Test Series: October, 2020

MOCK TEST PAPER

FINAL (NEW) COURSE: GROUP – I
PAPER – 1: FINANCIAL REPORTING
Question No.1 is compulsory. Candidates are required to answer any four questions from the
remaining five questions.
Wherever necessary, suitable assumptions may be made and disclosed by way of a note.
Working notes should form part of the answers.

Time Allowed – 3 Hours Maximum Marks – 100

1. (a) Summarized Balance Sheets of PN Ltd. and SR Ltd. as on 31 March 2020 were given as below:
(Amount in `)
Particulars PN Ltd. SR Ltd.
Assets
Land & building 4,68,000 5,61,600
Plant & Machinery 7,48,800 4,21,200
Investment in SR Ltd. 12,48,000 -
Inventories 3,74,400 1,13,600
Trade Receivables 1,86,500 1,24,800
Cash & Cash equivalents 45,200 24,900
Total Assets 30,70,900 12,46,100
Equity & Liabilities
Equity Share Capital (Shares of ` 100 each fully paid) 15,60,000 6,24,000
Other Reserves 9,36,000 3,12,000
Retained Earnings 1,78,400 2,55,800
Trade Payables 1,46,900 34,300
Short-term borrowings 2,49,600 20,000
Total Equity & Liabilities 30,70,900 12,46,100
(i) PN Ltd. acquired 70% equity shares of ` 100 each of SR Ltd. on 1 October 2019.
(ii) The Retained Earnings of SR Ltd. showed a credit balance of ` 93,600 on 1 April 2019 out
of which a dividend of 12% was paid on 15 December 2019.
(iii) PN Ltd. has credited the dividend received to its Retained Earnings.
(iv) Fair value of Plant & Machinery of SR Ltd. as on 1 October 2019 was ` 6,24,000. The rate
of depreciation on Plant & Machinery was 10% p.a.
(v) Following are the increases on comparison of Fair Value as per respective Ind AS with book
value as on 1 October 2019 of SR Ltd. which are to be considered while consolidating the
Balance Sheets:
(a) Land & Buildings ` 3,12,000
(b) Inventories ` 46,800
(c) Trade Payables ` 31,200.

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 (vi) The inventory is still unsold on Balance Sheet date and the Trade Payables are not yet
settled.
(vii) Other Reserves as on 31 March 2020 are the same as was on 1 April 2019.
(viii) The business activities of both the company are not seasonal in nature and therefore, it can
be assumed that profits are earned evenly throughout the year.
Prepare the Consolidated Balance Sheet as on 31 March 2020 of the group of entities PN Ltd.
and SR Ltd. (16 Marks)
(b) CARP Ltd. is engaged in developing computer software. The expenditures incurred by
CARP Ltd. in pursuance of its development of software is given below:
(i) Paid ` 1,50,000 towards salaries of the program designers.
(ii) Incurred ` 3,00,000 towards other cost of completion of program design.
(iii) Incurred ` 80,000 towards cost of coding and establishing technical feasibility.
(iv) Paid ` 3,00,000 for other direct cost after establishment of technical feasibility.
(v) Incurred ` 90,000 towards other testing costs.
(vi) A focus group of other software developers was invited to a conference for the introduction
of this new software. Cost of the conference aggregated to ` 60,000.
(vii) On 15 March 2020, the development phase was completed and a cash flow budget was
prepared.
Net profit for the year 2019-2020 was estimated to be equal to ` 30,00,000.
How CARP Ltd. should account for the above-mentioned cost as per relevant Ind AS?
(4 Marks)
2. (a) PQR Ltd. is the company which has performed well in the past but one of its 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 31 March 20 20, 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:
`
Year ended 31 March 2021 2,76,000
Year ended 31 March 2022 1,92,000
Year ended 31 March 2023 1,20,000
Year ended 31 March 2024 1,14,000

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 March 2020 for ` 6,00,000
and related selling expenses in this regard could have been ` 96,000. The machine was
revalued previously, and at 31 March 2020 an amount of ` 36,000 was held in revaluation
surplus in respect of the asset. The carrying value of the asset at 31 March 20 20 was
` 6,60,000. The Indian government has indicated that it may compensate the company for any
loss in value of the assets up to its recoverable amount. (5 Marks)

