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Dr. CA Ravi Agarwal’s CA Inter Accounts Compiler 6.0 Score 70+ in Accounts
Paper 1-Advanced Accounting
Index
Sl No. Chapter Name Page No,

1. Introduction to Accounting Standards 01-05
2. Framework for Preparation and Presentation of 06-31

Financial Statements
3. Applicability of Accounting Standards 32-39
4.1 AS 1- Disclosure of Accounting Policies 40-50
4.2 AS 3 - Cash Flow Statements 51-79
4.3 AS 17- Segment Reporting 80-98
4.4 AS 18 - Related Party Disclosures 99-119
4.5 AS 20 - EPS 120-143
4.6 AS 24 - Discontinuing Operations 144-155
4.7 AS 25 Interim Financial Reporting 156-173
5.1 AS 2 - Valuation of Inventory 174-197
5.2 AS 10 - Property, Plant & Equipment 198-231
5.3 AS 13 - Accounting for Investments 232-318
5.4 AS 16 - Borrowing Costs 319-344
5.5 AS 19 - Leases 345-356
5.6 AS 26 - Intangible Assets 357-374
5.7 AS 28 - Impairment of Assets 375-397
6.1 Employee Benefits 398-414
6.2 AS 29 - Provisions, Contingent Liabilities & 415-434

Contingent Assets
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Dr. CA Ravi Agarwal’s CA Inter Accounts Compiler 6.0 Score 70+ in Accounts Dr. CA Ravi Agarwal’s CA Inter Accounts Compiler 6.0 Score 70+ in Accounts 1
Paper 1-Advanced Accounting Paper 1-Advanced Accounting
Chapter 1
Introduction to Accounting Standards
7.1 AS 4 - Contingencies & Events occurring after the 435-448
Balance Sheet Date
7.2 AS 5 - Net Profit or Loss for the period, Prior period 449-462 MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV
Attempts
items & Changes in Accounting polici
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
7.3 AS 11 - The Effects of Changes in Foreign 463-488 StudyMat. Q.3 to Q.11

Exchange rates
Past NO Q.1 NO NO NO NO NO NO NO Q.2 NO NO
7.4 AS 22 - Accounting for Taxes on Income 489-504 Exams
MTP NO NO NO NO NO NO NO Q.1 NO NO Q.1 NO
8.1 AS 7 - Construction Contracts 505-530
RTP NO NO NO NO NO NO NO NO NO NO NO NO
8.2 AS 9 - Revenue Recognition 531-550
9.1 AS 12 - Accounting for Government Grants 551-576
9.2 AS 14 - Accounting for Amalgamation 577-588
10.1 AS 21 - Consolidated Financial Statements 589-711
10.2 AS 23 - Accounting for Investments in Associates in 712-721

Consolidated Financial Statements
10.3 AS 27- Financial Reporting of Interests in Joint 722-738

Ventures
11.1 Preparation of Financial Statements 739-826
11.2 Cash Flow Statement 827-891
12 Buy back of security 892-971
13 Amalgamation of Companies 972-1078
14 Accounting for Reconstruction of Companies 1079-1181
15 Accounting for Branches including Foreign 1182 -1300

Branches
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Dr. CA Ravi Agarwal’s CA Inter Accounts Compiler 6.0 Score 70+ in Accounts 2 Dr. CA Ravi Agarwal’s CA Inter Accounts Compiler 6.0 Score 70+ in Accounts 3
The main advantages of setting accounting standards are as follows:

Accounting Standards make the financial statements of different companies compa-
Chapter 1 a.
rable which helps investors in decision making.
Introduction to Accounting Standards b. Accounting Standards prevent any misleading accounting treatment.
c. Accounting Standards prevent manipulation of data by the management.

Question 1
Question 3
“Accounting Standards standardize diverse accounting policies with a view to eliminate the non- com-
parability of financial statements and improve the reliability of financial statements.” Discuss and ex- Accounting Standards for non-corporate entities in India are issued by
plain the benefits of Accounting Standards. (MTP 5 Marks, Nov ’21 & April ‘23) (PYP 5 Marks Nov’18,)
a. Central Govt b. State Govt.
Answer 1
c. Institute of Chartered Accountants of India. d. MCA
Accounting Standards standardize diverse accounting policies with a view to eliminate the non- compa-
rability of financial statements and improve the reliability of financial statements. Accounting Standards Ans: (C)
provide a set of standard accounting policies, valuation norms and disclosure requirements. Accounting
standards aim at improving the quality of financial reporting by promoting comparability, consistency and
Question 4
transparency, in the interests of users of financial statements. The following are the benefits of Accounting
Standards:
Accounting Standards
(i) Standardization of alternative accounting treatments: Accounting Standards reduce to a
reasonable extent confusing variations in the accounting treatment followed for the purpose a. Harmonies accounting policies and eliminate b. Improve the reliability of financial
of preparation of financial statements. the non-comparability of financial state- statements.
ments.
(ii) Requirements for additional disclosures: There are certain areas where important is not
statutorily required to be disclosed. Standards may call for disclosure beyond that re- c. Both (a) and (b). d. Manipulate the data for the manage-
quired by law. ment.
(iii) Comparability of financial statements: The application of accounting standards would fa- Ans: (C)
cilitate comparison of financial statements of different companies situated in India and fa-
cilitate comparison, to a limited extent, of financial statements of companies situated in
different parts of the world. However, it should be noted in this respect that differences in the Question 5
institutions, traditions and legal systems from one country to another give rise to differences
It is essential to standardize the accounting principles and policies in order to ensure
in Accounting Standards adopted in different countries.
a. Transparency b. Consistency.
Question 2
c. Comparability d. All the above
Explain the objective of ‘Accounting Standards’ in brief. State the advantages of setting Accounting
Standards. (PYP 4 Marks Nov ’22, Old & New SM) Ans: (d)
Answer 2 Question 6
Accounting Standards are the written policy documents issued by Government relating to various aspects
Which committee is responsible for approval of accounting standards and their modification for
of measurement, treatment, presentation and disclosure of accounting transactions and events.
thepurpose of applicability to companies?
Following are the objectives of Accounting Standards:
a. Accounting Standards harmonize the diverse accounting policies and practices fol- a. NFRA. b. MCA.
lowed by different companies in India.
c. Central Government Advisory Committee. d. IASB
b. Accounting Standards facilitate the preparation of financial statements and make them
comparable. Ans: (b)
c. Accounting Standards give a sense of faith and reliability to the users.
Ind AS are issued by the Central Government of India under the supervision and control of ASB of ICAI
Question 7
and in consultation with NFRA. NFRA recommends these standards to the MCA and MCA has to spell out
the accounting standards applicable for companies in India.
Global Standards facilitate
a. Cross border flow of money. b. Comparability of financial statements Question 10
c. Uniformity and Transparency of finan- d. All the three Explain the significance of emergence of IFRS as Global Standards.
cial statements
Answer 10
Ans: (d)
Global Standards facilitate cross border flow of money, global listing in different bourses and com-
Theoretical Question and Answer parability of financial statements. Global Standards improve the ability of investors to compare
investments on a global basis and thus lowers their risk of errors of judgment. It facilitates accounting
Question 8 and reporting for companies with global operations and eliminates some costly requirements say
reinstatement of financial statements.
Explain the objective of “Accounting Standards” in brief. State the advantages of setting Accounting
Standards.
Question 11
Answer 8
What do you mean by Carve outs/ins in Ind AS? Explain.
Accounting Standards are the written policy documents issued by Government relating to various as-
pects of measurement, treatment, presentation and disclosure of accounting transactions and events. Answer 11
Following are the objectives of Accounting Standards: Certain changes have been made in Ind AS considering the economic environment of the country,
which is different as compared to the economic environment presumed to be in existence by IFRS.
a. Accounting Standards harmonize the diverse accounting policies and practices followed by
These differences are due to differences in economic conditions prevailing in India. These differenc-
different companies in India.
es which are in deviation to the accounting principles and practices stated in IFRS, are commonly
b. Accounting Standards facilitates the preparation of financial statements and make them known as ‘Carve- outs’. Additional guidance given in Ind AS over and above what is given in IFRS, is
comparable. termed as ‘Carve in’.
c. Accounting Standards give a sense of faith and reliability to the users.
The main advantage of setting accounting standards are as follows:
a. Accounting Standards makes the financial statements of different companies comparable

which helps investors in decision making.
b. Accounting Standards prevent any misleading accounting treatment.

c. Accounting Standards prevent manipulation of data by the management.
Question 9
Briefly explain the process of issuance of Indian Accounting Standards.
Answer 9
Due to the recent stream of overseas acquisitions by Indian companies, there is need for adoption of
high- quality standards to convince foreign enterprises about the financial standing as also the disclo-
sure and governance standards of Indian acquirers.
The Government of India in consultation with the ICAI decided to converge and not to adopt IFRSs issued
by the IASB. The decision of convergence rather than adoption was taken after the detailed analysis
of IFRSs requirements and extensive discussion with various stakeholders.
The ICAI has worked towards convergence of global accounting standards by considering the applica-
tion of IFRS in Indian corporate environment. Recognising the growing need of full convergence of Ind AS
with IFRS, ICAI constituted a Task Force to examine various issues involved.
Chapter 2 Chapter 2
Framework for Preparation and Presentation of Financial Statements Framework for Preparation and Presentation of Financial Statements
Attempts MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV
Question 1
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
Study Explain in brief, the alternative measurement bases, for determining the value at which an element
Q.23 TO Q.34 canbe recognized in the Balance Sheet or Statement of Profit and Loss. [MTP 5 Marks March ’19 & April
Mat. ‘19 , March ’21 ,Oct ‘23] (RTP Nov 18)
Q.15 Q.2 Q.16 NO NO Q.16,Q.17 Q.10, NO NO Q.21 Q.22 NO
Answer 1
Past Q.18
The Framework for Recognition and Presentation of Financial statements recognizes four alternative
Exams Q.19
measurement bases for the purpose of determining the value at which an element can be recognized
Q. 20 in the balance sheet or statement of profit and loss. These bases are: (i)Historical Cost; (ii)Current cost
Q.2,Q.5 Q.5 Q.1 NO Q.6 NO Q.1,Q.9 Q.6 Q.3,Q.4 Q.7,Q.8 Q.9,Q.12 Q.1,Q.7 (iii) Realizable (Settlement) Value and (iv) Present Value.
MTP Q.4 Q.19 A brief explanation of each measurement basis is as follows:
Q.5 1. Historical Cost: Historical cost means acquisition price. According to this, assets are recorded at
an amount of cash or cash equivalent paid or the fair value of the asset at the time of acquisi-
Q.15 Q.1 Q.12, NO Q.13 Q.12 Q.11 Q.10 Q.16 Q.16 Q.13 Q.13
tion. Liabilities are generally recorded at the amount of proceeds received in exchange for the
RTP
obligation.
Q.14
2. Current Cost: Current cost gives an alternative measurement basis. Assets are carried out at the
amount of cash or cash equivalent that would have to be paid if the same or an equivalent
asset was acquiredcurrently. Liabilities are carried at the undiscounted amount of cash or cash
equivalents that would be required to settle the obligation currently.
3. Realizable (Settlement) Value: As per realizable value, assets are carried at the amount of cash
or cash equivalents that could currently be obtained by selling the assets in an orderly disposal.
Liabilities are carried at their settlement values; i.e. the undiscounted amount of cash or cash
equivalents paid to satisfy the liabilities in the normal course of business.
4. Present Value: Under present value convention, assets are carried at present value of future net
cash flows generated by the concerned assets in the normal course of business. Liabilities un-
der this convention are carried at present value of future net cash flows that are expected to be
required to settle the liability in the normal course of business.
Question 2
“One of the characteristics of financial statements is neutrality”- Do you agree with this statement?
Comment. [MTP March ‘18, 5 Marks, PYP Nov ’18 5 Marks, Old & New SM)
Answer 2
Yes, one of the characteristics of financial statements is neutrality. To be reliable, the information con-
tained in financial statement must be neutral, that is free from bias.
Financial Statements are not neutral if by the selection or presentation of information, the focus of anal-
ysis could shift from one area of business to another thereby arriving at a totally different conclusion on
the business results.
For example, if the assets of a company primarily consist of trade receivables and insurance claims and
the financial statements do not specify that the insurance claims have been lying unrealized for a number
of years or that a few key trade receivables have not given balance confirmation certificates, an errone- Answer 4
ous conclusion may be drawn on the liquidity of the company. Financial statements are said to depict the
true and fair view of the business of the organization by virtue of neutrality. (i) Current Liabilities/Other Current Liabilities
(ii) Shareholders’ Fund / Reserve & Surplus

Question 3
(iii) Current liabilities/Other Current Liabilities
Opening Balance Sheet of Mr. A is showing the aggregate value of assets, liabilities and equity Rs. 8 (iv) Contingent Liabilities and Commitments
lakh, Rs. 3 lakh and Rs. 5 lakh respectively. During accounting period, Mr. A has the following transac-
(v) Shareholders’ Fund / Share Capital
tions:
(vi) Property, Plant & Equipment
(1) Earned 10% dividend on 2,000 equity shares held of Rs. 100 each
(vii) Shareholders’ Fund/Money received against share warrants
(2) Paid Rs. 50,000 to creditors for settlement of Rs. 70,000
(viii) Current Assets
(3) Rent of the premises is outstanding Rs. 10,000
(4) Mr. A withdrew Rs. 9,000 for his personal use. Question 5
You are required to show the effect of above transactions on Balance Sheet in the form of Assets -
Liabilities = Equity after each transaction. (MTP 5 Marks April 21, April 22, Old & New SM) How will a company classify its investment in preference shares, which are convertible into eq-
uityshares within one year from the balance sheet date? Will it classify the investment as a current
Answer 3 asset or a non-current asset? Explain. (MTP 5 Marks, March’19, Oct’18, Aug’18, Mar’18)
Effects of each transaction on Balance sheet of the trader is shown below:
Answer 5
Transactions Assets Rs. - Liabilities Rs. = Equity Rs. lakh In accordance with the Schedule III, an investment realizable within 12 months from the reporting date is
lakh lakh classified as a current asset. Such realisation should be in the form of cash or cash equivalents, rather
Opening 8.00 - 3.00 = 5.00 than through conversion of one asset into another non-current asset. Hence, company must classify
such an investment as a non-current asset, unless it expects to sell the preference shares or the equity
(1) Dividend earned 8.20 - 3.00 = 5.20 shares on conversion and realise cash within 12 months.
(2) Settlement of Creditors 7.70 - 2.30 = 5.40
(3) Rent Outstanding 7.70 - 2.40 = 5.30 Question 6
(4) Drawings 7.61 - 2.40 = 5.21 M/s Shyam, a proprietorship firm runs a business of stationary items. It provides you the following
information relating to assets and liabilities:
Question 4
Assets & Liabilities As on 01.04.2019 As on 31.03.2020
State under which head the following accounts should be classified in Balance Sheet, as per Schedule
Creditors 20,000 15,000
IIIof the Companies Act, 2013:
Outstanding Expenses 600 800
(i) Share application money received in excess of issued share capital.
Property, Plant & Equipment 12,000 13,000
(ii) Share option outstanding account.
Stock 10,000 12,000
(iii) Unpaid matured debenture and interest accrued thereon.
Cash in hand 7,500 2,000
(iv) Uncalled liability on shares and other partly paid investments.
Cash at Bank 2,500 10,000
(v) Calls unpaid.
Debtors ? 18,000
(vi) Intangible Assets under development.
(vii) Money received against share warrant.
(viii) Cash equivalents. (MTP 4 Marks, Mar’22, 5 Marks, April’19)
Details of the year’s transactions are as follows: To General expenses (W.N. 9,200 By Net Loss (balancing 150
5) fig.)
(1) Discounts allowed to Debtor 4,000
To Depreciation (W.N. 4) 3,000
(2) Returns from debtors 1,450
(3) Bad debts 500 16,700 16,700
(4) Total sales (Cash and Credit) 72,000 Balance Sheet as at 31st March, 2020
(5) Discount allowed by creditors 700 Liabilities ₹ Assets ₹
(6) Returns to creditors 400 Capital (W.N. 1) 39,850 Property, Plant & Equipment 12,000
(7) Receipts from debtors paid into Bank 76,000
Less: Net loss 150 Add: New asset 4,000
(8) Cash purchases 1,000
39,700 16,000
(9) Expenses paid by cash 9,000
Less: Drawings 500 39,200 Less: Depreciation 3,000 13,000
(10) Drawings by cheque 500
Sundry credi- 15,000 Stock in trade 12,000
(11) Purchase of Property, Plant & Equipment by cheque 4,000 tors
(12) Cash deposited into bank 5,000 Expensesout- 800 Sundry debtors (W.N. 2) 18,000
(13) Cash withdrawn from bank 9,000 standing
(14) Payments to creditors by cheque 60,000 Cash in hand 2,000

Cash in Bank 10,000
No Property, Plant & Equipment were sold during the year. Any difference in cash account to be considered 55,000 55,000
as cash sales. You are required to prepare Trading and Profit & Loss Account for the year ended 31.03.2020
and the Balance Sheet as at 31.03.2020 from the given information. (MTP 16 Marks, Oct ’21, May’20) Working Notes:
(1) Ascertainment of Opening Capital - Statement of Affairs as at 1.4.19
Answer 6
In the books of M/s Shyam Trading and Profit and Loss Account for the year ended 31st March, 2020 Liabilities ₹ Assets ₹
Sundry creditors 20,000 Property, Plant & 12,000
Particulars ₹ ₹ Particulars ₹ ₹
Equipment
To Opening stock 10,000 By Sales:
Outstanding expenses 600 Stock 10,000
To Purchases: Cash 500
Prasad’s Capital Debtors 28,450
Cash 1,000 Credit 71,500
(Balancing figure) 39,850 Cash in hand 7,500
Credit (W.N. 3) 56,100 Less: Returns -1450 70,550
Cash at Bank 2,500
57,100 By Closing Stock 12,000
60,450 60,450
Less: Returns 400 56,700
To Gross Profit c/d 15,850
2. Sundry Debtors Account
82,550 82,550
To Discount allowed 4,000 By Gross profit b/d 15,850 ₹ ₹
To Balance b/d (bal. fig) 28,450 By Cash 76,000
To Bad Debts 500 By Discount received 700
71,500 By Discount 4,000
To Sales (72,000 – 500) By Returns (sales) 1,450
By Bad debts 500
By Balance c/d (given) 18,000 To sales (balancing 500 - By Creditors 60,000

as cash sales)
99,950 99,950
By Cash (C) 9,000
3. Sundry Creditors Account
By Bank (C) 5,000
₹ ₹ By Balance c/d 2,000 10,000
To Bank – Payments 60,000 By Balance b/d 20,000 17,000 83,500 17,000 83,500
To Discount 700 By Purchases - credit 56,100
Question 7
To Returns 400 By (Balancing figure)
The following extract of Balance Sheet of Ram Ltd. (a non-investment company) was obtained: Balance
To Balance c/d (closing Sheet (Extract) as on 31st March ,2022
balance) 15,000
Liabilities ₹
76,100 76,100
Issued and subscribed capital:
20,000, 14% Preference shares of ₹ 100 each fully paid 20,00,000
4. Depreciation on Property, Plant & Equipment
1,20,000 Equity shares of ₹ 100 each, ₹ 80 paid-up 96,00,000
₹
Capital reserves (₹ 1,50,000 is revaluation reserve) 1,95,000
Opening balance of Property, Plant & Equipment 12,000
Securities premium 50,000
Add: Additions 4,000
15% Debentures 65,00,000
16,000
Unsecured loans: Public deposits repayable after one year 3,70,000
Less: Closing balance of Property, Plant & Equipment (13,000)
Investment in shares, debentures, etc. 75,00,000
Depreciation 3,000
Profit and Loss account (debit balance) 15,00,000
5. Expenses to be shown in profit and loss account
You are required to compute Effective Capital as per the provisions of Schedule V to Companies Act,
Expenses (in cash) 9,000 2013.(MTP 5 Marks, Sep 22 & Oct ‘23)
Add: Outstanding of 2020 800
Answer 7
9,800
Computation of Effective capital
Less: Outstanding of 2019 600
9,200 ₹
Paid-up share capital-
6. Cash and Bank Account 20,000, 14% Preference shares 20,00,000
Particulars Cash Bank Cash Bank 1,20,000 Equity shares 96,00,000
₹ ₹ ₹ ₹ Capital reserves (excluding revaluation reserve) 45,000
To balance b/d 7,500 2,500 By Purchases 1,000 - Securities premium 50,000
To debtors - 76,000 By Expenses 9,000 15% Debentures 65,00,000
By Property, Public Deposits 3,70,000
To Banks E11 (c) 9,000 - Plant & 4,000 (A) 1,85,65,000

Equipment Investments 75,00,000
To Cash (c) - 5,000 By Drawings 500 Profit and Loss account (Dr. balance) 15,00,000
(B) 90,00,000 (v) Rate of gross profit remains the same.
Effective capital (A–B) 95,65,000 (vi) Business Expenditures are ₹ 50,000 for the year. All expenditures are paid off in cash.
(vii) Closing stock is to be valued on LIFO Basis.
Question 8
Futura Ltd. had the following items under the head “Reserves and Surplus” in the Balance Sheet as on All sales and purchases are on credit basis and there are no cash purchases and sales.
31st March, 2022: You are required to prepare Trading, Profit and Loss Account, Trade Debtors Account and Trade Credi-
Amount ₹ in lakhs torsAccount for the year ending 31.03.2022.
Securities Premium Ac- 80 (MTP 16 Marks April 23 & Nov ‘21)

count Answer 9
Capital Reserve 60 Trading and Profit and Loss account for the year ending 31st March, 2022
General Reserve 90 Particulars Rs. Particulars Rs.
To Opening Stock 40,000 By Sales 4,31,250
The company had an accumulated loss of ₹ 250 lakhs on the same date, which it has disclosed under the
head “Statement of Profit and Loss” as asset in its Balance Sheet. Comment on accuracy of this treat- To Purchases (Working Note) 3,45,000 By Closing Stock 40,000
ment in line with Schedule III to the Companies Act, 2013. (MTP 4 Marks Oct ’22)
To Gross Profit c/d (20% on 86,250
Answer 8 sales)
Schedule III to the Companies Act, 2013 provides that debit balance of Statement of Profit and Loss (after 4,71,250 4,71,250
all allocations and appropriations) shall be shown as a negative figure under the head ‘Surplus’. Similarly,
To Business Expenses 50,000 By Gross Profit b/d 86,250
the balance of ‘Reserves and Surplus’, after adjusting negative balance of surplus, shall be shown under the
head ‘Reserves and Surplus’ even if the resulting figure is in the negative. In this case, the debit balance of To Depreciation on:
profit and loss i.e. ₹ 250 lakhs exceeds the total of all the reserves i.e. ₹ 230 lakhs. Therefore, balance of ‘Re-
Machinery 6,500
serves and Surplus’ after adjusting debit balance of profit and loss is negative by ₹ 20 lakhs, which should be
disclosed on the face of the balance sheet. Thus the treatment done by the company is incorrect. Building 5,000 11,500
To Net profit 24,750
Question 9 86,250 86,250
The following is the Balance Sheet of Manish and Suresh as on 1 st April, 2021:
Trade Debtors Account
Equity and Liabilities ₹ Assets ₹ Particulars Rs. Particulars Rs.
Capital Accounts: Building 1,00,000 To Balance b/d 50,000 By Bank (bal. fig.) 4,09,375
Manish 1,50,000 Machinery 65,000 To Sales 4,31,250 By Balance c/d (1/6 of 71,875
Suresh 75,000 Stock 40,000 4,31,250)
Creditors for goods 30,000 Debtors 50,000 4,81,250 4,81,250
Creditors for expenses 25,000 Bank 25,000
Trade Creditors Account
2,80,000 2,80,000
They give you the following additional information: Particulars Rs. Particulars Rs.
(i) Creditors’ Velocity 1.5 month & Debtors’ Velocity 2 months. Here velocity indicates the no. of timesthe To Bank (Balancing figure) 3,31,875 By Balance b/d 30,000
creditors and debtors are turned over a year. To Balance c/d/ (1/8 of Rs. 43,125 By Purchases 3,45,000
(ii) Stock level is maintained uniformly in value throughout all over the year. 3,45,000)
(iii) Depreciation on machinery is charged @ 10%, Depreciation on building @ 5% in the current 3,75,000 3,75,000
year. Working Note:
(iv) Cost price will go up 15% as compared to last year and also sales in the current year will increase by
25% in volume.
Rs. Present Value Assets are carried at present value of future net cash flows gener-
ated by the concerned assets in the normal course of business.
(i) Calculation of Rate of Gross Profit earned during previous year
Liabilities are carried at present value of future net cash flows
A Sales during previous year (= 50,000 x 12/2) 3,00,000 that are expected to be required to settle the liability in the normal
course of business.
B Purchases (Rs. 30,000 x 12/1.5) 2,40,000
In preparation of financial statements, all or any of the measurement basis can be used in varying
C Cost of Goods Sold (Rs. 40,000 + Rs. 2,40,000 — Rs. 40,000) 2,40,000
combinations to assign money values to financial items.
D Gross Profit (A-C) 60,000
E 20% Question 11
Rate of Gross Profit X 100
(a) With regard to financial statements, name any five qualitative characteristics and elements. (RTP
(ii) Calculation of sales and Purchases during current year Rs.
May’21)
A Cost of goods sold during previous year 2,40,000 (b) Aman started a business on 1st April 2020 with Rs. 24,00,000 represented by 1,20,000 units of Rs. 20
B Add: Increases in volume @ 25 % 60,000 each.During the financial year ending on 31st March, 2021, he sold the entire stock for Rs. 30 each.
In order to maintain the capital intact, calculate the maximum amount, which can be withdrawn
3,00,000
by Aman in the year 2020-21 if Financial Capital is maintained at historical cost. (RTP May’21,
C Add: Increase in cost @ 15% 45,000 Nov’19) (Same concept different figures Old & New SM, RTP Nov’18)
D Cost of Goods Sold during Current Year 3,45,000
Answer 11
E Add: Gross profit @ 25% on cost (20% on sales) 86,250 (a)
F Sales for current year [D+E] 4,31,250
(i) Qualitative Characteristics of Financial Statements: Understandability, Relevance,
Comparability, Reliability & Faithful Representation
Question 10
(ii) Elements of Financial Statements:
What is meant by ‘Measurement’? What are the bases of measurement of Elements of Financial Asset, Liability, Equity, Income/Gain and Expense/Loss
Statements? Explain in brief. (RTP Nov 21, PYP 5 Marks Dec ’21)
(b)
Answer 10 Particulars Financial Capital Maintenance at

Measurement is the process of determining money value at which an element can be recognized in the
Historical Cost (Rs.)
balance sheet or statement of profit and loss. The framework recognizes four alternative measurement
Closing equity 36,00,000 represented by cash
bases for the purpose. These bases can be explained as:
(Rs. 30 x 1,20,000 units)
Historical cost This is the Acquisition price. According to this, assets are recorded
at an amount of cash and cash equivalent paid or the fair value Opening equity 1,20,000 units x Rs. 20 = 24,00,000
of the assets at time of acquisition.
Permissible drawings to keep Capital intact 12,00,000 (36,00,000 – 24,00,000)
Current Cost Assets are carried out at the amount of cash or cash equivalent
that would have to be paid if the same or an equivalent asset was
acquired currently. Liabilities are carried at the undiscounted Question 12
amount of cash or cash equivalents that would be required to set-
With regard to financial statements name any four.
tle the obligation currently.
(i) Users
Realizable (Settlement) For assets, amount currently realizable on sale of the asset in an
(ii) Qualitative characteristics
Value orderly disposal. For liabilities, this is the undiscounted amount
expected to be paid on settlement of liability in the normal course (iii) Elements (RTP Nov 20, RTP May 19, MTP 5 Marks Mar’23)
of business.
Answer 12
(i) Users of financial statements:
Investors, Employees, Lenders, Supplies/Creditors, Customers, Government & Public
(ii) Qualitative Characteristics of Financial Statements: statements can be classified in five broad groups depending on their economic characteristics: Asset,
Understandability, Relevance, Comparability, Reliability & Faithful Representation Liability, Equity, Income/Gain and Expense/Loss.
(iii) Elements of Financial Statements:
Asset, Liability, Equity, Income/Gain and Expense/Loss Asset Resource controlled by the enterprise as a result of past events from
which future economic benefits are expected to flow to the enterprise
Question 13 Liability Present obligation of the enterprise arising from past events, the settle-
ment of which is expected to result in an outflow of a resource
A Ltd. has entered into a binding agreement with Gamma Ltd. to buy a custom-made machine
Rs.1,00,000. At the end of 20X1-X2, before delivery of the machine, A Ltd. had to change its method of embodying economic benefits.
production. The new method will not require the machine ordered and it will be scrapped after delivery. Equity Residual interest in the assets of an enterprise after deducting all its
The expected scrap value is nil. liabilities.
You are required to advise the accounting treatment and give necessary journal entry in the year 20X1- Income/gain Increase in economic benefits during the accounting period in the form of inflows
X2.(RTP May’20, May’23 & Nov ‘23) or enhancement of assets or decreases in liabilities that result in increase in eq-
uity other than those relating to contributions from equity participants
Answer 13
A liability is recognized when outflow of economic resources in settlement of a present obligation can be Expense/loss Decrease in economic benefits during the accounting period in the form of out-
anticipated and the value of outflow can be reliably measured. In the given case, A Ltd. should recognize flows or depletions of assets or incurrence of liabilities that result in decrease in
a liability of Rs.1,00,000 to Gamma Ltd. equity other than those relating to distributions to equity participants.
When flow of economic benefit to the enterprise beyond the current accounting period is considered
improbable, the expenditure incurred is recognized as an expense rather than as an asset. In the present-
case, flow of future economic benefit from the machine to the enterprise is improbable. The entire amount Question 16
of purchase price of the machine should be recognized as an expense.
Summarised Balance Sheet of Cloth Trader as on 31.03.2021 is given below:
Journal entry
Loss on change in production method Dr. 1,00,000 Equity & Liabilities Amount Assets Amount (₹)
(₹)
To Gamma Ltd. 1,00,000
Proprietor’s Capital 3,00,000 Property, plant and equipment 3,60,000
(Loss due to change in production method)
Profit & Loss Account 1,25,000 Closing Inventory 1,50,000
Profit and loss A/c Dr. 1,00,000
10% Loan Account 2,10,000 Trade receivables 1,00,000
To Loss on change in production method 1,00,000
Trade payables 50,000 Deferred Expenses 50,000
(Loss transferred to profit and loss account)
Cash & Bank 25,000
Question 14 6,85,000 6,85,000

Additional Information is as follows:
What are fundamental accounting assumptions? (RTP May 19)
1. The remaining life of Property, plant and equipment is 8 years. The pattern of use of the
Answer 14 asset is even. The net realisable value of Property, plant and equipment on 31.03.2022 was ₹
Fundamental Accounting Assumptions: Accrual, Going Concern and Consistency 3,25,000.
2. Purchases and Sales in 2021-22 amounted to ₹ 22,50,000 and ₹ 27,50,000 respectively.

Question 15
3. The cost and net realizable value of inventory on 31.03.2022 were ₹ 2,00,000 and ₹ 2,50,000 re-
Explain main elements of Financial Statements. (RTP May 18) (PYP5 Marks May ’18)
spectively.
Answer 15 4. Expenses including interest on loan for the year amounted to ₹ 78,000.
Elements of Financial Statements
5. Deferred Expenses are amortized equally over 5 years.
The Framework for preparation and Presentation of financial statements classifies items of financial
6. Sundry Debtors on 31.03.2022 are ₹ 1,50,000 of which ₹ 5,000 is doubtful. Collection of another ₹
Answer 17
7. 25,000 depends on successful re-installation of certain product supplied to the customer; The qualitative characteristics are attributes that improve the usefulness of information provided in finan-
cial statements. Financial statements are required to show a true and fair view of the performance, finan-
8. Closing Sundry Creditors are ₹ 75,000, likely to be settled at 10% discount. cial position and cash flows of an enterprise. The framework for Preparation and Presentation of Financial
Statements suggests that the financial statements should maintain the following four qualitative charac-
9. Cash balance as on 31.03.2022 is ₹ 4,22,000.
teristics to improve the usefulness of the information furnished therein.
(1) There is an early repayment penalty for the loan of ₹ 25,000. You are required to prepare: (Not
assuming going concern) 1. Understandability: The financial statements should present information in a manner as to be
readily understandable by the users with reasonable knowledge of business and economic activ-
(2) Profit & Loss Account for the year 2021-22. ities and accounting.
Balance Sheet as on 31st March, 2022. (RTP May’22, Nov’22, PYP 5 Marks May’19) (Same concept different
figures PYP 4 Marks Nov’20, Old & New SM) 2. Relevance: The financial statements should contain relevant information only. Information, which
is likely to influence the economic decisions by the users, is said to be relevant. Such information
Answer 16 may help the users to evaluate past, present or future events or may help in confirming or correct-
ing past evaluations. The relevance of a piece of information should be judged by its materiality.
Profit and Loss Account for the year ended 2021-22(not assuming going concern)
A piece of information is said to be material if its misstatement (i.e., omission or erroneous state-
Particulars Amount ₹ Particulars Amount ₹ ment) can influence economic decisions of a user.
3. Reliability: To be useful, the information must be reliable; that is to say, they must be free from
To Opening Stock 1,50,000 By Sales 27,50,000
material error and bias. The information provided are not likely to be reliable unless transactions
To Purchases 22,50,000 By Closing Stock 2,50,000 and events reported are faithfully represented. The reporting of transactions and events should
be neutral, i.e. free from bias and be reported on the principle of ‘substance over form’. The in-
To Expenses 78,000 By Trade payables 7,500
formation in financial statements must be complete. Prudence should be exercised in reporting
To Depreciation 35,000 uncertain outcome of transactions or events.
To Provision for doubtful debts 30,000
4. Comparability: Comparison of financial statements is one of the most frequently used and most
To Deferred expenses 50,000 effective tools of financial analysis. The financial statements should permit both inter-firm and
To Loan penalty 25,000 intra-firm comparison. One essential requirement of comparability is disclosure of financial effect
of change in accounting policies.
To Net Profit (b.f.) 3,89,500
30,07,500 30,07,500 Question 18
Balance Sheet as at 31st March, 2022 (not assuming going concern) Explain how financial capital is maintained at historical cost? Kishore started a business on 1st April,
2019 with ₹ 15,00,000 represented by 75,000 units of ₹20 each. During the financial year ending on 31st
Liabilities Amount ₹ Assets Amount ₹ March, 2020, he sold the entire stock for ₹ 30 each. In order to maintain the capital intact, calculate
Capital 3,00,000 Fixed Assets 3,25,000 the maximumamount, which can be withdrawn by Kishore in the year 2019-20 if Financial Capital is
maintained at historical cost. (PYP 4 Marks Jan 21)
Profit & Loss A/c 5,14,500 Inventory 2,50,000
10% Loan 2,35,000 Trade receivables (less provision) 1,20,000
Answer 18
Trade payables 67,500 Deferred expenses Nil Financial capital maintenance at historical cost: Under this convention, opening and closing assets are
stated at respective historical costs to ascertain opening and closing equity. If retained profit is greater
Bank 4,22,000 than or equals to zero, the capital is said to be maintained at historical costs. This means the business will
11,17,000 11,17,000 have enough funds to replace its assets at historical costs. This is quite right as long as prices do not rise.
Maximum amount withdrawn by Kishore in year 2019-20 if financial capital is maintained at historical cost
Question 17
What are the qualitative characteristics of the Financial Statements which improve the usefulness of the
information furnished therein? (PYP 4 Marks Nov ’20, Old & New SM)
Particulars Financial Capital Maintenance atHis- Answer 20

torical Cost (₹) Effect of each transaction on Balance sheet of Mrs. A is shown below:
Closing equity (₹ 30 x 75,000 units) 22,50,000 represented by cash
Transactions Assets - Liabilities = Equity
Opening equity 75,000 units x ₹ 20 = 15,00,000
₹ lakh ₹ lakh ₹ lakh
Opening 10.00 - 4.00 = 6.00
Thus ₹ 7,50,000 is the maximum amount that can be withdrawn by Kishore in year 2019-20 if financial
(1) Dividend earned 10.20 - 4.00 = 6.20
capital is maintained at historical cost.
[10.00+0.20] [6.00+0.20]
Question 19 (2) Settlement of Creditors 9.50 - 3.10 = 6.40
[10.20-0.70] [4.00-0.90] [6.20+0.20]

A trader commenced business on April 1, 2020 with ₹ 120,000, represented by 6000 units of a certain prod-
uct at ₹ 20 per unit. During the year 2020-21 he sold these units at ₹ 30/- per unit and had withdrawn ₹ (3) Salary Outstanding 9.50 - 3.30 = 6.20
60,000. The price of the product at the end of financial year was ₹ 25/- per unit. Compute retained profit of [3.10+0.20] [6.40-0.20]
the trader under the concept of physical capital maintenance at current cost. Also, state, whether Answer
(4) Drawings 9.30 - 3.30 = 6.00
would be different if the trader had not withdrawn any amount. (PYP July’21, 5 Marks) (MTP 5 Marks Sep ’23)
[9.50-0.20] [6.20-0.20]
Answer 19
Physical Capital Maintenance at Current Cost Question 21
In the given case, the specific price index applicable to the product is 125 (25/20X100). Current cost of
As on 1st April, 2021 opening Balance Sheet of Mr. Mohanty is showing the aggregate value of Assets,
opening stock = (₹ 1, 20,000 / 100) x 125 Or 6,000 unit’s x ₹ 25 = ₹ 1, 50,000 Liabilities and Equity ₹ 12 Lakhs, 3 Lakhs and 9 lakhs respectively.
Current cost of closing cash = ₹ 1, 20,000 (₹ 1, 80,000 – ₹ 60,000) Opening equity at closing current costs During the accounting period 01/04/2021 to 31/03/2022, Mr. Mohanty has the following transactions:
= ₹ 1,50,000
1. A liability of ₹ 50,000 was finally settled at a discount of 2%.
Closing equity at closing current costs = ₹ 1, 20,000 Retained Profit = ₹ 1, 20,000 – ₹ 1, 50,000 = (-) ₹ 30,000
The negative retained profit indicates that the trader has failed to maintain his capital. The available fund 2. Dividend earned @ 15% on 1,000 (F.V 100 each) Equity shares held @ ₹ 12,000.
of ₹ 1, 20,000 is not sufficient to buy 6,000 units again at increased price of ₹ 25 per unit. The drawings
should have been restricted to ₹ 30,000 (₹ 60,000 – ₹ 30,000). 3. Rent of the premises paid ₹ 20,000.
If the trader had not withdrawn any amount, then the Answer would have been as below: 4. Mr. Mohanty withdrew ₹ 10,000 for personal purposes and also withdrew Goods worth ₹ 5,000 for
Current cost of opening stock = ₹ 1, 80,000 personal purposes.
Opening equity at closing current costs = ₹ 1, 50,000 Retained Profit = ₹ 1, 80,000 – ₹ 1, 50,000 = ₹ 30,000 5. ₹ 15,000 were received against Bill Receivables.
If the trader had not withdrawn any amount, then the retained profit would have been₹ 30,000. You are required to show the effect of the above transactions on Balance Sheet in the form of Assets -
Liabilities = Equity equation after each transaction. .(PYP 4 Marks Nov ’22)
Question 20
Answer 21
Mrs. A is showing the consolidated aggregate opening balance of equity, liabilities and assets of ₹ 6 Effects of each transaction on Balance sheet of the trader is shown below:
lakh, 4lakh and 10 lakhs respectively. During the current year Mrs. A has the following transactions:
1. Received 20% dividend on 10,000 equity shares of ₹ 10 each held as investment. Assets Liabilities Equity
2. The amount of ₹ 70,000 is paid to creditors for settlement of ₹ 90,000. Transactions ₹ lakh - ₹ lakh = ₹ lakh
3. Salary is pending by ₹ 20,000. Opening 12 - 3 = 9

4. Mrs. A’s drawing ₹ 20,000 for her personal use. (1) Settlement of Creditors 12 – 0.49 3 – 0.50 9.0 + 0.01
You are required to prepare the statement of the effect of aforesaid each transaction on closing bal- 11.51 - 2.5 = 9.01
ancesheet in the form of Assets – Liabilities = Equity after each transaction. (PYP 5 Marks, Dec ‘21)
(2) Dividend earned 11.51 + 0.15 9.01+ 0.15
11.66 - 2.5 = 9.16 Financial Capital Maintenance at Physical Capital Maintenance
(3) Rent paid 11.66 -0.20 9.16 -0.20 Sr. No. Particulars Computation ₹
11.46 - 2.5 = 8.96
(i) Opening Equity 1,500 x1,350 20,25,000
(4) Drawings 11.46 -0.15 8.96 -0.15
11.31 - 2.5 = 8.81 (ii) Closing Equity 1,500 x 1,500 22,50,000

(5) *Money received against 11.31+0.15 -0.15
Bills receivables (iii) Maximum Drawing (ii)- (i) 2,25,000
11.31 - 2.5 = 8.81
*No change as cash received from bills receivable will have impact on individual asset only (will reduce
Question 23
bill receivables with corresponding increase in cash).
The ‘going concern’ concept assumes that

Question 22
a. The business can continue in operational existence for the foreseeablefuture.
Mille started a business on 01.04.2022 with a capital of ₹ 15,00,000. She purchased ₹ 1,500 units of stock
at ₹ 1,000 each. She sold the entire stock for ₹ 1,500 each unit till 31.03.2023. b. The business cannot continue in operational existence for the foreseeable future.
You are required to calculate the maximum amount which can be withdrawn by Mille in order to keep c. The business is continuing to be profitable.
hercapital intact, if Financial Capital is maintained at: d. The business cannot continue if it is not able to earn profits.
(i) Historical Cost
Ans: (a)
(ii) Current Purchasing Power (opening index at 100 and closing index at 125)
(iii) Physical Capital Maintenance Question 24
(Price per unit at the end of year is ₹ 1,350) (PYP 5 Marks May ‘23)
Two principal qualitative characteristics of financial statements are
Answer 22 a. Understand ability and materiality b. Relevance and reliability
Financial Capital Maintenance at historical Costs c. Relevance and materiality d. Comparability and materiality.
Sr. No. Particulars Computation ₹ Ans: (b)
(i) Opening Equity 1,500 x 1,000 15,00,000 Question 25
(ii) Closing Equity 1,500 x 1,500 22,50,000 All of the following are components of financial statements except
(iii) Maximum Drawing (ii)- (i) 7,50,000 a. Balance sheet b. Statement of Profit and loss
c. Human responsibility report d. Social responsibility report.
Ans: (c)
Financial Capital Maintenance at current purchasing power
Sr. No. Particulars Computation ₹
Question 26
(i) Opening Equity 1,500 x 1,000 x 125/100 18,75,000 An accounting policy can be changed if the change is required
(ii) Closing Equity 1,500 x 1,500 22,50,000 a. By statute or accounting standard b. For more appropriate presentation of
financial statements
(iii) Maximum Drawing (ii)- (i) 3,75,000
c. Both (a) and (b) d. By statute as well as accounting stan-
dards.
Opening equity 60,000 units x ₹ 20 = 12,00,000

Ans: (c)
Question 27
Questions 31
Value of equity may change due to
Opening Balance Sheet of Mr. A is showing the aggregate value of assets, liabilities and equity ₹ 8
a. Contribution from or Distribution b. Income earned lakh, ₹ 3 lakh and ₹ 5 lakh respectively. During accounting period, Mr. A has the following transac-
to equity participants tions:
c. expenses incurred d. All the three. (1) Earned 10% dividend on 2,000 equity shares held of ₹ 100 each
(2) Paid ₹ 50,000 to creditors for settlement of ₹ 70,000
(3) Rent of the premises is outstanding ₹ 10,000
Ans: (d)
(4) Mr. A withdrew ₹ 9,000 for his personal use.
Theoretical Questions and Answer
You are required to show the effect of above transactions on Balance Sheet in the form of Assets -
Questions 28 Liabilities = Equity after each transaction.
What are the qualitative characteristics of the financial statements whichimprove the usefulness of the Answer 31
information furnished therein?
Effects of each transaction on Balance sheet of the trader is shown below:
Answer 28 Assets Liabilities Equity

The qualitative characteristics are attributes that improve the usefulness of information provided in finan- Transactions lakh – ₹ lakh = ₹ lakh
cial statements. Understand ability; Relevance; Reliability; Comparability are the qualitative characteris-
tics of financial statements. For details, refer para 7 of the chapter. Opening 8.00 – 3.00 = 5.00
(1) Dividend earned 8.20 – 3.00 = 5.20
Questions 29 (2) Settlement of Creditors 7.70 - 2.30 = 5.40
“One of the characteristics of financial statements is neutrality”- Do you agree with this statement? (3) Rent Outstanding 7.70 – 2.40 = 5.30
(4) Drawings 7.61 – 2.40 = 5.21
Answer 29
Yes, one of the characteristics of financial statements is neutrality. To be reliable, the informationcon- Questions 32
tained in financial statement must be neutral, that is free from bias. Financial Statements are not
Balance Sheet of Anurag Trading Co. on 31st March, 20X1 is given below:
neutral if by the selection or presentation of information, the focus of analysis could shift from one area of
business to another thereby arriving at a totally different conclusion on the business results.
Liabilities Amount (₹) Assets Amount (₹)
Practical Questions Answer
Capital 50,000 Property, Plant and Equipment 69,000

Questions 30
Profit and Loss A/c 22,000 Stock in Trade 36,000
Mohan started a business on 1st April 20X1 with ₹ 12,00,000 represented by 60,000 units of ₹ 20 each.
10% Loan 43,000 Trade Receivables 10,000
During the financial year ending on 31st March, 20X2, he sold the entire stock for ₹ 30 each. In order to
maintain the capital intact, calculate the maximum amount, which can be withdrawn by Mohan in
theyear 20X1-X2 if Financial Capital is maintained at historical cost. Trade Payables 18,000 Deferred Expenditure 15,000
Bank 3,000
Answer 30
1,33,000 1,33,000
Particulars Financial Capital Maintenance at Historical
Cost (₹)
Closing equity 18,00,000 represented by cash
(₹ 30 x 60,000 units)
Additional Information: Question 33 (Illustration)
1. Remaining life of Property, Plant and Equipment is 5 years with even use. The net realisable Balance sheet of a trader on 31st March, 20X1 is given below:
value of Property, Plant and Equipment as on 31 st March, 20X2 was ₹ 64,000.
Liabilities ₹ Assets ₹
2. Firm’s sales and purchases for the year 20X1-X2 amounted to ₹ 5 lacs and
Capital 60,000 Property, Plant and 65,000
3. ₹ 4.50 lacs respectively. Equipment
4. The cost and net realisable value of the stock were ₹ 34,000 and ₹ 38,000 respectively. Profit and Loss Account 25,000 Stock 30,000
10% Loan 35,000 Trade receivables 20,000
5. General Expenses for the year 20X1-X2 were ₹ 16,500.
Trade payables 10,000 Deferred expenditure 10,000
6. Deferred Expenditure is normally amortised equally over 4 years starting from Bank 5,000
7. F.Y. 20X0-X1 i.e. ₹ 5,000 per year. 1,30,000 1,30,000
Additional information:
8. Out of trade receivables worth ₹10,000, collection of ₹4,000 depends on successful re- design
of certain product already supplied to the customer. 1. The remaining life of Property, Plant and Equipment is 5 years. The pattern of use of the asset is
even. The net realisable value of Property, Plant and Equipment on 31.03.X2 was ₹60,000.
9. Closing trade payable is ₹10,000, which is likely to be settled at 95%.
2. The trader’s purchases and sales in 20X1-X2 amounted to ₹ 4 lakh and ₹ 4.5 lakh respectively.
10. There is pre-payment penalty of ₹2,000 for Bank loan outstanding.
Prepare Profit & loss Account for the year ended 31st March, 20X2 by assuming it is not a Going 3. The cost and net realisable value of stock on 31.03.X2 were ₹ 32,000 and ₹ 40,000respectively.
Concern.
4. Expenses (including interest on 10% Loan of ₹ 3,500 for the year) amounted to ₹ 14,900.
Answer 32
5. Deferred expenditure is amortised equally over 4 years.
Profit and Loss Account of Anurag Trading Co. for the year ended 31st March, 20X2
6. Trade receivables on 31.03.X2 is ₹ 25,000, of which ₹ 2,000 is doubtful. Collection of another
(Assuming business is not a going concern)
7. ₹ 4,000 depends on successful re-installation of certain product supplied to the customer.
₹ ₹
To Opening Stock 36,000 By Sales 5,00,000 8. Closing trade payable is ₹ 12,000, which is likely to be settled at 5% discount.
To Purchases 4,50,000 By Trade payables 500 9. Cash balance on 31.03.X2 is ₹ 37,100.

To General expenses 16,500 By Closing Stock 38,000
10. There is an early repayment penalty for the loan ₹ 2,500.
To Depreciation (69,000-64,000) 5,000
To Provision for doubtful debts 4,000 You are required to prepare Profit and Loss Accounts and Balance Sheets of the trader in both cases
To Deferred expenditure 15,000 (i) assuming going concern (ii) not assuming going concern.
To Loan penalty 2,000

Answer 33
To Net Profit (b.f.) 10,000 Profit and Loss Account for the year ended 31st March, 20X2
5,38,500 5,38,500 Case (i) Case (ii) Case (i) Case (ii)
₹ ₹ ₹ ₹
To Opening Stock 30,000 30,000 By Sales 4,50,000 4,50,000
To Purchases 4,00,000 4,00,000 By Closing 32,000 40,000
Stock
The negative retained profit indicates that the trader has failed to maintain his capital. The available
To Expenses 14,900 14,900 By Trade 600
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
To Depreciation 13,000 5,000 payables
per unit.
To Provision for You are required to compute the Capital maintenance under all three bases ie. (i) Historical costs, (ii)
doubtful debts 2,000 6,000 Current purchasing power and (iii) Physical capital maintenance.
To 2,500 10,000
Deferred
Answer 34
expenditure
Financial Capital Maintenance at historical costs
To Loan penalty 2,500
₹ ₹
Closing capital (At historical cost) Less: 12,000
To Net Profit 19,600 22,200
Capital to be maintained
(b.f.)
Opening capital (At historical cost)
4,82,000 4,90,600 4,82,000 4,90,600 Introduction (At historical cost)
12,000
Retained profit
Balance Sheet as at 31st March, 20X2 Nil (12,000)
Nil
Liabilities Case (i) Case Assets Case Case
(ii) (i) (ii) Financial Capital Maintenance at current purchasing power
₹
₹ ₹ ₹ ₹ ₹
Capital 60,000 60,000 Property, Plant 52,000 60,000 Closing capital (At closing price) Less: 12,000
and Equipment Capital to be maintained Opening cap-
ital (At closing price) Introduction (At
Profit & Loss A/c 44,600 47,200 Stock 32,000 40,000
closing price)
10% Loan 35,000 37,500 Trade 14,400
Retained profit/(loss)
receivables (less 23,000 19,000 Nil (14,400)
provision)
(2,400)
Trade payables 12,000 11,400 Deferred 7,500 Nil
expenditure Physical Capital Maintenance
Bank 37,100 37,100

₹ ₹
1,51,600 1,56,100 1,51,600 1,56,100
Closing capital (At current cost) ( 4,800 units) Less: 12,000
Capital to be maintained
Question 34 (Illustration)
Opening capital (At current cost) (6,000 units)
A trader commenced business on 01/01/20X1 with ₹ 12,000 represented by 6,000 units of a certainprod- Introduction (At current cost) 15,000
uct at₹ 2 per unit. During the year 20X1 he sold these units at
Nil (15,000)
₹ 3 per unit and had withdrawn ₹ 6,000. Let us assume that the price of the product at the end ofyear is
₹ 2.50 per unit. In other words, the specific price index applicable to the product is 125. Loss resulting in non-maintenance of capital (3,000)
Current cost of opening stock = (₹ 12,000 / 100) x 125 = 6,000 x ₹ 2.50 = ₹ 15,000 Current cost ofclosing
cash = ₹ 12,000 (₹ 18,000 – ₹ 6,000)
Opening equity at closing current costs = ₹ 15,000 Closing equity at closing currentcosts = ₹ 12,000 Re-
tained Profit = ₹ 12,000 – ₹ 15,000 = (-) ₹ 3,000
Chapter 3 Chapter 3
Applicability of Accounting Standards Applicability of Accounting Standards
Question 1
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
Study Q.5 TO Q.14 M/s X & Co. (a partnership firm) had a turnover of ₹ 5 crores (excluding other income) and borrowings
of ₹ 1.5 crores in the previous year. It wants to avail the exemptions available in application of Account-
Mat.
ing Standards to non-corporate entities for the year ended 31.3.2022. Advisethe management of M/s X &
Past NO NO NO NO NO NO Q.4 NO NO NO NO NO Co in respect of the exemptions of provisions of ASs, as per the directive issued by the ICAI. (MTP 5 Marks
Oct ’22) (Same concept different figures MTP Oct’18 5 Marks, Old & New SM)
Exams
MTP NO Q.1 NO NO NO NO NO NO NO Q.1 NO NO Answer 1
RTP NO NO NO NO NO Q.2 NO NO Q.3 NO NO NO The question deals with the issue of Applicability of Accounting Standards to a non−corporate entity. For
availment of the exemptions, first of all, it has to be seen that M/s Omega & Co. falls in which level of the
non−corporate entities. Its classification will be done on the basis of the classification of non− corporate
entities as prescribed by the ICAI. According to the ICAI, non− corporate entities can be classified under
4 levels viz Level I, Level II, Level III and Level IV entities.
Non-corporate entities which meet following criteria are classified as Level IV entities:
1. All entities engaged in commercial, industrial or business activities, whose turnover (excluding
other income) does not exceed rupees ten crores in the immediately preceding accounting year.
2. All entities engaged in commercial, industrial or business activities having borrowings (including
public deposits) does not exceed rupees two crores at any time during the immediately preced-
ing accounting year.
3. Holding and subsidiary entities of any one of the above.

As the turnover of M/s Omega & Co. is less than ₹ 10 crores and borrowings less than ₹ 2 crores, it falls
under Level IV non−corporate entities. In this case, AS 3, AS 14, AS 17, AS 18, AS 20, AS 21, AS 23, AS 24, AS
25, AS 27 and AS 28 will not be applicable to M/s Omega & Co. Relaxations from certain requirements
in respect of AS 10, AS 11, AS 13, AS 15, AS 19, AS 22, AS 26 and AS 29 are also availableto M/s Omega & Co.
Question 2
What are the issues, with which Accounting Standards deal? (RTP Nov 20)(Old & New SM)
Answer 2
Accounting Standards deal with the issues of (i) Recognition of events and transactions in the financial
statements, (ii) Measurement of these transactions and events, (iii) Presentation of these transactions
and events in the financial statements in a manner that is meaningful and understandable to the read-
er, and (iv) Disclosure requirements.
Question 3 Answer 4
Criteria for classification of non−corporate entities as level 1 entities for purpose of application of
(a) A company with a turnover of Rs. 225 crores and borrowings of Rs. 51 crore during the year A counting Standards decided by the Institute of Chartered Accountants of India is given below: Non−
ended 31st March, 2021, wants to avail the exemptions available in adoption of Accounting corporate entities which fall in any one or more of the following categories, at the end of the relevant
Standards applicable to companies for the year ended 31.3. 2021. Advise the management accounting period, are classified as Level I entities:
on the exemptions that are available as per the Companies (Accounting Standards) Rules,
2021. (i) Entities whose equity or debt securities are listed or are in the process of listing on any stock
exchange, whether in India or outside India.
(b) An organization whose objects are charitable or religious, believes that the Accounting Stan-
dards are not applicable to it since only a very small proportion of its activities are business (ii) Banks (including co−operative banks), financial institutions or entities carrying on insurance
in nature. Comment. (RTP May ’22) business.
(iii) All commercial, industrial and business reporting entities, whose turnover (excluding other
Answer 3 income) exceeds rupees fifty crore (as per amendment- Rupees two fifty crore) in the
(a) The question deals with the issue of Applicability of Accounting Standards for corporate entities. immediately preceding accounting year.
The companies can be classified under two categories viz SMCs and Non−SMCs under the Com- (iv) All commercial, industrial and business reporting entities having borrowings (including
panies (Accounting Standards) Rules, 2021. As per the Companies (Accounting Standards) Rules, public deposits) in excess of rupees ten crore (as per amendment- Rupees fifty crore) at
2021, criteria for above classification as SMCs, are: any time during the immediately preceding accounting year.
“Small and Medium Sized Company” (SMC) means, a company− whose equity or debt securities (v) Holding and subsidiary entities of any one of the above.
are not listed or are not in the process of listing on any stock exchange, whether in India or outside
India;
Question 5
฀ which is not a bank, financial institution or an insurance company;
Non-corporate entities which are not Level I entities whose turnover (excludingother income) ex-
฀ whose turnover (excluding other income) does not exceed rupees two−fifty crores in the im-
ceeds rupees _ but does not exceed rupees two-fifty crores in the immediately preceding
mediately preceding accounting year;
accountingyear are classified as Level IIentities.
฀ which does not have borrowings (including public deposits) in excess of rupees fifty crores at
any time during the immediately preceding accounting year; and a. Five crores. a. Two crores
฀ which is not a holding or subsidiary company of a company which is not a small and medi- b. Fifty crores c. Ten crores
um−sizedcompany. Since, XYZ Ltd.’s turnover was Rs. 225 crores which does not exceed Rs. 250
crores but borrowings of Rs. 51 crore are more than Rs. 50 crores, it is not a small and medium Ans: (C) Ten crores
sized company (SMC). The exemptions available to SMC are not available to this company.
(b) Accounting Standards apply in respect of any enterprise (whether organized in corporate, co−op- Question 6
erative or other forms) engaged in commercial, industrial or business activities, whether or not
profit oriented and even if established for charitable or religious purposes. Accounting Standards The following Accounting Standard is not applicable to Non-Corporate Entities falling in Level II in
however, do not applyto enterprises solely carrying on the activities, which are not of commercial, its entirety.
industrial or business nature, (e.g., an activity of collecting donations and giving them to flood
affected people). Exclusion of an enterprise from the applicability of the Accounting Standards a. AS 10 b. AS 17
would be permissible only if no part of the activity of such enterprise is commercial, industrial or
c. AS 2 d. AS 13
business in nature. Even if a very small proportion of the activities of an enterprise were considered
to be commercial, industrial or business in nature, the Accounting Standards would apply to all its Ans: (b) AS 17
activities including those, which are not commercial, industrial or business in nature.
Question 7
Question 4
All non-corporate entities engaged in commercial, industrial and business reporting entities, whose
List the Criteria for classification of non-corporate entities as level I Entities for the purpose of applica-
turnover (excluding other income) exceeds rupees 250 crores in the immediately preceding ac-
tion of Accounting Standards as per the Institute of Chartered Accountants of India. (PYP 4 Marks Jan
counting year, are classified as.
21)
a. Level II entities b. Level I entities

c. Level III entities d. Level IV entities
Ans: (b) Level I entities Answer 11

Criteria for classification of Non-company Entities as decided by the Institute of Chartered Accountants
Question 8 of India
Level I Entities
All non-corporate entities engaged in commercial, industrial or business activities having bor-
Non-company entities which fall in any one or more of the following categories, at the end of the rel-
rowings (including public deposits) in excess of rupees two crores but does not exceed rupees ten
evant accounting period, are classified as Level I entities:
crores at any timeduring the immediately preceding accounting year.
1. Entities whose securities are listed or are in the process of listing on any stock exchange, whether
a. Level II entities b. Level IV entities
in India or outside India.
c. Level III entities d. Level I entities
2. Banks (including co-operative banks), financial institutions or entities carrying on insurance busi-
ness.
Ans: (C) Level III entities
3. All entities engaged in commercial, industrial or business activities, whose turnover (excluding
other income) exceeds rupees two-fifty crore in the immediately preceding accounting year.
Question 9
4. All entities engaged in commercial, industrial or business activities having borrowings (including
“Small and Medium Sized Company” (SMC) means, a company- public deposits) in excess of rupees fifty crore at any time during the immediately preceding
accounting year.
a. which may be a bank, financial institution or an insurance company.
5. Holding and subsidiary entities of any one of the above.
b. whose turnover (excluding other income) does not exceed rupees two-fifty crores in the im-
mediately preceding accounting year; Level II Entities
Non-company entities which are not Level I entities but fall in any one or more of the following cate-
c. whose turnover (excluding other income) does not exceed rupees fifty crores in the imme-
gories are classified as Level II entities:
diately preceding accounting year;
d. whose turnover (excluding other income) does not exceed rupees five hundred crores in the 1. All entities engaged in commercial, industrial or business activities, whose turnover (excluding
immediately preceding accounting year. other income) exceeds rupees fifty crore but does not exceed rupees two-fifty crore in the im-
mediately preceding accounting year.
Ans: (b) 2. All entities engaged in commercial, industrial or business activities having borrowings (including
public deposits) in excess of rupees ten crore but not in excess of rupees fifty crore at any time
whose turnover (excluding other income) does not exceed rupees two-fifty crores in the immediately
during the immediately preceding accounting year.
preceding accounting year;
Theory Questions Answer 3. Holding and subsidiary entities of any one of the above.
Question 10 Question 12
What are the issues, with which Accounting Standards deal? List the criteria to be applied for rating a non-corporate entity as Level IV entity for the purpose of
compliance of Accounting Standards in India.
Answer 10
Answer 12
Accounting Standards deal with the issues of (i) Recognition of events and transactions in the finan-
cial statements, (ii) Measurement of these transactions and events, (iii) Presentation of these trans- Level IV Entities
actions andevents in the financial statements in a manner that is meaningful and understandable to the
Additional requirements
reader, and (iv) Disclosure requirements.
1. An MSME which avails thE ExEMptions or rElaxations givEn to it shall disclosE (by way of a notE toits financial statE-
Question 11 MEnts) thE fact that it is an
MsME, thE lEvEl of MsME and that it has coMpliEd with the Accounting Standards
insofar as they are applicable to entities falling in Level II or Level III or Level IV, as the case may
List the criteria to be applied for rating a non-corporate entity as Level-I entity and Level II entity forthe be.
purpose of compliance of Accounting Standards in India.
2. Where an entity, being covered in Level II or Level III or Level IV, had qualified for any exemption or
relaxation previously but no longer qualifies for the relevant exemption or relaxation in the current As per the Companies (Accounting Standards) Rules, 2021, criteria for above classification as SMCs,
accounting period, the relevant standards or requirements become applicable from the cur- are:
rent period and the figures for the corresponding period of the previous accounting period need “Small and Medium Sized Company” (SMC) means, a company-
not be revised merely by reason of its having ceased to be covered in Level II or Level III or Level
IV, as the case may be. The fact that the entity was covered in Level II or Level III or Level IV, as the
case may
whose equity or debt securities are not listed or are not in the process of listing on any stock
exchange, whether in India or outside India;
3. be, in the previous period and it had availed of the exemptions or relaxations available to that Level
of entities shall be disclosed in the notes to the financial statements. The fact that previous peri-
which is not a bank, financial institution or an insurance company;
od figures have not been revised shall also be disclosed in the notes to the financial statements.
whose turnover (excluding other income) does not exceed rupees two- fifty crores in the im-
4. Where an entity has been covered in Level I and subsequently, ceases to be so covered and gets
mediately preceding accounting year;
covered in Level II or Level III or Level IV, the entity will not qualify for exemption/relaxation available to
that Level, until the entity ceases to be covered in Level I for two consecutive years. Similar is the case
which does not have borrowings (including public deposits) in excess of rupees fifty crores at
in respect of an entity, which has been covered in Level II or Level III and subsequently, gets covered
any time during the immediately preceding accounting year; and
under Level III or Level IV.
which is not a holding or subsidiary company of a company which is not a small and medi-
5. If an entity covered in Level II or Level III or Level IV opts not to avail of the exemptions or relaxations
um-sized
available to that Level of entities in respect of any but not all of the Accounting Standards, it shall
disclose the Standard(s) in respect of which it has availed the exemption or relaxation. company.
6. If an entity covered in Level II or Level III or Level IV opts not to avail any one or more of the exemptions Since, XYZ Ltd.’s turnover was Rs. 50 crores which does not exceed Rs. 250 crores and borrow-
or relaxations available to that Level of entities, it shall comply with the relevant requirements of the ings of Rs. 1 crore are
Accounting Standard.
less than Rs. 50 crores, it is a small and medium sized company (SMC).
7. An entity covered in Level II or Level III or Level IV may opt for availing certain exemptions or relaxa-
tions from compliance with the requirements prescribed in an Accounting Standard: Question 14
8. Provided that such a partial exemption or relaxation and disclosure shall not be permitted to mis- A company was classified as Non-SMC in 20X1-X2. In 20X2-X3, it has been classified as SMC. The
lead any person or public. management desires to avail the exemptions or relaxations available for SMCs in 20X2-X3. However,
the accountant of the company does not agree with the same. Comment.
9. In respect of Accounting Standard (AS) 15, Employee Benefits, exemptions/ relaxations are available
to Level II and Level III entities, under two sub- classifications, viz., (i) entities whose average num- Answer 14
ber of persons employed during the year is 50 or more, and (ii) entities whose average number of
persons employed during the year is less than 50. The requirements stated in paragraphs (1) to As per Companies (Accounting Standards) Rules, 2021, an existing company, which was previously not
(6) above, mutatis mutandis, apply to these sub- classifications. a SMC and subsequently becomes a SMC, should not be qualified for exemption or relaxation in
respect of accounting standards available to a SMC until the company remains a SMC for two con-
secutive accounting periods. Therefore, the management of the company cannot avail the exemp-
Practical Questions Answer tions/ relaxations available to the SMCs for the FY 20X2-X3.
Question 13
XYZ Ltd., with a turnover of Rs. 50 crores during previous year and borrowings of Rs. 1 crore during any
time in the previous year, wants to avail the exemptions available in adoption of Accounting Standards
applicable to companies for the year ended 31.3.20X1. Advise the management on the exemptions that
are available as per the Companies (Accounting Standards) Rules, 2021.
Answer 13
The question deals with the issue of Applicability of Accounting Standards for corporate entities.
The companies can be classified under two categories viz SMCs and Non SMCs under the Companies
(Accounting Standards) Rules, 2021.
Chapter 4.1 Chapter 4.1

AS 1- Disclosure of Accounting Policies AS 1- Disclosure of Accounting Policies
Question 1
HIL Ltd. was making provision for non-moving stocks based on no issues having occurred for the last
12months up to 31.03.2019. The company now wants to change it and make provision based on tech-
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023 nical evaluation during the year ending 31.03.2020. Total value of stock on 31.3.20 is Rs. 120 lakhs. Pro-
Study vision required based on technical evaluation amounts Rs. 3.00 lakhs. However, provision required
Q.10 TO Q.19 based on 12 months (no issues) is Rs. 4.00 lakhs. You are required to discuss the following points in
Mat. the light of Accounting Standard (AS)-1:
Past NO Q.1 Q.8 NO NO NO Q.1, NO Q.2 NO Q.9 NO
Q.3
1. Does this amount to change in accounting policy?
Exams
MTP NO Q.3, Q.4 Q.2 Q.1, NO Q.1 Q.3 Q.1, Q.4 Q.1 Q.1, 2. Can the company change the method of accounting?
Q.4 Q.2 Q.2 Q.2
3. Explain how it will be disclosed in the annual accounts of HIL Ltd. for the year 2019-20. (MTP 5 Mark
RTP NO NO NO NO Q.2 Q.6 Q.5 NO NO NO Q.3 NO March ’21, MTP 5 Marks April ’22 & MTP 5 Marks April ‘23) (PYP Nov ’18, 5 Marks, PYP 5 Marks Dec’21)
(Same concept different figures- MTP 5 Marks Mar’23, RTP May’20 & Nov ‘23)
Answer 1
The decision of making provision for non−moving inventories on the basis of technical evaluation does
not amount to change in accounting policy. Accounting policy of a company may require that provi-
sion for non−moving inventories should be made but the basis for making provision will not constitute
accounting policy. The method of estimating the amount of provision may be changed in case a more
prudent estimate can be made.
In the given case, considering the total value of inventory, the change in the amount of required provi-
sion of non−moving inventory from Rs. 4 lakhs to Rs. 3 lakhs are also not material. The disclosure can be
made for such change in the following lines by way of notes to the accounts in the annual accounts of
HIL Ltd. for the year 2019−20 in the following manner:
“The company has provided for non−moving inventories on the basis of technical evaluation unlike pre-
ceding years. Had the same method been followed as in the previous year, the profit for the year and
the value of net assets at the end of the year would have been lower by Rs. 1 lakh.”
Question 2
State whether the following statements are ‘True’ or ‘False’ in line with the provisions of AS Also give
reason for your answer.
1. Certain fundamental accounting assumptions underline the preparation and presentation of fi-
nancial statements. They are usually specifically stated because their acceptance and use are not
assumed.
2. If fundamental accounting assumptions are not followed in presentation and preparation of finan-
cial statements, a specific disclosure is not required.
3. All significant accounting policies adopted in the preparation and presentation of financial
statements should form part of the financial statements.
4. Any change in an accounting policy, which has a material effect should be disclosed. Where the
amount by which any item in the financial statements is affected by such change is not ascertainable, Question 4
wholly or in part, the fact need not to be indicated.
Kumar Ltd. had made a rights issue of shares in 2017. In the offer document to its members, it had
5. There is no single list of accounting policies which are applicable to all circumstances. (MTP 5 Marks projected a surplus of Rs. 40 crores during the accounting year to end on 31 st March, 2017. The draft
April 21, Oct 19, Mar 22, May’20 & Oct ‘23, RTP 5 Marks May 20, PYP 5 Marks May ’22, Old & New SM) results for the year, prepared on the hitherto followed accounting policies and presented for perusal
of the board of directors showed a deficit of Rs. 10 crores. The board in consultation with the man-
Answer 2 aging director, decided not to provide for “after sales expenses” during the warranty period; Till the
1. False; As per AS 1 “Disclosure of Accounting Policies”, certain fundamental accounting assumptions last year, provision at 2% of sales used to be made under the concept of “matching of costs against
underlie the preparation and presentation of financial statements. They are usually not specifically revenue” and actual expenses used to be charged against the provision. The board now decided to
stated because their acceptance and use are assumed. Disclosure is necessary if they are not fol- account for expenses as and when actually incurred. Sales during the year total to Rs. 600 crores.
lowed. 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 (MTP Apr’19, Aug’18, Oct’22 5 Marks)
2. False; As per AS 1, if the fundamental accounting assumptions, viz. Going Concern, Consistency and
Accrual are followed in financial statements, specific disclosure is not required. If a fundamental ac-
Answer 4
counting assumption is not followed, the fact should be disclosed.
As per AS 1, any change in the accounting policies which has a material effect in the current period
3. True; To ensure proper understanding of financial statements, it is necessary that all significant
or which is reasonably expected to have a material effect in later periods should be disclosed. In the
accounting policies adopted in the preparation and presentation of financial statements should
case of a change in accounting policies which has a material effect in the current period, the amount
be disclosed. The disclosure of the significant accounting policies as such should form part of the
by which any item in the financial statements is affected by such change should also be disclosed to
financial statements and they should be disclosed at one place.
the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be
4. False; Any change in the accounting policies which has a material effect in the current period or indicated. Accordingly, the notes on accounts should properly disclose the change and its effect.
which is reasonably expected to have a material effect in later periods should be disclosed. Where Notes on Accounts:
such amount is not ascertainable, wholly or in part, the fact should be indicated.
So far, the company has been providing 2% of sales for meeting “after sales expenses during the warranty
5. True; As per AS 1, there is no single list of accounting policies which are applicable to all circumstanc-
period. With the improved method of production, the probability of defects occurring in the products
es. The differing circumstances in which enterprises operate in a situation of diverse and complex
has reduced considerably. Hence, the company has decided not to make provision for such expenses
economic activity make alternative accounting principles and methods of applying those principles
but to account for the same as and when expenses are incurred. Due to this change, the profit for the
acceptable.
year is increased by Rs. 12 crores than would have been the case if the old policy were to continue.
Question 3
Question 5
In the books of Rani Ltd., closing inventory as on 31.03.2020 amounts to ₹1,75,000 (valued based on FIFO
The draft results of Surya Ltd. for the year ended 31st March, 2020, prepared on the hitherto followed
method). The Company decides to change from FIFO method to weighted average method for ascer-
accounting policies and presented for perusal of the board of directors showed a deficit of Rs. 10
taining the costs of inventory from the year 2019-20. On the basis of weighted average method, clos-
crores. The board in consultation with the managing director, decided to value year-end inventory
ing inventory as on 31.03.2020 amounts to ₹1,59,000. Realizable value of the inventory as on 31;03;2020
at works cost (Rs. 50 crores) instead of the hitherto method of valuation of inventory at prime cost (Rs.
amounts to ₹2,07 ,000. Discuss disclosure requirements of change in accounting policy as per AS 1.(MTP
30 crores). As chief accountant of the company, you are asked by the managing director to draft the
Nov ’21, 5 Marks, MTP Oct’18 5 Marks, RTP May 23, PYP 5 Marks Dec’21, Old & New SM)
notes on accounts for inclusion in the annual report for 2019-2020. (RTP May ’21)
Answer 3
Answer 5
As per AS 1 “Disclosure of Accounting Policies”, any change in an accounting policy which has a materi-
As per AS 1, any change in the accounting policies which has a material effect in the current period or
al effect should be disclosed in the financial statements. The amount by which any item in the financial
which is reasonably expected to have a material effect in later periods should be disclosed. In the
statements is affected by such change should also be disclosed to the extent ascertainable. Where such
case of a change in accounting policies which has a material effect in the current period, the amount
amount is not ascertainable, wholly or in part, the fact should be indicated. Thus Rani Ltd. should disclose
by which any item in the financial statements is affected by such change should also be disclosed to
the change in valuation method of inventory and its effect on financial statements. The company may
the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be
disclose the change in accounting policy in the following manner:
indicated. Accordingly, the notes on accounts should properly disclose the change and its effect.
“The company values its inventory at lower of cost and net realizable value. Since net realizable value
Notes on Accounts:
of all items of inventory in the current year was greater than respective costs, the company valued its
inventory at cost. In the present year i.e. 2019−20, the company has changed to weighted average meth- “During the year inventory has been valued at factory cost, against the practice of valuing it at prime
od, which better reflects the consumption pattern of inventory, for ascertaining inventory costs from the cost as was the practice till last year. This has been done to take cognizance of the more capital inten-
earlier practice of using FIFO for the purpose. The change in policy has reduced current profit and value of sive method of production on account of heavy capital expenditure during the year. As a result of this
inventory by ₹16,000 (1,75,000 – 1,59,000).” change,the year−end inventory has been valued at Rs. 50 crores and the profit for the year is increased
by Rs. 20 crores.”
Answer 8
Question 6 The term “Accrual” has been explained in the AS 1 on Disclosure of Accounting Policies, as “Revenues and
costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or
What are the three fundamental accounting assumptions recognized by Accounting Standard (AS) 1? paid) and recorded in the financial statements of the periods to which they relate”
Briefly describe each one of them. (RTP Nov’20) Reasons for Accrual Basis of Accounting
Answer 6 1. Accrual basis of accounting, attempts to record the financial effects of the transactions, events, and
circumstances of an enterprises in the period in which they occur rather than recording them in the
Accounting Standard (AS) 1 recognizes three fundamental accounting assumptions. These are as follows: period(s) in which cash is received or paid by the enterprise.
1. Going Concern: The financial statements are normally prepared on the assumption that an enter- 2. Receipts and payments of the period will not coincide with the buying producing or selling events
prise will continue its operations in the foreseeable future and neither there is intention, nor there and other economic events that affect entity performance.
is need to materially curtail the scale of operations.
3. The goal of Accrual basis of accounting is to follow the matching concept of income and expen-
diture so that reported net income measures an enterprise’s performance during a period instead of
2. Consistency: The principle of consistency refers to the practice of using same accounting policies
merely listing its cash receipts and payments.
for similar transactions in all accounting periods unless the change is required (i) by a statute, (ii)
by an accounting standard or (iii) for more appropriate presentation of financial statements. 4. Accrual basis of accounting recognizes assets, liabilities or components of revenues and expenses
for amounts received or paid in cash in past, and amounts expected to be received or paid in cash
3. Accrual basis of accounting: Under this basis of accounting, transactions are recognized as soon in the future.
as they occur, whether or not cash or cash equivalent is actually received or paid.
5. Important point of difference between accrual and accounting based on cash receipts and outlay
is in timing of recognition of revenues, expenses, gains and losses.
Question 7
(i) ABC Ltd. was previously making provision for non-moving stocks based on stocks not issued for Question 9
the last 12 months up to 31.03.2020. Now, the company wants to make provisions based on technical
You are required to comment on the following cases as per the provisions of Accounting Standard-1
evaluation during the year ending 31;03;2021; Total value of stock ₹ 133;75 lakhs Provision required
based on technical evaluation ₹ 4;00 lakhs Provision required based on 12 months not issued ₹ 5;00 ‘Disclosure of Accounting Policies’:
lakhs; (2.5 Marks, Dec ’21) (1) Bee Limited has not complied with AS-2 “Valuation of inventories” and the same is disclosed in
the Notes on Accounts. Management is of the view that the financial statements give a true and
Answer 7 fair view as non-compliance with AS-2 is disclosed.
(i) The decision of making provision for non−moving inventories on the basis of technical evaluation does (2) Cee Limited sold its Office Building for Rs. 10,00,000 on 1st March, 2023. The buyer has paid the
not amount to change in accounting policy. Accounting policy of a company may require that provi- full amount and taken possession of the building. The book value of the Office Building is Rs.
sion for non−moving inventories should be made. The method of estimating the amount of provision 4,00,000. On 31st 2023, documentation and legal formalities are pending. The company has not
may be changed in case a more prudent estimate can be made. recorded the disposal and the amount received is shown as an advance.
(3) Dee Limited has prepared its accounts on cash basis and the same is not disclosed.
In the given case, considering the total value of inventory, the change in the amount of required provision (4) Jee Limited disclosed significant accounting policies adopted in the preparation of financial
of non−moving inventory from ₹ 5 lakhs to ₹ 4 lakhs is also not material. The disclosure can be made for statements, in the Directors’ Report. (PYP 5 Marks May ‘23)
such change in the following lines by way of notes to the accounts in the annual accounts of ABC Ltd. for
the year 2020 −21: Answer 9
“The company has provided for non−moving inventories on the basis of technical evaluation unlike pre- (1) As per AS−I disclosure of accounting policies is not a remedy for wrong or inappropriate treatment
ceding years. Had the same method been followed as in the previous year, the profit for the year and the in accounting. In the given case the financial statement does not give a true and fair view as they
corresponding effect on the year end net assets would have been lower by ₹ 1 lakh.” are not in compliance with AS−2.
(2) Considering the substance over form as per AS−I, documentation and legal formalities represent
Question 8 the form of the transaction, although the legal title has not been transferred, the economic reality
and substance are that the rights and beneficial interest in the Office Building have been trans-
What do you mean by ‘Accrual’ in reference to AS-1? Also, specify any three reasons for ‘Accrual Basis ferred. Therefore, recording of acquisition/ disposal (by the transferee and transferor respectively)
of Accounting’. (PYP May’19, 5 Marks) would in substance represent the transaction entered into.
(3) Accrual is a fundamental accounting assumption. If it is not followed by the company, the facts
should be disclosed under AS−I. Hence the company should disclose the fact that the cash basis of
accounting has been followed in the notes on accounts.
(4) The practice followed by the company is not correct. It should be disclosed as part of financial
statements (The director’s report is not part of financial statements). Answer 13
Accounting Standard (AS) 1 recognises three fundamental accounting assumptions. These are: (i) Go-
Question 10 ing Concern; (ii) Consistency; and (iii) Accrual basis of accounting.
Which of the following is NOT a major consideration in selection and application of accounting poli-
cies?
Question 14
Has Accounting Standard 1 prescribed the manner in which the accounting policies followed by the
a. Prudence b. Comparability
entityshould be disclosed?
c. Materiality d. Substance over form
Answer 14
Ans: (b)
Paras 18-20 of Accounting Standard 1, Disclosure of Accounting Policies, lay down the manner in which
accounting policies have to be disclosed, which is stated as under:
Question 11
฀ To ensure proper understanding of financial statements, it is necessarythat all significant ac-
Adoption of different accounting policies by different companies operating in the same industry af- counting policies adopted in the preparation and presentation of financial statements should
fects which of the qualitative characteristics the most? be disclosed.
฀ Such disclosure should form part of the financial statements.

