the following entry in its consolidated financial
statements:
(` in crore)
Debit Credit
Identifiable net assets of Shaun Ltd. Dr. 16,200
Goodwill (W.N.1) Dr. 2,160
Foreign currency translation reserve Dr. 54
PPE revaluation reserve Dr. 27
To Cash 13,500
To Investment in associate (4,320 + 378 + 54 + 27) 4,779
To Retained earnings (W.N.2) 27
To Gain on previously held interest in Shaun Ltd. recognised in
Profit or loss (W.N.3) 135
(Recognition of acquisition of Shaun Ltd.)
Working Notes:
1. Calculation of Goodwill
` in crore
Cash consideration 13,500
Add: Fair value of previously held equity interest in Shaun Ltd. 4,860
Total consideration 18,360
Less: Fair value of identifiable net assets acquired (16,200)
Goodwill 2,160
2. The credit to retained earnings represents the reversal of the unrealized gain of
` 27 crore in Other Comprehensive Income related to the revaluation of property, plant and
equipment. In accordance with Ind AS 16, this amount is not reclassified to profit or loss.
3. The gain on the previously held equity interest in Shaun Ltd. is calculated as follows:
` in crore
Fair Value of 30% interest in Shaun Ltd. at 1 st April, 2020 4,860
Carrying amount of interest in Shaun Ltd. at 1 st April, 2020 (4,779)
81
Unrealised gain previously recognised in OCI 54
Gain on previously held interest in Shaun Ltd. recognised in profit or loss 135
(b) In accordance with paragraph 72 of Ind AS 37, ‘Provisions, Contingent Liabilities and Contingent
Assets’, a constructive obligation to restructure arises only when an entity has detailed formal
plan for restructuring identifying the business or part of business concerned; the principal
locations affected; the location, function, and approximate number of employees who will be
compensated for terminating their services; the expenditures that will be undertaken; and when
the plan will be implemented; and has raised a valid expectation in those affected that it will carry
out the restructuring by starting to implement that plan or announcing its main features to those
affected by it.
Further, paragraph 75 of Ind AS 37 provides that a management or board decision to restructure
taken before the end of the reporting period does not give rise to a constructive obligation at the
end of the reporting period unless the entity has, before the end of the reporting period
(a) started to implement the restructuring plan; or
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 (b) announced the main features of the restructuring plan to those affected by it in a sufficiently
specific manner to raise a valid expectation in them that the entity will carry out the
restructuring.
In the given case, since COVID-19 pandemic impact started during March 2020, it is likely that
the senior management started drawing up the plan for restructuring some of its business
activities after the end of the reporting period, i.e., 2019-2020. If that be so, as per Ind AS 37,
the management decisions subsequent to reporting date do not give rise to constructive
obligation as of reporting date and no provision is required for restructuring costs as at
31 March 2020.
In this regard, paragraph 75 of Ind AS 37 provides that if an entity starts to implement a
restructuring plan, or announces its main features to those affected, only after the reporting
period, disclosure is required under Ind AS 10, Events after the Reporting Period, if the
restructuring is material and non-disclosure could influence the economic decisions that users
make on the basis of the financial statements.
(c) Scenario (i)
Since the loan is repayable on demand, it has fair value equal to cash consideration given.
KK Ltd. and YK Ltd. should recognize financial asset and liability, respectively, at the amount of
loan given (assuming that loan is repayable within a year). Upon, repayment, both the entities
should reverse the entries that were made at the origination.
Journal entries in the books of KK Ltd.
At origination
Loan to YK Ltd. A/c Dr. ` 10,00,000
To Bank A/c ` 10,00,000
On repayment
Bank A/c Dr. ` 10,00,000
To Loan to YK Ltd. A/c ` 10,00,000
Journal entries in the books of YK Ltd.
At origination
Bank A/c Dr. ` 10,00,000
To Loan from KK Ltd. A/c ` 10,00,000
On repayment
Loan from KK Ltd. A/c Dr. ` 10,00,000
To Bank A/c ` 10,00,000
In the consolidated financial statements, there will be no entry in this regard since loan receivable
and loan payable will get set off.
Scenario (ii)
Applying the guidance in Ind AS 109, a ‘financial asset’ shall be recorded at its fair value upon
initial recognition. Fair value is normally the transaction price. However, sometimes certain type
of instruments may be exchanged at off market terms (ie, different from market terms for a similar
instrument if exchanged between market participants).
If a long-term loan or receivable that carries no interest while similar instruments if exchange d
between market participants carry interest, then fair value for such loan receivable will be lower
from its transaction price owing to the loss of interest that the holder bears. In such cases where
part of the consideration given or received is for something other than the financial instrument, an