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 (b) On 1 April 2019, the fair value of the assets of XYZ Ltd.ʼs defined benefit plan were valued at
` 20,40,000 and the present value of the defined obligation was ` 21,25,000. On
31 March 2020 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 2020
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 2020 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? (5 Marks)
(c) On 1 April 2019, Shelter Ltd. issued 5,000, 8% convertible debentures with a face value of
` 100 each maturing on 31 March 2024. The debentures are convertible into equity shares of
Shelter Ltd. at a conversion price of ` 105 per share. Interest is payable annually in cash. At the
date of issue, Shelter Ltd. could have issued non-convertible debt with a 5 year term bearing a
coupon interest rate of 12%. On 1 April 2022, the convertible debentures have a fair value of
` 5,25,000. Shelter Ltd. makes a tender offer to debenture holders to repurchase the debentures
for ` 5,25,000, which the holders accepted. At the date of repurchase, Shelter Ltd. could have
issued non-convertible debt with a 2 year term bearing a coupon interest rate of 9%.
Show accounting entries in the books of Shelter Ltd. for recording of equity and liability
component:
(i) At the time of initial recognition and
(ii) At the time of repurchase of the convertible debentures.
The following present values of ` 1 at 8%, 9% & 12% are supplied to you:
Interest Rate Year 1 Year 2 Year 3 Year 4 Year 5
8% 0.926 0.857 0.794 0.735 0.681
9% 0.917 0.842 0.772 0.708 0.650
12% 0.893 0.797 0.712 0.636 0.567
(10 Marks)
3. (a) Deepak Ltd., an automobile group acquires 25% of the voting ordinary shares of Shaun Ltd.,
another automobile business, by paying, ` 4,320 crore on 01.04.2019. Deepak Ltd. accounts its
investment in Shaun Ltd. using equity method as prescribed under Ind AS 28. At 31.03.20 20,
Deepak Ltd. recognised its share of the net asset changes of Shaun Ltd. using equity accounting
as follows:
(` in crore)
Share of Profit or Loss 378
Share of Exchange difference in OCI 54
Share of Revaluation Reserve of PPE in OCI 27
On 01.04.2020, Deepak Ltd. acquired remaining 75% of Shaun Ltd. for cash ` 13,500 crore. Fair
value of the 25% interest already owned was ` 4,860 crore and fair value of Shaun Ltd.'s
identifiable net assets was ` 16,200 crore as on 01.04.2020.
How should such business combination be accounted for in accordance with the applicable
Ind AS? (8 Marks)