a. Comparability b. Relevance
฀ All the disclosures should be made at one place instead of being scattered over several state-
c. Faithful representation d. Reliability ments, schedules and notes.
Ans: (a)
Practical Questions Answer
Question 12
Question 15
Which of the following statement would not be correct in relation to disclosures to be made in the fi-
nancial statements after making any change in an accounting policy? State whether the following statements are ‘True’ or ‘False’. Also give reason for your answer.
a. Any change in an accounting policy which has a material effect shouldbe disclosed. (i) Certain fundamental accounting assumptions underline the preparation and presen-
tation of financial statements. They are usually specifically stated because their accep-
b. The amount by which any item in the financial statements is affected by such change should be
tance and use are not assumed.
disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part,the
fact should be indicated. (ii) If fundamental accounting assumptions are not followed in presentation and prepara-
tion of financial statements, a specific disclosure is not required.
c. If a change is made in the accounting policies which has no material effect on the financial
statements for the current period but which is reasonably expected to have a material effect in (iii) All significant accounting policies adopted in the preparation and presentation of fi-
later periods, the fact of such change should be appropriately disclosed in the period in which nancial statements should form part of the financial statements.
the change is adopted.
(iv) Any change in an accounting policy, which has a material effect should be disclosed.
d. If a change is made in an accounting policy which has material effect on the financial statements Where the amount by which any item in the financial statements is affected by such
for the current period and is reasonably expected to have a material effect in later periods, the change is not ascertainable, wholly or in part, the fact need not to be indicated.
fact of such change shouldbe appropriately disclosed only in the later periods i.e. year(s) next to the
year in which the change is adopted. Answer 15
False; As per AS 1 “Disclosure of Accounting Policies”, certain fundamental accounting as-
Ans: (d) (i)
sumptions underlie the preparation and presentation of financial statements. They are usu-
ally not specifically stated because their acceptance and use are assumed. Disclosure is
Theoretical Questions Answer necessary if they are not followed.
(ii) False; As per AS 1, if the fundamental accounting assumptions, viz. Going Concern, Consis-
Question 13 tency andAccrual are followed in financial statements, specific disclosure is not required.
If a fundamental accounting assumption is not followed, the fact should be disclosed.
What are the three fundamental accounting assumptions recognised by Accounting Standard (AS) 1?
Briefly describe each one of them. True; To ensure proper understanding of financial statements, it is necessary that all significant
accounting policies adopted in the preparation and presentation of financial statements should be Question 18 (Illustration)
disclosed. The disclosure of the significant accounting policies as such should form part of the financial
statements and they should be disclosed in one place. Jagannath Ltd. had made a rights issue of shares in 20X2. In the offer document to its members,
it had projected a surplus of `40 crores during the accounting year to end on 31st March, 20X2. The
False; Any change in the accounting policies which has a material effect in the current period or which is
draft results for the year, prepared on the hitherto followed accounting policies and presented
reasonably expected to have a material effect in later periods should be disclosed. Where such amount
for perusal of the board of directors showed a deficit of `10 crores. The board in consultation with
is not ascertainable, wholly or in part, the fact should be indicated.
the managing director,decided on the following:
Question 16 (i) Value year-end inventory at works cost (Rs. 50 crores) instead of the hitherto method of
valuation ofinventory at prime cost (Rs. 30 crores).
Give examples of areas where accounting policies adopted could be different for different enterprises. (ii) Provide for permanent diminution in the value of investments, which had taken place
Would there be any adverse impact due to the adoption of different policies, and if yes, how does Ac- over the pastfive years, the amount of provision being `10 crores.
counting Standard 1 seek to address such issue?
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 20X1-20X2.
Answer 16
There are various areas where different accounting policies could be adopted by different entities within Answer 18
the same industry. An entity may choose to value its inventories using FIFO method, whereas another en-
As per AS 1, any change in the accounting policies which has a material effect in the current period or
tity may choose to value the same using Weighted Average method.
which is reasonably expected to have a material effect in later periods should be disclosed. In the case
While an entity is free to choose its accounting policy as long as in thefinancial statements reflect of a change in accounting policies which has a material effect in the current period, the amount by
a true and fair view of the state of affairs of the enterprise as at the balance sheet date and of the which any item in the financial statements is affected by such change should also be disclosed to the
profit or lossfor the period ended, the application of different accounting policies by different entities extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indi-
affects the comparability of the financial statements of such different entities by stakeholders, analysts, cated. Accordingly, the notes on accounts should properly disclose the change and its effect.
investors etc. To mitigate the loss of comparability, Accounting Standard 1, Disclosure of Accounting Notes on Accounts:
Policies requires disclosure of significant accounting policies as a part of the financial statements.
This would help users of the financial statements to understand the policies followed by different (i) During the year inventory has been valued at factory cost, against the practice of valuing
entities, particularly if they belong to the same industry, and make a correct analysis of each entity it at prime cost as was the practice till last year. This has been done to take cognizance of
resulting in more informed decision-making. the more capital intensive method of production on account of heavy capital expenditure
during the year. As a result of this change, the year-end inventory has been valued at Rs.
50 crores and the profit for the year has increased by Rs. 20 crores.
(ii) The company has decided to provide `10 crores for the permanent diminution in the value
In the books of M/s Prashant Ltd., closing inventory as at 31.03.20X2 amounts to Rs. 1,63,000 (on the ba- of investments which has taken place over the period of past five years. The provision so
sis of FIFO method). made has reduced the profit disclosed in the accounts by `10 crores.
The company decides to change from FIFO method to weighted average method for ascertaining the
cost of inventory from the year 20X1-X2. On the basis of weighted average method, closing inventory Question 19 (Illustration)
as on 31.03.20X2 amounts to Rs. 1,47,000. Realisable value of the inventory as on 31.03.20X2 amounts to
Rs. 1,95,000. Discuss disclosure requirement of change in accounting policy as per AS-1. XYZ Company 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/petitions in a
Answer 17 Special Court. XYZ
As per AS 1“Disclosure of Accounting Policies”, any change in an accounting policy which has a materi- has accepted Inter-Corporate Deposits (ICDs) and it is making its best efforts to settle the dues.
al effect should be disclosed in the financial statements. The amount by which any item in the financial There
statements is affected by such change should also be disclosed to the extent ascertainable. Where such were claims at varied rates of interest, from lenders, from the due date of ICDs to the date of repay-
amount is not ascertainable, wholly or in part, the fact should be indicated. Thus Prashant Ltd. should ment. The company has provided interest, as per the terms of the contract till the due date and a
disclose the change in valuation method of inventory and its effect on financial statements. The company note for non- provision of interest on the due date to date of repayment was affected in the financial
may disclose the change in accounting policy in the following manner: 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
‘The company values its inventory at lower of cost and net realizable value. Since net realizable value of all
considers that these claims are in the nature of “claims against the company not acknowledged as
items of inventory in the current year was greater than respective costs, the company valued its inven-
debt”, and the same has been disclosed by way of a note in the accounts instead of making a provi-
tory at cost. In the present year i.e. 20X1-X2, the company has changed to weighted average method,
sion in the statement of profit and loss. State whether the treatment done by the Company is correct
which better reflects the consumption pattern of inventory, for ascertaining inventory costs from the
or not.
earlier practice of using FIFO for the purpose. The change in policy has reduced current profit and
value of inventory by Rs. 16,000.
Answer 19
Chapter 4.2
AS 1 ‘Disclosure of Accounting Policies’ recognises ‘prudence’ as one of the major considerations governing AS 3- Cash Flow Statements
the selection and application of accounting policies. In view of the uncertainty attached to future events,
profits are not anticipated but recognised only when realised though not necessarily in cash. Provision is
made for all known liabilities and losses even though the amount cannot be determined with certainty Attempts MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV
and represents only a best estimate in the light of available information. Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
Also as per AS 1, ‘accrual’ is one of the fundamental accounting assumptions. Irrespective of the terms Study
Q.16 TO Q.31
ofthe contract, so long as the principal amount of a loan is not repaid, the lender cannot be replaced Mat.
in a disadvantageous position for non- payment of interest in respect of overdue amount. From the
Past Q.6 NO NO Q.9 NO NO Q.11 Q.10 Q.12 Q.13 Q.14 NO
aforesaid, it is apparent that the company has an obligation on account of the overdue interest. In this
situation, the company should provide for the liability (since it is not waived by the lenders) at an Exams
amount estimated oron reasonable basis based on facts and circumstances of each case. However, MTP NO Q.3 NO NO Q.1 Q.2 Q.5,Q.9 Q.4 Q.5,Q.9 Q.6 Q.7 Q.9
in respect of the overdue interest amounts, which are settled, the liability should be accrued to the ex-
RTP NO NO NO NO Q.1,Q.8 NO NO NO NO NO NO Q.15
tent of amounts settled. Non- provision of the overdue interest liability amounts to violation of accrual
basis of accounting. Therefore, the treatment, done by the company, of not providing the interest
amount from due date to the date of repayment is not correct.
Reference: The students are advised to refer the full text of AS 1 “Disclosure of Accounting Policies”.
Cash generated from operations 3,288

Chapter 4.2 Income taxes paid (1,458)
AS 3- Cash Flow Statements Net cash from operating activities 1,830
Cash flows from investing activities
Payments for purchase of Property Plant & Equipment (1,380)
Question 1
Proceeds from sale of Property Plant & Equipment 768
Prepare Cash Flow Statement of Tom & Jerry Ltd. for the year ended 31st March, 2020, in accordance with Purchase of investments (78)
AS-3 (Revised) from the following Summary Cash Account:
Sale of investments 102
Summary Cash Account
Net cash used in investing activities (588)
Rs. in ‘000 Rs. in’000 Cash flows from financing activities
Balance as on 01.04.2019 210 Proceeds from issue of share capital 1,800
Receipts from Customers 16,596 Bank loan repaid (1,500)
Sale of Investments (Cost Rs. 90,000) 102 Interest paid on bank loan (300)
Issue of Shares 1,800 Dividend paid (480)
Sale of Property Plant & Equipment 768 Net cash used in financing activities (480)
19,476 Net increase in cash and cash equivalents 762
Payment to Suppliers 12,204 Cash and cash equivalents at beginning of period 210
Purchase of Investments 78 Cash and cash equivalents at end of period 972
Purchase of Property Plant & Equipment 1,380 ,

Question 2
Wages & Salaries 414
Selling & Administration Expenses 690 What do you mean by the term “cash and cash equivalent” as per AS 3? From the following
information of XYZ Limited, calculate cash and cash equivalent as on 31-03-2019.
Payment of Income Tax 1,458
Particulars Amount (₹)
Payment of Dividends 480
Cash balance with Bank 10,000
Repayment of Bank Loan 1,500
Fixed Deposit created on 01-11-2018 and maturing on15-07-2019 75,000
Interest paid on Bank Loan 300 (18,504)
Short Term Investment in highly liquid Sovereign Debt Mutual fund made on01- 1,00,000
Balance as on 31.03.2020 972 03-2019 (having maturity period of less than 3 months)
(MTP 8 Marks May 20) (Same concept different figures RTP May’20)
Bank Balance in a Foreign Currency Account in India $ 1,000
(Conversion Rate: on the day of deposit ₹ 69/USD; ₹ 70/USD as on 31-03-2019)
Answer 1 Debentures purchased of ₹ 10 lacs of A Ltd., which are redeemable on 31st 90,000
October, 2019
Cash Flow Statement of Tom & Jerry Ltd. for the year ended 31st March, 2020
Shares of Alpha Ltd. purchased on 1st January, 2019 60,000
(Rs; ’000) (MTP 5 Marks Oct 20)
Cash flows from operating activities
Answer 2
Cash receipts from customers 16,596 As per AS 3, Cash and cash equivalents consists of: (i) Cash in hand and deposits repayable on demand
Cash payments to suppliers (12,204) with any bank or other financial institutions and (ii) Cash equivalents, which are short term, highly liquid
investments that are readily convertible into known amounts of cash and are subject to insignificant risk
Cash paid to employees (414) or change in value. A short−term investment is one, which is due for maturity within three months from
Other cash payments (for Selling & Administrative expenses) (690) the date of acquisition. Investments in shares are not normally taken as cash equivalent, because of
uncertainties associated with them as to realizable value.

Computation of Cash and Cash Equivalents as on 31st March, 2019
₹
CA CS CMA Mentoring Program Reviews
Cash balance with bank 10,000
Short term investment in highly liquid sovereign debt mutual fund 1,00,000
on 1.3.19
Bank balance in foreign currency account ($1,000 x ₹ 70) 70,000
1,80,000
Note: Fixed deposit, Shares and Debentures will not be considered as cash and cash equivalents.
Question 3
Classify the following activities as (i) Operating Activities, (ii) Investing Activities, (iii) Financing
Activities:
a. Purchase of Machinery.
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. (MTP 5 Marks Oct ‘18)
Answer 3
(i) Operating Activities: c, e, f, g, j.
(ii) Investing Activities: a, h.

(iii) Financing Activities: b, d, i.
Question 4
From the following information, prepare the Cash Flow from Financing activities as per AS 3
‘Cash Flow Statements’ as the accountant of XYZ Limited is not able to decide and seeks your advice:
(i) Received ₹ 4,00,000 as redemption of short-term deposit
(ii) Proceeds of ₹ 20,00,000 from issuance of equity share capital
(iii) Received interest of ₹ 70,000 on Govt. bonds.
(iv) An amount of ₹ 13,00,000 incurred for purchase of goodwill
(v) Proceeds of ₹ 5,00,000 from sale of patent.
Proceeds of ₹ 12,00,000 from long term borrowing.
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(vi) Amount paid for redemption of debentures of ₹ 22,00,000

(vii) Underwriting commission of ₹ 40,000 paid on issue of equity share capital Answer 5
(viii) Interest of ₹ 1,44,000 paid on long-term borrowing. (MTP 5 Marks Oct ‘21) Cash Flow Statement for the year ended 31.3.2021
Answer 4 Rs. Rs.

Statement showing Cash Flow from Financing Activities Cash flow from operating activities
₹ Cash received on account of trade receivables 3,50,000
Cash inflow from financing activity Cash paid on account of trade payables (90,000)
Proceeds from issuance of equity share capital 20,00,000 Cash paid to employees (salaries and wages) (25,000)
Proceeds from long term borrowings 12,00,000 Other cash payments (overheads) (15,000)
Total cash inflow from financing activity 32,00,000 Cash generated from operations 2,20,000
Less: Cash outflow from financing activity Income tax paid (1,55,000)
Amount paid for redemption of debentures 22,00,000 Net cash generated from operating activities 65,000
Underwriting commission paid 40,000 Cash flow from investing activities
Interest paid on long−term borrowings 1,44,000 (23,84,000) Payment for purchase of machinery (4,00,000)
Net cash inflow from financing activity 8,16,000 Proceeds from sale of machinery 70,000
Net cash used in investment activities (3,30,000)
Question 5
Cash flow from financing activities
Following is the cash flow abstract of Alpha Ltd. for the year ended 31st March, 2021: Proceeds from issue of share capital 5,00,000
Cash Flow (Abstract)
Bank loan repaid (2,50,000)
Inflows Rs. Outflows Rs.
Debentures redeemed (50,000)
Opening cash and bank balance 80,000 Payment for Account Payables 90,000
Net cash used in financing activities 2,00,000
Share capital – shares issued 5,00,000 Salaries and wages 25,000
Net decrease in cash and cash equivalents (65,000)
Collection from Trade Payment of overheads 15,000
Cash and cash equivalents at the beginning of the year 80,000
Receivables 3,50,000 Machinery acquired 4,00,000
Cash and cash equivalents at the end of the year 15,000
Debentures redeemed 50,000
Sale of Machinery 70,000 Bank loan repaid 2,50,000
Question 6
Tax paid 1,55,000
Closing cash and bank bal- 15,000 Classify the following activities as
ance
(I) Operating Activities,
10,00,000 10,00,000 (iI) Investing activities,
Prepare Cash Flow Statement for the year ended 31st March, 2021 in accordance with AS 3. (MTP5 Marks (iIi) Financial activities and
April 21, Mar 22, Old & New SM) (iV) Cash Equivalents.
(1) Cash receipts from Trade Receivables
(2) Highly liquid Marketable Securities without risk of change in value
(3) Purchase of investment
(4) Proceeds from long term borrowings
(5) Wages and Salaries paid
(6) Bank overdraft
(7) Purchase of Goodwill

Note: Debtors written off against provision for doubtful debts does not require any further adjustment in
(8) Interim dividend paid on equity shares
Cash Flow Statement.
(9) Short term Deposits
(10) Underwriting commission paid Question 8
(MTP 5 Marks, Sep 22) (PYP May ‘18, 5 Marks)
Classify the following activities as (1) Operating Activities, (2) Investing Activities, (3)
Answer 6 Financing Activities (4) Cash Equivalents.
a. Proceeds from long-term borrowings.
1. Operating Activities: Items 1 and 5.
b. Proceeds from Trade receivables.
2. Investing Activities: Items 3,7 and 9
c. Trading Commission received.
3. Financing Activities: Items 4,6,8 and 10
d. Redemption of Preference Shares.
4. Cash Equivalent: 2
e. Proceeds from sale of investment
Question 7 f. Interim Dividend paid on equity shares.
How will you disclose following items while preparing Cash Flow Statement of Gagan Ltd. as per AS-3 g. Interest received on debentures held as investment.
for the year ended 31st March, 2022? h. Dividend received on shares held as investments.
(i) 10% Debentures issued: As on 01-04-2021 ₹ 1,10,000 i. Rent received on property held as investment.
As on 31-03-2022 ₹ 77,000 j. Dividend paid on Preference shares.
(ii) Debentures were redeemed at 5% premium at the end of the year. Premium was k. Marketable Securities (RTP May 20)
charged to the Profit & Loss Account for the year.
(iii) Unpaid Interest on Debentures: As on 01-04-2021 ₹ 275

Answer 8
As on 31-03-2022 ₹ 1,175 Operating Activities: b, c.
(iv) Debtors of ₹ 36,000 were written off against the Provision for Doubtful Debts A/c Investing Activities: e, g, h, i.
during the year. Financing Activities: a, d, f, j.
(v) 10% Bonds (Investments): As on 01-04-2021 ₹ 3,50,000 Cash Equivalent: k.
(vi) As on 31-03-2022 ₹ 3,50,000
Question 9
(vii) Accrued Interest on Investments:As on 31-03-2022 ₹ 10,500 (MTP 5 Marks March ’23)
Answer 7 Prepare cash flow from investing activities as per AS 3 of M/s Subham Creative Limited for year ended
31.3.2019. (PYP Nov;’19,5 Marks, Old & New SM) (Same concept lesser adjustments- MTP 4 Marks March 21,
Cash Flow Statement of Gagan Ltd. for the year ended March 31, 2022
MTP 5 Marks April 22 & Oct ‘23)
A Cash Flow from Operating Activities
Net Profit as per Profit & Loss A/c −−−−−−−−
Particulars Amount (Rs. )
Add: Premium on Redemption of Debentures 1,650
Machinery acquired by issue of shares at face value 2,00,000
Add: Interest on 10% Debentures 11,000
Claim received for loss of machinery in earthquake 55,000
Less: Interest on 10% Investments (35,000)
Unsecured loans given to associates 5,00,000
B Cash Flow from Investing Activities
Interest on loan received form associate company 70,000
Interest on Investments [35,000−10,500] 24,500
Pre-acquisition dividend received on investment made 52,600
C Cash Flow from Financing Activities
Debenture interest paid 1,45,200
Interest on Debentures paid [11,000 − (1,175 − 275)] (10,100)
Term loan repaid 4,50,000
Redemption of Debentures [(1,10,000 − 77,000) at 5% premium] (34,650)
Interest received on investment (TDS of Rs. 8,200 was deducted on the above interest) 73,800
Purchased debentures of X Ltd., on 1st December, 2018 which are redeemable
Question 10
within 3 months 3,00,000
Book value of plant & machinery sold (loss incurred Rs. 9,600) 90,000 Prepare cash flow statement of Gama Limited for the year ended 31st March, 2021 in accordance with
AS-3(Revised) from the following cash account summary: (PYP July’21, 5Marks)
Cash summary Account
Answer 9 Inflows ₹ (‘000) Outflows ₹ (‘000)

Cash Flow Statement from Investing Activities of Subham Creative Limited for the year ended 31-03- Opening Balance 945 Payment to suppliers 54,918
2019
Receipts from Customers 74,682 Purchase of Investments 351
Cash generated from investing activities Rs. Rs. Sale of Investments 459 Property, plant and 6,210
Interest on loan received 70,000 equipment acquired
(Cost ₹ 4,05,000)
Pre−acquisition dividend received on investment made 52,600 Issue of Shares 8,100 Wages and salaries 1,863
Unsecured loans given to subsidiaries (5,00,000) Sale of Property, Plant and 3,456 Payment of Overheads 3,105
Interest received on investments (gross value) 82,000 equipment
Taxation 6,561
TDS deducted on interest (8,200) Dividends 2,160
Sale of Plant & Machinery ₹ (90,000 – 9,600) 80,400 87,642 Repayment of Bank Overdraft 6,750
Cash used in investing activities (before extra−ordinary (2,23,200) Interest paid on Bank 1,350
item) Overdraft
Extraordinary claim received for loss of machinery 55,000 Closing Balance 4,374
Net cash used in investing activities (after extra−ordinary (1,68,200) 87,642
item) Answer 10
Note: Gama Limited Cash Flow Statement for the Year Ended 31st March 2021
1. Debenture interest paid and Term Loan repaid are financing activities and therefore not consid- Particulars Amount Amount
ered for preparing cash flow from investing activities.
(₹’000) (₹’000)
2. Machinery acquired by issue of shares does not amount to cash outflow, hence also not considered
Cash flow from Operating Activities:
in the above cash flow statement.
Cash receipts from customers 74,682
The investments made in debentures are for short−term, it will be treated as ‘cash equivalent’ and willnot
be considered as outflow in cash flow statement. Cash payments to suppliers (54,918)
Cash payments for wages & salaries (1,863)
Cash payments of overheads (3,105)
Cash Generated from Operations 14,796
Payment of Taxation (6,561)
Net Cash from Operating Activities 8,235
Cash Flow from Investing Activities:
Proceeds from sale of investments 459
Proceeds from sale of Property, Plant and Equipment 3,456
Purchase of Investments (351)

Purchase of Property, Plant and Equipment (6,210)
Dividend received 50,000
Net Cash Used in Investing Activities (2,646)
Cash flows from financing activities
Cash Flow from Financing Activities: (2,160)
Proceeds from issuance of share capital
Proceeds from issue of shares 8,100 Equity shares issued for cash ₹ 10,00,000 Pro-
Payment of Dividend (2,160) ceeds from securities premium
Repayment of Bank Overdraft (6,750) (₹ 5,50,000 – 5,00,000) ₹ 50,000
Interest paid on Bank Overdraft (1,350) 10,50,000

Net Cash Used in Financing Activities Less: Redemption of Preference shares (₹
Net Increase in Cash & Cash Equivalent 3,429 7,00,000 – ₹ 6,00,000) (1,00,000) 9,50,000
Cash and Cash Equivalent in the Beginning of the year 945

Note:
Cash and Cash Equivalent in the end of the year 4374
1. Machinery acquired by issue of shares does not amount to cash outflow, hence
also not considered in the cash flow statement.
Question 11 2. ABC Ltd. has been considered as a non−financial company in the given answer.
Following are the extracts from the Balance Sheet of ABC Ltd.
Question 12
Liabilities 31.3.2020 31.3.2021
The following information is provided by Alpha Limited, for the year ended 31st March, 2022:
(₹) (₹) (i) Net profit before taking into account income tax and income from law suits but aftertaking
Equity Share Capital 25,00,0000 35,60,000 into account the following items was ₹ 40 lakhs;
(ii) Depreciation on Fixed Assets ₹ 10 lakhs;
10% Preference Share Capital 7,00,000 6,00,000
(iii) Discount on issue of Debentures written of ₹ 60,000;
Securities Premium Account 5,00,000 5,50,000
(iv) Interest on Debentures paid ₹ 7,00,000;
Profit & Loss A/c 20,00,000 28,00,000 (v) Book value of investments ₹ 6 lakhs (Sale of Investments for ₹ 6,40,000);
(vi) Interest received on investments ₹ 1,20,000;
Equity Share Capital for the year ended 31st March, 2021 includes ₹ 60,000 of equity shares issued to (vii) Compensation received ₹ 1,80,000 by the company in a suit filed;
Grey Ltd; at par for supply of Machinery of ₹ 60,000; Profit & Loss account on 31st March, 2021 includes ₹ (viii) Income tax paid ₹ 21,00,000
50,000 of dividend received on Equity shares invested in X Ltd. Show how the related items will appear (ix) Current assets and current liabilities in the beginning and at the end of the year were as de-
in the Cash Flow Statement of ABC Ltd. as per AS-3 (Revised) tailed below:
(PYP 5 Marks, Dec ‘21)
As on 31.3.2021 As on 31.3.2022
Answer 11
₹ ₹
The related items given in the question will appear in the Cash Flow Statement of ABC Limitedfor
the year ended 31st March, 2021 as follows: Stock 24,00,000 26,36,000
₹ ₹ Sundry Debtors 4,16,000 4,26,200
Cash flows from operating activities Cash in hand 3,92,600 70,600
Closing Balance as per Profit and Loss Account 28,00,000 Bills Receivable 1,00,000 80,000
Less: Opening Balance as per Profit and Loss Account (20,00,000) Bills Payable 90,000 80,000
8,00,000 Sundry Creditors 3,32,000 3,42,600
Less: Dividend received 50,000 Outstanding Expenses 1,50,000 1,63,600
7,50,000
You are required to prepare Cash Flow Statement from Operating Activities in accordance withAS-3 (vii) Insurance claims received against loss of stock or loss of profits.
(revised) using the indirect method for the year ended 31st March,2022. (PYP 5 Marks May’22) (viii) Loans and advances given to subsidiaries and interest earned from them.
Answer 12 (ix) Issue of Bonus Shares.
(x) Term loan repaid.
Alpha Ltd.
Cash Flow Statement (from Operating Activities) for the year ended 31st March, 2022 You are required to classify the above activities in Cash Flow Statement as per ‘AS-3’; (PYP 5Marks
Nov ’22)
₹ ₹
Answer 13
Cash flow from Operating Activities
Net profit before income tax and extraordinary items: 40,00,000 No. Activities
Adjustments for: (i) Dividend paid for the year Financing
Depreciation on Property, plant and equipment 10,00,000 (ii) TDS on interest income earned on invest- Investing
ments made
Discount on issue of debentures 60,000
(iii) Loans and advances given to suppliers and inter- Operating
Interest on debentures paid 7,00,000 est earned from them
Interest on investments received (1,20,000) (iv) Deposit with bank for a term of two years Investing
Profit on sale of investments (40,000) 16,00,000 (v) Highly liquid Marketable Securities (without Cash Equivalent
Operating profit before working capital changes 56,00,000 risk of change in value)
Adjustments for: (vi) Investments made and dividends earned on them Investing
Increase in inventory (2,36,000)
(vii) Insurance claims received against loss of stock Operating
Increase in Sundry Debtors (10,200)
Decrease in Bills receivables 20,000 or loss of profits
Increase in Sundry Creditors 10,600 (viii) Loans and advances given to subsidiaries and Investing
interest earned from them
Increase in Bills payables (10,000)
(ix) Issue of Bonus Shares No Cash Inflow/Cash
Increase in outstanding expenses 13,600 (2,12,000)
outflow
Cash generated from operations 53,88,000
(x) Term Loan repaid Financing
Income tax paid (21,00,000)
Cash flow from ordinary items 32,88,000 Question 14
Cash flow from extraordinary items:
The summarized Balance Sheets of Flora Limited for the year ended 31st March, 2022 and
Compensation received in a suit filed 1,80,000 31 stMarch, 2023 are as below:
Net cash flow from operating activities 34,68,000 Assts 31/03/2023 31/03/2022
(₹) (₹)
Question 13 Goodwill 15,000 28,000

Land 5,75,000 6,00,000
Ridgeway Limited, a Non-Financial company has the following activities:
(i) Dividend paid for the year. Furniture and Fixtures 48,000 44,000
(ii) TDS on interest income earned on investments made. Vehicles 22,000 28,000
(iii) Loans and advances given to suppliers and interest earned from them. Office Equipment 21,000 -
(iv) Deposit with bank for a term of two years. Long-term Investments 60,000 1,10,000
(v) Highly liquid Marketable Securities (without risk of change in value).
Stock-in-hand 96,000 88,000
(vi) Investments made and dividends earned on them.
Bills Receivables 18,150 14,500

Trade Receivables 46,000 52,000 Answer 14
Cash and Bank Balances 1,29,850 34,500 Cash Flow Statement of Flora Limited from Operating Activities For the year ended 31st March, 2023
Total 10,31,000 9,99,000
₹ ₹
Liabilities 31/03/2023 31/03/2022 Net profit before taxation (W.N.1) 92,000

(₹) (₹) Adjustment: Depreciation on Furniture & Fixtures 5,000
Equity Shares Capital 6,80,000 5,00,000 Depreciation on Vehicles 2,200
General Reserves 90,000 60,000 Profit on sale of land (₹ 125000 − ₹ 100000) (25,000)
Profit and Loss Account 93,000 52,000 Loss on sale (Vehicle) 800
Capital Reserve 75,000 - Profit on sale of long−term investments (8,000)
8% Debentures of ₹ 100 each - 3,00,000 Interest received (6,500)
Loan from Mr. Andrew - 15,000 Interest on debentures 12,000
Bills Payables 11,000 13,000 Goodwill written off 13,000 (6,500)
Trade Payables 49,000 45,000 Operating profit before working capital changes 85,500
Creditors for Equipment 10,500 - Increase in Stock in Hand (8,000)
Outstanding Expenses 4,500 3,000 Increase in Bills Receivables (3,650)
Provision for Taxation 18,000 11,000 Decrease in Trade Receivables 6,000
Total 10,31,000 9,99,000 Decrease in Bills payable (2,000)
Increase in Trade Payables 4,000
Additional Information: Increase in outstanding expenses 1,500 (2,150)
1. On 1st April, 2022, one of the vehicles was sold for ₹ 3,000. No new purchases were made during Cash generated from Operations 83,350
the year. Less: Income taxes paid 9,000
2. A part of the total land was sold for ₹ 1,25,000 (Cost ₹ 1,00,000) and the balance land was reval- Cash flow from Operating activities 74,350
ued. Capital reserve consists of profit on revaluation of balance land. No new purchases were
made during the year. (iii) Depreciation provided during the year- Alternative presentation:
• Furniture and Fixtures ₹ 5,000 Cash Flow Statement of Flora Limited from Operating Activities For the year ended 31st March, 2023
• Vehicles ₹ 2,200 ₹
3. Interim dividend of 5,000 was paid during the year. Net profit before taxation (W.N. 1) 92,000
4. Provision for taxation for the year 2022-2023 was ₹ 16,000. Adjustment: Depreciation on Furniture & fixtures 5,000
5. 8% Debentures were redeemed at par after half year interest payment on 30th September, 2022. Depreciation on Vehicles 2,200
6. Part of the long-term investments were sold at a profit of 8,000. Profit on sale of land (25,000)
7. Interest income received during the year on long-term investment was 6,500. Loss on sale (Vehicle) 800
You are required to prepare Cash Flow Statement from Operating Activities for the year ended31st Profit on sale of long− term investments (8,000)
March, 2023 using indirect method. (All workings should form part of the answer) (PYP 10 Marks May
‘23) Interest received (6,500)
Interest on debentures 12,000
Goodwill written off 13,000 (6,500)
Operating profit before working capital changes 85,500 (ii) Receipts from credit customers during the year, totalled ₹ 268 crores;
Increase in inventory (8,000) (iii) Purchases for the year amounted to ₹ 440 crores out of which credit purchase was 80%;Balance in
creditors as on 1.4.2022 ₹ 168 crores 31.3.2023 ₹ 184 crores
Decrease in Trade receivables* 2,350
(iv) Suppliers of other consumables and services were paid ₹ 38 crores in cash;
Increase in Trade payables** 2,000
(v) Employees of the enterprises were paid 40 crores in cash.
Increase in outstanding expenses 1,500 (2,150) (vi) Fully paid 9% Preference shares of the face value of ₹ 64 crores were redeemed; Equity shares of
Cash generated from Operations 83,350 the face value of ₹ 40 crores were allotted as fully paid up at premium of 20%;
Less: Income taxes paid 9,000 (vii) 10% Debentures of ₹ 40 crores at a premium of 10% were redeemed; Debenture holders were issued
equity shares in lieu of their debentures. ₹ 52 crores were paid by way of income tax.
Cash flow from Operating activities 74,350
(viii) A new machinery costing ₹ 50 crores was purchased in part exchange of an old machinery; The
*[(18,150 +46,000) − (14,500 + 52,000)] ** [(11,000 + book value of the old machinery was ₹ 26 crores. Through the negotiations, the vendor agreed to
take over the old machinery at a higher value of ₹ 30 crores. The balance was paid in cash to the
49,000) − (13,000+45,000)] Working Notes:
vendor.
1. (Net Profit before Taxation (ix) Investment costing ₹ 36 cores were sold at a loss of ₹ 4 crores;
Increases in Profit and Loss A/c (93,000−52,000) 41,000 (x) Dividends totaling ₹ 30 crores was also paid;
Increases in General Reserve (90,000−60,000) 30,000 (xi) Debenture interest amounting ₹ 4 crore was paid;
(xii) Non-cash expenditure incurred during the current year was 1.2 crores.
Interim dividend Paid 5,000
(xiii) Dividends declared during the current year was 15% on equity share capital (ESC = ‘120 crores);
Transfer – provision for Taxation 16,000
(xiv) On 31st March 2022, Balance with Bank and Cash on hand totalled ₹ 4 crores. (RTP Nov ’23)
Increase in retained earnings (Net Profit before Taxation) 92,000
Answer 15
Provision for Taxation Account Cash flow statement (using direct method) for the year ended 31st March, 2023
(₹ in crores) (₹ in crores)
₹ ₹
Cash flow from operating activities
To Bank (Balancing figure) 9,000 By Balance b/d 11,000
Cash sales 524
To Balance c/d 18,000 By Profit and loss account 16,000 Cash collected from credit customers 268
27,000 27,000 Less: Cash paid to suppliers for goods & services and to
employees (Refer Working Note) (502)
Vehicles Account
Cash from operations 290
Particulars (₹)
Less: Income tax paid (52)
Opening Balance 28,000
Net cash from operating activities 238
Less: Depreciation (2,200)
Cash flow from investing activities
Less: Closing Balance (22,000)
Net Payment for purchase of Machine (50 – 30) (20)
Book value of vehicle sold 3,800
Less: Sale Value (3,000)
Net cash from investing activities 12
Loss on sale of Vehicle 800
Redemption of Preference shares (64)
Question 15
Proceeds from issue of Equity shares 48
On the basis of the following information prepare a Cash Flow Statement for the year end- Debenture interest paid (4)
ed 31st March, 2023 (Using direct method):
(i) Total sales for the year were ₹ 796 crores out of which cash sales amounted to ₹ 524 crores.
Dividend Paid (30)

should be
Net cash used in financing activities (50)
Net increase in cash and cash equivalents 200 a. Classified as operating cash flows b. Classified as financing cash flows
Add: Cash and cash equivalents as on 1.04.2022 4 c. Not shown in cash flow statement d. Classified as investing cash flows
Cash and cash equivalents as on 31.3.2023 204 Ans: (a)

Working Note:
Calculation of cash paid to suppliers of goods and services and to employees Question 19
(₹ in crores) In the cash flow statement, ‘cash and cash equivalents’ do not include
Opening Balance in creditors Account 168
a. Bank balances b. Short-term investments readily convert-
Add: Purchases (440x .8) 352
ible into Cash are subject to an insignifi-
Total 520 cant risk of changes in value
Less: Closing balance in Creditors Account 184 c. Cash balances d. Loan from bank
Cash paid to suppliers of goods 336
Ans: (d)
Add: Cash purchases (440x .2) 88
Total cash paid for purchases to suppliers (a) 424 Question 20
Add: Cash paid to suppliers of other consumables and services (b) 38
While preparing a Cash Flow Statement using the Indirect method as required under AS 3, which
Add: Payment to employees (c) 40 of the following will not be deducted from/added to the Net Profit to arrive at the “Cash flow from
Operating activities”?
Total cash paid to suppliers of goods & services and to employees[(a)+ (b) + 502
(c)]
a. Interest income b. Gain on sale of a fixed asset
Question 16 c. Depreciation d. Gain on sale of inventory
Ans: (d)
Crown Ltd. wants to prepare its cash flow statement. It sold equipment of book value of ₹ 60,000 at a
gain of ₹ 8,000. The amount to be reported in its cash flow statement under operating activities is
Theoretical Questions Answers
a. Nil b. ₹ 8,000
c. ₹ 68,000 d. ₹ 60,000 Questions 21
Ans: (a) What are the main features of the Cash Flow Statement?
Question 17
Answers 21
According to AS 3 on “Cash Flow Statement”, cash flow statement deals with the provision of in-
While preparing cash flows statement, an entity (other than a financial institution) should disclose formation about the historical changes in cash and cash equivalents of an enterprise during the
thedividends received from its investment in shares as given period from operating, investing and financing activities. Cash flows from operating activities
can be reported using either
a. Operating cash inflow b. Investing cash inflow
(a) the direct method, or (b) the indirect method. A cash flow statement when used in conjunc-
c. Financing cash inflow d. Cash & cash equivalent tion with theother financial statements, provides information that enables users to evaluate the
changes in net assets of an enterprise, its financial structure (including its liquidity and solvency),
Ans: (b) and its ability to affect the amount and timing of cash flows in order to adapt to changing cir-
cumstances and opportunities.
Question 18
XYZ Co. is a financial enterprise. In its cash flow statement, interest paid and dividends received
(i) Loans and Advances given to the following and interest earned on them:
Questions 22
(1) to suppliers
Mayuri Ltd. acquired Plant and Machinery for ₹ 25 lakhs. During the same year, it also sold Furniture
(2) to employees
andFixtures for ₹ 4 lakhs. Can the company disclose, Net Cash Outflow towards purchase of Fixed As-
sets ₹ 21lakhs (i.e., 25 lakhs – 4 lakhs) in the Cash Flow Statement? (3) to its subsidiaries companies
(i) Investment made in subsidiary Smart Ltd. and dividend received
Answers 22
(i) Dividend paid for the year
As per AS 3, Cash Flow Statements, an enterprise should report separately major classes of gross cash
receipts and gross cash payments arising from investing and financing activities, except in the case of: Discuss in the context of AS 3 Cash Flow Statement.
฀ cash receipts and payments on behalf of customers when the cash flows reflect the Answers 24
activities of the customer rather than those of the enterprise; and
Treatment as per AS 3 ‘Cash Flow Statement’
฀ cash receipts and payments for items in which the turnover is quick, the amounts
are large, and the maturities are short. (i) Loans and advances given and interest earned
In the given case, since the purchase of Plant and Machinery and disposal of Furniture and Fixtures do (1) to suppliers - Cash flows from operating activities
not fall in the criteria of exception mentioned above, the same should be presented on a gross basis as (2) to employees - Cash flows from operating activities
an outflow of ₹ 25 lakhs and an inflow of ₹ 4 lakhs. Presentation of net cash outflow of ₹ 21 lakhs is not
permitted as per AS 3. (3) to its subsidiary companies - Cash flows from investing activities
(i) Investment made in subsidiary company and dividend received Cash flows from investing activ-
ities
Practical Questions Answers
(i) Dividend paid for the year Cash flows from financing activities
Questions 23
Questions 25
How would the following cash flows be classified in accordance with AS 3?
From the following information of XYZ Limited, calculate cash and cash equivalent as on 31-03-20X2 as
Corporate Income Tax paid amounting to ₹ 70 lakhs during the reporting period. per AS 3.
Payment of advance tax ₹ 8,75,000 out of which ₹ 75,000 was towards capital gains arising Particulars Amount (₹)
on accountof sale of assets during the reporting period.
Balance as per the Bank Statement 25,000
Fixed Deposits withdrawn by customers of State Bank of I dia ₹ 3 crores.
Cheque issued but not presented in the Bank 15,000
Answers 23 Short Term Investment in liquid equity shares of ABC 50,000
As per AS 3, the given cash flows shall be recorded as under: Limited
Fixed Deposit created on 01-11-20X1 and maturing on 15- 75,000
Corporate Income Tax paid amounting to ₹ 70 lakhs: Operating Cash Flows
04-20X2
₹ 70 lakhs during the reporting period.
Short Term Investment in highly liquid Sovereign Debt 1,00,000
Payment of advance tax ₹ 8,75,000 out of which ₹ ₹ 8,00,000: Operating Cash Flows
75,000 was towards capital gains arising on account Mutual fund on 01-03-20X2 (having maturity period of less
₹ 75,000: Investing Cash Flows
of sale of assets during the reporting period. than 3 months)
Fixed Deposits withdrawn by customers of State ₹ 3 crores: Operating Cash Flows for Bank Balance in a Foreign Currency Account in India $ 1,000
Bank of India ₹ 3 crores. State Bank of India.
(Conversion Rate: On the day of deposit ₹ 69/USD as on
Questions 24 31-03-20X2 ₹ 70/USD)
Money Ltd., a non-financial company has the following entries in its Bank Account. It has sought
youradvice on the treatment of the same for preparing Cash Flow Statement.
Answers 25 (b) Proceeds from issuance of equity share capital
Computation of Cash and Cash Equivalents as on 31st March, 20X2 (c) Cash Sales.
(d) Proceeds from long-term borrowings.
₹
(e) Cheques collected from Trade receivables.
Cash balance with bank (₹ 25,000 less ₹ 15,000) 10,000
(f) Cash receipts from Trade receivables.
Short term investment in highly liquid sovereign debt 1,00,000
(g) Trading Commission received.
mutual fund on 1.3.20X2
(h) Purchase of investment.
Bank balance in foreign currency account ($1,000 x ₹ 70,000
70) (i) Redemption of Preference Shares.
1,80,000 (j) Cash Purchases.
Note: Short term investment in liquid equity shares and fixed deposit will not be considered as cash (k) Proceeds from sale of investment
and cash equivalents.
(l) Purchase of goodwill.
(m) Cash paid to suppliers.

Questions 26
(n) Interim Dividend paid on equity shares.
Z Ltd. has no Foreign Currency Cash Flow during the reporting period. It held a deposit in a bank in
France. The balances as at the beginning of the year and at the end of the year were € 100,000 and €
(o) Wages and salaries paid.
105,000 respectively. The exchange rate at the beginning of the year was € 1 = ₹ 82, and at the end of (p) Proceed from sale of patents.
the year was€ 1 = ₹ 85. The increase in the deposit balance of € 5,000 was on account of interest cred-
(q) Interest received on debentures held as investment.
ited on the last day of the reporting period. The deposit was reported at ₹ 82,00,000 in the opening
balance sheet and at ₹ 89,25,000 in the closing balance sheet. You are required to show how these (r) Interest paid on Long-term borrowings.
transactions would be presented in the Cash Flow Statement as per AS 3.
(s) Office and Administration Expenses paid
Answers 26 (t) Manufacturing Overheads paid.
The Statement of Profit and Loss was credited on account of: (u) Dividend received on shares held as investments.
Interest Income: € 5,000 x ₹ 85 = ₹ 4,25,000 (v) Rent Received on property held as investment.
Exchange difference = € 100,000 x (₹ 85 – ₹ 82) = ₹ 3,00,000 (w) Selling and distribution expense paid.
In preparing the Cash Flow Statement, the exchange difference of ₹ 3,00,000 should be deducted from (x) Income tax paid
the Net Profit before taxes, since it is a non-cash item. However, in order to reconcile the opening
(y) Dividend paid on Preference shares.
balance of the Cash and Cash Equivalents with its closing balance, the Exchange Difference of ₹
3,00,000 should be added to the opening balance in a Note to the Cash Flow Statement., (z) Underwritings Commission paid.
Cash Flows arising from transactions in a Foreign Currency shall be recorded in Z Ltd.’s reporting curren- (aa) Rent paid.
cy by applying to the foreign currency amount the exchange rate between the reporting currency and (ab) Brokerage paid on purchase of investments.
the foreign currency at the date of the cash flow.
(ac) Bank Overdraft
Question 27 (Illustration) (ad) Cash Credit

(ae) Short-term Deposits
Classify the following activities as
(af) Highly liquid Marketable Securities (without risk of change in value)
(a) Operating Activities,
(ag) Refund of Income Tax received.
(b) Investing Activities,
(c) Financing Activities Answers 27

(d) Cash Equivalents. (a) Operating Activities: c, e, f, g, j, m, o, s, t, w, x, aa & gg.
(a) Purchase of Machinery. (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 Equivalent: ff. Question 30 (Illustration)
Following is the cash flow abstract of Alpha Ltd. for the year ended 31 st March, 20X1: Cash Flow (Ab-
stract)
Question 28(Illustration)
Inflows ₹ Outflows ₹
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, Opening balance: Payment for Account
20X1? Cash 10,000 Payables 90,000
Bank 70,000 Salaries and wages 25,000
Answers 28
Share capital – shares issued 5,00,000 Payment of overheads 15,000
As per AS 3 on ‘Cash flow Statement’, cash and cash equivalents consists of cash in hand, balance with
banks and short-term, highly liquid investments. If investment, of ₹10 lacs, made in debentures is for Collection on account of Property, plant and
short-term period then it is an item of ‘cash equivalents’. Trade Receivables 3,50,000 equipment acquired 4,00,000
However, if investment of ₹10 lacs made in debentures is for long-term period then as per AS 3, it should Debentures redeemed 50,000
be shown as cash flow from investing activities.
Sale of Property, plant and 70,000 Bank loan repaid 2,50,000
Question 29 (Illustration) equipment

Taxation 55,000
Classify the following activities as per AS 3 Cash Flow Statement:
Dividends 1,00,000
1. Interest paid by financial enterprise Closing balance:
Cash 5,000
2. Tax deducted at source on interest received from subsidiary company
bank 10,000
3. Deposit with Bank for a term of two years 10,00,000 10,00,000
4. Insurance claim received towards loss of machinery by fire

Prepare Cash Flow Statement for the year ended 31st March, 20X1in accordance with Accounting
5. Bad debts written off Standard 3.
Answers 29 Answers 30
(i) Interest paid by financial enterprise Cash flows from operating activities As per AS 3, an investment
Cash Flow Statement for the year ended 31.3.20X1
normally qualifies as a cash equivalent only when it has a short maturity of, say three months or less
from the date of acquisition and is subject to insignificant risk of change in value. ₹ ₹
(ii) TDS on interest received from subsidiary company Cash flows from investing activities Cash flow from operating activities
(iii) Deposit with bank for a term of two years Cash flows from investing activities Cash received on account of trade receivables 3,50,000
(iv) Insurance claim received against loss of fixed asset by fire Extraordinary item to be shown as a sep-
Cash paid on account of trade payables (90,000)
arate heading under ‘Cash flow from investing activities’
Cash paid to employees (salaries and wages) (25,000)
(v) Bad debts written off It is a non-cash item which is adjusted from net profit/loss under indirect meth-
od, to arrive at net cash flow from operating activity. Other cash payments (overheads) (15,000)
Income tax paid (55,000)

Net cash generated from operating activities 1,65,000
Payment for purchase of Property, plant and equipment (4,00,000)
Proceeds from sale of Property, plant and equipment 70,000 Answers 31

Net cash used in investment activities (3,30,000) Cash Flow Statement from Investing Activities of
M/s Creative Furnishings Limited for the year ended 31-03-20X1
Proceeds from issue of share capital 5,00,000 Cash generated from investing activities ₹ ₹
Bank loan repaid (2,50,000) Interest on loan received 82,500

Debentures redeemed (50,000)
Unsecured loans given to subsidiaries (4,85,000)
Dividends paid (1,00,000)
Interest received on investments (gross value) 76,200
Net cash used in financing activities 1,00,000
TDS deducted on interest (8,200)
Sale of plant 74,400
Cash and cash equivalents at the beginning of the year 80,000 Cash used in investing activities (before extra-ordinary item) (1,97,700)
Cash and cash equivalents at the end of the year 15,000 Extraordinary claim received for loss of plant 49,600
Net cash used in investing activities (after extra-ordinary item) (1,48,100)
Note:
Prepare Cash Flow from Investing Activities of M/s. Creative Furnishings Limited for the year ended 1. Debenture interest paid and Term Loan repaid are financing activities and, therefore, not
31-3-20X1. considered for preparing cash flow from investing activities.
Particulars ₹ 2. Plant acquired by issue of 8% debentures does not amount to cash outflow, hence also
not considered in the above cash flow statement.
Plant acquired by the issue of 8% Debentures 1,56,000
Note:
Claim received for loss of plant in fire 49,600
For details regarding preparation of Cash Flow Statement and Problems based on practical application
Unsecured loans given to subsidiaries 4,85,000
of AS 3, students are advised to refer unit 2 of Chapter 11.
Interest on loan received from subsidiary companies 82,500
Reference:
The students are advised to refer the full text of AS 3 “Cash Flow Statement.
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

AS 17- Segment Reporting AS 17- Segment Reporting
Question 1
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023 A Company has an inter-segment transfer pricing policy of charging at cost less 5%. The market prices
are generally 20% above cost. You are required to examine whether the policy adopted by the company
Study is correct or not? (MTP 5 Marks Nov ’21 & April ‘23) (RTP May’21, Nov’20, May’22, Nov ’19, May’18, Nov’22,
Q.10 TO Q.26
Mat. Old & New SM)
Past Q.8 NO NO Q.7 NO Q.7 Q.2,Q.7 NO Q.9 NO NO NO

Answer 1
Exams
AS 17 ‘Segment Reporting’ requires that inter-segment transfers should be measured on the basis that
MTP NO NO NO NO NO NO NO Q.1 NO NO Q.1,Q.2 Q.7 the enterprise actually used to price these transfers. The basis of pricing inter- segment transfers and any
RTP NO Q.1,Q.6 Q.5 Q.1 Q.2 Q.1 Q.1 Q.3 Q.1,Q.4 Q.1 Q.2 Q.7 change therein should be disclosed in the financial statements. Hence, the enterprise can have its own
policy for pricing inter-segment transfers and hence, inter-segment transfers may be based on cost, below
cost or market price. However, whichever policy is followed, the same should be disclosed and applied
consistently. Therefore, in the given case inter-segment transfer pricing policy adopted by the company is
correct if followed consistently.
Question 2
The Chief Accountant of Cotton Garments Limited gives the following data regarding its five segments:
(₹ in Crore)
Particulars A B C D E Total
Segment Assets 40 15 10 10 5 80
Segment Results (95) 5 5 (5) 15 (75)
Segment Revenue 310 40 30 40 30 450
The Chief 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’. (MTP 5 Marks March
’23) (RTP May ’20 & May ‘23) (PYP 5 Marks, Jan 21) (Similar to RTP Nov 20 & Nov 19 but different figures)
(PYP 5 Marks May ’23)
Answer 2
As per para 27 of AS 17 ‘Segment Reporting’, a business segment or geographical segment should be
identified as a reportable segment if:
1. Its revenue from sales to external customers and from other transactions with other segments is
10% or more of the total revenue- external and internal of all segments; or
2. Its segment result whether profit or loss is 10% or more of:
The combined result of all segments in profit; or
The combined result of all segments in loss, whichever is greater in absolute amount; or
3. Its segment assets are 10% or more of the total assets of all segments. are similar. This would ensure that the chemicals having significantly different risks and returns are not in-
cluded in a single business segment.
Further, if the total external revenue attributable to reportable segments constitutes less than 75% of
total enterprise revenue, additional segments should be identified as reportable segments even if they b) As per AS 17, “Changesin accounting policies adopted for segment reporting that have a material
do not meet the 10% thresholds until at least 75% of total enterprise revenue is included in reportable effect onsegment information should be disclosed. Such disclosure should include a description
segments. of the nature of the change, and the financial effect of thechangeifitis reasonably determinable.”
It also states that “some changes in accounting policies relate specifically to segment reporting.
Accordingly,
Examples include changes in identification of segments and changes in the basis for allocating
1. On the basis of revenue from sales criteria, segment A is a reportable segment. revenues and expenses to segments. Such changes can have a significant impact on the seg-
ment information reported but will not change aggregate financial information reported for the
2. On the basis of the result criteria, segments A & E are reportable segments (since their re- enterprise. To enable users to understand and impact of such changes, this Statement requires
sults in absolute amount is 10% or more of ₹ 100 crore). the disclosure of the nature of change and the financial effect of the change, if reasonably de-
terminable”.
3. On the basis of asset criteria, all segments except E are reportable segments.
In view of the above, a change in the basis of allocation of revenue and expenses to segments is
Since all the segments are covered in at least one of the above criteria, all segments have to be report- a change in the accounting policy adopted for segment reporting. Accordingly, if the change has
ed upon in accordance with AS 17. a material financial effect on the segment information, a description of the nature of the change,
and the financial effect of the change, if it is reasonably determinable, should be disclosed.
Hence, the opinion of chief accountant that only segment ‘A’ is reportable is wrong.
Question 4
Question 3
Company A is engaged in the manufacture and sale of products, which constitute two distinct business
a) Company A is engaged in the manufacture of chemicals. The company manufactures five segments. The products of the Company are sold in the domestic market only. The management in-
types of chemicals that have different applications. Can this company include more than formation system of the Company is organized to reflect operating information by two broad market
one type of chemical in a single business segment? Comment. segments, rural and urban. Besides the two business segments, how should Company A identify geo-
b) Is an enterprise required to disclose changes in the basis of allocation of revenue and ex- graphical segments? Do geographical segments exist within the same country? Explain in line with the
penses to segments? Explain. (RTP Nov ‘21) provisions of AS 17. (RTP May 22) (New SM)
Answer 3 Answer 4
a) As per AS 17, “A business segment is a distinguishable component of an enterprise that is en- AS 17 explains that, “a single geographical segment does not include operations in economic environ-
gaged in providing an individual product or service or a group of related products of services ments with significantly differing risks and returns. A geographical segment may be a single country, a
and that is subject to risks and returns that are different from those of other business segments. group of two or more countries, or a region within a country”. Accordingly, to identity geographical seg-
Factors that should be considered in determining whether products or services are related in- ments, Company A needs to evaluate whether the segments reflected in the management information
clude: system function in environments that are subject to significantly differing risks and returns irrespective of
the fact whether they are within the same country.
(a) the nature of the products of services;
The Standard recognizes that, “Determining the composition of a business or geographical segment
(b) the nature of the productions processes;
involves a certain amount of judgement…”. Accordingly, while the management information system of the
(c) the type of class of customers for the products or services; Company provides segment information for rural and urban geographical segments for the purpose of
internal reporting, judgement is required to determine whetherthese segments are subject to significantly
(d) the methods used to distribute the products or provide the services; and
differing risks and returns based on the definition of geographical segment. In making such a judgement,
(e) if applicable, the nature of the regulatory environment, for example, banking, insurance, aspect like different pricing and other policies, e.g., credit policies, deployment of resources between dif-
or public utilities.” ferent regions etc., may be considered for the purpose identifying ‘urban and ‘rural’ as separate geo-
graphical segment. Company A, in making judgment for identifying geographical segments, should also
As per provisions of the standard, a single business segment does not include products and services
consider the relevance, reliability and comparability over time of segment information that will be report-
with significantly differing risks and returns. Products and services included in a single business segment
ed. The Standard, explains that, “In making that judgement, enterprise management takes into account
may be dissimilar with respect to one or several factors listed above but are expected to be similar with
the objective of reporting financial information bysegment as set forth in the standard and the qualitative
respectto majority of the factors. In the present case, the Company should consider whether the chem-
characteristics of financial statements. The qualitative characteristics include the relevance, reliability
icals with different applications, have similar risks end returns. For this purpose, the Company should
and comparability over time of financial information that is reported about the different groups of prod-
ascertain whether one or more types of chemicals are related keeping in view the relevant factors in-
ucts and services of an enterprise and about its operations in particular geographical areas, and the
cluding those given in the definition of business segment. Chemicals having different applications can
usefulness of that information for assessing the risks and returns of the enterprise.”
be included in a single business segment if majority of the relevant factors including those listed above
Question 5
Answer 6
PK Ltd. has identified business segment as its primary reporting format. It has identified India, USA Calculation of segment result
andUK as three geographical segments. It sells its products in the Indian market, which constitutes
70 percent of the Company’s sales. 25 per cent is sold in USA and the balance is sold in UK. Is PK Ltd. as Segments A B C Total
part of its geographical secondary segment information, required to disclose segment revenue from Rs. Rs. Rs. Rs.
export sales, where such sales are not significant? (RTP May 19)
Directly attributed revenue 5,00,000 3,00,000 1,00,000 9,00,000
Answer 5 Enterprise revenue (allocated in 50,000 40,000 20,000 1,10,000
As per AS 17 if primary format of an enterprise for reporting segment information is business segments, it 5: 4: 2 basis)
should also report segment revenue from external customers by geographical area based on the geo- Revenue from transactions with other
graphical location of its customers, for each geographical segment whose revenue from sales to exter- segments
nal customers is 10 per cent or more of enterprise revenue. Accordingly, for the purposes of disclosing
Transaction from B 1,00,000 50,000 1,50,000
secondary segment information, PK Ltd. is not required to disclose segment revenue from export sales
to UK, since that segment does not meet the 10 per cent or more of enterprise revenue threshold. How- Transaction from C 10,000 50,000 60,000
ever, other secondary segment information as per AS 17 should be disclosed in respect of this segment Transaction from A 25,000 1,00,000 1,25,000
if the thresholds prescribed in the AS 17 are met.
Total segment revenue as per AS 17
(A) 6,60,000 4,15,000 2,70,000 13,45,000
Question 6
Operating expenses 3,00,000 1,50,000 75,000 5,25,000
(a) Calculate the segment results of a manufacturing organization from the following information: Enterprise expenses (allocated in 5 35,000 28,000 14,000 77,000
(RTP Nov 18 & New SM) : 4 : 2 basis)
Segments A B C Total Expenses on transactions with other

segments
Directly attributed revenue 5,00,000 3,00,000 1,00,000 9,00,000
Transaction from B 75,000 30,000 1,05,000
Enterprise revenue (allocated in 1,10,000
5:4: 2 basis) Transaction from C 6,000 40,000 46,000
Revenue from transactions with Transaction from A 18,000 82,000 1,00,000

othersegments Total segment expenses as per AS 17
Transaction from B 1,00,000 50,000 1,50,000 (B) 4,16,000 2,36,000 2,01,000 8,53,000
Transaction from C 10,000 50,000 60,000 Segment result (A-B) 2,44,000 1,79,000 69,000 4,92,000
Transaction from A 25,000 1,00,000 1,25,000
Question 7
Operating expenses 3,00,000 1,50,000 75,000 5,25,000
Enterprise expenses (allocated 77,000 The accountant of Parag Limited has furnished you with the following data related to its Business
in5: 4: 2 basis) Divisions: (Rs. in Lacs)
Expenses on transactions with Division A B C D Total
othersegments
Segment Revenue 100 300 200 400 1,000
Transaction from B 75,000 30,000
Segment Result 45 -70 80 -10 45
Transaction from C 6,000 40,000
Segment Assets 39 51 48 12 150
Transaction from A 18,000 82,000
You are requested to identify the reportable segments in accordance with the criteria laid down in AS
17. (PYP 5 Marks, Nov 20) (Similar to PYP Jan 21 & Nov 19 but different figures, Old & New SM) (MTP 5 Marks
Sep ’23) (RTP Nov ’23)
Answer 7 (PYP 5 Marks May’22)

As per AS 17 ‘Segment Reporting’, a business segment or geographical segment should be identified as Answer 9
a reportable segment if:
As per AS 17 ‘Segment Reporting’, a business segment or geographical segment should be identified as a
Its revenue from sales to external customers and from other transactions with other segments is 10% or reportable segment if:
more of the total revenue- external and internal of all segments; or
Its segment results whether profit or loss is 10% or more of:
Its segment result whether profit or loss is 10% or more of:
฀ The combined result of all segments in profit; or ฀ The combined result of all segments in profit; i.e., ₹ 250 Lakhs or
฀ The combined result of all segments in loss, whichever is greater in absolute amount; ฀ The combined result of all segments in loss; i.e., ₹ 300 Lakhs Whichever is greater in
or Its segment assets are 10% or more of the total assets of all segments. absolute amount i.e., ₹ 300 Lakhs.
On the basis of revenue criteria, segments A, B, C and D - all are reportable segments. Operating Absolute amount of Profit or Reportable Segment Yes or No
On the basis of the result criteria, segments A, B and C are reportable segments (since their results in Segment Loss (₹ In lakhs)
absolute amount is 10% or more of 125 Lakhs). On the basis of asset criteria, all segments except Dare re- A 225 Yes
portable segments. Since all the segments are covered in at least one of the above criteria, all segments
have to be reported upon in accordance with Accounting Standard (AS) 17.
B 25 No
C 175 Yes
Question 8 D 20 No
M/s Nathan Limited has three segments namely P, Q and R. The assets of the company are Rs. 15 E 105 Yes
crores. Segment P has 4 crores, Segment Q has 6 crores and Segment R has 5 crores. Deferred tax On the basis of the profitability test (result criteria), segments A, C and E are reportable segments (since
assets included in the assets of each segment are P - Rs. 1 crore, Q - Rs. 0.90 crores and R - Rs. 0.80 their results in absolute amount is 10% or more of ₹ 300 lakhs i.e., 30 lakhs).
crores. The accountant contends all these three segments are reportable segments. Comment. (PYP
5 Marks, May 18) (Old & New SM)
Question 10
Answer 8 As per AS 17, reportable segments are those whose total revenue from external sales and inter- seg-
According to AS 17 “Segment Reporting”, segment Assets do not include income tax assets. mentsales is (Old & New SM)
Therefore, the revised total assets are 12.3 crores [`15 – (Rs. 1 + 0.9 + 0.8). Details of Segment wise assets
a. 10% or more of the total revenue of all b. 10% or more of the total revenue of all
Segment P holds total assets of Rs. 3 crores (Rs. 4 crores – Rs. 1 crores); Segment Q holds Rs. 5.1 crores (Rs.
6 crores – 0.9 crores); Segment R holds Rs. 4.2 crores (Rs. 5 crores – Rs. 0.8 crores). segments external segments
Thus, all the three segments hold more than 10% of the total assets, all segments are reportable segments. c. 12% or more of the total revenue of all seg- d. 12% or more of the total revenue of all exter-
Hence, the contention of the accountant that all three segments are reportable segments is correct. ments nal segments
Ans: (a)
Question 9
Answer any four of the following: Question 11

XYZ Ltd. has 5 business segments. Profit / Loss of each of the segments for the year ended 31st
Which of the following statements is correct? (Old & New SM)
March,2022 has been provided below. You are required to identify from the following whether report-
able segments or not reportable segments, on the basis of “profitability test” as per AS-17.
a. Management has a discretion to include a segment as a reportable segment even if it
passes the 10% materiality test.
Segment Profit (Loss) ₹ in lakhs
b. Management has a discretion to include any segment as a reportable segment if it fails the
A 225
12% materiality test.
B 25
c. It is mandatory for the management to include the segment as a reportable segment if it
C (175) passes the 10% materiality test.
D (20) d. It is not mandatory for the management to include the segment as a reportable segment if it
E (105) passes the 10% materiality test.
Ans: (c) segments taken together becomes reportable segment.
Ans: (c)
Question 12
Which of the following statements is correct? (Old & New SM)
Questions 15
a. The overall test of 75% considers only external revenue to compute the threshold limit.
Nathan Limited has three segments namely P, Q and R. The assets of the company are ₹ 15 crores. Seg-
b. The overall test of 75% considers only internal revenue to compute the threshold limit. ment P has 4 crores, Segment Q has 6 crores and Segment R has 5 crores. Deferred tax assets included
c. The overall test of 75% considers both internal and external revenue to compute in the assets of each segment are P - ₹ 1 crore, Q - ₹ 0.90 crores and R - ₹ 0.80 crores. The accountant
the threshold limit. contends all these three segments are reportable segments. Comment.
d. It is management choice whether they want to include both external and internal reve-
Answers 15
nue for computing threshold limit.
According to AS 17 “Segment Reporting”, segment assets do not include income tax assets. Therefore, the
Ans: (a) revised total assets are 12.3 crores [₹ 15 - (₹ 1 +0.9 + 0.8).
Details of Segment wise assets:

Question 13
Segment P holds total assets of ₹ 3 crores (₹ 4 crores - ₹ 1 crores); Segment Q holds ₹ 5.1 crores (₹ 6 crores
Which of the following statements is correct? (Old & New SM) - ₹ 0.9 crores);
a. The 10% test computed on the basis of revenue, considers both internal and external Segment R holds ₹ 4.2 crores (₹ 5 crores - ₹ 0.8 crores).
revenue to compute the threshold limit. Thus, all the three segments hold more than 10% of the total assets, all segments are reportable segments.
Hence, the contention of the Accountant that all three segments are reportable segments is correct.
b. The 10% test computed on the basis of revenue, considers only external revenue to
compute the threshold limit. Questions 16
c. The 10% test computed on the basis of revenue, considers only internal revenue to
Company A is engaged in the manufacture and sale of products, which constitute two distinct business
compute the threshold limit. segments. The products of the Company are sold in the domestic market only. The management infor-
d. It is management choice whether they want to include both external and internal revenue mation system of the Company is organized to reflect operating information by two broad marketseg-
ments, rural and urban.
for computing threshold limit.
Besides the two business segments, how should Company A identify geographical segments? Do geo-
Ans: (a) graphical segments exist within the same country? Explain in line with the provisions of AS 17.
Answers 16
Question 14
AS 17 explains that, “a single geographical segment does not include operations in economic environ-
Which of the following statements is correct? (Old & New SM) ments with significantly differing risks and returns. A geographical segment may be a single country, a
group of two or more countries, or a region within a country”.
a. In case of 10% test based on profit/loss, we need to consider that any segment whose profit
or loss is 10% or more than the net profit or netloss respectively of all segments taken together Accordingly, to identity geographical segments, Company A needs to evaluate whether the seg-
becomes reportable segment. ments reflected in the management information system function in environments that are subject to sig-
nificantly differing risks and returns irrespective of the fact whether they are within the same country.
b. In case of 10% test based on profit/loss, we need to consider that any segment whose profit
or lossis 10% or more than the net profit (after netting the losses) of all segments taken together The Standard recognizes that, “Determining the composition of a business or geographical segment in-
becomes reportable segment. volves a certain amount of judgement…”. Accordingly, while the management information system of the
Company provides segment information for rural and urban geographical segments for the purpose of
c. In case of 10% test based on profit/loss, we need to consider that any segment whose profit
internal reporting, judgement is required to determine whether these segments are subject to significantly
or loss is 10% or more than the net profit or loss (whichever is higher in absolute figures) of
differing risks and returns based on the definition of geographical segment. In making such a judgement,
all segments taken together becomes reportable segment.
aspect like different pricing and other policies, e.g., credit policies, deployment of resourcesbetween differ-
d. In case of 10% test based on profit/loss, we need to consider that any segment whose profit ent regions etc., may be considered for the purpose identifying ‘urban and ‘rural’ as separate geograph-
or lossis 10% or more than the net profit or loss (whichever is lower in absolute figures) of all ical segment.
Company A, in making judgment for identifying geographical segments, should also consider the amount i.e. ₹ 300 Lakhs.
relevance, reliability and comparability over time of segment information that will be reported. The
Standard, explains that, “In making that judgement, enterprise management takes into account Operating Segment Absolute amount of Profit orLoss (₹ Reportable Segment
the objective of reporting financial information by segment as set forth in the standard and the In lakhs) Yes or No
qualitative characteristics of financial statements. The qualitative characteristics include the relevance, A 225 Yes
reliability and comparability over time of financial information that is reported about the different
groups of products and services of an enterprise and about its operations in particular geographical B 25 No
areas, and the usefulness of that information for assessing the risks and returns of the enterprise.” C 175 Yes
D 20 No
Questions 17
E 105 Yes
PK Ltd. has identified business segment as its primary reporting format. It has identified India, USA On the basis of the profitability test (result criteria), segments A, C and E are reportable segments (since
and UK as three geographical segments. It sells its products in the Indian market, which consti- their results in absolute amount is 10% or more of₹ 300 lakhs i.e. 30 lakhs).
tutes 70 percent of the Company’s sales. 25 per cent is sold in USA and the balance is sold in UK.
Is PK Ltd. as part of its geographical secondary segment information, required to disclose segment Questions 19
revenue from export sales, where such sales are not significant?
ABC Limited has 5 segments namely A, B, C, D and E. The profit/loss of each segment for the year ended
Answers 17 March 31st, 20X2 is as follows:
As per AS 17, if primary format of an enterprise for reporting segment information is business segments,
Segment Profit/
it should also report segment revenue from external customers by geographical area based on the
geographical location of its customers, for each geographical segment whose revenue from sales to (Loss) (₹ in crore)
external customers is 10 per cent or more of enterprise revenue. A 780
Therefore, for the purposes of disclosing secondary segment information, PK Ltd. is not required to dis- B 1,500
close segment revenue from export sales to UK, since that segment does not meet the 10 per cent ormore
of enterprise revenue threshold. However, other secondary segment information as per AS 17 should be C (2,300)
disclosed in respect of this segment if the thresholds prescribed in the AS 17 are met. D (4,500)
E 6,000
Questions 18
Total 1,480
XYZ Ltd. has 5 business segments. Profit / Loss of each of the segments for the year ended 31st March,
Identify the Reportable segments.
20X2 have been provided below. You are required to identify from the following whether report-
ablesegments or not reportable segments, on the basis of “profitability test” as per AS-17. Answers 19
Segment Profit (Loss) ₹ in lakhs In compliance with AS 17, the segment profit/loss of respective segment will be compared with thegreater
of the following:
A 225
All segments in profit, i.e., A, B and E - Total profit ₹ 8,280 crores. All segments in loss, i.e., C and D - Total loss
B 25 6,800 crores.
C (175) Greater of the above - ₹ 8,280 crores.
D (20) Based on the above, reportable segments will be determined as follows:
E (105)
Segment Profit/(Loss) Absolute Profit/Loss as a % of Reportable Segment
Answers 18 8,280
As per AS 17 ‘Segment Reporting’, a business segment or geographical segment should be identified A 780 9% No
as a reportable segment if: B 1,500 18% Yes
Its segment results whether profit or loss is 10% or more of: C (2,300) 28% Yes
฀ The combined result of all segments in profit; i.e. ₹ 250 Lakhs or D (4,500) 54% Yes
฀ The combined result of all segments in loss; i.e. ₹ 300 Lakhs Whichever is greater in absolute
E 6,000 72% Yes

Conclusion:
Total 1,480
Segments L, M, O and P clearly satisfy the revenue and assets tests and they are separate reportable
segments.
Questions 20
Segment N does not satisfy the revenue test, but it does satisfy the asset test and it is a reportable
Heavy Goods Ltd. has 6 segments namely L-Q (below). The total revenues (internal and external), segment.
profitsor losses and assets are set out below:
Segment Q does not satisfy the revenue or the assets test but is does satisfy the profits test. Therefore,
(In₹) Segment Q is also a reportable segment.
Hence all segments i.e. L, M, N, O, P and Q are reportable segments.