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 entity shall measure the fair value of the financial instrument. The difference in fair value and
transaction cost will treated as investment in Subsidiary YK Ltd.
Both KK Ltd. and YK Ltd. should recognise financial asset and liability, respectively, at fair value
on initial recognition, i.e., the present value of ` 10,00,000 payable at the end of 3 years using
discounting factor of 10%. Since the question mentions fair value of the loan at initial recognition
as ` 8,10,150, the same has been considered. The difference between the loan amount and its
fair value is treated as an equity contribution to the subsidiary. This represents a further
investment by the parent in the subsidiary.
Journal entries in the books of KK Ltd. (for one year)
At origination
Loan to YK Ltd. A/c Dr. ` 8,10,150
Investment in YK Ltd. A/c Dr. ` 1,89,850
To Bank A/c ` 10,00,000
During periods to repayment- to recognise interest
Year 1 – Charging of Interest
Loan to YK Ltd. A/c Dr. ` 81,015
To Interest income A/c ` 81,015
Transferring of interest to Profit and Loss
Interest income A/c Dr. ` 81,015
To Profit and Loss A/c ` 81,015
On repayment
Bank A/c Dr. ` 10,00,000
To Loan to YK Ltd. A/c ` 10,00,000
Note- Interest needs to be recognised in statement of profit and loss. The same cannot
be adjusted against capital contribution recognised at origination.
Journal entries in the books of YK Ltd. (for one year)

At origination
Bank A/c Dr. ` 10,00,000
To Loan from KK Ltd. A/c ` 8,10,150
To Equity Contribution in KK Ltd. A/c ` 1,89,850
During periods to repayment- to recognise interest
Year 1
Interest expense A/c Dr. ` 81,015
To Loan from KK Ltd. A/c ` 81,015
On repayment
Loan from KK Ltd. A/c Dr. ` 10,00,000
To Bank A/c ` 10,00,000
In the consolidated financial statements, there will be no entry in this regard since loan and
interest income/expense will get set off.
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 Scenario (iii)
Generally, a loan which is repayable when funds are available, cannot be stated as loan
repayable on demand. Rather the entity needs to estimate the repayment date and determine its
measurement accordingly by applying the concept prescribed in Scenario (ii).
In the consolidated financial statements, there will be no entry in this regard since loan and
interest income/expense will get set off.
In case the subsidiary YK Ltd. is planning to grant interest free loan to KK Ltd., then the
difference between the fair value of the loan on initial recognition and its nominal value should be
treated as dividend distribution by YK Ltd. and dividend income by the parent KK Ltd.
4. Transition date (opening) IND-AS BALANCE SHEET of SHAURYA LIMITED
As at 1 April 2018
(All figures are in ’000, unless otherwise specified)
Particulars Previous Transitional Ind Opening Ind AS
GAAP AS adjustments Balance sheet
ASSETS
Non-current assets
Property, plant and equipment (Note 1) 20,00,000 5,00,000 25,00,000
Goodwill (Note 2) 1,00,000 - 1,00,000
Other Intangible assets (Note 3) 2,00,000 - 2,00,000
Financial assets:
Investment 5,00,000 - 5,00,000
Loans (Note 4) 40,000 10,000 50,000
Other financial assets 1,10,000 - 1,10,000
Other non-current assets 2,00,000 - 2,00,000
Current assets
Inventories 12,50,000 - 12,50,000
Financial assets
Investment (Note 5) 18,00,000 30,000 18,30,000
Trade receivables (Note 6) 9,00,000 - 9,00,000
Cash and cash 10,00,000 - 10,00,000
equivalents/Bank
Other financial assets 3,50,000 - 3,50,000
Other current assets 50,000 - 50,000
TOTAL ASSETS 85,00,000 5,40,000 90,40,000
EQUITY AND LIABILITIES
Equity
Equity share capital 10,00,000 - 10,00,000
Other equity 25,00,000 7,90,000 32,90,000
Non-current liabilities
Financial liabilities
Borrowings (Note-7) 4,50,000 - 4,50,000