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 (b) An entity engaged in automobile sector has assessed the impact of COVID-19 outbreak on its
future viability of business model. Senior Management has identified the need for restructuring
some of its business activities and retrenching its employees in many areas. Senior Management
is drawing up a plan for the consideration of the Board of Directors in their meeting scheduled in
May 2020, which is subsequent to the reporting date of the current financial year i.e.
31 March 2020. Can the entity recognise provisions for restructuring costs in the financial
statements of the current year i.e. 2019-2020? (4 Marks)
(c) KK Ltd. has granted an interest free loan of ` 10,00,000 to its wholly owned Indian Subsidiary
YK Ltd. There is no transaction cost attached to the said loan. The Company has not finalised
any terms and conditions including the applicable interest rates on such loans. The Board of
Directors of the Company are evaluating various options and has requested your firm to provide
your views under Ind AS in following situations:
(i) The Loan given by KK Ltd. to its wholly owned subsidiary YK Ltd. is interest free and such
loan is repayable on demand.
(ii) The said Loan is interest free and will be repayable after 3 years from the date of granting
such loan. The current market rate of interest for similar loan is 10%. Considering the same,
the fair value of the loan at initial recognition is `8,10,150.
(iii) The said loan is interest free and will be repaid as and when YK Ltd. has funds to repay the
Loan amount.
Based on the same, KK Ltd. has requested you to suggest the accounting treatment of the
above loan in the stand-alone financial statements of KK Ltd. and YK Ltd. and also in the
consolidated financial statements of the group. Consider interest for only one year on the
above loan for the purpose of providing journal entries. (8 Marks)
4. Shaurya Limited is the company having its registered and corporate office at New Delhi. 60% of the
Shaurya Limited’s shares are held by the Government of India and rest by other investors.
This is the first time that Shaurya limited would be applying Ind AS for the preparation of its financials
for the current financial year 2019-2020. Following balance sheet is prepared as per earlier GAAP as
at the beginning of the preceding period along with the additional information:
Balance Sheet as at 31 March 2018
(All figures are in ’000, unless otherwise specified)
Particulars Amount
EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share Capital 10,00,000
(b) Reserves & Surplus 25,00,000
(2) Non-Current Liabilities
(a) Long Term Borrowings 4,50,000
(b) Long Term Provisions 3,50,000
(c) Deferred tax liabilities 3,50,000
(3) Current Liabilities
(a) Trade Payables 22,00,000
(b) Other Current Liabilities 4,50,000
(c) Short Term Provisions 12,00,000
TOTAL 85,00,000
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 ASSETS
(1) Non-Current Assets
(a) Property, Plant & Equipment (net) 20,00,000
(b) Intangible assets 2,00,000
(c) Goodwill 1,00,000
(d) Non-current Investments 5,00,000
(e) Long Term Loans and Advances 1,50,000
(f) Other Non-Current Assets 2,00,000
(2) Current Assets
(a) Current Investments 18,00,000
(b) Inventories 12,50,000
(c) Trade Receivables 9,00,000
(d) Cash and Bank Balances 10,00,000
(e) Other Current Assets 4,00,000
TOTAL 85,00,000
Additional Information (All figures are in ’000) :
1. Other current liabilities include ` 3,90,000 liabilities to be paid in cash such as expense payable,
salary payable etc. and ` 60,000 are statutory government dues.
2. Long term loans and advances include ` 40,000 loan and the remaining amount consists
Advance to staff of ` 1,10,000.
3. Other non-current assets of ` 2,00,000 consists Capital advances to suppliers.
4. Other current assets include ` 3,50,000 current assets receivable in cash and Prepaid expenses
of ` 50,000.
5. Short term provisions include Dividend payable of ` 2,00,000. The dividend payable had been
as a result of board meeting wherein the declaration of dividend for financial year 2017 -2018 was
made. However, it is subject to approval of shareholders in the annual general meeting.
Chief financial officer of Shaurya Limited has also presented the following information against
corresponding relevant items in the balance sheet:
a) Property, Plant & Equipment consists a class of assets as office buildings whose carrying amount
is ` 10,00,000. However, the fair value of said office building as on the date of transition is
estimated to be ` 15,00,000. Company wants to follow revaluation model as its accounting
policy in respect of its property, plant and equipment for the first annual Ind AS financial
statements.
b) The fair value of Intangible assets as on the date of transition is estimated to be ` 2,50,000.
However, the management is reluctant to incorporate the fair value changes in books of account .
c) Shaurya Ltd. had acquired 80% shares in a company, Excel private limited few y ears ago thereby
acquiring the control upon it at that time. Shaurya Ltd. recognised goodwill as per erstwhile
accounting standards by accounting the excess of consideration paid over the net assets
acquired at the date of acquisition. Fair value exercise was not done at the time of acquisition.