Segment Inter Segment Sales External Sales Profit / loss Total assets
L 4,200 12,300 3,000 37,500
Questions 21
M 3,500 7,750 1,500 23,250
N 1,000 3,500 (1,500) 15,750 Calculate the segment results of a manufacturing organization from the following information:
0 0 5,250 (750) 10,500 Segments A B C Total
P 500 5,500 900 10,500 Directly attributed revenue 5,00,000 3,00,000 1,00,000 9,00,000
Q 1,200 1,050 600 5,250 Enterprise revenue 1,10,000

10,400 35,350 3,750 1,02,750 (allocated in 5 :4 : 2 basis)
Heavy Goods Ltd. needs to determine how many reportable segments it has. You are required to Revenue from transactions with
advice Heavy Goods Ltd. as per the criteria defined in AS 17.
other segments
Answers 20 Transaction from B 1,00,000 50,000 1,50,000
Quantitative Threshold Test: Transaction from C 10,000 50,000 60,000
Revenue Test: Transaction from A 25,000 1,00,000 1,25,000
Combined total sales of all the segment = ₹ 10,400 + ₹ 35,350 = ₹ 45,750. Operating expenses 3,00,000 1,50,000 75,000 5,25,000
10% thresholds = 45,750 x 10% = 4,575.
Enterprise expenses 77,000
Profitability Test:
(allocated in 5 :4 :2 basis)
In the given situation, combined reported profit = ₹ 6,000 and combined reported loss (₹ 2,250).
Expenses on transactions with other
Hence, for 10% thresholds ₹ 6,000 will be considered.
segments
10% thresholds = ₹ 6,000 x 10% = ₹ 600 Asset
Test: Transaction from B 75,000 30,000
Combined total assets of all the segment = ₹ 1,02,750 10% thresholds = ₹ 1,02,750 x 10% = 10,275Accord- Transaction from C 6,000 40,000
ingly, quantitative thresholds are calculated below: Transaction from A 18,000 82,000
Reportable
Segments L M N O P Q Answers 21
segments Computation of segment result:
% segment sales to 36.66% 24.59% 9.84% 11.48% 13.11% 4.92% L, M,O,P
Segments A B C Total
total sales
% segment profit to 50% 25% 25% 12.5% 15% 10% L,M,N,O,P,Q ₹ ₹ ₹ ₹
total profits Directly attributed revenue 5,00,000 3,00,000 1,00,000 9,00,000

% segment assets 36.50% 22.63% 15.33% 10.22% 10.22% 5.11% L,M,N,O,P Enterprise revenue
50,000 40,000 20,000 1,10,000
to total assets (allocated in 5 :4 :2 basis)
Revenue from transactions with other

The combined result of all segments in loss, whichever is greater in absolute amount; or
segments
Its segment assets are 10% or more of the total assets of all segments.
1,00,000 50,000 1,50,000
Transaction from B If the total external revenue attributable to reportable segments constitutes less than 75% of total
10,000 60,000 enterprise revenue, additional segments should be identified as reportable segments even if they
Transaction from C
50,000 1,00,000 1,25,000 do not meet the 10% thresholds until atleast 75% of total enterprise revenue is included in reportable seg-
Transaction from A ments. On the basis of turnover criteria segments M and N are reportable segments.
6,60,000 25,000 2.70,000 13,45,000
Total segment revenue (1)Op- On the basis of the result criteria, segments M, N and R are reportable segments (since their results in
3,00,000 4,15,000 75,000 5,25,000
absolute amount is 10% or more of₹ 200 lakhs).
erating expenses Enterprise 35,000 1,50,000 14,000 77,000
On the basis of asset criteria, all segments except R are reportable segments.
expenses (allocated in 5 :4 :2 28,000
Since all the segments are covered in at least one of the above criteria, all segments have to be reportedin
basis) accordance with Accounting Standard (AS) 17. Hence the opinion of chief accountant is wrong.
Expenses on transactions with other seg-

ments
75,000 30,000 1,05,000 A Company has an inter-segment transfer pricing policy of charging at cost less 10%. The market prices
Transaction from B are generally 25% above cost. Is the policy adopted by the company correct?
6,000 46,000
Transaction from C
40,000 82,000 1,00,000 Answers 23
Transaction from A
4,16,000 18,000 2,01,000 8,53,000 AS 17 ‘Segment Reporting’ requires that inter-segment transfers should be measured on the basis
Total segment expenses (2) 2,44,000 2,36,000 69,000 4,92,000 that the enterprise actually used to price these transfers. The basis of pricing inter-segment trans-
fers and any change therein should be disclosed in the financial statements. Hence the enterprise
Segment result (1-2) 1,79,000 can have its own policy for pricing inter-segment transfers and hence inter-segment transfers may be
based on cost, below cost or market price. However, whichever policy is followed, the same should be
disclosed and applied consistently. Therefore, in the given case inter-segment transfer pricing policy
adopted by the company is correct if, followed consistently.
The Chief Accountant of Sports Ltd. gives the following data regarding its six segments:
in lakhs
M/s XYZ Ltd. has three segments namely X, Y, Z. The total Assets of the Company are ₹ 10.00 crores.
Particulars M N O P Q R Total
Segment X has₹ 2.00 crores, segment Y has ₹ 3.00 crores and segment Z has₹ 5.00 crores. Deferred tax
Segment Assets 40 80 30 20 20 10 200 assets included in the assets of each segments are X- ₹ 0.50 crores, Y—₹ 0.40 crores and Z—₹ 0.30
crores. The accountant contends that all the three segments are reportable segments. Comment.
Segment Results 50 (190) 10 10 (10) 30 (100)
Segment Revenue 300 620 80 60 80 60 1,200 Answers 24

The Chief accountant is of the opinion that segments “M” and “N” alone should be reported. Is he According to AS 17 “Segment Reporting”, segment assets do not include income tax assets. Therefore,
justified in his view? Discuss. the revised total assets are ₹ 8.8 crores [₹ 10 crores – (₹ 0.5 + ₹ 0.4 +₹ 0.3)]. Segment X holds total as-
sets of ₹ 1.5 crores (₹ 2 crores –₹ 0.5 crores); Segment Y holds ₹ 2.6 crores (₹ 3 crores –₹ 0.4 crores);
Answers 22 and Segment Z holds ₹ 4.7 crores (₹ 5 crores –₹ 0.3 crores). Thus all the three segments hold more than
10% of the total assets, all segments are reportable segments.
As per AS 17 ‘Segment Reporting’, a business segment or geographical segment should be identified
as a reportable segment if:
Its revenue from sales to external customers and from other transactions with other segments is 10%
or more of the total revenue- external and internal of all segments; or
Its segment result whether profit or loss is 10% or more of:
The combined result of all segments in profit; or
Question 25 (Illustration) Answers 25

Prepare a segmental report for publication in Diversifiers Ltd. from the following details of the Diversifiers Ltd. Segmental Report (₹’000)
company’s three divisions and the head office:
₹ (‘000) Divisions Inter Seg- Consolidated

Forging Shop Division Particulars ment Elimi- Total
Forg- Bright Fitting
nations
Sales to Bright Bar Division 4,575 ing Bar
shop
Other Domestic Sales 90
Segment Revenue
Export Sales 6,135
Sales:
Bright Bar Division 10,800
Domestic 90 - - - 90
Sales to Fitting Division 45
Export 6,135 300 270 - 6,705
Export Sales to Rwanda 300
External Sales 6,225 300 270 - 6,795
Fitting Division 345
Inter-Segment Sales 4,575 45 - 4,620 -
Export Sales to Maldives 270 Total Revenue 10,800 345 270 4,620 6,795
Segment Result (Given) 240 30 (12) 258
Particulars Head Office ForgingShop Bright BarDivi- FittingDivi-
Division sion sion Head Office Expenses (144)
₹ (‘000)
₹ (‘000) ₹ (‘000) ₹ (‘000) Operating Profit 114
Pre-tax operating result 240 30 (12) Interest Expense (16)
Head office cost reallocated 72 36 36 Profit Before Tax 98
Interest costs 6 8 2 Information in Relation
Fixed assets 75 300 60 180 to Assets and Liabilities:
Net current assets 72 180 60 135 Fixed Assets 300 60 180 - 540
Long-term liabilities 57 30 15 180 Net Current Assets 180 60 135 - 375

Segment assets 480 120 315 - 915
Unallocated Corporate
Assets (75 + 72) - - - - 147
Total assets 1,062
Segment liabilities 30 15 180 - 225
Unallocated corporate 57
liabilities
Total liabilities 282
Sales Revenue by Geographical Market (₹ ’000)
H o m e Export Sales (by forging Export to Export to C o n s o l i d a t e d

Sales shop division) Rwanda Maldives Total
External sales 90 6,135 300 270 6,795
Chapter 4.4
AS 18- Related Party Disclosures
Microteach Ltd. produces batteries for scooters, cars, trucks, and specialized batteries for investors
andUPS. How many segments should it have and why?
Answers 26
In case of Microtech Ltd., the basic product is the batteries, but the risks and returns of the batteries for
automobiles (scooters, cars and trucks) and batteries for invertors and UPS are affected by different set Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
of factors. In case of automobile batteries, the risks and returns are affected by the Government policy,
Study Mat. Q.12 TO Q.32
road conditions, quality of automobiles, etc. whereas in case of batteries for invertors and UPS, the risks
and returns are affected by power condition, standard of living, etc. Therefore, it can be said that Mi- Past Exams Q.3 Q.2,Q.10 Q.9 NO NO NO NO Q.1 NO NO Q.11 NO
crotech Ltd. has two business segments viz- ‘Automobile batteries’ and ‘batteries for Invertors and UPS’.
Reference: The students are advised to refer the full text of AS 17 “Segment Reporting”. MTP NO NO NO NO Q.3 Q.2 Q.1,Q.2 NO Q.2 Q.3 Q.4 Q.1,Q.2
RTP Q.7 Q.4 NO NO Q.4 Q.4 Q.6 Q.5 Q.8 Q.1 NO Q.9
Chapter 4.4 Question 2
AS 18- Related Party Disclosures (i) Mr. Raj a relative of key management personnel received remuneration of Rs. 2,50,000 for his
services in the company for the period from 1.4.2020 to 30.6.2020. On 1.7.2020, he left the service.
Should the relative be identified as at the closing date i.e. on 31.3.2021 for the purposes of AS
18? (MTP 5 Marks March 21, Oct’20, Mar’22, Old & New SM) (Same concept different figures PYP 2.5
Question 1 Marks July’21, PYP 2.5 Marks, Nov ‘18)
SP hotels Limited enters into an agreement with Mr. A for running its hotel for a fixed return payable to the (ii) X Ltd. sold goods to its associate Company during the 1st quarter ending 30.6.2020. After that,
later every year. The contract involves the day-to-day management of the hotel, while all financial and the related party relationship ceased to exist. However, goods were supplied as were supplied to
operating policy decisions are taken by the Board of Directors of the company. Mr. A does not own any any other ordinary customer. Decide whether transactions of the entire year need disclosure as
voting power in SP Hotels Limited. Would he be considered as a related party of SP Hotels Limited? Also related party transaction. (MTP 5 Marks March 21, Oct’20, Mar’22 & Oct ‘23, Old & New SM)
explain the required related party disclosure requirements under AS 18? (MTP 5 Marks April 21, Sep ’23,
Answer 2
RTP Nov 22, PYP 5 Marks July’21) (Same concepts but lesser adjustments as RTP Nov’19, May’19)
(i) According to AS 18 on ‘Related Party Disclosures’, parties are considered to be related if at any time
Answer 1 during the reporting period one party has the ability to control the other party or exercise signifi-
Mr. A will not be considered as a related party of SP Hotels Limited in view of AS 18 which states, “individ- cant influence over the other party in making financial and/or operating decisions. Hence, Mr. Raj,
uals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that gives a relative of key management personnel should be identified as related party for disclosure in the
them control or significant influence over the enterprise, and relatives of any such individual”. In thegiven financial statements for the year ended 31.3.2021.
case, in the absence of share ownership, Mr. A would not be considered to exercise significant influence (ii) As per AS 18, transactions of X Ltd. with its associate company for the first quarter ending 30.06.2020
on SP Hotels Limited, even though there is an agreement giving him the power to manage the company. only are required to be disclosed as related party transactions. The transactions for the period in
Further, the fact that Mr. A does not have the ability to direct or instruct the board of directors does not which related party relationship did not exist need not be reported.
qualify him as a key management personnel.
Related Party Disclosures: Name of the related party and nature of the related party relationship where Question 3
control exists should be disclosed irrespective of whether or not there have been transactions between
the related parties. You are required to identify the related parties in the following cases as per AS 18: M Ltd. holds 61 %
shares of S Ltd. S Ltd. holds 51 % shares of F Ltd. C Ltd. holds 49% shares of F Ltd. (Give your answer - Re-
This is to enable users of financial statements to form a view about the effects of related party relation-
porting Entity wise for M Ltd., S Ltd., C Ltd. and F Ltd.) (MTP 5 Marks May 20 & Sep ‘22) (PYP 2.5 MarksMay
ships on the enterprise.
18)
If there have been transactions between related parties, during the existence of a related party relation-
ship, the reporting enterprise should disclose the following: Answer 3
(i) The name of the transacting related party; (a) Reporting entity− M Ltd.
(ii) A description of the relationship between the parties; ฀ S Ltd. (subsidiary) is a related party
(iii) A description of the nature of transactions; ฀ F Ltd.(subsidiary) is a related party
(iv) Volume of the transactions either as an amount or as an appropriate proportion; (b) Reporting entity− S Ltd.
(a) Any other elements of the related party transactions necessary for an ฀ M Ltd. (holding company) is a related party
(b) understanding of the financial statements; ฀ F Ltd. (subsidiary) is a related party
(c) The amounts or appropriate proportions of outstanding items pertaining to related parties (c) Reporting entity− F Ltd.
at the balance sheet date and provisions for doubtful debts due from such parties at
฀ M Ltd. (holding company) is a related party
that date;
฀ S Ltd. (holding company) is a related party
(d) Amounts written off or written back in the period in respect of debts due from or to related
parties. ฀ C Ltd. (investor/ investing party) is a related party
(d) Reporting entity− C Ltd.
฀ F Ltd. (associate) is a related party
Question 4 ga Bank Limited exercises significant influence over B Limited by virtue of ownership of 25 per cent of
the voting power. Omega Bank Limited is also a provider of finance for B Limited (as it has provided a
(i) On the basis of provisions of AS 18 ‘Related Party Disclosures’: Identify the related parties in the loan to B Limited), and as per the standard, a provider of finance is deemed not to be a related party
following cases: during its normal dealings with the enterprise by virtue only of those dealing. However, in this case, the
exemption would not be available to Omega Bank Limited as the exercise of significant influence of
X Limited holds 60% shares of Y Limited Y Limited holds 55% shares of W Limited Z Limited holds
Omega Bank Limited over B Limited has been demonstrated on account of ownership of more than 20
35% shares of W Limited
per cent of voting power. Accordingly, Omega Bank Limited would be construed to be a related party
(ii) Himalaya Limited sold goods for ₹ 40 Lakhs to Aravalli Limited during financial year ended on in the financial statements of B Limited and consequently, the latter would be required to disclose the
March 31, 2022. The Managing Director of Himalaya Limited owns 80% shares of Aravalli Limited.
transactions with Omega Bank Limited in its financial statements.
The sales were made to Aravalli Limited at normal selling prices followed by Himalaya Limited.
The chief accountant of Himalaya Limited contends that these sales need not require a differ- (b) Both B Limited and C Limited are ‘associates’ of A Limited. Follow−associates cannot be regarded as a
ent treatment from the other sales made by the company and hence no disclosure is necessary related parties only by virtue of the relationship. AS 18 states that “enterprise that directly, or indirectly
as per AS 18. You are required to comment on this. (MTP 5 Marks March ’23, RTP Nov ’20) (Same through one or more intermediaries, control, or are controlled by, or are under common control with,
concept different figures RTP May’20, RTP Nov’18, Old & New SM) the reporting enterprise” are related parties. Further, it is given that “associates and joint ventures of
the reporting enterprise and the investing party or venture in respect of which the reporting enterprise
Answer 4 is an associate or a joint venture” are also related parties. As B Limited is not an associate of C Limited,
nor is it being controlled, directly or indirectly, by C Limited or is not so controlling C Limited, it is not a
(i) X Ltd., Y Ltd. & W Ltd. are related to each other. Z Ltd. & W Ltd. are related to each other related partyof C Limited.
by virtueof associate relationship. However, neither X Ltd. nor Y Ltd. is related to Z Ltd. and
vice versa since neither control nor significant influence exists between them.
Question 6
(ii) Himalaya Ltd. and Aravalli Ltd are related parties since key management personnel of Hima-
laya Ltd. R Ltd. has 60% voting right in S Ltd. S Ltd. has 15% voting right in T Ltd. R Ltd. directly enjoys voting right of
i.e. its managing director holds 80% in Aravalli Ltd. and hence disclosure of transaction between them is 10% in T Ltd. T Ltd. is a listed company and regularly supplies goods to R Ltd. The management of T Ltd. has
required irrespective of whether the transaction was done at normal selling price. Hence the contention not disclosed its relationship with R Ltd. You are required to assess the situation from the view point of AS
of Chief Accountant of Himalaya Ltd that these sales require no disclosure under related party Trans- 18 on Related Party Disclosures. (RTP May 21)
actions, is wrong.
Answer 6
Question 5 AS 18 ‘Related Party Disclosures’, defines related party as one that has at any time during the reporting period,
the ability to control the other party or exercise significant influence over the other party in making financial
(a) Omega Bank Limited holds 25 per cent of the voting power of B Limited. Omega Bank Limited and/or operating decisions.
also provides finance by way of a loan to B Limited at market rates of interest, on account Definition for Control
of which, Omega Bank Limited would have the power to nominate one person to the board
Here, control is defined as ownership directly or indirectly of more than one−half of the voting power of an
of directors of B Limited. Any major transactions proposed to be entered into by B Limited
enterprise; and Significant Influence is defined as participation in the financial and/or operating policydeci-
would need the consent of Omega Bank Limited. Would Omega Bank Limited be considered
sions of an enterprise but not control of those policies.
as related party for B Ltd. (reporting enterprise)?
Nature of Relationship
(b) A Limited has two Associates, B Limited and C Limited, and owns 25 per cent of the voting
power of B Limited and 30 per cent of the voting power of C Limited. Would Be Limited be R Ltd. has direct economic interest in T Ltd. to the extent of 10%, and through S Ltd. in which it is the majority
considered a related partyfor the purpose of financial statements of C Limited? (RTP Nov ‘21) shareholders, it has further control of 9% in T Ltd. (60% of S Ltd.’s 15%). These two taken together (10% + 9%)
make the total control of 19%.
Answer 5 Conclusion
(a) Omega Bank Limited would be a related party of B Limited. As per AS 18 “associates and joint ven- In the present case, control of R Ltd. in T Ltd. directly and through S Ltd., is only 19%. Significant influence may
tures of thereporting enterprise and the investing party of venture in respect of which the report- also not be exercised as an investing party (R Ltd.) holds, directly or indirectly through intermediariesonly 19%
ing enterprise is an associate or a joint venture” are related party relationship. Further, an as- of the voting power of the T Ltd. Accordingly, R Ltd. and T Ltd. are not related parties. Hence related party dis-
sociate has been defined as “an enterprise in which an investing reporting party has significant closure, as per AS 18, is not required.
influence and which is neither a subsidiary nor a joint venture of the party”. Significant influence has
been defined to be “participation in the financial and /or operating policy decisions of an enterprise, but
not control of those policies”. Further, it is given in the standard that significant influence may be gained
by share ownership, agreement or statute. As regards share ownership, there is a presumption
that ownership of 20 per cent or more of the voting power enables the enterpriseto exercise sig-
nificant influence, unless it could be clearly demonstrated otherwise. In the given example, Ome-
Question 7 (b) In context of AS 18, “Key management personnel” are those persons who have the authority and
responsibility for planning, directing and controlling the activities of the reporting enterprise. For
Is remuneration paid to Board of Directors a related party transaction? Explain. (RTP May 18) example, in the case of a company, the managing director(s), whole time director(s), manager
and any person in accordance with whose directions or instructions the board of directors of the
Answer 7 company is accustomed to act, are usually considered key management personnel.
In case of a Company, the Managing Director, whole time director, manager and any person in accor-
dance with whose directions or instructions the board of directors of the company is accustomed to Question 9
act, are
Identify the related parties in the following cases as per AS-18
usually considered Key Managerial Personnel (KMP). Persons who do not have the authority and re-
sponsibility for planning, directing and controlling the activities of the enterprise would not be KMP. (i) Maya Ltd. holds 61 % shares of Sheetal Ltd. Sheetal Ltd. holds 51 % shares of Fair Ltd.Care Ltd.
Conversely, persons without any formal titles may be considered to be KMP, if they plan, direct and control holds 49% shares of Fair Ltd. (Give your answer - Reporting Entity wise for Maya Ltd., Sheetal
the activities of the enterprise. Ltd., Care Ltd. and Fair Ltd.) (RTP Nov ’23)
Further, as per Sec 2(76) of Companies Act, 2013, a related party includes a director or his relative. Sec (ii) Mr. Subhash Kumar is Managing Director of a Ltd. and also holds 72% capital of B Ltd.
2(34) defines a director as a director appointed to the Board of a Company. Hence, remuneration paid (PYP 5 Marks May ’19)
to Board of Directors will be considered as related party transaction.
Answer 9
Question 8 (i) a) Reporting entity− Maya Ltd.
• Sheetal Ltd. (subsidiary) is a related party
a) In respect of a key supplier who is dependent on the company for its existence and the com-
pany enjoys influence over the prices of this supplier (which may not be formally demonstra- • Fair Ltd.(subsidiary) is a related party
ble), can the supplier andthe company be considered as related parties? (b) Reporting entity− Sheetal Ltd.
b) Define “Key management personnel” in the context of AS 18. (RTP May 22) • Maya Ltd. (holding company) is a related party
Answer 8 • Fair Ltd. (subsidiary) is a related party
(a) The supplier and the company cannot be considered to be related parties merely because the (c) Reporting entity− Fair Ltd.
latter is able to influence the transaction price between the parties. Paragraph 3 of AS 18 states • Maya Ltd. (holding company) is a related party
that “enterprises that directly, or indirectly through one or more intermediaries, control, or are
controlled by, or are under common control with, the reporting enterprise” are considered to be • Sheetal Ltd. (holding company) is a related party
related party relationships. However, the conditions which define the existence of control, as fol- • Care Ltd. (investor/ investing party) is a related party
lows, are not satisfied in the given example.
(d) Reporting entity− Care Ltd.
฀ ‘ownership, directly or indirectly, of more than one−half of the voting power of an enterprise, or
• Fair Ltd. (associate) is a related party
฀ Control of the composition of the board of directors in the case of a company or of the compo-
sition of the corresponding governing body in case of any other enterprise, or (ii) Mr. Subhash Kumar is Key management personnel as he has the authority for planning, directing
and controlling the activities of A Ltd. He also holds substantial interest in B Ltd. as he holds 72% cap-
฀ a substantial interest in voting power and the power to direct, by statue or agreement, the fi- ital ofB Ltd. Thus, Mr. Subhash is related party for both A Ltd. and B Ltd. Moreover, as per the definition
nancial and/or operating policies of the enterprise”. Paragraph 10 of the standard defines sig- of related party relationship described in para 3 of AS 18, enterprises over which Subhash is able to
nificant influence as “participation in the financial and/or operating policy decisions of an en- exercise significant influence are also related parties. Thus, a Ltd. and B Ltd. willalso be construed as
terprise, but not control of those policies”. In the given example, although the supplier and the related to each other.
company have entered into a commercial transaction, the terms of which are influenced by the
latter because of its better bargaining power in the specific market for such goods, it cannot be
Question 10
concluded that there is participation in the financial and/or operating policy decisions. There-
fore, as the conditions specified by the Standard for being classified as a related party are not
Following transactions are disclosed as on 31st March, 2018:
satisfied in the given example, the company cannot be said to be related to the supplier.This view
is supported by paragraph 4 (b) of the Standard which states that “a single customer, supplier, Goods sold amounting to Rs. 50 lakhs to associate company during the 1st quarter ended on 30th June,
franchiser, distributor, or general agent with whom an enterprise transacts a significant volume 2017. After that related party relationship ceased to exist. However, goods were supplied as was sup-
of businessmerely by virtue of the resulting economic dependence” would not be deemed to be plied to any other ordinary customer. Decide whether transactions of the entire year have to be dis-
related parties. closed as related party transaction. (PYP 2.5 Marks, Nov ’18)
Question 12
Answer 10 According to AS-18 Related Party Disclosures, which ONE of the following is not a related party ofSky-
lineLimited?
As per provision of AS 18, the transactions only for the period in which related party relationships exist
need to be reported. a. A shareholder of Skyline Limited owning 30% of the ordinary share capital
Hence, transactions of the entity with its associate company for the first quarter ending 30.06.2017 only b. An entity providing banking facilities to Skyline Limited in the normal course of business
are required to be disclosed as related party transactions. Transactions of the entire year need not be
disclosed as related party transactions and transactions for the period (after 1st July) in which related c. An associate of Skyline Limited
party relationship did not exist need not be reported. d. Key management personnel of Skyline Limited
Hence transaction of sale of goods with the associate company for first quarter ending 30th June, 2017
Ans: (b)
for Rs. 50 Lakhs only are required to be disclosed as related party transaction on 31.3.18.
Question 13
Question 11
Are the following statements in relation to related parties true or false, according to AS-18 Related
Answer the following with respect to AS-18:
PartyDisclosures?
(i) ABC Ltd. sold goods of Rs. 2,00,000 to its associate company for the 1stquarter ending 30.06.2022.
A) A party is related to another entity that it is jointly controlled by.
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 B) A party is related to another entity that it controls.
as related party transaction.
Statement (A) Statement (B)
(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 Direc- a. False False
tors in Arjun Ltd.). Are both the companies related? b. False True
(iii) Asha Ltd. sells all the manufactured furniture of Rs. 1,00,00,000 to Sasha Ltd, as per agreement. c. True False
Sasha Ltd. is the only customer to Asha Ltd. In the financial statements, Asha Ltd. wants to pres-
d. True True
entSasha company as a related party. Comment on the disclosure requirement. (PYP 5 Marks
May ’23)
Ans: (d)
Answer 11
Question 14
i) As per AS 18, parties are considered to be related if any time during the reporting period one par-
ty has the ability to control the other party or exercise significant influence over the other party. Which of the following is not a related party as envisaged by AS-18 Related Party Disclosures?
Transactions of ABC Ltd. with its associate company for the first quarter ending 30.06.2022 only are
required to be disclosed as related party transactions as the company has the ability to exercise
significant influence only till 30.6.2022. a. A director of the entity b. The parent company of the entity
The transactions for the period in which related party relationship did not exist need not be reported. c. A shareholder of the entity that holds 1% d. The spouse of the managing director of
stake in the entity the entity
(ii) In the given case, Arjun Ltd. cannot be said to control the composition of board of directors of
Bheem Ltd. as the directors have been appointed in their individual capacity as professionals and Ans: (c)
not by virtue of their being directors in Arjun Ltd.
Hence, it cannot be concluded that the companies are related merely because the majority of the Question 15
directors of one company became the majority of the directors of the second in their individual
capacity as professionals. According to AS-18 Related Party Disclosures, related party transaction is a transfer of resources
(iii) In the context of AS 18, a single customer, supplier, franchiser, distributor, or general agent with orobligations between related parties – provided a price is charged for such transfer.
whom an enterprise transacts a significant volume of business cannot be construed as Related
Party Relationship merely by virtue of the resulting economic dependence. There is an economic a. True b. False
dependence between the companies but no one controls or exercise significant influence on the
other.
Ans: (b)
In the given case, Asha Ltd. need not report Sasha Company as its related party in its financial state-
ments.
Question 16
According to AS-18 Related Party Disclosures, parties are considered to be related, if and only if at the
end of the reporting period - one party has the ability to control the other party or exercise significant
CA CS CMA Mentoring Program Reviews influence over the other party in making financial and/or operating decisions.
a. True b. False
Ans: (b)
Questions 17
Who are related parties under AS 18? What are the related party disclosure requirements?
Answers 17
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.
If there have been transactions between related parties, during the existence of a related party
relationship, the reporting enterprise should disclose the following:
(i) The name of the transacting related party;
(ii) A description of the relationship between the parties;

(iii) A description of the nature of transactions;
(iv) Volume of the transactions either as an amount or as an appropriate proportion;
(v) Any other elements of the related party transactions necessary for an understand-
ing of the financial statements;
(vi) The amounts or appropriate proportions of outstanding items pertaining to related parties at
the balance sheet date and provisions for doubtful debts due from such parties at that date;
(vii) Amounts written off or written back in the period in respect of debts due from or to related parties.
Questions 18
ABC Limited is in the business of manufacturing textiles. It has certain commercial contracts
with its customers and those customer contracts carry various clauses, imposing restriction on ABC
Limited for disclosure of certain information. Accordingly, the company doesn’t intend to pro-
vide related party disclosure under AS-18 in its ensuing financial statements. Is this correct?
Answers 18
As per AS-18 stipulate that related party disclosure requirements under AS- 18 do not apply in cir-
cumstances, where providing such disclosures would conflict with the reporting enterprise’s duties
of confidentiality, as specifically required in terms of a statute or by any regulator or similar com-
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In case, where (1) a statute or (2) a regulator or (3) a similar competent authority governing an en-
terprise prohibit the enterprise to disclose certain information, which is required to be disclosed as
Answers 21
per AS 18, disclosure of such information is not warranted. For example, banks are obliged by law to As per AS 18, transactions of X Ltd. with its associate company for the first quarter ending 30.06.20X1 only
maintain confidentiality in respect of their customers’ transactions and AS-18 would not override the ob- are required to be disclosed as related party transactions. The transactions for the period in which re-
ligation to preserve the confidentiality of customers’ dealings. lated party relationship did not exist would not be reported.
However, this exemption is not available in respect of confidentiality provisions in a commercial contract
between two enterprises - where confidentiality is not specifically required in terms of (1) a statute or Questions 22
(2) by any regulator or (3) similar competent authority.
You are required to identify the related parties in the following cases as per AS 18:
Therefore, in the given case AS-18 related party disclosures would have to be made by ABC Limited in
M Ltd. holds 61 % shares of S Ltd. S Ltd. holds 51 % shares of F Ltd. C Ltd. holds 49% shares of F Ltd.
its ensuing financial statements.
(Give your answer - Reporting Entity wise for M Ltd., S Ltd., C Ltd. and F Ltd.)
Questions 19 Answers 22
Should the related parties be identified as at the reporting date (i.e. balance sheet date) for the Reporting Entity Related Party
purposes of AS-18? In disclosing transactions with related parties, are the transactions of the en-
M Ltd. S Ltd. (subsidiary) F Ltd.(subsidiary)
tire reporting period to be disclosed or only those for the period during which related party rela-
tionship exists?
S Ltd. M Ltd. (holding company) F Ltd. (subsidi-
Answers 19 ary)
F Ltd. M Ltd. (ultimate holding company) S Ltd. (holding
As per the definition of related parties in AS-18, the existence of a related party relationship should be iden-
company)
tified at all points during the year (and not only at the close of the financial year). However, AS 18 requires
disclosure of transactions with these parties only during the existence of the related party relationship. C Ltd. (investor/ investing party)
C Ltd. F Ltd. (associate)
Questions 20
Identify the related parties in the following case as per AS 18:A Ltd. holds 51% of B Ltd.
Mr. Raj, a relative of key management personnel, received remuneration of Rs. 2,50,000 for his ser- B Ltd holds 51% of O Ltd.Z Ltd holds 49% of O Ltd.
vicesin the company for the period from 1.4.20X1 to 30.6.20X1. On 1.7.20X1, he left the service of the
company. Answers 23
Should the relative be identified as at the closing date i.e. on 31.3.20X2 for the purposes of AS 18? In relation to Reporting enterprise - A Ltd.
Answers 20 ฀ B Ltd. (subsidiary) is a related party

฀ O Ltd.(subsidiary) is a related party
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 influ-
ence over the other party in making financial and/or operating decisions. Hence Mr. Raj, a relative In relation to Reporting enterprise - B Ltd.
of key management personnel, should be identified as related party for disclosure in the financial
฀ A Ltd. (holding company) is a related party
statements for the year ended 31.3.20X2.
฀ O Ltd. (subsidiary) is a related party
Questions 21
X Ltd. sold goods to its associate company during the 1st quarter ended 30.6.20X1. After that, the re- In relation to Reporting enterprise - O Ltd.
lated party relationship ceased to exist. However, goods were supplied as were supplied to any other ฀ A Ltd. (ultimate holding company) is a related party
ordinary customer. Decide whether transactions of the entire year have to be disclosed as related par-
ty transaction. ฀ B Ltd. (holding company) is a related party
฀ Z Ltd. (investor/ investing party) is a related party (O Ltd Being Associate of Z Ltd)
Reporting enterprise - Z Ltd.
฀ O Ltd. (Associate) is a related party Question 25 (Illustration)
Consider a scenario wherein:
฀ A Ltd. has 60% voting right in B Ltd.

฀ A Ltd. also has 22% voting right in C Ltd.; and
฀ B Ltd. has 30% voting right in C Ltd.
Whether C Ltd. is to be treated under AS-18 as a party related to A Ltd.?
Answers 24
Yes – in relation to A Ltd. (the reporting enterprise), C Ltd. is a related party under AS-18. This is because A
Ltd. indirectly controls C Ltd.
In this case, A Ltd. (together with its subsidiary B Ltd.) controls more than one half of the voting rights ofC Ltd.
Answer 25
Questions 26 Illustrations
Given the above structure: Identify related party relationships, if R Ltd. is the reporting enterprise
Answers 26
Answers 27
The following table identifies the related party relationships for R Ltd. (being the reporting enterprise):
The following table identifies the related party relationships for each of the entities in the Group:
Party Name Relationship under AS-18
P Ltd. P Ltd. has indirect control on R Ltd. (through Q Ltd.)
Hence R Ltd. is related to P Ltd.
Q Ltd. Q Ltd. has direct control of R Ltd.
Hence R Ltd. is related to Q Ltd.
Reporting enterprise Related Party as per AS-18
S Ltd. R Ltd. and S Ltd. are under common control of Q Ltd.
Hence R Ltd. is related to S Ltd. UH Ltd. All the four entities (viz. Sub 1, Sub 2, JC 1 and Ass 1)
X Ltd. X Ltd. is controlled by R Ltd.
Sub 1 Only two of the entities in the Group (viz. UH Ltd. and Sub 2)
Hence R Ltd. is related to X Ltd.
Sub 2 Only two of the entities in the Group (viz. UH Ltd. and Sub 1)
Y Ltd. is the sub-subsidiary of Q Ltd.
Y Ltd. Both R Ltd. and Y Ltd. are under common control of Q Ltd. Hence R Ltd. is
JC 1 Only UH Ltd.
related to Y Ltd.
Ass 1 Only UH Ltd.
Consider the following organization structure related to UH Ltd. (the ultimate

parent company of a Group), wherein UH Ltd. has made the following invest-
ments:
฀ Investment in two of the wholly owned subsidiaries, viz. Sub 1 and Sub 2
฀ Investment in JC 1, in which UH Ltd. has a joint control
฀ 20% investment in Ass 1 (and hence, Ass 1 is an associate of UH Ltd.)
Given the above structure: Identify related party relationships for each of the above entities under
AS-18
Question 28
Answers 29
Yes – This is because as per AS-18, 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 Andy (being the spouse and relative of the KMP of P Ltd.) needs to be reported as related
party atthe year-end date (i.e. 31st March 20X2). This is because the remuneration Andy received from P
Ltd. (for the period April 20X1 to 30 June 20X1) falls within the reporting year April 20X1 to March 20X2.
Consider a scenario wherein:
UK Bank holds 23% equity shares with voting rights in P Ltd.
The bank has provided a loan of Rs. 20 million to P Ltd. at market interest rate
Answer 28
As per the terms and conditions of the loan agreement, the bank has appointed one person
as its nominee to the board of directors of P Ltd. and any major transaction to be entered into
by P Ltd. will require the consent of the Bank
Determine: Whether under AS-18 - UK Bank is a related party to P Ltd. (the reporting enter-
Answer 29 prise)?
Answers 30
In the instant case, the UK Bank holds 23% shares with voting rights in P Ltd. and hence is deemed to
exercise significant influence over P Ltd.
The bank is also a provider of finance to P Ltd. (the reporting enterprise) and as per AS-18, parties
like providers of finance are deemed not to be considered as a related party in the course of normal
dealings with an enterprise by virtue only of those dealings. However, this exemption will not be
available to UK Bank in this case – since it exercises significant influence over P Ltd. (by virtue of holding
23% shares with voting rights in P Ltd.)
Accordingly, for P Ltd. (the reporting enterprise), the UK Bank is a related party and it will be required to
disclose the transactions with UK Bank in its financial statements.
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Question 31 (Illustration) Question 32 (Illustration)
Consider a scenario wherein: Narmada Ltd. sold goods for Rs. 90 lakhs to Ganga Ltd. during financial year ended 31-3-20X1.
The Managing Director of Narmada Ltd. owns 100% shares of Ganga Ltd. The sales were made to
P Ltd. hold 22% shares and voting rights in Q Ltd. (and hence Q Ltd. is an associate of P Ltd.) Ganga Ltd. at normal selling prices by Narmada Ltd. The Chief accountant of Narmada Ltd contends
that these sales need not require a different treatment from the other sales made by the compa-
On 1st April 20X1, P Ltd. sold certain goods to Q Ltd. amounting to Rs. 5 lacs ny and hence no disclosure is necessary as per the accounting standard. Is the Chief Accountant
correct?
On 30th June 20X1, P Ltd. sold its entire 22% stake in Q Ltd. (and hence the related party rela-
tionshipceased to exist after 30th June 20X1) Answers 32
However, P Ltd. continued supply goods to Q Ltd. subsequent to 30th June 20X1 (just like any As per AS 18 ‘Related Party Disclosures’, Enterprises over which a key management personnel is able to
other customer) and sold goods worth Rs. 15 lacs during 9-month period ended 31st March exercise significant influence are related parties. This includes enterprises owned by directors or major
20X2 shareholders of the reporting enterprise and enterprise that have a member of key management in
common with the reporting enterprise.
Consider 31st March 20X2 as the year-end date for P Ltd.
In the given case, Narmada Ltd. and Ganga Ltd are related parties and hence disclosure of transaction
between them is required irrespective of whether the transaction was done at normal selling price.
Hence the contention of Chief Accountant of Narmada Ltd is wrong.
Determine whether the transaction for the entire year (ending on 31st March 20X2) is required to be dis-
closed under AS-18 as related party transaction
Answers 31
No – This is because as per AS-18, the disclosure requirements under the Standard relate only to the peri-
od during related party relationship existed.
Accordingly, only transactions between P Ltd and Q Ltd till 30th June 20X1 (being sale of goods worth Rs. 5
lacs) are required to be reported / disclosed under AS- 18.
Transactions entered into after 30th June 20X1 are NOT required to be disclosed under AS-18.

AS 20- EPS AS 20- EPS
Question 1
From the following information, you are required to compute Basic and Diluted Earnings Per Share
Attempts MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV (EPS) of M/s. XYZ Limited for the year ended 31st March, 2019:
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023 Net Profit for the year after tax: Rs. 75,00,000
Study Number of Equity Shares of Rs.10 each outstanding: Rs. 10,00,000
Q.13 TO Q.31
Mat.
1,00,000, 8% Convertible Debentures of Rs. 100 each were issued by the Company at the beginning of
Past Q.4 Q.8 NO Q.2 NO NO Q.9 NO Q.10 Q.11 NO NO the year. 1,10,000 Equity Shares were supposed to be issued on conversion. Consider rate of Incom-
Exams eTax as 30% (MTP 5 Marks Oct’18, RTP May 20) (Same concept different figures- MTP 5 Marks Nov’21,
MTP Q.2 Q.1 Q.2 NO Q.2 Q.4 Q.3 Q.1,Q.4 Q.3,Q.4 Q.2 Q.4 Q.4 RTP Nov’19, RTP May’19, RTP Nov’22, RTP May’18)
RTP Q.1 Q.2 Q.1 Q.1 Q.1 Q.2 Q.6 Q.5 Q.7 Q.1 Q.2 NO
Answer 1
Computation of basic earnings per share
Net profit for the current year / Weighted average number of equity shares outstanding during the
year Rs. 75,00,000 / 10,00,000 = Rs. 7.50 per share
Computation of diluted earnings per share
Adjusted net profit for the current year
Rs.
Net profit for the current year 75,00,000
Add: Interest expense for the current year 8,00,000
Less: Tax relating to interest expense (30% of Rs.8,00,000) (2,40,000)
Adjusted net profit for the current year 80,60,000
Number of equity shares resulting from conversion of debentures
= 1,10,000 Equity shares (given in the Question)
Weighted average number of equity shares used to compute diluted earnings per share
= 11,10,000 shares (10,00,000 + 1,10,000)
Diluted earnings per share
= Rs. 80,60,000/ 11,10,000
= Rs. 7.26 per share
Note: Conversion of convertible debentures into Equity Share will be dilutive potential equity shares.
Hence, to compute the adjusted profit the interest paid on such debentures will be added back as the
same would not be payable in case these are converted into equity shares.
Question 2
From the following information, you are required to compute the basic and adjusted Earnings per
share:
Net profit for 2015-16 11 lakh

Question 3
Net profit for 2016-17 15 lakh
No. of shares issued before rights issue 5 lakhs Explain the concept of ‘weighted average number of equity shares outstanding during the period’.
Also compute, based on AS 20, the weighted average number of equity shares in the following case:
Right issue One for every 5 held (MTP 5 Marks April 21, April 22)
Right issue price 15 per share
No. of shares
Last date of exercising right option 1-06-2016
1st April, 2020 Balance of equity shares 7,20,000
Fair value of shares before right issue 21 per share
31st August, 2020 Equity shares issued for cash 2,40,000
(MTP 5 Marks- Mar’19, Mar’18) (Same concept different figures MTP 5 Marks May’20, MTP 5 Marks
1st February, 2021 Equity shares bought back 1,20,000
Sep’22, RTP Nov’20, RTP Nov’18, May’23, PYP 5 Marks Nov’19, Old & New SM)
31st March, 2021 Balance of equity shares 8,40,000
Answer 2
Answer 3
As per AS 20, “Earnings Per Share”, the weighted average number of equity shares outstanding during
the period reflects the fact that the amount of shareholders’ capital may have varied during the period
as a result of a larger or less number of shares outstanding at any time. For the purpose of calculating
basic earnings per share, the number of equity shares should be the weighted average number of eq-
uity shares outstanding during the period.
Weighted average number of equity shares:
7,20,000 X 5/12 = 3,00,000 shares

9,60,000 X 5/12 = 4,00,000 shares
8,40,000 X 2/12 = 1,40,000 shares
= 8,40,000 shares
Question 4
On 1st April, 2021 a company had 6,00,000 equity shares of Rs. 10 each (Rs. 5 paid up by all share-
holders). On 1st September, 2019 the remaining Rs. 5 was called up and paid by all shareholders ex-
cept one shareholder having 60,000 equity shares. The net profit for the year ended 31st March, 2022
was Rs. 21,96,000 after considering dividend on preference shares and dividend distribution tax on
such dividend totaling to Rs. 3,40,000. You are required to compute Basic EPS for the year ended 31st
March, 2022 as per Accounting Standard 20 “Earnings Per Share”. (MTP 5 Marks Mar’22, Oct ‘20& Oct
’21, March ’23 & Oct ‘23, PYP 5 Marks, May ’18, Old & New SM)
Answer 4
Working Note:
Calculation of weighted average number of equity shares
As per AS 20 ‘Earnings Per Share’, partly paid equity shares are treated as a fraction of equity share to (vi) Equity Shares issued as consideration for the acquisition of an asset other than in cash. (RTP
the extent that they were entitled to participate in dividend relative to a fully paid equity share during the May ‘21) (New SM)
reporting period. Assuming that the partly paid shares are entitled to participate in the dividend to the
extent of amount paid, weighted average number of shares will be calculated as follows: Answer 6
The following dates should be considered for consideration of weights for the purpose of
Date No. of equity shares Amount paid per Weighted average no. of equity shares
calculation of weighted average number of shares in the given situations:
share
Rs. Rs. Rs. (i) Date of Cash receivable
1.4.2020 6,00,000 5 6,00,000 х 5/10 х 5/12 = 1,25,000 (ii) Date of conversion
1.9.2020 5,40,000 10 5,40,000 х 7/12 = 3,15,000 (iii) Date on which settlement becomes effective
1.9.2020 60,000 5 60,000 х 5/10 х 7/12 = 17,500 (iv) When the services are rendered
Total weighted 4,57,500 (v) Date when interest ceases to accrue
average equity (vi) Date on which the acquisition is recognized.
shares
Question 7
Question 5
a) Stock options have been granted by AB Limited to its employees and they vest equally over
AB Limited is a company engaged in manufacturing industrial packaging equipment. As per the terms
5 years, i.e., 20 per cent at the end of each year from the date of grant. The options will vest
of an agreement entered with its debenture holders, the company is required to appropriate adequate
only if the employee is still employed with the company at the end of the year. If the employ-
portion of its profits to a specific reserve over the period of maturity of the debentures such that, at the
ee leaves the company during the vesting period, the options that have vested can be exer-
redemption date, the reserve constitutes at least half the value of such debentures. As such appropri-
cised, while the others would lapse. Currently, AB Limited includes only the vested options for
ations are not available for distribution to the equity shareholders, AB Limited has excluded this from
calculating Diluted EPS. Should only completely vested options be included for computation of
the numerator in the computation of Basic EPS. Is this treatment correct as per provisions of AS 20? (RTP
Diluted EPS? Is this in accordance with the provisions of AS 20? Explain.
Nov 21)
b) X Limited, as at March 31, 2021, has income from continuing ordinary operations of Rs. 2,40,000,
Answer 5 a loss from discontinuing operations of Rs. 3,60,000 and accordingly a net loss of Rs. 1,20,000.
The Company has 1,000 equity shares and 200 potential equity shares outstanding as at
The appropriation made to such a mandatory reserve created for the redemption of debentures would
March 31, 2021. You are required to compute Basic and Diluted EPS? (RTP May 22)
be included in the net profit attributable to equity shareholders for the computation of Basic EPS. AS 20
states that “For the purpose of calculating basic earnings per share, the net profit or loss for the period at- Answer 7
tributable to equity shareholders should be the net profit or loss for the period after deducting preference
dividends and any attributable tax thereto for the period”; With an emphasison the phrase attributable a) The current method of calculating Diluted EPS adopted by AB limited is not in accordance with
to equity shareholders, it may be construed that such amounts appropriated to mandatory reserves, AS 20. The calculation of Diluted EPS should include all potential equity shares, i.e., all the stock
though not available for distribution as dividend, are still attributable to equity shareholders. Accordingly, options granted at the balance sheet date, which are dilutive in nature, irrespective of the vest-
these amounts should be included in the computation of Basic EPS. In view of this, the treatment made ing pattern. The options that have lapsed during the year should be included for the portion of the
by the company is not correct. period the same wereoutstanding, pursuant to the requirement of the standard.
AS 20 states that “A potential equity share is a financial instrument or other contract that entitles,
Question 6 or may entitle, its holder to equity shares”; Options including employee stock option plans under
which employees of an enterprise are entitled to receive equity shares as part of their remuner-
In the following list of shares issued, for the purpose of calculation of weighted average number of ation and other similar plans are examples of potential equity shares. Further, for the purpose of
shares, from which date, weight is to be considered: calculating diluted 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
(i) Equity Shares issued in exchange of cash,
be adjusted for the effects of all dilutive potential equity shares.
(ii) Equity Shares issued as a result of conversion of a debt instrument,
b) As per AS 20 “Potential equity shares should be treated as dilutive when, and only when, their
(iii) Equity Shares issued in exchange for the settlement of a liability of the enterprise, conversion to equity shares would decrease net profit per share from continuing ordinary op-
(iv) Equity Shares issued for rendering of services to the enterprise, erations”;As income from continuing ordinary operations, Rs. 2,40,000 would be considered and
not Rs. (1,20,000), for ascertaining whether 200 potential equity shares are dilutive or anti−dilutive.
(v) Equity Shares issued in lieu of interest and/or principal of another financial instrument, Accordingly, 200 potential equity shares would be dilutive potential equity shares since their in-
clusion would decrease the net profit per share from continuing ordinary operations from Rs. 240
to Rs. 200. Thus the basic E.P.S would be Rs. (120) and diluted E.P.S. would be Rs. (100).
(iv) Each debenture is convertible into 8 Equity Shares

Question 8
(v) Tax relating to interest expenses 35%
From the following information given by Sampark Ltd., Calculate Basis EPS and Diluted EPS as per AS20:
Rs. (PYP 5 Marks Dec’21)
Net Profit for the current year 2,50,00,000 Answer 9

No. of Equity Shares Outstanding 50,00,000
In calculating diluted earnings per share, effect is given to all dilutive potential equity shares that were
No. of 12% convertible debentures of ₹ 100 each 50,000 outstanding during the period;” As per AS 20 ‘Earnings per Share’, the net profit or loss for the period at-
tributable to equity shareholders and the weighted average number of shares outstanding* during the
Each debenture is convertible into 8 Equity Shares
period should be adjusted for the effects of all dilutive potential equity shares for the purpose of calcu-
Interest expense for the current year 6,00,000 lation of diluted earnings per share. Basic EPS for the year 2020−21= 64,12,500/15,00,000 = ₹ 4;275or ₹ 4;28
Tax saving relating to interest expense (30%) 1,80,000 Computation of diluted earnings per share for year 2020-21
(PYP 5 Marks Nov’18)
Answer 8
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) 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%)
*Weighted average number of equity shares outstanding during the period is increased by the weighted
average number of additional equity shares which would have been outstanding assuming the conver-
sion of all dilutive potential equity shares.
Question 10
NAT, a listed entity, as on 1st April,2021 had the following capital structure:
Question 9
₹
“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 10,00,000 Equity Shares having face value of ₹ 1 each 10,00,000
per share for the year 2020-21 from the following information:
10,00,000 8% Preference Shares having face value of ₹ 10 each 1,00,00,000
(i) Net profit after tax for the year ₹ 64,12,500
During the year 2021-2022, the company had profit after tax of ₹ 90,00,000
(ii) No. of equity shares outstanding 15,00,000 On 1st January,2022, NAT made a bonus issue of one equity share for every 2 equity shares outstand-
ing as at 31st December,2021.
(iii) No. of 9% convertible debentures of ₹ 100 issued on 1st July,2020 75,000
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.
Exercise price for shares under option during the year 2022: ₹ 20.00
You are required to:
You are required to compute Basic and Diluted Earnings Per Share as per AS 20.(PYP 5 Marks Nov’22)
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. Answer 11
Explain why the bonus issue of shares and the shares issue at full market price are treated differently in
Computation of Basic earnings per share
the calculation of the basic earnings per share? (5 Marks). (PYP 5 Marks May’22)
Earnings Shares Earnings/
Answer 10 Share
I. Calculation of Basic Earnings per share for the year ended 31stMarch, 2022 including the ₹
comparative figure: ₹
Net profit for the year 2022 72,00,000
Earnings for the year ended 31st March, 2021 = EPS x Number of shares outstanding during 2020 −
Weighted average no. of shares during year 30,00,000
2021
2022 Basic earnings per share 2.40
= ₹ 62;30 x 10,00,000 equity shares
(72,00,000/30,00,000)
= ₹ 6,23,00,000
(a) Adjusted Earnings per share after taking into consideration bonus issue
Computation of Diluted earnings per share
Adjusted Basic EPS = Earnings for the year 2020−2021 / Total outstanding shares +Bonus issue
Earnings Shares Earnings/Share
= ₹ 6,23,00,000 / (10,00,000+ 5,00,000)
₹ ₹
= ₹ 6,23,00,000 / 15,00,000
Net profit for the year 2022 72,00,000
= ₹ 41;53 per share
Weighted average no. of shares during 30,00,000
(b) Basic EPS for the year 2021−2022
year 2022
Basic EPS = Total Earnings – Preference Shares Dividend) / (Total shares outstanding at thebeginning
+ Bonus issue + weighted average of the shares issued in January, 2022) Number of shares under option 6,00,000
= (₹ 90,00,000 – ₹ (1,00,00,000 x 8%) / (10,00,000 + 5,00,000 + (2,00,000 x 3/12)) Number of shares that would have been
= ₹ 82,00,000 / 15,50,000 shares issued at fair value
= ₹ 5;29 per share (6,00,000 x 20.00)/25.00 (4,80,000)
II. In case of a bonus issue, equity shares are issued to existing shareholders for no additional Diluted earnings per share 72,00,000 31,20,000 2.31
consideration. Therefore, the number of equity shares outstanding is increased without an in- (rounded−off)
crease in resources. Since the bonus issue is an issue without consideration, the issue is treated
as if it had occurred prior to the beginning of the year 2021, the earliest period reported. 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
However, the share issued at full market price does not carry any bonus element and usually
consideration.
results in a proportionate change in the resources available to the enterprise. Therefore, it is
taken into consideration from the time it has been issued i.e. the time− weighting factor is con- To the extent that partly paid shares are not entitled to participate in dividends during the reporting
sidered based on the specific shares outstanding as a proportion of the total number of days period they are considered the equivalent of options.
in the period.
Question 11
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
Working Notes:
Question 12
Net Profit for FY 2021-22 30,00,000
Net Profit for FY 2022-23 50,00,000
No. of shares outstanding prior to rights issue 20,00,000 shares Rights Issue Price ₹ 20
Last day to exercise rights 1st June, 2022
Right issue is one new share for each five equity share outstanding (i.e. 4,00,000 new shares)
Fair value of one equity share immediately prior to exercise of rights on 1st June, 2022 was ₹ 26.00.
Compute Basic Earnings Per Share for FY 2016-17, FY 2022-23 and restated EPS for FY 2021-22. (Nov ’23)
Questions 13
Answer 12
Computation of Basic Earnings Per Share (as per AS 20 Earnings Per Share) AB Company Ltd. had 1,00,000 shares of common stock outstanding on January 1. Additional 50,000
shares were issued on July 1, and 25,000 shares were re- acquired on September 1. The weighted av-
Year 2016- Year 2017- erage numberof shares outstanding during the year on Dec. 31 is
₹ 17 18
a. 1,40,000 shares b. 1,25,000 shares
₹
c. 1,16,667 shares d. 1,20,000 shares
EPS for the year 2021−22 as originally reported
= Net Profit of the year attributable to equity shareholders Ans: (c)
Questions 14
Weighted average number of equity shares outstanding during the
Year As per AS 20, potential equity shares should be treated as dilutive when, and only when, their con-
= (₹ 30,00,000 / 20,00,000 shares) 1.5 versionto equity shares would
EPS for the year 2021−22 restated for rights issue a. Decrease net profit per share b. Increase net profit per share from
= [₹ 30,00,000 / (20,00,000 shares 1.04 (W.N. 2)] 1.44 fromcontinuing ordinary opera- continuing ordinary operations.
tions.
EPS for the year 2022−23 including effects of rights issue (approx.)
c. Make no change in net profit per d. Decrease net loss per share from
₹ 50, 00, 000 share from continuing ordinary continuing ordinary operations.
(20, 00, 000 shares × 1.04 ×2 / 12) + (24,00, 000 shares × 10 / 12) operations.
2.13
₹ 50,00,000/ 23,46,667 shares
Ans: (a)
(approx.)
Questions 15
As per AS 20, equity shares which are issuable upon the satisfaction of certain conditions resulting
fromcontractual arrangements are
a. Dilutive potential equity shares b. Contingently issuable shares

c. Contractual issued shares d. Potential equity shares
Ans: (b) Answers 18

The following dates should be considered for consideration of weights for the purpose
Questions 16 of calculation of weighted average number of shares in the given cases:
In case potential equity shares have been cancelled during the year, they should be: (i) Date of Cash receivable
a. Ignored for computation of Diluted EPS. (ii) Date of conversion
b. Considered from the beginning of the year till the date they are cancelled. (iii) Date on which settlement becomes effective
c. The company needs to make an accounting policy and (iv) When the services are rendered
can follow the treatment in (a) or (b) as it decides. (v) Date when interest ceases to accrue
d. Considered for computation of diluted EPS only if the impact (vi) Date on which the acquisition is recognised.
of such potential equity shares would be material.
A Potential Equity Share is a financial instrument or other contract that entitles or may entitle its holder
to equity shares.
Ans: (b)
Questions 19
Questions 17
Partly paid up equity shares are: Stock options have been granted by AB Limited to its employees and they vest equally over 5
years,i.e., 20 per cent at the end of each year from the date of grant. The options will vest only if
a. Always considered as a part of Basic EPS. the employee is still employed with the company at the end of the year. If the employee leaves
the company during the vesting period, the options that have vested can be exercised, while the
b. Always considered as a part of Diluted EPS. otherswould lapse. Currently, AB Limited includes only the vested options for calculating Diluted
c. Depending upon the entitlement of dividend to the share- EPS.
holder, it will be considered as a part of Basic or Diluted Should only completely vested options be included for computation of Diluted EPS? Is this in ac-
EPS as the case may be. cordance with the provisions of AS 20? Explain.
d. Considered as part of Basic/ Diluted EPS depending on the
accountingpolicy of the company.
Answers 19
As per AS 20 “A potential equity share is a financial instrument or othercontract that entitles, or may en-
Ans: (c) title, its holder to equity shares”.
Theoretical Questions Answers Options including employee stock option plans under which employees of an enterprise are en-
titled to receive equity shares as part of their remuneration and other similar plans are examples of
Questions 18 potential equity shares. Further, forthe purpose of calculating diluted earnings per share, the net prof-
it or lossfor the period attributable to equity shareholders and the weighted average number of
In the following list of shares issued, for the purpose of calculation of weighted average shares outstanding duringthe period should be adjusted for the effects of all dilutive potential eq-
number ofshares, from which date weight is to be considered: uity shares.
(i) Equity Shares issued in exchange of cash, The current method of calculating Diluted EPS adopted by AB limited is notin accordance with AS
20. The calculation of Diluted EPS should include all potential equity shares, i.e., all the stock options
(ii) Equity Shares issued as a result of conversion of a debt instrument,
granted at the balance sheet date, which are dilutive in nature, irrespective of the vesting pattern.
(iii) Equity Shares issued in exchange for the settlement of a liability of the enterprise, Theoptions that have lapsed during the year should be included for the portion of the period the
(iv) Equity Shares issued for rendering of services to the enterprise, same were outstanding, pursuant to the requirement of the standard.
(v) Equity Shares issued in lieu of interest and/or principal of another financial instrument,
Questions 20
(vi) Equity Shares issued as consideration for the acquisition of an asset
other than in cash. Also define Potential Equity Share. Explain why the bonus issue of shares and the shares issue at full market price are treated different-
ly in the calculation of the basic earnings per share?
Answers 20 Adjusted/Restated Earnings per share for the year ended 31st March20X1:
In case of a bonus issue, equity shares are issued to existing shareholders for no additional consider- (after taking into consideration bonus issue)
ation. Therefore, the number of equity shares outstanding is increased without an increase in resources. Adjusted/Restated Basic EPS:
Since the bonus issue is an issue without consideration, the issue is treated as if it had occurred prior to
= Earnings for the year 20X0-20X1 / (Total outstanding shares +Bonusissue)
the beginning of the earliest period reported.
= Rs . 6,23,00,000 / (10,00,000+ 5,00,000)
However, the share issued at full market price does not carry any bonus element and usually results in a
proportionate change in the resources available to the enterprise. Therefore, it is taken into consideration = Rs . 6,23,00,000 / 15,00,000
from the time it has been issued i.e. the time- weighting factor is considered based on the specific shares
= Rs . 41.53 per share
outstanding as a proportion of the total number of days in the period.
Computation of Basic EPS for the year 20X1-20X2:
Practical Questions Answers Basic EPS = (Total Earnings – Preference Shares Dividend) / (Total shares outstanding atthe beginning
+ Bonus issue + weighted average of the shares issued in January, 20X2)
Questions 21 = (Rs. 90,00,000 – Rs. (1,00,00,000 x 8%)) / (10,00,000 + 5,00,000 + (2,00,000 x 3/12))
NAT, a listed entity, as on 1st April, 20X1 had the following capital structure: = Rs . 82,00,000 / 15,50,000 shares = Rs. 5.29 per share
ii) In case of a bonus issue, equity shares are issued to existing shareholders for no ad-
ditional consideration. Therefore, the number of equity shares outstanding is increased
Particulars ₹ without an increase in resources. Since the bonus issue is an issue without consideration,
10,00,000 Equity Shares having face value of Rs. 1 each 10,00,000 the issue is treated as if it had occurred prior to the beginning of the year 20X1, the earliest
period reported.
10,00,000 8% Preference Shares having face value of Rs. 10 each 1,00,00,000
However, the share issued at full market price does not carry any bonus element and usually results
During the year 20X1-20X2, the company had profit after tax of Rs. 90,00,000.
in a proportionate change in the resources available to the enterprise. Therefore, it is taken into
On 1st January, 20X2, NAT made a bonus issue of one equity share for every 2 equity shares outstand- consideration from the time it has been issued i.e. the time- weighting factor is considered based on the
ing as at 31st December, 20X1. specific shares outstanding as a proportion of the total number of days in the period.
On 1st January, 20X2, NAT issued 2,00,000 equity shares of Rs. 1 each at their full market price of Rs. 7.60
per share. Questions 22
NAT’s shares were trading at Rs. 8.05 per share on 31st March, 20X2.
Further it has been provided that the basic earnings per share for the year ended 31st March, 20X1 was
previously reported at Rs. 62.30.
(i) Calculate the basic earnings per share to be reported in the financial statements of NAT for
the yearended 31st March, 20X2 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 differ-
ently in the calculation of the basic earnings per share?
Answers 21
i) Computation of Basic Earnings per share for the year ended 31st March, 20X2:
(including the comparative figure)Working Note – I:
Earnings for the year ended 31st March, 20X1:
= EPS x Number of shares outstanding during 20X0-20X1
= Rs . 62.30 x 10,00,000 equity shares
= Rs . 6,23,00,000
Answers 22 Questions 23
On 1st April, 20X1 a company had 6,00,000 equity shares of Rs. 10 each (Rs. 5 paid up by all sharehold-
ers). On 1st September, 20X1 the remaining Rs. 5 was called up and paid by all shareholders except
one shareholder having 60,000 equity shares. The net profit for the year ended 31st March, 20X2 was
Rs. 21,96,000 after considering dividend on preference shares of Rs. 3,40,000.
You are required to compute Basic EPS for the year ended 31 st March, 20X2 as per Accounting Stan-
dard 20 “Earnings Per Share”.
Answers 23
Refer working note 2.

Working Note:
Calculation of weighted average number of equity shares
As per AS 20 ‘Earnings Per Share’, partly paid equity shares are treated as a fraction of equity share to
the extent that they were entitled to participate in dividend relative to a fully paid equity share duringthe
reporting period. Assuming that the partly paid shares are entitled to participate in the dividend to the
extent of amount paid, weighted average number of shares will becalculated as follows:
Date No. of Amount Weighted average no. of equityshares

equity
paid per
shares share
` `
`
1.4.20X1 6,00,000 5 6,00,000 х 5/10 х 5/12 =
1,25,000
1.9.20X1 5,40,000 10 5,40,000 х 7/12 = 3,15,000
1.9.20X1 60,000 5 60,000 х 5/10 х 7/12 = 17,500
Total weighted 4,57,500
average equity
shares
a. Equity shares issued in exchange for cash are included when cash is receivable;
Questions 24 b. Equity shares issued as a result of the conversion of a debt instrument to equity shares are
included as of the date of conversion;
No. of equity shares outstanding = 30,00,000Basic earnings per share Rs. 5.00
c. Equity shares issued in lieu of interest or principal on other financial instruments are included
No. of 12% convertible debentures of Rs. 100 each; 50,000 Each debenture is convertible into 10 as of the date interest ceases to accrue;
equity shares Tax Rate 30% Compute Diluted Earnings per Share. Working notes should form part of
the answer. d. Equity shares issued in exchange for the settlement of a liability of the enterprise are in-
cluded as of the date the settlement becomes effective;
Answers 24 e. Equity shares issued as consideration for the acquisition of an asset other than cash are in-
Earnings for the year: cluded as of the date on which the acquisition is recognised; and
= No. of Shares x Basic EPS f. Equity shares issued for the rendering of services to the enterprise are included as the
services are rendered.
= 30,00,000 shares x Rs. 5 per share = Rs. 1,50,00,000
In these and other cases, the timing of the inclusion of equity shares is determined by the spe-
cific terms and conditions attaching to their issue. Due consideration should be given to the sub-
Computation of Adjusted Net Profit: stance of any contract associated with the issue.
= Earnings for the year + Interest on debentures net of tax

= 1,50,00,000 + (6,00,000 - 1,80,000) = Rs. 1,54,20,000
Computation of Adjusted Denominator: Date Particulars No. of Shares Face Value Paid up Value
No. of equity shares resulting from conversion of debentures:
= 50,000 x 10 shares = 5,00,000 shares 1st January Balance at beginning of year 1,800 Rs. 10 Rs. 10
No. of equity shares for diluted EPS = 30,00,000 + 5,00,000 31st October Issue of Shares 600 Rs. 10 Rs. 5
= 35,00,000 shares Calculate Weighted Number of Shares.
Computation of Diluted EPS: Answers 26

= Rs. 1,54,20,000/35,00,000 shares = Rs. 4.4 per share.
Assuming that partly paid shares are entitled to participate in the dividend to the extent of amount
paid, number of partly paid equity shares would be taken as 300for the purpose of calculation of
Question 25 (Illustration) earnings per share.
Computation of weighted average would be as follows:

Date Particulars Balance
(1,800 x 12/12) + (300 x 2/12) = 1,850 shares.
1st January Balance at beginning of year 1,800 - 1,800
Where an enterprise has equity shares of different nominal values but with the same dividend rights, the
31st May Issue of shares for cash 600 - 2,400 number of equity shares is calculated by converting all such equity shares into equivalent number
1st November Buy Back of shares - 300 2,100 of shares of the same nominal value.
Calculate Weighted Number of Shares. Contingently Issuable Shares
Equity shares which are issuable upon the satisfaction of certain conditions resulting from con-
Answers 25 tractual arrangements (contingently issuable shares) are considered outstanding, and included in the
Computation of Weighted Average: computation of basic earnings per share from the date when all necessary conditions under the
contract have been satisfied.
(1,800 x 5/12) + (2,400 x 5/12) + (2,100 x 2/12) = 2,100 shares.
Bonus Issue, Share split and Right issue
Equity shares may be issued, or the number of shares outstanding may be reduced, without a cor-
The weighted average number of shares can alternatively be computed as follows: (1,800 x12/12) + (600
responding change in resources. Examples include:
x 7/12) - (300 x 2/12) = 2,100 shares
a. A bonus issue;
In most cases, shares are included in the weighted average number of shares from the date the
consideration is receivable, for example: b. A bonus element in any other issue, for example a bonus element in a
rights issue to existing shareholders; Fair value per share immediately prior to the exercise of rights / Theoretical ex − rights fair value per
share
c. A share split; and
The theoretical ex-rights fair value per share is calculated by adding the aggregate fair value of the
d. A reverse share split (consolidation of shares).
shares immediately prior to the exercise of the rights to the proceeds from the exercise of the rights, and
In case of a bonus issue or a share split, equity shares are issued to existing shareholders for no ad- dividing by the number of shares outstanding after the exercise of the rights.
ditional consideration. Therefore, the number of equity shares outstanding is increased without an
increase in resources. The number of equity shares outstanding before the event is adjusted for the
proportionatechange in the number of equity shares outstanding as if the event had occurred at the
beginning of the earliest period reported means along with the impact to current year adjustment, it
will also impact the calculation of EPS of last year retrospectively. Net profit for the year 20X1 ₹ 11,00,000
For example, upon a two-for-one bonus issue, the number of shares outstanding prior to the issue is Net profit for the year 20X2 ₹ 15,00,000
multiplied by a factor of three to obtain the new total number of shares, or by a factor of two to obtain 15,00,000 No. of shares outstanding prior to rights issue 5,00,000 share
the number of additional shares.
Rights issue price
₹ 15.00
Last date to exercise rights 1st March 20 X 2
Net profit for the year 20X1 18,00,000 Rights issue is one new share for each five outstanding (i.e. 1,00,000 new shares) Fair value of one
equity share immediately prior to exercise of rights on 1st March 20X2 was Rs. 21.00. Compute Basic
Net profit for the year 20X2 60,00,000 Earnings Per Share.
No. of equity shares outstanding until 30th September 20X2 20,00,000
Answers 28
Bonus issue 1st October 20X2 was 2 equity shares for each equity share outstanding at
30th September, 20X2
Calculate Basic Earnings Per Share.
Answers 27
Adjusted earnings per share for the year 20X1 (20,00,000+40,00,000) = ₹ 0.30
Computation of earnings per share:
Since the bonus issue is an issue without consideration, the issue is treated as if it had occurred prior
EPS for the year 20X1 as originally reported: Rs. 11,00,000/5,00,000 shares = Rs. 2.20 EPS for the year
to the beginning of the year 20X1, the earliest period reported.
20X1
The issue of equity shares at the time of exercise or conversion of potential equity shares will not usu-
restated for rights issue: Rs. 11,00,000/ (5,00,000 shares x 1.05) = Rs. 2.10
ally give rise to a bonus element, since the potential equity shares will usually have been issued for
full value, resulting in a proportionate change in the resources available to the enterprise. In a rights EPS for the year 20X2 including effects of rights issue:
issue, on the other hand, the exercise price is often less than the fair value of the shares. Therefore, a
(5,00,000 x 1.05 x 2/12) + (6,00,000 x 10/12) = 5,87,500 sharesEPS = 15,00,000/5,87,500 = 2.55
rights issue usually includes a bonus element.
[Thus, it may be noted that if a company makes a right issue at fair value itself, then there will be no bonus Question 29 (Illustration)
element in the right issue].
The number of equity shares to be used in calculating basic earnings per share for all periods prior to
Net profit for the current year Rs. 1,00,00,000
therights issue is the number of equity shares outstanding prior to the issue, multiplied by the follow-
ing adjustment factor: No. of equity shares outstanding 50,00,000
The earnings have not been increased as the total number of shares has been increased only by the
Basic earnings per share Rs. 2.00 number of shares (25,000) deemed for the purpose of the computation to have been issued for no
consideration.
No. of 12% convertible debentures of Rs. 100 each 1,00,000
Each debenture is convertible into 10 equity shares
Interest expense for the current year Rs. 12,00,000
Tax relating to interest expense (30%) Rs. 3,60,000 X Limited, during the year ended March 31, 20X1, has income from continuing ordinary operations
of Rs. 2,40,000, a loss from discontinuing operations of Rs. 3,60,000 and accordingly a net loss of
Compute Diluted Earnings Per Share. Rs. 1,20,000. The Company has 1,000 equity shares and 200 potential equity shares outstanding
as at March 31, 20X1.
Answers 29
You are required to compute Basic and Diluted EPS?
Adjusted net profit for the current year (1,00,00,000 + 12,00,000 – 3,60,000) = Rs. 1,08,40,000
No. of equity shares resulting from conversion of debentures: 10,00,000 Shares No. of equity shares used
Answers 31
to compute diluted EPS: (50,00,000 + 10,00,000) As per AS 20 “Potential equity shares should be treated as dilutive when, and only when, their conversion
= 60,00,000 Shares to equity shares would decrease net profit per share from continuing ordinary operations”.
Diluted earnings per share: (1,08,40,000/60,00,000) = Rs. 1.81 As income from continuing ordinary operations, Rs. 2,40,000 would be considered and not Rs. (1,20,000),
for ascertaining whether 200 potential equity shares are dilutive or anti-dilutive. Accordingly, 200 po-
Question 30 (Illustration) tential equity shares would be dilutive potential equity shares since their inclusion would decrease
the net profit per share from continuing ordinary operations from Rs. 240 to Rs. 200. Thus, the basic E.P.S
would be Rs. (120) and diluted E.P.S. would be Rs. (100).
Net profit for the year 20X1 Rs. 12,00,000
In case there are more than 1 potential equity shares:
Weighted average number of equity shares outstanding during the year 20X1 5,00,000
shares In considering whether potential equity shares are dilutive or antidilutive, each issue or series of
potential equity shares is considered separately rather than in aggregate. The sequence in which
Average fair value of one equity share during the year 20X1 Rs. 20.00 potential equity shares are considered may affect whether or not they are dilutive. Therefore, in
order to maximise the dilution of basic earnings per share, each issue or series of potential equity
Weighted average number of shares under option during the year 20X1 1,00,000 shares shares is considered in sequence from the most dilutive to the least dilutive. For the purpose of de-
termining thesequence from most dilutive to least dilutive potential equity shares, the earnings per
Exercise price for shares under option during the year 20X1 Rs. 15.00 incremental potential equity share is calculated. Where the earnings per incremental share is the least,
the potential equity share is considered most dilutive and vice-versa.
Compute Basic and Diluted Earnings Per Share.
Answers 30
Computation of earnings per share
Earnings ` Shares Earnings/Share `

Net profit for the year 20X1 12,00,000
Weighted average no. of shares duringyear 20X1 5,00,000
Basic earnings per share 2.40
Number of shares under option 1,00,000
Number of shares that would havebeen issued at
fair value (100,000 x 15.00)/20.00
(75,000)
Diluted earnings per share 12,00,000 5,25,000 2.29
Note:
Chapter 4.6
AS 24- Discontinuing Operations
Chapter 4.6
Attempts MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV AS 24- Discontinuing Operations
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
Study
Q.8 TO Q.14 Question 1
Mat.
Past NO Q.4 NO NO NO NO NO Q.7 NO NO NO NO (i) What are the disclosure and presentation requirements of AS 24 for discontinuing opera-
tions? (RTP May 20, May 22, Old & New SM)
Exams
MTP NO Q.6 Q.6 NO NO NO NO NO NO NO NO NO
(ii) Give four examples of activities that do not necessarily satisfy criterion (a) of paragraph 3
of AS 24,but that might do so in combination with other circumstances. (RTP May 20, Nov 18,
RTP Q.6 Q.1 NO NO Q.1 Q.4 Q.7 Q.3 Q.1 Q.5 Q.6 NO May 22, Old &New SM)
Answer 1
(i) An enterprise should include prescribed information relating to a discontinuing operation in its
financial statements beginning with the financial statements for the period in which the initial
disclosure event (as defined in paragraph 15) occurs
INITIAL DISCLOSURE
An enterprise should include the following information relating to a discontinuing operation in its
financial statements beginning with the financial statements for the period in which the initial
disclosure event occurs:
a. A description of the discontinuing operation(s)

b. The business or geographical segment(s) in which it is reported as per AS 17
c. The date and nature of the initial disclosure event.
d. The date or period in which the discontinuance is expected to be completed if known or deter-
minable
e. The carrying amounts, as of the balance sheet date, of the total assets to be disposed of and
the total liabilities to be settled
f. The amounts of revenue and expenses in respect of the ordinary activities attributable to the
discontinuing operation during the current financial reporting period
g. The amount of pre−tax profit or loss from ordinary activities attributable to the discontinuing
operation during the current financial reporting period, and the income tax expense related
thereto
h. The amounts of net cash flows attributable to the operating, investing, and financing activ-
ities ofthe discontinuing operation during the current financial reporting period
DISCLOSURES OTHER THAN INITIAL DISCLOSURES NOTE
All the disclosures above should be presented in the notes to the financial statements except for
amounts pertaining to pre−tax profit/loss of the discontinuing operation and the income tax
expense thereon (second last bullet above) which should be shown on the face of the statement
of profit and loss.
Other disclosures
When an enterprise disposes of assets or settles liabilities attributable to a discontinuing op-
eration or enters into binding agreements for the sale of such assets or the settlement of
such liabilities, it should include, in its financial statements, the following information when
the events occur: Questions 2
a. For any gain or loss that is recognized on the disposal of assets or settlement of liabilities
attributable to the discontinuing operation, (i) the amount of the pre−tax gain or loss and Rohini Limited is in the business of manufacture of passenger cars and commercial vehicles. The
(ii) income tax expense relating to the gain or loss and 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
b. The net selling price or range of prices (which is after deducting expected disposal costs) sale of neither the division nor its assets. As part of its prospective plan it will reduce the production of
of those net assets for which the enterprise has entered into one or more binding sale passenger cars by 20% annually. It also plans to establish another new factory for the manufacture of
agreements, the expected timing of receipt of those cash flows and the carrying amount of commercial vehicles and transfer surplus employees in a phased manner.
those net assets on the balance sheet date. You are required to comment:
Updating the disclosures (i) If mere gradual phasing out in itself can be considered as a ‘discontinuing operation’
In addition to these disclosures, an enterprise should include, in its financial statements, for within the meaning of AS-24.
periods
(ii) If the Company passes a resolution to sell some of the assets in the passenger car division
subsequent to the one in which the initial disclosure event occurs, a description of any sig- and also to transfer few other assets of the passenger car division to the new factory, does
nificant changes in the amount or timing of cash flows relating to the assets to be disposed this trigger the application of AS-24?
or liabilities to be settled and the events causing those changes.
(iii) Would your answer to (ii) above be different if the Company resolves tosell the assets of
The disclosures should continue in financial statements for periods up to and including the the passenger car division in a phased but time bound manner? (New SM)
period in which the discontinuance is completed. Discontinuance is completed when the
plan is substantially completed or abandoned, though full payments from the buyer(s) may Answers 2
not yet have been received. If an enterprise abandons or withdraws from a plan that was
(i) A discontinuing operation is a component of an enterprise:
previously reported as a discontinuing operation, that fact, reasons therefore and its effect
should be disclosed. (a) that the enterprise, pursuant to a single plan, is:
Separate disclosure for each discontinuing operation Any disclosures required by AS 24 i) disposing of substantially in its entirety, such as by sellingthe component in a single
should be presented separately for each discontinuing operation. transaction or by demerger or spin−off of ownership of the component to the en-
Presentation of the required disclosures terprise’s shareholders; or
The above disclosures should be presented in the notes to the financial statements except the ii) disposing of piecemeal, such as by selling off the component’s assets and settling
following which should be shown on the face of the statement of profit and loss: its liabilities individually; or
a. The amount of pre−tax profit or loss from ordinary activities attributable to the discontin- iii) terminating through abandonment; and
uing operation during the current financial reporting period, and the income tax expense
(b) that represents a separate major line of business or geographical area of operations; and
related thereto and
(c) that can be distinguished operationally and for financial reporting purposes.
b. The amount of the pre−tax gain or loss recognized on the disposal of assets or settle-
ment of liabilities attributable to the discontinuing operation. Mere gradual phasing out is not considered as discontinuing operation as defined under
AS 24,
(ii) Para 3 of AS 24 “Discontinuing Operations” explains the criteria for determination of discon-
tinuing operations. ‘Discontinuing Operations’;
Examples of activities that do not necessarily satisfy criterion (a) of the definition, but that Examples of activities that do not necessarily satisfy criterion of thedefinition, but that might do
might do so in combination with other circumstances, include: so in combination with other circumstances, include:
a. Gradual or evolutionary phasing out of a product line or class of service. i) Gradual or evolutionary phasing out of a product line or class of service;
b. Discontinuing, even if relatively abruptly, several products within an ongoing line of business. ii) Shifting of some production or marketing activities for a particular line of business from
one location to another; and
c. Shifting of some production or marketing activities for a particular line of business
from one location to another and iii) 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 compa-
d. Closing of a facility to achieve productivity improvements or other cost savings. nies’ strategic plan has no final approval from the board through a resolution and there
isno 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 proposals were passed through a resolution to the b. That represents a separate major line of business or geographical area of operations.
new factory, but the closure road map and new segment starting roadmap are missing.
c. That can be distinguished operationally and for financial reporting purposes.
Hence AS 24 will not be applicable and it cannot be considered as Discontinuing operations.
An enterprise should include the following information relating to a discontinuing operation
(iii) Yes, phased and time bound program resolved in the board clearly indicates the closure in its financial statements beginning with the financial statements for the period in which the
of the passenger car segment in a definite time frame and will constitute a clear roadmap. initial disclosure event occurs:
Hence this action will attract compliance of AS 24 and it will be considered as Discontinu-
A description of the discontinuing operation(s);
ing Operations as per AS−24.
The business or geographical segment(s) in which it is reported as per AS 17;
Question 3
The date and nature of the initial disclosure event.
What are discontinuing operations as per AS 24? Should an enterprise include prescribed
informationrelating to a discontinuing operation in its financial statements? (RTP Nov ‘21) The date or period in which the discontinuance is expected to be completed if known or
determinable,
Answer 3
The carrying amounts, as of the balance sheet date, of the total assets to be disposed of and
A discontinuing operation is a component of an enterprise:
the total liabilities to be settled;
a. That the enterprise, pursuant to a single plan, is:
The amounts of revenue and expenses in respect of the ordinary activities attributable to
(i) Disposing of substantially in its entirety, such as by selling the component in a single
the discontinuing operation during the current financial reporting period;
transactionor by demerger or spin−off of ownership of the component to the enterprise’s
shareholders or The amount of pre−tax profit or loss from ordinary activities attributable to the discontinuing
(ii) Disposing of piecemeal, such as by selling off the component’s assets and settling its operation during the current financial reporting period, and the income tax expense related
liabilities individually or thereto;
(iii) Terminating through abandonment and The amounts of net cash flows attributable to the operating, investing, and financing activi-
b. That represents a separate major line of business or geographical area of operations. ties of the discontinuing operation during the current financial reporting period.
c. That can be distinguished operationally and for financial reporting purposes.

An enterprise should include prescribed information relating to a discontinuing operation in its
Question 5
financial statements, as per requirements of AS 24, beginning with the financial statements for
the period in which the initial disclosure event occurs.
What is the disclosure requirement in interim financial reports as per AS 24 for discontinuing
operations? (RTP Nov’22)
Question 4
Answer 5
What do you understand by Discontinuing Operations? What are the disclosure and pres-
Disclosure in interim financial reports
entationrequirements of AS 24 for discontinuing operations? Explain in brief. (RTP Nov 20, PYP 5
Marks Nov’18) Disclosures in an interim financial report in respect of a discontinuing operation should be made
in accordance with AS 25, ‘Interim Financial Reporting’, including:
Answer 4
As per AS 24 “Discontinuing Operations”, a discontinuing operation is a component of an en- Any significant activities or events since the end of the most recent annual reporting period
terprise: relating to a discontinuing operation and
a. That the enterprise, pursuant to a single plan, is: Any significant changes in the amount or timing of cash flows relating to the assets to be disposed
or liabilities to be settled.
(i) Disposing of substantially in its entirety, such as by selling the component in a sin-
gle 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 Question 6
liabilities individually or
A consumer goods producer has changed the product line as follows:
(iii) Terminating through abandonment and
ufacture of commercial vehicles and transfer surplus employees in a phased manner. You are required
Dish washing Bar Clothes washing
to comment:
Bar
(Per month) (Per month) If mere gradual phasing out in itself can be considered as a ‘discontinuing operation’ within the
meaning of AS-24.
January 2021 - September 2021 2,00,000 2,00,000
October 2021 - December 2021 1,00,000 3,00,000 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
January 2022 - March 2022 Nil 4,00,000
the application of AS-24?
The company has enforced a gradual enforcement of change in product line on the basis of an over-
all plan. The Board of Directors has passed a resolution in March 2021 to this effect. The company Would your answer to the above be different if the Company resolves to sell the assets of the
followscalendar year as its accounting year. passenger car division in a phased but time bound manner? (PYP 5 Marks July 21) (Same concept
You required to advise the company whether it should be treated as discontinuing operation or not lesser adjustments RTP May’21)
as per AS 24? (RTP May ’23, MTP 5 Marks Apr’19, Aug’18, RTP May’18)
Answer 7
Answer 6 As per AS 24, a discontinuing operation is a component of an enterprise:
As per AS 24 ‘Discontinuing Operations’, 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
(i) that the enterprise, pursuant to a single plan, is:
transaction or by demerger or spin−off of ownership of the component to the enter-
(1) disposing of substantially in its entirety, prise’s shareholders;
(2) disposing of piecemeal, or or
(3) terminating through abandonment; and (ii) disposing of piecemeal, such as by selling off the component’s assets and settling its
(ii) that represents a separate major line of business or geographical area of operations; and liabilities individually; or
(iii) that can be distinguished operationally and for financial reporting purposes. (iii) terminating through abandonment; and
As per provisions of the standard, business enterprises frequently close facilities, abandon products (b) that represents a separate major line of business or geographical area of operations; and
oreven product lines, and change the size of their work force in response to market forces. While those (c) that can be distinguished operationally and for financial reporting purposes.
kinds of terminations generally are not, in themselves, discontinuing operations, they can occur in
Mere gradual phasing out is not considered as discontinuing operation as defined under AS 24, ‘Discon-
connection with a discontinuing operation. Examples of activities that do not necessarily satisfy cri-
tinuing Operations’; Examples of activities that do not necessarily satisfy criterion of the definition, but that
terion of discontinuing operation are gradual or evolutionary phasing out of a product line or class of
might do so in combination with other circumstances, include:
service, discontinuing, even if relatively abruptly, several products within an ongoing line of business;
(a) Gradual or evolutionary phasing out of a product line or class of service;
In the given case, the company has enforced a gradual enforcement of change in product line and does
not represent a separate major line of business and hence is not a discontinued operation. If it were a (b) Shifting of some production or marketing activities for a particular line of busi-
discontinuing operation, the initial disclosure event is the occurrence of one of the following, whichever ness from one location to another; and
occurs earlier:
(c) Closing of a facility to achieve productivity improvements or other cost savings. In this
the enterprise has entered into a binding sale agreement for substantially all of the assets at- case, it cannot be considered as Discontinuing Operation as per AS−24 as the and there
tributable to the discontinuing operation; or 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.
the enterprises board of directors or similar governing body has both approved a detailed, formal (ii) No, the resolution is salient about stoppage of the Car segment in definite time period. Though,
plan for discontinuance and made an announcement of the plan. saleof some assets and some transfer proposals 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 operations.