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 Provisions 3,50,000 - 3,50,000
Deferred tax liabilities (Net) 3,50,000 (50,000) 3,00,000
Current liabilities
Financial liabilities
Trade payables 22,00,000 - 22,00,000
Other financial liabilities 3,90,000 - 3,90,000
Other current liabilities 60,000 - 60,000
Provisions (Note-8) 12,00,000 (2,00,000) 10,00,000
TOTAL EQUITY AND LIABILITIES 85,00,000 5,40,000 90,40,000
OTHER EQUITY
Retained Earnings (`) Fair value reserve Total
As at 31 March, 2018 27,90,000 (W.N.1) 5,00,000 32,90,000
Working Note 1:
Retained earnings balance:
Balance as per Earlier GAAP 25,00,000
Transitional adjustment due to loan’s fair value 10,000
Transitional adjustment due to increase in mutual fund’s fair value 30,000
Transitional adjustment due to decrease in deferred tax liability 50,000
Transitional adjustment due to decrease in provisions (dividend) 2,00,000
Total 27,90,000
Disclosure forming part of financial statements:
Proposed dividend on equity shares is subject to the approval of the shareholders of the company at
the annual general meeting and should not recognized as liability as at the Balance Sheet date.
Note 1: Property, plant & Equipment:
As per para D5 of Ind AS 101,an entity may elect to measure an item of property, plant and equipment
at the date of transition to Ind AS at its fair value and use that fair value as its deemed cost at that
date.
Note 2: Goodwill:
Ind AS 103 mandatorily requires measuring the assets and liabilities of the acquiree at its fair value as
on the date of acquisition. However, a first time adopter may elect to not apply the provisions of
Ind AS 103 with retrospective effect that occurred prior to the date of transition to Ind AS.
Hence company can continue to carry the goodwill in its books of account as per the previous GAAP.
Note 3: Intangible assets:
Para D7 read with D6 of Ind AS 101 states that a first-time adopter may elect to use a previous GAAP
revaluation at, or before, the date of transition to Ind AS as deemed cost at the date of the revaluation,
if the revaluation was, at the date of the revaluation, broadly comparable to:
(a) Fair value; or
(b) Cost or depreciated cost in accordance with Ind AS, adjusted to reflect, for example, changes in
a general or specific price index.