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 d) Trade receivables include an amount of ` 20,000 as provision for doubtful debts measured in
accordance with previous GAAP. Now as per latest estimates, the provision needs to be revised
to ` 25,000.
e) Company had given a loan of `1,00,000 to an entity for the term of 10 years six years ago.
Transaction costs were incurred separately for this loan. The loan carries an interest rate of 7%.
The principal amount is to be repaid in equal installments over the period of ten years at the year
end. Interest is also payable at each year end. The fair value of loan as on the date of transition
is ` 50,000 as against the carrying amount of loan which at present amounts to ` 40,000.
However, Ind AS 109 mandates to charge the interest expense as per effective interest method
after the adjustment of transaction costs. Management says it is tedious task in the given case to
apply the effective interest rate changes with retrospective effect and hence is relu ctant to apply
the same retrospectively in its first time adoption.
f) In the long term borrowings, ` 4,50,000 of component is due towards the State Government.
Interest is payable on the government loan at 4%, however the prevailing rate in the market at
present is 8%. The fair market value of loan stands at ` 4,20,000 as on the relevant date.
g) Under Previous GAAP, the mutual funds were measured at cost or market value, whichever is
lower. Under Ind AS, the Company has designated these investments at fair val ue through profit
or loss. The value of mutual funds as per previous GAAP is ` 2,00,000 as included in ‘current
investment’. However, the fair value of mutual funds as on the date of transition is ` 2,30,000.
h) Ignore separate calculation of deferred tax on above adjustments. Assume the net deferred tax
income to be ` 50,000 on account of Ind AS transition adjustments.
Requirements:
- Prepare transition date balance sheet of Shaurya Limited as per Indian Accounting Standards
- Show necessary explanation for each of the items presented by chief financial officer in the form
of notes, which may or may not require the adjustment as on the date of transition. (20 Marks)
5. (a) On 1 April 2019, entity A contracted for the construction of a building for ` 22,00,000. The land
under the building is regarded as a separate asset and is not part of the qualifying asset. The
building was completed at the end of March, 2020, and during the period the following payments
were made to the contractor:
Payment date Amount (`)
1 April 2019 2,00,000
30 June 2019 6,00,000
31 December 2019 12,00,000
31 March 2020 2,00,000
Total 22,00,000
Entity A’s borrowings at its year end of 31 March 2020 were as follows:
a. 10%, 4-year note with simple interest payable annually, which relates specifically to the
project; debt outstanding on 31 March 2020 amounted to ` 7,00,000. Interest of ` 65,000
was incurred on these borrowings during the year, and interest income of ` 20,000 was
earned on these funds while they were held in anticipation of payments.
b. 12.5% 10-year note with simple interest payable annually; debt outstanding at 1 April 20 19
amounted to ` 10,00,000 and remained unchanged during the year; and
c. 10% 10-year note with simple interest payable annually; debt outstanding at 1 April 20 19
amounted to ` 15,00,000 and remained unchanged during the year.
What amount of the borrowing costs can be capitalized at year end as per relevant Ind AS?
(6 Marks)
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(b) Following are the Financial Statements of Abraham Ltd.:
Balance Sheet
Particulars Note No. As at 31 March, 2020
(` in lakh)
EQUITY AND LIABILITIES:
Shareholders’ funds
Share capital (shares of ` 10 each) 1,000
Reserves and surplus 1 2,400
Non-current liabilities
Long term borrowings 2 5,700
Deferred tax liabilities 3 400
Current liabilities
Trade payables 300
Short-term provisions 300
Other current liabilities 4 200
Total 10,300
ASSETS
Non-current assets
Property, plant and equipment 5,000
Deferred tax assets 3 700
Current assets
Inventories 1,500
Trade receivables 5 1,100
Cash and bank balances 2,000
Total 10,300

Statement of Profit & Loss

Particulars Note No. Year ended 31 March 2020
(` in lakh)
Revenue from operations 6,000
Expenses:
Employee benefit expense 1,200
Operating costs 3,199
Depreciation 450
Total expenses 4,849
Profit before tax 1,151
Tax expense 201
Profit after tax 950

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Notes to Accounts:
Note 1: Reserves and surplus (` in lakh)
Capital reserve 500
Surplus from P & L
Opening balance 550
Additions 950 1,500
Reserve for foreseeable loss 400
Total 2,400
Note 2: Long-term borrowings
Term loan from bank 5,700
Total 5,700
Note 3: Deferred tax
Deferred tax asset 700
Deferred tax liability 400
Total 300
Note 4: Other current liabilities
Unclaimed dividends 10
Billing in advance 150
Other current liabilities 40
Total 200
Note 5: Trade Receivables
Considered good (outstanding within 6 months) 1,065
Considered doubtful (due from past 1 year) 40
Provision for doubtful debts (5)
Total 1,100
Additional information:
(i) Share capital comprises of 100 lakh shares of ` 10 each.
(ii) Term Loan from bank for ` 5,700 lakh also includes interest accrued and due of ` 700 lakh
as on the reporting date.
(iii) Reserve for foreseeable loss is created against a service contract due within 6 month s.
(iv) Inventory should be valued at cost ` 1,500 lakh, NRV as on date is ` 1,200 lakh.
(v) A dividend of 10% was declared by the Board of directors of the company.
(vi) Accrued Interest income of ` 300 lakh is not booked in the books of the company.
(vii) Deferred taxes related to taxes on income are levied by the same governing tax laws.
Identify and report the errors and misstatements in the above extracts and prepare
corrected Balance Sheet and Statement of Profit & Loss and where required the releva nt
notes to the accounts with explanations thereof. (14 Marks)