Question 7
(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.
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 Hence, this action will attract compliance of AS 24 and it will be considered as Discontinuing
only commercial vehicles over the coming 5 years. However, no specific plans have been drawn up Operations as per AS−24.
for sale of neither the division nor its assets. As part of its prospective plan it will reduce the produc-
tion of passenger cars by 20% annually. It also plans to establish another new factory for the man-
Question 8 Ans: (c)

AB decided to dispose of its Clothing division as part of its long-term strategy.
Question 11
a. Date of Board approval - 1st March b. Date of formal announcement
20X1; made to affected parties - 15th Identify the incorrect statement.
March 20X1 e. Discontinuing operations are infrequent events, but this does not meanthat all infrequent
c. Date of Binding Sale agreement – d. Reporting date – 31st March 20X1 events are discontinuing operations.
1st July 20X1; f. The fact that a disposal of a component of an enterprise is classified as a discontinuing
operation under AS 24 would always raise a question regarding the enterprise’s ability to
The date of initial disclosure event would be: continue as a going concern.
g. For recognising and measuring the effect of discontinuing operations, AS 24 does not provide
a. 1st March 20X1 b. 15th March 20X1 any guidelines, but for the purpose the relevantAccounting Standards should be referred.
c. 31st March 20X1 d. 31st July 20X1 h. An enterprise shall include a description of the discontinuing operation,in its financial
statements beginning with the financial statements for the period in which the initial dis-
Ans: (b) closure event occurs.
Question 9 Ans: (b)
To qualify as a component that can be distinguished operationally and for financial reporting pur- Theoretical Questions Answers
poses,the condition(s) to be met is (are):
Questions 12
a. The operating assets and lia- b. Its revenue can be directly attribut-
bilities of the component can be ed to it. (ii) What are the disclosure and presentation requirements of AS 24 for discontinuing operations?
directly attributed to it.
(iii) Give four examples of activities that do not necessarily satisfy criterion (a) of
c. At least a majority of its operating d. All of the above paragraph 3 of AS 24, but that might do so in combination with other circum-
expenses can be directly attribut- stances.
ed to it.
Ans: (d) Answers 12

An enterprise should include prescribed information relating to a discontinuing operation in its fi-
Question 10 nancial statements beginning with the financial statements for the period in which the initial disclosure
event (as defined in paragraph 15 of AS 24) occurs. For details, please refer Section 6.5 of this Chapter
Identify which of the following statements is incorrect? above.
a. A discontinuing operation is a component of an enterprise that representsa separate (ii) Examples of activities that do not necessarily satisfy criterion (a) of the definition, but that
major line of business or geographical area of operations. might do so in combination with other circumstances, include:
(a) Gradual or evolutionary phasing out of a product line or class ofservice;
b. A discontinuing operation is a component of an enterprise that can be distinguished
operationally and for financial reporting purposes. (b) Discontinuing, even if relatively abruptly, several products withinan ongoing line of
business;
c. A discontinuing operation is a component of an enterprise that may ormay not be
distinguished operationally and for financial reporting purposes. (c) Shifting of some production or marketing activities for a particularline of business from
one location to another; and
d. A discontinuing operation may be disposed of in its entirety or piecemeal, but always pur-
suant to an overall plan to discontinue the entire component. (d) Closing of a facility to achieve productivity improvements or other cost savings.
Questions 13
What are the initial disclosure requirements of AS 24 for discontinuing operations?
Answers 13 single transaction or by demerger or spin-off of ownership of the component to

the enterprise’s shareholders; or
An enterprise should include the following information relating to a discontinuing operation in
its financial statements beginning with the financial statements for the period in which the initial ii) disposing of piecemeal, such as by selling off the component’s assets and settling
disclosure event occurs: its liabilities individually; or
(a) A description of the discontinuing operation(s) iii) terminating through abandonment; and
(b) The business or geographical segment(s) in which it is reported as per AS 17. (b) that represents a separate major line of business or geographical area of operations;
and
(c) The date and nature of the initial disclosure event.
(c) that can be distinguished operationally and for financial reporting purposes.
(d) The date or period in which the discontinuance is expected to be completed if known or
determinable Mere gradual phasing out is not considered as discontinuing operation as defined un-
der AS 24,
(e) The carrying amounts, as of the balance sheet date, of the total assets to be disposed
of and the total liabilities to be settled. ‘Discontinuing Operations’.
(f) The amounts of revenue and expenses in respect of the ordinary activities attributable Examples of activities that do not necessarily satisfy criterion of thedefinition, but that
to the discontinuing operation during the current financial reporting period. might do so in combination with other circumstances, include:
(g) The amount of pre-tax profit or loss from ordinary activities attributable to the discontin- i) Gradual or evolutionary phasing out of a product line or class of service;
uing operation during the current financial reportingperiod, and the income tax expense ii) Shifting of some production or marketing activities for a particular line of business
related thereto. from one location to another; and
(h) The amounts of net cash flows attributable to the operating, investing, and financing activ- iii) Closing of a facility to achieve productivity improvements or other cost savings. In
ities of the discontinuing operation during the current financial reporting period. this case, it cannot be considered as Discontinuing Operation as per AS-24 as the
companies’ strategic plan has no final approval from the board through a resolution
and there isno 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.
Questions 14
(ii) No, the resolution is silent about stoppage of the Car segment in definite time period.
Rohini Limited is in the business of manufacture of passenger cars and commercial vehicles. The Though, sale of some assets and some transfer proposal were passed through a resolution to
Company is working on a strategic plan to close the production of passenger cars and to produce the new factory, but the closure road map and new segment starting roadmap are missing.
only commercial vehicles over the coming 5 years. However, no specific plans have been drawn up Hence AS 24 will not be applicable and it cannot be considered as Discontinuing operations.
for saleof neither the division nor its assets. As part of its prospective plan it will reduce the produc-
(iii) Yes, phased and time bound program resolved in the board clearly indicates the closure
tion of passenger cars by 20% annually. It also plans to establish another new factory for the manu-
of the passenger car segment in a definite time frame and will constitute a clear roadmap.
facture ofcommercial vehicles and transfer surplus employees in a phased manner.
Hence this action will attract compliance of AS 24 and it will be considered as Discontin-
You are required to comment: uing Operations as per AS-24.
(i) If mere gradual phasing out in itself can be considered as a ‘discontinuing operation’
within themeaning of AS-24.
(ii) If the Company passes a resolution to sell some of the assets in the passenger car divi-
sion 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 (ii) above be different if the Company resolves tosell the as-
sets of thepassenger car division in a phased but time bound manner?
Answers 14
(i) 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 sellingthe component in a

AS 25 Interim Financial Reporting AS 25 Interim Financial Reporting
Question 1
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
Fresh Limited reported a Profit Before Tax (PBT) of Rs. 4 lakhs for the third quarter ending 30-09-2016. On
Study
Q.9 TO Q.23 enquiry you observe the following. Give the treatment required under AS 25:
Mat.
Past NO NO NO NO NO NO NO NO NO NO NO NO Dividend income of Rs. 4 lakhs received during the quarter has been recognized to the extent of
Exams Rs. 1 lakh only.
MTP NO NO NO NO NO NO NO NO NO NO NO NO
80% of sales promotion expenses Rs. 15 lakhs incurred in the third quarter has been deferred to
RTP Q.7 Q.6 Q.5 NO NO Q.3 NO NO NO NO NO NO
the fourth quarter as the sales in the last quarter is high.
In the third quarter, the company changed depreciation method from WDV to SLM, which resulted
in excess depreciation of Rs.12 lakhs. The entire amount has been debited inthe third quarter,
though the share of the third quarter is only Rs. 3 lakhs.
Rs. 2 lakhs extra-ordinary gain received in third quarter was allocated equally to thethird and
fourth quarter.
Cumulative loss resulting from change in method of inventory valuation was recognized in the
third quarter of Rs. 3 lakhs. Out of this loss Rs. 1 lakh relates to previous quarters.
Sale of investment in the first quarter resulted in a gain of Rs. 20 lakhs. The company had appor-
tioned this equally to the four quarters.
Prepare the adjusted profit before tax for the third quarter. (MTP 5 Marks Oct 17)
Answer 1
As per para 36 of AS 25 “Interim Financial Reporting”, seasonal or occasional revenue and cost within a
financial year should not be deferred as of interim date untill it is appropriate to defer at the end of the en-
terprise’s financial year. Therefore, dividend income, extraordinary gain, and gain on sale of investment
received during 3 rd quarter should be recognised in the 3rd quarter only. Similarly, sales promotion ex-
penses incurred in the 3 rd quarter should also be charged in the 3rd quarter only.
Further, as per the standard, if there is change in the accounting policy within the current financial year,
then such a change should be applied retrospectively by restating the financial statements of prior interim
periods of the current financial year. The change in the method of depreciation or inventory valuation is a
change in the accounting policy. Therefore, the prior interim periods’ financial statements should be restat-
ed by applying the change in the method of valuation retrospectively.
Accordingly, the adjusted profit before tax for the 3rd quarter will be as follows:
Statement showing Adjusted Profit Before Tax for the third quarter:
(Rs. in lakhs) Salary and other expenses 60

Profit before tax (as reported) 4 Advertisement expenses (routine) 4
Add: Dividend income Rs. (4-1) lakhs 3 Administrative and selling expenses 8
Excess depreciation charged in the 3rd quarter, due tochangein the method, 9
should be applied retrospectively Rs. (12-3)lakhs
While preparing interim financial report for the first quarter, A Ltd. wants to defer
Extra ordinary gain Rs. (2-1) lakhs 1 Rs. 42 crore expenditure to third quarter on the argument that third quarter is having more sales,
Cumulative loss due to change in the method of inventory valuation should be 1 therefore third quarter should be debited by higher expenditure, considering the seasonal nature of
applied retrospectively Rs. (3-2) lakhs business. The expenditures are uniform throughout all quarters.
Less: Sales promotion expenses (80% of Rs. 15 lakhs) 12 alculate the result of first quarter as per AS 25 and comment on the A Ltd. view. (RTP Nov 20)
Gain on sale of investment (occasional gain should not be deferred) 5 Answer 3

Adjusted Profit before tax for the third quarter 1 (a) Calculation of the result of first quarter as per AS 25
Particulars (Rs. in
Question 2 crore)
On 30-6-2017, L Limited incurred Rs. 6,00,000 net loss from disposal of a business segment. Also on
Result of first quarter ending 31st March, 2020
31-7-2017, the company paid Rs. 1,60,000 for property taxes assessed for the calendar year 2017. How Turnover 100
should the above transactions be included in determination of net income of L Limited for the six
Other Income Nil
months interim period ended on 30-9-2017? (MTP 4 Marks Aug 17)
Total (a) 100
Answer 2 Less: Changes in inventories Nil
Para 28 of AS 25 “Interim Financial Reporting” states that revenues and gains should be recognized in Salaries and other expenses 60
interim reports on the same basis as used in annual reports. As at September 30, 2017, L Ltd. would report
the entire Rs. 6,00,000 loss on the disposal of its business segment since the loss was incurred during the
Administrative and selling expenses (4 + 8) 12
interim period. Total (b) 72
A cost charged as an expense in an annual period should be allocated among the interim periods, which Profit (a)-(b) 28
are clearly benefited from the expense, through the use of accruals and/or deferrals. Since Rs. 1,60,000
property tax payment relates to the entire 2017 calendar year, only Rs. 80,000 of the payment would be
reported as an expense at September 30, 2017, while out of the remaining Rs. 80,000, Rs. 40,000 for Jan.2017 As per AS 25 on Interim Financial Reporting, the income and expense should be recognised when they are
to March, 2017 would be shown as payment of the outstanding amount of previous year and another Rs. earned and incurred respectively. As per AS 25, the costs should be anticipated ordeferred only when
40,000 related to quarter October, 2017 to December, 2017, would be reported as a prepaidexpense.
it is appropriate to anticipate that type of cost at the end of the financial year, and
Question 3
costs are incurred unevenly during the financial year of an enterprise.
A Ltd. is dealing in seasonal products. The following is the quarterly sales pattern of the product:
The expenditure of Rs. 42 crore made in the first quarter shall be charge in that quarter only i.e.
when they are earned and incurred. Therefore, the argument given by A Ltd. relating to deferment
Quarter 1 II III IV
of Rs. 42 crore is not tenable as expenditures are uniform throughout all quarters.
Ending 31st March 30th June 30th September 31st December
20% 20% 50% 25%
For the first quarter ending 31st March, 2020, A Ltd. gives you the following information: Question 4
Rs. in crore Adam Ltd. provides you the following information and asks you to calculate the tax expense for each
quarter with reference to AS 25, assuming that there is no difference between the estimated taxable
Sales 100
income and the estimated accounting income:
Estimated Gross Annual Income 33,00,000 (inclusive of Estimated Capital Gains of Rs. 8,00,000) Esti-
mated Income of Quarter I is Rs. 7,00,000, Quarter II is Rs. 8,00,000, Quarter III (including Estimated
Capital Gains of Rs. 8,00,000) is Rs. 12,00,000 and Quarter IV is Rs. 6,00,000.
Tax Rates: On Capital Gains 12%On Other Income: First Rs. 5,00,000 30% Balance Income· 40% (RTP
Nov 19) CA CS CMA Mentoring Program Reviews
Answer 4
As per para 29 of AS 25 ₹Interim Financial Reporting₹, income tax expense is recognised in each interim
period based on the best estimate of the weighted average annual income tax rate expected for the
full financial year.
If different income tax rates apply to different categories of income (such as capital gains or income
earned in particular industries) to the extent prac ticable, a separate rate is applied to each individual
category ofinterim period pre-tax income.
Rs.
Estimated annual income exclusive of estimated capital gain (33,00,000 –
8,00,000) (A) 25,00,000
Tax expense on other income:
30% on Rs. 5,00,000 1,50,000
40% on remaining Rs. 20,00,000 8,00,000
(B) 9,50,000
Weighted average annual income tax rate =
B /A
(9,50,000/25,00,000) x 100 = 38%
Tax expense to be recognised in each of the quarterly reports
Rs.
Quarter I - Rs. 7,00,000 x 38% 2,66,000
Quarter II - Rs. 8,00,000 x 38% 3,04,000
Quarter III - Rs. (12,00,000 - 8,00,000) x 38% 1,52,000
Rs. 8,00,000 x 12% 96,000 2,48,000
Quarter IV - Rs. 6,00,000 x 38% 2,28,000
10,46,000
Question 5
Faithful Ltd. is dealing in seasonal product sales pattern of the product, quarter wise is as follows: 1st-
2nd3rd4th
Information regarding the 1st quarter ending on 30th June, 2018 is as follows:Sales 80 crore
Chapter_4.6 to entire 4th chap-
Salary and other expenses 60 crore
ters-proof done.indd Visit CAmentoringprogram.org or +917890770777
Advertisement expenses (routine) 4 crore
Administrative and selling expenses 8 crore
Answer 6
While preparing interim financial report for first quarter Faithful Ltd. wants to defer
Estimated tax liability on annual income = [Income Rs. 900 lakhs – b/f losses Rs. 315 lakhs (90% of 350)]
Rs. 10 crore expenditure to third quarter on the argument that third quarter is having more sales there- x 33% = 33% of Rs. 585 lakhs = Rs. 193.05 lakhs
fore third quarter should be debited by more expenditure. Considering the seasonal nature of business
As per para 29(c) of AS 25 ₹Interim Financial Reporting₹, income tax expense is recognised in each in-
and the expenditures are uniform throughout all quarters, calculate the result of the first quarter as per
terim period based on the best estimate of the weighted average annual income tax rate expected for
AS 25. Also give a comment on the company’s view. ( RTP May 19)
the full financial year.
Thus, estimated weighted average annual income tax rate = Rs. 193.05 lakhs divided by Rs. 900
Answer 5 lakhs=21.45%
According to AS 25 the Income and Expense should be recognized when they are earned and incurred Tax expense to be recognised in each quarter Rs. in lakhs
respectively. Therefore, seasonal incomes will be recognized as and when they occur. Thus, the company’s
Quarter I – Rs. 350 lakhs x 21.45% 75.075
view is not as per AS 25. Correct Statement of Profit or Loss for the quarter ending on 30 th June, 2018 would
be Quarter II – Rs. 150 lakhs x 21.45% 32.175
Quarter III – (Rs. 50 lakhs) x 21.45% (10.725)
Particulars (Rs. in
Quarter IV – Rs. 450 lakhs x 21.45% 96.525
crore)
193.05
Result of first quarter ending 30th June, 2018
Turnover 80 Question 7
Other Income Nil
Estimated annual income ₹ 1 lakh (inclusive of Estimated
Total (a) 80 Capital Gains (earned in Quarter II) ₹ 20,000 The estimated income of
Less: Changes in inventories Nil each quarter is ₹25,000Tax Rates:
On Capital Gains 10%
Salaries and other cost 60
On other income:
Administrative and selling Expenses (4+8) 12 First ₹40,000 30%
Total (b) 72 Balance income 40%
There is no difference between the estimated taxable income and the estimated accounting income.
Profit (a)-(b) 8 Calculate tax expense for each quarter and for the year. (RTP May 18)
Question 6 Answer 7
Tax Expense:
To comply with listing requirements and other statutory obligations, Prateek Ltd. prepares interim fi-
On Capital Gains portion of annual income:
nancial reports at the end of each quarter. The company has brought forward losses of Rs. 350 lakhs
under Income-tax Law, of which 90% is eligible for set off as per the recent verdict of the Court, that has 10% of ₹ 20,000 ₹ 2,000
attained finality. No deferred tax asset has been recognized on such losses in view of the uncertainty
On other income: 30% of ₹ 40,000 + 40% of ₹ 40,000 ₹ 28,000
over its eligibility for set off. The company has reported quarterly earnings of Rs. 350 lakhs and Rs. 150
lakhs respectively for the first two quarters of financial year 2017-2018 and anticipates net earnings of Total: ₹ 30,000
Rs. 400 lakhs in the coming half year ended March 2018 of which Rs. 50 lakhs will be the loss in the quar-
Weighted Average Annual Effective Tax Rate:
ter ended December, 2017. The tax rate for the company is 30% with a 10% surcharge. You are required
to calculate the amount of tax expense to be reported for each quarter of financial year 2017-2018. (RTP
Nov 18)
On Capital Gains portion of annual Income: (2,000 / 20,000) X 100 = 10% On other income: (28,000/
80,000) X 100 = 35%
When income of ₹ 25,000 for 2nd Quarter includes capital gains of ₹ 20,000, the tax expense for each
quarter will be calculated as below:
Income Tax Expense
Quarter I ₹25,000 35% of ₹ 25,000 = ₹ 8,750
Quarter II Capital Gains: ₹20,000 10% of ₹ 20,000 = ₹ 2,000 Question 9
Other: ₹ 5,000 35% of ₹5,000 = ₹ 1,750 ₹ 3,750 AS 25 mandates the following in relation to interim financial reports.
Quarter III ₹25,000 35% of ₹ 25,000 = ₹ 8,750 a. Which entities should publish b. How frequently it should publish
interimfinancial reports. interim financial reports.
Quarter IV ₹25,000 35% of ₹ 25,000 = ₹8,750
c. How soon it should publish after the d. None of the above.
Total tax expense for the end of interim period.
year ₹30,000
Ans: (d)
An enterprise reports quarterly, estimates an annual income of ₹ 10 lakhs. Assume tax rates on 1st ₹ The standard defines Interim Financial Report as a financial report for an interim period that contains a
5,00,000 at 30% and on the balance income at 40%. The estimated quarterly income are ₹ 75,000, ₹ set of financial statements.
2,50,000, ₹ 3,75,000 and ₹ 3,00,000.
a. Complete b. Condensed
Calculate the tax expense to be recognized in each quarter. (RTP Nov 17)(New SM)
c. Financial statement similar to annual d. Either complete or condensed
Answer 8
Ans: (d)
As per para 29 of AS 25 ‘Interim Financial Reporting’, income tax expense is recognised in each interim
period based on the best estimate of the weighted average annual income tax rate expected for the full
Question 11
financial year.
ABC Limited has reported Rs. 85,000 as per tax profit in first quarter and expects a loss of Rs. 25,000 each
in subsequent quarters. It has corporate tax rate slab of 20% on the first Rs. 20,000 earnings and 40%
₹ on all additional earnings. Calculate tax expenses that should report in first quarter interim financial
report.
Estimated Annual Income (A) 10,00,000
Tax expense: a. Rs. 17,000 b. Rs. 30,000
30% on ₹ 5,00,000 1,50,000 c. Rs. 2,000 d. AS 25 does not mandate to report tax
expenses
40% on remaining ₹ 5,00,000 2,00,000
(B) 3,50,000
Ans: (a)
Question 12
Weighted average annual income tax rate = B/A = 3,50,000/ 10,00,000= 35%
An entity prepares quarterly interim financial reports in accordance with AS 25. The entity is engaged
in sale of mobile phones and normally 5% of customers claim on their warranty. The provision in the first
Tax expense to be recognized in each of the quarterlyreports ₹ quarter was calculated as 5% of sales to date, which was `10 million. However, in the second quarter, a
fault was found and warranty claims were expected to be 10% for the whole of the year. Sales in the sec-
ond quarter were `15 million. What would be the provision charged in the second quarter’s interim finan-
Quarter I - ₹ 75,000 x 35% 26,250
cial statements?
Quarter II - ₹ 2,50,000 x 35% 87,500
a. `1 million b. Rs. 2 million
Quarter III - ₹ 3,75,000 x 35% 1,31,250
c. Rs. 1.25 million d. Rs. 1.5 million
Quarter IV - ₹ 3,00,000 x 35% 1,05,000
Ans: (b)
₹ 10,00,000 3,50,000
Theoretical Questions Answers Answers 14
Questions 13 The presentation and disclosure requirements contained in AS 25 should be applied only if an enterprise
prepares and presents an ‘interim financial report’ as defined in AS 25. Accordingly, presentation and
What are the periods for which Interim Financial Statements are required to be pre- disclosure requirements contained in AS 25 are not required to be applied in respect of interim finan-
sented? You are required to answer your question in light of preparation of financial cial results (which do not meet the definition of ‘interim financial report’ as per AS 25) presented by an
statements for the period ended and as at 31st December, 20X1. The Financial Year is FY enterprise.
20X1-X2. The quarterly financial results presented under Clause 41 of the Listing Agreement do not meet the defi-
Answers 13 nition of ‘interim financial report’ as per AS 25. However, the recognition and measurement principles
laid down in AS 25 should be applied for recognition and measurement of items contained in such in-
A.s per Accounting Standard 25, Interim reports should include interimfinancial statements (condensedor terim financial results.
complete) for periods as given below.
Statement Current period Comparative period

Questions 15
Balance sheet End of current interimperiod End of immediately preceding fi-
nancial year Whether the impairment loss recognized on property, plant and equipment in first quarter of the fi-
nancial year can be reversed in the second quarter in that financial year?
Statement of profit Current interim period Comparable interim period and
and loss andcumulatively for the year- year-to date of immediately pre-
Answers 15
to-date ceding
financial year As per AS 25, the principles for recognising and measuring losses from inventorywrite-downs, restructur-
ings, or impairments in an interim period are the same asthose that an enterprise would follow if it pre-
Cash flow statement Cumulatively for the cur- Comparable year-to-date of imme- pared only annual financial statements. However, if such items are recognised and measured in one in-
rentfinancial year- to-date diately preceding financial year terimperiod and the estimate changes in a subsequent interim period of that financialyear, the original
estimate is changed in the subsequent interim period either byaccrual of an additional amount of loss
In light of the above, following periods needs to be covered in interim financial statements for the period or by reversal of the previously recognised amount. In light of the same, the impairment loss recognized
ended and as at 31st December, 20X1: in onequarter can be reversed in the another quarter of the financial year, if favourableindicator exists
as per AS 28 and the recoverable amount increased in comparison to earlier period.
Balance Sheet as of the end of the current interim period and a comparative balance sheet as
of the end of the immediately preceding financial year (As at 31 December 20X1
and 31 March 20X1).
Questions 16
Statements of for the current interim period and cumulatively for the current financial year
In view of the provisions of Accounting Standard 25 on Interim Financial Reporting, on what
Profitand Loss to date, with comparative statements of profit and loss for the comparable
basis will you calculate, for an interim period, the provision in respect of defined benefit
interim periods (current and year-to-date) of the immediately preceding
schemes like pension, gratuity etc. for the employees?
financial year. (for 3 months and 9 months i.e., year to date ended 31 De-
cember 20X1 and samefor 31 December 20X0 being comparative period). Answers 16
Cash Flow State- cumulatively for the current financial year to date, with a comparative Accounting Standard 25 suggests that provision in respect of defined benefit schemes like pen-
ment statement for the comparable year-to-date period of the immediately sion and gratuity for an interim period should be calculated based on the year-to-date basis by
preceding financial year. (year to date i.e., 1 April 20X1 to 31 December 20X1 using the actuarially
and 1 April 20X0 to 31 determined rates at the end of the prior financial year, adjusted for significant market fluctuations
December 20X0). since that time and for significant curtailments, settlements or other significant one-time events.
Questions 14 Questions 17
Whether quarterly financial results presented under Clause 41 of the Listing Agreement entered into On 30th June, 20X1, Asmitha Ltd. incurred Rs. 2,00,000, net loss from disposal of a business
between Stock Exchanges and the listed enterprises meet the definition of ‘interim financial report’ as segment. Also,on 31st July, 20X1, the company paid Rs. 60,000 for property taxes assessed for
per AS 25 and the provisions of AS 25 should be applied on the same? the calendar year 20X1. How the above transactions should be included in determination of
net income of Asmitha Ltd. for the six months interim period ended on 30th September, 20X1.
Answers 17 Quarter Rs. 3,75,000 x 35% 1,31,250

III -
According to Para 10 of AS 25 “Interim Financial Reporting”, if an enterprise prepares and presents
a complete set of financial statements in its interim financial report, the form and content of those Quarter IV - Rs. 3,00,000 x 35% 1,05,000
statements should conform to the requirements as applicable to annual complete set of financial
Rs. 10,00,000 3,50,000
statements. As at 30th September, 20X1, Asmitha Ltd would report the entire amount of Rs. 2,00,000
as loss on the disposal of its business segment since the loss was incurred during interim period. A
cost charged as an expense in an annual period should be allocated to interim periods on accrual Questions 19
basis.
Antarbarti Limited reported a Profit Before Tax (PBT) of Rs. 4 lakhs for the third quarter ending 30-09-
Since Rs. 60,000 Property tax payment relates to entire calendar year 20X1, Rs. 30,000 would be re- 20X1. On enquiry you observe the following. Give the treatment required under AS 25:
ported as an expense for six months ended on 30th September, 20X1 while out of the remaining Rs.
30,000, Rs. 15,000 for January, 20X1 to March, 20X1 should be shown as payment of the outstanding (i) Dividend income of Rs. 4 lakhs received during the quarter has been recognized to the
amount of previous year and another Rs. 15,000 related to quarter October, 20X1 to December, 20X1 extent of Rs. 1 lakh only.
would be reported as prepaid expenses. (ii) 80% of sales promotion expenses Rs. 15 lakhs incurred in the third quarter has been de-
ferred to the fourth quarter as the sales in the last quarter is high.
(iii) In the third quarter, the company changed depreciation method from WDV to
Questions 18 SLM, which resulted in excess depreciation of Rs. 12 lakhs. The entire amount has
been debited in the third quarter, thoughthe share of the third quarter is only Rs.
An enterprise reports quarterly, estimates an annual income of Rs. 10 lakhs. Assume tax rates on 3 lakhs.
1st Rs. 5,00,000 at 30% and on the balance income at 40%. The estimated quarterly income are
(iv) Rs. 2 lakhs extra-ordinary gain received in third quarter was allocated equally to
Rs. 75,000, Rs. 2,50,000, Rs. 3,75,000 and Rs. 3,00,000.
the third and fourth quarter.
Calculate the tax expense to be recognized in each quarter.
(v) Cumulative loss resulting from change in method of inventory valuation was
recognized in the third quarter of Rs. 3 lakhs. Out of this loss Rs. 1 lakh relates to
Answers 18 previous quarters.
As per para 29 of AS 25 ‘Interim Financial Reporting’, income tax expense is recognised in each in- (vi) Sale of investment in the first quarter resulted in a gain of Rs. 20 lakhs. The com-
terim period based on the best estimate of the weighted average annual income tax rate expected pany had apportioned this equally to the four quarters.
for the full financial year.
Prepare the adjusted profit before tax for the third quarter.
Rs.
Estimated Annual Income (A) 10,00,000
Answers 19
Tax expense:
As per para 36 of AS 25 “Interim Financial Reporting”, seasonal or occasional revenue and cost
30% on Rs. 5,00,000 1,50,000
within a financial year should not be deferred as of interim date until it is appropriate to defer at
40% on remaining Rs. 5,00,000 2,00,000 the end of the enterprise’s financial year. Therefore, dividend income, extra-ordinary gain, and
(B) 3,50,000 gain on sale of investment received during 3rd quarter should be recognised in the 3rd quarter only.
Similarly, sales promotion expenses incurred in the 3rd quarter should also be charged in the 3rd
quarter only.
Further, as per AS 10, Property, Plant and Equipment, if there is change in the depreciation method,
such a change should be accounted for as a change in accounting estimate in accordance with
AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies, and
applied prospectively. Therefore, no adjustment would be required due to change in the method
of depreciation.
Accordingly, the adjusted profit before tax for the 3rd quarter will be as follows:
Tax expense to be recognized in each of the quarterly reports `
Quarter I - ` 75,000 x 35% 26,250
Quarter II - Rs. 2,50,000 x 35% 87,500
Statement showing Adjusted Profit Before Tax for the third quarter
Answers 20
( Rs. in lakhs)
Profit before tax (as reported) Add: Dividend income Rs. (4-1) lakhsExcess depreci- 4 Particulars (₹ In crores)
ation charged in the 3rd quarter, due to change in the method Result of first quarter ended 30th June, 20X1
3
Extra ordinary gain Rs . (2-1) lakhs Cumulative loss due to change in the Turnover 80
-
method of inventory valuation should be Other Income Nil
1
applied retrospectively Rs. (3-2) lakhs Total (a) 80
Less: Changes in inventories Nil
Less: Sales promotion expenses (80% of Rs. 15 lakhs) 1 Salaries and other cost 60
Gain on sale of investment (occasional gain should not be deferred) 9 Administrative and selling Expenses (4+8) 12
Adjusted Profit before tax for the third quarter (12) Total (b) 72
(5) Profit (a)-(b) 8
(8)
According to AS 25, the Income and Expense should be recognized when they are earned and incurred
respectively. Therefore, seasonal incomes will be recognized when they occur. Thus, the company’s view
isnot as per AS 25.
Sincere Corporation is dealing in seasonal product. Sales pattern of the product
quarter-wise is as follows:
1st quarter 30th June 10% Question 21 (Illustration)
2nd quarter 30th September 10%
The accounting year of X Ltd. ends on 30th September, 20X1 and it makes its reports quarterly. Howev-
3rd quarter 31st December 60% er, for the purpose of tax, year ends on 31st March every year. For the Accounting year from 1-10-20X0
to 30-9-20X1, the quarterly income is as under:
4th quarter 31st March 20%
1st quarter ending on 31st December, 20X0 Rs. 200 crores

Information regarding the 1st quarter ended on 30th June, 20X1 is as follows:
Sales 80 crores 2nd quarter ending on 31st March, 20X1 Rs. 200 crores
Salary and other expenses 60 crores 3rd quarter ending on 30th June, 20X1 Rs. 200 crores
Advertisement expenses (routine) 4 crores 4th quarter ending on 30th September, 20X1 Rs. 200 crores
Administrative and selling expenses 8 crores
Total Rs. 800 crores
While preparing interim financial report for first quarter Sincere Corporation wants to defer Rs. 10 crores Average actual tax rate for the financial year ending on 31st March, 20X1 is 20% and for financial year
expenditure to third quarter on the argument that third quarter is having more sales, therefore, the third ending 31st March, 20X2 is 30%. Calculate tax expense for each quarter.
quarter should be debited by more expenditure. Considering the seasonal nature of business and the
expenditures are uniform throughout all quarters, calculate the result of the first quarter as per AS 25. Answers 21
Also give a comment on the company’s view. Calculation of tax expense
1st quarter ending on 31st December, 20X0 200 × 20% Rs. 40 lakhs
2nd quarter ending on 31st March, 20X1 200 × 20% Rs. 40 lakhs
3rd quarter ending on 30th June, 20X1 200 × 30% Rs. 60 lakhs
4th quarter ending on 30th September, 20X1 200 × 30% Rs. 60 lakhs
While preparing interim financial report for the first quarter, ‘I - Corp.’ wants to defer Rs. 21 crores ex-
penditure to third quarter on the argument that third quarter is having more sales,therefore, third quar-
ter should be debited by higher expenditure, considering the seasonal nature of business and that the
expenditures are uniform throughout all quarters.
Accountants of Poornima Ltd. showed a net profit of Rs . 7,20,000 for the third quarter of Calculate the result of first quarter as per AS 25 and comment on the company’s view.
20X1 after incorporating the following:
(i) Bad debts of Rs. 40,000 incurred during the quarter. 50% of the bad debts have Answers 23
been deferred tothe next quarter. Result of the first quarter ended 30th June, 20X1
(ii) Extra ordinary loss of Rs. 35,000 incurred during the quarter has been fully recognized in this
quarter (Rs. in crores)
(iii) Additional depreciation of Rs. 45,000 resulting from the change in the method of chargeof de- Turnover 50
preciation assuming that Rs. 45,000 is the charge for the 3rd quarter only.
Add: Other Income Nil
Ascertain the correct quarterly income.
Total 50
Answers 22
Less: Change in inventories Nil
In the above case, the quarterly income has not been correctly stated. As per AS 25 “Interim
Salaries and other cost 30
Financial
Administrative and selling expenses (8 + 2) 10 40
Reporting”, the quarterly income should be adjusted and restated as follows:
Profit 10
Bad debts of Rs. 40,000 have been incurred during current quarter. Out of this, the company has deferred
50% (i.e.) Rs. 20,000 to the next quarter. Therefore, Rs. 20,000 should be deducted from
As per AS 25 on Interim Financial Reporting, the income and expense should be recognized when
Rs . 7,20,000. The treatment of extra-ordinary loss of Rs . 35,000 being recognized in the same quarter they areearned and incurred respectively. As per AS 25, the costs should be anticipated or deferred
is correct. only whenit is appropriate to anticipate that type of cost at the end of the financial year, and costs
are incurred unevenly during the financial year of an enterprise.
Recognising additional depreciation of Rs . 45,000 in the same quarter is in tune with AS 25. Hence no
adjustments are required for these two items. Therefore, the argument given by I-Corp relating to deferment of Rs. 21 crores is not tenable as expendi-
turesare uniform throughout all quarters.
Poornima Ltd should report quarterly income as Rs.7,00,000 (Rs.7,20,000 – Rs.20,000).
Intelligent Corporation (I - Corp.) is dealing in seasonal products. The quarterly sales patternof the product
is given below:
Quarter I II III IV
Ending 30th June 30th September 31st December 31st March
15% 15% 50% 25%
For the First quarter ending 30th June, 20X1, I -Corp. gives you the following information:
Rs. crores
Sales 50
Salary and other expenses 30
Advertisement expenses (routine) 02
Administrative and selling expenses 08

AS 2- Valuation of Inventory AS 2- Valuation of Inventory
Question 1
An enterprise ordered 20,000 KG of certain material at ₹ 110 per unit. The purchase price includes GST
₹ 12 per KG, in respect of which full input tax credit (ITC) is admissible. Freight incurred amounted to
₹ 1,17,600. Normal transit loss is 2%. The enterprise actually received 19,500 KG and consumed 18,000
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023 KG of the material.
Study
Q.22 TO Q.33
You are required to calculate cost of material per KG;Allocation of material cost. (RTP May 23) (SM)
Mat.
Past NO NO Q.2,Q.18 Q.17 NO NO Q.17 Q.16 Q.19 Q.20 NO NO Answer 1
Exams Calculation of Normal cost per Kg.
MTP Q.5 Q.2,Q.6 Q.2,Q.5 Q.17 Q.2 NO Q.3,Q.4 Q.7 Q.3 Q.8,Q.9 Q.3,Q10 Q.4,Q.17
₹
RTP Q.13 Q.6 Q.11 Q.8 Q.10 Q.6 Q.12 Q.11 Q.5,Q.14 Q.15 Q1 Q.21
Purchase price (20,000 Kg. x ₹ 110) 22,00,000
Less: Input Tax Credit (20,000 Kg. x ₹ 12) (2,40,000)
19,60,000
Add: Freight 1,17,600
A. Total material cost 20,77,600
B. Number of units normally received = 98% of 20,000 Kg. Kg. 19,600
C. Normal cost per Kg. (A/B) 106
Allocation of material cost
Kg. ₹ /Kg. ₹
Materials consumed 18,000 106 19,08,000
Cost of inventory 1,500 106 1,59,000
Abnormal loss 100 106 10,600
Total material cost 19,600 106 20,77,600
Note: Abnormal losses are recognized as separate expense.
Question 2
Omega Ltd. has a normal wastage of 4% in the production process. During the year 2019-20, the
Company used 12,000 MT of raw material costing Rs. 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
inthe 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 5 Marks, May ’20, April ’19, Oct ’18, Old & New SM)(Same
concept different figures PYP May’19 5 Marks)
Answer 2 Answer 4
As per para AS 2 ‘Valuation of Inventories’, abnormal amounts of wasted materials, Labour and (i) As per AS 2 ‘Valuation of Inventories’, certain costs are excluded from the cost of the in-
other production costs are excluded from cost of inventories and such costs are recognized as ventories and are recognized as expenses in the period in which incurred. Examples of
expenses in the period in which they are incurred. The normal loss will be included in determin- such costs are:
ing the cost of inventories (finished goods) at the year end.
(a) abnormal amount of wasted materials, Labour, or other production costs;
Amount of Normal Loss and Abnormal Loss:
(b) storage costs, unless those costs are necessary in the production process prior to a
Material used 12,000 MT @ Rs. 150 = Rs. 18,00,000 further production stage;
Normal Loss (4% of 12,000 MT) 480 MT
(c) administrative overheads that do not contribute to bringing the inventories to their
Net quantity of material 11,520MT present location and condition; and
Abnormal Loss in quantity 150 MT (630 MT less 480 MT) (d) selling and distribution costs.
Abnormal Loss Rs. 23,437.50 (ii) As per AS 2 “Valuation of Inventories”, the inventories are to be valued at lower of cost or
net realizable value. In this case, the cost of inventory is Rs. 10 lakhs. The net realizable
[150 units @ Rs. 156.25 (Rs.18,00,000/11,520)] Amount of Rs. 23,437.50 will be charged to the Profit
value is 11,00,000 Rs. 90%
and Loss statement.
= Rs. 9,90,000. So, the stock should be valued at Rs. 9,90,000.
Question 3
Question 5
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 Rs. 1,000. The entire quantity of waste and finished output On the basis of information given below, find the value of inventory (by periodic inven-
is in stock at the year end. State with reference to Accounting Standard, how will you value the inventory method) as per AS 2, to be considered while preparing the Balance Sheet as on 31st
tories in this case? What will be treatment for normal and abnormal waste? (MTP 5 Marks, March ’21, March, 2017 on weighted Average Basis.
Apr’22 & April ’23, Old & New SM)
Details of Purchases:
Answer 3
As per para 13 of AS 2 (Revised), abnormal amounts of wasted materials, labour and other produc- Date of pur- Unit(Nos.) Purchase cost per unit (Rs.)
tion costs are excluded from cost of inventories and such costs are recognized as expenses in the chase
period in which they are incurred.
01-03-2017 20 108
In this case, normal waste is 250 MT and abnormal waste is 50 MT. The cost of 250 MT will l be in-
cluded in determining the cost of inventories (finished goods) at the year end. The cost of abnor- 08-03-2017 15 107
mal waste (50 MT x 1,052.6315 = Rs. 52,632) will be charged to the profit and loss statement.
17-03-2017 30 109
Cost per MT (Normal Quantity of 4,750 MT) = 50,00,000 / 4,750 = Rs. 1,052.6315 Total value of inven-
25-03-2017 15 107
tory = 4,700 MT x Rs. 1,052.6315 = Rs. 49,47,368.
Details of issue of Inventory:

Date of Issue Unit(Nos.)
Question 4
03-03-2017 10
(i) “In determining the cost of inventories, it is appropriate to exclude certain costs and rec-
ognize them as expenses in the period in which they are incurred”. Provide examples of 12-03-2017 20
such costs as per AS 2 ‘Valuation of Inventories’. (MTP 2.5 Marks April 21 & Oct ‘23, RTP 18-03-2017 10
May’22, Old & New SM)
24-03-2017 20
(ii) X Limited purchased goods at the cost of Rs. 40 lakhs in October, 2020. Till March, 2021,
75% of the stocks were sold. The company wants to disclose closing stock at Rs. 10 lakhs.
The expected sale value is Rs. 11 lakhs and a commission at 10% on sale is payable to the
agent. Advise, what is the correct value of closing stock to be disclosed as at 31.3.2021.
(MTP 2.5 Marks April 21 & Oct ‘23)
Net realizable value of inventory as on 31st March, 2017 is Rs. 107.75 per unit. You are required at cost. Value of Closing Stock:
to compute the value of Inventory as per AS 2. (MTP March ‘19, 5 Marks, MTP March ‘18, 5 Marks,
RTP May’22) Qty. Rate Amount (Rs.)
(Rs.)
Answer 5
Raw Material X 1,000 440 4,40,000
Net Realizable Value of Inventory as on 31st March, 2017 = Rs. 107.75 x 20 units = Rs. 2,155 Value
of inventory as per Weighted Average basis. Total units purchased and total cost: Finished Goods Y 2,400 660 15,84,000
Total Value of Closing Stock 20,24,000
01.03.2017 Rs. 108 x 20 units = Rs. 2160
08.3.2017 Rs. 107 x 15 units = Rs. 1605
Working Note:
17.03.2017 Rs. 109 x 30 units = Rs. 3270
Statement showing cost calculation of Raw Material X and Chemical Y
25.03.2017 Rs. 107 x 15 units = Rs. 1605
Total 80 units = Rs. 8640 Raw Material X Rs.
Weighted Average Cost = Rs. 8640/80 units = Rs.108Total cost =Rs. 108 x 20 units = Rs. 2,160 Cost Price 380
Value of inventory to be considered while preparing Balance Sheet as on 31st March, 2017
is, Cost or Net Realizable value whichever is lower i.e. Rs. 2,155. Add: Freight Inward 40
Unloading charges 20
Question 6
Cost 440
A Limited is engaged in manufacturing of Chemical Y for which Raw Material X is required. The Chemical Y Rs.
company provides you following information for the year ended 31st March, 2017.
Materials consumed 440
Rs. Per unit Direct Labour 120
Raw Material X Variable overheads 80
Cost price 380 Fixed overheads (Rs.4,00,000/20,000 units) 20
Unloading Charges 20 Cost 660
Freight Inward 40
Replacement cost 300
Chemical Y
Material consumed 440
Direct Labour 120
Variable Overheads 80
Additional Information:
(i) Total fixed overhead for the year was Rs. 4,00,000 on normal capacity of 20,000 units.
(ii) Closing balance of Raw Material X was 1,000 units and Chemical Y was Rs. 2,400 units.
You are required to calculate the total value of closing stock of Raw Material X and Chem-
ical Y according to AS 2, when Net realizable value of Chemical Y is Rs. 800 per unit. (MTP
Aug. ‘18, 5 Marks, RTP Nov’18) (Same concept different figures RTP Nov’20)
Answer 6
When Net Realizable Value of the Chemical Y is Rs. 800 per unit NRV is greater than the
cost of Finished Goods Y i.e. Rs. 660 (Refer W.N.)
Hence, Raw Material and Finished Goods are to be valued
Question 7 Total value of 6,18,000

closing stock
From the following information provided by XYZ Limited you are required to compute the closing
inventory: Working Note:
Raw Material P Statement showing calculation of cost of raw material P and finished good Q
Closing balance 600 units ₹ per unit Raw Material P ₹

Cost price including GST 250 Cost Price (250-20) 230
Input tax credit available 20
Add: Freight Inward 30
Freight inward 30
Handling charges 15
Handling charges 15
Cost 275
Replacement cost 180
Finished goods Q
Finished Goods Q ₹
Closing balance 1500 units ₹ per unit Materials consumed 250
Material consumed 250 Direct Labour 70
Direct Labour 70 Variable overheads 30
Direct overhead 30 10
360
Total fixed overhead for the year was ₹ 3,00,000 on a normal capacity of 30,000 units while actual
production has been of 25,000 units.
Calculate the value of closing stock, when Question 8
(i) Net realizable value of the finished good Q is ₹ 450 per unit. Hello Ltd. purchased goods at the cost of Rs. 20 lakhs in October. Till the end of the financial year,
(ii) Net Realizable value of the Finished Good Q is ₹ 340 per unit.(MTP Oct ’21, 5 marks) 75% of the stocks were sold. The Company wants to disclose closing stock at Rs. 5 lakhs. The
expected sale value is Rs. 5.5 lakhs and a commission at 10% on sale is payable to the agent.
Answer 7 You are required to ascertain the value of closing stock? (MTP 5 Marks Sep ’22, RTP Nov’19)
(i) When Net Realizable Value of the Finished Good Q is ₹ 450 per unit Value of Closing Stock:
Answer 8
Valuation Qty. Rate Amount
As per AS 2 “Valuation of Inventories”, the inventories are to be valued at lower of cost or net realizable
Base
(₹) (₹) value.
Raw Material P Cost 600 275 1,65,000 In this case, the cost of inventory is Rs. 5 lakhs. The net realizable value is Rs. 4.95 lakhs (Rs. 5.5
lakhs less cost to make the sale @ 10% of Rs. 5.5 lakhs). So, the closing stock should be valued at
Finished Good Q Cost 1,500 360 5,40,000 Rs. 4.95 lakhs.
Total value of closing stock 7,05,000
Question 9
When Net Realizable Value of the Finished Good Q is ₹ 340 per unit Since NRV of finished goods Q is less
than its cost i.e. ₹ 360 (Refer W.N.), raw material P is to be valued at replacement cost and finished goods
U.S.A Ltd. purchased raw material @ ₹ 400 per kg. Company does not sell raw material but uses
is to be valued at NRV.
in production of finished goods. The finished goods in which raw material is used are expected
Value of Closing Stock: to be sold at below cost. At the end of the accounting year, company is having 10,000 kg of raw
material in inventory. As the company never sells the raw material, it does not know the selling
Valuation Base Qty. Rate (₹) Amount (₹) price of raw material and hence cannot calculate the realizable value of the raw material for
Raw material P Replacement cost 600 180 1,08,000 valuation of inventories at the end of the year. However replacement cost of raw material is ₹
300 per kg. How will you value the inventory of raw material? (MTP 5 Marks Oct ’22)
Finished good Q Net Realizable 1,500 340 5,10,000
Value
Answer 9 Therefore, value of closing inventory: Finished Goods (1,200 x

20) ₹ 24,000 Raw Materials (900 x 9.50) ₹
As per AS 2 (Revised) “Valuation of Inventories”, materials and other supplies held for use in the pro- 8,550 32,550
duction of inventories are not written down below cost if the finished products in which they will
be incorporated are expected to be sold at or above cost. However, when there has been a decline
Question 11
in the price of materials and it is estimated that the cost of the finished products will exceed net
realizable value, the materials are written down to net realizable value. In such circumstances, the
replacement cost of the materials may be the best available measure of their net realizable value. On 31st March 2020, a business firm finds that cost of a partly finished unit on that date
Therefore, in this case, USA Ltd. will value the inventory of raw material at ₹ 30,00,000 (10,000 kg. @ is ₹ 430. The unit can be finished in 2020-21 by an additional expenditure of ₹ 310. The
₹ 300 per kg.). finished unit can be sold for
₹ 750 subject to payment of 2% brokerage on selling price. The firm seeks your advice
Question 10 regarding the amount at which the unfinished unit should be valued as at 31st March,
2020 for preparation of final accounts. Assume that the partly finished unit cannot be
The expected production for the year was 15,000 kg of the finished product. Due to fall in market de-
sold in semi-finished form and its NRV is zero without processing it further. (RTP Nov
mand the sales price for the finished goods was ₹ 20 per kg and the replacement cost for the raw ma-
21)(Same concept different figures RTP May 19)(Old & New SM)
terial was ₹ 9.50 per kg on the closing day. You are required to calculate the closing inventory as on that
date. (MTP 5 Marks March ’23) (RTP May 20)
Answer 11
Particulars Kg. ₹
Valuation of unfinished unit
Opening Inventory: Finished Goods 1,000 25,000
₹
Raw Materials 1,100 11,000
Net selling price 750
Purchases 10,000 1,00,000
Less: Estimated cost of completion (310)
Labour 76,500
440
Overheads (Fixed) 75,000
Less: Brokerage (2 % of 750) (15)
Sales 10,000 2,80,000
Net Realisable Value 425
Closing Inventory: Raw Materials 900 Cost of inventory 430
Finished Goods 1200 Value of inventory (Lower of cost and net realisable value) 425
Answer 10
Question 12
Calculation of cost for closing inventory
The inventory of Rich Ltd. as on 31st March, 2020 comprises of Product – A: 200 units and Product – B:
Particulars ₹ 800 units.
Cost of Purchase (10,200 x 10) 1,02,000 Details of cost for these products are:
Direct Labour 76,500 Product – A: Material cost, wages cost and overhead cost of each unit are Rs. 40,
75000 𝑋 10,200 51,000
Rs. 30 and Rs. 20 respectively, Each unit is sold at Rs. 110, selling expenses amounts to 10% of selling
Fixed Overhead costs.
15,000 Product – B: Material cost and wages cost of each unit are Rs. 45 and Rs. 35 respectively and normal
selling rate is Rs. 150 each, however due to defect in the manufacturing process 800 units of Product-
Cost of Production 2,29,500
B were expected to be sold at Rs. 70. You are requested to value closing inventory according to AS 2
Cost of closing inventory per unit (2,29,500/10,200) ₹ 22.50 after considering the above. (RTP May ’21)
Net Realisable Value per unit ₹ 20.00
Answer 12
Since net realisable value is less than cost, closing inventory will be valued at ₹ 20.
According to AS 2 ‘Valuation of Inventories’, inventories should be valued at the lower of cost and net
As NRV of the finished goods is less than its cost, relevant raw materials will be valued at realizable value.
replacement cost i.e. ₹ 9.50.
Product – A Answer 14
Material cost Rs. 40 x 200 = 8,000 AS 2 does not apply to producers of agricultural products but applies to traders in agricultural products.
Hence AS 2 will apply to Rohan Pvt. Ltd. and it will have to value inventory at lower of cost or market value.
Wages cost Rs. 30 x 200 = 6,000
Overhead Rs. 20 x 200 = 4,000
Question 15
Total cost Rs. 18,000
The closing stock of finished goods (at cost) of a company amounted to Rs. 4,50,000. The following
Realizable value [200 x (110-11)] Rs. 19,800
items were included at cost in the total:
Hence inventory value of Product -A Rs. 18,000
(a) 100 coats, which had cost Rs . 2,200 each and normally sold for Rs . 4,000 each.
Owing to a defect in manufacture their NRV was determined at 50% of their normal
Product – B selling price.
(b) Shirts which had cost Rs . 50,000, their net realizable value at Balance sheet date was Rs.
Material cost Rs. 45 x 800 = 36,000
55,000. Commission @ 10% on sales is payable to agents.
Wages cost Rs. 35 x 800 = 28,000
What should the inventory value be according to AS 2 after considering the above items?
Total cost Rs. 64,000 (RTP Nov’22)
Realizable value (800 x 70) Rs. 56,000
Hence inventory value of Product-B Rs. 56,000 Answer 15
Total Value of closing inventory i.e. Product A + Product B (18,000+ 56,000) Rs. 74,000 Valuation of closing stock
Rs.
Closing stock at cost 4,50,000
Question 13
Less: Adjustment for 100 coats (Working Note 1) (20,000)
A private limited company manufacturing fancy terry towels had valued its closing inventory of inven- Value of inventory 4,30,000
tories of finished goods at the realizable value, inclusive of profit and the export cash incentives. Firm
contracts had been received and goods were packed for export, but the ownership in these goods had Working Notes:
not been transferred to the foreign buyers. You are required to advise the company on the valuation of
1. Adjustment for Coats Rs.
the inventories in line with the provisions of AS 2. (RTP May ’18)
Cost included in Closing Stock 2,20,000
Answer 13 NRV of Coats 2,00,000
Accounting Standard 2 “Valuation of Inventories” states that inventories should be valued at lower of his- Adjustment to be made as NRV is less than Cost 20,000
torical cost and net realizable value. The standard states, “at certain stages in specific industries, such as
when agricultural crops have been harvested or mineral ores have been extracted, performance may 2. No adjustment required for shirts as their NRV is more than their cost which was
be substantially complete prior to the execution of the transaction generating revenue. In such cases, included in value of inventory.
when sale is assured under forward contract or a government guarantee or when market exists and there
is a negligible risk of failure to sell, the goods are often valued at net realizable value at certain stages
of production.” Terry Towels do not fall in the category of agricultural crops or mineral ores. Accordingly,
Question 16
taking into account the facts stated, the closing inventory of finished goods (Fancy terry towel) should
have been valued at lower of cost and net realizable value and not at net realizable value. Further, export
Joy Ltd. purchased 20,000 kilograms of Raw Material @ ₹ 20 per kilogram during the year 2020-21.
incentives are recorded only in the year the export sale takes place. Therefore, the policy adopted by the
They have furnished you with the following further information for the year ended 31st March, 2021:
company for valuing its closing inventory of inventories of finished goods is not correct.
Particulars Units Amount (₹)
Question 14
Opening Inventory:
Rohan Pvt. Ltd., a wholesaler in agriculture products, has valued the inventory on Net Realizable Value Finished Goods 2,000 1,00,000
on the ground that AS 2 does not apply to inventory of agriculture products. (RTP May ’22)
Raw Materials 2,200 44,000
Direct Labour 3,06,000
Fixed Overheads 3,00,000 Question 17
Sales 20,000 11,20,000 Mr. Jatin gives the following information relating to the items forming part of the inventory as on
Closing Inventory: 31.03.2019. His enterprise produces product P using Raw Material X.
Finished Goods 2,400 (i) 900 units of Raw Material X (purchases @ ₹ 100 per unit). Replacement cost of Raw
Material X as on3103.2019 is ₹ 80 per unit
Raw Materials 1,800
(ii) 400 units of partly finished goods in the process of producing P. Cost incurred till
The plant has a capacity to produce 30,000 Units of finished product per annum. However, the actual
date is ₹ 245 per unit. These units can be finished next year by incurring additional
production of finished products during the year 2020-21 was 20,400 Units. Due to a fall in the market
cost of ₹ 50 per unit.
demand, the price of the finished goods in which the raw material has been utilized is expected to be
sold @ ₹ 40 per unit. The replacement cost of the raw material was ₹ 19 per kilogram. You are required to (iii) 800 units of Finished Goods P and total cost incurred is ₹ 295 per unit.
ascertain the value of closing inventory as at 31st March, 2021 as per AS 2. (PYP July’21, 5 Marks) Expected selling price of product P is ₹280 per unit, subject to a payment of 5% broker-
age on selling price.
Answer 16
Statement Showing the Computation of Value of Closing Inventory Value of Closing Finished Goods Determine how each item of inventory will be valued as on 31.03.2019. Also calculate
the value of total Inventory as on 31.03.2019. (PYP 5 Marks Jan ‘21) (Sam concept dif-
Particulars Amount (₹) ferent figures PYP 5 Marks Nov’19, MTP Oct’19 5 Marks, Old & New SM)(MTP 5 Marks Sep
’23)
Cost of Raw Material consumed (20,400 units X ₹ 20 per kg) 4,08,000
Direct Labour 3,06,000
Answer 17
Fixed Overheads (3,00,000/30,000 x 20,400) 2,04,000
As per AS 2 (Revised) “Valuation of Inventories”, materials and other supplies held for use in the pro-
Cost of Production 9,18,000 duction of inventories are not written down below cost if the finished products in which they will be
Cost of Closing Inventory of Finished Goods per unit (₹ 45 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 realizable
9,18,000/20,400)
value, the materials are written down to net realizable value. In such circumstances, the replacement
Net Realizable Value (NRV) per unit 40 cost of the materials may be the best available measure of their net realizable value. In the given case,
selling price of product P is ₹ 266 and total cost per unit for production is ₹ 295.
Since net realizable value is less than cost, closing inventory of Finished Goods will be valued at ₹ 40
per unit Value of Closing Raw Materials as NRV of finished goods is less than its cost, the relevant raw Hence the valuation will be done as under:
material will be valued at its replacement cost, which is the best available measure of its NRV i.e. @ ₹
(i) 900 units of raw material X will be written down to replacement cost as market value of
19 per kg. Therefore, value of closing inventory would be as under:
finished product is less than its cost, hence valued at ₹ 80 per unit.
Finished Goods 2,400 units @ ₹ 40/- per unit ₹ 96,000 (ii) 400 units of partly finished goods will be valued at 216 per unit i.e., lower of cost (₹ 245) or
Net realizable value ₹ 216 (Estimated selling price ₹ 266 per unit less additional cost of ₹
Raw Materials 1,800 kg @ ₹ 19/- per kg ₹ 34,200
50).
Total ₹ 1,30,200
(iii) 800 units of finished product P will be valued at NRV of ₹ 266 per unit since it is lower than
cost ₹ 295.
Working Note:Calculation of raw material consumed during the year
Particulars Unit (Kg) 2021 Valuation of Total Inventory as on 31.03.2019:
Opening Inventory 2,200 Units Cost NRV/Repl Value = unit’s x cost or

Purchases 20,000 (₹) acement NRV whichever is
cost
Less: Closing Inventory (1,800) less (₹)
Raw Material Consumed 20,400 Raw material X 900 100 80 72,000

Partly finished 400 245 216 86,400
goods
Finished goods P 800 295 266 2,12,800
Value of Inventory 3,71,200
Question 18 Less: Closing inventories (12,20,000)
State whether the following statements are ‘True’ or ‘False’. Also give reason for your answer. As per Cost of Goods Sold 24,50,000
the provisions of AS-2, inventories should be valued at the lower of cost and selling price. (PYP 1 Mark, Calculation of Profit 30,40,000
May’19)
Sales (Given) (A) 24,50,000
Answer 18 Cost of Goods Sold 4,00,000
False: Inventories should be valued at the lower of cost and net realizable value (not selling price) as Add: General Overheads 28,50,000
per AS 2.
Total Cost (B) 1,90,000
Profit (A-B)
Question 19
Question 20
SM Enterprises is a leading distributor of petrol. A detailed inventory of petrol in hand is taken when
Following information of Sarah Limited is given:
the books are closed at the end of each month. For the month ending June 2021 following information
is available: Sarah Limited uses Raw Material ‘A’ for production of production of Finished Goods ‘B’
Sales for the month of June 2021 was ₹30,40,000.

Closing balance of Raw Material ‘A’ in units on 31stMarch,2022 750
General overheads cost ₹4,00,000.
Price Per Unit in ₹
Inventory at beginning 10,000 litres @ ₹ 92 per litre.
Cost Price 150
Purchases-June 1, 2021, 20,000 litres @ ₹ 90 per litre, June 30, 2021, 10,000 litres @ ₹ 95 per litre. Freight inward 10
Closing inventory 13,000 litres.

Replacement Cost 152
You are required to compute the following by FIFO method as per AS 2:
Closing balance of Finished Good ‘B’ in units on 31st March,2022 1,600
(i) Value of Inventory on 30th June, 2021.
(ii) Amount of cost of goods sold for June,2021. Price Per Unit in ₹
(iii) Profit/Loss for the month of June,2021. (PYP 5 Marks May ‘22) Material Consumed 225
Direct Labour 75
Direct variable overhead 60
Answer 19
Total Fixed Overheads amounts to ₹ 1,00,000 on normal capacity of 20,000 units.You are re-
₹ quired to calculate the value of Closing Stock of Raw materials and Closing Stock of Finished
Goods, as on 31st March, 2022, as per AS 2, when selling price of Finished Goods ‘B’ is ₹ 360 per
Cost of closing inventory for 13,000 litres as on 30th June 2021 unit. (PYP 5 Marks Nov ’22)
10,000 litres @ ₹ 95 9,50,000
Answer 20
3,000 litres @ ₹ 90 2,70,000
Value of inventory (determined at cost in absence of NRV) - Raw Material A ₹
12,20,000 Cost Price 150
Calculation of cost of goods sold Add: Freight Inward 10
Opening inventories (10,000 litres @ ₹ 92) 9,20,000 Cost per unit 160
Purchases June – 1 (20,000 litres @ ₹ 90) 18,00,000 Replacement cost per unit of raw material 152
June – 30 (10,000 litres @ 95) 9,50,000

36,70,000 As per AS 2 (Revised) “Valuation of Inventories”, the inventories are to be valued at lower of cost
or net realizable value. Materials and other supplies held for use in the production of inventories
are written down below cost if the selling price of finished product containing the material does Question 22
not exceed the cost of the finished product. In the given case, net realizable value of the Product
‘B’ (Finished Goods) is ₹ 360 per unit which is less than its cost ₹ 365 per unit. Raw Material is to be Which item of inventory is under the scope of AS 2 (Revised)?
valued at replacement cost.
a. WIP arising under construction con- b. Raw materials
Value of the closing stock of raw material on 31/03/2022 would be ₹ 1,14,000 (750 units X ₹152 per unit).
tracts
Finished Goods B ₹ c. Shares d. Debentures held as stock in trade
Materials consumed 225 Ans: (b)
Direct Labour 75
Direct Variable overheads 60 Question 23
Fixed overheads (₹ 1,00,000/20,000 units) 5
Materials and other supplies held for use in the production of inventories are not written downbelow-
Cost per unit 365 cost if the finished products in which they will be incorporated are expected to be
Net realizable value per unit 360 a. Sold at or above cost b. Sold above cost
As per AS 2 (Revised) “Valuation of Inventories”, the inventories are to be valued at lower of cost ornet c. Sold less than cost d. Sold at market value(where mar-
realizable value. Hence, Finished Goods are to be valued at NRV since NRV is less than the cost. ket value is more than cost)
Value of the closing stock of Finished goods as on 31/03/2022 would be ₹ 5,76,000 (1,600 units X ₹ Ans: (a)
360 per unit).
Question 24
Question 21
All of the following costs are excluded while computing value of inventories except?
Alpha Ltd. sells flavored milk to customers; some of the customers consume the milk in the shop run
by Alpha Limited. While leaving the shop, the consumers leave the empty bottles in the shop and the a. Selling and Distribution costs b. Allocated fixed production overheads
company takes possession of these empty bottles. The company has laid down a detailed internal based on normal capacity
record procedure for accounting for these empty bottles which are sold by the company by calling for
tenders. c. Abnormal wastage d. Storage costs (which is necessary
part of the production process)
Keeping this in view:
Decide whether the inventory of empty bottles is an asset of the company; Ans: (b)
If so, whether the inventory of empty bottles existing as on the date of Balance Sheet is to be con-
sidered as inventories of the company and valued as per AS 2 or to be treated as scrap and shownat Questions 25
realizable value with corresponding credit to ‘Other Income’? (RTP Nov ’23)
Identify the statement(s) which is/are incorrect.
Answer 21 a. Storage costs which is a necessary part of the production process isincluded in in-
As per the ‘Framework on Presentation and Preparation of Financial Statements’:
ventory valuation.
Tangible objects or intangible rights carrying probable future benefits, owned by an enterprise are
b. Administration overheads are never included in inventory valuation.
called assets. c. Full amount of variable production overheads incurred are included in inventory val-
Alpha Ltd. sells these empty bottles by calling tenders. It means further benefits are accrued on its sale.
uation.
Therefore, empty bottles are assets for the company. d. Administration overheads are always included in inventory valuation.
As per AS 2, inventories are assets held for sale in the ordinary course of business.
Ans: (b)
Inventory of empty bottles existing on the Balance Sheet date is the inventory and Alpha Ltd. has
detailed controlled recording and accounting procedure which duly signify its materiality.
Thus, inventory of empty bottles cannot be considered as scrap and should be valued as inventory in
accordance with AS 2.
Theoretical Questions Answers Practical Questions Answers
Questions 26 Questions 27
“In determining the cost of inventories, it is appropriate to exclude certain costs and rec- Capital Cables Ltd., has a normal wastage of 4% in the production process. During the year 20X1-20X2
ognise them as expenses in the period in which they are incurred”.Provide examples of the Company used 12,000 MT of raw material costing ₹ 150 per MT. At the end of the year 630 MT of
such costs as per AS 2 (Revised) ‘Valuation of Inventories’. 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 (Revised) the treatment of normal loss and abnormal loss and also
Answers 26 findout the amount of abnormal loss, if any.
As per AS 2 (Revised) ‘Valuation of Inventories’, certain costs are excluded fromthe cost of the inventories
Answers 27
and are recognised as expenses in the period in which incurred. Examples of such costs are:
As per AS 2 (Revised) ‘Valuation of Inventories’, abnormal amounts of wasted materials, labour and
abnormal amount of wasted materials, labour, or other production costs; other production costs are excluded from cost of inventories and such costs are recognised as ex-
a) storage costs, unless those costs are necessary in the production process prior to a penses in the period in which they are incurred. The normal loss will be included in determining the
further production stage; cost of inventories (finished goods) at the year end.
b) administrative overheads that do not contribute to bringing the inventories to their

present location and condition; and
Amount of Abnormal Loss:
c) selling and distribution costs.
Material used 12,000 MT @₹150 = ₹18,00,000
Normal Loss (4% of 12,000 MT) 480 MT
Net quantity of material 11,520 MT
Abnormal Loss in quantity 150 MT
Abnormal Loss 23,437.50
[150 units @ ₹ 156.25 (₹ 18,00,000/11,520)
Amount ₹ 23,437.50 will be charged to the Statement
of Profit and Loss.
Questions 28
Mr. Mehul gives the following information relating to items forming part of inventory as on 31-3-
20X1. His factory produces Product X using Raw material A.
(i) 600 units of Raw material A (purchased @ ₹ 120). Replacement cost of raw ma-
terial A as on 31-3-20X1 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 addi-
tional cost of ₹ 60 per unit.
(iii) 1500 units of finished Product X and total cost incurred ₹ 320 per unit. Expected
selling price ofProduct X is ₹ 300 per unit.
Determine how each item of inventory will be valued as on 31-3-20X1. Also calculate the
value of total inventory as on 31-3-20X1.
Answers 28
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 inthe 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 Answers 29
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. Valuation of unfinished unit
Hence the valuation will be done as under: ₹
(i) 600 units of raw material will be written down to replacement cost as market val- Net selling price 750
ue of finished product is less than its cost, hence valued at ₹ 90 per unit.
Less: Estimated cost of completion (310)
(ii) 500 units of partly finished goods will be valued at 240 per unit i.e. lower of cost
440
(₹ 260) or Net realisable value ₹ 240 (Estimated selling price ₹ 300 per unit less ad-
ditional cost of ₹ 60). Less: Brokerage (4% of 750) (30)
(iii) 1,500 units of finished product X will be valued at NRV of ₹ 300 per unit since it is lower Net Realisable Value 410
than cost ₹ Cost of inventory 530
320 of product X. Value of inventory (Lower of cost and net realisable value) 410
Valuation of Total Inventory as on 31.03.20X1:
Units Cost NRV / Value = units × cost or

NRVwhichever is less Question 30 (Illustration)
(₹) Replacement
(₹)
cost The company deals in three products, A, B and C, which are neither similar nor interchangeable. At the
Raw material A 600 120 90 54,000 time of closing of its account for the year 20 X1-X2, the Historical Cost and Net Realisable Value of the
items of closing stock are determined as follows:
Partly finished goods 500 260 240 1,20,000
Finished goods X 1,500 320 300 4,50,000 Items Historical Cost (₹ in lakhs) Net Realisable Value (₹ in lakhs)
Value of Inventory 6,24,000 A 40 28

B 32 32
Questions 29 C 16 24
On 31st March 20X1, a business firm finds that cost of a partly finished unit on that date is ₹ 530. The unit What will be the value of closing stock?
can be finished in 20X1-X2 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 Answers 30
at which the unfinished unit should be valued as at 31st March, 20X1 for preparation of final accounts.
As per AS 2 (Revised) on ‘Valuation of Inventories’, inventories should be valued at the lower of cost
Assume that the partly finished unit cannot be sold in semi-finished form and its NRV is zerowithout pro-
and net realisable value. Inventories should be written down to net realisable value on an item-by-
cessing it further.
item basis in the given case.
Items Historical Net Realisable Value Valuation of closing

Cost stock (₹ in lakhs)
(₹ in lakhs)
(₹ in lakhs)
A B 40 28 28
C
32 32 32
16 24 16
88 84 76
Hence, closing stock will be valued at ₹ 76 lakhs.
Question 31 (Illustration) Answers 33

X Co. Limited purchased goods at the cost of ₹ 40 lakhs in October, 20X1. Till March, 20X2, 75% of the In accordance with AS 2 (Revised), the cost of conversion include a systematic allocation of fixed and
stocks were sold. The company wants to disclose closing stock at 10 lakhs. The expected sale value is ₹11 variable overheads that are incurred in converting materials into finished goods. The allocation of fixed
lakhs and a commission at 10% on sale is payable to the agent. Advise, what is the correct closing stock overheads for the purpose of their inclusion in the cost of conversion is based on normal capacity of the
to be disclosed as at 31.3.20X2. production facilities.
Cost per kg. of finished goods:

Answers 31
₹
As per AS 2 (Revised) “Valuation of Inventories”, the inventories are to be valued at lower of cost or net
realisable value. Material Cost 200
In this case, the cost of inventory is ₹ 10 lakhs. The net realisable value is 11,00,000 90% = ₹ 9,90,000. So, Direct Labour 40
Direct Variable Production Overhead 20
20,00,000 10 70
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 yearend.
2,00,000
State with reference to Accounting Standard, how will you value the inventories in this case?
Fixed Production Overhead
Answers 32 270
As per AS 2 (Revised), abnormal amounts of wasted materials, labour and other production costs are Hence the value of 4,000 kgs. of finished goods = 4,000 kgs x 270 = 10,80,000
excluded from cost of inventories and such costs are recognised as expenses in the period in which they
are incurred.
In this case, normal waste is 250 MT and abnormal waste is 50 MT. The cost of 250 MT will be included in
determining the cost of inventories (finished goods) at the year end. The cost of abnormal waste (50 MT x
1,052.6315 = ₹ 52,632) will be charged to the profit and loss statement.
Cost per MT (Normal Quantity of 4,750 MT) = 50,00,000 / 4,750 = ₹ 1,052.6315 Total value of inventory =
4,700 MT x ₹ 1,052.6315 = ₹ 49,47,368.
You are required to value the inventory per kg of finished goods consisting of:
per kg.
Material cost 200
Direct labour 40
Direct variable overhead 20
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.