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 However, there is a requirement that Intangible assets must meet the definition and recognition criteria
as per Ind AS 38.
Hence, company can avail the exemption given in Ind AS 101 as on the date of transition to use the
carrying value as per previous GAAP.
Note 4: Loan:
Para B8C of Ind AS 101 states that if it is impracticable (as defined in Ind AS 8) for an entity to apply
retrospectively the effective interest method in Ind AS 109, the fair v alue of the financial asset or the
financial liability at the date of transition to Ind ASs shall be the new gross carrying amount of that
financial asset or the new amortised cost of that financial liability at the date of transition to Ind AS.
Accordingly, ` 50,000 would be the gross carrying amount of loan and difference of ` 10,000
(` 50,000 – ` 40,000) would be adjusted to retained earnings.
Note 5: Mutual Funds:
Para 29 of Ind AS 101 states that an entity is permitted to designate a previously reco gnised financial
asset as a financial asset measured at fair value through profit or loss in accordance with paragraph
D19A. The entity shall disclose the fair value of financial assets so designated at the date of
designation and their classification and carrying amount in the previous financial statements.
D19A states that an entity may designate a financial asset as measured at fair value through profit or
loss in accordance with Ind AS 109 on the basis of the facts and circumstances that exist at the date
of transition to Ind AS.
Note 6: Trade receivables:
Para 14 of Ind AS 101 states that an entity’s estimates in accordance with Ind ASs at the date of
transition to Ind AS shall be consistent with estimates made for the same date in accordance with
previous GAAP (after adjustments to reflect any difference in accounting policies), unless there is
objective evidence that those estimates were in error.
Para 15 of Ind AS 101 further states that an entity may receive information after the date of transition
to Ind ASs about estimates that it had made under previous GAAP. In accordance with paragraph 14,
an entity shall treat the receipt of that information in the same way as non -adjusting events after the
reporting period in accordance with Ind AS 10, Events after the Reporting Period.
The entity shall not reflect that new information in its opening Ind AS Balance Sheet (unless the
estimates need adjustment for any differences in accounting policies or there is objective evidence
that the estimates were in error). Instead, the entity shall reflect that new information in profit or loss
(or, if appropriate, other comprehensive income) for the year ended 31 March 2019.
Note 7: Government Grant:
Para 10A of Ind AS 20 states that the benefit of a government loan at a below-market rate of interest
is treated as a government grant. The loan shall be recognised and measured in accordance with
Ind AS 109, Financial Instruments. The benefit of the below-market rate of interest shall be measured
as the difference between the initial carrying value of the loan determined in accordance with
Ind AS 109, and the proceeds received. The benefit is accounted for in accordance with this
Standard.
However, Para B10 of Ind AS 101 states, a first-time adopter shall classify all government loans
received as a financial liability or an equity instrument in accordance with Ind AS 32, Financial
Instruments: Presentation. Except as permitted by paragraph B11, a first-time adopter shall apply the
requirements in Ind AS 109, Financial Instruments, and Ind AS 20, Accounting for Government Grants
and Disclosure of Government Assistance, prospectively to government loans existing at the date of
transition to Ind ASs and shall not recognise the corresponding benefit of the governme nt loan at a
below-market rate of interest as a government grant. Consequently, if a first-time adopter did not,
under its previous GAAP, recognise and measure a government loan at a below -market rate of interest
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 on a basis consistent with Ind AS requirements, it shall use its previous GAAP carrying amount of the
loan at the date of transition to Ind AS as the carrying amount of the loan in the opening Ind AS
Balance Sheet. An entity shall apply Ind AS 109 to the measurement of such loans after the date of
transition to Ind AS.
Note 8: Dividend
Dividend should be deducted from retained earnings during the year when it has been declared and
approved. Accordingly, the provision declared for preceding year should be reversed (to rectify the
wrong entry). Retained earnings would increase proportionately due to such adjustment.
5. (a) As per Ind AS 23, when an entity borrows funds specifically for the purpose of obtai ning a
qualifying asset, the entity should determine the amount of borrowing costs eligible for
capitalisation as the actual borrowing costs incurred on that borrowing during the period less
any investment income on the temporary investment of those borrow ings.
The amount of borrowing costs eligible for capitalization, in cases where the funds are borrowed
generally, should be determined based on the expenditure incurred in obtaining a qualifying
asset. The costs incurred should first be allocated to the specific borrowings.
Analysis of expenditure:
Date Expenditure Amount allocated in Weighted for period
general borrowings outstanding
(`) (`) (`)
1 April 2019 2,00,000 0 0
30 June 2019 6,00,000 1,00,000* 1,00,000 × 9/12 = 75,000
31 Dec 2019 12,00,000 12,00,000 12,00,000 × 3/12 = 3,00,000
31 March 2020 2,00,000 2,00,000 2,00,000 × 0/12 = 0
Total 22,00,000 3,75,000

*Specific borrowings of ` 7,00,000 fully utilized on 1 April & on 30 June to the extent of
` 5,00,000 hence remaining expenditure of ` 1,00,000 allocated to general borrowings.
The expenditure rate relating to general borrowings should be the weighted average of the
borrowing costs applicable to the entity’s borrowings that are outstanding during the period, other
than borrowings made specifically for the purpose of obtaining a qualifying asset.
Capitalisation rate = (10,00,000 x 12.5%) + (15,00,000 x 10%) = 11%
10,00,000 + 15,00,000
Borrowing cost to be capitalized: Amount
(`)
On specific loan 65,000
On General borrowing (` 3,75,000 × 11%) 41,250
Total 1,06,250
Less: Interest income on specific borrowings (20,000)
Amount eligible for capitalization 86,250
Therefore, the borrowing costs to be capitalized are ` 86,250.