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6. (a) How will you recognize and present the grants received from the Government in the following
cases as per Ind AS 20?
(i) A Ltd. received one acre of land to setup a plant in backward area (fair value of land
` 12 lakh and acquired value by Government is ` 8 Iakhs).
(ii) B Ltd. received an amount of loan for setting up a plant at concessional rate of interest from
the Government.
(iii) D Ltd. received an amount of ` 25 lakh for immediate start-up of a business without any
condition.
(iv) S Ltd. received ` 10 lakh for purchase of machinery costing ` 80 lakh. Useful life of
machinery is 10 years. Depreciation on this machinery is to be charged on straight line
basis.
(v) Government gives a grant of ` 25 lakh to U Limited for research and development of
medicine for breast cancer, even though similar medicines are available in the market but
are expensive. The company is to ensure by developing a manufacturing process over a
period of two years so that the cost comes down at least to 50%. (5 Marks)
(b) KK Ltd. runs a departmental store which awards 10 points for every purchase of ` 500 which
can be discounted by the customers for further shopping with the same merchant. Unutilised
points will lapse on expiry of two years from the date of credit. Value of each point is ` 0.50.
During the accounting period 2019-2020, the entity awarded 1,00,00,000 points to various
customers of which 18,00,000 points remained undiscounted. The management expects only
80% will be discounted in future of which normally 60-70% are redeemed during the next year.
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 2019-2020? 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.
(c) How much of the deferred revenue should be recognized at the year-end (2019-2020)
because of the estimation that only 80% of the outstanding points will be redeemed?
(d) In the next year 2020-2021, 60% of the outstanding points were discounted. Balance
40% of the outstanding points of 2019-2020 still remained outstanding. How much of
the deferred revenue should the merchant recognize in the year 20 20-2021 and what
will be the amount of balance deferred revenue?
(e) How much revenue will the merchant recognized in the year 2021-2022, if 3,00,000
points are redeemed in the year 2021-2022?
(10 Marks)
(c) EITHER
An entity issues 2,000 convertible bonds at the beginning of Year 1. The bonds have a three -
year term and are issued at par with a face value of ` 1,000 per bond, giving total proceeds of
` 20,00,000. Interest is payable annually in arrears at a nominal annual interest rate of 6%.
Each bond is convertible at any time up to maturity into 250 ordinary shares. The entity has
given an option to settle the principal amount of the convertible bonds in ordinary shares or in
cash.

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When the bonds are issued, the prevailing market interest rate for similar debt without a
conversion option is 9%. At the issue date, the market price of one ordinary share is ` 3.
Income tax is ignored.
Calculate basic and diluted EPS when
Profit attributable to ordinary equity holders of the parent entity Year 1 ` 10,00,000
Ordinary shares outstanding 12,00,000
Convertible bonds outstanding 2,000

(5 Marks)
OR
ABC Ltd. is a long-standing customer of XYZ Ltd. Mrs. P whose husband is a director in
XYZ Ltd. purchased a controlling interest in entity ABC Ltd. on 1 June 2019. Sales of products
from XYZ Ltd. to ABC Ltd. in the two-month period from 1 April 2019 to 31 May 2019 totalled
` 8,00,000. Following the share purchase by Mrs. P, XYZ Ltd. began to supply the products at a
discount of 20% to their normal selling price and allowed ABC Ltd. three months’ credit
(previously ABC Ltd. was only allowed one month’s credit, XYZ Ltd.’s normal credit policy).
Sales of products from XYZ Ltd. to ABC Ltd. in the ten-month period from 1 June 2019 to
31 March 2020 totalled ` 60,00,000. On 31 March 2020, the trade receivables of XYZ Ltd.
included ` 18,00,000 in respect of amounts owing by ABC Ltd.
Analyse and show (where possible by quantifying amounts) how the above event would be
reported in the financial statements of XYZ Ltd. for the year ended 31 March 20 20 as per Ind AS.
You are required to mention the disclosure requirements as well. (5 Marks)

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