AS 10-Property, Plant & Equipment AS 10-Property, Plant & Equipment
Question 1
Attempts MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV Mohan Ltd. 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 (tem-
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023 porary) site.
Study The following incremental costs will be incurred:
Q.20 TO Q.53
Mat.
Setup costs of Rs. 5,00,000 to install machinery in the new location.Rent of Rs. 15,00,000
Past
NO Q.4 NO NO NO Q.16 NO Q.17 Q.18 NO Q.19 NO Removal costs of Rs. 3,00,000 to transport the machinery from the old location to the temporarylo-
Exams
cation.
MTP Q.1,Q.3 Q.1,Q.2
Q.1 Q.6 Q.3,Q.5 Q.1 Q.2,Q.3 Q.1,Q.4 Q.7 Q.1,Q.4 Q.7 Q.4,Q.16 Mohan Ltd. wants to seek your guidance as whether these costs can be capitalized into the cost of the
Q.7 Q.3
new building. You are required to advise in line with AS 10 “Property, Plant and Equipment”. (MTP 5
RTP Q.5 Q.7 Q.7 Q.12 Q.11 Q.10 Q.9 Q.8 Q.13 Q.14 Q.15 Q.7 Marks May 20, April 21, March 18, Oct ’18 & Apr’22 & Oct ‘22) (Old & New SM)
Answer 1
Constructing or acquiring a new asset may result in incremental costs that would have been avoided if
the asset had not been constructed or acquired. These costs are not be included in the cost of the asset
if they are not directly attributable to bringing the asset to the location and condition necessary for it to
be capable of operating in the manner intended by management.
The costs to be incurred by the company are in the nature of costs of reducing or reorganizing the
operations of the accompany. These costs do not meet that requirement of AS 10 “Property, Plant and
Equipment” and cannot, therefore, be capitalized.
Question 2
(i) Entity A carried plant and machinery in its books at ₹ 2,00,000 which were destroyed in a
fire. Thesemachines were insured ‘New for old’ and were replaced by the insurance com-
pany with new machines of fair value ₹ 20,00,000. The old destroyed machines were ac-
quired by the insurance company and the company did not receive any cash compen-
sation. State, how Entity A should account for the same? (MTP 2.5 Marks Oct 20, Mar 22)
(ii) Omega Ltd, a supermarket chain, is renovating one of its major stores. The store will have
more available space for store promotion outlets after the renovation and will include a
restaurant. Management is preparing the budgets for the year after the store reopens,
which include the cost of remodelling and the expectation of a 15% increase in sales re-
sulting from the store renovations, which will attract new customers.
Decide whether Omega Ltd. can capitalize the remodelling cost or not as per provisions
of AS 10
“Property plant & Equipment”. (MTP 2.5 Marks Oct 20, Oct’19, Mar 22)
Answer 2
(i) Entity A should account for a loss in the Statement of Profit and Loss on de-recognition of
the carrying value of plant and machinery in accordance with AS 10 on Property, Plant and
Equipment. Entity A should separately recognize a receivable and a gain in the income
statement resulting from the insurance proceeds once receipt is virtually certain. The receiv- However, the cost of salaries of staff engaged in preparation of restaurant Rs. 7,50,000 before its
able should be measured at the fair value of assets provided by the insurer. opening are in the nature of operating expenditure that would be incurred if the restaurant was
open and these costs are not necessary to bring the restaurant to the conditions necessary for it
(ii) The expenditure in remodelling the store will create future economic benefits (in the form of
to be capable of operating in the manner intended by management. Hence, Rs. 7,50,000 should
15%of increase in sales). Moreover, the cost of remodelling can be measured reliably, there-
be expensed.
fore, it should be capitalized in line with AS 10.
Question 5
Question 3
In the year 2018-19, an entity has acquired a new freehold building with a useful life of 50 years
ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom-made machine
for Rs. 75,00,000. The entity desires to calculate the depreciation charge per annum using a
amounting to Rs. 4,00,000. As on 31st March, 2020 before delivery of the machine, ABC Ltd. had to
straight-line method. It has identified the following components (with no residual value of lifts
change its method of production. The new method will not require the machine ordered and so it
& fixtures at the end of their useful life) as follows:
shall be scrapped after delivery. The expected scrap value is ‘NIL’. Show the treatment of machine
in the books of ABC Ltd. (MTP 5 Marks Oct 20, Oct 18, Mar 22, Aug 18, Oct’19)
Component Useful life (Years) Cost
Answer 3 Land Infinite Rs. 10,00,000
A liability is recognized when outflow of economic resources in settlement of a present obligation can Roof 25 Rs. 15,00,000
be anticipated and the value of outflow can be reliably measured. In the given case, ABC Ltd. should Lifts 20 Rs. 7,50,000
recognize a liability of ₹ 4,00,000 payable to XYZ Ltd. When flow of economic benefit to the enterprise
beyond the current accounting period is considered improbable, the expenditure incurred is recog- Fixtures 10 Rs. 2,50,000
nized as an expense rather than as an asset. In the present case, flow of future economic benefitfrom Remainder of building 50 Rs. 40,00,000
the machine to the enterprise is improbable. The entire amount of purchase price of the machine
Rs. 75,00,000
should be recognized as an expense. Hence ABC Ltd. should charge the amount of ₹ 4,00,000 (being
loss due to change in production method) to Profit and loss statement and record the corresponding Calculate depreciation for the year 2018-19 as per componentization method. Also state the treatment,
liability (amount payable to XYZ Ltd.) for the same amount in the books for the year ended 31st March, in case Roof requires replacement at the end of its useful life. (MTP Oct. ‘19, 2.5 Marks)(Same concept
2020. different figures RTP May’18)
Answer 5
Question 4
Statement showing amount of depreciation as per Componentization Method
Neon Enterprise operates a major chain of restaurants located in different cities. The company has ac-
quired 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 restau- Component Depreciation (Per annum) (Rs.)
rant will be closed.
Land Nil
Management has prepared the following budget for this period – Salaries of the staff engaged in prepa-
Roof 60,000
ration of restaurant before its opening Rs. 7,50,000 Construction and remodeling cost of restaurant Rs.
30,00,000. Lifts 37,500
Explain the treatment of these expenditures as per the provisions of AS 10 “Property, Plant and Fixtures 25,000
Equipment”.(MTP 5 Marks March ’21 , Sep ’22 & Oct ‘23) (PYP Nov’18, 5 Marks) Remainder of Building 80,000
2,02,500
Answer 4
Note: When the roof requires replacement at the end of its useful life the carrying amount will benil. The
As per provisions of AS 10, any cost directly attributable to bring the assets to the location and con- cost of replacing the roof should be recognised as a new component.
ditions necessary for it to be capable of operating in the manner indicated by the management are
called directly attributable costs and would be included in the costs of an item of PPE.
Question 6
Management of Neon Enterprise should capitalize the costs of construction and remodelling the
restaurant, because they are necessary to bring the restaurant to the condition necessary for it to be Mohan Ltd. purchased an asset on 1st January 2013 for Rs. 5,00,000 and the asset had an estimated
capable of operating in the manner intended by management. The restaurant cannot be opened useful life of 5 years and a residual value of nil. On 1st January 2017, the directors review the esti-
without incurring the construction and remodelling expenditure amounting Rs. 30,00,000 and thus the mated life and decide that the asset will probably be useful for a further 4 years. You are required to
expenditure should be considered part of the asset. compute the amount of depreciation for each year, if company charges depreciation on Straight Line
basis. [MTP April ‘19, 5 Marks]
Answer 6 Answer 7
The entity has charged depreciation using the straight-line method at Rs. 1,00,000 per annum i.e According to AS 10 (Revised), the following costs can be capitalized:
(5,00,000/5 years). On 1st January 2017, the asset’s net book value is [5,00,000 - (1,00,000 x4)] Rs.
1,00,000. The remaining useful Iife is 4 years. The company should amend the annual provision for Cost of the plant Rs. 25,00,000
depreciation to charge the unamortized cost over the revised remaining life of four years. Conse- Initial delivery and handling costs Rs. 2,00,000
quently, it should charge depreciation for the next 4 years at Rs. 25,000 per annum i.e. (1,00,000/4
Cost of site preparation Rs. 6,00,000
years).
Consultants’ fees Rs. 7,00,000
Question 7 Estimated dismantling costs to be incurred after 7 years Rs. 3,00,000
Rs. 43,00,000
ABC Ltd. is installing a new plant at its production facility. It has incurred these costs:
Cost of the plant (cost per supplier’s invoice plus taxes) Rs. 25,00,000 Note: Interest charges paid on “Deferred credit terms” to the supplier of the plant (not a qualifying as-
set) of Rs.2,00,000 and operating losses before commercial production amounting to Rs.4,00,000 are
Initial delivery and handling costs Rs. 2,00,000
not regarded as directly attributable costs and thus cannot be capitalized. They should be written off to
Cost of site preparation Rs. 6,00,000 the Statement of Profit and Loss in the period they are incurred.
Consultants used for advice on the acquisition of the plant Rs. 7,00,000
Question 8
Interest charges paid to supplier of plant for deferred credit Rs. 2,00,000
A property costing ₹ 10,00,000 is bought on 1.4.2020. Its estimated total physical life is 50 years.
Estimated dismantling costs to be incurred after 7 years Rs. 3,00,000
However, the company considers it likely that it will sell the property after 25 years. The estimated
Operating losses before commercial production Rs. 4,00,000 residual value in 25 years’ time, based on current year prices, is:
Case (a) ₹ 10,00,000

Please advise ABC Ltd. on the costs that can be capitalised in accordance with AS 10 (Revised). (MTP
Aug. ‘18, 5 Marks)(Same concept lesser adjustments MTP 5 Marks Nov’21, MTP 5 Marks Mar’23, Old & Case (b) ₹ 9,00,000
New SM, RTP May’19, Nov’18 & Nov ‘23)
You are required to compute the amount of depreciation charged for the year ended 31.3.2021.
(RTPNov 21, Old & New SM)
Answer 8
Case (a)
The company considers that the residual value, based on prices prevailing at the balance sheet
date, will equal the cost. There is, therefore, no depreciable amount and depreciation is zero.
Case (b)
The company considers that the residual value, based on prices prevailing at the balance sheet
date, will be ₹ 9,00,000 and the depreciable amount is, therefore, ₹ 1,00,000.
Annual depreciation (on a straight line basis) will be ₹ 4,000 [{10,00,000 – 9,00,000} ÷ 25].
Question 9
You are required to give the correct accounting treatment for the following in line with
provisions ofAS 10:
(a) Trozen Ltd. operates a major chain of supermarkets all over India. It acquires a new store
in Pune which requires significant renovation expenditure. It is expected that the reno-
vations will be done in 2 months during which the store will be closed. The budget for this
period, including expenditure related to construction and remodelling costs (Rs. 18 lakhs), Question 10
salaries of staff (Rs. 2 lakhs) who will be preparing the store before its opening and related
utilities costs (Rs. 1.5 lakhs), is prepared. The cost of salaries of the staff and utilities are Omega Ltd. contracted with a supplier to purchase machinery which is to be installed in its one de-
operating expenditures that would be incurred even after the opening of the supermarket. partment in three months’ time. Special foundations were required for the machinery which were
What will the treatment of all these expenditures in the booksof accounts? to be prepared within this supply lead time. The cost of the site preparation and laying foundations
were 1,40,000. These activities were supervised by a technician during the entire period, who is em-
(b) ABC Ltd is setting up a new refinery outside the city limits. In order to facilitate the con- ployed for this purpose at ₹ 45,000 per month.
struction of the refinery and its operations, ABC Ltd. is required to incur expenditure on the
construction/development of railway siding, road and bridge. Though ABC Ltd. incurs the The machine was purchased at ₹ 1,58,00,000 and ₹ 50,000 transportation charges were incurred to
expenditure on the construction/development, it will not have ownership rights on these bring the machine to the factory site. An Architect was appointed at a fee of ₹ 30,000 to supervise
items and they are also available for use to other entities and public at large. Can ABC Ltd. machinery installation at the factory site. You are required to ascertain the amount at which the Ma-
capitalize expenditure incurred on these items as property, plant and equipment (PPE)? chinery should be capitalized under AS 10. (RTP Nov 20)
(RTP May ’21)
Answer 10
Answer 9 Calculation of Cost of Machinery
(a) Trozen Ltd. should capitalize the costs of construction and remodelling the supermarket, be-
cause they are necessary to bring the store to the condition necessary for it to be capable of Particulars ₹
operating in the manner intended. The supermarket cannot be opened without incurring the
remodelling expenditure. Therefore, this construction and remodelling expenditure of Rs. 18 Purchase Price Given 1,58,00,000
lakh should be considered as part of the cost of the asset. However, the cost of salaries of the Add: Site Preparation Cost Given 1,40,000
staff Rs. 2 lakh and utilities cost Rs. 1.5 lakh are operating expenditures that would be incurred
Technician’s Salary Specific/Attributable overheads for 3 1,35,000
even after the opening of the supermarket. Therefore, these costs are not necessary to bring
months (45,000 x3)
the store to the condition necessary for it to be capable of operating in the manner intended
by the management and should be expensed. Initial Delivery Cost Transportation 50,000
(b) AS 10 states that the cost of an item of property, plant and equipment shall be recognized as Professional Fees for Architect’s Fees 30,000
an asset if, and only if: Installation
(a) it is probable that future economic benefits associated with the item will flow to the Total Cost of Asset 1,61,55,000
entity; and
(b) the cost of the item can be measured reliably. Question 11
Further, the standard provides that the standard does not prescribe the unit of measure for recognition,
(a) Entity A has a policy of not providing for depreciation on PPE capitalized in the year until
i.e., what constitutes an item of property, plant and equipment. Thus, judgement is required in applying
the following year, but provides for a full year’s depreciation in the year of disposal of an
the recognition criteria to an entity’s specific circumstances. The cost of an item of property, plant and
asset. Is this acceptable?
equipment comprise any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management. (b) Entity A purchased an asset on 1st January 2016 for Rs.1,00,000 and the asset had an esti-
mated useful life of 10 years and a residual value of nil. On 1st January 2020, the directors
In the given case, railway siding, road and bridge are required to facilitate the construction of the refin-
review the estimated life and decide that the asset will probably be useful for a further 4
ery and for its operations. Expenditure on these items is required to be incurred in order to get future
years. Calculate the amount of depreciation for each year, if company charges depreci-
economic benefits from the project as a whole which can be considered as the unit of measure for the
ation on Straight Line basis.
purpose of capitalization of the said expenditure even though the company cannot restrict the access of
others for using the assets individually. It is apparent that the aforesaid expenditure is directly attributable (c) The following items are given to you:ITEMS
to bringing the asset to the location and condition necessary for it to be capable of operating in the man- a. Costs of testing whether the asset is functioning properly, after deducting the net
ner intended by management. proceeds from selling any items produced while bringing the asset to that location
In view of this, even though ABC Ltd. may not be able to recognize expenditure incurred on these assets as and condition (such as samples produced when testing equipment);
an individual item of property, plant and equipment in many cases (where it cannot restrict others from b. Costs of conducting business in a new location or with a new class of customer (in-
using the asset), expenditure incurred may be capitalized as a part of overall cost of the project. From this, cluding costs of staff training);
it can be concluded that, in the given case the expenditure incurred on these assets, i.e., railway siding,
road and bridge, should be considered as the cost of constructing the refinery and accordingly, expen- Any costs directly attributable to bringing the asset to the location and condition necessary forit to
diture incurred on these items should be allocated and capitalized as part of the items of property, plant be capable of operating in the manner intended by management
and equipment of the refinery. c. Costs of opening a new facility or business, such as, inauguration costs;
d. Purchase price, including import duties and non–refundable purchase
taxes, after deductingtrade discounts and rebates. pose of Rs.45,000 per month. The technician’s services were given by Department B to Department
A, which billed the services at Rs.49,500 per month after adding 10% profit margin.
With reference to AS 10 “Property, Plant and Equipment”, classify
the above itemsunder the following heads:
The machine was purchased at Rs.1,58,34,000 inclusive of IGST @ 12% for which input credit is
HEADS: available to Shrishti Ltd. Rs.55,770 transportation charges were incurred to bring the machine to
the Page factory site. An Architect was appointed at a fee of Rs. 30,000 to supervise machinery
(i) Purchase Price of PPE installation at the factory site.
(ii) Directly attributable cost of PPE or
(iii) Cost not included in determining the carrying amount of an item of PPE. (RTP May 20) Ascertain the amount at which the Machinery should be capitalized under AS 10 considering that
IGST credit is availed by the Shristhi Limited. Internally booked profits should be eliminated in
Answer 11 arriving at the cost of machine. (RTP Nov 19)
(a) The depreciable amount of a tangible Property Plant & Equipment should be allocated on Answer 12
a systematic basis over its useful life. The depreciation method should reflect the pattern
in which the asset’s future economic benefits are expected to be consumed by the entity. Calculation of Cost of Property Plant & Equipment (i.e. Machinery)
Useful life means the period over which the asset is expected to be available for use by the
entity. Depreciation should commence as soon as the asset is acquired and is available Particulars ₹
for use. Thus, the policy of Entity A is not acceptable.
Purchase Price Given (Rs.158,34,000 x 100/112) 1,41,37,500
(b) The entity has charged depreciation using the straight-line method at Rs.10,000 per an-
Add: Site Preparation Cost Given 1,41,870
num i.e (1,00,000/10 years). On 1st January 2020, the asset’s net book value is [1,00,000 –
(10,000 x 4)] = Rs.60,000. The remaining useful life is 4 years. The company should amend Technician’s Salary Specific/Attributable overheads for 3 1,35,000
the annual provision for depreciation to charge the unamortized cost over the revised re-
months (See Note) (45,000 x3)
maining life of four years. Consequently, it should charge depreciation for the next 4 years
at Rs.15,000 per annum i.e. (60,000 / 4 years). Depreciation is recognized even if the Fair Initial Delivery Cost Transportation 55,770
value of the Asset exceeds its Carrying Amount. Repair and maintenance of an asset do Professional Fees for Architect’s Fees 30,000
not negate the need to depreciate it. Installation
(1) Costs of testing whether the asset is functioning properly, after deducting the net pro- Total Cost of Asset 1,45,00,140
ceeds from selling any items produced while bringing the asset to that location and con-
dition (such as samples produced when testing equipment) will be classified as “Directly
Question 13
attributable cost of PPE”.
(2) Costs of conducting business in a new location or with a new class of customer (including A Ltd. has incurred the following costs. Determine if the following costs can be added to the invoiced
costs of staff training) will be classified under head (iii)as it will not be included in deter- purchase price and included in the initial recognition of the cost of the item of property, plant and
mining the carrying amount of an item of PPE. equipment:
(3) Any costs directly attributable to bringing the asset to the location and condition nec- 1. Import duties paid
essary for it to be capable of operating in the manner intended by management will be
2. Shipping costs and cost of road transport for taking the machinery to factory
included in determination of Purchase Price of PPE
3. Insurance for the shipping
(4) Costs of opening a new facility or business, such as, inauguration costs will be classified
under head (iii) as it will not be included in determining the carrying amount of an item 4. Inauguration costs for the factory
of PPE.
5. Professional fees charged by consulting engineer for the installation process
(5) Purchase price, including import duties and non–refundable purchase taxes, after de-
6. Costs of advertising and promotional activities
ducting trade discounts and rebates will be included in determination of Purchase Price
of PPE. 7. Administration and other general overhead costs
8. Cost of site preparation. (RTP May ’22)
Question 12
Answer 13
Shrishti Ltd. contracted with a supplier to purchase machinery which is to be installed in its Department
A in three months’ time. Special foundations were required for the machinery which were to be prepared Included in Cost: Point no. 1,2,3,5,8 Excluded from Cost: Point no. 4,6,7
within this supply lead time. The cost of the site preparation and laying foundations were Rs.1,41,870.
These activities were supervised by a technician during the entire period, who is employed for this pur-
Question 14 The machine was ready for use on 15.01.2021 but was used from 01.02.2021. Due to this delay further ex-
penses of ₹ 8,900 were incurred. Calculate the value at which the plant should be capitalized in the
RS Ltd. has acquired a heavy plant at a cost of Rs. 2,00,00,000. The estimated useful life is 10 years. books of Star Limited. (RTP May 23)
At the end of the 2nd year, one of the major components i.e. the Boiler has become obsolete (which
wasacquired at price of Rs. 50,00,000) and requires replacement, as further maintenance is un- Answer 15
economical. The remainder of the plant is perfect and is expected to last for next 8 years. The cost Calculation of Cost of Plant
of a new boileris Rs. 60,00,000. Can the cost of the new boiler be recognised as an asset, and, if so,
what should be thecarrying value of the plant at the end of second year? (RTP Nov’22)
Particulars Rs.
Answer 14 Purchase Price Given 6,80,000

Add: Site Preparation Cost Given 21,200
Recognition of Asset: The new boiler will produce economic benefits to RS Ltd., and the cost is mea-
surable. Hence, the item should be recognized as an asset. The cost old boiler should be de- recog- Labour charges (56,000×200/500) Given 22,400
nized and the new boiler will be added .
Spare parts 5,000
Statement showing cost of new boiler and machine after year 2 Supervisor’s Salary 25% of Rs. 26,000 6,500
Original cost of plant ₹ 2,00,00,000 Technical costs 1/10 of Rs. 34,000 3,400
Less: WAccumulated depreciation [(2,00,000/10)*2] ₹ 40,00,000 Test run and experimental production Given 18,000
charges
(Carrying value of the plant after two years ₹ 1,60,00,000
Architect Fees for set up Given 11,000
Less: Current Cost of Old Boiler to be derecognized Depreciation on assets used for installation Given 12,000
Less: WDV of Boiler (replaced) after 2 years 40,00,000 Total Cost of Asset 7,79,500
(50,00,000/10 x 8) Less: GST credit receivable (40,000)
1,20,00,000 Value to be capitalized 7,39,500
Add: Cost of new Boiler to be recognized 60,00,000 Note: Further Expenses of ₹ 8,900 from 15.1.2021 to 1.2.2021 to be charged to profit and loss A/c as
Revised carrying amount of Plant 1,80,00,000 plant was ready for production on 15.1.2021.
Question 16
Question 15
A Ltd. had following assets. Calculate depreciation for the year ended 31st March, 2020 for
Star Limited purchased machinery for ₹ 6,80,000 (inclusive of GST of ₹ 40,000). Input credit is available
each Asset as per AS 10 (Revised):
for entire amount of GST paid. The company incurred the following other expense for installation.
Cost of preparation of site for installation 21,200Total Labour charges 56,000 (200 out of the total (i) Machinery purchased for ₹ 10 lakhs on 1st April, 2015 and residual value after
of 500 men hours worked, were spent on installation of the machinery) useful life of 5 years, based on 2015 prices is ₹ 10 lakhs.
(ii) Land for ₹ 50 lakhs.
Spare parts and tools consumed in installation 5,000
Total salary of supervisor 26,000
(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
(Time spent for installation was 25% of the total time worked) not begin using the machine until 31st March, 2020.
Total technical expense 34,000 (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
(1/10 relates to the plant installation)
asset for further 2 years only. (PYP 5 Marks Nov 20)(MTP 5 Marks Sep ’23)
Test run and experimental production expenses 18,000
Consultancy charges to architect for plant set up 11,000
Depreciation on assets used for installation 12,000
Answer 16 Answer 17
Computation of amount of depreciation as per AS 10 I. Statement Showing the Computation of the amount at which the Machinery should be
capitalized in the books of A Limited
₹
Particulars Amount
(i) Machinery purchased on 1/4/15 for ₹ 10 lakhs (having residual value of ₹ 10 Nil
lakhs) (₹)
Reason: The company considers that the residual value, based on prices Purchase cost of machinery Given 1,27,50,000
prevailing at the balance sheet date, will equal the cost. Therefore, there is Add: Site Preparation Cost Given 2,10,000
no depreciable amount and depreciation is correctly zero.
Architect’s Salary Specific / Attributable 1,40,000
(ii) Land (50 lakhs) (considered freehold) Nil overheads for 4 months
Reason: Land has an unlimited useful life and therefore, it is not depreciated. (₹ 35,000 x 4)
(iii) Machinery constructed for own use (₹ 5,00,000/10) 50,000 Initial Delivery Cost Transportation 2,12,500
Reason: The entity should begin charging depreciation from the date the ma- Professional Fees for Installation Engineer’s Fees 37,500
chine is ready for use i.e. 1st April,2019. The fact that the machine was not used
Total Cost of Machinery to be 1,33,50,000
for a period after it was ready to be used is not relevant in considering when
capitalized
to begin charging depreciation.
(iv) Machinery having revised useful life Reason: The entity has charged deprecia- 15,000 Management should capitalize the costs of construction and remodelling the store, be-
tion using the straight-line method at ₹ 10,000 per annum i.e (50,000/5 years). cause they are necessary to bring the store to the condition necessary for it to be capa-
On 1st April,2019 the asset’s net book value is [50,000 – (10,000 x 2)] i.e. ₹ 30,000. ble of operating in the mannerintended by management. The store cannot be opened
The remaining useful life is 2 years asper revised estimate. The company should without incurring the remodelling expenditure, and thus the expenditure should be
amend the annual provision for depreciation to charge the unamortized cost considered part of the asset. However, if the cost of salaries, utilities and storage of
over the revised remaining life of 2 years. Consequently, it should charge depre- goods are in the nature of operating expenditure that would be incurred if the store was
ciation for the next 2 years at ₹ 15,000 per annum i.e. (30,000 / 2 years). open, then these costs are not necessary to bring the store to the condition necessary
for it to be capable of operating in the manner intended by management and should be
expensed.
Question 17
Question 18
I. A Limited has contracted with a supplier to purchase machinery which is to be installed at
its new plant in four months’ time. Special foundations were required for the machinery
(i) XYZ Limited provided you the following information for the year ended 31 st March, 2022.
which were to beprepared within this supply lead time. The cost of the site preparation and
laying foundations were ₹ 2,10,000. These activities were supervised by an Architect during
the entire period, who is employed for this purpose at a salary of ₹ 35,000 per month. The
The carrying amount of a property at the end of the year amounted to ₹
machinery was purchased for ₹ 1,27,50,000 and a sum of ₹ 2,12,500 was incurred towards
2,16,000 (cost/value ₹ 2,50,000 and accumulated depreciation ₹ 34,000). On this
transportation charges to bring the machinery to the plant site. An Engineer was appoint-
date the property was revalued and was deemed to have a fair value of ₹ 1,90,000.
ed at a fees of ₹ 37,500 to supervise the installation of the machinery at the plant site. You
The balance in the revaluation surplus relating to a previous revaluation gain for
are required to ascertain the amount at which the machinery should be capitalized in the
this property was ₹ 20,000.
books of A Limited. (PYP 2.5 Marks Jul’21)
II. B Limited, which operates a major chain of retail stores, has acquired a new store location. (ii) You are required to calculate the revaluation loss as per AS 10 (Revised) and give its treat-
The new location requires substantial renovation expenditure. Management expects that ment in the books of accounts.
the renovation will last for 4 months during which the store will be closed. Management An asset that originally cost ₹ 76,000 and had accumulated depreciation of ₹ 62,000
has prepared the budgetfor this period including expenditure related to construction and was disposed of during the year for ₹ 4,000 cash.
re-modelling costs, salary of staffwho shall be preparing the store before its opening and
related utilities cost. How would such expenditure be treated in the books of B Limited ? You are required to explain how the disposal should be accounted for in the financial state-
(PYP 2.5 Marks, July,21, Old & New SM) mentsas per AS 10 (Revised). (PYP 5 Marks May ‘22)
Answer 18 (iii) Profit/Loss on exchange of Plant & Machinery. (PYP 5 Marks May ‘23)
As per AS 10, a decrease in the carrying amount of an asset arising on revaluation should be charged to Answer 19
the statement of profit and loss. However, the decrease should be debited directlyto owners’ interests
under the heading of revaluation surplus to the extent of any credit balance existing in the revaluation i) Depreciation to be charged in the Profit & Loss Account
surplus in respect of that asset.
Particulars Amount in Rs.
Calculation of revaluation loss and its accounting treatment
Depreciation on old Machinery 1,40,750
₹ [10% on Rs . 56,30,000 for 3 months (01.04.2022 to
Carrying value of the asset as on 31st March, 2022 a 2,16,000 30.06.2022)] 1,76,000
Revalued amount of the asset b (1,90,000) Add: Depreciation on Machinery acquired on
Total revaluation loss on asset c=a-b 26,000 01.06.2022
Adjustment of previous revaluation reserve d (20,000) (Rs. 21,12,000 X 10% X10/12)
Net revaluation loss to be charged to the Profit and loss e=c-d 6,000 Add: Depreciation on Machinery after adjustment of 4,67,625
account Exchange
AS 10 states that the carrying amount of an item of property, plant and equipment isderecognized on [10% of Rs . 56,30,000 – 9,60,000 + 15,65,000) for 9
disposal of the asset. It further states that the gain or loss arising from the derecognition of an item of
property, plant and equipment should be included in the statement of profit and loss when the item months]
is derecognized. Gains should also not be classified as revenue. Total Depreciation to be charged in Profit & Loss A/c 7,84,375
Book value of Plant & Machinery as on 31.3.2023
Calculation of loss on disposal of the asset and its accounting treatment Particulars Amount in Rs.
Balance as per books on 01.04.2022 56,30,000
₹
Original cost of the asset a 76,000 Add: Included in purchases on 01.06.2022 21,12,000
Accumulated depreciation till date b 62,000 Add: Purchases on 30.06.2022 15,65,000 36,77,000
Carrying value of the asset as on 31st March, 2022 c=a-b 14,000 93,07,000
Cash received on disposal of the asset d 4,000 Less: Book value of Machine sold on (9,60,000)
Loss on disposal of asset charged to the Profit and loss account e=c-d 10,000 30.06.2022 83,47,000
Less: Depreciation on Machinery in use (7,60,375)

Question 19
In the books of Top maker Limited, carrying amount of Plant and Machinery as on Rs. (7,84,375 -24,000) 75,86,625
1stApril, 2022 is Rs. 56,30,000. Book Value as on 31.03.2023
On scrutiny, it was found that a purchase of Machinery worth Rs. 21,12,000 was included in the
purchase of goods on 1stJune, 2022. On 30thJune, 2022 the company disposed a Machine having
book value of Rs. 9,60,000 (as on 1stApril, 2022) for Rs. 8,25,000 in part exchange of a new machine Note: The computation of depreciation and book value of Plant & Machinery can be presented in the
costing Rs. 15,65,000. following alternative manner:
The company charges depreciation @ 10% p.a. on written down value method on Plant and Ma- Particulars Book Value or Period Depreciation Book Value as
chinery. Cost or Acqui- on
sition
31.03.2023
You are required to compute:
Opening 46,70,000 01.04.2022 4,67,000 42,03,000
(i) Depreciation to be charged to Profit & Loss Account; Value (56,30,000 – to (46,70,000 x
(ii) Book value of Plant & Machinery as on 31stMarch, 2023; and
9,60,000) 31.03.2023 10%) Ans: (c)

Sold 9,60,000 01.04.2022 24,000 -
Question 22
to (9,60,000 x
30.06.2022 10% x 3/12) A plot of land with carrying amount of Rs. 1,00,000 was revalued to Rs. 1,50,000 at the end of Year
2. Subsequently, due to drop in market values, the land was determined to have a fair value of Rs.
Purchases 21,12,000 01.06.2022 1,76,000 19,36,000
1,30,000at the end of Year 4. Assuming that the entity adopts Revaluation Model, what would be the
to (21,12,000 x accountingtreatment of Revaluation?
31.03.2023 10% x 10/12) a. Initial upward valuation of Rs . 50,000 credited to Revaluation Reserve. Subsequent
New 15,65,000 01.07.2022 1,17,375 14,47,625 downward revaluation of Rs. 20,000 debited to P/L.
Machinery to b. Initial upward valuation of Rs. 50,000 credited to P/L. Subsequent downward revaluation
of Rs. 20,000 debited to P/L.
31.03.2023
c. Initial upward valuation of Rs . 50,000 credited to Revaluation Reserve. Subse-
(15,65,000 x
quent downward revaluation of Rs. 20,000 debited to Revaluation Reserve.
10% x 9/12)
d. Initial upward valuation of Rs . 50,000 debited to P/L. Subsequent downward revalua-
Total 7,84,375 75,86,625 tion of Rs. 20,000 credited to P/L.
Ans: (c)
Profit/Loss on Exchange of Machinery
Question 23
Particulars Amount in
Balance as per books on 01.04.2022 9,60,000 A plot of land with carrying amount of Rs. 1,00,000 was revalued to Rs. 90,000 at the end of Year
2. Subsequently, due to increase in market values, the land was determined to have a fair value of Rs.
Less: Depreciation for 3 months (Rs. 9,60,000 x 10 /100 x 3 / 12) (24,000)
1,05,000 at theend of Year 4. Assuming that the entity adopts Revaluation Model, what would be
W.D.V. as on 30.06.2022 9,36,000 the accountingtreatmentof Revaluation?
Less: Exchange value (8,25,000)
Initial downward valuation of Rs. 10,000 debited to Revaluation Reserve. Subsequent upward
Loss on Exchange of Machinery 1,11,000 revaluation of Rs. 15,000 credited to P/L.
Question 20 Initial downward valuation of Rs. 10,000 debited to P/L. Subsequent upward revaluation of Rs.
15,000 credited to P/L.
As per AS 10 (Revised) ‘Property, plant and equipment’, which of the following costs is not included in
the carrying amount of an item of PPE Initial downward valuation of Rs. 10,000 debited to P/L. Subsequent upward revaluation of Rs.
10,000 credited to P/L and Rs. 5,000 credited to Revaluation Reserve.
a. Costs of site preparation b. Costs of relocating
(c) Initial downward valuation of Rs. 10,000 credited to P/L. Subsequent upward revaluation of Rs.
c. Installation and assembly costs d. Initial delivery and handling costs 10,000 debited to P/L and Rs. 5,000 debited to Revaluation Reserve.
Ans: (b) Ans: (c)
As per AS 10 (Revised) ‘Property, Plant and Equipment’, an enterprise holding investment properties On sale of an asset which was revalued upwards, what would be the treatment of Revaluation Re-
should value Investment property. serve?
a. As per fair value b. Under discounted cash flow model The Revaluation Reserve is credited to P/L since the profit on sale of such asset is now realized.
c. Under cost model d. Under cash flow model
The Revaluation Reserve is credited to Retained Earnings as a movement in reserves without
impacting the P/L.
No change in Revaluation Reserve since profit on sale of such asset is already impacting the P/L. Questions 28
The Revaluation Reserve is reduced from the asset value to compute profit or loss.
An entity is setting up a manufacturing plant. Construction of the plant is completed in August and
theplant is ready for commercial production in November. However, the entity commences produc-
Ans: (b)
tion inMarch. When should be company start charging depreciation.
Question 25 Answers 28
A machinery was purchased having an invoice price Rs. 1,18,000 (including GST Rs. 18,000) on 1 April As per AS 10, Property, Plant and Equipment, depreciation of an asset begins when it is avail-
20X1. The GST amount is available as input tax credit. The rate of depreciation is 10% on SLM basis. The able for use, i.e., when it is in the location and condition necessary for it to be capable of ope
depreciation for 20X2 -X3 would be ating in the manner intended by management.
a. Rs. 10,000 b. Rs. 11,800 In the given case, since the plant is ready for commercial production in November, deprecia-
tion shall commence from November. The date of commencement of commercial production
c. Rs. 9,000 d. Rs. 10,500
is irrelevant for charging depreciation.
Ans: (a)
Questions 29
Theoretical Questions Answers Which factors should be considered by a company while determining useful life?
All the following factors are considered in determining the useful life of an asset:
A company changed its method of depreciation from SLM to WDV. How should the change be rec-
ognised? (a) Expected usage of the asset. Usage is assessed by reference to the expected capacity or phys-
ical output of the asset.
Answers 26 (b) expected physical wear and tear, which depends on operational factors such as the
As per AS 10, Property, Plant and Equipment, the depreciation method applied to an asset should be re- number of shifts for which the asset is to be used and the repair and maintenance pro-
viewed at least at each financial year-end and, if there has been a significant change in the expected gramme, and the care and maintenance of the asset while idle.
pattern of consumption of the future economic benefits embodied in the asset, the method should be (c) technical or commercial obsolescence arising from changes or improvements in produc-
changed to reflect the changed pattern. Such a change should be accounted for as a change in an action, or from achange in the market demand for the product or service output of the asset.
counting estimate in accordance with AS 5. Expected future reductions in the selling price of an item that was produced using an as-
Accordingly, the change in method of depreciation should be accounting for as a change in accounting set could indicate the expectation of technical or commercial obsolescence of the asset,
estimate, prospectively. which, in turn, might reflect a reduction of the future economic benefits embodied in the
asset.
Questions 27 (d) legal or similar limits on the use of the asset, such as the expiry dates of related leases.
A company has debited the Building Account with the Cost of the Land on which the building stands and
has provided depreciation on such total cost. Comment on the accounting treatment.
Questions 30
Answers 27
An entity gave the following Note in its Financial Statements:
As per AS 10, Property, Plant and Equipment, each part of an item of property, plant and equipment with
a cost that is significant in relation to the total cost of the item should be depreciated separately. ‘The company chooses not to charge depreciation on Property, Plant and Equipment on ac-
Further, Land and buildings are separable assets and are accounted for separately, even when they count of:
are acquired together. With some exceptions, such as quarries and sites used for landfill, land has an a. Annual Maintenance Contracts being expensed thereby ensuring timely repairs of
unlimited usefullife and therefore is not depreciated. Buildings have a limited useful life and therefore Plant and Machinery.
are depreciable assets.
b. Depreciation being a non-cash expense has no impact on cash flows. Accordingly, it is not
In the given case, land should not be depreciated unless it has a limited useful life. Accordingly, it is incor- necessaryto depreciate an asset when repairs and maintenance charges are expensed
rect to debit the cost of land to the Building Account and provide depreciation on the aggregate cost. in the Statement of Profit and Loss.
c. The values of certain assets like Property increase with passage of time, and hence
charging depreciation does not make sense.
d. At the end of the useful life, the asset is ultimately sold, and since the asset is at cost due (d) At the end of the useful life, the asset is ultimately sold, and since the asset is at cost due
to no depreciation, exact profit or loss on sale of the asset is stated.’ to no depreciation, exact profit or loss on sale of the asset is stated.
You are required to state the appropriateness of the above accounting policy in line with the The value of any asset, after usage, will reduce. Accordingly, the argument that the ‘exact profit or loss on
relevantAccounting Standards. sale of the asset’ will be obtained is incorrect. Due to usage of the asset, the value of the asset would be
lower than the cost. Charging depreciation would seek to bring the book value approximating to such
Answers 30 reduced value. Thereafter, on sale of the asset, the true profit or loss would be available. Accordingly,
this argument is also invalid.
Depreciation refers to writing off the value of the asset over its useful life. Such write-off is necessitat-
ed on account of normal wear-and-tear, usage, or obsolescence. Since items of Property, Plant It may be pertinent to note that Accounting Standard 1, Disclosure of Accounting Policies states
and Equipment are generally used in generating revenue, the pro-rated write-off in value of such that Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate
item should be recorded in the books against the income earned by such an asset. treatment of the item in the accounts. In other words, the company cannot be absolved of the fact
that it has not complied with the relevant accounting standards merely by giving a disclosure of
Providing depreciation is mandatory, in spite of the fact that repairs are expensed in the Statement
incorrect policies or practices being followed.
of Profit and Loss, or the value of the Property is appreciating. Depreciation is a systematic alloca-
tion of cost of the asset against the income generated from the continued use of the asset. Further, Thus, the company’s stand of disclosing the incorrect policy as a remedy is not correct. The company
the Companies Act, 2013 mandates depreciation to be charged in order to determine the correct is suggested to charge depreciation on a systematic basis over the useful life of the asset thereby com-
profits. Thus, not charging depreciation would result in non-compliance with the Companies Act plying with the Accounting Standards.
provisions as well.
The argument laid down by the company and the reasons for the same being invalid are discussed Practical Questions Answers
below.
(a) Annual Maintenance Contracts being expensed thereby ensuring timely repairs of Plant Questions 31
and Machinery:
With reference to AS-10 Revised, classify the items under the following heads: HEADS
The fact that the company enters into Annual Maintenance Contracts for timely repairs can
be regarded as a running cost. Such expense is incurred in order to ensure that the machine (i) Purchase Price of Property, plant and Equipment (PPE)
continues to run as intended. Thus, it implies that because the machine is being utilized, it will (ii) Directly attributable cost of PPE or
need regular repairs. In other words, continuous use is resulting in normal wear-and-tear
which is the reason why depreciation should be charged by the company. By stating that (iii) Cost not included in determining the carrying amount of an item of PPE.
the company incurs Annual Maintenance Expenses, the company is recording only the ’main-
tenance expenses’, but not the wear- and-tear requiring the maintenance in the first place.
ITEMS
Hence, this argument put forth by the company is not valid.
(b) Depreciation being a non-cash expense has no impact on cash flows. Accordingly, it is not nec- (1) Import duties and non-refundable purchase taxes.
essary to depreciate an asset when repairs and maintenance charges are expensed in the (2) Initial delivery and handling costs.
Statement of Profit and Loss.
(3) Initial operating losses, such as those incurred while demand for the output of an item
When viewed from the prism of depreciation alone, it appears that the fact that depreciation is builds up.
a non-cash item is correct. However, it must be noted that at the time of procurement of the
(4) Costs incurred while an item capable of operating in the manner intended by manage-
asset, the company would have paid cash. Depreciation is after all writing off this amount
ment has yetto be brought into use or is operated at less than full capacity.
over the life of the asset. Hence the argument that depreciation is a non-cash item is not
valid. Depreciation is writing off the cost of the asset (which was already paid for) over the (5) Trade discounts and rebates.
useful life of the asset, and hence is mandatory.
(6) Costs of relocating or reorganizing part or all of the operations of an enterprise.
(c) The values of certain assets like Property increase with passage of time, and hence
(7) Installation and assembly costs.
charging depreciation does not make sense.
(8) Administration and other general overhead costs.
Certain assets like immovable property do increase in value with the passage of time. However,
such assets are ‘used for the purposes of business’ and are not ‘held for sale’ or held as invest- Answers 31
ment property. Accordingly, since the asset is being used for carrying on business, providing
depreciation will give a true and fair view of the results of the company, and hence the argu- Heads
ment that the value of the property appreciates is not valid. (i) Purchase price of PPE
If the company wants to show the fair market value of the PPE, then it has the option to ap- (ii) Directly attributable cost of PPE
ply Revaluation model. However, depreciation is mandatory to be charged in Revaluation (iii) Cost not included in determining the carrying amount of an item of PPE
model also.
Items Classified 5. Estimated dismantling costs to be incurred after 7 years Rs.

under Head 3,00,000
1 Import duties and non-refundable purchase taxes (i) Rs.
2 Initial delivery and handling costs (ii) 43,00,000
Note:
3 Initial operating losses, such as those incurred while demand for the output of (iii)
an item builds up Interest charges paid on “Deferred credit terms” to the supplier of the plant (not a qualifying asset)
of Rs.2,00,000 and operating losses before commercial production amounting to Rs. 4,00,000 are not
4 Costs incurred while an item capable of operating in the manner intended by (iii) regarded as directly attributable costs and thus cannot be capitalised. They should be written off to the
management has yet to be brought into use or is operated at less than full Statement of Profit and Loss in the period they are incurred.
capacity.
5 Trade discounts and rebates (deducted for computing purchase price) (i)
6 Costs of relocating or reorganizing part or all of the operations of an enterprise. (iii) Questions 33
Arka Ltd. purchased machinery for Rs. 3,000 lakhs. Depreciation was charged at 10% on SLM basis
7 Installation and assembly costs (ii)
for a useful life of 10 years. At the end of Year 4, the machinery was revalued to Rs. 2,700 lakhs and the
8 Administration and other general overhead costs (iii) samewas adopted. What will be the carrying amount of the asset at the end of Year 5 and Year 6?
Assume nochange in the useful life.
Questions 32
Answers 33
ABC Ltd. is installing a new plant at its production facility. It has incurred these costs:
Particulars Rs. in lakhs
1. Cost of the plant (cost per supplier’s invoice plus taxes) Rs. 25,00,000 Original Cost of the Asset 3,000.00
2. Initial delivery and handling costs Rs. 2,00,000 Less: Depreciation for 4 years (Rs. 3,000 lakhs x 10% x 4 years) (1,200.00)
Book Value at the end of Year 4 1,800.00
3. Cost of site preparation Rs. 6,00,000
Add: Revaluation Surplus (balancing figure) 900.00
4. Consultants used for advice on the acquisition of the plant Rs. 7,00,000
Revalued Amount as given (= revised depreciable value) 2,700.00
5. Interest charges paid to supplier of plant for deferred credit Rs. 2,00,000 Less: Depreciation for Year 5 (Rs. 2,700 lakhs ÷ 6 years) 450.00
6. Estimated dismantling costs to be incurred after 7 years Rs. 3,00,000 Carrying Amount at the end of Year 5 2,250.00
Less: Depreciation for Year 6 (Rs. 2,700 lakhs ÷ 6 years) 450.00
7. Operating losses before commercial production Rs. 4,00,000
Carrying Amount at the end of Year 6 1,800.00
Please advise ABC Ltd. on the costs that can be capitalised in accordance with AS 10 (Revised).
Questions 34
Answers 32
According to AS 10 (Revised), these costs can be capitalised: Skanda Ltd. acquired a machinery for Rs. 2,50,00,000 five years ago. Depreciation was charged at 10%
p.a.on SLM basis, useful life being 10 years. At the beginning of Year 3, the machinery was revalued to
1. Cost of the plant Rs. Rs. 3,00,00,000 with the surplus on revaluation being credited to Revaluation Reserve. Depreciation
25,00,000 was provided on the revalued amount over the balance useful life of 8 years. The machinery was sold
in the current year for Rs. 1,12,50,000. Give the accounting treatment for the above in the Company’s
2. Initial delivery and handling costs Rs.
accounts.What will be the treatment if the machinery fetched only Rs. 42,50,000 now?
2,00,000
3. Cost of site preparation Rs. Answers 34
6,00,000
Particulars Rs.
4. Consultants’ fees Rs.
7,00,000 Original Cost of the Asset 2,50,00,000
Less: Depreciation for 2 years (Rs. 2,50,00,000 x 10% x 2 years) 50,00,000
Book Value at the beginning of Year 3 2,00,00,000 whole for Rs. 6,00,000.
There is no change in the Dismantling and Site Restoration liability during the period of use. You are
Add: Revaluation Surplus (balancing figure) 1,00,00,000
required to explain how the above transaction would be accounted in accordance with AS 10.
Revalued Amount as given (= revised depreciable value) 3,00,00,000
Less: Depreciation for Years 3-5 (Rs. 3,00,00,000 ÷ 8 yrs x 3 yrs) 1,12,50,000 Answers 35
Carrying Amount at the end of Year 5 1,87,50,000 1. Cost at Initial Recognition:
The treatment of Gain / Loss on Disposal / Revaluation is as below:

Particulars Rs.
Cost of the Plant (as per Invoice) 30,00,000
Particulars Disposal Proceeds = Rs. Disposal Proceeds = Rs.
1,12,50,000 42,50,000 Initial Delivery and Handling Costs 1,00,000
Book Value Less Dis- Cost of Site Preparation 2,00,000
posal Proceeds Rs. 1,87,50,000 Rs. 1,87,50,000 Consultants’ Fees 50,000
= Loss recognized in – Rs .1,12,50,000 – Rs. 42,50,000 Estimated Dismantling and Site Restoration Costs 30,000
Profit or Loss
= Rs.75,00,000 = Rs . 1,45,00,000 Total Cost of Plant including Motors 33,80,000
(Loss) (Loss)
Less: Cost of Motors identified as a separate component (1/6)* 5,63,333
Revaluation Surplus
Cost of the Plant (excluding Motors – balance 5/6) 28,16,667
directly transferred to Rs. 1,00,00,000 Rs. 1,00,00,000
Retained Earnings * Purchase price of Motors = Rs. 5,00,000 out of Rs. 30,00,000 i.e., 1/6 of value of Plant
Note:
Questions 35 Since the asset is not a qualifying asset, payment of interest to the supplier is not capitalized.
Further, operating losses of Rs. 40,000 incurred before commercial production is not a directly
Akshar Ltd. installed a new Plant (not a qualifying asset), at its production facility, and incurred the attributable cost, andhence excluded from cost of asset. These costs are expensed to the P/L
following costs: as and when they are incurred.
—Cost of the Plant (as per supplier’s invoice): Rs. 30,00,000

2. Recognition of Motors Replacement
Initial delivery and handling costs: Rs. 1,00,000
Particulars Rs.
Cost of site preparation: Rs. 2,00,000 Cost of Motors determined above 5,63,333
Consultant fee for advice on acquisition of Plant: Rs. 50,000 Less: Depreciation for 4 years (as per SLM) 3,75,555
5,63,333 ÷ 6 years x 4 years
Interest charges paid to supplier against deferred credit: Rs. 1,00,000
Carrying Amount of Motors at the end of Year 4 1,87,778
Estimate of Dismantling and Site Restoration costs: Rs. 50,000 after 10 years (Present Value is Rs. Accounting:
30,000)
The company should derecognize the existing Carrying Amount of Motors replaced of Rs. 1,87,778.
Operating losses before commercial production: Rs. 40,000 Further, the acquisition cost of new motors of Rs. 6,00,000 would be capitalized as a separate compo-
nent. This amount will be depreciated over the next 5 years at Rs. 6,00,000 ÷ 5 years = Rs. 1,20,000 p.a.
The company identified motors installed in the Plant as a separate component and a cost of Rs. 5,00,000
(Purchase Price) and other costs were allocated to them proportionately. The company estimates the 3. Revaluation
useful life of the Plant and those of the Motors as 10 years and 6 years respectively and SLM method of
Depreciation is used. Particulars Rs.
At the end of Year 4, the company replaces the Motors installed in the Plant at a cost of Rs. 6,00,000 Cost of the Plant at initial recognition [from (1) above] 28,16,667
andestimated the useful life of new motors to be 5 years. Also, the company revalued its entire class of Less: SLM Depreciation for 4 years: Rs. 28,16,667 ÷ 10 years x 4 years 11,26,667
Fixed Assets at the end of Year 4. The revalued amount of Plant as a whole is Rs. 25,00,000. At the end
Carrying Amount of Plant at the end of Year 4 16,90,000
of Year 8, the company decides to retire the Plant from active use and also disposed the Plant as a
cost is measurable. Since the recognition criteria is fulfilled, the same should be recognised as a
Revalued Amount of Plant (Excluding Motors, since the same is treated as a 19,00,000
separate item of Property, Plant and Equipment. However, since the initial breakup of the compo-
separate component: Rs. 25,00,000 –
nents is not available,the cost of the replacement of Rs. 450 lakhs can be used as an indication based
Rs. 6,00,000) on the guidance given above, discounted at 8% for the 6-year period lapsed.
Therefore, Gain on Revaluation credited to Revaluation Reserve 2,10,000 Thus, estimate of cost 6 years back = Rs. 450 lakhs ÷ 1.086 = Rs. 283.58 lakhs
Revised Depreciation Charge p.a.: 19,00,000 ÷ 6 years 3,16,667 Current carrying amount of turbine (to be de-recognised) = Estimated cost Rs. 283.58 lakhs
Derecognition (–) SLM depreciation at 10% (useful life 10 years) for 6 years Rs. 170.15 lakhs= Rs. 113.43 lakhs.
Hence revised carrying amount of the machinery will be as under:
Particulars Motors Plant (excluding
Motors)
Cost / Revalued Amount at end of Year 4 6,00,000 19,00,000 Particulars Rs. in lakhs
Less: Depreciation for Years 5-8 1,20,000 x 4 3,16,667 x 4 Historical Cost [Rs. 1,000 lakhs (–) SLM Depreciation at 10% (10 year life) for 6 400.00
years]
= 4,80,000 =12,66,668
Add: Cost of new turbine 450.00
Carrying Amount before Disposal / De- recognition 1,20,000 6,33,332
Less: Derecognition of current carrying amount of old turbine (113.43)
Less: Disposal Proceeds Rs. 6,00,000 allocated in 95,575 5,04,425
ratio of carrying amount New Carrying Amount of Machinery 736.57
Loss to be written off to P/L 24,425 1,28,907

Questions 37
Notes:
(a) The Revaluation Surplus of Rs. 2,10,000 would be transferred directly to Retained Earnings. Preet Ltd. intends to set up a steel plant, for which it has acquired a dilapidated factor having an area
of 5,000 acres at a cost of ₹ 60,000 per acre. Preet Ltd. has incurred Rs. 1.10 crores on demolishing
(b) The allocation of disposal proceeds of Rs. 6,00,000 for the plant as whole is apportioned based the old Factory Building thereon. A sum of Rs. 63,00,000 (including 5% GST thereon) was realized
on carrying amount of motors and plant (excluding motors) from the sale ofmaterial salvaged from the site. Preet Ltd. incurred Stamp Duty and Registration
Alternatively, it may be apportioned as 1/6 towards motors and 5/6 plant (excluding motors) based on Charges of 7% of landvalue, paid legal and consultancy charges Rs. 8,00,000 for land acquisition
the reasoning that the initially, motors amounted to 1/6 of the entire plant. This approach may not be and incurred Rs. 1,25,000 on titleguarantee insurance. Compute the value of the land acquired.
preferable because there has been a revaluation of the plant (excluding motors) and a disposal and
subsequent acquisition of the Motor, which is not in the initial proportion of 5/6 and 1/6 respectively. Answers 37
Particulars Rs.
Purchase Price: 5,000 acres x Rs. 60,000 per acre 3,000.00
Questions 36
Stamp Duty and Registration Charges at 7% 210.00
Bharat Infrastructure Ltd. acquired a heavy machinery at a cost of Rs. 1,000 lakhs, the breakdown of Legal and Consultancy Fees 8.00
its components is not provided. The estimated useful life of the machinery is 10 years. At the end of Year
6,the turbine, which is a major component of the machinery, needed replacement, as further usage Title Guarantee Insurance 1.25
and maintenance was uneconomical. The remainder of the machine is in good condition and is ex- Demolition Expenses (Net of Salvage Income) 50.00
pected tolast for the remaining 4 years. The cost of the new turbine is Rs. 450 lakhs. Give the account-
[Rs. 110 lakhs (–)Rs. 60 lakhs (Rs. 63 lakhs x 100/105)]
ing treatmentfor the new turbine, assuming SLM Depreciation and a discount rate of 8%.
Cost of Land 3,269.25
Answers 36
As per AS 10, Property, Plant and Equipment, the derecognition of the carrying amount of compo- Question 38 (Illustration)
nents of an item of Property, Plant and Equipment occurs regardless of whether the cost of the
previous part / inspection was identified in the transaction in which the item was acquired or con- (Capitalising the cost of “Remodelling” a Supermarket)
structed. If it is not practicable for an enterprise to determine the carrying amount of the replaced part/ Entity A, a supermarket chain, is renovating one of its major stores. The store will have more
inspection, it may use the cost of the replacement or the estimated cost of a future similar inspection as availablespace for in store promotion outlets after the renovation and will include a restaurant.
an indication of what the cost of the replaced part/ existing inspection component was when the item Management ispreparing the budgets for the year after the store reopens, which include the cost of
was acquired or constructed. remodelling and the expectation of a 15% increase in sales resulting from the store renovations,
which will attract new customers. State whether the remodelling cost will be capitalised or not.
In the given case, the new turbine will produce economic benefits to Bharat Infrastructure Ltd. and the
The expenditure in remodelling the store will create future economic benefits (in the form of 15% of
Particulars Rs.
increase in sales) and the cost of remodelling can be measured reliably, therefore, it should be capital-
ised. Purchase Price Given 1,58,00,000
Question 39 (Illustration) Add: Site Preparation Cost Given 1,40,000
Entity A has an existing freehold factory property, which it intends to knock down and redevelop. During Technician’s Salary Specific/Attributable overheads for 1,35,000
the redevelopment period the company will move its production facilities to another (temporary)
3 months (45,000 x 3)
site.The following incremental costs will be incurred:
1. Setup costs of Rs. 5,00,000 to install machinery in the new location. Initial Delivery Cost Transportation 50,000
2. Rent of Rs. 15,00,000 Professional Fees for Architect’s Fees 30,000

3. Removal costs of Rs. 3,00,000 to transport the machinery from the old location to the temporary lo-
Installation
cation.
Can these costs be capitalised into the cost of the new building? Total Cost of Machinery 1,61,55,000
Answers 39
Constructing or acquiring a new asset may result in incremental costs that would have been avoided
if theasset had not been constructed or acquired. These costs are not to be included in the cost of the (Capitalisation of directly attributable costs)
asset if they are not directly attributable to bringing the asset to the location and condition necessary
Entity A, which operates a major chain of supermarkets, has acquired a new store location. The
for it to be capable of operating in the manner intended by management. The costs to be incurred by
new location requires significant renovation expenditure. Management expects that the renova-
the company are in the nature of costs of relocating or reorganising operations of the company and
tions will last for 3 months during which the supermarket will be closed.
do not meet the requirement of AS 10 (Revised) and therefore, cannot be capitalised.
Management has prepared the budget for this period including expenditure related to construction
and remodelling 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?
Omega Ltd. contracted with a supplier to purchase machinery which is to be installed in its one de-
Answers 41
partment in three months’ time. Special foundations were required for the machinery which were
to be prepared within this supply lead time. The cost of the site preparation and laying foundations Management should capitalise the costs of construction and remodelling the supermarket, because
were Rs.1,40,000. These activities were supervised by a technician during the entire period, who is they are necessary to bring the store to the condition necessary for it to be capable of operating in the
employed for this purpose of Rs. 45,000 per month. The machine was purchased at Rs. 1,58,00,000 mannerintended by management. The supermarket cannot be opened without incurring the remodel-
and Rs. 50,000 transportation charges were incurred to bring the machine to the factory site. An Ar- ling expenditure, and thus the expenditure should be considered part of the asset.
chitect was appointed at a fee of Rs. 30,000 to supervise machinery installation at the factory site.
However, if the cost of salaries, utilities and storage of goods are in the nature of operating expenditure
You are required to ascertainthe amount at which the Machinery should be capitalized.
that would be incurred if the supermarket was open, then these costs are not necessary to bring the store
to the condition necessary for it to be capable of operating in the manner intended by management
and should be expensed.
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 intend-
ed manner. Accordingly, thenet operating costs incurred should be capitalised. Comment.
Answers 42
The net operating costs should not be capitalised but should be recognised in the Statement of
Profit and Loss.
Even though it is running at less than full operating capacity (in this case 80% of operating capacity),
there is sufficient evidence that the amusement park is capable of operating in the manner intended Question 45 (Illustration)
by management. Therefore, these costs are specific to the start-up and, therefore, should be ex-
pensed as incurred. What happens if the cost of the previous part/inspection was/ was not identified in the transaction in
which the item was acquired or constructed?
Answers 45
(Consideration received comprising a combination of non-monetary and monetary assets) De-recognition of the carrying amount occurs regardless of whether the cost of the previous part/in-
Entity A exchanges land with a book value of Rs. 10,00,000 for cash of Rs. 20,00,000 and plant and ma- spection was identified in the transaction in which the item was acquired or constructed.
chinery valued at Rs. 25,00,000. What will be the measurement cost of the assets received. (Con-
sider that the transaction has commercial substance)?
Answers 43
In the given case, Plant & Machinery is valued at Rs. 25,00,000, which is assumed tobe fair value in What will be your answer in the above question, if it is not practicable for an enterprise to determine
absence of information. Further, since fair value of land (asset given up) is not given, the transaction the carrying amount of the replaced part/inspection?
will be recorded at fair value of assets acquired of Rs. 45,00,000 (Rs. Cash 20,00,000 + Rs. Plant & Machinery
25,00,000). Since land of book value Rs . 10,00,000 is transferred in exchange of assets worth Rs. Answers 46
45,00,000, a gain of Rs. 35,00,000 will be recognised in the books of Entity A.
It may use the cost of the replacement or the estimated cost of a future similar inspection as an indi-
The following journal entry will be passed in the books of Entity A: cation of what the cost of the replaced part/existing inspection component was when the item was
acquired or constructed.
Cash/ Bank A/c Dr. 20,00,000
Plant & Machinery A/c Dr. 25,00,000 Question 47 (Illustration)
To Land 10,00,000 (Revaluation on a class by class basis)
To Profit on Sale of Land (balancing figure) 35,00,000 Entity A is a large manufacturing group. It owns a number of industrial buildings, such as facto-
ries and warehouses and office buildings in several capital cities. The industrial buildings are locat-
Question 44 (Illustration) ed 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 subse-
(Exchange of assets that lack commercial substance) quent measurement of the office buildings but continue to apply the historical cost model to the
Entity A exchanges car X with a book value of Rs. 13,00,000 and a fair value of Rs. 13,25,000 for cash industrial buildings.
of Rs. 15,000 and car Y which has a fair value of Rs. 13,10,000. The transaction lacks commercial sub- State whether this is acceptable under AS 10 (Revised) or not with reasons?
stance as thecompany’s cash flows are not expected to change as a result of the exchange. It is in
the same positionas it was before the transaction. What will be the measurement cost of the assets Answers 47
received?
Entity A’s management can apply the revaluation model only to the office buildings. The office buildings
Answers 44 can beclearly distinguished from the industrial buildings in terms of their function, their nature and their
general location.AS 10 (Revised) permits assets to be revalued on a class by class basis.
Since the transaction lacks commercial substance, the entity recognises the assets received at the
The different characteristics of the buildings enable them to be classified as different PPE classes.
book value of car X. Therefore, it recognises cash of Rs. 15,000 and car Y as PPE with a carrying value of
The different measurement models can, therefore, be applied to these classes for subsequent mea-
Rs. 12,85,000.
surement.
The following journal entry will be passed in the books of Entity A:
However, all properties within the class of office buildings must be carried at revalued amount.
Cash/ Bank A/c Dr. 15,000
Car Y A/c (balancing figure) Dr. 12,85,000 Question 48 (Illustration)
To Car X A/c 13,00,000 Entity A has a policy of not providing for depreciation on PPE capitalised in the year until the following
Determination of Cost in special cases: year, but provides for a full year’s depreciation in the year of disposal of an asset. Is this acceptable?
Cost of an item of PPE is the cash price equivalent at the recognition date.
Answers 48 Calculate the amount of depreciation.
The depreciable amount of a tangible fixed asset should be allocated on a systematic basis over its useful Answers 51
life. The depreciation method should reflect the pattern in which the asset’s future economic benefits are
expected to be consumed by the entity. Case (a)
Useful life means the period over which the asset is expected to be available for use by the entity. Depre- The company considers that the residual value, based on prices prevailing at the balance sheet
ciation should commence as soon as the asset is acquired and is available for use. Thus, the policy ofEntity date, will equal the cost.
A is not acceptable. There is, therefore, no depreciable amount and depreciation is correctly zero.
Case (b)
The company considers that the residual value, based on prices prevailing at the balance sheet date,
(Change in estimate of useful life) will be
Entity A purchased an asset on 1st January 20X1 for Rs. 1,00,000 and the asset had an estimated useful Rs. 9,00,000 and the depreciable amount is, therefore, Rs. 1,00,000.
life of 10 years and a residual value of nil.
Annual depreciation (on a straight-line basis) will be Rs. 5,000 [{10,00,000 – 9,00,000} ÷ 20].
On 1st January 20X5, the directors review the estimated life and decide that the asset will probably
beuseful for a further 4 years.
Calculate the amount of depreciation for each year, if company charges depreciation on Straight
Linebasis. (Determination of appropriate Depreciation Method)
Entity B manufactures industrial chemicals and uses blending machines in the production pro-
Answers 49 cess. Theoutput of the blending machines is consistent from year to year and they can be used
The entity has charged depreciation using the straight-line method at Rs. 10,000 per annum i.e (1,00,000/10 for different products.
years). However, maintenance costs increase from year to year and a new generation of machines with
On 1st January 20X5, the asset’s net book value is [1,00,000 – (10,000 x 4)] Rs. 60,000. significant improvements over existing machines is available every 5 years. Suggest the depre-
ciation method to the management.
The remaining useful life is 4 years.
The company should amend the annual provision for depreciation to charge the unamortised cost over Answers 52
the revised remaining life of four years. The straight-line depreciation method should be adopted, because the production output is consistent
Consequently, it should charge depreciation for the next 4 years at Rs. 15,000 per annum i.e. (60,000 from year to year.
/ 4 years). Factors such as maintenance costs or technical obsolescence should be considered in determiningthe
blending machines’ useful life.
Entity B constructs a machine for its own use. Construction is completed on 1st November 20X1 but the
company does not begin using the machine until 1 st March 20X2. Comment. Gain on replacement of Insured Assets) Entity A carried plant and machinery in its books at Rs.
2,00,000. These were destroyed in a fire. The assets were insured ‘New for old’ and were replaced by
Answers 50 the insurance company with new machines that cost Rs.20,00,000. The machines were acquired
The entity should begin charging depreciation from the date the machine is ready for use – that is, 1st by the insurance company and the company did not receive Rs. 20,00,000 as cash compensa-
November 20X1. The fact that the machine was not used for a period after it was ready to be used is not tion. State, how Entity A should account for the same?
relevant in considering when to begin charging depreciation.
Answers 53
Question 51 (Illustration) Entity A should account for a loss in the Statement of Profit and Loss on derecognition of the carrying
value of plant and machinery in accordance with AS 10 (Revised).
(Depreciation where residual value is the same as or close to Original cost) A property costing Rs.
Entity A should separately recognise a receivable and a gain in the income statement resulting
10,00,000 is bought in 20X1. Its estimated total physical life is 50 years. However, the company con-
from the insurance proceeds under AS 29 (Revised)* once receipt is virtually certain. The receiv-
siders it likely that it will sell the property after 20 years.
able should be measured at the fair value of assets that will be provided by the insurer.
The estimated residual value in 20 years’ time, based on 20X1 prices, is:
Case (a) Rs. 10,00,000Case (b) Rs. 9,00,000.

AS 13-Accounting for Investments AS 13-Accounting for Investments
Question 1
The Investment portfolio of XYZ Ltd. as on 31.03.2020 consisted of the following:
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
Study Mat. Q.45 TO Q.67 (Rs. in lacs)
Q.9 Q.22 Q.32 Q.36 NO Q.30 Q.31 Q.37 NO Q.35 Q.43 NO Current Investments Cost Fair Value as on
Q.34 Q.39 Q.33 Q.41 31.03.2020
Past
Exams Q.38 (1) 1000 Equity Shares of A Ltd.500 5 7
Equity Shares of B Ltd. 1000 Eq-
Q.40 (2) 10 15
uity Shares of C Ltd.
Q.25 Q.3 Q.7 Q.5 Q.1 Q.2 Q.10 Q.4 Q.11 Q.2 Q.3 Q.10 Q.10 (3) 15 12
Q.13 Q.11 Q.12 Q.16 Q.12 Q.15 Q.31
MTP Q.8 Q.6 Q.9 Q.9 Q.10 Total 30 34
Q.13 Q.37
Q.25 Q.28
Give your comments on the following:
Q.16 Q.6 Q.3 Q.4 Q.17 Q.17 Q.16 Q.4 Q.19 Q.20 Q.21 Q.44
(i) The company wants to value the above portfolio at Rs. 30 lakhs being lower of cost or fair
RTP Q.21 Q.10 Q.26 Q.25 Q.24 Q.23 Q.22 Q.27 Q.28 Q.29
market value.
(i) Company wants to transfer 1000 Equity Shares of C Ltd. from current investments to
long terminvestments on 31.03.2020 at cost of Rs. 15 lakhs. (MTP 5 Marks May 20)
Answer 1
As per AS 13 “Accounting for Investments”, Valuation of current investments on overall (or global) ba-
sis is not considered appropriate. Sometimes, the concern of an enterprise may be with the value of a
category of related current investments and not with each individual investment, and accordingly the
investments may be carried at the lower of cost and fair value computed category-wise (i.e. equity
shares, preference shares, convertible debentures, etc.). However, the more prudent and appropriate
method is to carry investments individually at the lower of cost and fair value.
(i) Hence the company has to value the current investment at Rs. 27 Lacs (A Ltd. shares at Rs. 5
lacs; B Ltd.shares at Rs. 10 lacs and C Ltd. shares at Rs. 12 lacs). The company’s decision to value
the portfolio at Rs.30 lacs are not appropriate.
(ii) Moreover, where investments are reclassified from current to long-term, transfers are made at
the lowerof cost and fair value at the date of transfer.
Hence, the company has to make transfer of 1,000 equity shares of C Ltd. at Rs. 12 lacs (fair
value) and not Rs. 15 lacs (cost) as the fair value is less than cost.
Question 2
Whether the accounting treatment ‘at cost’ under the head ‘Long Term Investments’ without provid-
ing for any diminution in value is correct and in accordance with the provisions of AS 13. If not,what
should have been the accounting treatment in such a situation? What methodology should be ad-
opted for ascertaining the provision for diminution in the value of investment, if any. Explain in brief.
(MTP 4 Marks Oct 20, Mar 22)
Answer 2 Answer 5
The accounting treatment ‘at cost’ under the head ‘Long Term Investment’ in the financial statements of Investment in Debentures A/c
the company without providing for any diminution in value is correct and is in accordance with the pro-
visions of AS 13 provided that there is no decline, other than temporary, in the value of investment. If the Rs. Lakh Rs. Lakh
decline in the value of investment is, other than temporary, compared to the time when the shares were June 1, 2018 To Bank 10.70 June 1, 2018 By Interest Recov- 0.20
purchased, provision is required to be made. The reduction in market value should not be considered, in erable (Note
isolation to determine the decline, other than temporary. The amount of the provision for diminution in the
1)
value of investment may be ascertained considering the factors indicated in AS 13.
Nov 1, 2018 To Bank 5.45 Nov 1, 2018 By Interest Recov- 0.05
Question 3 erable (Note 2)
How you will deal with following in the financial statements of the Parish Electronics Ltd. as on 31.3.18 with Feb 28, 2019 To Interest Re- 0.30 Feb 28, 2019 By Bank 6.78
reference to AS-13? coverable (Note 3)
Also Parish Electronics Ltd. has current investment (X Ltd.’s shares) purchased for Rs. 5 lakhs, which Feb 28, 2019 To Profit 0.12 Mar 31, 2019 By Balance c/d 9.54
the company want to reclassify as long term investment. The market value of these investments as on ondisposal
date of Balance Sheet was Rs. 2.5 lakhs. [MTP Aug. ‘18, 5 Marks, RTP May 19, MTP 5 Marks Oct ’22) (Note 4)
16.57 16.57
Answer 3
Working Notes:
As per AS 13 ‘Accounting for Investments’, where investments are reclassified from current tolong - term,
transfers are made at the lower of cost or fair value at the date of transfer. 1. 10,000 x 100 x 12/100 x 2/12 = Rs. 0.20 Lakhs
In the given case, the market value of the investment (X Ltd. shares) is Rs.2.50 lakhs, which is lower than 2. 5,000 x 100 x 12/100 x 1/12 = Rs. 0.05 Lakhs
its cost i.e. Rs. 5 lakhs. Therefore, the transfer to long term investments should be made at cost of Rs. 2.50
3. 6,000 x 100 x 12/100 x 5/12 = Rs. 0.30 Lakhs
lakhs. The loss of Rs. 2.50 lakhs should be charged to profit and loss account.
4. Cost of investments (per unit) = [(10,70,000 -20,000)+(5,45,000– 5,000)]/15,000
units = [10,50,000+ 5,40,000]/15,000 = Rs. 106
Question 4
Cost of investments sold = Rs. 106 x 6,000 = Rs. 6,36,000
Z Bank has classified its total investment on 31-3-2021 into three categories (a) held to maturity (b)
available for sale (c) held for trading as per the RBI Guidelines. ‘Held to maturity’ investments are car- Sale proceeds = Rs. 6,78,000 - Rs. 30,000(interest) = Rs. 6,48,000
ried at acquisition cost less amortized amount. ‘Available for sale’ investments are carried at marked Profit = Rs. 6,48,000 - Rs. 6,36,000 = Rs. 12,000
to market. ‘Held for trading’ investments are valued at weekly intervals at market rates. Net deprecia-
tion, if any, is charged to revenue and net appreciation, if any, is ignored. You are required to comment
Question 6
whether the policy of the bank is in accordance with AS 13? (MTP 5 Marks Nov ’21, RTP Nov 21, Nov 19)
Akash Ltd. had 4,000 equity share of X Limited, at a book value of Rs. 15 per share (face value of Rs. 10
Answer 4 each) on 1st April 2018. On 1st September 2018, Akash Ltd. acquired 1,000 equity shares of X Limited at
As per AS 13 ‘Accounting for Investments’, the accounting standard is not applicable to Bank, Insurance a premium of Rs. 4 per share. X Limited announced a bonus and right issue for existing share holders.
Company, Mutual Funds. In this case Z Bank is a bank, therefore, AS 13 does not apply to it. For banks, The terms of bonus and right issue were -
the RBI has issued separate guidelines for classification and valuation of its investment and Z Bank should
(1) Bonus was declared, at the rate of two equity shares for every five equity shares held on
comply with those RBI Guidelines/Norms. Therefore, though Z Bank has not followed the provisions of AS
30th September, 2018.
13, yet it would not be said as non-compliance since, it is complying with the norms stipulated by the RBI.
(2) Right shares are to be issued to the existing shareholders on 1st December, 2018. The com-
pany issued two right shares for every seven shares held at 25% premium. No dividend, was
Question 5
payable on these shares. The whole sum being payable by 31st December, 2018.
A fund purchased 10,000 debentures of a company on June 1, 2018 for Rs. 10.7 lakh and further 5,000 de- (3) Existing shareholders were entitled to transfer their rights to outsiders, either wholly or
bentures on Nov 1, 2018 for Rs. 5.45 lakh. The debentures carry fixed annual coupon of 12%, payable on in part.
every 31 March and 30 September. On Feb 28, 2019 the fund sold 6,000 of these debentures for Rs. 6.78 (4) Akash Ltd. exercised its option under the issue for 50% of its entitlements and sold the re-
lakh. Nominal value per debenture is Rs. 100. Show Investment in Debentures A/c in books of the fund. maining rights for Rs. 8 per share.
(MTP 5 Marks, Oct’19) (5) Dividend for the year ended 31st March 2018, at the rate of 20% was declared by the compa-
ny andreceived by Akash Ltd., on 20th January 2019.
(6) On 1st February 2019, Akash Ltd., sold half of its share holdings at a premium of Rs. 4 per Answer 6
share.
Investment Account-Equity Shares in X Ltd.
(7) The market price of share on 31.03.2019 was Rs. 13 per share.
You are required to prepare the Investment Account of Akash Ltd. for the year ended 31st March, 2019
Date No. of Divi- Amount Date No. of Divi- Amount
and determine the value of shares held on that date assuming the investment as current investment.
shares dend shares dend
(MTP Oct. ‘19, 10 Marks, RTP Nov 18)
Rs. Rs. Rs. Rs.
2018 2019
April 1 To Balance 4,000 - 60,000 J a n . By Bank 8,000 2,000
b/d 20 (dividend)
Sept 1 To Bank 1,000 - 14,000 Feb. 1 By Bank 4,000 56,000
Sept.30 To Bonus 2,000 — M a r . By Balance 4,000 42,250

31 c/d
Issue
Dec.1 To Bank 1,000 - 12,500
(Right)
2019
Feb. 1 To Profit & 13,750
Loss A/c
Feb. 1 To Profit &
Loss A/c
(Dividend
income) 8,000
8,000 8,000 1,00,250 8,000 8,000 1,00,250

April. 1 To Balance 4,000 42,250
b/d
Working Notes:
Rs.
(Rs. 60,000 + Rs. 14,000 + Rs. 12,500) 86,500
Less: Dividend on shares purchased on 1st Sept, 2018 (2,000)
Cost of 8,000 shares 84,500
Cost of 4,000 shares (Average cost basis*) 42,250
Sale proceeds (4,000 shares @ 14/-) 56,000

Profit on sale 13,750
1. Cost of shares sold. Amount paid for 8,000 shares
* For ascertainment of cost for equity shares sold, average cost basis has been applied.
2. Value of investment at the end of the year
Closing balance will be valued based on lower of cost (Rs. 42,250) or net realizable value (Rs.13 x
4,000).Thus investment will be valued at Rs. 42,250.
3. Calculation of sale of right entitlement Working Notes:

1,000 shares x Rs. 8 per share = Rs. 8,000
(I) Cost of 12% debentures purchased on 1.12.2016 Rs.
Amount received from sale of rights will be credited to P & L A/c as per AS 13
Cost Value (10,000 xRs.101) = 10,10,000
4. Dividend received on investment held as on 1st April, 2018
Add: Brokerage (1% of Rs.10,10,000) = 10,100
= 4,000 shares x Rs. 10 x 20%
Less; Cum Interest (10,000 x 100 x12% x 2/12) = (20,000)
= Rs. 8,000 will be transferred to Profit and Loss A/c
Total = 10,00,100
Dividend received on shares purchased on 1st Sep. 2018
(ii) Sale proceeds of 12% debentures sold on 1st March, 2017 Rs.
= 1,000 shares x Rs. 10 x 20% = Rs. 2,000 will be adjusted to Investment A/c
Sales Price (10,000 xRs.106) = 10,60,000
Note: It is presumed that no dividend is received on bonus shares as bonus shares are declared
on 30th Sept., 2018 and dividend pertains to the year ended 31.3.2018. Less; Brokerage (1% of Rs.10,60,000) = (10,600)
Less; Cum Interest (10,000 x 100 x12% x 5/12) = (50,000)
Question 7 Total = 9,99,400
In 2015, Royal Ltd. issued 12% fully paid debentures of Rs. 100 each, interest being payable half year-
Question 8
ly on 30th September and 31st March of every accounting year.
Smart Investments made the following investments in the year 2017-18:
On 1st December, 2016, M/s. Kumar purchased 10,000 of these debentures at Rs.101 cum-interest 12% State Government Bonds having face value Rs. 100
price, also paying brokerage @ 1% of cum-interest amount of the purchase. On 1st March, 2017 the
Date Particulars
firm sold all of these debentures at Rs.106 cum-interest price, again paying brokerage @ 1 % of
cum- interest amount. Prepare Investment Account in the books of M/s. Kumar for the period 1st 01.04.2017 Opening Balance (1200 bonds) book value of Rs. 1,26,000
December, 2016 to 1st March, 2017[MTP March ‘19, 6 Marks, Old & New SM)
02.05.2017 Purchased 2,000 bonds @ Rs. 100 cum interest
Answer 7 30.09.2017 Sold 1,500 bonds at Rs. 105 ex interest Interest on the bonds is received on 30th June
and 31st Dec. each year. Equity Shares of X Ltd.
In the books of M/s Kumar Investment
15.04.2017 Purchased 5,000 equity shares @ Rs. 200 on cum right basis Broker-
Account for the period from 1st December 2016 to 1st March, 2017 (Scrip: 12% Debentures of Royal
age of 1% was paid in addition (Face Value of shares Rs. 10)
Ltd.)
03.06.2017 The company announced a bonus issue of 2 shares for every
5shares held.
Date Particu- Nominal Inter- Cost date Particu- Nominal Inter- Cost
lars est lars est 16.08.2017 The company made a rights issue of 1 share for every 7 shares held
1.12.2016 To Bank 10,00,000 20,000 10,00,100 1.3.2017 By 10,00,000 50,000 9,99,400 at Rs. 250 per share.
A/c (W.N.1) Bank
The entire money was payable by 31.08.2017.
A/c(W.N.2)
22.8.2017 Rights to the extent of 20% was sold @ Rs. 60. The remaining rights
To Profit & 10,00,000 By Profit &
1.3.2017
loss A/c
30,000 1.3.2017
loss A/c
700
were subscribed.
02.09.2017 Dividend @ 15% for the year ended 31.03.2017 was received on
50,000 10,00,100 10,00,000 50,000 10,00,100 16.09.2017
15.12.2017 Sold 3,000 shares @ Rs. 300. Brokerage of 1% was incurred extra.
15.01.2018 Received interim dividend @ 10% for the year 2017-18
31.03.2018 The shares were quoted in the stock exchange @ Rs. 220
Answer 8 Investments in Equity shares of X Ltd. for year ended 31.3.2018
Prepare Investment Accounts in the books of Smart Investments. Assume that the averagecost Date Particu- Nos. In- Amount Date Particulars Nos. In- Amount
methodis followed. (MTP Aug. ‘18, 12 Marks, Old & New SM) lars come come
15.4.17 To Bank 5,000 10,10,000 By Bank (Divi-
3.6.17 A/c To Bo- 2,000 - - 16.9.17 dend) By Bank - - 7,500
In the books of Smart Investments nus (Sale)
31.8.17 800 2,00,000 15.12.17 3,000 - 8,91,000
Issue By Bank (interim
12% Govt. Bonds for the year ended 31st March, 2018
31.3.18 4,800 4,28,500 15.1.18 dividend) 4,800
To Bank
A/c To P 31.3.18 By Bal. c/d 4,800
Date Particulars Nos. Income Amount Date Particulars Nos. Income Amount
&L
1.4.17 To Open- 1,200 3,600 1,26,000 30.6.17 By Bank - 19,200 -
ing A/c A/c
balance (Inter- 7,800 4,800 16,38,500 7,800 4,800 16,38,500

est)
b/d (3,200
x Working Notes:
100 x 1. Profit on sale of bonds on 30.9.17

12% = Sales proceeds – Average cost Sales proceeds = Rs. 1,57,500
x 6/12) Average cost = Rs. [(1,26,000+1,92,000) x 1,500/3,200] = 1,49,062.50 Profit = 1,57,500– Rs.
2.5.17 To Bank 2,000 8,000 1,92,000 30.9.17 By Bank 1,500 4,500 1,57,500 1,49,062.50=Rs. 8,437.50
A/c A/c
31.3.18 To P&L 27,400 31.12.17 By Bank - 10,200 - 2. Valuation of bonds on 31st March, 2018
A/c A/c
Cost = Rs. 3,18,000/3,200 x1,700 = 1,68,937.50
(Inter- (Inter-
est) est)
(1,700 x 3. Cost of equity shares purchased on 15/4/2017
100 x = Cost + Brokerage
12% = (5,000 x Rs. 200) + 1% of (5,000 x Rs. 200) = Rs. 10,10,000
x 6/12)
To P&L 8,437.50 31.3.18 By Bal. c/d 1,700 5,100 1,68,937.50
4. Sale proceeds of equity shares on 1 5/12/2017
A/c
= Sale price – Brokerage
(Profit
on Sale) = (3,000 x Rs. 300) – 1% of (3,000 x Rs. 300) = Rs. 8,91,000.
3,200 39,000 3,26,437.50 3,200 39,000 3,26,437.50
5. Profit on sale of shares on 15/12/2017
= Sales proceeds – Average cost Sales proceeds = Rs. 8,91,000

Average cost = Rs. [(10,10,000+2,00,000 -7,500) x 3,000/7,800]
= Rs. [12,02,500 x 3,000/7,800] = 4,62,500 Profit = Rs. 8,91,000 – Rs. 4,62,500=Rs. 4,28,500.
6. Valuation of equity shares on 31st March, 2018
Cost =Rs. [12,02,500 x 4,800/7,800] = Rs. 7,40,000 Market Value = 4,800 shares ×Rs. 220 =Rs. 10,56,000
Closing stock of equity shares has been valued at Rs.7,40,000 i.e. cost being lower than the market Answer 9
value.
(i) Investment in Equity shares of JP Power Ltd.
Note: If rights are not subscribed for but are sold in the market, the sale proceeds are taken to the
profit and loss statement as per para 13 of AS 13 “Accounting for Investments”. Date Particulars No. Dividend Amount Date Particulars No. Divi- Amount
dend
₹ ₹ ₹
Question 9 ₹
1.1.19 To Bank A/c 600 12,000 31.3.19 By Balance 1,500 34,500
Mr. Vijay entered into the following transactions of purchase and sale of equity shares of JP Power Ltd. The
c/d
shares have paid up value of ₹ 10 per share.
15.3.19 To Bank A/c 900 22,500 4,500
Date No. of Shares Terms

01.01.2019 600 Buy @ ₹ 20 per share
1,500 34,500 1,500 34,500
15.03.2019 900 Buy @ ₹ 25 per share
1.4.19 To Balance 1,500 34,500 15.9.19 By 3,000
20.05.2019 1000 Buy @ ₹ 23 per share b/d Bank - div-
25.07.2019 2500 Bonus Shares received idend
20.12.2019 1500 Sale @ ₹ 22 per share 20.5.19 To Bank A/c 1,000 23,000 20.12.19 By Bank 1,500 33,000
01.02.2020 1000 Sale @ ₹ 24 per share 25.7.19 To Bonus 2,500 _ 1.2.20 By Bank 1,000 24,000
shares
Addition information:
(1) On 15.09.2019 dividend @ ₹ 3 per share was received for the year ended 31.03.2019. 12.11.19 To Bank A/c 600 4,500 12,000 31.3.20 By Balance 3,100 36,812.50
c/d
(2) On 12.11.2019 company made a right issue of equity shares in the ratio of one share for five
shares held on payment of ₹ 20 per share. He subscribed to 60% of the shares and renounced 20.12.19 To P& L A/c
the remaining shares on receipt of ₹ 3 per share. (profit on
15,187.50
sale)
(3) Shares are to be valued on weighted average cost basis.
1.2.20 To P& L A/c 12,125
You are required to prepare Investment Account for the year ended 31.03.2019 and 31.03.2020. (MTP 8
(profit on
Marks Mar’22,Oct 20, PYP May ’18 10 Marks)
sale)
31.3.20 To P & L A/c
(dividend)
5,600 4,500 96,812.50 5,600 4,500 96,812.50
Working Notes:
1. Calculation of Weighted average cost of equity shares

600 shares purchased at ₹ 12,000
900 shares purchased at ₹ 22,500
1,000 shares purchased at ₹ 23,0002,500 shares at nil cost
600 right shares purchased at ₹ 12,000
Total cost of 5,600 shares is ₹ 66,500 [₹ 69,500 less ₹ 3,000 (pre-acquisition dividend received
on 1,000 shares purchased on 20.5.19].
Hence, weighted average cost per share will be considered as ₹ 11.875 per share (66,500/5,600).
2. It has been considered that no dividend was received on bonus shares as the dividend per-
tains to the year ended 31set March, 2019.
3. Calculation of right shares subscribed by Vijay Right Shares (considering that right shares [Interest Payable on 31st March and 30th September]
have been granted on Bonus shares also) = 5,000/5 x 1= 1,000 shares
Particu- Nominal Inter- Cost Rs. Date Particulars Nominal interest Cost
Shares subscribed = 1,000 x 60%= 600 shares lars value est Rs. Value Rs. Rs. (Rs.)
Date
Value of right shares subscribed = 600 shares @ ₹ 20 per share = ₹ 12,000 Calculation of sale Rs.
of right renouncement 1.4.22 To Bank 2,00,000 - 2,16,000 30.09.2022 By Bank - 12,000
No. of right shares sold = 1,000 x 40% = 400 shares A/c A/c
Sale value of right = 400 shares x ₹ 3 per share = ₹ 1,200 1.7.22 To Bank 1,00,000 2,000 1,10,000 [7 3,00,000
A/c
Note: As per para 13 of AS 13, sale proceeds of rights is to be credited to P & L A/c.
(W.N.1) x 8%
4. Profit on sale of equity shares
x
As on 20.12.19
(6/12]
Sales price (1,500 shares at ₹ 22) 33,000.00 31.12. To P & L 14,033 - 1.10.2022 By Bank 80,000 84,000
Less: Cost of shares sold (1,500 x ₹ 11.875) (17,812.50) 22 A/c A/ c
Profit on sale 15,187.50 [Inter- 1.10.2022 By P & 2,933

est] LA/c (loss)
As on 1. 2.20
(W.N.3)
Sales price (1,000 shares at ₹ 24) 24,000
1.12.2022 By Bank 733
Less: Cost of shares sold (1,000 x ₹ 11.875) (11,875) A/c (Ac-
Profit on sale 12,125 crued
Balance of 3,100 shares as on 31.3.20 will be valued at ₹ 36,812.50 (at rate of ₹ 11.875 per share) interest)
(T 55,000
Question 10 x 08 x
2/12)
A Ltd. purchased on 1st April, 2022 8% convertible debenture in C Ltd. of face value of ₹ 2,00,000 @ ₹ 108. 1.12.2022 By
On 1st July, 2022 A Ltd. purchased another ₹ 1,00,000 debentures @ ₹ 112 cum interest. On 1st October, Equity 55,000 59,767
2022 ₹ 80,000 debentures were sold @ ₹ 105. On 1st December, 2022, C Ltd. give option forconversion of shares
8% convertible debentures into equity share of ₹ 10 each. A Ltd. received 5,000 equity shares in C Ltd. in
in C Ltd.
conversion of 25% debentures held on that date. The market price of debenture andequity share in C Ltd.
(W.N. 3
on 31st December, 2022 is ₹ 110 and ₹ 15 respectively. Interest on debenture ispayable each year on 31 st
and 4)
March, and 30th September. Prepare investment account in the books of A Ltd. on average cost basis
for the accounting year ended 31st December, 2022. (MTP 8 Marks April 23 ,April ’22 ,April ’21 & Oct ‘23) 31.12.2022 By Bal- 1,65,000 3,300 1,79,300
(RTP May 19) ance c/d
(W.N.5)
Answer 10 3,00,000 16,033 3,26,000 3,00,000 16,033
Investment Account for the year ending on 31st December, 2022 Scrip : 8% Convertible Debentures in C 3,26,000
Ltd.
SCRIP: Equity Shares in C LTD.
Date Particulars Cost Date Particulars Cost (Rs.)