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 (b) Following adjustments /rectifications are required to be done
1. Reserve for foreseeable loss for ` 400 lakh, due within 6 months, should be a part of
provisions. Hence, it needs to be regrouped. If it was also part of previous year’s
comparatives, a note should be added in the notes to account on the regrouping done this
year.
2. Interest accrued and due of ` 700 lakh on term loan will be a part of current liabilities.
Thus, it should be shown under the heading “Other Current Liabilities”.
3. As per Ind AS 2, inventories are measured at the lower of cost and net realisable value.
The amount of any write down of inventories to net realisable value is recognised as an
expense in the period the write-down occurs. Hence, the inventories should be valued at
` 1,200 lakh and write down of ` 300 lakh (` 1,500 lakh – ` 1,200 lakh) will be added to the
operating cost of the entity.
4. In the absence of the declaration date of dividend in the question, it is presumed that the
dividend is declared after the reporting date. Hence, no adjustment for the same is made in
the financial year 2019-2020. However, a note will be given separately in this regard (not
forming part of item of financial statements).
5. Accrued income will be shown in the Statement of Profit and Loss as ‘Other Income’ and as
‘Other Current Asset’ in the Balance Sheet.
6. Since the deferred tax liabilities and deferred tax assets relate to taxes on income levied by
the same governing taxation laws, these shall be set off, in accordance with Ind AS 12. The
net DTA of ` 300 lakh will be shown in the balance sheet.
7. As per Division II of Schedule III to the Companies Act, 2013, the Statement of Profit and
Loss should present the Earnings per Equity Share.
8. The presentation of the notes to ‘Trade Receivables’ will be modified as per the
requirements of Division II of Schedule III.
Balance Sheet of Abraham Ltd.
For the year ended 31 March 2020
Note No. ( ` in lakh)
ASSETS
Non-current assets
Property, plant and equipment 5,000
Deferred tax assets 1 300
Current assets
Inventories 1,200
Financial assets
Trade receivables 2 1,100
Cash and cash equivalents 2,000
Others financial asset (accrued interest) 300
TOTAL 9,900
EQUITY AND LIABILITIES
Equity
Equity share capital 3 1,000
Other equity 4 2,000

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 Non-current liabilities
Financial liabilities
Long-term borrowings 5 5,000
Current liabilities
Financial liabilities
Trade payables 300
Others 6 710
Short-term provisions (300 + 400) 7 700
Other current liabilities 8 190
TOTAL 9,900
Statement of Profit and Loss of Abraham Ltd.
For the year ended 31 st March, 2020
Note No. ( ` in lakh)
Revenue from operations 6,000
Other income 300
Total income 6,300
Expenses
Operating costs 9 3,199
Change in inventories cost 300
Employee benefits expense 1,200
Depreciation 450
Total expenses 5,149
Profit before tax 1,151
Tax expense (201)
Profit for the period 950

Earnings per equity share

Basic 9.5
Diluted 9.5
Number of equity shares (face value of ` 10 each) 100 lakh

Statement of Changes in Equity of Abraham Ltd.

For the year ended 31 March 2020
3. Equity Share Capital (` in lakh)
Balance at the beginning of the Changes in Equity share Balance at the end of
reporting period capital during the year the reporting period
1,000 0 1,000

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 4. Other Equity (` in lakh)
Particulars Reserves & Surplus Total
Capital reserve Retained Earnings
Balance at the beginning of the year 500* 550 1,050
Total comprehensive income for the year 950 950
Balance at the end of the year 500 1,500 2,000

*Note: Capital reserve given in the Note 1 of the question is assumed to be brought forward from
the previous year. However, alternatively, if it may be assumed as created during the year.
1. Deferred Tax ( ` in lakh)
Deferred Tax Asset 700
Deferred Tax Liability 400
300

2. Trade Receivables ( ` in lakh)

Trade receivables considered good 1,065
Trade receivables which have significant increase in credit risk 40
Less: Provision for doubtful debts (5) 35
Total 1,100
5. Long Term Borrowings ( ` in lakh)
Term Loan from Bank (5,700 - 700) 5,000
Total 5,000
6. Other Financial Liabilities ( ` in lakh)
Unclaimed dividends 10
Interest on term loan 700
Total 710
7. Short-term provisions ( ` in lakh)
Provisions 300
Foreseeable loss against a service contract 400
Total 700
8. Other Current Liabilities ( ` in lakh)
Billing in Advance 150
Other 40
Total 190
9. Dividends not recognised at the end of the reporting period
At year end, the directors have recommended the payment of dividend of 10% ie
` 1 per equity share. This proposed dividend is subject to the approval of shareholders in
the ensuing annual general meeting.

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6. (a) (i) The land and government grant should be recognized by A Ltd. at fair value of ` 12,00,000
and this government grant should be presented in the books as deferred income.
Alternatively, if the company is following the policy of recognising non-monetary grants at
nominal value, the company will not recognise any government grant. Land will be shown
in the financial statements at ` 1)
(ii) As per para 10A of Ind AS 20 ‘Accounting for Government Grants and Disclosure of
Government Assistance’, loan at concessional rates of interest is to be measured at fair
value and recognised as per Ind AS 109. Value of concession is the difference between the
initial carrying value of the loan determined in accordance with Ind AS 109, and the
proceeds received. The benefit is accounted for as Government grant.
(iii) ` 25 lakh has been received by D Ltd. for immediate start-up of business. Since this grant
is given to provide immediate financial support to an entity, it should be recognised in the
Statement of Profit and Loss immediately with disclosure to ensure that its effect is clearly
understood, as per para 21 of Ind AS 20.
(iv) ` 10 lakh should be recognized by S Ltd. as deferred income and will be transferred to profit
and loss over the useful life of the asset. In this case, ` 1,00,000 [` 10 lakh/10 years]
should be credited to profit and loss each year over period of 10 years. Alternatively, if the
company is following the policy of recognising non-monetary grants at nominal value, the
company will not recognise any government grant. The machinery will be recognised at
` 70 lakh (` 80 lakh - ` 10 lakh). Reduced depreciation will be charged to the Statement of
Profit or Loss.
(v) As per para 12 of Ind AS 20, the entire grant of ` 25 lakh should be recognized immediately
as deferred income and charged to profit and loss over a period of two years based on the
related costs for which the grants are intended to compensate provided that there is
reasonable assurance that U Ltd. will comply with the conditions attached to the grant.
(b) (a) Points earned on ` 10,00,000 @ 10 points on every ` 500 = [(10,00,000 / 500) x 10] = 20,000
points.
Value of points = 20,000 points x ` 0.5 each point = ` 10,000
Revenue recognized for sale of ` 9,90,099 [10,00,000 x (10,00,000/10,10,000)]
goods
Revenue for points deferred ` 9,901 [10,00,000x (10,000/10,10,000)]
Journal Entry
` `
Bank A/c Dr. 10,00,000
To Sales A/c 9,90,099
To Liability under Customer Loyalty programme 9,901
(b) Points earned on ` 50,00,00,000 @ 10 points on every ` 500 = [(50,00,00,000/500) x 10] =
1,00,00,000 points.
Value of points = 1,00,00,000 points x ` 0.5 each point = ` 50,00,000
Revenue recognized for sale of goods = ` 49,50,49,505 [50,00,00,000 x (50,00,00,000/
50,50,00,000)]
Revenue for points = ` 49,50,495 [50,00,00,000 x (50,00,000/ 50,50,00,000)]
Journal Entry in the year 2019
` `
Bank A/c Dr. 50,00,00,000
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 To Sales A/c 49,50,49,505
To Liability under Customer Loyalty programme 49,50,495
(On sale of Goods)
Liability under Customer Loyalty programme Dr. 42,11,002
To Sales A/c 42,11,002
(On redemption of (100 lakhs -18 lakhs) points)
Revenue for points to be recognized
Undiscounted points estimated to be recognized next year 18,00,000 x 80% = 14,40,000 points
Total points to be redeemed within 2 years = [(1,00,00,000-18,00,000) + 14,40,000]
= 96,40,000
Revenue to be recognised with respect to discounted point = 49,50,495 x
(82,00,000/96,40,000) = 42,11,002
(c) Revenue to be deferred with respect to undiscounted point in 2019-2020 = 49,50,495 –
42,11,002 = 7,39,493
(d) In 2020-2021, KK Ltd. would recognize revenue for discounting of 60% of outstanding points as
follows:
Outstanding points = 18,00,000 x 60% = 10,80,000 points
Total points discounted till date = 82,00,000 + 10,80,000 = 92,80,000 points
Revenue to be recognized in the year 2020-2021 = [{49,50,495 x (92,80,000 / 96,40,000)} -
42,11,002] = ` 5,54,620.
Liability under Customer Loyalty Programme Dr. ` 5,54,620
To Sales A/c ` 5,54,620
(On redemption of further 10,80,000 points)