(Rs.)
1.12.2022 To 8 % debentures 59,767 31.12.2022 By balance 59,767
c/d
Working Notes: Answer 11

Books of Vijay Investment Account (Scrip: Equity Shares in X Ltd.)
Cost of Debenture purchased on 1st July = Rs. 1,12,000 — Rs. 2,000 (Interest) = Rs. 1,10,000
No. Amount No. Amount
Cost of Debentures sold on 1st Oct. = (Rs.2,16,000 + Rs. 1,10,000) x 80,000/3,00,000
₹ ₹
Loss on sale of Debentures = Rs. 86,933— Rs.84,000 Nominal value of debentures converted into 1.4.2019 To Bal b/d To 30,000 4,50,000 31.10.2019 By — 10,000
equity shares [(Rs. 3,00,000 — 80,000) x.25] Bank Bank (divi-
22.6.2019 5,000 80,000
dend
Interest received before the conversion of debentures
10.8.2019 To Bonus ToBank 5,000 - 1,50,000 on shares
Interest on 25% of total debentures = 55,000 x 8% x 2/12 = 733 acquired on
30.9.2019 (Rights Shares) 10,000
22/6/2019)
Cost of Debentures converted = (Rs. 2,16,000 + Rs. 1,10,000) x 55,000/3,00,000 = Rs. 59,767 15.11.2019 To Profit 32,000 15.11.2019 By Bank 20,000 3,00,000
Cost of closing balance of Debentures = (Rs. 2,16,000 + Rs.1,10,000) x 1,65,000 / 3,00,000 = Rs. 1,79,300 (on sale (Sale of
ofshares) shares)
Closing balance of Debentures has been valued at cost. 31.3.2020 By Bal. c/d 30,000 4,02,000
5,000 equity Shares in C Ltd. will be valued at cost of Rs. 59,767 being lower than the market value 50,000 7,12,000 50,000 7,12,000
Rs. 75,000 (Rs. 15 x5,000)
Note: It is assumed that interest on debentures, which are converted into cash, has been received at the Working Notes:
time of conversion.
Question 11
On 1st April, 2019, Mr. Vijay had 30,000 Equity shares in X Ltd. (the company) at a book value of ₹ 4,50,000
(Face Value ₹ 10 per share). On 22nd June, 2019, he purchased another 5000 shares of the same compa-
ny for ₹ 80,000. The Directors of X Ltd. announced a bonus of equity shares in the ratio of one share for
seven shares held on 10th August, 2019.
On 31st August, 2019 the Company made a right issue in the ratio of three shares for every eight shares
held, on payment of ₹ 15 per share. Due date for the payment was 30th September, 2019, Mr.Vijay sub-
scribed to 2/3rd of the right shares and sold the remaining of his entitlement to Viru for a consideration
of ₹ 2 per share.
On 31stOctober,2019, Vijay received dividends from X Ltd. @ 20% for the year ended 31 st March, 2019.
Dividend for the shares acquired by him on 22ndJune,2019 to be adjusted against the cost of purchase.
On 15th November, 2019 Vijay sold 20,000 Equity shares at a premium of ₹ 5 per share.
You are required to prepare Investment Account in the books of Mr. Vijay for the year ended 31st March,
2020 assuming the shares are being valued at average cost.(MTP 8 Marks,Oct’21 & MTP 10 Marks May’20,
Old & New SM)
Working Notes:
Question 12
On 1st April, 2021, Rajat has 50,000 equity shares of P Ltd. at a book value of Rs. 15 per share (face value Rs.
10 each). He provides you the further information:
On 20th June, 2021 he purchased another 10,000 shares of P Ltd. at Rs. 16 per share.
On 1st August, 2021, P Ltd. issued one equity bonus share for every six shares held by the share-
holders.
On 31st October, 2021, the directors of P Ltd. announced a right issue which entitles the holders
to subscribe three shares for every seven shares at Rs. 15 per share. Shareholders can transfer Question 13
their rights in full or in part.
Gopal holds 2,000, 15% Debentures of ₹ 100 each in Ritu Industries Ltd. as on April 1, 2021 at a cost of ₹
Rajat sold 1/3rd of entitlement to Umang for a consideration of Rs. 2 per share and subscribed the rest
2,10,000. Interest is payable on June, 30th and December, 31st each year. On May 1, 2021, 1,000 deben-
on 5th November, 2021.
tures are purchased cum-interest at ₹ 1,07,000. On November 1, 2021, 1,200 debentures are sold ex-in-
You are required to prepare Investment A/c in the books of Rajat for the year ending 31st March, 2022. terest at ₹ 1,14,600. On November 30, 2021, 800 debentures are purchased ex-interest at ₹ 76,800. On
(MTP 6 Marks Sep 22, MTP 8 Marks March ’21, Old & New SM) December 31, 2021, 800 debentures are sold cum-interest for ₹ 1,10,000. You are requiredto prepare the
Investment Account showing value of holdings on March 31, 2022 at cost, using FIFO Method. (MTP 10
Answer 12 Marks Oct ’22 & April ‘19)
In the books of Rajat

Answer 13
Investment Account (Equity shares in P Ltd.) Investment Account of Gopal For the year ended 31.3.2022
Date Particulars No. of A m o u n t Date Particulars No. of A m o u n t (Script: 15% Debentures in Ritu Industries Ltd.) (Interestpayable on 30th June and 31st December)
shares (Rs. ) shares (Rs. )
Date Particu- Nominal Inter- Cost ₹ Date Particu- Nominal Inter- Cost ₹
1.4.21 To Balance b/d 50,000 7,50,000 31.3.22 By 90,000 12,10,000
lars Value ₹ est ₹ lars Value ₹ est ₹
To
Balance c/d (Bal.
20.6.21 Bank A/c 10,000 1,60,000 1.04.21 To Bal- 2,00,000 7,500 2,10,000 30.06.21 By Bank - 22,500
fig.)
ance A/c A/c
1.8.21 To Bonus 10,000 -
issue (W.N.1) 1.05.21 To Bank 1,00,000 5,000 1,02,000 1.11.21 By Bank 1,20,000 6,000 1,14,600
A/c
5.11.21 To Bank A/c (right
A/c
shares)
30.11.21 To Bank 80,000 5,000 76,800 1.11.21 By Profit - - 11,400
(W.N.4) 20,000 3,00,000 A/c & Loss
90,000 12,10,000 90,000 12,10,000 A/c
31.12.21 To Profit 20,000 31.12.21 By Bank 80,000 6,000 1,04,000
& Loss A/c
A/c
31.03.22 To Profit 37,250 31.12.21 By Bank - 13,500 -
&
Loss A/c A/c
(Bal. fig.) 31.12.21 By Bank - 6,750 -
A/c
31.3.22 By Bal. 1,80,000 - 1,78,800 The director of XYZ Ltd. announces a bonus and right issue. No dividend was payable on these issues.
c/d The terms of the issue were as follows:
3,80,000 54,750 4,08,800 3,80,000 54,750 4,08,800 ฀ Bonus basis 1:6 (Date: 16.08.2022)
฀ Right basis 3: 7 (Date: 31.08.2022) price ₹15 per share
Working Notes: ฀ Due date for payment 30.09.2022
฀ Shareholders can transfer their rights in full or in part.
Accordingly, Sanket sold 33 1/3% of his entitlement in the market for consideration of ₹ 4 per share on
31.08.2022 & he procured other entitlement by payment.
Dividends for the year ended 31.03.2022 at the rate of 20% were declared by XYZ Ltd. and received by
Sanket on 31.10.2022. Dividend amount for shares acquired by him on 01.06.2022 are to be adjusted
against the cost of purchase.
On 15.11.2022, Sanket sold 25,000 equity shares at premium ₹ 12 per share. You are required to prepare
in books of Sanket.
(i) Investment Account

(ii) Profit & Loss Account (Extract for Investment)
Books of accounts are closed by Sanket on 31.12.2022 and market price of shares on that date is ₹ 20
per share. (10 Marks March ’23)(Same concept different figures Old & New SM)
Answer 14
Books of Sanket Investment Account
(Scrip: Equity Shares in XYZ Ltd.)

₹ ₹
1.1.2022 To Bal b/d To 50,000 12,50,000 31.10.2022 By Bank (divi- — 20,000
Bank dend
1.6.2022 10,000 2,00,000
16.8.2022 To Bonus 10,000 — on shares
(W.N.1)
acquired
To Bank on
30.9.2022 (Rights Shares) 20,000 3,00,000 1.6.2022)
(W.N.3) (W.N.4)
15.11.2022 To Profit (on 69,444 15.11.2022 By Bank 25,000 5,50,000

sale of shares)
(Sale of
shares)
31.12.2022 By Bal. 65,000 12,49,444
c/d(W.N.6)
Question 14 90,000 18,19,444 90,000 18,19,444
Sanket had 50,000 Equity shares of XYZ Ltd. on 01.01.2022 at a book value of ₹ 25 per share (face value
₹ 10). On 01.06.2022, he purchased another 10,000 shares of the company at ₹ 20 per share.
Profit and Loss Account (An extract for investment)
31.12.2022 To Balance c/d (profit) 2,09,444 31.8.22 By Sale of rights (W.N.3) 40,000
Question 15
31.10.22 By Dividend (W.N.4) 1,00,000
Omega Limited (listed company) issued ₹ 4,50,000 5% Debentures on 30th September 2020 on which
15.11.22 By Profit transferred 69,444
interest is payable half yearly on 31st March and 30th September. The company has power to pur-
2,09,444 2,09,444 chase debentures in the open market for cancellation thereof. On 31 December 2020, investments
made for the purpose of redemption were ₹ 67,500. The following purchases were made during the
year ended 31st December, 2022 and the cancellation were made on the same date 1st March 2022 -
Working Notes:
₹ 75,000 nominal value purchased for ₹ 74,175 ex-interest.
(i) 1st September 2022 - ₹ 60,000 nominal value purchased for ₹ 60,375 cum-interest. You are re-
quired to draw up the following accounts up to the date of cancellation:
(ii) Debentures Account; and

Own Debenture (Investment) Account. Ignore taxation. (MTP 5 Marks March ’23)
Answer 15
Omega Limited-Debenture Account
2022 ₹ 2022 ₹
Mar 1 To Own Debentures 74,175 Jan 1 By Balance b/d 4,50,000
Mar 1 To Profit on cancellation
(25,000-24,725) 825
Sep 1 To Own Debentures
(Note 3)
59,124
Sep 1 To Profit on cancellation
(20,000-19,708) 876
Dec 31 Balance c/d 3,15,000
4,50,000 4,50,000
Dec 31 Balance c/d 3,15,000

4,50,000 4,50,000
Own Debenture (Investment) Account

Nominal Interest Cost Nominal Interest Cost
Cost Cost
₹ ₹ ₹ ₹
₹ ₹
2022 2022
Mar 1 To Bank Mar 1 By Deben- -

(W.N. 1) tures A/c
75000 1563 74,175 75,000 74,175
Sep 1 To Bank Sep 1 By Deben- - Answer 17

(W.N. 2 tures A/c
60,000 1,251 59,124 60,000 59,124 A limited invested ₹ 600 lakhs in the equity shares of B Ltd. Out of the same, the company intends to hold
& 3) 50% shares for long term period i.e. ₹ 300 lakhs and remaining as temporary (current) investment i.e. ₹
300 lakhs. Irrespective of the fact that investment has been held by A Limited only for 3 months (from
Dec. 31 By P&L A/c
1.1.2020 to 31.3.2020), AS 13 lays emphasis on intention of the investor to classify the investment as current
- - 2,814 - or long term even though the long-term investment may be readily marketable.
1,35,000 2,814 1,33,299 1,35,000 2,814 1,33,299 In the given situation, the realizable value of all such investments on 31.3.2020 became ₹ 200 lakhs i.e. ₹
100 lakhs in respect of current investment and ₹ 100 lakhs in respect of long-term investment.
Working notes:
As per AS 13, ‘Accounting for Investment’, the carrying amount for current investments is the lower of
cost and fair value. In respect of current investments for which an active market exists, market value
1. 75,000 x 5% x 5/12 = 1,563
generally provides the best evidence of fair value. Accordingly, the carrying value of investment held as
2. 60,000 x 5% x 5/12 = 1,251 temporary investment should be shown at realizable value i.e. at ₹ 100 lakhs. The reduction of ₹ 200 lakhs
3. 60,375 – 1,251= 59,124 in the carrying value of current investment will be charged in the profit and loss account. Standard further
states that long-term investments are usually carried at cost. However, when there is a decline, other
than temporary, in the value of long-term investment, the carrying amount is reduced to recognize the
decline.
Question 16 Here, B Limited has lost a case of copyright which drastically reduced the realizable value of its shares
to one third which is quiet a substantial figure. Losing the case of copyright may affect the business and
Paridhi Electronics Ltd. invested in the shares of Dhansukh Ltd. on 1st May 2020 at a cost of Rs. 10,00,000.
the performance of the company in long run. Accordingly, it will be appropriate to reduce the carrying
Three fourth of these investments were current investments and the remaining investments were in-
amountof long-term investment by ₹ 200 lakhs and show the investments at ₹ 100 lakhs as the downfall
tended to be held for more than a year. The published accounts of Dhansukh Ltd. received in January,
in the value of shares is not temporary. The reduction of ₹ 200 lakhs in the carrying value of long-term
2021 reveals that the company has incurred cash losses with decline in market share and investment
investment will be charged to the profit and loss account.
of Paridhi Electronics Ltd. may not fetch more than 7,50,000. The reduction in value is apparent to be
non-temporary. You are required to explain how you will deal with the abovein the financial statements
of the Paridhi Electronics Ltd. as on 31.3.21 with reference to AS 13? (RTP May ’21, Old & New SM) (Same Question 18
concepts different figures RTP May 18, MTP 4 Marks, Oct’21)
Omega Equity Investments Ltd., wants to re-classify its investments in accordance with AS 13. State
Answer 16 the values, at which the investments have to be reclassified in the following cases:
As per AS 13, “Accounting for Investments”, carrying amount for current investments is the lower of cost (i) Long term investments in Company A, costing Rs.8.5 lakhs are to be re-classified as cur-
and fair value. But long term investments should be carried in the financial statements at cost. However, rent. The company had reduced the value of these investments to Rs.6.5 lakhs to recognize
provision for diminution shall be made to recognize a decline, other than temporary, in the value of the a permanent decline in value. The fair value on date of transfer is Rs.6.8 lakhs.
investments, such reduction being determined and made for each investment individually. The standard (ii) Current investment in Company C, costing Rs.10 lakhs are to be re-classified as long term
also states that indicators of the value of an investment are obtained by reference to its market value, the as the company wants to retain them. The market value on date of transfer is Rs.12 lakhs.
investee’s assets and results and the expected cash flows from the investment. Paridhi Ltd. made three
fourth of Rs. 10,00,000 ie. Rs.7,50,000 as current investment and remaining Rs. 2,50,000 as long term. The (iii) Certain long term investments no longer considered for holding purposes, to be reclassified
facts of the case given in the question clearly suggest that the provision for diminution should be made to as currentinvestments. The original cost of these investments was Rs.18 lakhs but had been
reduce the carrying amount of shares for both categories of shares to bring them to market value. Hence written down to Rs.12 lakhs to recognize permanent decline as per AS 13. (RTP May 20)
the carrying value of investments will be shown at amount of Rs. 7,50,000 in the financial statements for
Answer 18
the year ended 31st March, 2021 and charge the difference of loss of Rs. 2,50,000 to profit and loss account.
As per AS 13 ‘Accounting for Investments’, where long-term investments are reclassified as current in-
Question 17 vestments, transfers are made at the lower of cost and carrying amount at the date of transfer. And
where investments are reclassified from current to long term, transfers are made at lower of cost and
A Ltd. on 1-1-2020 had made an investment of ₹ 600 lakhs in the equity shares of B Ltd. of which 50%is fair value on the date of transfer. Accordingly, the re-classification will be done on the following basis:
made in the long term category and the rest as temporary investment. The realizable value of all such (i) In this case, carrying amount of investment on the date of transfer is less than the cost; hence
investment on 31-3-2020 became ₹ 200 lakhs as B Ltd. lost a case of copyright. How will you recog- this reclassified current investment should be carried at Rs.6.5 lakhs in the books.
nize the reduction in the value of the investment in the financial statements for the year end 31-3-2020
as per AS 13 considering this downfall in the value of shares as non-temporary? (RTP Nov 20, Old & New (ii) In this case, reclassification of current investment into long-term investments will be made at
SM) Rs.10 lakhs as cost is less than its market value of Rs.12 lakhs.
(iii) In this case, the book value of the investment is Rs.12 lakhs, which is lower than its cost i.e.
Rs.18 lakhs. Here, the transfer should be at carrying amount and hence this re-classified current (i) In the first case, the market value of the investments is Rs. 30 lakhs, which is higher than its
investment should be carried at Rs.12 lakhs. cost i.e. Rs. 25 lakhs. Therefore, the transfer to long term investments should be made at cost
i.e. Rs. 25 lakhs
Question 19 (ii) In the second case, the market value of the investment is Rs. 12.5 lakhs, which is
JVR Limited has made investment of ₹ 97.84 Crores in Equity Shares of QSR Limited in 2016-17. The in- lower than its cost i.e. Rs. 20 lakhs. Therefore, the transfer to long term investments should
vestment has been made at par. QSR Limited has been in continuous losses for the last 2 years. be made in the books at the market value i.e. Rs. 12.5 lakhs. The loss of Rs. 7.50 lakhs (20-12.5)
should be charged to Profit and Loss statement.
Limited is willing to re-assess the carrying amount of its investment in QSR Limited and wish to provide
for diminution in value of investment for the year ended 31st March, 2021. Discuss whether the connec- (iii) In the third case, the book value of the investments is Rs. 11 lakhs, which is lower than its cost,
tion of JVR Limited to bring down the carrying Amount of investment in QSR Limited is in accordance i.e. Rs. 15 lakhs. As the transfer should be at carrying amount, hence this re-classified current
with Accounting Standards. (RTP May ’22) investment should becarried at Rs. 11 lakhs.Question 21
Answer 19
The investments are classified into two categories as per AS 13, viz., Current Investments and Long-term Question 21
Investments. A current Investment is an investment that is by its nature readily realizable and is intended
to be held for not more than one year from the date on which such investment is made. The carrying Gowtham Limited invested in shares of another company (with the intention to hold the shares for
amount for current investments is the lower of cost and fair value. Any reduction to fair value and any short-term period) on 30th November, 2021 at a cost of ₹ 4,25,000. It also earlier purchased Gold of ₹
reversals of such reductions are included in the statement of profit and loss. A long - term investment is 8,00,000 and Silver of ₹ 3,50,000 on 31st March, 2019.
an investment other than a current investment. The investments referred in the question can be classified Market values as on 31st March, 2022, of the above investments are as follows:Shares ₹ 3,50,000
as long-term investments and long-term investments are usually carried at cost. However, when there is
Gold ₹ 10,25,000
a decline, other than temporary, in the value of a long-term investment, the carrying amount is reduced
to recognize the decline. The contention of the company to bring down the value of investment may be Silver ₹ 5,10,000
correct if the decline in value is permanent in nature and the reduction in carrying amount may be charged You are required to explain how will the above investments be shown (individually and in total) in the
to the statement of profit and loss. The reduction in carrying amount is reversed when there is a rise in the books of account of Gowtham Limited for the year ending 31st March, 2022 as per the provisions of AS
value of the investment, or if the reasons for the reduction no longer exist. 13. (RTP May 23, Old & New SM) (Same concept different figures RTP Nov’18)
Question 20 Answer 21
As per AS 13 (Revised) ‘Accounting for Investments’, for investment in shares - if the investment is pur-
Mother Mart Ltd., wants to re-classify its investment in accordance with AS 13. Decide the treatment
chased with an intention to hold for short-term period (less than one year), then it will be classified as
to be given in each of the following cases assuming that the market value has been determined in an
current investment and to be carried at lower of cost and fair value, i.e., in case of shares, at lower ofcost
arm’s length transaction between knowledgeable and willing buyer and seller:
(₹ 4,25,000) and market value (₹ 3,50,000) as on 31 March 2022, i.e., ₹ 3,50,000.
(i) A portion of current investments purchased for Rs. 25 lakhs to be reclassified as long-term
Gold and silver are generally purchased with an intention to hold it for long term period (more than one
investments, as the company has decided to retain them. The market value as on the date of
year) until and unless given otherwise. Hence, the investment in Gold and Silver (purchased on 31st-
balance sheet was Rs. 30 lakhs. The fair value of the investments on the date of transfer is
March, 2019) should continue to be shown at cost (since there is no ‘other than temporary’ diminution)
same as the market value on the balance sheet date
as on 31st March, 2022, i.e., ₹ 8,00,000 and ₹3,50,000 respectively, though their market values have been
(ii) Another portion of current investments purchased for Rs. 20 lakhs has to be reclassified as increased.
long-term investments. The Fair value of these investments as on the date of the balance
Thus the shares, gold and silver will be shown at ₹ 3,50,000, ₹ 8,00,000 and
sheet was Rs. 12.5 lakhs.
₹ 3,50,000 respectively and hence, total investment will be valued at ₹ 15,00,000 for the year ending on
(iii) One portion of long-term investments, no longer considered for holding purposes, to be re-
31st March, 2022 as per AS 13.
classified as current investments. The original cost of these was Rs. 15 lakhs, but had been
written down to Rs. 11lakhs to recognize permanent decline as per AS 13.(RTP Nov’22, Old & New
SM)
Question 22
Answer 20
As per AS 13 ‘Accounting for Investments’, where investments are reclassified from current to long-term, Following transactions of Meeta took place during the financial year 2020 -21:
transfers are made at the lower of cost and fair value at the date of transfer. When long-term investments
are re-classified as current investments, transfers are made at the lower of cost and carrying amount at 1st April, 2020 Purchased ₹ 4,500 8% bonds of ₹ 100 each at ₹ 80.50 cum-interest.
the date of transfer. Interest is payable on 1st November and 1st May.
1st May, 2020 Received half year’s interest on 8% bonds. Investment in Equity shares of Kamal Ltd. for the year ended 31 st March, 2021
10 July, 2020 Purchased 6,000 equity shares of ₹ 10 each in Kamal Limited for ₹ Date Particu- No. Income Amount Date Particulars No. Income Amount
lars
44 each through a broker, who charged brokerage @ 2%. ₹ ₹ ₹ ₹
1st October 2020 Sold 1,125 8% bonds at ₹ 81 Ex-interest. 2020 To Bank 6,000 -- 2,69,280 2021 By Bank – - 10,800
1st November, 2020 Received half year’s interest on 8% bonds. July 10
A/c
Jan dividend
15th January, 2021 Received 18% interim dividend on equity shares of Kamal Limited. 15
15th March, 2021 Kamal Limited made a rights issue of one equity share for every four Eq- 2021 To Bank 600 - 3,000 March By Balance 6,600 2,72,280
uity shares held at ₹ 5 per share. Meeta exercised the option for 40% of c/d
March A/c 31
her entitlements and sold the balance rights in the market at (bal. fig.)
15 (W.N. 3)
₹ 2.25 per share.
March To P & L
Prepare separate investment account for 8% bonds and equity shares of Kamal Limited in the books of
Meeta for the year ended on 31st March, 2021. Assume that the average cost method is followed. (RTP Nov 31 A/c 10,800
21, PYP Nov ’18 , 10Marks) -
6,600 10,800 2,72,280 6,600 10,800 2,72,280
Answer 22
In the books of Meeta
Working Notes:
8% Bonds for the year ended 31st March, 2021
Profit on sale of 8% Bonds
Sales price ₹ 91,125
Less: Cost of bonds sold = 3,47,250/4,500x 1,125 (₹ 86,812.50) Profit on sale ₹ 4,312.50
Closing balance as on 31.3.2021 of 8 % Bonds

3,47,250/4,500x 3,375= ₹ 2,60,437.50
Calculation of right shares subscribed by Kamal Ltd.

Right Shares = 6,000/4 x 1= 1,500 shares
Shares subscribed by Meeta = 1,500 x 40%= 600 shares
2021 By Balance 3,375 - 2,60,437.50
c/d (W.N.2) Value of right shares subscribed = 600 shares @ ₹ 5 per share = ₹ 3,000
Mar. 31
Calculation of sale of right entitlement by Kamal Ltd.
4,500 35,250 3,51,562.50 4,500 35,250 3,51,562.50
No. of right shares sold = 1,500 – 600 = 900 rights for 2,025
Note: As per para 13 of AS 13, sale proceeds of rights are to be credited to P & L A/c.
Question 23
On 1st April, 2019 Mr. Shyam had an opening balance of 1000 equity shares of X Ltd Rs. 1,20,000 (face
value Rs.100 each). On 5.04.2019 he further purchased 200 cum-right shares for Rs. 135 each. On
8.04.2019 the director of X Ltd announced right issue in the ratio of 1:6.
Mr. Shyam waived off 100% of his entitlement of right issue in the favour of Mr. Rahul at the rate of
Rs. 20 each. All the shares held by Shyam had been acquired on cum right basis and the total mar-
ket price (ex-right) of all these shares after the declaration of rights got reduced by Rs. 3,400. On
10.10.2019 Shyam sold 350 shares for Rs. 140 each. 31.03.2020 The market price of each share is Rs. 125
each. You are required to prepare the Investment account in the books of Mr. Shyam for the yearend- Working Notes:
ed 31.03.2020 assuming that the shares are being valued at average cost. (RTP May ’21)
1. Sale of Rights Rs. 4,000
Answer 23 The market price of all shares of X Ltd after shares becoming ex-rights has been reduced by Rs.
3,400
In the books of Mr. Shyam
In this case out of sale proceeds of Rs.4,000; Rs. 3,400 may be applied to reduce the carryingamount to
for the year ending on 31-3-2020 (Scrip: Equity Shares of X Limited)e 203 the market value and Rs. 600 would be credited to the profit and loss account.
1.4.2019 To Bal- 1000 1,20,000 8.04.2019 By Bank 3,400

2. Profit on sale of 350 shares
ance b/d A/c
(W.N.1) Amount
5.04.2019 To 200 27,000 10.10.2019 By Bank 350 49,000 Sale price of 350 shares (350 shares X 140 each) Rs. 49,000
Bank A/c (350x
(200x Rs.140) Less: Cost of 350 shares [(1,20,000+27,000-3,400) X350]/1200 Rs. 41,883
Rs.135) Profit Rs. 7,117
10.10.2019 To Prof- 7,117 31.3.2020 By Bal- 850 1,01,717
it & ance 3. Valuation of 850 shares as on 31.03.2020
c/d
Loss
A/c (W.N.3) Particulars Amount
(W.N.2) Cost price of 850 shares Rs. 1,01,717
1200 1,54,117 1200 1,54,117 [(1,20,000 +27,000 -3,400) x 850 /1,200]
Fair Value as on 31.03.2020 [850 X Rs. 125 each] Rs. 1,06,250
Cost price or fair value whichever is less Rs. 1,01,717
Question 24
(a) In 2018, Royal Ltd. issued 12% fully paid debentures of ₹ 100 each, interest being payable
half yearly on 30th September and 31st March of every accounting year. On 1st December,
2019, M/s. Kumar purchased 10,000 of these debentures at ₹ 101 (cum-interest) price. On
1st March, 2020 the firm sold all of these debentures at ₹ 106 (cum-interest) price. You are
required to prepare Investment (Debentures) Account in the books of M/s. Kumar for the
period 1st December, 2019 to 1st March, 2020. (Nov 20)
(b) Mr. X acquires 200 shares of a company on cum-right basis for ₹ 60,000. He subsequently
receives anoffer of right to acquire fresh shares in the company in the proportion of 1:1 at ₹
105 each. He does not subscribe but sells all the rights for ₹ 15,000. The market value of the
shares after their becoming ex-rights has also gone down to ₹ 50,000. What should be the
accounting treatment in this case? (RTPNov 20)
Answer 24
Investment Account in the books of M/s Kumar for the period from 1st December 2019 to 1st March,
2020(Scrip: 12% Debentures of Royal Ltd.)
Date Particu- Nom- Inter- Cost Date Particu- No- Interest Cost 2019 at a price of Rs.1.50 per share of which 75 paise is payable on or before 15th July 2019
lars inal est lars mina l (₹) and the balance, 75 paise per share, on or before 15th September, 2019.
(₹)
Value Value The shares issued under (i) and (ii) were not to rank for dividend for the year ending 31st December
2019.
(₹) (₹)
1.12.2019 To Bank 10,00,00 20,000 9,90,000 1.03.2020 By Bank 10,00,00 50,000 10,10,00 (a) Meera received her bonus shares and took up 4,000 shares under the right issue,
A/c A/c paying thesum thereon when due and selling the rights of the remaining shares at
(W.N.1) 40 paise per share; the proceeds were received on 30th September 2019.
0 (W.N.2) 0 0
To Profit & (b) On 15th March 2020, she received interim dividend from Kumar Ltd. of 15 per cent
1.3.2020
loss A/c in respectof the current financial year.
30,000 Page
(c) On 30th March 2020, she received Rs.28,000 from the sale of 20,000 shares.
20,000 You are required to record these transactions in the Investment Account in Meera’s
books for the year ended 31st March 2020 transferring any profits or losses on these
transactions to Profit and Loss account. Apply average cost basis. Expenses and
10,00,00 50,000 10,10,000 10,00,00 50,000 10,10,00
tax to be ignored. (RTP May 20, MTP 8 Marks Oct ’18,MTP 10 Marks Mar’18)
0 0 0
Answer 25
Working Notes:
₹ Investment Account (Shares in Kumar Limited) in the books of Meera
(i) Cost of 12% debentures purchased on 1.12.2019
Cost Value (10,000 X ₹101) = 10,10,000
Date Particulars No. of Income Amount Date Particulars No. of Income Amount
Less: Interest (10,000 x 100 x12% x 2/12) = (20,000) Shares Shares
Page
Total = 9,90,000
(ii) Sale proceeds of 12% debentures sold on 1st March, 2020 ₹ 2019 Rs. Rs. 2019 Rs. Rs.
Sales Price (10,000 X ₹106) = 10,60,000 April 1 To Bank (Pur- 40,000 - 60,000 M a y By Bank (Sale) 8,000 - 15,200
chases) 15
Less: Interest (10,000 x 100 x12% x 5/12) = (50,000)
May 15 To Profit & Loss - - 3,200
Total = 10,10,000 A/c (W.N.1)
As per AS 13, where the investments are acquired on cum-right basis and the market value of June15 To Bonus Issue 8,000 - Nil 2020
investments immediately after their becoming ex-right is lower than the cost for which they were
July 15 To Bank (@ 4,000 - 3,000 M a r . By Bank (Divi- 4,800 -
acquired, it may be appropriate to apply the sale proceeds of rights to reduce the carrying
75 p. paid 15 dend
amount of such investments to the market value. In this case, the amount of the ex-right market
on 4,000
value of 200 shares bought by X immediately after the declaration of rights falls to ₹50,000. In this @ 15% on
shares)
case, out of sale proceeds of ₹ 15,000, ₹ 10,000 may be applied to reduce the carrying amount to Rs.32,000)
bring it to the market value ₹50,000 and ₹ 5,000 would be credited to the profit and loss account.
Sept. To Bank (@ 75 - - 3,000 M a r . By Bank (Sale) 20,000 - 28,000
p. paid on 30
Question 25 4,000
shares)
Meera carried out the following transactions in the shares of Kumar Ltd.:
2020 To Profit & Loss 3,455 M a r . By B a l a n c e 24,000 - 29,455
(1) On 1st April, 2019 she purchased 40,000 equity shares of Rs.1 each fully paid up for Mar. 31
A/c (W.N.2) 31 c/d*
Rs.60,000.
To Profit & Loss - 4,800
(2) On 15th May 2019, Meera sold 8,000 shares for Rs.15,200. A/c
(3) At a meeting on 15th June 2019, the company decided: 52,000 4,800 72,655 52,000 4,800 72,655
(i) To make a bonus issue of one fully paid up share for every four shares held on 1st June 2019
and
(ii) To give its members the right to apply for one share for every five shares held on 1st June
* Working Notes: Aug.1 To Bank 2,50,000 11,250 2,45,000 Oct.1 By Bank 2,00,000 2,06,000
Oct.1 To P&L A/c 2,167
(1) Profit on Sale on 15-5-2019: Dec. To P&L A/c 52,313 Dec. By Equity 1,10,000 1,12,108
Cost of 8,000 shares @ Rs.1.50 Rs.12,000 31 31 share
Less: Sales price Rs.15,200 Dec. By Bank 3,713
Profit Rs.3,200 31 (See note1)
(2) Cost of 20,000 shares sold: D e c . By Balance 4,40,000 4,850 4,48,434
Cost of 44,000 shares (48,000 + 6,000) Rs.54,000 31 c/d
Cost of 20,000 shares Rs.24,545 7,50,000 69,188 7,66,542 7,50,000 69,188 7,66,542
Note 1: Rs.3,713 received on 31.12.2018 represents interest on the debentures converted till date ofconver-
sion.Note 2: Cost being lower than Market Value the debentures are carried forward at Cost.
Investment in Equity shares in P Ltd. Account

Profit on sale of 20,000 shares (Rs.28,000 – Rs.24,545) Rs. 3,455
Date Particulars Nominal Amount Date Particulars Nominal Amount
Question 26 ₹ ₹ ₹ ₹
A Pvt. Ltd. follows the calendar year for accounting purposes. The company purchased 5,000 (nos.) 2018 2018
13.5% Convertible Debentures of Face Value of Rs.100 each of P Ltd. on 1st May 2018 @ Rs.105 on cum Dec 31 To 13.5% 1,00,000 1,12,108 Dec.31 By P&L A/c 22,108
interest basis. The interest on these instruments is payable on 31st March & 30th September respec-
Deb. Dec.31 By Bal. c/d 1,00,000 90,000
tively. On August 1st 2018 the company again purchased 2,500 of such debentures @ Rs.102.50each on
cum interest basis. On 1st October, 2018 the company sold 2,000 Debentures @ Rs.103 each.On 31st De- 1,00,000 1,12,108 1,00,000 1,12,108
cember, 2018 the company received 10,000 equity shares of Rs.10 each in P Ltd. on conversion of 20% of
its holdings. Interest for 3 months on converted debentures was also received on 31.12.2018. The market Note 1: Cost being higher than Market Value the shares are carried forward at Market Value.
value of the debentures and equity shares as at the close of the year were Rs.106 and Rs.9 respectively.
Prepare the Debenture Investment Account & Equity Shares Investment Account in the books of A Pvt. Working Notes:
Ltd. for the year 2018 on Average Cost Basis. (RTP Nov 19)(Similar to May 18 but includes additional ad- 1. Interest paid on Rs.5,00,000 purchased on May 1st, 2018 for the month of April 2018, as part of
justments) purchase price: 5,00,000 x 13.5% x 1/12 = Rs.5,625
2. Interest received on 30th Sept. 2018
Answer 26 On Rs.5,00,000 = 5,00,000 x 13.5% x ½ = 33,750 On Rs.2,50,000 = 2,50,000 x 13.5% x ½ = 16,875
Books of A Pvt. Ltd. Total Rs.50,625
Investment in 13.5% Convertible Debentures in P Ltd. Account(Interest payable 31st March & 30th Sep- 3. Interest paid on Rs.2,50,000 purchased on Aug. 1st 2018 for April 2018 to July 2018 as part of
tember) purchase price:
2,50,000 x 13.5% x 4/12 = Rs.11,250
Date Particulars Nominal I n t e r - Amount Date Particulars Nominal Interest Amount
4. Loss on Sale of Debentures Cost of acquisition
est
(Rs.5,19,375 + Rs.2,45,000) x Rs.2,00,000/Rs.7,50,000 = 2,03,833
₹ ₹ ₹ ₹ ₹ ₹
2018 2018 Page Less: Sale Price (2,000 x 103) = 2,06,000
Profit on sale = Rs. 2,167
May 1 To Bank 5,00,000 5,625 5,19,375 Sept. By Bank (6 50,625
5. Interest on 1,100 Debentures (being those converted) for 3 months i.e. Oct-Dec. 2018 1,10,000 x
30 months Int) 13.5% x 3/12 = Rs.3,713
6. Cost of Debentures converted to Equity Shares

(Rs.5,19,375 + Rs.2,45,000) x 1,10,000/7,50,000= Rs.1,12,108
7. Cost of Balance Debentures 1.4.2020 To Bal- 4,00,000 12,000 3,92,000 30.6.2020 By Bank - 36,000 -
ance (6,00,000
(Rs.5,19,375 + Rs.2,45,000) x Rs.4,40,000/Rs.7,50,000 = Rs.4,48,434 b/d
x
6%)
8. Interest on Closing Debentures for period Oct.- Dec. 2018 carried forward (accrued interest)
1.6.2020 To Bank 2,00,000 10,000 2,34,800 1.9.2020 By Bank 3,00,000 6,000 3,17,400
Rs.4,40,000 x 13.5% x 3/12 = Rs.14,850
1.9.2020 To Profit 23,400 1.12.2020 By Bank 2,00,000 10,000 2,05,800
& Loss
Question 27
A/c
Mr. Wise had 12% Debentures of Face Value ₹ 100 of Alpha Ltd. as current investments. He provides 31.1.2021 To Bank 3,00,000 3,000 3,06,000 1.12.2020 By Profit & - - 9,600
the following details relating to the investments. Loss a/c
1-4-2020 Opening balance 4,000 debentures costing ₹ 98 each 31.3.2021 To Profit 45,000 31.12.20 By Bank - 6,000 -
1-6-2020 Purchased 2,000 debentures @ ₹ 120 cum interest & Loss (1,00,000
A/c
x 6%)
1-9-2020 Sold 3,000 debentures @ ₹ 110 cum interest (Bal.
fig.)
1-12-2020 Sold 2,000 debentures @ ₹ 105 ex interest
31.3.2021 By Profit & - - 3,400
31-1-2021 Purchased 3,000 debentures @ ₹ 100 exinterest Loss A/c
31-3-2021 Market value of the investments ₹ 105 each

31.3.2021 By Balance 4,00,000 12,000 4,20,000
Interest due dates are 30th June and 31st December. Mr. Wise closes his books on 31-3-2021. He in- c/d
curred 2% brokerage for all his transactions. Show investment account in the books of Mr. Wise as-
9,00,000 70,000 9,56,200 9,00,000 70,000 9,56,200
suming FIFO method is followed. (RTP May ’22)
Working Notes:
Answer 27 1. Valuation of closing balance as on 31.3.2021
Investment A/c of Mr. Wise
₹
for the year ending on 31-3-2021 (Scrip: 12% Debentures of Alpha Limited (Interest Payable on 30th
June and 31st December) Amount in ₹ Market value of 4,000 Debentures at ₹ 105 4,20,000
Cost price of 1,000 debentures at 1,17,400
Date Partic- Nom- Inter- Cost Date Particulars Nom- Inter- Cost
ulars inal est inal est
Value Value
3,000 debentures at 3,06,000 4,23,400
Value at the end = ₹ 4,20,000 i.e. whichever is less

2. Profit on sale of debentures as on 1.9.2020
₹
Sales price of debentures (3,000 x ₹ 110) 3,30,000
Less: Brokerage @ 2% (6,600)
3,23,400
Less: Interest for 2 months (6,000)
Less: Cost price of Debentures
(2,94,000)
Profit on sale 23,400
3. Loss on sale of debentures as on 1.12.2020 May 1 To Bank 5,00,000 5,625 5,19,375 Sept.30 By Bank 50,625
(6 months Int)
₹
Aug.1 To Bank 2,50,000 11,250 2,45,000 Oct.1 By Bank 2,00,000 2,06,000
Sales price of debentures (2,000 x ₹ 105) 2,10,000
Oct.1 To P&L A/c 2,167
Dec.31 To P&L A/c 52,313
2,05,800
Dec.31 By Balance c/d 5,50,000 18,563 5,60,542
Less: Cost price of Debentures (98,000 + 1,17,400) (2,15,400)
7,50,000 69,188 7,66,542 7,50,000 69,188 7,66,542
Loss on sale 9,600
4. Purchase Cost of 2,000 debentures on 1.6.2020 Note: Cost being lower than Market Value the debentures are carried forward at Cost.Working
₹
Notes:
2000 Debentures @₹ 120 cum interest 2,40,000
1. nterest paid on ₹ 5,00,000 purchased on May 1st, 2021 for the month of April 2021, as part of purchase
Add: Brokerage @ 2% 4,800
price: 5,00,000 x 13.5% x 1/12 = ₹ 5,625
2,44,800
Less: Interest for 5 months (10,000)
2. Interest received on 30th Sept. 2021
Purchase cost of 2,000 debentures 2,34,800
On ₹ 5,00,000 = 5,00,000 x 13.5% x ½ = 33,750
5. Sale value for 3,000 debentures on 1.9.2020
On ₹ 2,50,000 = 2,50,000 x 13.5% x ½ = 16,875
₹
Total ₹ 50,625
Sales price of debentures cum interest (3,000 x ₹ 110) 3,30,000
3. Interest paid on ₹ 2,50,000 purchased on Aug. 1st 2021 for April 2021 to July 2021 as part ofpurchase
3,23,400 price:
Less: Interest for 2 months (6,000) 2,50,000 x 13.5% x 4/12 = ₹ 11,250
Sale value for 3,000 debentures 3,17,400
4. Loss on Sale of Debentures Cost of acquisition

Question 28
(₹ 5,19,375 + ₹ 2,45,000) x ₹ 2,00,000/₹ 7,50,000 = 2,03,833
Alpha Ltd. purchased 5,000, 13.5% Debentures of Face Value of ₹ 100 each of Pergot Ltd. on 1st May 2021
Less: Sale Price (2,000 x 103) = 2,06,000 Profit on sale= ₹ 2,167
@ ₹ 105 on cum interest basis. The interest on these debentures is payable on 31st & 30th of March &
September respectively. On August 1st 2021 the company again purchased 2,500 of such debentures
@ ₹ 102.50 each on cum interest basis. On October 1st, 2021 the company sold 2,000 Debentures @ ₹
5. Cost of Balance Debentures
103 each on ex- interest basis. The market value of the debentures as at the close of the year was ₹
106. You are required to prepare the Investment in Debentures Account in the books of Alpha Ltd. for (₹ 5,19,375 + ₹ 2,45,000) x ₹ 5,50,000/₹ 7,50,000 = ₹ 5,60,542
the year ended 31st Dec. 2021 on Average Cost Basis. (RTP Nov’22, MTP 8 Marks , Nov ‘21)
Answer 28 6. Interest on Closing Debentures for period Oct.-Dec. 2021 carried forward (accrued interest)
Books of Alpha Ltd. ₹ 5,50,000 x 13.5% x 3/12 = ₹ 18,563
Investment in 13.5% Debentures in Pergot Ltd. Account (Inter- Question 29

estpayable on 31st March & 30th September)
Remo Ltd. held on 1st April, 2021, 1000 9% Government Securities at ₹ 90,000 (Face Value of Security
₹ 100 each). Three month’s interest had accrued on the above date. On 1 st May, the company pur-
Date Particu- Nomi- Inter- Amount Date Particulars Nomi- Inter- Amount
chased the same Government Securities of the face value of ₹ 80,000 at ₹ 95 cum-interest. On 1st
lars nal est nal est
June, ₹ 60,000 face value of the security was sold at ₹ 94 cum-interest. Interest on the security was
2021 ₹ ₹ ₹ 2021 ₹ ₹ ₹ paid each year on 30 th June and 31st December and was credited by the bank on the same date.
On 30th September, ₹ 40,000 face value of the Govt. securities were sold at ₹ 97 cum-interest. On 1st 7. Accrued Interest on 400 units as on 30 09.2021 = ₹ 40,000 x 9/100 x 3/12 = ₹ 900
December, the company purchased the same security ₹ 10,000 at par ex-interest. On 1st March, the 8. Cost of 400 Govt. Securities sold on 30.09.2021 = 40,000 x 90,000/1,00,000 = ₹ 36,000
company sold ₹ 10,000 face value of the government securities at ₹ 95 ex- interest.
9. Profit on securities sold on 30th September = ₹37,900 (38,800-900) - ₹ 36,000 = ₹ 1,90010. Ac-
You are required to draw up the 9% Government Security Account in the books of Remo Limited. FIFO crued Interest on 1 12.2021 = ₹ 10,000 x 9/100 x 5/12 = ₹ 375
method shall be followed.
11. Interest received on 31 12.2021 = ₹ 90,000 x 9/100 x 6/12 = ₹ 4,050
Calculation shall be made to the nearest rupee or multiple thereof. (RTP May 23) 12. Accrued Interest on 100 units as on 01 03.2022 = ₹ 10,000 x 9/100 x 2/12 = ₹ 150 13. Cost of 100
Govt. Securities sold on 01.03.2022 = ₹ 10,000 x 73,600/80,000 = ₹ 9,200
14. Profit on securities sold on 01.03.2022 = ₹ 9,500 - ₹ 9,200 = ₹ 300 15
Answer 29
In the Books of Remo Ltd. Calculation of closing balance: Units ₹
9% Government Securities (Investment) Account Securities in hand remained in hand at 31/3/2022
Face Interest Cost Particulars Face Value Inter- Cost

From original holding (1,00,000 – 60,000 – 40,000) -
Value est Purchased on 1st May (80,000 – 10,000) 70,000 64,400
2021 ₹ ₹ ₹ 2021 ₹ ₹ ₹ Purchased on 1st December 10,000 10,000
April To Bal- June 1 By 80,000 74,400
ance b/d Bank
1 1,00,000 2,250 90,000 A/c 60,000 2,250 54,150
Question 30
May To Bank June 30 By Bank
A Limited invested in the shares of XYZ Ltd. on 1st December, 2019 at a cost of ₹ 50,000. Out of these
1 A/c 80,000 2,400 73,600 A/c - 5,400 -
shares, ₹ 25,000 shares were purchased with an intention to hold for 6 months and ₹ 25,000 shares
June To P&L A/c - - 150 Sept. 30 By were purchased with an intention to hold as long-term Investment.
Bank
A Limited also earlier purchased Gold of ₹ 1,00,000 and Silver of ₹ 30,00,000 on 1st April, 2019.Market
1 A/c 40,000 900 37,900
value as on 31st March, 2020 of above investments are as follows:
Sept. To P & L - - 1,900 Dec. 31 By - 4,050 -
A/c Bank Shares ₹ 47,500 (Decline in the value of shares is temporary.)Gold ₹ 1,80,000
30 A/c Silver₹ 30,55,000
Dec. To Bank Mar.1 By Bank How above investments will be shown in the books of accounts of M/s A Limited for the year ended
31st March, 2020 as per the provisions of AS 13 (Revised)? (PYP 5 Marks Nov ’20)
1 A/c 10,000 375 10,000 2022 A/c 10,000 150 9,500
Mar. 1 To P&L A/c - - 300 Mar. 31 ByBal- Answer 30
ance c/d
2022 2022 80,000 1,800 74,400
As per AS 13 (Revised) ‘Accounting for Investments, for investment in shares - if the investment is pur-
Mar. To P&L A/c chased with an intention to hold for short-term period (less than one year), then it will be classified as
current investment and to be carried at lower of cost and fair value.
31, (Transfer) - 9,525 -
In the given case ₹ 25,000 shares held as current investment will be carried in the books at ₹ 23,750 (₹
2022
47,500/2).
1,90,000 14,550 1,75,950 1,90,000 14,550 1,75,950
If equity shares are acquired with an intention to hold for long term period (more than one year), then
should be considered as long-term investment to be shown at cost in the Balance Sheet of the com-
Working Notes:1.
pany.However, provision for diminution should be made to recognize a decline, if other than temporary,
1. Interest accrued on 1st April 2021 = ₹1,00,000 x 9% x 3/12 = ₹ 2,250 in the value of the investments. Hence, ₹ 25,000 shares held as long-term investment will be carried in
2. Accrued Interest on 800 units as on 01 05.2021 = ₹ 80,000 x 9/100 x 4/12 = ₹ 2,400 the books at ₹ 25,000.
3. Cost of Investment for purchase on 01.05.2021 = ₹ 76,000 - ₹ 2,400 = ₹ 73,600 Gold and silver are generally purchased with an intention to hold them for long term period (more
4. Accrued Interest on 600 units as on 01 06.2021 = ₹ 60,000 x 9/100 x 5/12 = ₹ 2,250 than one year) until and unless given otherwise.
5. Profit on Securities sold on 1st June = ₹ 54,150 (56,400 – 2,250)- ₹ 54,000 (60,000 x 90,000/1,00,000) Hence, the investment in Gold and Silver (purchased on 1st March, 2019) should continue to be shown
= ₹ 150 at cost (since there is no ‘other than temporary’ diminution) as on 31st March, 2020. Thus Gold at
6. Interest received on 30 06.2021 = ₹1,20,000 x 9/100 x 6/12 = ₹ 5,400 ₹ 1,00,000 and Silver at ₹ 30,00,000 respectively will be shown in the books.
Question 31 re-classified as long term investments, as the company has decided to retain them. The
market value of these investments on 31st March, 2018 was Rs. 6 lakhs and fair value on
Kunal Securities Ltd. wants to reclassify its investments in accordance with AS-13 (Revised). State the 15th June 2018 was Rs. 8.5 lakhs.
values, at which the investments have to be reclassified in the following cases:
(4) Another portion of current investments purchased on 7th December, 2017 for Rs. 4 lakhs
(i) Long term investment in Company A, costing ₹ 10.5 lakhs is to be re-classified as current in- are to be reclassified as long term investments. The market value of these investments
vestment. The company had reduced the value of these investments to₹ 9 lakhs to recognize was : on 31st March, 2018 Rs. 3.5 lakhson 15th June, 201 Rs. 3.8 lakhs(PYP May ‘19, 5 Marks)
a permanent decline in value. The fair value on the date of reclassification is ₹ 9.3 lakhs.
Answer 32
(ii) Long term investment in Company B, costing ₹ 14 lakhs is to be re-classified as current in-
vestment The fair value on the date of reclassification is ₹ 16 lakhs and book value is ₹ 14 lakhs. As per AS 13 (Revised) ‘Accounting for Investments’, where long-term investments are reclassified as
current investments, transfers are made at the lower of cost and carrying amount at the date of transfer;
(iii) Current investment in Company C, costing ₹12 lakhs is to be re-classified as long term in-
and where investments are reclassified from current to long term, transfers are made at lower of cost
vestment as the company wants to retain them. The market value on the date of reclassifi-
and fair value on the date of transfer.
cation is ₹ 13.5 lakhs. Current investment in Company D, costing ₹ 18 lakhs is to be re-clas-
sified as long term investment. The market value on the date of reclassification is ₹ 16.5 Accordingly, the re-classification will be done on the following basis:
lakhs. (PYP 5 Marks Jan ’21, Old & New SM)(MTP 5 Marks Sep ’23)
(i) In this case, carrying amount of investment on the date of transfer is less than the cost;
Answer 31 hence this reclassified current investment should be carried at Rs. 12 lakhs in the books.
As per AS 13 (Revised) ‘Accounting for Investments’, where long-term investments are reclassified as cur- (ii) In this case also, carrying amount of investment on the date of transfer is less than the cost;
rent investments, transfers are made at the lower of cost and carrying amount at the date of transfer.And hence this re-classified current investment should be carried at Rs. 5 lakhs in the books.
where investments are reclassified from current to long term, transfers are made at lower of cost and fair
(iii) In this case, reclassification of current investment into long-term investments will be made
value on the date of transfer.
at Rs. 7 lakhs as cost is less than its fair value of Rs.8.5 lakhs on the date of transfer.
Accordingly, the re-classification will be done on the following basis:
* (Rs. 8,56,667 - Rs. 2,00,000)
(i) In this case, carrying amount of investment on the date of transfer is less than the cost; hence
** Considering that Rs. 13,00,000 was debited to Building WIP A/c earlier.
this reclassified current investment should be carried at ₹ 9 lakhs in the books.
(iv) In this case, market value (considered as fair value) is Rs. 3.8 lakhs on the date of transfer
(ii) The carrying / book value of the long-term investment is same as cost i.e., ₹ 14 lakhs. Hence this-
which is lower than the cost of Rs. 4 lakhs. The reclassification of current investment into
long-term investment will be reclassified as current investment at book value of ₹ 14 lakhs only.
long-term investments will be made at Rs. 3.8 lakhs.
(iii) In this case, reclassification of current investment into long-term investments will be made at ₹
12 lakhs as cost are less than its market value of ₹ 13.5 lakhs. Question 33
(iv) Market value of the investment is ₹ 16.5 lakhs, which is lower than its cost i.e., ₹ 18 lakhs. There-
fore, Mr. Mohan has invested some money in various Mutual funds. Following information in this regard is
given:
the transfer to long term investments should be done in the books at the market value i.e., ₹
165 lakhs. Mutual Date of purchase Purchase Brokerage Stamp duty Market value as on 31.03.2021
Funds cost (₹) Cost (₹) (₹) (₹)
Question 32 A 01.05.2017 50,000 200 20 48,225
On 15th June, 2018, Y limited wants to re-classify its investments in accordance with AS 13 (revised). B 05.08.2020 25,000 150 25 24,220
Decide and state the amount of transfer, based on the following information: C 01.01.2021 75,000 300 75 78,190
(1) A portion of long term investments purchased on 1st March, 2017 are to be re-classified as D 07.05.2020 70,000 275 50 65,880
current investments. The original cost of these investments was Rs. 14 lakhs but had been You are required to:
written down by Rs. 2 lakhs (to recognise ‘other than temporary’ decline in value). The mar-
ket value of these investments on 15th June, 2018 was Rs. 11 lakhs. 1. Classify his investment in accordance with AS-13 (revised).
(2) Another portion of long term investments purchased on 15th January, 2017 are to be re-clas- 2. Value of Investment in mutual fund as on 31.03.2021(PYP 5 Marks , Dec ‘21)
sified as current investments. The original cost of these investments was Rs. 7 lakhs but had
been written down to Rs. 5 lakhs (to recognize ‘other than temporary’ decline in value). The Answer 33
fair value of these investments on 15th June, 2018 was Rs. 4.5 lakhs. As per AS “Accounting for Investments”, a current investment is an investment that is by its nature
(3) A portion of current investments purchased on 15th March, 2018 for Rs. 7 lakhs are to be Page 213
readily realizable and is intended to be held for not more than one year from the date on which such at cost. However, provision for diminution should be made to recognize a decline, other than
investment is made. The carrying amount for current investments is the lower of cost and fair value. temporary, in the value of the investments, such reduction beingdetermined and made for
each investment individually.
A long-term investment is an investment other than a current investment. Long term investments
are usually carried at cost. If there is a decline, other than temporary, in the value of a long-term in- On this basis, the facts of the given case, it would be appropriate to reduce the carrying val-
vestment; the carrying amount is reduced to recognize the decline. ue of Long-term investments to ₹ 55,000 in the financial statements for the year ended 31st
March, 2022.Thus the unquoted investment in the shares of Rachel Ltd. will be valued at ₹ 55,000
Mu- Classification Cost (₹) Market value (₹) Carrying value (₹)
tual The provision for diminution amounting ₹ 45,000 should be made to reduce the carryingamount of the
Funds investments.
A Long-term Investment 50,220 48,225* 50,220 Equity Shares in Garry Ltd. will be considered as current investment as intended to hold for not more
than six months. As per AS 13, “Accounting for Investments”, carrying amount for current. investments
B Current Investment 25,175 24,220 24,220
is the lower of cost and fair value. In respect of current Investments for which as active market exists,
C Current Investment 75,375 78,190 75,375 market value generally provides the best evidence of fair value.
D Current Investment 70,325 65,880 65,880 Since on 31st March,2022, the shares of Garry Limited were trading at a price of ₹ 80 per share on the
stock exchange, the equity shares of Garry Ltd. should be carried in the financial statements at real-
Total 2,15,695
izable value i.e. at ₹ 3,20,000 (4,000 shares @ ₹ 80 per share).The reduction of ₹ 1,80,000 in carrying
Note: *The reduction in value of Mutual fund A is considered to be temporary. If reduction in Market value of current investment will be charged to the statement of profit and loss for the year ended 31 st
value is assumed as other than temporary in nature, then the carrying value of ₹48,225 will be consid- March,2022.
ered.
Question 36
Question 34
Mr. Harsh provides the following details relating to his holding m 10% debentures (face value of Rs.
State whether the following statements are ‘True’ or ‘False’. Also give reason for your answer. 100 each) of Exe Ltd., held as current assets:
As per the provisions of AS-13, a current investment is an investment, that by its nature, is readily real-
izable and is intended to be held for not more than six months from the date on which such investment 1.4.2018 opening balance - 12,500 debentures, cost Rs. 12,25,000
is made (PYP 1 Mark May’19) 1.6.2018 purchased 9,000 debentures @ Rs. 98 each ex-interest
Answer 34 1.11.2018 purchased 12,000 debentures @ Rs. 115 each cum-interest

31.1.2019 sold 13,500 debentures @ Rs. 110 each cum-interest
False: A current investment is an investment that is by its nature readily realizable and is intended
to be held for not more than one year from the date on which such investment is made. 31.3.2019 Market value of debentures @ Rs. 115 each
Due dates of interest are 30th June and 31st December. Brokerage at 1% is to be paid for each
Question 35 transaction.Mr, Harsh closes his books on 31.3.2019. Show investment account as it would appear in
his books assuming FIFO method is followed. (PYP Nov.’19,10 Marks)
(i) An unquoted long term investment made in the shares of Rachel Limited is carried in the
books of Ziva Limited at a cost of ₹ 1,00,000. The audited financial statements of Rachel Lim- Answer 36
ited received in May,2021 showed that the company had been incurring cash losses with de- Investment Account of Mr. Harsh for the year ending on 31-3-2019(Scrip: 10% Debentures of Exe Lim-
clining market share and the long term investment may not fetch more than ₹ 55,000. ited) (Interest Payable on 30th June and 31st December)
(ii) On 1st December, 2021 Ziva Limited had made an investment of ₹ 5,00,000 in 4,000 Equity
Date Particu- Nominal Interest CostRs. Date Particulars Nominal Interest CostRs.
Shares of Garry Limited at a price of ₹ 125 per share with an intention to hold it for not more lars Value Rs. Rs. Value Rs. Rs.
than six months. In the first week of March, 2022, Garry Limited suffered heavy loss due to an
earthquake; the loss was not covered by an insurance policy. On 31st March,2022, the shares
of Garry Ltd. were traded at a price of ₹ 80 per share on the Stock Exchange. 1.4.18 To Bal- 12,50,000 31,250 12,25,000 30.6.18 By Bank 21,500 x - 1,07,500 -
ance b/d 100 x 10% x 1/2
How would you deal with the above investments in the books of Ziva Limited for the year end-
ed 31st March,2022 as per the provisions of Accounting Standard 13 ‘Accounting for Invest- 1.6.18 To Bank 9,00,000 37,500 8,90,820 31.12.19 By Bank 33,500 1,67,500
ments’? (PYP 5 Marks Nov ’22) x 100
(ex-In-
terest) x10% x 1/2
Answer 35 (W.N.1)
I. Investments classified as long -term investments should be carried in the financial statements
1.11.18 To Bank 12,00,000 40,000 13,53,800 31.1.19 By Bank (W.N.3) 13,50,000 11,250 14,58,900
(cum-
Interest) Rs.
(W.N.2) Sales price of debentures (13,500 x Rs. 110) 14,85,000
31.1.19 To Profit 1,34,920 31.3.19 By Balance c/d 20,00,000 50,000 21,45,640

& Loss 14,70,150
A/c
(W.N.3) Less: Interest (1,35,000/ 12) (11,250)
(W.N.4) - 14,58,900
31.3.19 To Profit 2,27,500 Less: Cost of Debentures [(12,25,000 + (890820 X 1,00,000/9,00,000)] (13,23,980)
& Loss
A/c Profit on sale 1,34,920
(Bal. fig.) Valuation of closing balance as on 31.3.2019:Market value of 20,000 Debentures at Rs. 115 = Rs.
33,50,000 3,36,250 36,04,540 33,50,000 3,36,250 36,04,540 23,00,000 Cost of
Working Notes: 8,000 Debentures = 8,90,820/ 9,000 X 8,000 = 7,91,840

7. Purchase of debentures on 1.6.18 12,000 Debentures = 13,53,800
Interest element = 9,000 x 100 x 10% x 5/12 = Rs. 37,500 Total 21,45,640
Value at the end is Rs. 21,45,640, i.e., which is less than market value of Rs. 23,00,000.
Investment element = (9,000 x 98) + [1%(9,000 x 98)] = Rs. 8,90,820
8. Purchase of debentures on 1.11.2018
Interest element = 12,000 x 100 x 10% x 4/12 = Rs. 40,000
Question 37
Investment element = 12,000 X 115 X 101% less 40,000 = Rs. 13,53,800
Mr. Z has made following transactions during the financial year 2020-21: Investment 1: 8% Corporate
9. Profit on sale of debentures as on 31.1.19 Bonds having face value ₹ 100.
Date Particulars
01-06-2020 Purchased 36,000 Bonds at ₹ 86 cum-interest. Interest is payable on
30th September and 31st March every year
15-02-2021 Sold 24,000 Bonds at ₹ 92 ex-interest
Interest on the bonds is received on 30th September and 31st March.Investment 2 : Equity Shares of
G Ltd having face value ₹ 10
Date Particulars
01-04-2020 Opening balance 8000 equity shares at a book value of ₹ 190 per share
01-05-2020 Purchased 7,000 equity shares@ ₹ 230 on cum right basis; Brokerageof
1% was paid in addition.
15-06-2020 The company announced a bonus issue of 2 shares for every 5 shares
held
01-08-2020 The company made a rights issue of 1 share for every 7 shares held at₹
230 per share. The entire money was payable by 31.08.2020
25-08-2020 Rights to the extent of 30% of his entitlements was sold @ ₹ 75 pershare.
The remaining rights were subscribed.
Investment in Equity Shares of G Ltd

15-09-2020 Dividend @ ₹ 6 per share for the year ended 31.03.2020 was receivedon
16.09.2020. No dividend payable on Right issue and Bonus issue. For the period 1st April 2020 to 31 March 2021
01-12-2020 Sold 7 ,000 shares @ 260 per share. Brokerage of 1% was incurredextra.
Date Particu- Nos Divi- Amount Date Particulars Nos Divi- Amount
lars dend dend
25-01-2021 Received interim dividend @ ₹ 3 per share for the year 2020-21. (₹) (₹)
(₹) (₹)
31-:03-2021 The shares were quoted in the stock exchange @ ₹ 260. 01/4/20 To Bal- 8,000 15,20,000 16/9/20 By Bank A/c 48,000 42,000
Both investments have been classified as Current investment in the books of Mr. Z. On 15th May 2021, Mr. Z ance
decides to reclassify investment in equity shares of Z Ltd. as Long term Investment. On 15th May 2021, the
shares were quoted in the stock exchange @ ₹ 180. b/d (WN 7)
You are required to: 01/5/20 To Bank 7,000 16,26,100 1/12/20 By Bank A/c 7000 18,01,800
Prepare Investment Accounts in the books of Mr. Z for the year 2020-21, assuming that the average cost A/c
method is followed. Profit and loss Account for the year 2020-21, based on the above information. Sug- (WN 5) (WN 8)
gest values at which investment in equity shares should be reclassified in accordance with AS 13. [PYP
15/6/20 To 6,000 25/1/21 By Bank A/c 48,300
July’21, 20 Marks](MTP 15 Marks Sep ’23)
Bonus
Answer 37 Shares (WN 10)
In the books of Mr. Z
25/8/20 To Bank 2,100 4,83,000
Investment in 8% Corporate Bonds Account For the period 01 April 2020 to 31 March 2021
A/c (Right
Date Particulars Nos Interest Amount Date Particulars Nos Interest Amount
Shares)
(₹) (₹) (₹) (₹)
(WN 6)
1/6/20 To 36,00 48,000 30,48,000 30/9/2 By Bank A/c 1,44,000
01/12/20 To Profit & 7,14,800
Bank
Loss
A/c (WN1) 0 0 (Interest
A/c
36,000 x 100 x
(Sale of
8% x 6/12)
shares)
15/2/2 To Profit & 1,76,000 15/2/2 By Bank A/c 24,000 72,000 22,08,00
Loss A/c
(WN 9)
1 1 0
(WN2) 31/3/21 To Profit & 31/3/21 By Balance 16,100 25,00,100

Loss A/c c/d (WN 11)
(WN 3) 96,300
Total 23,100 96,300 43,43,900 Total 23,100 96,300 43,43,900
31/3/2 To Profit & 2,16,000 31/3/2 By Bank A/c 48,000 Working Notes
1. Computation of the Interest element in the bonds purchased on 01 June 2020
1 Loss A/c 1 (Interest
No of Bonds purchased 36,000
12,000 x 100 x
8% x 6/12) Face value per bond ₹ 100
By Balance c/d 12,000 10,16,00 Face value of the bonds purchased ₹ 36,00,000
(WN 4) 0 Interest Rate 8%
Total 36,000 2,64,000 32,24,000 Total 36,000 2,64,000 32,24,00 Interest Amount 36,00,000 x 8% x 2/12
0 ₹ 48,000
Note: For computing the interest on the bonds sold on 15 Feb 2021, if number of days (138 days) is taken
instead of months, the interest received on 15.02.2021 should be ₹72,592 and the total interesttransferred Cum-interest per bond ₹ 86
to Profit & Loss Account should be ₹ 2,16,592. Wrongly printed as Z Ltd. in the Question paper. It should Value of bond excluding interest 36,000 x 86 – 48,000
have been given as G Ltd.
7. Computation of Dividend Received on 16 Sept 2020

₹ 30,48,000
2. Computation of the Interest element in the bonds sold on 15 Feb 2021 No of shares held during the period of dividend 8,000 shares
No of Bonds sold 24,000 Dividend per share ₹6
Face value per bond ₹ 100 Dividend Amount 8,000 x 6 = ₹ 48,000
Face value of the bonds sold ₹ 24,00,000 No of shares received after the period of dividend 7,000 shares
Interest Rate 8% (Excluding bonus & right shares)
Interest Amount 24,00,000 x 8% x 4.5/12 = ₹ 72,000
Dividend per share ₹6
3. Computation of Profit on Sale of Bonds on 15 Feb 2021
Dividend Amount 7,000 x 6 = ₹ 42,000
No of Bonds sold 24,000 The amount of dividend for the period for which the shares were not held by the investor has been treat-
ed as capital receipt. Thus ₹ 42,000 shall be treated as capital receipt.
Face value per bond ₹ 100
Ex- interest Rate per bond ₹ 92
8. Sale Proceeds for the shares sold on 1st Dec. 2020
Sales proceeds ₹ 22,08,000
Average Cost of Bonds (30,48,000/36,000) x 24,000 No of shares sold 7,000 Shares
₹ 20,32,000 Sale price per share ₹ 260
Profit on sale of bonds Sale Proceeds – Average Cost Proceeds from sale of share 7,000 x 260 = ₹ 18,20,000
22,08,000 – 20,32,000 Less: Brokerage @ 1% ₹ 18,200
₹ 1,76,000 Net Sale Proceeds ₹ 18,01,800
4. Valuation of Bonds as on 31 March 2021 9. Profit on sale of shares on 1st Dec. 2020
No of Bonds held as on 31 Mar 2021 12,000 Sales Proceeds ₹ 18,01,800

Average Cost of Bonds (30,48,000/36,000) x 12,000 Average Cost (15,20,000+16,26,100+4,83,000-42,000)/23,100x7000
₹ 10,16,000 = ₹ 10,87,000
5. Computation of the cost of the equity shares purchased on 01 May 2020 Profit on sale of shares Sales Proceeds – Average Cost
No of shares purchased 7,000 = ₹ 18,01,800-10,87,000
Cum right price per share ₹ 230 = ₹ 7,14,800

10. Computation of Amount of Interim Dividend
Cost of purchase ₹ 16,10,000
Brokerage @1% ₹ 16,100 No of shares held 8,000+7,000+6,000+2,100-7,000
Cost including brokerage ₹ 16,26,100 = 16,100
6. Right Shares Dividend per share ₹ 3 per share

Dividend Received 16,100 shares x ₹ 3 per share
No of Right Shares Issued (8,000+7,000+6,000)/7 = 3,000 shares
= ₹ 48,300
No of right shares sold 3,000 shares x 30% = 900 shares 11. Valuation of Shares as on 31 March 2021
Proceeds from sale of right shares 900 shares x ₹ 75 = ₹ 67,500
Cost of Shares (15,20,000 + 16,26,100 + 4,83,000 – 42,000) / 23,100
to be credited to statement of profit &
loss x 16,100
No of right shares subscribed 3,000-900 = 2,100 shares = 25,00,100
Amount of right shares subscribed 2,100 x 230 = ₹ 4,83,000 Market Value of Shares ₹ 260 x 16,100 = ₹ 41,86,000
Closing stock of equity

shares has been value at ₹
25,00,100 i.e. cost being low-
er than its market value. Question 38
II. Profit & Loss Account (Extract)
During the year ended 31st March, 2021, Purple Ltd. entered into the following transactions:
For the period 01 April 2020 to 31 March 2021
Particulars Amount (₹) Particulars Amount (₹) 1st April, 2020 Purchased ₹ 4,00,000, 10% Govt. loan 1(interest payable on
30th April and 31st October) at ₹ 70 cum interest.
To Balance c/d 12,70,600 By Investment in 8% Corporate Bonds 1,76,000
Account (Profit on sale of bonds) 1st April, 2020 Purchased 6,000 Equity shares of ₹ 5 each in XY Ltd. for
₹ 1,26,000.
By Investment in 8% Corporate Bonds 2,16,000
Account (Interest on bonds) 1st October, 2020 Sold ₹ 80,000, 10% Govt. loan at ₹75 ex-interest.
By Sale of Right Shares 67,500 15th January, 2021 XY Ltd. made a bonus issued of four equity shares for every
By Investment in Equity Shares of G Ltd 7,14,800 three shares held. Purple Ltd. sold all of the bonus shares for
(Profit on sale of shares) ₹ 10 each.
By Investment in Equity Shares of G Ltd 96,300 1st March, 2021 Received dividend @ 22% on shares in XY Ltd. for the year
(Dividend Income) ended31st December, 2020.
Prepare Investment accounts in the books of Purple Ltd. (PYP 10 Marks , Dec ‘21)
III. As per AS 13, when investments are classified from Current Investments to Long term Investments, Answer 38
transfer is made at Cost and Fair value, whichever is less (as on the date of transfer). So, in the
In the books of Purple Ltd.
given case valuation shall be done as follows:
10% Govt. Loan
Date of reclassification/transfer – 15 May 2021 Per Unit Cost of 16,100 shares held – ₹ 25,00,100/16,100 [Interest Payable: 30th April & 31st October]
shares – ₹ 155.29
Date Particula Nominal Interes Cost Date Particula Nominal Inter- Cost
Market Price/Fair Value per share – ₹ 180 rs rs est
t
As the cost per unit is lower than its fair value, the shares are to be transferred at its cost i.e., at ₹
Value(₹) (₹) (₹) Value (₹) (₹)
155.29 per share on 15 May 2021 (₹)
Note: 1.4.20 To Bank 4,00,000 16,667 2,63,333 30.4.20 By Bank - 20,000 -

A/c A/c
1. In the eight last line of the Question, investment in equity shares of G Ltd. was wrongly printed
(W.N.1) (4,00,000
asZ Ltd. in the Question paper. In the above solution, it has been considered as investment in
G Ltd. If considered as Investment in equity shares in Z Ltd. (some other investment and not x 10% x
investmentin G Ltd.), then the cost of the investment for shares in Z Ltd. will not be available. 6/12)
2. The entire amount of sale proceeds from rights has been credited to Profit and Loss account in 1.10.20 To Profit 1.10.20 By Bank
the above solution. However, the sale proceeds of rights in respect of 7,000 shares (purchased
& 7,333 A/c 80,000 3,333 60,000
cum right on 1.5.20) can be applied to reduce the carrying amount of such investments (with-
out crediting it to profit and loss account) considering that the value of these shares has re- Loss A/c (W.N.2)
duced after becoming their ex -right. In that case, ₹ 22,500 (67,500X 7/21) will be applied to (W.N 5)
reduce the carrying amount of investment and ₹ 45,000 will be credited to profit and loss
31.10.20 By Bank - 16,000 -
account.
A/c
31.3.21 To Profit 31.3.21 By
& Loss 35,999 Balance 3,20,000 13,333 2,10,666
A/c c/d
(W.N.3)
4,00,000 52,666 2,70,666 4,00,000 52,666 2,70,666 52,667 Profit
Investment in Equity Shares of XY Ltd. Account (of ₹ 5 each) 5. = 7,333

6. Dividend on equity shares = 6,000 x 5 x 22% = ₹ 6,600 out of which ₹ 1,650 will be treated as capital
d rs
receipt as it has been received for the period of 3 months during which shares were not held.
(₹) (₹) (₹) (₹)
Note: It has been considered that dividend received relates for the period of 12 months ended 31st
1.4.20 To Bank 6,000 1,26,000 15.1.21 By Bank 8,000 80,000 Dec., 2020, strictly based on the information, given in the Question. Hence, dividend received for the
A/c A/c
4,950 period of 3 months (1st January, 20 to 31st March, 20) has been treated as pre-acquisition.
15.1.2 To Bonus 8,000 1.3.21 By Bank 1,650

Issue A/c Question 39
1 8,000
(W.N.6)
To Profit On 1st April, 2019 Mr. H had 30,000 equity shares of ABC Ltd. at book value of ₹ 18 per share (Nominal
15.1.2
value 10 per share). On 10th June, 2019, H purchased another 10,000 equity shares of the ABC ltd. at
& Loss
1 ₹ 16 per share through a broker who charged 1.5% brokerage.
A/c.
(W.N.4) 4,950 The Directors of ABC Ltd. announced a bonus and a right issue. The terms of the issues were as follows
(i) Bonus shares were declared at the rate of one equity share for every four shares held on 15th
31.3.2 To Profit 31.3.21 By 6,000 52,350
July, 2019.
& Loss
1 Bal-
A/c (ii) Right shares were to be issued to the existing equity shareholders on 31st August, 2019. The
ance
company decides to issue one right share for every five equity shares held at 20% premium and
c/d
the due date for payment will be 30th September, 2019. Shareholders were entitled to transfer
14,000 4,950 1,34,000 14,000 4,950 1,34,000 their rights in full or in part.
Working Notes: (iii) No dividend was payable on these issues.
Cost of investment purchased on 1st April, 2020
Mr. H subscribed 60% of the rights entitlements and sold the remaining rights for consideration
4,000, 10% Govt. loan were purchased @ ₹ 70 cum-interest. Total amount paid 4,000 bonds x of ₹ 5 per share.
1. ₹ 70 = 2,80,000 which includes accrued interest for 5 months, i.e., 1st November, 2020 to 31st
March, 2021. Accrued interest will be ₹ 4,00,000 x 10% x 5/12 = ₹ 16,667. Therefore, cost of invest- Dividends for the year ending 31st March, 2019 was declared by ABC Ltd. at the rate of 20%
ment purchased = ₹ 2,80,000 – ₹ 16,667 = ₹ 2,63,333. andreceived by Mr. H on 31st October, 2019.
Sale of 10% Govt. loan on 1st October, 2020
800, 10% Govt. loan were sold@ ₹ 75 ex-interest, i.e., Total amount received = 800 x 75 On 15th January, 2020 Mr. H sold half of his shareholdings at ₹ 17.50 per share and brokerage
was charged @1 %.
2. + accrued interest for 5 months = ₹ 60,000 + ₹ 3333
Cost of 10% Govt. loan on 31.3.2021 You are required to prepare Investment account in the books of Mr. H for the year ending 31st
March, 2020, assuming the shares are valued at average cost. . (PYP 10 Marks Nov ’20)
Cost of 10% Govt. loan on 31.3.2021 will be ₹ 2,63,333 x 3,20,000/4,00,000
= ₹ 2,10,666. Answer 39
Interest accrued on 10% Government Loan on 31.3.2021 = ₹ 3,20,000 x 10% x 5/12 = ₹ In the books of Mr. H
3. 13,333 Investment in equity shares of ABC Ltd. for the year ended 31st March, 2020
Date Particulars No. Income Amount Date Particu- No. Income Amount
Profit on sale of bonus shares
lars
₹ ₹ ₹ ₹
Cost per share after bonus = ₹ 1,26,000/ 14,000 = ₹ 9 (average cost method beingfollowed)
2019 To Balance b/d 30,000 - 5,40,000 2019 By Bank - 60,000 20,000
Profit per share sold (₹ 10 – ₹ 9) = ₹ 1.
A/c
April 1 Oct.
4. Therefore, total profit on sale of 8,000 shares = 8,000 x ₹ 1 = ₹ 8,000.
(W.N. 5)
Profit on sale of 10% Govt. loan ₹ June To Bank A/c 10,000 -- 1,62,400 20X2 By Bank 28,000 - 4,85,100
Sale value = 60,000 A/c
Jan.
Cost of ₹ 80,000 10% Government Loan = 2,63,333 x 80,000/ 4,00,000 (W.N.4)
=
July To Bonus Issue 10,000 - - March By Balance 28,000 - 3,77,200

(W.N. 1) 31 c/d
Rs.
Sept. To Bank A/c 6,000 - 72,000 (W.N. 6)
(W.N. 2) Sale proceeds of 28,000 shares (28,000 x ₹17.50) 4,90,000
2020 To P & L A/c (W.N. - - 1,07,900 Less: 1% Brokerage (4,900)

4) 4,85,100
Jan.
March To P & L A/c - 60,000 - Less: Cost of 28,000 shares sold (3,77,200)
31 Profit on sale 1,07,900
56,000 60,000 8,82,300 56,000 60,000 8,82,300 5. Dividend received on investment held as on 1st April, 2019
Working Notes: = 30,000 shares x ₹ 10 x 20%

= ₹ 60,000 will be transferred to Profit and Loss A/c and Dividend received on
1. Calculation of no. of bonus shares issued Bonus Shares = (30,000 + 10,000) di-
shares purchased on 10th June, 2019
vided by 4
= 10,000 shares x ₹ 10 x 20% = ₹20,000 will be adjusted to Investment A/c
= 10,000 shares
6. Calculation of closing value of shares (on average basis) as on 31st March,