The Liability under Customer Loyalty programme at the end of the year 20 20-2021 will be
` 7,39,493 – ` 5,54,620 = ` 1,84,873.
(e) In the year 2021-2022, the merchant will recognize the balance revenue of ` 1,84,873
irrespective of the points redeemed as this is the last year for redeeming the points. Journal entry
will be as follows:
Liability under Customer Loyalty programme Dr. ` 1,84,873
To Sales A/c ` 1,84,873
(On redemption of balance points)

(c) Allocation of proceeds of the bond issue:

Liability component (W.N.1) ` 18,47,720
Equity component ` 1,52,280
` 2,000,000
The liability and equity components would be determined in accordance with Ind AS 32. These
amounts are recognised as the initial carrying amounts of the liability and equity components.
The amount assigned to the issuer conversion option equity element is an addition to equity and
is not adjusted.

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 Basic earnings per share Year 1:
` 10,00,000
= ` 0.83 per ordinary share
12,00,000
Diluted earnings per share Year 1:
It is presumed that the issuer will settle the contract by the issue of ordinary shares. The dilutive
effect is therefore calculated in accordance with the Standard.

` 10,00,000 + ` 1,66,295 (W.N.2)

= ` 0.69 per ordinary share
12,00,000 + 5,00,000 (W.N.3)
Working Notes:
1. This represents the present value of the principal and interest discounted at 9%
1,20,000 x 2.531 = Rs. 3,03,720
20,00,000 x 0.772 = Rs. 15,44,000
Rs. 18,47,720
2. Profit is adjusted for the accretion of ` 1,66,295 (` 18,47,720 × 9%) of the liability because
of the passage of time. However, it is assumed that interest @ 6% for the year has already
been adjusted.
3. 5,00,000 ordinary shares = 250 ordinary shares x 2,000 convertible bonds
OR
XYZ Ltd. would include the total revenue of ` 68,00,000 (` 60,00,000 + ` 8,00,000) from
ABC Ltd. received / receivable in the year ended 31st March 2020 within its revenue and show
` 18,00,000 within trade receivables at 31 March 2020.
Mrs. P would be regarded as a related party of XYZ Ltd. because she is a close family member of
one of the key management personnel of XYZ Ltd.
From 1st June 2019, ABC Ltd. would also be regarded as a related party of XYZ Ltd. because
from that date ABC Ltd. is an entity controlled by another related party.
Since ABC Ltd. is a related party with whom XYZ Ltd. has transactions, XYZ Ltd. should disclose:
– The nature of the related party relationship.
– The revenue of ` 60,00,000 from ABC Ltd. since 1st June 2019.
– The outstanding balance of ` 18,00,000 at 31st March 2020.
In the current circumstances it may well be necessary for XYZ Ltd. to also disclose the
favourable terms under which the transactions are carried out.

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