2. Calculation of right shares subscribed
2020 7,54,000 /56,000 X 28,000 = Rs. 3,77,200
30,000 𝑆ℎ𝑎𝑟𝑒𝑠+10,000 𝑆ℎ𝑎𝑟𝑒𝑠+10,000 𝑆ℎ𝑎𝑟𝑒𝑠
Right Shares = Question 40
5 P Ltd. had 8,000 equity shares of K Ltd., at a book value of ₹ 15 per share (face value of ₹ 10 each) on 1st
= 10,000 shares April,2019. On 1st September, 2019, P Ltd. acquired another 2,000 equity shares of K Ltd. at a premium
of ₹ 4 per share. K Ltd. announced a bonus and right issue for existing shareholders.
Shares subscribed 10,000 x 60% = 6,000 shares
The term of bonus and right issue were:
Value of right shares subscribed = 6,000 shares @ ₹ 12 per share = ₹ 72,000
(i) Bonus was declared at the rate for two equity shares for every five shares held on 30th
September, 2019.
3. Calculation of sale of right entitlement (ii) Right shares are to be issued to the existing shareholders on 1st December, 219. The Com-
Amount received from sale of rights will be 4,000 shares x ₹ 5 per share pany had issued two right shares for every seven shares held at 25% premium on face val-
ue. No dividend was payable on these shares. The whole sum being payable by 31st De-
= ₹ 20,000 and it will be credited to statement of profit and loss.
cember, 2019.
4. Calculation of profit/loss on sale of shares-
(iii) Existing shareholders were entitled to transfer their right to outsiders either wholly or in
Total holding = 30,000 shares original part.
10,000 shares purchased (iv) P Ltd. exercised its option under the issue for 50% of its entitlements and sold the remain-
ing rights for ₹8 per share.
10,000 shares bonus
(v) Dividend for the year ended 31st March,2019 at the rate of 20% was declared by K Ltd. and
6,000 shares right shares 56,000
received by P Ltd. on 20th January, 2020.
50% of the holdings were sold i.e. 28,000 shares (56,000 x1/2) were sold.
(vi) On 1st February, 2020, P Ltd. sold half of its shareholdings at a premium of ₹ 4 per share.
Cost of total holdings of 56,000 shares
(vii) The market price of share on 31st March,2020 was ₹13 per share.
= ₹ 5,40,000 + ₹ 1,62,400 + ₹ 72,000– ₹ 20,000 = ₹ 7,54,400
You are required to prepare the Investment account of P Ltd. for the year ended 31st March,2020
Average cost of shares sold would be:
and determine the value of shares held on that date, assuming the investment as current in-
= 7,54,400 / 56,000 X 28,000 = Rs. 3,77,200 vestment.Consider average cost basis for ascertainment for cost for equity shares sold. (PYP
10 Marks Jan 21)
Answer 40 Sale proceeds (8,000 X ₹14) 1,12,000

Investment Account-Equity Shares in K Ltd. Profit on sale 27,500
Date No. of Dividend Amount Date No. of Dividen Amount Value of investment at the end of the year
shares shares
d Assuming investment as current investment, closing balance will be valued based on lower of
₹ ₹ ₹ ₹ cost or net realizable value. Here, Net realizable value is ₹13 per share i.e., 8,000 shares x ₹ 13 = ₹
1,04,000 and cost = 84,500. Therefore, value of investment at the end of the year will be ₹ 84,500.
1.4.19 To Bal.b/d 8,000 - 1,20,000 20.1.20 By 16,000 4,000
Bank(divi-
Page
dend)
Question 41
[8,000 x 10
Mr. Saurabh held 10,000 equity shares of BT Limited on 1st April,2021. Nominal value of the
x 20%]
shares is
and[2,000 x
10 x 20%] ₹ 2 each and their book value is ₹ 7 per share.
1.9.19 To Bank 2,000 - 28,000 1.2.20 By Bank 8,000 1,12,000
- On 4th July,2021 he purchased another 7,500 shares at ₹ 10 each.
30.9.19 To Bonus Issue 4,000 —
- On 31st July 2021 the company announced a Bonus and Right issue.
31.12.19 To Bank(Right) 2,000 - 25,000 31.3.20 By Balance 8,000 84,500 - Bonus was declared of one share for every five shares held and was received on 5th Au-
c/d (W.N. 3) gust,2021.
(W.N.1)
- Right issue to be issued on 12th September,2021, which entitled the holders to subscribe to
20.1.20 To Profit & Loss 16,000 additional 2 shares for every 7 shares held at ₹ 2 per share. Shareholders were entitled to
A/c (Dividend transfer their rights in full or part. Mr. Saurabh sold whole of his entitlements to Mr. Nihal at
income) ₹ 1.50 per share.
1.2.20 To P& L 27,500 - Dividend was declared for the year ended 31st March,2021 @ 25% and received by Mr. Sau-
A/c (profit on rabhon 19th September 2021.
sale) - On 11th December 2021 Mr. Saurabh sold 7,500 shares at ₹ 8 per share.
16,000 16,000 2,00,500 16,000 16,000 2,00,500
- The market price of the shares on 31st March,2022 was ₹ 7 per share.
Working Notes:Right shares You are required to prepare the Investment Account of Mr. Saurabh on 31st March,2022 considering
No. of right shares issued = (8,000 + 2,000 + 4,000)/ 7 X 2= 4,000 No. of right shares subscribed = the above mentioned points, also state the value of shares held on that date. (Assume investment as
4,000 x 50% = 2,000 shares Value of right shares issued = 2,000 x ₹12.50 = ₹ 25,000 current investment) (PYP 10 Marks Nov ‘22)
No. of right shares sold = 2,000 shares

1. Sale of right shares = 2,000 x ₹ 8 = ₹ 16,000 to be credited to statement of profit and loss
2. Cost of shares sold — Amount paid for 16,000 shares
₹
(₹1,20,000 + ₹ 28,000 + ₹ 25,000) 1,73,000
Less: Dividend on shares purchased on Sept.1 (since the dividend (4,000)
pertains to the year ended 31st March, 2019, i.e., the pre-acquisition period)
Cost of 16,000 shares 1,69,000
Cost of 8,000 shares (Average cost basis) 84,500
Answer 41
Investment Account in Books of Saurabh (3) Value of investments
Current investments are valued at lower of cost or net realizable value. Here, cost= (70,000 +
(Script: Equity Shares in BT Ltd.) 75,000 – 3,750)/ 21,000 X 13,500 = ₹ 90,804
Net realizable value of the shares = ₹ 94,500
No. Divi- Amount No. Divi- Amount
dend Therefore, value of investments will be taken lower of above i.e.₹ 90,804
dend
Note: As question is silent, Average cost basis has been considered for calculation of cost of shares
₹ ₹
in above solution. Alternatively, FIFO method can also be considered for calculation of cost of
1.4.21 To Bal b/d 10,000 70,000 19.9.2021 By 5,000 3,750 shares. An alternative solution is given below based on FIFO method-
Bank
Alternative Solution
(dividend Investment Account in Books of Saurabh(Script: Equity Shares in BT Ltd.)
4.7.21 To Bank 7,500 75,000 on shares
acquired No. Dividend Amount No. Dividend Amount
on ₹ ₹
4.7. 2021) 1.4.21 To Bal 10,000 70,000 19.9.21 By 5,000 3,750

Bank
5.8.21 To Bonus 3,500 0 b/d
11.12.21 To P&L A/c 9,554 11.12.2021 By Bank 7,500 60,000 (dividend
(Profit on
on sale of (Sale 4.7.21 To Bank 7,500 75,000 shares

of acquired
shares) shares) on
31.3.22 To P&L A/c 5,000 31.3.2022 By Bal. 13,500 90,804 4.7. 2021)
c/d
5.8.21 To Bo- 3,500 0
21,000 5,000 1,54,554 21,000 5,000 1,54,554 nus
Working Notes: 11.12. To P&L 7,500 11.12.21 By Bank 7,500 60,000
21 A/c
(Profit
on sale (Sale of
of
shares) shares)
31.3.2 To P&L 5,000 31.3.22 By Bal. c/d 13,500 88,750
2 A/c
21,000 1,52,500 21,000 1,52,500
Working Note:
Answer 42
In the books of Ms. Jayshree Investment Account (Equity shares in Rama Ltd.)
Date Particulars No. of Amount Date Particulars No. of Amount

shares shares
(₹) (₹)
1.4.21 To Balance b/d 5,000 77,250 1.11.21 By Bank A/c 10,000 2,50,000
To Bank A/c
15.5.21 5,000 90,000
26.8.21 To Bonus issue 31.3.22 By Balance c/d 17,500 1,92,500
(W.N.1)
10,000 ---
To Bank A/c
1.11.21 31.3.22 By Profit & Loss 9,386
(right shares)
(W.N.4) A/c (loss on
To Profit & 7,500 1,50,000 valuation)

1.11.21 Loss A/c 1,34,636
27,500 4,51,886 27,500 4,51,886
Working Notes:
Question 42 1. Profit on sale of shares (average cost basis) on 1.11.21 10,000 shares @ ₹ 25 per share = 2,50,000
Cost of shares sold = [(77,250 + 90,000 + 1,50,000)/27,500 x 10,000]
On 1st April 2021 Ms. Jayshree has 5,000 equity shares of Rama Limited (a listed company) of face
value of₹ 10 each. Ms. Jayshree has purchased the above shares at ₹ 15 per share and paid a broker- = ₹ 1,15,364
age of 2% and stamp duty of 1 %.
Profit on sale of shares = ₹ 1,34,636
On 15th May,2021 Ms. Jayshree purchased another 5,000 shares of Rama Limited at ₹ 18 including 2. Value of shares on 31.3.22 [(77,250 + 90,000 + 1,50,000)/27,500 x 17,500]
brokerage and stamp duty.
= ₹ 2,01,886 or ₹ 1,92,500 (17,500 shares at ₹ 11)
On 26th August,2021 Rama Limited issued one bonus equity share for every 1 equity share held by
the shareholders. Shares will be valued at ₹, 1,92,500 as market value is less than cost.
On 23rd October,2021 Rama Limited announced a Right Issue which entitles the holders to sub-
scribe 1 equity share for every 2 equity shares held at ₹ 20 per share. Shareholders can exercise Note: Average cost basis has been considered for valuation of shares at the year end
their rights in full or in part. Ms. Jayshree sold 1/4th of entitlement to Mr. Mike for a consideration and forcalculation of cost of shares sold in the given answer.
of ₹ 10 per share and subscribed the rest on 1st November 2021.
Question 43
Ms. Jayshree also sold 10,000 shares at ₹ 25 per share on 1st November,2021. The shares of Rama
The following information is given for Mr. Atwood for the year ended 31.03.2023:
Limited were quoted at ₹ 11 per share on 31st March,2022.
01.04.2022 Mr. Atwood has 3,000 equity shares in Sun Limited at a book valueof Rs.
You are required to prepare Investment account for Ms. Jayshree for the year ended 31st March 3,30,000 (nominal value Rs. 100 each.)
2022. (5 Marks) ( May 22)
01.07.2022 Purchased 1,500 equity shares in Sun Limited for Rs. 1,38,600.
01.08.2022 Purchased 5,000.9% Bonds at Rs. 97 cum-interest (face value Rs. 100).The
due dates of interest are 1st September and 1st March.
02.10.2022 Dividend declared on equity shares and paid by Sun Limited for theyear
2021- 2022 @ 10%.
15.10.2022 Sun Limited made a bonus issue of two equity shares for every fiveshares Loss A/c
held. (W.N 3)
01.01.2023 1,000 equity shares in Sun Limited sold @Rs. 115 per share. 31.3.23 By Bank A/c
31.03.2023 Sold 4,000,9% Bonds @ Rs. 99 ex-interest (W.N 2) 4,00,000 3,000 3,96,000
The market price of Equity Shares of Sun Limited is Rs. 125 each and Bonds Rs. 98 each on 31st 31.3.23 To Profit & 30,000 31.3.23 By Balance
March2023. Loss A/c c/d (W.N.4) 1,00,000 750 93,250
• Interest on bonds was received on due dates. 5,00,000 48,750 4,89,250 5,00,000 48,750 4,89,250
You are required to prepare Investment Account in the books of Mr. Atwood for the year ended 31st- Working Notes:
March 2023, assuming that the investments are valued at the average cost or market value. whichever
is lower. (Round off to nearest Rupee) (PYP 10 Marks May ‘23) 1. Cost of Bond purchased on 1st August, 2022
5,000, 9% bonds were purchased @ Rs. 97 cum-interest. Total amount paid 5,000 bonds x Rs.
Answer 43 97 = 4,85,000 which includes accrued interest for 5 months, i.e., 1st March, 2022 to 31st July,
In the books of Atwood 2022. Accrued interest will be Rs. 5,00,000 x 9/100x 5/12 = Rs. 18,750. Therefore, cost of Bond
purchased =
Investment in Equity Shares of Sun Ltd. Account
Rs. 4,85,000 – 18,750 = Rs. 4,66,250.
Date Particulars No. Dividend Amount Date Particulars No. Divi- Amount
2. Sale of bonds on 31st March, 2023
dend
(Rs. ) (Rs. ) (Rs. )
4,000 bonds were sold@ Rs. 99 ex-interest, i.e., Total amount received = 4,000 x 99 + accrued
(Rs. )
interest for 1 month = Rs. 3,96,000 + Rs. 3,000 (4,00,000 x 9/100 x 1/12)
1.04.22 To Balance 3,000 3,30,000 2.10.22 By Bank 30,000 15,000
3. Profit on sale of bonds Rs.
A/c (W.N.
b/d
5) Sale value = 3,96,000
1.07.22 To Bank 1,500 1,38,600 1.1.23 1,000 1,15,000
By Bank Cost of 4,00,000 9% bonds = 4,66,250/5,000x 4,000 = 3,73,000
A/c
A/c Profit = 23,000
15.10.22 To Bonus 1,800 31.3.23 By Balance 5,300 3,81,600 4. Value of bonds on 31.3.2023 Lower of:
Issue
Cost of bonds on 31.3.2023 will be Rs. 4,66,250/ 5,000 x 1,000 = Rs. 93,250. Market Value on 31.3.2023
1.01.23 To Profit & 43,000 c/d will be Rs. 1,000 X 98 = 98,000
(W.N.7)
Loss A/c Value of bonds on 31.3.2023 = Rs. 93,250
(W.N. 6) Interest accrued on bonds on 31.3.2023 = 1,00,000 x 9% x 1/12 = Rs. 750
31.3.23 To Profit & 30,000
5. Dividend on equity shares for 2021-22
Loss A/c
Post acquisition dividend = 3,00,000 x 10% = Rs. 30,000 transferred to Profit & Loss account
6,300 30,000 5,11,600 6,300 30,000 5,11,600 Pre-acquisition dividend = 1,50,000 X 10% = Rs. 15,000 credited to investment A/c
9% Bonds Account 6. Profit on sale of equity shares Rs.
[Interest Payable: 1st September & 1st March] Sale value = 1,15,000
Date Particu- Nomi- Inter- Cost Date Particu- Nominal Interest Cost Cost of shares = 4,53,600 / 6,300 x 1,000 = 72,000 Profit = 43,000 (Average cost method being
lars nal est lars followed)
(Rs. ) Value (Rs. ) (Rs. )
Value (Rs. ) (Rs. ) 7. Value of equity shares at end of year Lower of:
(Rs. ) Cost of shares on 31.3.2023 will be Rs. 4,53,600 / 6,300 x 5,300 = Rs. 3,81,600
1.8.22 To 5,00,000 18,750 4,66,250 1.9.22 By Bank A/c - 22,500 -
Market Value on 31.3.2023 will be Rs. 5,300 x 125 = 6,62,500 Value of shares = Rs. 3,81,600
BankA/c (5,00,000 x
(W.N.1)
9% x 6/12)
31.3.23 To Profit & 23,000 1.3.23 By Bank A/c - 22,500 -
Question 44
On 1st April, 2022, Alpha has 1,00,000 equity shares of Beta Ltd. at a book value of ₹ 15 per share (nom-
Question 45
inal value ₹ 10 each). He provides you the further information:
1. On 20th June, 2022 he purchased another 20,000 shares of Beta Ltd. at ₹ 16 per share The cost of Right shares is
2. On 1st August, 2022, Beta Ltd. issued one equity bonus share for every six shares held by the a. Added to the cost of investments b. Subtracted from the cost of invest-
shareholders. ments
3. On 31st October, 2022, the directors of Beta Ltd. announced a right issue which entitles the c. No treatment is required d. Added to cost of investments at mar-
holders to subscribe three shares for every seven shares at ₹ 15 per share. Shareholders can ket value
transfer their rights in full or in part.
Alpha sold 1/3rd of entitlement to Umang for a consideration of ₹ 2 per share and subscribed the rest on
Ans: (a)
5th November, 2022.
You are required to prepare Investment A/c in the books of Alpha for the year ending 31st March, 2023.
Question 46
(RTP Nov ’23)
Answer 44 Long term investments are carried at
In the books of Alpha Investment Account (Equity shares in Beta Ltd.)

a. Fair value b. Cost less ‘other than temporary’ decline
Date Particulars No. of Amount (₹) Date Particulars No. of Amount c. Cost and market value whichever is d. Cost and market value whichever is
shares shares less higher
(₹)
1.4.2022 To Balance 1,00,000 15,00,000 31.3.2023 By Balance c/d 1,80,000 24,20,000
b/d (Bal. fig.) Ans: (b)
20.6.2022 To Bank A/c 20,000 3,20,000
Question 47
1.8.2022 To Bonus
issue (W.N.1) 20,000 - Current investments are carried at
5.11.2022 To Bank A/c a. Fair value b. Cost

(right c. Cost and fair value, whichever is less d. Cost and fair value, whichever is higher
shares) 40,000 6,00,000
(W.N.4)
Ans: (c)
1,80,000 24,20,000 1,80,000 24,20,000
Question 48
A Ltd. acquired 2,000 equity shares of Omega Ltd. on cum-right basis at Rs. 75 per share.
Subsequently, omega Ltd. made a right issue of 1:1 at Rs. 60 per share, which was sub-
scribed for by A. Total cost of investments at the year- end will be Rs.
a. 2,70,000 b. 1,50,000
c. 1,20,000 d. 1,70,000
Working Notes:
Ans: (a)
Question 49
Cost of investment includes
ally carried at cost. However, when there is a decline, other than temporary, in the value of a long term
a. Purchase costs b. Brokerage and Stamp duty paid
investment, the carrying amount is reduced to recognise the decline. The reduction in carrying amount
c. Both (a) and (b) d. None of the above is charged to the statement of profit and loss.
Ans: (c) Questions 52
Whether the accounting treatment ‘at cost’ under the head ‘Long Term Investments’ without provid-
Theoretical Questions Answers ing for any diminution in value is correct and in accordance with the provisions of AS 13. If not, what
should have been the accounting treatment in such a situation? Explain in brief.
Questions 50
Answers 52
Briefly explain disclosure requirements for Investments as per AS-13.
The accounting treatment ‘at cost’ under the head ‘Long Term Investment’ in the financial statements
of the company without providing for any diminution in value is correct and is in accordance with the
Answers 50 provisions of AS 13 provided that there is no decline, other than temporary, in the value of investment. If
the decline in the value of investment is, other than temporary, compared to the time when the shares
The disclosure requirements as per AS 13 (Revised) are as follows:
were purchased, provision is required to be made.
(i) Accounting policies followed for the determination of carrying amount of investments.
(ii) Classification of investment into current and long term. Practical Questions Answers
(iii) The amount included in profit and loss statements for
Questions 53
(a) Interest, dividends and rentals for long term and current investments, disclos-
ing therein gross income and tax deducted at source thereon; Mr. X acquires 200 shares of a company on cum-right basis for Rs. 70,000. He subsequently receives
(b) Profits and losses on disposal of current investment and changes in carrying an offerof right to acquire fresh shares in the company in the proportion of 1:1 at Rs. 107 each. He does
amount of such investments; not subscribe but sells all the rights for Rs. 12,000. The market value of the shares after their becom-
ing ex- rights has also gone down to Rs. 60,000. What should be the accounting treatment in this
(c) Profits and losses and disposal of long term investments and changes in car- case?
rying amount of investments.
(iv) Aggregate amount of quoted and unquoted investments, giving the aggregate mar- Answers 53
ket value of quoted investments;
As per AS 13, where the investments are acquired on cum-right basis and the market value of invest-
(v) Any significant restrictions on investments like minimum holding period for sale/dis- ments immediately after their becoming ex-right is lower than the cost for which they were acquired, it
posal, utilisation of sale proceeds or non-remittance of sale proceeds of investment may be appropriate to apply the sale proceeds of rights to reduce the carrying amount of such invest-
held outside India. ments to the market value. In this case, the amount of the ex-right market value of 200 shares bought
by X immediately after the declaration of rights falls to Rs. 60,000. In this case, out of sale proceeds of Rs.
(vi) Other disclosures required by the relevant statute governing the enterprisesQues-
12,000, Rs. 10,000 may be applied to reduce the carrying amount to bring it to the market value and Rs.
tions 51
2,000 would be credited to the profit and loss account.
Questions 51
How will you classify the investments as per AS 13? Explain in Brief. Questions 54
On 1st April, 20X1, XY Ltd. has 15,000 equity shares of ABC Ltd. at a book value of Rs. 15 per share (nom-
Answers 51 inalvalue Rs. 10 per share). On 1st June, 20X1, XY Ltd. acquired 5,000 equity shares of ABC Ltd. for
The investments are classified into two categories as per AS 13, viz., Current Investments and Long-term Rs. 1,00,000. ABC Ltd. announced a bonus and right issue.
Investments.
(1) Bonus was declared, at the rate of one equity share for every five shares held, on 1st July
A current Investment is an investment that is by its nature readily realisable and is intended to be held for 20X1.
not more than one year from the date on which such investment is made. The carrying amount for cur-
(2) Right shares are to be issued to the existing shareholders on 1st September 20X1. The com-
rent investments is the lower of cost and fair value. Any reduction to fair value and any reversals of such
pany will issue one right share for every 6 shares at 20% premium. No dividend was pay-
reductions are included in the statement of profit and loss.
able on these shares.
A long-term investment is an investment other than a current investment. Long term investments are usu-
(3) Dividend for the year ended 31.3.20X1 were declared by ABC Ltd. @ 20%, which was
receivedby XY Ltd. on 31st October 20X1.

XY Ltd.
(i) Took up half the right issue.

(ii) Sold the remaining rights for Rs. 8 per share.
(iii) Sold half of its shareholdings on 1st January 20X2 at Rs. 16.50 per share. Bro-
kerage being 1%.
You are required to prepare Investment account of XY Ltd. for the year ended 31st March 20X2
assuming the shares are being valued at average cost.
Answers 54
In the books of XY Ltd. Investment in equity shares of ABC Ltd. for the year ended 31st March, 20X2
Date Particulars No. Divi- Amount Date Particulars No. Divi- Amount
dend dend
Rs. Rs.
Rs. Rs.
20X1 To Balance 15,000 - 2,25,000 20X1 By Bank - 30,000 10,000

April 1 b/d Oct. A/c
31
(W.N. 5)
June 1 5,000 -- 1,00,000 20X2 By Bank 13,000 - 2,12,355
Jan. 1 A/c
To Bank A/c
(W.N.4)
July 1 4,000 - - Mar By Bal- 13,000 - 1,69,500

ance
ch c/d (W.N.
31 6)
To BonusIs-
Sept.1 2,000 - 24,000
sue (W.N.1)
To Bank A/c
(W.N. 2)
20X2 To P & L A/c - - 42,855

Jan 1 (W.N. 4)
To P & L A/c
“20X2 - 30,000 -
March
31
26,000 30,000 3,91,855 26,000 30,000 3,91,855

Working Notes:
Questions 55 1. Interest element in opening balance of bonds = 1,20,000 x 9% x 3/12 = Rs. 2,700
2. Purchase of bonds on 1. 3.20X1
The following information is presented by Mr. Z (a stock broker), relating to his holding in 9% Central
Government Bonds. Interest element in purchase of bonds = 200 x 100 x 9% x 5/12 = Rs. 750 Investment
Opening balance (nominal value) Rs. 1,20,000, Cost Rs. 1,18,000 (Nominal value of each unit is Rs. element in purchase of bonds = 200 x 98 = Rs. 19,600
100). 3. Interest for half-year ended 31 March = 1,400 x 100 x 9% x 6/12 = Rs. 6,300
1.3.20X1 Purchased 200 units, ex-interest at Rs. 98. 4. Sale of bonds on 1.7.20X1
1.7.20X1 Sold 500 units, ex-interest out of original holding at Rs . 100.1.10.20X1 Purchased
Interest element = 500 x 100 x 9% x 3/12 = Rs. 1,125
150 units at Rs. 98, cum interest.
Investment element = 500 x 100 = Rs. 50,000
1.11.20X1 Sold 300 units, ex-interest at Rs. 99 out of original holdings.
Interest dates are 30th September and 31st March. Mr. Z closes his books every 31st December. Show
the investment account as it would appear in his books. Mr. Z follows FIFO method. 5. Profit on sale of bonds on 1.7.20X1
Answers 55 Cost of bonds = (1,18,000/ 1,200) x 500 = Rs. 49,167 Sale proceeds = Rs. 50,000 Profit
element = Rs. 833
In the Books of Mr. Z
6. Interest for half-year ended 30 September
9% Central Government Bonds (Investment) Account
= 900 x 100 x 9% x 6/12 = Rs. 4,050
Particulars Nominal Inter- Principal Particulars Nominal Inter- Principal
Value est Value est
7. Sale of bonds on 1.11.20X1
20X1 Rs. Rs. Rs. 20X1 Rs. Rs. Rs.
Jan.1 To Mar. 31 By Bank Interest element = 300 x 100 x 9% x 1/12 = Rs. 225
Balance b/d
1,20,000 2,700 1,18,000
A/c
- 6,300 - Investment element = 300 x 99 = Rs. 29,700
(W.N.1) (W.N.3)
March 1 To July 1 By Bank 8. Profit on sale of bonds on 1.11.20X1

Bank A/c
20,000 750 19,600 50,000 1,125 50,000 Cost of bonds = (1,18,000/ 1,200) x 300 = Rs. 29,500 Sale proceeds = Rs. 29,700
A/c (W.N.4)
Profit element = Rs. 200
(W.N.2)
July 1 To P&L A/c - - 833 Sept. By Bank
(W.N.5) 30
A/c
- 4,050 -
9. Closing value of investment
(W.N.6) Calculation of closing balance: Nominal Rs.
Oct. 1 To Nov. 1 By Bank
Bank A/c value
15,000 - 14,700 30,000 225 29,700
A/c (W.N.7)
Bonds in hand remained in hand at 31st December 20X1
(150 x 98) 1,18,000 39,333
From original holding (1,20,000 – 40,000 × 40,000
Nov. 1 To P&L A/c - - 200 Dec. 31 By
1,20,000
(W.N.8) Balanc 75,000 1,688 73,633
50,000 – 30,000) =
e c/d
(W.N. Purchased on 1st March 20,000 19,600
Dec. 31 To P&L A/c 9 Purchased on 1st October 15,000 14,700
(b.f.) 9,938 & W.N.10) 75,000 73,633
(Transfer) 10. Interest element in closing balance of bonds = 750 x 100 x 9% x 3/12 = Rs. 1,688
1,55,000 13,388 1,53,333 1,55,000 13,388 1,53,333
Working Note:
Questions 56 31.3.20X2 By Balance 95,000 - 93,514

c/d
Mr. Purohit furnishes the following details relating to his holding in 8% Debentures (Rs . 100 each) of
P Ltd., held as Current assets: (W.N.3)
1.4.20X1 Opening balance – Nominal value Rs . 1,20,000, Cost Rs. 1,18,0001.7.20X1 100 Deben- 1,35,000 9,533 1,32,980 1,35,000 9,533 1,32,980
tures purchased ex-interest at Rs. 98 Working Notes:
1.10.20X1 Sold 200 Debentures ex-interest at Rs. 100 1.1.20X2 Purchased 50 Debentures at Rs. 98
ex-interest1.2.20X2 Sold 200 Debentures ex-interest at Rs. 99
Due dates of interest are 30th September and 31st March.
Mr. Purohit closes his books on 31.3.20X2. Brokerage at 1% is to be paid for each transaction (at ex- in-
terest price). Show Investment account as it would appear in his books. Assume FIFO method. Market
value of 8% Debentures of P Limited on 31.3.20X2 is Rs . 99.
Answers56
Investment A/c of Mr. Purohit for the year ending on 31-3-20X2
(Scrip: 8% Debentures of P Limited) (Interest Payable on 30th September and 31st March)
Date Particulars Nom- Inter- Cost Date Particulars Nom- Inter- Cost
inal est inal est
Value Value
Rs. Rs. Rs. Rs.

1.4.20X1 To 1,20,000 - 1,18,000 30.9.20X1 By Bank (1,300 - 5,200 -
Balance b/d
x 100 x 8% x
6/12)
1.7.20X1 To Bank (ex- 10,000 200 9,898 1.10.20X1 By Bank 20,000 - 19,800
(W.N.4)
Interest)
(W.N.1)
1.10.20X To 133 1.2.20X2 By Bank (ex- 20,000 533 19,602
Profit &
1 Interest)
Loss A/c (W.N.5)
(W.N.4)
1.10.20X2 To Bank (ex- 5,000 100 4,949 1.2.20X2 By Profit & 64Page
Loss
Interest) A/c (W.N.5)
(W.N.2)
31.3.20X To - 9,233 31.3.20X2 By Bank (950 x - 3,800 -
Profit 100 x 8% x
2
& Loss
6/12)
A/c (Bal.
fig.)
Loss on sale 64
Interest element in sale of investment = 200 x 100 x 8% x 4/ Rs. 533
On 1st April, 20X1, Mr. Vijay had 30,000 Equity shares in X Ltd. at a book value of Rs. 4,50,000 (Face Investment Account in Books of Vijay (Scrip: Equity Shares in X Ltd.)
Value Rs . 10 per share). On 22nd June, 20X1, he purchased another 5000 shares of the same com- No. Amount No. Amount
pany for Rs. 80,000.
Rs. Rs.
The Directors of X Ltd. announced a bonus of equity shares in the ratio of one share for seven shares
held on 10th August, 20X1. 1.4.20X1 To Bal b/d 30,000 4,50,000 31.10.20X1 By Bank — 10,000
To
On 31st August, 20X1 the Company made a right issue in the ratio of three shares for every eight shares (dividend
held, on payment of Rs. 15 per share. Due date for the payment was 30th September, 20X1, Mr. Vijay on shares
22.6.20X1 5,000 80,000
subscribed to 2/3rd of the right shares and sold the remaining of his entitlement to Viru for a consider- acquired on
Bank
ation of Rs. 2 per share. 22.6.20X1)
On 31st October, 20X1, Vijay received dividends from X Ltd. @ 20% for the year ended 31st March, 20X1. 10.8.20X1 To Bonus 5,000 _
Dividend for the shares acquired by him on 22nd June, 20X1 to be adjusted against the cost of purchase. 30.9.20X1 To Bank 10,000 1,50,000
On 15th November, 20X1 Vijay sold 20,000 Equity shares at a premium of Rs. 5 per share.
(Rights
You are required to prepare Investment Account in the books of Mr. Vijay for the year ended 31st March, Shares)
20X2 assuming the shares are being valued at average cost.
15.11.20X1 To P&L 32,000 15.11.20X1 By Bank 20,000 3,00,000
A/c(Profit
on sale (Sale of
ofshares) shares)
By Bal. c/d
31.3.20X2 30,000 4,02,000
50,000 7,12,000
50,000 7,12,000
Working Notes:
An unquoted long term investment is carried in the books at a cost of Rs. 2 lakhs. The published ac-
counts of the unlisted company received in May, 20X1 showed that the company was incurring cash
losseswith declining market share and the long term investment may not fetch more than Rs. 20,000.
How will you deal with this in preparing the financial statements of R Ltd. for the year ended 31st
March, 20X1?
Answers 59
As stated in the question that financial statements for the year ended 31st March, 20X1 are still under
preparation – The answer has been given on the assumption that the financial statements are yet to be
completed and approved by the Board of Directors.
Also, the fall in value of investments has been considered on account of conditions existing on the bal-
ance sheet date.
Investments classified as long term investments should be carried in the financial statements at cost.
Questions 58 However provision for diminution should be made to recognise a decline, other than temporary, in the
valueof the investments, such reduction being determined and made for each investment individually.
Blue-chip Equity Investments Ltd., wants to re-classify its investments in accordance with AS 13 (Re- AS 13 (Revised) ‘Accounting forInvestments’ states that indicators of the value of an investment are ob-
vised). State the values, at which the investments have to be reclassified in the following cases: tained by reference to its market value, the investee’s assets and results and the expected cash flows
(i) Long term investments in Company A, costing Rs. 8.5 lakhs are to be reclassified as current. from the investment. On the above basis, the facts of the given case clearly suggest that the provision
The company had reduced the value of these investments to Rs. 6.5 lakhs to recognise ‘other for diminutionshould be made to reduce the carrying amount of long term investment to Rs. 20,000 in
than temporary’ decline in value. The fair value on date of transfer is Rs . 6.8 lakhs. the financial statements for the year ended 31st March, 20X1.
(ii) Long term investments in Company B, costing Rs. 7 lakhs are to be reclassified as current.
The fair value on date of transfer is Rs. 8 lakhs and book value is Rs. 7 lakhs.
(iii) Current investment in Company C, costing Rs. 10 lakhs are to be reclassified as long term as X Ltd. on 1-1-20X1 had made an investment of Rs. 600 lakhs in the equity shares of Y Ltd. of which
the company wants to retain them. The market value on date of transfer is Rs. 12 lakhs. 50% is made in the long term category and the rest as temporary investment. The realisable value
of all such investment on 31 -3-20X1 became Rs. 200 lakhs as Y Ltd. lost a case of copyright. From the
Answers 58 given market conditions, it is apparent that the reduction in the value is not temporary in nature.
How will you recognise the reduction in financial statements for the year ended on 31 -3-20X1?
As per AS 13 (Revised) ‘Accounting for Investments’, where long-term investments are reclassified as cur-
rent investments, transfers are made at the lower of cost and carrying amount at the date of transfer.
Answers 60
And where
X Ltd. invested Rs. 600 lakhs in the equity shares of Y Ltd. Out of the same, the company intends to hold
investments are reclassified from current to long term, transfers are made at lower of cost and fair value 50% shares for long term period i.e. Rs. 300 lakhs and remaining as temporary (current) investment i.e.
on the date of transfer. Rs. 300 lakhs. Irrespective of the fact that investment has been held by X Ltd. only for 3 months (from
1.1.20X1 to 31.3.20X1), AS 13 (Revised) lays emphasis on intention of the investor to classify the investment
Accordingly, the re-classification will be done on the following basis:
as current or long term even though the long term investment may be readily marketable.
(i) In this case, carrying amount of investment on the date of transfer is less than the cost;
In the given situation, the realisable value of all such investments on 31.3.20X1 became Rs. 200 lakhs i.e.
hence this reclassified current investment should be carried at Rs. 6.5 lakhs in the books.
Rs. 100 lakhs in respect of current investment and Rs. 100 lakhs in respect of long term investment.
(ii) The carrying / book value of the long term investment is same as cost i.e. Rs. 7 lakhs. Hence this
As per AS 13 (Revised), ‘Accounting for Investment’, the carrying amount for current investments is the
long terminvestment will be reclassified as current investment at book value of Rs. 7 lakhs only.
lower of cost and fair value. In respect of current investments for which an active market exists, market
(iii) In this case, reclassification of current investment into long-term investments will be made value generally provides the best evidence of fair value.
at Rs. 10 lakhs as cost is less than its market value of Rs. 12 lakhs.
Accordingly, the carrying value of investment held as temporary investment should be shown at realis-
able value i.e. at Rs. 100 lakhs. The reduction of Rs. 200 lakhs in the carrying value of current investment will
be chargedto the profit and loss account.
The Standard further states that long-term investments are usually carried at cost. However, when there
is adecline, other than temporary, in the value of long term investment, the carrying amount is reduced
to recognise the decline.
Here, Y Ltd. lost a case of copyright which drastically reduced the realisable value of its shares to one third
Shares 2,25,000
which is quiet a substantial figure. Losing the case of copyright may affect the business and the perfor-
mance of the company in the long run. Accordingly, it will be appropriate to reduce the carrying amount of Gold 6,00,000
long term investment by Rs. 200 lakhs and show the investments at Rs. 100 lakhs, since the downfall in the
Silver 3,50,000
value of shares is other than temporary. The reduction of Rs. 200 lakhs in the carrying value of long term
investment will also be charged to the Statement of profit and loss.
How above investments will be shown in the books of accounts of M/s Innovative Garments Man-
ufacturing Company Limited for the year ending 31st March, 20 X4 as per the provisions of Ac-
counting Standard 13 “Accounting for Investments”
Answers 62
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: As per AS 13 (Revised) ‘Accounting for Investments’, for investment in shares if the investment is pur-
chased with an intention to hold for short-term period (less than one year), then it will be classified as
(1) A portion of current investments purchased for Rs. 20 lakhs, to be reclassified as long term incurrent investment and to be carried at lower of cost and fair value, i.e., in case of shares, at lower of cost
vestment, as the company has decided to retain them. The market value as on the date of ( Rs. 2,50,000) and market value (Rs. 2,25,000) as on 31 March 20X4, i.e., Rs. 2,25,000.
Balance Sheet was
If equity shares are acquired with an intention to hold for long term period (more than one year), then
Rs. 25 lakhs. shouldbe considered as long-term investment to be shown at cost in the Balance Sheet of the compa-
ny. However, provision for diminution should be made to recognise a decline, if other than temporary,
(2) Another portion of current investments purchased for Rs. 15 lakhs, to be reclassified as long in the value of the investments.
term investments. The market value of these investments as on the date of balance sheet was
Gold and silver are generally purchased with an intention to hold it for long term period (more than one
Rs. 6.5 lakhs.
year)until and unless given otherwise. Hence, the investment in Gold and Silver (purchased on 1st March,
(3) Certain long term investments no longer considered for holding purposes, to be reclassified 20X1) should continue to be shown at cost (since there is no ‘other than temporary’ diminution) as on
as current investments. The original cost of these was Rs. 18 lakhs but had been written down 31st March, 20X4, i.e., Rs. 4,00,000 and Rs. 2,00,000 respectively, though their market values have been
to Rs. 12 lakhs to recognise other than temporary decline as per AS 13 (Revised). increased.
Answers 61
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. In 20X1, M/s. Wye Ltd. issued 12% fully paid debentures of Rs. 100 each, interest being payable half
yearly on 30th September and 31st March of every accounting year.
(1) In the first case, the market value of the investment is Rs. 25 lakhs, which is higher
than its cost i.e. Rs. 20lakhs. Therefore, the transfer to long term investments should be On 1st December, 20X2, M/s. Bull & Bear purchased 10,000 of these debentures at Rs. 101 ex-interest
carried at cost i.e. Rs. 20 lakhs. price,also paying brokerage @ 1% of ex-interest amount of the purchase. On 1st March, 20X3 the firm
sold all these debentures at Rs. 103 ex-interest price, again paying brokerage @ 1 % of ex-interest
(2) In the second case, the market value of the investment is Rs. 6.5 lakhs, which is lower amount. Prepare Investment Account in the books of M/s. Bull & Bear for the period 1st December, 20X2
than its cost i.e. Rs. 15 lakhs. Therefore, the transfer to long term investments should be to 1st March, 20X3.
carried in the books at the marketvalue i.e. Rs. 6.5 lakhs. The loss of Rs. 8.5 lakhs should
be charged to profit and loss account. Answers 63
As per AS 13 (Revised), where long-term investments are re-classified as current in- In the books of M/s Bull & Bear Investment Account for the period from 1st December 20X2 to 1s March,
vestments, transfers are made at the lower of cost and carrying amount at the date 20X3 (Scrip: 12% Debentures of M/s. Wye Ltd.)
of transfer.
Nominal
(3) In the third case, the book value of the investment is Rs. 12 lakhs, which is lower than Nominal
Cost Inter-
Value
its cost i.e. Rs. 18 lakhs. Here, the transfer should be at carrying amount and hence this Date Particulars Value Interest
(Rs. )
Date Particulars
est
Cost(Rs. )
re-classified current investment should be carried at Rs. 12 lakhs. (Rs. ) (Rs. )
M/s Innovative Garments Manufacturing Company Limited invested in the shares of another company
on1st October, 20X3 at a cost of Rs. 2,50,000. It also earlier purchased Gold of Rs. 4,00,000 and Silver of Rs.
2,00,000 on 1st March, 20X1. Market value as on 31st March, 20X4 of above investments are as follows:
1.12.20X2 To Bank 10,00,000 20,000 10,20,100 1.03.20X3 10,00,000 50,000 10,19,700

A/c
By Bank
(W.N.1) A/c (W.N.2)
1.3.20X3 To Profit 1.3.20X3 By Profit &

& loss A/c
- 30,000 (b.f.) 400
loss A/c*
(b.f.) 10,00,000 50,000 10,20,100 10,00,000 50,000 10,20,100
* This represents income for M/s. Bull & Bear for the period 1st December, 20X2 to 1st March, 20X3, i.e.,
interest for three months- 1st December, 20X2 to 28 February, 20X3).
Working Notes:
1. Cost of 12% debentures purchased on 1.12.20X2 Rs.

Cost Value (10,000 Rs. 101) = 10,10,000
Add: Brokerage (1% of Rs. 10,10,000) = 10,100
Total = 10,20,100
2. Sale proceeds of 12% debentures sold Rs.

Sales Price (10,000 Rs. 103) 10,30,000
=
Less: Brokerage (1% of Rs. 10,30,000) = (10,300)
Total = 10,19,700
On 1.4.20X1, Mr. Krishna Murty purchased 1,000 equity shares of Rs . 100 each in TELCO Ltd. @ Rs .
120 each from a Broker, who charged 2% brokerage. He incurred 50 paise per Rs. 100 as cost of shares
transfer stamps. On 31.1.20X2, Bonus was declared in the ratio of 1: 2. Before and after the record date
of bonus shares, the shares were quoted at 175 per share and Rs. 90 per share respectively. On 31.3.20X2,
Mr. Krishna Murty sold bonus shares to a Broker, who charged 2% brokerage.
Show the Investment Account in the books of Mr. Krishna Murty, who held the shares as Current assets
and closing value of investments shall be made at Cost or Market value whichever is lower.
Answers 64
In the books of Mr. Krishna Murty Investment Account
for the year ended 31st March, 20X2
(Scrip: Equity Shares of TELCO Ltd.)
Mr. X purchased 500 equity shares of Rs. 100 each in Omega Co. Ltd. for Rs . 62,500 inclusive of bro-
kerage and stamp duty. Some years later the company resolved to capitalise its profits and to issue
to the holders of equity shares, one equity bonus share for every share held by them. Prior to capital-
isation, the shares of Omega Co. Ltd. were quoted at Rs. 175 per share. After the capitalisation, the
shares were quoted at Rs. 92.50 per share. Mr. X. sold the bonus shares and received at Rs. 90 per
share.
Prepare the Investment Account in X’s books on average cost basis.
Answers 65
In the books of X Investment Account
[Scrip: Equity shares in Omega Co. Ltd.] Question66 (Illustration)
Particulars Nominal Cost Particulars Nominal Cost On 1st April, 20X1, Rajat has 50,000 equity shares of P Ltd. at a book value of Rs. 15 per share (nominal
Value Value value Rs. 10 each). He provides you the further information:
(1) On 20th June, 20X1 he purchased another 10,000 shares of P Ltd. at Rs. 16 per share.
To Cash 50,000 62,500 By Cash - Sale (500 x 90) 50,000 45,000 (2) On 1st August, 20X1, P Ltd. issued one equity bonus share for every six shares held by the
shareholders.
To Bonus shares (W.N.1) 50,000 - By Balance c/d (W.N. 3) 50,000 31,250
(3) On 31st October, 20X1, the directors of P Ltd. announced a right issue which entitles the holders
To P & L A/c (W.N. 2) - 13,750 to subscribe three shares for every seven shares at Rs. 15 per share. Shareholders can transfer their
rights in full or in part.
1,00,000 76,250 1,00,000 76,250
Rajat sold 1/3rd of entitlement to Umang for a consideration of Rs. 2 per share and subscribed the rest
To Balance b/d 50,000 31,250 on 5th November, 20X1.
You are required to prepare Investment A/c in the books of Rajat for the year ending 31st March,20X2.
Working Notes:
1. Bonus shares do not have any cost. Answers 66

In the books of Rajat Investment Account(Equity shares in P Ltd.)
Date Particulars No. of Amount Date Particulars No. of Amount

shares (Rs. ) shares (Rs. )
1.4.X1 To Balance b/d 50,000 7,50,000 31.3.X2 By 90,000 12,10,000

To Bank A/c Balance
20.6.X1 10,000 1,60,000 c/d(Bal. fig.)
To Bonus issue
1.8.X1 (W.N.1)
To Bank A/c 10,000 -

5.11.X1 (right shares)
(W.N.4)
20,000 3,00,000
90,000 12,10,000 90,000 12,10,000

Working Notes:
Cost being lower than the market price, therefore shares are carried forward at cost.
1.4.20X1 To Bal b/d To 25,000 3,75,000 31.10.20X1 By Bank — 10,000

Bank (dividend
20.6.20X1 5,000 80,000
To Bonus on
16.8.20X1 5,000 —
(W.N.1) shares
To Bank acquired on
30.9.20X1 (Rights 10,000 1,50,000 20/6/20X1)
Shares) (W.N.4)
Question 67 (Illustration) (W.N.3)
To Profit (on
On 1.4.20X1, Sundar had 25,000 equity shares of ‘X’ Ltd. at a book value of Rs. 15 per share (Nominal
sale of
value Rs. 10). On 20.6.20X1, he purchased another 5,000 shares of the company at Rs. 16 per share. The di- 15.11.20X1 44,444 15.11.20X1 By Bank 25,000 3,75,000
rectors of ‘X’ Ltd. announced a bonus and rights issue. No dividend was payable on these issues. The shares)
(Sale of
terms of theissue are as follows: shares)
Bonus basis 1:6 (Date 16.8.20X1).
31.12.20X1 By Bal. c/d 20,000 2,64,444
Rights basis 3:7 (Date 31.8.20X1) Price Rs. 15 per share. Due date for payment 30.9.20X1.
(W.N.6)
Shareholders were entitled to transfer their rights in full or in part. Accordingly, Sundar sold 33.33%
45,000 6,49,444 45,000 6,49,444
of his entitlement to Sekhar for a consideration of Rs. 2 per share.
Dividends: Dividends for the year ended 31.3.20X1 at the rate of 20% were declared by X Ltd. and received Profit and Loss Account (An extract)
by Sundar on 31.10.20X1. Dividends for shares acquired by him on 20.6.20X1 are to be adjusted against
the cost of purchase.
On 15.11.20X1, Sundar sold 25,000 equity shares at a premium of Rs. 5 per share. You are required to pre- To Balance c/d 1,04,444 By Profit transferred 44,444
pare in the books of Sundar.
By Sale of rights (W.N.3) 10,000
Investment Account
By Dividend (W.N.4) 50,000
Profit & Loss Account.
1,04,444 1,04,444
For your exercise, assume that the books are closed on 31.12.20X1and shares are valued at average
Working Notes:
cost.
Answers 67
Books of Sundar Investment Account(Scrip: Equity Shares in X Ltd.)
Rs. Rs.
Chapter 5.4
AS 16-Borrowing Costs
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
Study
Q.18 TO Q.32
Mat.
Reference: The students are also advised to refer the full bare text of AS 13 (Revised) “Accounting for Past
Investments”. NO NO NO Q.14 NO Q.13 NO NO Q.15 NO Q.16 NO
Exams
Q.1 Q.2 Q.3 Q.5 Q.3

MTP Q.3 Q.4 Q.3 Q.4 NO NO Q.1
Q.3 Q.6 Q.4 Q.6 Q.13
Q.5 Q.3
RTP Q.7 Q.1 Q.9 Q.7 Q.4 Q.7 Q.10 Q.11 Q.12 Q.17
Q.8 Q.8
Qualifying Asset: A qualifying asset is an asset that necessarily takes a substantial period of time
Chapter 5.4 (ordinarily, a period of twelve months unless a shorter or longer period can be justified on the basis
AS 16-Borrowing Costs of the facts and circumstances of the case) to get ready for its intended use or sale.
(i) When construction of asset completed on 30th April, 2021
Question 1 The treatment for total borrowing cost of ₹ 68.20 lakhs will be as follows:
A company incorporated in June 2020, has setup a factory within a period of 8 months with borrowed Purpose Nature Interest tocapi- be Interest to be
funds. The construction period of the assets had reduced drastically due to usage of technical inno- talized charged to profit and
vations by the company and the company is able to justify the reasons for the same. Whether interest loss account
₹ in lakhs
on borrowings for the period prior to the date of setting up the factory should be capitalized although it ₹ in lakhs
has taken less than 12 months for the assets to get ready for use. You are required to comment on the Plant and machinery Qualifying asset [68.20 x
necessary treatment with reference to AS 16. (MTP 5 Marks April 21, April 22, RTP Nov’18) (564/620)]
Answer 1 Under Modernization = 62.04
As per AS 16 ‘Borrowing Costs’, a qualifying asset is an asset that necessarily takes a substantial period of and renovation
time to get ready for its intended use or sale. Further, the standard states that what constitutes a sub-
stantial period of time primarily depends on the facts and circumstances of each case. However, ordinari- scheme
ly, a period of twelve months is considered as substantial period of time unless a shorter or longer period Working Capital Not a qualifying [68.20 x
can be jus tified on the basis of facts and circumstances of the case. In estimating the period, time which (56/620)]
an asset takes, technologically and commercially, to get it ready for its intended use or sale is considered.
asset = 6.16
It may be implied that there is a rebuttable presumption that a 12 months period constitutes substantial 62.04 6.16
period of time.
When construction of assets is completed by 28th February, 2019
Under present circumstances where construction period has reduced drastically due to technical inno-
vation, the 12 months period should at best be looked at as a benchmark and not as a conclusiveyardstick. In this scenario, when the process of renovation gets completed in less than 12 months, the plant andma-
It may so happen that an asset under normal circumstances may take more than 12 months to complete. chinery will not be considered as qualifying assets (until and unless the entity specifically considers that
However, an enterprise that completes the asset in 8 months should not be penalized for its efficiency by the asset took substantial period of time for completing their construction) and the whole of interest will
denying it interest capitalization and vice versa. The substantial period criteria ensures that enterprises do be required to be charged off / expensed off to Profit and loss account.
not spend a lot of time and effort capturing immaterial interest cost for purposes of capitalization.
Question 3
Therefore, 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 capitalised although it has taken less than 12 months for the
asset to get ready to use. (Includes concepts of AS 11- Effects of changes in Foreign Exchange Rates)
Omega Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year 2021-22 for
Question 2 its residential project at 4%. The interest is payable at the end of the Financial Year. At the time of
availment of loan exchange rate was Rs. 56 per US $ and the rate as on 31st March, 2022 was Rs. 62 per
U Limited has obtained a term loan of ₹ 620 lacs for a complete renovation and modernization of its US $. If Omega Limited had borrowed the loan in India in Indian Rupee equivalent, the pricing of loan
Factory on 1st April, 2020. Plant and Machinery was acquired under the modernization scheme and in- would have been 10.50%.
stallation was completed on 30th April, 2021. An expenditure of ₹ 564 lacs was incurred on this Plant and
You are required to compute Borrowing Cost and exchange difference for the year ending 31st March,
Machinery and the balance loan of ₹ 56 lacs has been used for working capital purposes. The company
2022 as per applicable Accounting Standards. (MTP 5 Marks Sep‘22,Mar’18, Mar’19, MTP 4 Marks
has paid total interest of ₹ 68.20 lacs during financial year 2020-2021 on the above loan. The accoun-
March 21 & Oct ‘23, RTP May ’21)
tant seeks your advice how to account for the interest paid in the books of accounts. Willyour answer
be different, if the whole process of renovation and modernization gets completed by 28th February,
Answer 3
2021?(MTP 5 Marks , Oct ’21)
(i) Interest for the period 2021-22
Answer 2
= US $ 10 lakhs x 4% × Rs. 62 per US$ = Rs. 24.80 lakhs
Borrowing Cost: As per AS 16 ‘Borrowing Costs’, borrowing costs that are directly attributable to the ac-
(ii) Increase in the liability towards the principal amount
quisition, construction or production of a qualifying asset should be capitalized as part of the cost of that
asset. Other borrowing costs should be recognized as an expense in the period in which they are incurred. = US $ 10 lakhs × Rs. (62 - 56) = Rs. 60 lakhs
Borrowing costs should be expensed except where they are directly attributable to acquisition, construc-
(iii) Interest that would have resulted if the loan was taken in Indian currency
tion or production of qualifying asset.
= US $ 10 lakhs × Rs. 56 x 10.5% = Rs. 58.80 lakhs i Construction of Qualifying Asset* 9,00,000x40/100 NIL
(iv) Difference between interest on local currency borrowing and foreign currency bor- factory building = ₹ 3,60,000
rowing = Rs.
ii Purchase of Not a Qualifying Asset NIL 9,00,000x35/100
58.80 lakhs - Rs. 24.80 lakhs = Rs. 34 lakhs.
Machinery = ₹ 3,15,000
Therefore, out of Rs. 60 lakhs increase in the liability towards principal amount, only Rs. 34 lakhs will be
iii Working Capital Not a Qualifying Asset NIL 9,00,000x25/100
considered as the borrowing cost. Thus, total borrowing cost would be Rs. 58.80 lakhs being the aggregate
of interest of Rs. 24.80 lakhs on foreign currency borrowings plus the exchange difference to the extent of = ₹ 2,25,000
difference between interest on local currency borrowing and interest on foreign currency borrowing of Rs. Total ₹ 3,60,000 ₹ 5,40,000
34 lakhs.
* A qualifying asset is an asset that necessarily takes a substantial period of time to
Hence, Rs. 58.80 lakhs would be considered as the borrowing cost to be accounted for as per AS 16 andthe get ready for its intended use or sale.
remaining Rs. 26 lakhs (60 - 34) would be considered as the exchange difference to be accounted for as
per AS 11.
Question 5
Question 4 Vital Limited borrowed an amount of ₹150 crores on 1.4.2021 for construction of boiler plant @ 10%
Suhana Ltd. issued 12% secured debentures of ₹ 100 Lakhs on 01.05.2021, to be utilized as under: p.a. The plant is expected to be completed in 4 years. Since the weighted average cost of capital is
13% p.a., the accountant of Vital Ltd. capitalized ₹ 19.50 crores for the accounting period ending on
Particulars Amount (₹ in 31.3.2022. Due to surplus fund out of ₹150 crores, an income of ₹ 1.50 crores was earned and credited to
lakhs) profit and loss account. Comment on the above treatment of accountant with reference to relevant
accounting standard. (MTP 5 Marks March ’23, RTP Nov 20)
Construction of factory building 40
Purchase of Machinery 35 Answer 5
Working Capital 25 Para 10 of AS 16 ‘Borrowing Costs’ states that to the extent the funds are borrowed specifically for
In March 2022, construction of the factory building was completed and machinery was installed and the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitaliza-
ready for it intended use. Total interest on debentures for the financial year ended 31.03.2022 was ₹ tion on that asset should be determined as the actual borrowing costs incurred on that borrowing
11,00,000. During the year 2021-22, the company had invested idle fund out of money raised from de- during the period less any income on the temporary investment of those borrowings. The capital-
bentures in banks’ fixed deposit and had earned an interest of ₹ 2,00,000. Explain the treatment of ization rate should be the weighted average of the borrowing costs applicable to the borrowings of
interest under Accounting Standard 16 and also explain nature of assets. (MTP 5 Marks Oct ’22, MTP Oct. the enterprise that are outstanding during the period, other than borrowings made specifically for
‘18, MTP Aug. ‘18, MTP Oct. ‘19, 5 Marks, RTP May 20) the purpose of obtaining a qualifying asset. Hence, in the above case, treatment of accountant
of Vital Ltd. is incorrect. The amount of borrowing costs capitalized for the financial year 2021-22
Answer 4 should be calculated as follows:
As per AS 16 “Borrowing Costs”, borrowing costs that are directly attributable to the acquisition, construc- Actual interest for 2021-22 (10% of ₹ 150 crores) ₹ 15.00 crores
tion or production of a qualifying asset should be capitalised as part of the cost of that asset. The amount Less: Income on temporary investment from specific borrowings (₹ 1.50 crores)
of borrowing costs eligible for capitalisation should be determined in accordance with this Standard. Oth-
er borrowing costs should be recognised as an expense in the period in which they are incurred. Also AS Borrowing costs to be capitalized during year 2021-22 ₹ 13.50 crores
16 “Borrowing Costs” states that to the extent that funds are borrowed specifically for the purpose of ob-
taining a qualifying asset, the amount of borrowing costs eligible forcapitalisation on that asset should be Question 6
determined as the actual borrowing costs incurred on that borrowing during the period less any income
on the temporary investment of those borrowings. ABC Limited has started construction of an asset on 1st December, 2021, which continues till 31st
March, 2022 (and is expected to go beyond a year). The entity has not taken any specific borrow-
Thus, eligible borrowing cost
ings to finance the construction of the asset but has incurred finance costs on its general borrowings
= ₹ 11,00,000 – ₹ 2,00,000 during the construction period. The directly attributable expenditure at the beginning of the month
on this asset was ₹ 10 lakh in December 2021 and ₹ 4 lakh in each of the months of January to March
= ₹ 9,00,000
2022. At the beginning of the year, the entity had taken Inter Corporate Deposits of ₹ 20 lakh at 9% rate
of interest and had an overdraft of ₹ 4 lakh, which increased to ₹ 8 lakh on 1st March, 2022. Interest
Interest to be charged
was paid on the overdraft at 10% until 1st January, 2022 and then the rate was increased to 12%. You
Sr. Interest to be to Profit & Loss Ac-
Particulars Nature of assets are required to calculate the annual capitalization rate for computation of borrowing cost in accor-
Capitalized (₹) count
No. dance with AS 16 ‘Borrowing Costs’. (5 Marks Nov’21 & April 23)
(₹)
Answer 6 while construction continues for the other parts, capitalization of borrowing costs in relation to a part
should cease when substantially all the activities necessary to prepare that part for its intended use or
Calculation of capitalization rate on borrowings other than specific borrowings
sale are complete.
Nature of general Period of Amount of Rate of inter- Weighted average

borrowings Outstanding loan(Rs.) estp.a. amount of Interest (Rs.) Question 9
balance
Zen Bridge Construction Limited obtained a loan of Rs. 64 crores to be utilized as under:
a b c d=[bXc)X(a/12)]
9% Debentures 12 months 20,00,000 9% 1,80,000 (i) Construction of Hill link road in Kedarnath Rs. 50 crores
Bank overdraft 9 months 4,00,000 10% 30,000 (ii) Purchase of Equipment and Machineries Rs. 6 crores
2 months 4,00,000 12% 8,000 (iii) Working Capital Rs. 4 crores
1 month 8,00,000 12% 8,000 (iv) Purchase of Vehicles Rs. 1crore
36,00,000 2,26,000 (v) Advances for tools/cranes etc. Rs. 1crore
Weighted average cost of borrowings (vi) Purchase of Technical Know how Rs. 2 crores
=(20,00,000 x(12/12))+(4,00,000 x(11/12))+(8,00,000 x (1/12)} = 24,33,334 (vii) Total Interest charged by the Bank for the year ending 31st March, Rs. 1.6 crores
2018
Capitalisation rate = [(Weighted average amount of interest / Weighted average of gen-
Show the treatment of Interest according to Accounting Standard by Zen Bridge Construction Limited.
eral borrowings) x 100] = [(2,26,000 / 24,33,334) x 100] = 9.29% p.a.
(RTP May 19)
Question 7 Answer 9
In May, 2020, Omega Ltd. took a bank loan from a Bank. This loan was to be used specifically for the According to AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes substantial peri-
construction of a new factory building. The construction was completed in January, 2021 and the build- od of time to get ready for its intended use. As per the standard, borrowing costs that are directlyattribut-
ing was put to its use immediately thereafter. Interest on the actual amount used for construction of able to the acquisition, construction or production of a qualifying asset should be capitalized as part of
the building till its completion was Rs. 18 lakhs, whereas the total interest payable to the bank on the the cost of that asset. Other borrowing costs should be recognized as an expense in the period in which
loan for the period till 31 st March, 2021 amounted to Rs. 25 lakhs. the company wantsto treat Rs. 25 lakhs they are incurred. Capitalization of borrowing costs is also not suspended when a temporary delay is a
as part of the cost of factory building and thus capitalize it on the plea that the loan was specifically tak- necessary part of the process of getting an asset ready for its intended use or sale.
en for the construction of factory building? Explain the treatment in line with theprovisions of AS 16. (RTP The treatment of interest by Zen Bridge Construction Ltd. can be shown as:
Nov 21, Nov 19, May’18)
Qualifying Interest to be Interest to be
Answer 7
Asset capitalized charged
AS 16 clearly states that capitalization of borrowing costs should cease when substantially all the activities to
necessary to prepare the qualifying asset for its intended use are completed. Therefore, interest on the Rs. in crores Profit & Loss A/c
amount that has been used for the construction of the building up to the date of completion (January,
2021) i.e. Rs. 18 lakhs alone can be capitalized. It cannot be extended to Rs. 25 lakhs. Rs. in crores
Question 8 Construction of hill road* Yes 1.25 1.6/64 x 50

Purchase of equipment and 0.15
When capitalization of borrowing cost should cease as per Accounting Standard 16? Explain in brief. machineries
(RTP May ’21, Nov’20, Old & New SM) No 1.6/64 x 6
Working capital No 0.10 1.6/64 x 4
Answer 8 Purchase of vehicles No 0.025 1.6/64 x 1
Capitalization of borrowing costs should cease when substantially all the activities necessary to prepare Advance for tools, cranes etc.
the qualifying asset for its intended use or sale are complete. An asset is normally ready for its intended
No 0.025 1.6/64 x 1
use or sale when its physical construction or production is complete even though routine administrative
work might still continue. If minor modifications such as the decoration of a property to the user’s speci- Purchase of technical
fication, are all that are outstanding, this indicates that substantially all the activities are complete. When
know-how No 0.05 1.6/64 x 2
the construction of a qualifying asset is completed in parts and a completed part is capable of being used
Total 1.25 0.35 Phase I Phase II Phase III Phase

IV
*Note: It is assumed that construction of hill road will normally take more than a year (substantialperiod of
Rs. Rs. Rs. Rs.
time), hence considered as qualifying asset.
Cash expenditure 10 30 25 30
Building purchased 24 34 30 38
Question 10
Total expenditure 34 64 55 68
(a) An enterprise has constructed a complex piece of equipment (qualifying asset) that Total expenditure of all phases 221
is to be installed on the production line of a manufacturing plant. The equipment has
been constructed over a period of 15 months. However, on installation, certain cali- Loan taken @ 15% at the beginning of the 200
brations are required to achieve the desired levelof production before it is finally com- year
missioned. This process is expected to take approximately 2 months during which test During mid of the current year, Phase I and Phase II have become operational. Find out the total
runs will be made. Should the borrowing costs attributable to borrowings pertaining to amount to be capitalized and to be expensed during the year. (RTP Nov ’22)
the 2 months test run period be capitalized?
Answer 11
Should capitalization of borrowing costs be continued when the qualifying asset has been constructed but
marketing activities to sell the asset are still in progress? (RTP May ’22) Particulars Rs.
1. Interest expense on loan Rs. 2,00,00,000 at 15% 30,00,000
Answer 10
2 Total cost of Phases I and II (Rs. 34,00,000 +64,00,000) 98,00,000
(a) As per AS 16 Borrowing Costs “Capitalization of borrowing costs should cease when substan-
3. Total cost of Phases III and IV (Rs. 55,00,000 + Rs. 68,00,000) 1,23,00,000
tially all the activities necessary to prepare the qualifying asset for its intended use or sale
are complete”. On installation of the equipment, an evaluation has to be made to conclude 4. Total cost of all 4 phases 2,21,00,000
whether substantially all the activities necessary to prepare the asset are complete. After an
5. Total loan 2,00,00,000
equipment has been installed it is usually tested and adjusted for commercial production be-
fore it is finally commissioned. The calibrations and adjustments required during this period 6. Interest on loan used for Phases I & II, based on proportionate 1(ap-
are performed in order to bring the equipment up to the stage at which it is ready to com- prox.)
mence commercial production. Until the asset reaches the stage when it is ready to support 3,30,317
commercial levels of production, it is not appropriate to conclude that substantially allthe ac- 30,00,000
tivities necessary to prepare the asset are complete. Thus, the borrowing cost incurred during Loan amount = × 98,00,000
the normal period of test runs (after the installation) are required to be capitalized.
2,21,00,000
As per provisions of AS 16, capitalization of borrowing costs should cease when substantially all the ac-
tivities necessary to prepare the qualifying asset for its intended use or sale are complete. Further, the 7. Interest on loan used for Phases III & IV, based on proportionate Loan 16,69,683
amount=
standard also explains that “An asset is normally ready for its intended use or sale when its physical con- (approx.)
struction or production is complete even though routine administrative work might sill continue. If minor 30,00,000
modifications, such as the decoration of a property to the user’s specification, are all that are outstanding,
2,21,00,000
this indicates that substantially all the activities are complete”. The emphasis in the Standard is on “to pre-
pare the qualifying asset for its intended use or sale” and not the actual activity of sale. Therefore, where Accounting treatment:
the physical construction of the asset is complete, substantially all the activities necessary to prepare the 1. For Phase I and Phase II
qualifying asset for its intended use or sale are complete. Therefore,in the given case, the borrowing costs
pertaining to the period during which the marketing activities to sell the asset are still in progress should Since Phase I and Phase II have become operational at the mid of the year, half of the inter-
not be capitalized as part of the cost of the asset. est amount of Rs. 6,65,158.50 (i.e. Rs. 13,30,317/2) relating to Phase I and Phase II should be
capitalized (in the ratio of asset costs 34:64) and added to respective assets in Phase I and
Phase II and remaining half of theinterest amount of Rs. 6,65,158.50 (i.e. Rs. 13,30,317/2) relat-
Question 11
ing to Phase I and Phase II should be expensed during the year.
Harish Construction Company is constructing a huge building project consisting of four phases. It is 2. For Phase III and Phase IV
expected that the full building will be constructed over s everal years but Phase I and Phase II of the
Interest of Rs. 16,69,683 relating to Phase III and Phase IV should be held in Capital Work-in-
building will be started as soon as they are completed.
Progress till assets construction work is completed, and thereafter capitalized in the ratio of
Following is the detail of the work done on different phases of the building during the current year: cost of assets. No part of this interest amount should be charged/expensed off during the
year since the work on these phases has not been completed yet.
(Rs. in lakhs)
Question 12 =19,000
Expert Limited issued 12% secured debentures of ₹ 100 lakhs on 01.06.2021. Money raised fromdeben- Purchase of truck Not a Qualifying Asset NIL 9,50,000x13/100
tures to be utilized as under: = 1,23,500
Intended Purpose Amount ₹ in lakhs Working Capital Not a Qualifying Asset NIL 9,50,000x30/100
Construction of factory building 40 = ₹ 2,85,000
Working Capital 30 Total ₹ 3,80,000 ₹ 5,70,000
Purchase of Machinery 15
Question 13
Purchase of Furniture 2
On 15th April, 2019 RBM Ltd. obtained a Term Loan from the Bank for ₹ 320 lakhs to be utilized as under:
Purchase of truck 13
Interest on debentures for the Financial Year 2021-2022 was paid by the Company. ₹ (in lakhs)
During the year, the company invested idle fund of ₹ 5 lakhs (out of the money raised fromdebentures) Construction for factory shed 240
in Bank’s fixed deposit and earned interest of ₹ 50,000.
Purchase of Machinery 30
In March, 2022 construction of factory building was not completed (it is expected that it will take an-
other 6 months). Working capital 24
In March 2022, Machinery was installed and ready for its intended use.Furniture was put to use at the Purchase of Vehicles 12
end of March 2022.
Truck is going to be received in April, 2022. Advance for tools/cranes etc. 8
You are required to show the treatment of interest as per AS 16 in respect of borrowing cost for theyear Purchase of technical know how 6
ended 31st March, 2022 in the Books of Expert Limited. (RTP May 23)
In March, 2020 construction of shed was completed and machinery was installed. Total in-
terest charged by the bank for the year ending 31st March, 2020 was ₹ 40 lakhs.In the context of
Answer 12 provisions of AS 16 ‘Borrowing Costs’, show the treatment of interest and also explain the nature
According to AS 16 “Borrowing Costs”, a qualifying asset is an asset that necessarily takes a substantial pe- of Assets. (PYP 5 Marks Nov ’20)(MTP 5 Marks Sep ’23)
riod of time to get ready for its intended use. As per the Standard, borrowing costs that are directly attrib-
utable to the acquisition, construction or production of a qualifying asset should be capitalized as part of Answer 13
the cost of that asset. The amount o f borrowing costs eligible for capitalization should be determined in As per AS 16 A qualifying asset is an asset that necessarily takes a substantial period of time to get ready
accordance with this Standard. Other borrowing costs should be recognized as an expense in the period for its intended use or sale. Other investments and those inventories that are routinely manufactured
in which they are incurred. It also states that to the extent that funds are borrowed specifically for the pur- or otherwise produced in large quantities on a repetitive basis over a short period of time, are not qual-
pose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization on that asset ifying assets. Assets that are ready for their intended use or sale when acquired also are not qualifying
should be determined as the actual borrowing costs incurred on that borrowing during the period less any assets. Borrowing costs that are directly attributable to the acquisition, construction or production of
income on the temporary investment of those borrowings. a qualifying asset should be capitalized as part of the cost of that asset. Other borrowing costs should
Thus, eligible borrowing cost = ₹ 10,00,000 (100 lakhs x 12% x 10/12) – ₹ 50,000 = ₹ 9,50,000 be recognized as an expense in the period in which they are incurred. Construction of factory shed
amounting ₹ 240 lakhs is qualifying asset in the given case. The interest for this amount during the year
Particulars Nature of assets Interest to be Interest to be will be added to the cost of factory shed. All others (purchase of machinery, vehicles and technical know
capitalized (₹) charged how, working capital, advance for tools/cranes) are non- qualifying assets and related borrowing cost
will be charged to Profit and Loss statement. Qualifying Asset as per AS 16 (construction of a shed) = ₹
to Profit &
240 lakhs Borrowing cost to be capitalized = ₹ 40 lakhs x 240/320 = ₹ 30 lakhs Interest to be debited to
LossAccount (₹)
Profit or Loss account: ₹ (40 – 30) = ₹ 10 lakhs. Note: Assumed that construction of factory shed com-
Construction of factory Qualifying Asset 9,50,000x40/100 NIL pleted on 31st March, 2020.
building = ₹ 3,80,000
Question 14
Purchase of Machinery Not a Qualifying Asset NIL 9,50,000x15/100
= 1,42,500 First Ltd. began construction of a new factory building on 1st April, 2017. It obtained Rs. 2,00,000 as a
special loan to finance the construction of the factory building on 1st April, 2017 at an interest rateof
Purchase of and furniture Not a Qualifying Asset NIL 9,50,000x2/100
8% per annum. Further, expenditure on construction of the factory building was financed through
other non-specific loans. Details of other outstanding non-specific loans were:

= 11.5%
Amount of interest to be capitalized
Amount (Rs.) Rate of Interest per annum
4,00,000 9% Rs.
5,00,000 12% Interest on average accumulated expenses:
3,00,000 14% Specific borrowings (Rs. 2,00,000 x 8%) = 16,000

The expenditures that were made on the factory building construction were as follows: Non-specific borrowings (Rs. 6,56,667* x 11.5%) = 75,517
Amount of interest to be capitalised = 91,517
Date Amount (Rs.)
Total expenses to be capitalized for building
1st April, 2017 3,00,000
Rs.
31st May, 2017 2,40,000
Cost of building Rs. (3,00,000 + 2,40,000 + 13,00,000
1st August, 2017 4,00,000
4,00,000 + 3,60,000)
31st December, 2017 3,60,000
Add: Amount of interest to be capitalized 91,517
The construction of factory building was completed by 31st March, 2018. As per the provisions of AS16,
13,91,517
you are required to:
Journal Entry
(1) Calculate the amount of interest to be capitalized.
Date Particulars Dr. (Rs.) Cr.
(2) Pass Journal entry for capitalizing the cost and borrowing cost in respect of the fac- (Rs.)
tory building. (PYP May ‘19, 5 Marks)
31.3.2018 Building A/c Dr. 13,91,517
Answer 14
To Building WIP* A/c 13,00,000
(i) Computation of average accumulated expenses
To Borrowing costs A/c
Rs. ,517
(Being amount of cost of building
Rs. 3,00,000 x 12 / 12 = 3,00,000 and borrowing cost thereon
capitalized)
Rs. 2,40,000 x 10 / 12 = 2,00,000
Rs. 4,00,000 x 8 / 12 = 2,66,667 Question 15
Rs. 3,60,000 x 3 / 12 = 90,000
Zebra Limited began construction of a new plant on 1st April,2021 and obtained a special loan of ₹
8,56,667 20,00,000 to finance the construction of the plant. The rate of interest on loan was 10%.The expendi-
ture that was incurred on the construction of plant was as follows:
Calculation of average interest rate other than for specific borrowings
The company’s other outstanding non-specific loan was ₹ 46,00,000 at an interest rate of 12%.The
Amount of loan (Rs. ) Rate Amount of construction of the plant completed on 31st March,2022. You are required to:
of
interest (₹ )
Calculate the amount of interest to be capitalized as per the provisions of AS 16 “Borrowing
interest
Cost”.
4,00,000 9% = 36,000
Pass a journal entry for capitalizing the cost and the borrowing cost in respect of the plant.
5,00,000 12% = 60,000
(PYP 5 Marks May’22)
3,00,000 14% = 42,000
Answer 15
Weighted average rate of interest 1,38,000
Total expenses to be capitalized for borrowings as per AS 16 “Borrowing Costs”:
1,38,000
( × 100) ₹
12,00,000 Cost of Plant (10,00,000 + 24,00,000 + 4,00,000) 38,00,000
Add: Amount of interest to be capitalized (W.N.) 3,24,000 ₹ (30,33,333- 20,00,000) x 12% 1,24,000
41,24,000 On non-specific borrowing
3,24,000
Journal Entry NOTE: Since specific borrowings are earmarked for construction of a particular qualifying asset,
it cannot be used for construction of any other qualifying asset except for temporary investment.
₹ ₹ Therefore, once the commencement of capitalization of borrowing cost criteria are met, actu-
al borrowing cost incurred on specific borrowing shall be capitalized irrespective of the fact that
31st March, 2022 Plant A/c Dr. 41,24,000 amounthad been utilized in parts.
To Bank A/c 41,24,000
[Being amount of cost of plant and Question 16

borrowing cost thereon capitalized]
On 1stApril, 2022 Workhouse Limited took a loan from a Financial Institution for Rs. 25,00,000 for the
Working Note:
construction of Building. The rate of interest is 12%.
Computation of interest to be capitalized:
In addition to above loan, the company has taken multiple borrowings as follows:
Expenditure ₹
i) 8% Debentures Rs. 15,00,000
1st April, 2021 10,00,000 On specific ₹ 10,00,000 x 10% 1,00,000
ii) 15% Term Loan Rs. 30,00,000
borrowing
iii) 10% Other Loans Rs. 18,00,000
1st August, 2021 On specific ₹ 10,00,000 x 10% 1,00,000
The company has utilised the above funds in construction / purchase of the following assets:
24,00,000 borrowing
(i) Building Rs. 70,00,000
1st August, 2021 On non-specific 8 1,12,000
borrowings (ii) Furniture Rs. 22,00,000
₹ 14,00,000× x 12%
(iii) Plant & Machinery Rs. 90,00,000
12
Factory Shed Rs. 43,00,000
1st January, 4,00,000 On non-specific 8 12,000
2022 borrowings The construction of Building, Plant & Machinery and Factory Shed was completed on 31st March 2023.
₹ 4,00,000 × ×12
Readymade Furniture was purchased directly from the market. The factory was ready for production
13 on 1stApril 2023.
3,24,000
You are required to calculate the borrowing cost for both qualifying and non-qualifying as-
Alternatively, interest cost to be capitalized can be derived by computing average accumulated expenses sets. (PYP 5 Marks May ‘23)
in the following manner.
Computation of Average Accumulated Expenses: Answer 16

Interest to be Capitalized (on qualifying asset)
1st April, 2021 10,00,000 x 12/12 10,00,000
1st August, 2021 10,00,000 x 12/12 10,00,000 Particulars Computation Rs.
14,00,000 x 8/12 9,33,333
i. On specific Borrowings 25,00,000x12% 3,00,000
1st January, 2022 4,00,000 x 3/12 1,00,000
ii. On non-specific borrowings (W.N.1) 6,67,500
30,33,333 iii. be
Amount of interest toCapital- (i+ii) 9,67,500
Computation of interest to be capitalized:
ised
₹ Interest transferred to P&L (on non-qualifying asset)
On specific borrowing ₹ 20,00,000 x 10% 2,00,000
Particulars Computation Rs.
i. On non-specific Borrowings (W.N.1) 82,500 Weighted Average interest rate for non-specific borrowings
Working note: Particulars Amount of loan Rate of interest Amount of interest

(a)
Treatment of interest under AS 16 on non-specific borrowings (b) (c) = (a) x (b)
Debentures 15,00,000 8% 1,20,000
Particulars Qualify- # Computation Interest- Interestcharged
ingasset Capital- to P&L Term loan 30,00,000 15% 4,50,000
ized Other loans 18,00,000 10% 1,80,000
A/c
i. Building Yes 45,00,000/2,00,00,000 x 1,68,750 - 63,00,000 7,50,000
63,00,000 x 11.9048% # Weighted Average Rate of Interest
ii. Furniture No 22,00,000/2,00,00,000 x - 82,500 = 7,50,000 / 63,00,000 x 100 = 11.9048%
63,00,000 x 11.9048%
Question 17
iii. Plant & Yes 90,00,000/2,00,00,000 x 3,37,500 -
Machinery 63,00,000 x 11.9048% Raj & Co. has taken a loan of US$ 20,000 at the beginning of the financial year for a specific projectat
an interest rate of 6% per annum, payable annually. On the day of taking loan, the exchange ratebe-
iv. Factory Yes 43,00,000/2,00,00,000 x 1,61,250 - tween currencies was ₹ 48 per 1 US$. The exchange rate at the closing of the financial year was
shed 63,00,000 x 11.9048% ₹ 50 per 1 US$. The corresponding amount could have been borrowed by the company in Indian Ru-
Total 6,67,500 82,500 pee at an interest rate of 11% per annum.
Determine the treatment of borrowing cost in the books of accounts. (RTP Nov ’23)
NOTE: Alternative manner of presentation for Treatment of interest under AS 16 on non-specificbor-
rowings:
Answer 17
Particulars Qualifying asset Expenses Share in Interest- Interest charged Interest on Foreign Currency Loan:
Incurred borrowings Capital- to P&L
= US $ 20,000 x₹ 50 per US $ x 6% = ₹ 60,000.
ized
Rs. Rs. A/c Rs.
Rs. Foreign Exchange Loss on Foreign currency loan:
i. Building Yes 45,00,000 7,50,000 1,68,750 - = US$ 20,000 x₹ (50-48) = ₹ 40,000.

x 45/200 Interest that would have been if the loan was taken in Indian currency i.e. local currency:
ii. Furniture No 22,00,000 7,50,000 - 82,500 = US $ 20,000 x 48 x 11% = ₹1,05,600
x 22/200
Difference between interest on local currency borrowing and foreign currency borrowing:
iii. Plant & Yes 90,00,000 7,50,000 3,37,500 -
= ₹ 1,05,600 - ₹ 60,000 = ₹45,600
Machinery
x 90 /200
The entire exchange difference of 40,000 would be considered as borrowing costs. The total borrowing
iv. Factory shed Yes 43,00,000 7,50,000 1,61,250 - cost would be ₹ 100000 (₹ 60000+ ₹ 40000).
x 43 / 200
Question 18
Total 2,00,00,000 6,67,500 82,500
As per AS 16, all the following are qualifying assets except
a. Manufacturing plants and Power b. Inventories that require substantial iv) 18th July, 20X1: Construction work commences
generation facilities period of time Identify the commencement date for capitalisation under AS 16.
c. Assets those are ready for sale. d. None of the above
a. 15th May, 20X1 b. 19th June, 20X1
Ans: (c) c. 18th July, 20X1 d. 2nd June, 20X1
Ans: (b)
Question 19
Which of the following statement is correct: Theoretical Questions Answers
a. Entire exchange gain is reduced b. Entire exchange loss is added to Questions 23

from the cost of the Qualifying as- the cost of a Qualifying asset.
set. When capitalization of borrowing cost should cease as per Accounting Standard 16? Explain the
c. No adjustment is done for the ex- d. None of the above provision.
change loss while computing cost of
Qualifying asset. Answers 23
Capitalization of borrowing costs should cease when substantially all the activities necessary to prepare
Ans: (c)
the qualifying asset for its intended use or sale are complete. An asset is normally ready for its intended
use or sale when its physical construction or production is complete even though routine adminis-
Question 20
trative work might still continue. If minor modifications such as the decoration of a property to the
Capitalisation rate considers: user’s specification, are all that are outstanding, this indicates that substantially all the activities are
complete. When the construction of a qualifying asset is completed in parts and a completed part is
capable of being used while construction continues for the other parts, capitalisation of borrowing
a. Borrowing costs on general borrow- b. Borrowing costs on general and
costs in relation to a part should cease when substantially all the activities necessary to prepare
ings only. specific borrowings both.
that part for its intended use or sale are complete.
c. Borrowing costs on specific borrow- d. None of the above
ings only
Questions 24
Ans: (a)
H Ltd. incurs borrowing costs for the purpose of construction of a qualifying asset for its own use.
The construction gets completed on May 31, 20X1. However, decoration work is under process
Question 21 which is expected to be completed by November 20X1 after which H Ltd. will be able to start using
the said asset for its own use. H Ltd. wants to capitalize the eligible borrowing costs incurred up to
If the amount eligible for capitalisation in case of inventory as per AS 16 is ₹ 12,000 and cost of inventory November 20X1.
is ₹ 40,000 and its net realizable value is ₹ 45,000; What amount can be capitalised as a part of invento-
rycost. Answers 24
a. ₹ 12,000 b. ₹ 5,000 The capitalization of borrowing costs shall cease when substantially all the activities necessary to pre-
pare the qualifying assets for its intended use or sale is completed.
c. ₹ 7,000 d. ₹ 10,000
In the given case, H Ltd. should capitalize borrowing costs only up to May 31, 20X1. The borrowing cost in-
Ans: (b) curred thereafter cannot be capitalized as the asset was ready for its intended use on May 31, 20X1. The
fact that decoration work was being carried out should not be considered as the asset was ready for its
intended use on May 31, 20X1.
Question 22
X Ltd is commencing a new construction project, which is to be financed by borrowing. The key dates
areas follows:
Questions 25
i) 15th May, 20X1: Loan interest relating to the project starts to be incurred
ABC Ltd. is in the process of getting an entertainment park constructed. For this purpose, it has
ii) 2nd June, 20X1: Technical site planning commences takenloan from a bank. The said park consists of several rides and facilities, each of which can
iii) 19th June, 20X1: Expenditure on the project started to be incurred be used individually. Three fourth part of the park has been constructed and can be opened up for
public, while construction on the remaining part is continuing. Whether the capitalization of bor-
Qualifying Interest to be Interest to be
rowing cost shouldcontinue for the whole park until construction continues?
Asset chargedto Profit &
capitalised ₹
Loss A/c ₹
Answers 25
Construction Yes 62,50,000 [80,00,000x(25/32)]
ABC Ltd. is in process of constructing an entertainment park which consists of several rides and facilities
that can operate independently for their intended use. Even though the park as whole is not complete, the of sea-link
individual facilities are ready for their intended use. Purchase of No 7,50,000 [80,00,000x(3/32)]
The cessation of capitalization depends upon the nature of the qualifying assets, particularly where the equipment and
qualifying assets consists of various parts. There are qualifying assets where each part is capable
of being used while the construction continues on other parts. There are qualifying assets where all parts machineries
have to be completed before any earlier completed part can be put to use. Working No 5,00,000 [80,00,000x(2/32)]
Since in the given scenario, the individual facilities are capable of operating independently and are ready capital
for their intended use, therefore the borrowing costs shall cease to be capitalized for the three-fourth part
Purchase of No 1,25,000 [80,00,000x(0.5/32)]
of the project.
vehicles
Practical Questions Answers Advance for No 1,25,000 [80,00,000x(0.5/32)]

tools, cranes
Questions 26
etc.
On 1st April, 20X1, Amazing Construction Ltd. obtained a loan of ₹ 32 crores to be utilised as under: Purchase of No 2,50,000 [80,00,000x(1/32)]
technical
Construction of sealink across two cities:
know-how
i) (work was held up totally for a month during the 25 crores
yeardue to high water levels) Total 62,50,000 17,50,000
ii) Purchase of equipments and machineries 3 crores *It is assumed that work held up for a month due to high water level is normal during the construc-
tion of sealink and capitalization of borrowing cost should not be suspended for necessary temporary
iii) Working capital 2 crores
delay.
iv) Purchase of vehicles 50,00,000
Questions 27
v) Advance for tools/cranes etc. 50,00,000
Rainbow Limited borrowed an amount of ₹ 150 crores on 1.4.20X1 for construction of boiler plant
vi) Purchase of technical know-how 1 crores
@ 11% p.a. The plant is expected to be completed in 4 years. Since the weighted average cost of
vii) Total interest charged by the bank for the year 80,00,000 capital is13% p.a., the accountant of Rainbow Ltd. capitalized ₹ 19.50 crores for the accounting period
ending31st March, 20X2 ending on 31.3.20X2. Due to surplus fund out of ₹ 150 crores, income of ₹ 3.50 crores were earned
Show the treatment of interest by Amazing Construction Ltd. and creditedto profit and loss account. Comment on the above treatment of accountant with ref-
erence to relevantaccounting standard.
Answers 26
Answers 27
According to AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes substantial period
of time to get ready for its intended use. Para 10 of AS 16 ‘Borrowing Costs’ states “To the extent that funds are borrowed specifically for the pur-
pose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization on that
Borrowing costs that are directly attributable to the acquisition, construction or production of a qual- asset should be determined as the actual borrowing costs incurred on that borrowing during the period
ifying asset should be capitalised as part of the cost of that asset. Other borrowing costs should be rec- less any income on the temporary investment of those borrowings.”
ognised as an expense in the period in which they are incurred.
The capitalization rate should be the weighted average of the borrowing costs applicable to the bor-
The treatment of interest by Amazing Construction Ltd. can be shown as: rowings of the enterprise that are outstanding during the period, other than borrowings made specifi-
cally for the purpose of obtaining a qualifying asset.
Thus, the treatment of accountant of Rainbow Ltd. is incorrect. Amount of borrowing costs capital-
ized should be calculated as follows:
Particulars ₹ in crores 5. Total loan 2,00,00,000

Actual interest for 20X1-20X2 (11% of ₹ 150 crores) 16.50 6. Interest on loan used for Phases I & II, based on proportionate 3,30,317
Less: Income on temporary investment from specific borrowings (3.50) 30,00,000 (approx.)
Borrowing costs to be capitalized during year 20X1-20X2 13.00 Loan amount = × 98,00,000
7. 2,21,00,000 16,69,683
Questions 28
(approx.)
Harish Construction Company is constructing a huge building project consisting of four phases. It is
expected that the full building will be constructed over several years but Phase I and Phase II of the
building will be started as soon as they are completed. Interest on loan used for Phases III & IV, based on
Following is the detail of the work done on different phases of the building during the current year: 30,00,000
(₹ in lakhs) proportionate Loan amount = 2,21,00,000 × 1,23,00,000

Accounting treatment For Phase I and Phase II
Phase I Phase II Phase III Phase IV
Since Phase I and Phase II have become operational at the mid of the year, half of the interest
₹ ₹ ₹ ₹ amount of ₹ 6,65,158.50 (i.e. ₹ 13,30,317/2) relating to Phase I and Phase II should be capitalized (in
Cash expenditure 10 30 25 30 the ratioof asset costs 34:64) and added to respective assets in Phase I and Phase II and remaining
half of the interest amount of ₹ 6,65,158.50 (i.e. ₹ 13,30,317/2) relating to Phase I and Phase II should be
Building purchased 24 34 30 38 expensed during the year.
Total expenditure 3 6 55 68 For Phase III and Phase IV
Total expenditure of all phases 4 4 221 Interest of ₹ 16,69,683 relating to Phase III and Phase IV should be held in Capital Work-in-Progress
Loan taken @ 15% at the beginning of the year 200 tillassets construction work is completed, and thereafter capitalized in the ratio of cost of assets. No
part of this interest amount should be charged/expensed off during the year since the work on these
During mid of the current year, Phase I and Phase II have become operational. Find out the total amount
phases has not been completed yet.
to be capitalized and to be expensed during the year.
Answers 28 Question 29 (Illustration)
Computation of amount to be capitalized PRM Ltd. obtained a loan from a bank for ₹ 120 lakhs on 30-04-20X1. It was utilised as follows:
No. Particulars ₹
Particulars Amount (₹ in lakhs)
1. Interest expense on loan ₹ 2,00,00,000 at 15% 30,00,000
Construction of a shed 50
2. Total cost of Phases I and II (₹ 34,00,000 +64,00,000) 98,00,000
Purchase of a machinery 40
3. Total cost of Phases III and IV (₹55,00,000 + ₹ 68,00,000) 1,23,00,000
Working Capital 20
4. Total cost of all 4 phases 2,21,00,000
Advance for purchase of truck 10
Construction of shed was completed in March 20X2. The machinery was installed on the date of ac-
quisition. Delivery of truck was not received. Total interest charged by the bank for the year ending
31- 03-20X2 was ₹ 18 lakhs. Show the treatment of interest.
Answers 29
Qualifying Asset as per AS 16 = ₹ 50 lakhs (construction of a shed) Borrowing cost to be capitalised = 18 x
50/120 = ₹ 7.5 lakhs Interest to be debited to Profit or Loss account = ₹ (18 – 7.5) lakhs = ₹ 10.5 lakhs
Question30 (Illustration)
X Ltd. began construction of a new building on 1st January, 20X1. It obtained ₹ 1 lakh special loan tofi-
nance the construction of the building on 1 st January, 20X1 at an interest rate of 10%. The company’s
other outstanding two non-specific loans were: (i) Total expenses to be capitalized for building
Amount Rate of Interest ₹

₹ 5,00,000 11% Cost of building ₹ (2,00,000 + 2,50,000 + 4,50,000 + 1,20,000) 10,20,000
₹ 9,00,000 13% Add: Amount of interest to be capitalised 74,189
The expenditures that were made on the building project were as follows: 10,94,189
(ii) Journal Entry
₹
January 20X1 2,00,000 Date Particulars Dr. (₹) Cr. (₹)
April 20X1 2,50,000 31.12. Building account Dr. 10,94,189
July 20X1 4,50,000 20X1
December 20X1 1,20,000 To Bank account 10,94,189
(Being amount of cost of building
Building was completed by 31st December 20X1. Following the principles prescribed in AS 16 ‘Borrowing And borrowing cost thereon
Cost,’ calculate the amount of interest to be capitalised and pass one Journal Entry for capitalising the
cost and borrowing cost in respect of the building. capitalised)
Answers 30 Question31 (Illustration)
(i) Computation of weighted average accumulated expenses The company has obtained Institutional Term Loan of ₹ 580 lakhs for modernisation and reno-
vation of its Plant & Machinery. Plant & Machinery acquired under the modernisation scheme
₹
and installation completed on 31st March, 20X2 amounted to ₹ 406 lakhs, ₹ 58 lakhs has been
₹ 2,00,000 x 12 / 12 = 2,00,000 advancedto suppliers for additional assets and the balance loan of ₹ 116 lakhs has been utilised
for working capital purpose. The Accountant is on a dilemma as to how to account for the total inter-
₹ 2,50,000 x 9 / 12 = 1,87,500
est of ₹ 52.20 lakhs incurred during 20X1-20X2 on the entire Institutional Term Loan of ₹ 580 lakhs.
₹ 4,50,000 x 6 / 12 = 2,25,000
₹ 1,20,000 x 1 / 12 = 10,000 Answers 31
6,22,500 As per para 6 of AS 16 ‘Borrowing Costs’, borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalised as part of the cost of that
Amount of loan (₹) Rate of Amount of interest (₹) asset. Other borrowing costs should be recognised as an expense in the period in which they are
interest incurred.
5,00,000 11% = 55,000 A qualifying asset is an asset that necessary takes a substantial period of time* to get ready for its in-
tended use or sale.
9,00,000 13% = 1,17,000
The treatment for total interest amount of ₹ 52.20 lakhs can be given as:
14,00,000 1,72,000
Weighted average rate of interest = 12.285% (approx.)
1,72,000 Purpose Nature Interest to be Interest to be
( × 100)
14,00,000
capitalised charged to profit
Interest on weighted average accumulated expenses
and loss account
₹ ₹ in lakhs ₹ in lakhs
Specific borrowings (₹ 1,00,000 x 10%) = 10,000 Modernisation and Qualifying asset 406
Non-specific borrowings (₹ 5,22,500 x 12.285%) = 64,189 renovation of plant
52.20 × 580 = 36.54
Amount of interest to be capitalised = 74,189 and machinery
Chapter 5.5
Advance to sup- Qualifying asset 52.20 × 406 = 5.22 52.20 × 116 10.44
plies for additional AS 19- Leases
580 580
assets
Working Capital Not a qualifying
Cove age 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
asset
Study
Q.14 TO Q.29
41.76 10.44 Mat.
* A substantial period of time primarily depends on the facts and circumstances of each case. How- Past Q.2
Q.2 NO Q.5 Q.10 NO NO NO Q.12 NO NO NO
ever, ordinarily, a period of twelve months is considered as substantial period of time unless Exams Q.11
a shorter or longer period can be justified on the basis of the facts and circumstances of the
Q.4 Q.2 Q.5
case.** It is assumed in the above solution that the modernisation and renovation of plant and MTP Q.2 Q.3 Q.1 Q.1 Q.11 Q.2 Q.4 Q.5 Q.8
machinery will take substantial period of time (i.e. more than twelve months). Regarding pur- Q.11 Q.5 Q.6
chase of additional assets, the nature of additional assets has also been considered as quali- Q.1
fying assets. Alternatively, the plant and machinery and additional assets may be assumed to be RTP NO Q.8 Q.3 Q.1 Q.7 Q.3 NO Q.7 NO Q.9 Q.13
non-qualifying assets on the basis that the renovation and installation of additional assets will not Q.9
take substantial period of time. In that case, the entire amount of interest, ₹ 52.20 lakhs will be rec-
ognised as expense in the profit and loss accountfor year ended 31 st March, 20X2.
Take Ltd. has borrowed ₹ 30 lakhs from State Bank of India during the financial year 20X1-
20X2. Theborrowings 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,
20X2, since the said project was not complete, the directors of Take Ltd. resolved to capi-
talise the interest accruing on borrowings amounting to ₹ 4 lakhs and add it to the cost of
investments. Comment.
Answers 32
As per AS 13 (Revised) “Accounting for Investments”, the cost of investment includes acquisition charges
such as brokerage, fees and duties. In the present case, Take Ltd. has used borrowed funds for pur-
chasing shares of its subsidiary company Give Ltd. ₹ 4 lakhs interest payable by Take Ltd. to State
Bank of India cannot be called as acquisition charges, therefore, cannot be constituted as cost of
investment.
Further, as per para 3 of AS 16 “Borrowing Costs”, a qualifying asset is an asset that necessarily takes
a substantial period of time to get ready for its intended use or sale. Since, shares are ready for its
intended use at the time of sale, it cannot be considered as qualifying asset that can enable a company
to add the borrowing cost to investments. Therefore, the directors of Take Ltd. cannot capitalise the
borrowing cost as part of cost of investment. Rather, it has to be charged to the Statement of Profit and
Loss for the year ended 31st March, 20X2.
Reference: The students are advised to refer the full text of AS 16 “Borrowing Costs” (issued 2000).
per AS 19 in the following cases:

Chapter 5.5
(i) Sale price of Rs. 50 lakhs is equal to fair value.
AS 19- Leases
(ii) Fair value is Rs. 45 lakhs and sale price is Rs. 38 lakhs.
Question 1 (iii) Fair value is Rs. 40 lakhs and sale price is Rs. 50 lakhs.
ABC Ltd. took a machine on lease from XYZ Ltd., the fair value being Rs. 10,00,000. The economic life of
(iv) Fair value is Rs. 46 lakhs and sale price is Rs. 50 lakhs
the machine as well as the lease term is 4 years. At the end of each year, ABC Ltd. pays Rs. 3,50,000. The (v) Fair value is Rs. 35 lakhs and sale price is Rs. 39 lakhs. (MTP 5 Marks Mar’18, Oct’18,
lessee has guaranteed a residual value of Rs. 50,000 on expiry of the lease to the lessor. However, XYZ PYP 5 Marks, May ’18) (Same concept different figures PYP 5 Marks Jan 21, MTP 5
Ltd. estimates that the residential value of the machinery will be Rs. 35,000 only. The implicit rate of re- Marks Oct’20, MTP 5 Marks Oct’21, Old & New SM)
turn is 16% and PV factors at 16% for year 1, year 2, year 3 and year 4 are 0.8621, 0.7432, 0.6407 and 0.5523
respectively. You are required to calculate the value of machinery to be considered by ABC Ltd. and the Answer 2
finance charges for each year. (MTP 5 Marks Apr’19, Oct’19, Mar’19, RTP May 20, RTP Nov 18)
Following will be the treatment in the given cases:
Answer 1 (i) When sale price of Rs. 24 lakhs is equal to fair value, A Ltd. should immediately recog-
nise the profit of Rs. 4 lakhs (i.e. 24 – 20) in its books.
As per AS 19 “Leases”, 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 (ii) When fair value is Rs. 20 lakhs & sale price is Rs. 24 lakhs then profit of Rs. 4 lakhs is to
inception of lease. However, if the fair value of the leased asset exceeds the present value of minimum be deferred and amortised over the lease period.
lease payment from the standpoint of the lessee, the amount recorded as an asset and liability should be
(iii) When fair value is Rs. 22 lakhs & sale price is Rs. 25 lakhs, profit of Rs. 2 lakhs (22 - 20) to
the present value of minimum lease payments from the stand point of the lessee.
be immediately recognised in its books and balance profit of Rs.3 lakhs (25-22) is to
Value of machinery be amortised/deferred over lease period.
In the given case, fair value of the machinery is Rs. 10, 00,000 and the net present value of minimum lease (iv) When fair value of leased machinery is Rs. 25 lakhs & sale price is Rs. 18 lakhs, then loss
payments is Rs. 10, 07,020 (Refer working Note). As the present value of the machine is more than the fair of Rs. 2 lakhs (20–18) to be immediately recognised by A Ltd. in its books provided loss
value of the machine, the machine and the corresponding liability will be recorded at value of Rs. 10,00,000. is not compensated by future lease payment.
Calculation of finance charges for each year (v) When fair value is Rs. 18 lakhs & sale price is Rs. 19 lakhs, then the loss of Rs. 2 lakhs (20-
Year Finance Payment Reduction in out- Outstand- 18) to be immediately recognised by A Ltd. in its books and profit of Rs. 1 lakhs (19-18)
charge standing liability ingliability should be amortised/deferred over lease period.
(Rs.) (Rs.) (Rs.) (Rs.)

Question 3
1st year beginning 10,00,000
- - -
Sun Limited wishes to obtain a machine costing Rs. 30 lakhs by way of lease. The effective life of the
End of 1st year 1,60,000 3,50,000 1,90,000 8,10,000
machine is 14 years, but the company requires it only for the first 5 years. It enters into an agreement
End of 2nd year 1,29,600 3,50,000 2,20,400 5,89,600 with Star Ltd., for a lease rental for Rs. 3 lakhs p.a. payable in arrears and the implicit rate of interest
is 15%. The chief accountant of Sun Limited is not sure about the treatment of theselease rentals and
End of 3rd year 94,336 3,50,000 2,55,664 3,33,936
seeks your advise. You are required to explain the necessary accounting treatment in line with AS 19.
End of 4th year 53,430 3,50,000 2,96,570 37,366 (use annuity factor at @ 15% for 3 years as 3.36) (MTP 5 Marks, Aug’18, RTP Nov ’19, RTP May 21)
Working Note:
Answer 3
Present value of minimum lease payments
As per AS 19 ‘leases’, a lease will be classified as finance lease if at the inception of the lease, the present
Annual lease rental x PV factor value of minimum lease payment amounts to at least substantially all of the fair value of leased asset.
Rs. 3,50,000 x (0.8621 + 0.7432 + 0.6407+ 0.5523) Rs. 9,79 ,405 In the given case, the implicit rate of interest is given at 15%. The present value of minimum lease pay-
ments at 15% using PV- Annuity Factor can be computed as:
Present value of guaranteed residual value Rs. 50,000 x (0.5523) Rs. 27,615
Annuity Factor (Year 1 to Year 5) 3.36 (approx.)
Rs. 10,07,020
Present Value of minimum lease payments (Rs. 3 lakhs each year) Rs. 10.08 lakhs (approx.)
Question 2 Thus present value of minimum lease payments is Rs. 10.08 lakhs and the fair value of the machine is
Rs. 30 lakhs. In a finance lease, lease term should be for the major part of the economic life of the asset
A Ltd. sold machinery having WDV of Rs. 40 lakhs to B Ltd. for Rs. 50 lakhs and the same machinerywas even if title is not transferred. However, in the given case, the effective useful life of the machineis 14 years
leased back by B Ltd. to A Ltd. The lease back is operating lease. Explain the accounting treatment as while the lease is only for five years. Therefore, lease agreement is an operating lease. Lease payments
under an operating lease should be recognized as an expense in the statement of profit and loss on a rates for 1st year, 2nd year, 3rd year and 4th year are 0.8696, 0.7561, 0.6575 and 0.5718 respectively.
straight line basis over the lease term unless another systematic basis is more representative of the time You are required to calculate the value of the lease liability as per AS-19 and also disclose impact of
pattern of the user’s benefit. this on Balance sheet and Profit & loss account at the end of year 1. (MTP 5 Marks Nov ’21 & April ’23,
Old & New SM)(Same concept different figures MTP 5 Marks Oct’22, PYP 5 Marks May ’19)
Question 4
Answer 5
You are required to give the necessary journal entry at the inception of lease to record the assettaken
on finance lease in books of lessee from the following information: According to AS 19 “Leases”, the lessee should recognise the lease as an asset and a liability at an
amount equal to the lower of the fair value of the leased asset at the inception of the finance lease and
Lease period = 5 years; the present value of the minimum lease payments from the standpoint of the lessee. In calculating the
Annual lease rents = Rs. 50,000 at the end of each year.Guaranteed residual value = Rs. 25,000 present value of the minimum lease payments the discount rate is the interest rate implicit in the lease.
Fair Value at the inception (beginning) of lease = Rs. 2,00,000 Present value of minimum lease payments will be calculated as follows:
Interest rate implicit on lease is = 12.6% (Discounted rates for year 1 to 5 are .890, .790, .700, .622 Year Minimum Lease Payment Implicit interest Present value
and .552 respectively). (MTP 5 Marks April 21, April 22) rate (Discount ₹
₹
rate @15%)
Answer 4 1 6,25,000 0.8696 5,43,500
Present value of minimum lease payment is computed below:
2 6,25,000 0.7561 4,72,563
Year MLP DF (12.6%) PV 3 6,25,000 0.6575 4,10,937
Rs. Rs. 4 7,50,000 0.5718 4,28,850
1 50,000 0.890 44,500 Total 26,25,000 18,55,850
2 50,000 0.790 39,500 Present value of minimum lease payments ₹ 18,55,850 is less than fair value at the inception of lease
i.e. ₹ 20,00,000, therefore, the asset and corresponding lease liability should be recognized at ₹18,55,850
3 50,000 0.700 35,000
as per AS 19.
4 50,000 0.622 31,100 Minimum LeasePayment of 4th year includes guaranteed residual value amounting ₹ 1,25,000
5 50,000 0.552 27,600

5 25,000 0.552 13,800
Question 6
1,91,500
Sun Limited leased a machine to Moon Limited on the following terms:
Present value of minimum lease payment = Rs. 1,91,500 Fair value of leased asset = Rs. 2,00,000As per
AS 19, on the date of inception of Lease, Lessee should show it as an asset and corresponding liabil-
ity at lower of Fair value of leased asset at the inception of the lease and present value of minimum (Amount in ₹)
lease payments from the standpoint of the lessee. The accounting entry at the inception of lease to Fair value at inception of lease 50,00,000
record the asset taken on finance lease in books of lessee is suggested below:
Lease Term 4 Years
Rs. Rs. Lease Rental per annum 16,00,000
Asset A/c Dr. 1,91,500
Guaranteed residual value 3,00,000
To Lessor (Lease Liability) A/c 1,91,500
Expected residual value 4,50,000
(Being recognition of finance lease as asset and liability)
Implicit Interest rate 15%
Discounted rates for 1st year, 2nd year, 3rd year and 4th year are 0.8696, 0.7561, 0.6575 and 0.5718 re-
Question 5
spectively.Calculate the value of Lease Liability and ascertain Unearned Finance Income as per AS-
19. (MTP 5 Marks Sep’22) (Same concept different figures Old & New SM)
S. Square Private Limited has taken machinery on finance lease from S.K. Ltd. The information is asun-
der: Lease term = 4 years
Fair value at inception of lease = ₹ 20,00,000 Lease rent = ₹ 6,25,000 p.a. at the end of year Guaranteed
residual value = ₹ 1,25,000 Expected residual value = ₹ 3,75,000 Implicit interest rate =15% Discounted
Answer 6 Question 7
According to AS 19 “Leases”, the lessee should recognise the lease as an asset and a liability at an (a)Classify the following into either operating or finance lease:
amount equal to the fair value of the leased asset at the inception of the finance lease. However, if the fair
value of the leased asset exceeds the present value of the minimum lease payments from the standpoint (i)If Present value (PV) of Minimum lease payment (MLP) = “X” ; Fair value of the
of the lessee, the amount recorded as an asset and a liability should be the present value of the minimum asset is “Y”
lease payments from the standpoint of the lessee. In calculating the present value of the minimum lease and X=Y.
payments the discount rate is the interest rate implicit in the lease. Present value of minimum lease pay-
ments will be calculated as follows: (ii) Economic life of the asset is 7 years, lease term is 6.5 years, but
asset is not acquired at the end of the lease term;
Year Minimum Lease Internal rate of return Present value
Payment (Discount rate @15%) (iii) Economic life of the asset is 6 years, lease term is 2 years, but the as-
₹
set is of special nature and has been procured only for use of the lessee . (RTP
₹
Nov 20)
1 16,00,000 0.8696 13,91,360
(b) Viral Ltd. sold machinery having WDV of Rs. 40 lakhs to Saral Ltd. for Rs. 50 lakhs
2 16,00,000 0.7561 12,09,760 and the samemachinery was leased back by Saral Ltd. to Viral Ltd. The lease back
is in nature of operating lease. You are required to explain the treatment in the
3 16,00,000 0.6575 10,52,000
given cases –
4 19,00,000 0.5718 10,86,420
(i) Fair value is Rs. 45 lakhs and sale price is Rs. 38 lakhs.
To- 67,00,000 47,39,540
tal (ii) Fair value is Rs. 40 lakhs and sale price is Rs. 50 lakhs.
Present value of minimum lease payments i.e. ₹ 47,39,540 is less than fair value at the inception of lease (iii) Fair value is Rs. 46 lakhs and sale price is Rs. 50 lakhs (RTP Nov 20, May
i.e. ₹ 50,00,000, therefore, the value of lease is ₹ 47,39,540 and lease liability should be recognized in the 22)
books at ₹ 47,39,540 as per AS 19.
Answer 7
Calculation of Unearned Finance Income
(a) (i) The lease is a finance lease if X = Y, or if X substantially equals Y.
As per AS 19 on Leases, unearned finance income is the difference between (a) the gross investment in the
(ii) The lease will be classified as a finance lease, since a substantial portion of the life
lease and (b) the present value of minimum lease payments under a finance lease from the standpoint
of the asset is covered by the lease term.
of the lessor; and any unguaranteed residual value accruing to the lessor, at the interest rate implicit in
the lease. (iii) Since the asset is procured only for the use of lessee, it is a finance lease.
Where: (b)As per AS 19, where sale and leaseback results in operating lease, then the accounting
treatment in different situations is as follows:
I. Gross investment in the lease is the aggregate of (i) minimum lease payments from
Situation 1: Sale price = Fair Value
the stand point of the lessor and (ii) any unguaranteed residual value accruing to the
lessor. Profit or loss should be recognized immediately.
Gross investment = Minimum lease payments + Unguaranteed residual value Situation 2: Sale Price < Fair Value
= [Total lease rent + Guaranteed residual value(GRV)] + Unguaranteed residual value (URV) Profit should be recognized immediately. The loss should also be recognized immediately ex-
cept that,if the loss is compensated by future lease payments at below market price, it should
= [(₹ 16,00,000 ×4 years) + ₹ 3,00,000] + ₹ 1,50,000 = ₹ 68,50,000
be deferred and amortized in proportion to the lease payments over the period for which the
II. Present value of minimum lease payment from Lessor’s view point asset is expected to be used.
Lease liability ₹ 47,39,540 + present value of (URV) unguaranteed residual value Situation 3: Sale Price > Fair Value
(₹ 1,50,000 x 0.5718) = ₹ 48,25,310 The excess over fair value should be deferred and amortized over the period for which the
asset is expected to be used.
Unearned Finance Income = (a) – (b) = ₹ 68,50,000 – ₹ 48,25,310= ₹ 20,24,690
Following will be the treatment in the situations given in the question:
*Minimum Lease Payment of 4th year includes guaranteed residual value amounting i.e
16,00,000 + 3,00,000
(i) When fair value of leased machinery is Rs. 45 lakhs & sales price is Rs. 38 lakhs, then loss
=19,00,000. of Rs. 2 lakhs (40 – 38) to be immediately recognized by Viral Ltd. in its books provided
loss is not compensated by future lease payment.
(ii) When fair value is Rs. 40 lakhs & sales price is Rs. 50 lakhs then, profit of Rs. 10 lakhs is to be May ’23)
deferredand amortized over the lease period When fair value is Rs. 46 lakhs & sales price
is Rs. 50 lakhs, profit of Rs. 6 lakhs (46 less 40) to be immediately recognized in its books Answer 9
and balance profit of Rs.4 lakhs (50-46) is to be amortized/deferred over lease period.
Computation of annual lease payment to the lessor
Question 8 Rs.
Aksat International Limited has given a machinery on lease for 36 months, and its useful life is 60 Cost of equipment 16,99,999.50
months. Cost & fair market value of the machinery is Rs. 5,00,000. The amount will be paid in 3 equal Unguaranteed residual value 1,33,500.00
annual installments and the lessee will return the machinery to lessor at termination of lease. The un-
Present value of residual value after third year @ 10% (Rs.1,33,500 × 0.751)
guaranteed residual value at the end of 3 years is Rs. 50,000. IRR of investment is 10% and present value
of annuity factor of Rs. 1 due at the end of 3 years at 10% IRR is 2.4868 and present value of Rs. 1 due at the 1,00,258.50
end of 3rd year at 10% IRR is 0.7513. Fair value to be recovered from lease payments (Rs.
You are required to comment with reason whether the lease constitute finance lease or operating lease. 16,99,999.5– Rs. 1,00,258.5) 15,99,741.00
If it is finance lease, calculate unearned finance income. (RTP May 19)(MTP 5 Marks Sep ’23) Present value of annuity for three years is 2.486
Answer 8 Annual lease payment = Rs. 15,99,741/ 2.486 6,43,500.00

Computation of Unearned Finance Income
Determination of Nature of Lease
Rs.
Present value of unguaranteed residual value at the end of 3rd year = Rs. 50,000 x 0.7513= Rs. 37,565
Total lease payments (Rs. 6,43,500 x 3) 19,30,500
Present value of lease payments = Rs. 5,00,000 – Rs. 37,565= Rs. 4,62,435
Add: Unguaranteed residual value 1,33,500
The percentage of present value of lease payments to fair value of the equipment is(Rs. 4,62,435/ Rs.
Gross investment in the lease 20,64,000.00
5,00,000) x 100 = 92.487%.
Less: Present value of investment (lease payments and residual val-
Since, lease payments substantially covers the major portion of the fair value; the lease constitutes
ue) (Rs. 1,00,258.5+ Rs. 15,99,741) (16,99,999.50)
finance lease.
Unearned finance income 3,64,000.50
Calculation of Unearned Finance Income
Annual lease payment = Rs. 4,62,435/ 2.4868 = Rs. 1,85,956 (approx.) Question 10
Gross investment in the lease = Total minimum lease payments + unguaranteed residual value
Classify the following into either operating lease or finance lease with reason:
= (Rs. 1,85,956 × 3) + Rs. 50,000
= Rs. 5,57,868 + Rs. 50,000 = Rs. 6,07,868
(1) Economic life of asset is 10 years, lease term is 9 years, but asset is not acquired at the
end of lease term.
Unearned finance income
(2) Lessee has option to purchase the asset at lower than fair value at the end of lease term.
= Gross investment - Present value of minimum lease payments and unguaranteed residual value (3) Lease payments should be recognized as an expense in the statement of Profit & Loss of
a lessee.
= Rs. 6,07,868 – Rs. 5,00,000 = Rs. 1,07,868
(4) Present Value (PV) of Minimum Lease Payment (MLP) = “X” Fair value of the asset is “Y”
Question 9 And X = Y.
(5) Economics life of the asset is 5 years, lease term is 2 years, but the asset is of special
WIN Ltd. has entered into a three year lease arrangement with Tanya sports club in respect of Fitness nature and has been procured only for use of the lessee. (PYP 5 Marks, Nov ’19, Old
Equipments costing Rs. 16,99,999.50. The annual lease payments to be made at the end of each year & New SM)
are structured in such a way that the sum of the Present Values of the lease payments and that of the
residual value together equal the cost of the equipments leased out. The unguaranteed residual value Answer 10
of the equipment at the expiry of the lease is estimated to be Rs. 1,33,500. The assets would revert to the
lessor at the end of the lease. Given that the implicit rate of interest is 10%. (i) The lease will be classified as a finance lease, since a substantial portion of the life
of the asset is covered by the lease term.
You are required to calculate the amount of the annual lease payment and the unearned finance in-
come. Discounting Factor at 10% for years 1, 2 and 3 are 0.909, 0.826 and 0.751 respectively. (RTP May’18, (ii) If it becomes certain at the inception of lease itself that the option will be exercised by
the lessee, it is a Finance Lease. Question 12
What are the disclosures requirements for operating leases by the lessee as per AS-19?
(iii) It is an operating lease under which lease payments are recognized as expense in the (PYP 5 Marks May’22)(New SM)
profit and loss account of lessee to have better matching between cost and revenue.
(iv) The lease is a finance lease if X = Y, or where X substantially equals Y. Answer 12
(v) Since the asset is of special nature and has been procured only for the use of lessee, it As per AS 19, lessees are required to make following disclosures for operating leases:
is a finance lease.
(a) the total of future minimum lease payments under non-cancelable operating leases
for each of the following periods:
Question 11
(i) not later than one year;
A machine was given on 3 years operating lease by a dealer of the machine for equal annual lease
(ii) later than one year and not later than five years;
rentals to yield 30% profit margin on cost of Rs. 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 (iii) later than five years;
1,05,000 units consecutively for 5 years. Straight line depreciation in proportion of output is considered (b) the total of future minimum sublease payments expected to be received under
appropriate. You are required to compute the following as per AS-19. non- cancelable subleases at the balance sheet date;
(i) Annual Lease Rent (c) lease payments recognised in the statement of profit and loss for the period, with sep-
(ii) Lease Rent income to be recognized in each operating year and arate amounts for minimum lease payments and contingent rents;
(iii) Depreciation for 3 years lease (PYP 5 Marks Dec’21, MTP 4 Marks March 21 , MTP 4 Marks May (d) sub-lease payments received (or receivable) recognised in the statement of profit
20, Old & New SM) and loss for the period;
(e) a general description of the lessee’s significant leasing arrangements including, but
Answer 11 not limited to, the following:
i. Annual lease rent (i) the basis on which contingent rent payments are determined;
Total lease rent (ii) the existence and terms of renewal or purchase options and escalation clauses;
= 130% of Rs. 2,25,000 X Output during lease period/ Total output and
= 130% of Rs. 2,25,000 x (60,000 +75,000+ 90,000)/(60,000 + 75,000 + 90,000 + 1,20,000 + (iii) restrictions imposed by lease arrangements, such as those concern-
1,05,000) ing dividends, additional debt, and further leasing.
= 2,92,500 x 2,25,000 units/4,50,000 units = Rs. 1,46,250 Note: The Level II and Level III non-corporate entities (and SMCs) need not make disclo-
suresrequired by (a), (b) and (e) above.
Annual lease rent = Rs. 1,46,250 / 3 = Rs. 48,750
ii. Lease rent Income to be recognized in each operating year
Question 13
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 Jaya Ltd. took a machine on lease from Deluxe Ltd., the fair value being ₹ 11,50,000. Economic life of
Hence income recognized in years 1, 2 and 3 will be as: the machine as well as lease term is 4 years. At the end of each year, lessee pays ₹ 3,50,000 to lessor.
Jaya Ltd. has guaranteed a residual value of ₹ 70,000 on expiry of the lease to Deluxe Ltd., however
Year 1 Rs. 39,000, Deluxe Ltd. estimates that residual value will be only ₹ 25,000. The implicit rate of return is 10% p.a.
Year 2 Rs. 48,750 and and present value factors at 10% are : 0.909, 0.826, 0.751 and 0.683 at the endof 1st, 2nd, 3rd and 4th
year respectively.
Year 3 Rs. 58,500.
Calculate the value of machinery to be considered by Jaya Ltd. and the value of the lease liabilityas
iii. Depreciation for three years of lease per AS-19.(RTP Nov ’23)
Since depreciation in proportion of output is considered appropriate, the depreciable
amount Rs.2,25,000 should be allocated over useful life 5 years in proportion of output,
Answer 13
i.e. in proportion of 60 :75: 90 : 120 : 105 . According to para 11 of AS 19 “Leases”, the lessee should recognise the lease as an asset and a liability
at an amount equal to the fair value of the leased asset at the inception of the finance lease. However, if
Depreciation for year 1 is Rs. 30,000, year 2 = 37,500 and year 3 = 45,000. the fair value of the leased asset exceeds the present value of the minimum lease payments from the
standpoint of the lessee, the amount recorded as an asset and a liability should be the present value of
the minimum lease payments from the standpoint of the lessee.

Chapter 5.6
In calculating the present value of the minimum lease payments the discount rate is the interest rate im-
plicit in the lease. Present value of minimum lease payments will be calculated as follows: AS 26- Intangible Assets
Year Minimum LeasePay- Internal rate of return(Dis- Present value

ment count rate @10%)
₹
₹
1 3,50,000 0.909 3,18,150
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
Study
2 3,50,000 0.826 2,89,100 Q.17 TO Q.31
Mat.
3 3,50,000 0.751 2,62,850
Past Q.10 Q.14
4 4,20,000* 0.683 2,86,860 Q.4 NO Q.13 NO NO NO NO NO NO
Exams Q.15 Q.15
Total 14,70,000 11,56,960 MTP NO NO Q.1 Q.1 Q.5 Q.4 Q.3 Q.5 Q.4 Q.8 Q.5 Q.4
Present value of minimum lease payments ₹ 11,56,960 is more than fair value at the inception of
Q.2 Q.7 Q.7 Q.15 Q.9 Q.15
lease i.e. ₹ 11,50,000, therefore, the lease liability and machinery should be recognized in the books
at ₹ 11,50,000 as per AS 19.* Minimum Lease Payment of 4th year includes guaranteed residual value Q.11
amounting i.e. 3,50,000 + 70,000 = 4,20,000. RTP Q.2 Q.4 Q.13 Q.2 Q.10 Q.9 Q.8 Q.7 Q.12 Q.2 Q.13 Q.16
Chapter 5.6 27,400 1.00 200
AS 26- Intangible Assets
Question 2
Question 1
K Ltd. launched a project for producing product X in October, 2016. The Company incurred Rs. 40 lakhs
A Ltd. has got the license to manufacture particular medicines for 10 years at a license fee of Rs. 200 towards Research and Development expenses up to 31st March, 2018. Due to prevailing market condi-
lakhs. Given below is the pattern of expected production and expected operating cash inflow: tions, the Management came to conclusion that the product cannot be manufactured and sold in
the market for the next 10 years. The Management hence wants to defer the expenditure write off to
Year Production in bottles (in lakhs) Net operating cash flow (Rs. in lakhs) future years. Advise the Company as per the applicable Accounting Standard. (MTP-Mar’19 5 Marks,
1 300 900 RTP Nov 19, May 18, RTP Nov’22, Old & New SM)
2 600 1,800 Answer 2

3 650 2,300
As per provisions of AS 26 “Intangible Assets”, expenditure on research should be recognized as an ex-
4 800 3,200 pense 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 con-
5 800 3,200
ditions specified in para 44 of the standard. An intangible asset (arising from development) should be
6 800 3,200 derecognized when no future economic benefits are expected from its use according to para 87 of the
7 800 3,200 standard. Thus, the manager cannot defer the expenditure write off to future years in the given case
hence, the expenses amounting Rs.40 lakhs incurred on the research and development project
8 800 3,200 has to be written off in the current year ending 31st March, 2018.
9 800 3,200
10 800 3,200 Question 3

Net operating cash flow has increased for third year because of better inventory management and
Plymouth Ltd. is engaged in research on a new process design for its product. It had incurred Rs. 10
handling method. Suggest the amortization method. (MTP 5 Marks Oct’19, Apr’19)
lakh on research during first 5 months of the financial year 2020 -21. The development of the process
Answer 1 began on 1st September, 2020 and up to 31st March, 2021, a sum of Rs. 8 lakhs were incurred as Devel-
opment Phase Expenditure, which meets assets recognition criteria. From 1st April, 2021, the Company
As per AS 26 ‘Intangibles Assets’, the amortization method used should reflect the pattern in which eco- has implemented the new process design and it is likely that this will result in after tax saving of Rs. 2
nomic benefits are consumed by the enterprise. If pattern cannot be determined reliably, then straight- lakhs per annum for next five years. The cost of capital is 10%. The present value of annuity factor of Rs.
line method should be used. In the instant case, the pattern of economic benefit in the form of net 1 for 5 years @ 10% is 3.7908. Decide the treatment of Research and Development Cost of the project
operating cash flow vis-à-vis production is determined reliably. A Ltd. should amortize the license fee as per AS 26. (MTP 5 Marks April 21)
of Rs. 200 lakhs as under:
Answer 3
Year Net operatingCash in flow Ratio Amortize amount(Rs. in
(Rs.) lakhs) Research Expenditure – According to AS 26 ‘Intangible Assets’, the expenditure on research of new process
design for its product Rs. 10 lakhs should be charged to Profit and Loss Account in the year in which it is
1 900 0.03 6
incurred. It is presumed that the entire expenditure is incurred in the financial year 2020 -
2 1,800 0.06 12 21. Hence, it should be written off as an expense in that year itself.
3 2,300 0.08 16 Cost of internally generated intangible asset – it is given that development phase expenditure amount-
3,200 0.12 24 ing Rs. 8 lakhs incurred up to 31st March, 2021 meets asset recognition criteria. As per AS 26, for mea-
4
surement of such internally generated intangible asset, fair value should be estimated by discounting
5 3,200 0.12 24 estimated future net cash flows.
6 3,200 0.12 24
Savings (after tax) from implementation of new design for next 5 Rs. 2 lakhs p.a.
7 3,200 0.12 24 years
8 3,200 0.12 24 Company’s cost of capital 10 %
9 3,200 0.12 24 Annuity factor @ 10% for 5 years 3.7908
10 3,200 0.11 (bal.) 22
MTP5 Marks May ’20, Oct’21 & April ’23, Old & New SM)
Present value of net cash flows (Rs. 2 lakhs x 3.7908) Rs. 7.582 lakhs
The cost of an internally generated intangible asset would be lower of cost value Rs. 8 lakhs or present Answer 5
value of future net cash flows Rs. 7.582 lakhs.
As per AS 26, costs incurred in creating a computer software product should be charged to research
Hence, cost of an internally generated intangible asset will be Rs. 7.582 lakhs. and development expense when incurred until technological feasibility/asset recognition criteria has
The difference of Rs. 0.418 lakhs (i.e. Rs. 8 lakhs – Rs. 7.582 lakhs) will be amortized by Plymouth for the been established for the product. Technological feasibility/asset recognition criteria have been estab-
financial year 2020-21. Amortization - The company can amortise Rs. 7.582 lakhs over a period of five lished upon completion of detailed program design or working model. In this case, Rs. 90,000 would be
years by charging Rs. 1.516 lakhs per annum from the financial year 2021 -2022 onwards. recorded as an expense (Rs. 50,000 for completion of detailed program design and Rs. 40,000 for coding
and testing to establish technological feasibility/asset recognition criteria).
Question 4 Cost incurred from the point of technological feasibility/asset recognition criteria until the time when
products costs are incurred are capitalized as software cost (63,000+ 18,000+ 19,500) = Rs. 1,00,500. Pack-
Sudesh Ltd. acquired a patent at a cost of Rs. 2,40,00,000 for a period of 5 years and the product life- ing cost Rs. 16,500 should be recognized as expenses and charged to Profit & Loss A/c.
cycle was also 5 years. The company capitalized the cost and started amortizing the asset at Rs.
48,00,000 per annum. After two years it was found that the product life -cycle may continue for
another 5 years from then. The net cash flows from the product during these 5 years were ex-
pectedto be Rs. 36,00,000, Rs. 46,00,000, Rs. 44,00,000, Rs. 40,00,000 and Rs. 34,00,000. Find out Question 7
the amortization cost of the patent for each of the years if the patent was renewable and Sudesh PIL Ltd. is showing an intangible asset at Rs. 72 lakhs as on 31-3-2022. This asset was acquired for Rs.
Ltd. got it renewed after expiry of five years. (MTP 5 Marks Oct ’20, Mar’22 & Oct ‘23)(Same concept 120 lakhs as on 01-04-2016 and the same was used from that date. The company has been following
different figures RTP Nov’18, Old & New SM, PYP 5 Marks May’18) the policy of amortization of the intangible assets over a period of 15 years, on straight line basis. You
are required to comment on the accounting treatment of asset with reference to AS 26 “Intangible As-
Answer 4 sets” and also give the necessary rectification journal entry in the books. ( MTP 5 Marks April 22, MTP
The entity amortized Rs. 48,00,000 per annum for the first two years i.e. Rs. 96,00,000. The remain- 4 Marks March’21, RTP Nov ’21)
ing carrying cost can be amortized during next 5 years on the basis of net cash flows arising
from the sale of the product. The amortization may be found as follows: Answer 7
As per AS 26 ‘Intangible Assets’, the depreciable amount of an intangible asset should be allocated on
VI 40,00,000 0.200 28,80,000 systematic basis over the best estimate of its useful life. There is a rebuttable presumption that the useful
life of an intangible asset will not exceed ten years from the date when the asset is available for use. The
VII 34,00,000 0.170 24,48,000 Company has been following the policy of amortization of the intangible asset over a periodof 15 years
Total 2,00,00,000 1.000 2,40,00,000 on straight line basis. The period of 15 years is more than the maximum period of 10 years specified as per
AS 26. Accordingly, the company would be required to restate the carrying amount of intangible asset as
It may be seen from above that from third year onwards, the balance of carrying amount i.e., Rs. 1,44,00,000 on 31.3.2022 at Rs. 48 lakhs i.e. Rs. 120 lakhs less Rs. 72 lakhs (Rs. 120 Lakhs / 10 years x 6 years = 72 Lakhs).
has been amortized in the ratio of net cash flows arising from the product of Change Ltd. The difference of Rs. 24 Lakhs (Rs. 72 lakhs – Rs. 48 lakhs) will be adjusted against the opening balance of
revenue reserve. The carrying amount of Rs. 48 lakhs will be amortized over remaining 4 years by amor-
Question 5 tizing Rs. 12 lakhs per year.
During 2019-20, an enterprise incurred costs to develop and produce a routine low risk computer The necessary journal entry (for rectification) will be Rev- Rs. 24 Lakhs
software product, as follows: enue Reserves Dr.
Particular Rs. To Intangible Assets Rs. 24 Lakhs
Completion of detailed program and design (Phase 1) 50,000

Question 8
Coding and Testing (Phase 2) 40,000
Surya Ltd. had the following transactions during the year ended 31 st March, 2021.
Other coding costs (Phase 3 & 4) 63,000
Testing costs (Phase 3 & 4) 18,000 (i) It acquired the business of Gomati Limited on a going concern basis for ₹ 25,00,000 on 1st
June,2020. The fair value of the Net Assets of Gomati Limited was ₹ 18,75,000. Surya Ltd. be-
Product masters for training materials (Phase 5) 19,500 lieves that due to popularity of the products of Gomati Limited in the market, its goodwill
Packing the products (1,500 units) (Phase 6) 16,500 exists.
After completion of phase 2, it was established that the product is technically feasible for the market. (ii) On 20th August, 2020, Surya Ltd. incurred cost of ₹ 6,00,000 to register the patent for its
You are required to state how the above referred cost to be recognized in the books of accounts. ( product.
Surya Ltd. expects the Patent’s economic life to be 8 years. (3) Franchise 4,50,000
(iii) On 1st October, 2020, Surya Ltd. has taken a franchise to operate an ice cream parlour Less: Amortization (over 6 years) (75,000)
from Volga Ltd. for ₹ 4,50,000 and at an Annual Fee of 10 % of Net Revenues (after deduct- Balance to be shown in the balance sheet 3,75,000
ing expenditure). The franchise expires after six years. Net Revenue for the year ended
31st March, 2021 amounted to ₹ 1,50,000.
Surya Ltd. follows an accounting policy to amortize all Intangibles on Straight Line basis
Question 9
(SLM) over the maximum period permitted by the Accounting Standards taking a full year
amortization in the year of acquisition. Goodwill on acquisition of business is to be amortized X Ltd. carried on business of manufacturing of Bakery products. The company has two trademarks
over 5 years (SLM). “Sun” and “Surya’’. One month before the company knows through one of the marketing managers
that both trademarks have allegedly been infringed by other competitors engaged in the same field.
Prepare an extract showing the Intangible Assets section in the Balance Sheet of Surya Ltd. as at
31st March, 2021. (MTP 5 Marks Oct’22, RTP May ’21) “Sun” and strong case in regard to trademark “Surya”. X Ltd. incurred additional legal fees to stop in-
fringement on both trademarks. Both trademarks have a remaining legal life of 10 years. How should
X Ltd. account for these legal costs incurred relating to the two trademarks? .(MTP 5 Marks March ’23,
Answer 8 RTP Nov’20)
Surya Ltd.
Balance Sheet (Extract relating to intangible asset) as on 31st March 2021
Answer 9
As per para 59 of AS 26, subsequent expenditure on an intangible asset after its purchase or its comple-
Note ₹
tion should be recognized as an expense. However, if the subsequent expenditure enables the asset to
No.
generate future economic benefits in excess of its originally assessed standard of performance or can
Assets be measured and attributed to the asset reliably, then such subsequent expenditure should be added to
the cost of the intangible asset.
(1) Non-current assets
1 14,00,000 The legal costs incurred for both the trademarks do not enable them to generate future economic bene-
Intangible assets
fits in excess of its originally assessed standard of performance. They only ensure to maintain them if
Notes to Accounts (Extract) the case is decided in favour of the company. Therefore, such legal costs must be recognised as an
expense.
₹ ₹
1. Intangible assets Question 10
Goodwill (Refer to note 5,00,000
A company acquired patent right for Rs.1200 lakhs. The product life cycle has been estimated to be 5
1) Patents (Refer to Note 5,25,000 years and the amortization was decided in the ratio of estimated future cash flows which are as under:
2)
3,75,000 14,00,000
Franchise (Refer to Note 3) Year 1 2 3 4 5
Working Notes: Estimated future cash flows
₹ (Rs. in lakhs) 600 600 600 300 300

After 3rd year, it was ascertained that the patent would have an estimated balance future life of 3
(1) Goodwill on acquisition of business
years and the estimated cash flow after 5th year is expected to be Rs. 150 lakhs. You are required to
Cash paid for acquiring the business (purchase consideration) 25,00,000 determine the amortization pattern under Accounting Standard 26. ( RTP May 20),(Same concept dif-
ferent figures PYP 5 Marks Nov’20)
Less: Fair value of net assets acquired (18,75,000)
Goodwill 6,25,000 Answer 10
Less: Amortization. over 5 years (as per SLM) (1,25,000) Amortization of cost of patent as per AS 26
Balance to be shown in the balance sheet 5,00,000
Year Estimated future cash flow Amortization Ratio Amortized Amount
(2) Patent 6,00,000
(Rs. in lakhs) (Rs. in lakhs)
Less: Amortization (over 8 years as per SLM) (75,000)
1 600 .25 300
Balance to be shown in the balance sheet 5,25,000
2 600 .25 300
3 600 .25 300 be debited to the profit and loss statement during the year ended 31st March, 2021.
4 300 .40 (Revised) 120

Question 13
5 300 .40 (Revised) 120
As per provisions of AS-26, how would you deal to the following situations:
6 150 .20 (Revised) 60
1,200 Rs. 23,00,000 paid by a manufacturing company to the legal advisor for defending the patent of
In the first three years, the patent cost will be amortized in the ratio of estimated future cash a product is treated as a capital expenditure.
flows i.e. (600: 600: 600: 300: 300).
During the year 2021-22, a company spent Rs. 7,00,000 for publicity and research expenses on
The unamortized amount of the patent after third year will be Rs. 300 lakh (1,200-900) which will be one of its new consumer product which was marketed in the same accounting year but proved
amortized in the ratio of revised estimated future cash flows (300:300:150) in the fourth, fifth and sixth to be a failure.
year. 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 cur-
Question 11 rent year approval of the concerned authority has been received. The company wishes to capitalize Rs.
25,00,000 by disclosing it as a prior period item.
PQR Ltd. has acquired a Brand from another company for Rs. 100 lakhs. PQR Ltd. contends that since
A company with a turnover of Rs. 200 crores and an annual advertising budget of Rs. 50,00,000 had tak-
the said brand is a very popular and famous brand, no amortization needs to be provi ed. Comment
en up for the marketing of a new product by a company. It was estimated that the company would have
on this in line with the Accounting Standards. (May 22)
a 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
Answer 11
the new product. (RTP May ’23, PYP Nov ’19 5 Marks) (Same concept different figures RTP May’19, Old &
AS 26 ‘Intangible Assets” provides that an intangible asset should be measured initially at cost. After New SM)
initial recognition, an intangible asset should be carried at cost less any accumulated amortization
and any accumulated impairment losses. The amount of an intangible asset should be allocated on a Answer 13
systematic basis over the best estimate of its useful life for computing amortization. There is a rebut- As per AS 26 “Intangible Assets”, subsequent expenditure on an intangible asset after its purchase or
table presumption that the useful life of an intangible asset will not exceed 10 years from the date its completion should be recognized as an expense when it is incurred unless (a) it is probable that the ex-
when the asset is available for use. It must be ensured that the value of brand is amortized in ac- penditure will enable the asset to generate future economic benefits in excess of its originally assessed
cordance with AS 26, as brand is considered to be intangible asset. The contention of PQR Ltd. that standard of performance; and (b) expenditure can be measured and attributed to the asset reliably. If
Brand is very popular and famous, hence no amortization needs to be provided is not correct these conditions are met, the subsequent expenditure should be added to the cost of the intangible asset.
as there is no persuasive evidence that the useful life of the intangible asset will exceed 10 years.
1. In the given case, the legal expenses to defend the patent of a product amounting Rs. 23,00,000
should not be capitalized and be charged to Profit and Loss Statement.
Question 12
2. The company is required to expense the entire amount of Rs. 7,00,000 in the Profit and Loss account
X Ltd. is engaged in the business of newspaper and radio broadcasting. It operates through different for the year ended 31st March, 2022 because no benefit will arise in the future.
brand names. During the year ended 31st March, 2021, it incurred substantial amount on business 3. As per AS 26, expenditure on an intangible item that was initially recognized as an expense by a
communication and branding expenses by participation in various corporate social responsibility reporting enterprise in previous annual financial statements should not be recognized as part of
initiatives. The company expects to benefit by this expenditure by attracting new customers over the cost of an intangible asset at a later date. Thus the company cannot capitalize the amount of
a period of time and accordingly it has capitalized the same under brand development expenses Rs. 25,00,000 and it should be recognized as expense
and intends to amortize the same over the period in which it expects the benefits to flow. As the
accountant of the company do you concur with these views? You are required to explain i n line with 4. Expenditure of Rs. 50,00,000 on advertising and promotional activities should always be charged
provisions of Accounting Standards. (RTP May 22) toProfit and Loss Statement. Hence, the company has done the correct treatment by debiting the
sum of 50 lakhs to Profit and Loss Account
Answer 12
Question 14
As per AS 26 on Intangible Assets, expenditure on an intangible item should be recognized as on ex-
pense when it is incurred unless it forms part of the cost of an intangible asset that meets the recog- A Company acquired for its internal use a software on 01.03.2020 from U.K. for £ 1,50,000. The exchange
nition criteria. An intangible asset should be recognized if, and only if: (i) it is probable that the future rate on the date was as Rs. 100 per £. The seller allowed trade discount @ 2.5%. The other expenditures
economic benefits that are attributable to the asset will flow to the enterprise; and (ii) the cost of were:
the asset can be measured reliably. In the given case, no intangible assets or other asset is acquired
or created that can be recognized, the accounting treatment by the company to amortize the entire (i) Import Duty 10%
expenditure over the period in which it expects the benefits to flow is not correct and the same should
(ii) Additional Import Duty 5%
(iii) Entry Tax 2% (Recoverable later from tax department). Answer 15

(iv) Installation expenses Rs . 1,50,000. As per AS 26 ‘Intangible Assets’
(i) Expenditure to be charged to Profit and Loss account for the year ending 31.03.2019
Professional fees for clearance from customs Rs. 50,000. Compute the cost of software to beCapi-
talized as per relevant AS. (PYP 5 Marks , Jan 21)
Rs. 42 lakhs is recognized as an expense because the recognition criteria were not met until 1st No-
vember, 2018. This expenditure will not form part of the cost of the production process recognized
Answer 14 as an intangible asset in the balance sheet.
Calculation of cost of software (intangible asset) acquired for internal use (ii) Carrying value of intangible asset as on 31.03.2019
At the end of financial year, on 31st March 2019, the production process will be recognized (i.e.
Purchase cost of the software £ 1,50,000 carrying amount) as an intangible asset at a cost of Rs. 38 (80-42) lakhs (expenditure in-
Less: Trade discount @ 2.5% £ ( 3,750) curred since the date the recognition criteria were met, i.e., from 1st November 2018)
£1,46,250 (iii) Expenditure to be charged to Profit and Loss account for the year ended 31.03.2020
Cost in Rs. (UK £1,46,250 x Rs. 100) 146,25,000 (Rs. in lacs)
Add: Import duty on cost @ 10% (Rs. ) 14,62,500 Carrying Amount as on 31.03.2019 38
160,87,500 Expenditure during 2019 – 2020 90
Add: Additional import duty @ 5% (Rs. ) 8,04,375 Book Value 128
168,91,875 Recoverable Amount (82)
Add: Installation expenses (Rs. ) 1,50,000 Impairment loss to be charged to Profit and loss account 46
Add: Professional fee for clearance from customs (Rs. ) 50,000
Rs. 46 lakhs to be charged to Profit and loss account for the year ending 31.03.2020.
Cost of the software to be capitalized (Rs. ) 170,91,875
(iv) Carrying value of intangible asset as on 31.03.2020
Note: Since entry tax has been mentioned as a recoverable / refundable tax, it is not included as
(Rs. in lacs)
part of the cost of the asset.
Book Value 128
Less: Impairment loss (46)
Question 15 Carrying amount as on 31.03.2020 82
M/s. Pasa Ltd. is developing a new production process. During the financial year ended 31st March,
Question 16
2019, the total expenditure incurred on the process was Rs. 80 lakhs. The production process met the
criteria for recognition as an intangible asset on 1st November, 2018. Expenditure incurred till this Swift Limited acquired patent rights to manufacture Solar Roof Top Panels at a cost of ₹ 600 lacs. The
date was Rs. 42 lakhs. Further expenditure incurred on the process for the financial year ending 31st product life cycle has been estimated to be 5 years and the amortization was decided in the ratio of
March, 2020 was Rs. 90 lakhs. As on 31.03.2020, the recoverable amount of know how embodied in the future cash flows which are estimated as under:
process is estimated to be Rs. 82 lakhs. This includes estimates of future cash outflows and inflows.
You are required to work out : Year 1 2 3 4 5
(1) What is the expenditure to be charged to Profit and Loss Account for the year ended 31st Cash Flows (₹ in 300 300 300 150 150
March, 2019 ? lacs)
(2) What is the carrying amount of the intangible asset as on 31st March, 2019? After 3rd year, it was estimated that the patents would have an estimated balance future life of 3 years
(3) What amount of expenditure to be charged to Profit and Loss Account for the and Swift Ltd. expected the estimated cash flow after 5 th year to be ₹ 75 Lacs. Determine the amortiza-
year ended 31st March,2020 ? tion cost of the patent for each of the above years as per Accounting Standard 26.(RTP Nov ’23)
(4) What is the carrying amount of the intangible asset as on 31st March, 2020? (PYP 5 Marks Answer 16
Nov 20 & Dec ‘21) (Same concept lesser adjustments MTP 5 Marks Sep’22 & Sep ‘23)
Amortization of cost of patent as per AS 26
Year Estimated future cashflow Amortization Ratio Amortized Amount Ans: (a)
(₹ in lakhs)
(₹ in lakhs)
Question 20
1 300 .25 150
2 300 .25 150 Hexa Ltd developed a technology to enhance the battery life of mobile devices. Hexa has capital-
ised development expenditure of Rs. 5,00,000. Hexa estimates the life of the technology developed to
3 300 .25 150
be 3 yearsbut the company has forecasted that 50% of sales will be in year 1, 35% in year 2 and 15%
in year 3. Whatshouldbe the amortisation charge in the second year of the product’s life?
4 150 .10 60
5 150 .10 60 a. 2,50,000 b. 1,75,000
6 75 .05 30 c. 1,66,667 d. 1,85,000
1.00 600 Ans: (b)

In the first three years, the patent cost will be amortized in the ratio of estimated future cash flows
i.e. (300: 300: 300: 150: 150).The unamortized amount of the patent after third year will be ₹ 150 lakh
(600-450) which will be amortized in the ratio of revised estimated future cash flows (150:150:75 or
2:2:1) in the fourth, fifth and sixth year.
Questions 21
Question 17
What is meant by Intangible Assets and what are the important factors to consider the rec-
ognition of item as an Intangible asset? What is the recognition criteria in accordance
Which of the following is not covered within the scope of AS 26?
with the provisions of AS 26?
a. Intangible assets held-for-sale in the b. Assets arising from employee benefits
Answers 21
ordinary course of business
An intangible asset is an identifiable non-monetary asset, without physical substance,
c. (a) & (b) both d. Research and development activities
held for use in the production or supply of goods or services, for rental to others, or for ad-
Ans: (c) ministrative purposes. Below are the 3 key ingredients to be satisfied to cover an item as an
intangible asset under this standard:
Question 18 ฀ Identifiability,
฀ Control over a resource and
Intangible asset is recognised if it:
฀ Expectation (i.e. probable – 50% plus) of future economic benefits flowing to the enter-
a. Meets the definition of an intangible asset b. Is probable that future economic ben- prise.
efits will flow The recognition of an item as an intangible asset requires an enterprise to demonstrate that
c. The cost can be measured reliably d. Meets all of the above parameters the item meets the definition of an intangible asset and recognition criteria set out as below:
a. It is probable that the future economic benefits that are attributable to the asset will
Ans: (d) flow to the enterprise; and
b. The cost of the asset can be measured reliably.
Question 19
Sun Limited has purchased a computer with various additional software. These are integral part of
the computer. Which of the following are true in the context of AS 26:
a. Recognise Computer and b. c. Recognise tangible and

software as tangible asset intangible separately
d. Recognise computer e. f. Does not recognize the
and software as intangible software as an asset.
asset
Questions 22 ducing and making the asset ready for its intended use from the time when the intangible
asset first meets the recognition criteria. For details, refer para 6.16.
What is the measurement criteria at the time of initial recognition of Intangible assets Internally generated goodwill is not recognised as an asset because it is not an identifiable
acquired throughseparate acquisition? resource controlled by the enterprise that can be measured reliably at cost.
Answers 22
Questions 24
If an intangible asset is acquired separately, the cost of the intangible asset can usually be
measured reliably. This is particularly so when the purchase consideration is in the form of Advise the complete accounting treatment for Research and development phase as per AS
cash or other monetary assets. 26.
The cost of an intangible asset comprises:
Answers 24
฀ its purchase price,
Research phase means acquisition of knowledge and Development phase means application
฀ any import duties and other taxes (other than those subsequently recoverable by the en- of knowledge.
terprise from the taxing authorities), and
The expenditure related to Research phase is expensed off in statement of Profit and loss.
฀ any directly attributable expenditure on making the asset ready for its intended use. However, the expenditure incurred in Development phase is capitalised as a cost of the
Directly attributable expenditure includes, for example, professional fees for legal ser- internally generated intangible asset.
vices.
If an enterprise cannot distinguish the research phase from the development phase of an in-
฀ Any trade discounts and rebates are deducted in arriving at the cost. ternal project to create an intangible asset, the enterprise treats the expenditure on that
project as if it were incurred in the research phase only.
Questions 23
Questions 25
What is the criteria for recognition and measurement of Internally generated intangi-
ble assets. Describe which kind of cost is considered for capitalisation with respect to What is meant by Amortization of an Intangible asset. What are the different methods for
provisions of AS 26. Whether the sameapplies for internally generated goodwill also? amortization as per AS 26?
To assess whether an internally generated intangible asset meets the criteria for recog- Amortization is the systematic allocation of the depreciable amount of an intangible asset over
nition, an enterprise classifies the generation of the asset into 2 phases: its useful life.
฀ Research Phase & The amortization method used should reflect the pattern in which the asset’s economic
฀ Development Phase benefits are consumed by the enterprise. If that pattern cannot be determined reliably, the
straight-line method should be used. A variety of amortization methods can be used to al-
Research Phase - The expenses related to Research phase is expensed off in statement of
locate the depreciable amount of an asset on a systematic basis over its useful life. These
Profit and loss.
methods include
Development Phase - Development is the application of research findings or other
฀ the straight-line method,
knowledge to a plan or design for the production of new or substantially improved ma-
terials, devices, products, processes, systems or services prior to the commencement of ฀ the diminishing balance method and
commercial production or use. ฀ the unit of production method.
An intangible asset arising from development (or from the development phase of an inter- The method used for an asset is selected based on the expected pattern of consumption of
nal project) should be recognised if, and only if, an enterprise can demonstrate all of the economic benefits and is consistently applied from period to period, unless there is a change
conditions given in para 6.15. in the expected pattern of consumption of economic benefits to be derived from that asset.
Cost of an Internally Generated Intangible Asset
The cost of an internally generated intangible asset is the sum of expenditure incurred
from the time when the intangible asset first meets the recognition criteria. Reinstate-
ment of expenditure recognised as an expense in previous annual financial statements
or interim financial reports is prohibited.
The cost of an internally generated intangible asset comprises all expenditure that can be
directly attributed, or allocated on a reasonable and consistent basis, to creating, pro-
Answers 27
As per para 41 of AS 26 “Intangible Assets”, expenditure on research should be recognised as
Questions 26 an expense when it is incurred. Hence, the expenses amounting Rs. 20 lakhs incurred on the
research has to be charged to the statement of profit and loss in the current year ending
Swift Ltd. acquired a patent at a cost of Rs. 80,00,000 for a period of 5 years and the product 31st March, 20X2.
life-cycle is also 5 years. The company capitalized the cost and started amortizing the asset at
Rs. 10,00,000 per annum. Thecompany had amortized the patent at 10,00,000 per annum in first Questions 28
two years on the basis of economic benefits derived from the product manufactured under the
patent. After two years it was found that the product life-cycle may continue for another 5 years During 20X1-X2, an enterprise incurred costs to develop and produce a routine low risk com-
from then. The patent was renewable and Swift Ltd. got it renewed after expiry of five years. puter software product, as follows:
The net cash flows from the product during these 5 years were expected to be Rs. 36,00,000, Rs.
46,00,000, Rs. 44,00,000, Rs. 40,00,000 and Rs. 34,00,000. Find out the amortization costof the patent Particular
for each of the years.
Completion of detailed program and design (Phase 1) 50,000
Answers 26 Coding and Testing (Phase 2) 40,000
Swift Limited amortised Rs. 10,00,000 per annum for the first two years i.e. Rs. 20,00,000. The remaining Other coding costs (Phase 3 & 4) 63,000
carrying cost can be amortised during next 5 years on the basis of net cash flows arising from the sale
Testing costs (Phase 3 & 4) 18,000
of the product. The amortisation may be found as follows:
Product masters for training materials (Phase 5) 19,500
S Net cash flows Rs. Amortisation Ratio Amortisation Amount Rs. Packing the products (1,500 units) (Phase 6) 16,500
I - 0.125 10,00,000
II - 0.125 10,00,000
After completion of phase 2, it was established that the product is technically feasible for
III 36,00,000 0.180 10,80,000 the market. You are required to state how the above referred cost to be recognized in the
IV 46,00,000 0.230 13,80,000 books of accounts.
V 44,00,000 0.220 13,20,000 Answers 28

VI 40,00,000 0.200 12,00,000 As per AS 26, costs incurred in creating a computer software product should be charged to research
VII 34,00,000 0.170 10,20,000 and development expense when incurred until technological feasibility/asset recognition criteria
has been established for the product. Technological feasibility/asset recognition criteria have been
Total 2,00,00,000 1.000 80,00,000 established upon completion of detailed program design, coding and testing. In this case, Rs. 90,000
It may be seen from above that from third year onwards, the balance of carrying amount i.e., Rs. would be recorded as an expense (Rs. 50,000 for completion of detailed program design and Rs. 40,000
60,00,000 has been amortised in the ratio of net cash flows arising from the product of Swift Ltd. for coding and testing to establish technological feasibility/asset recognition criteria). Cost incurred
from the point of technological feasibility/asset recognition criteria until the time when products
Questions 27 costs are incurred are capitalized as software cost (63,000+ 18,000+ 19,500) = Rs. 1,00,500. Packing cost
Rs. 16,500 should be recognized as expenses and charged to P & L A/c.
AB Ltd. launched a project for producing product X in October, 20X1. The Company incurred Rs. 20
lakhs towards Research. Due to prevailing market conditions, the Management came to conclusion
that the product cannot be manufactured and sold in the market for the next 10 years. The Manage-
ment hence wants to defer the expenditure write off to future years. ABC Ltd. developed know-how by incurring expenditure of Rs. 20 lakhs, The know-how was used
Advise the Company as per the applicable Accounting Standard. by the company from 1.4.20X1. The useful life of the asset is 10 years from the year of commencement
of its use. The company has not amortised the asset till 31.3.20X8. Pass Journal entry to give effect
to the value of know-how as per Accounting Standard-26 for the year ended 31.3.20X8.
Answers 29
Journal Entry
Rs. Rs.
Profit and Loss A/c (Prior period item) Dr. 12,00,000 Chapter 5.7
Amortization A/c Dr. 2,00,000
14,00,000 Accounting Standard 28 Impairment of Assets
To Know-how A/c
[Being amortization of 7 years (out of which amortization of 6
years charged as prior period
item)] Attempts MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
The company had spent Rs. 45 lakhs for publicity and research expenses on one of its new consumer
Past Ex-
product, which was marketed in the accounting year 20X1 -20X2, but proved to be a failure. State, Q.6 Q.7 NO NO NO NO NO NO NO NO NO NO
ams
how you will deal with the following matters in the accounts of U Ltd. for the year ended 31st March,
20X2. MTP Q.1 NO NO NO NO NO NO NO NO NO NO
RTP Q.5 Q.4 NO NO Q.3 Q.2 NO NO NO NO NO NO

Answers 30
In the given case, the company spent Rs. 45 lakhs for publicity and research of a new product which
was marketed but proved to be a failure. It is clear that in future there will be no related further revenue/
benefit because of the failure of the product. Thus, according to AS 26 ‘Intangible Assets’, the company
should charge the total amount of Rs. 45 lakhs as an expense in the profit and loss account.
As per para 63 of AS 26 “Intangible Assets”, there is a rebuttable presumption that the

useful life of an intangible asset will not exceed ten years from the date when the asset
is available for use. Amortisation should commence when the asset is available for use.
A company with a turnover of Rs. 250 crores and an annual advertising budget of Rs. 2 crores had
taken up the marketing of a new product. It was estimated that the company would have a turnover
of Rs. 25 crores from the new product. The company had debited to its Profit and Loss account the
total expenditure of Rs. 2 crore incurred on extensive special initial advertisement campaign for
the new product.
Is the procedure adopted by the company correct?
Answers 31
According to AS 26 ‘Intangible Assets’, “expenditure on an intangible item should be recognised as
an
expense when it is incurred unless it forms part of the cost of an intangible asset”.
AS 26 mentions that expenditure on advertising and promotional activities should be recognised as an

expense when incurred.
In the given case, advertisement expenditure of Rs. 2 crores had been taken up for the
marketing of a new product which may provide future economic benefits to an enter-
prise by having a turnover of Rs. 25 crores. Here, no intangible asset or other asset is
acquired or created that can be recognised. Therefore, the accounting treatment by the
company of debiting the entire advertising expenditure of Rs. 2 crores to the Profit and Loss
account of the year is correct.
Reference: The students are advised to refer the full text of AS 28 “Intangible Assets” (is-
sued 2002).
Chapter 5.7 Total Book Cost 108

Accounting Standard 28 Impairment of Assets
Carrying amount as on 31.03.2019 72
Question 1
Question 2
Wow Ltd. is developing a new production process. During the financial year ending 31st March, 2018,
the total expenditure incurred was Rs. 50 lakhs. This process met the criteria for recognition as an H Ltd. which is in a business of manufacturing and export of its product. Sometimes, back in 2018, the
intangible asset on 1st December, 2017. Expenditure incurred till this date was Rs.22 lakhs. Further Government put restriction on export of goods exported by H Ltd. and due to that restriction H Ltd. im-
expenditure incurred on the process for the financial year ending 31st March, 2019 was Rs. 80 lakhs. paired its assets. H Ltd. acquired identifiable assets worth of Rs. 4,000 lakh for Rs. 6,000 lakh at the
As at 31st March, 2019, the recoverable amount of know-how embodied in the process is estimated to End of the year 2014. The difference is treated as goodwill. The useful life of identifiable assets is years
be Rs. 72 lakhs. This includes estimates of future cash outflows as well as inflows. and depreciated on straight line basis. When Government put the restriction at the end of 2018, the
company recognised the impairment loss by determining the recoverable amount of assets for Rs.
You are required to calculate:
2,720 lakh. In 2020 Government lifted the restriction imposed on the export and due to this favourable
i. Amount to be charged to Profit and Loss A/c for the year ending 31st March,
change, H Ltd. re-estimate recoverable amount, which was estimated at Rs. 3,420 lakh.
2018 and carrying value of intangible as on that date.
Required:
ii. Amount to be charged to Profit and Loss A/c and carrying value of intangible
as on 31st March, 2019.Ignore depreciation. (MTP Oct 18 4 Marks) (i) Calculation and allocation of impairment loss in 2018.
(ii) Reversal of impairment loss and its allocation as per AS 28 in 2020. (RTP Nov 20)
Answer 1
As per AS 26 ‘Intangible Assets’ Answer 2
(i) For the year ending 31.03.2018 (i) Calculation and allocation of impairment loss in 2018(Amount in Rs. lakh)
(1) Carrying value of intangible as on 31.03.2018:
Goodwill Identifiable Total
At the end of financial year 31st March 2018, the production process will be recognized (i.e. assets
carrying amount) as an intangible asset at a cost of Rs. 28 lakhs (expenditure incurred
Historical cost 2,000 4,000 6,000
since the date the recognition criteria were met, i.e., from 1st December 2017).
(2) Expenditure to be charged to Profit and Loss account: Accumulated depreciation/amortisation (4 yrs.) (1,600) (1,067) (2,667)
The Rs. 22 lakhs is recognized as an expense because the recognition criteria were not Carrying amount before impairment 400 2,933 3,333
met until 1st December 2018. This expenditure will not form part of the cost of the produc- Impairment loss* (400) (213) (613)
tion process recognized in the balance sheet.
Carrying amount after impairment loss 0 2,720 2,720
(ii) For the year ending 31.03.2019 Notes:
Expenditure to be charged to Profit and Loss account:
1. As per para 87 of AS 28, an impairment loss should be allocated to reduce the carrying amount
(Rs. in lakhs) of the assets of the unit in the following order:
Carrying Amount as on 31.03.2018 28 (a) first, to goodwill allocated to the cash-generating unit (if any); and
Expenditure during 2018 –2019 80 (b) then, to the other assets of the unit on a pro-rata basis based on the carrying amount of each
asset in the unit.Hence, first goodwill is impaired at full value and then identifiable assets areim-
Total book cost 108 paired to arrive at recoverable value.
Recoverable Amount (72) 2. Since the goodwill has arisen on acquisition of assets, AS 14 comes into the picture. As per para 19
Impairment loss 36 of AS 14, goodwill shall amortise over a period not exceeding five years unless a somewhat longer
period can be justified. Therefore, the amortization period of goodwill is considered as 5 years.
(ii) Carrying amount of the assets at the end of 2020 (Amount in Rs. lakh)
Rs. 36 lakhs to be charged to Profit and loss account for the year ending 31.03.2019.
(1) Carrying value of intangible as on 31.03.2019:
End of 2020 Goodwill Identifiable Total
(Rs.in lakhs) assets
Carrying amount in 2020 0 2,225 2,225 Question 3
Add: Reversal of impairment loss (W.N.2) - 175 175 A publisher owns 150 magazine titles of which 70 were purchased and 80 were self - created. The price
Carrying amount after reversal of impairment loss - 2,400 2,400 paid for a purchased magazine title is recognised as an intangible asset. The costs of creating mag-
azine titles and maintaining the existing titles are recognised as an expense when incurred. Cash in-
Working Note: flows from direct sales and advertising are identifiable for each magazine title. Titles are managed by
customer segments. The level of advertising income for a magazine title depends on the range of
Calculation of depreciation after impairment till 2020 and reversal of impairment loss in 2020 titles in the customer segment to which the magazine title relates. Management has a policy to aban-
don old titles before the end of their economiclives and replace them immediately with new titles for
(Amount in Rs. lakh) the same customer segment.
Goodwill Identifiable Total What is the cash-generating unit as per AS 28? (RTP May 20)(New SM)
assets
Answer 3
Carrying amount after impairment loss in 2018 0 2,720 2,720
It is likely that the recoverable amount of an individual magazine title can be assessed. Even though
Additional depreciation (i.e. (2,720/11) x 2) – (495) (495) the level of advertising income for a title is influenced, to a certain extent, by the other titles in the customer
Carrying amount 0 2,225 2,225 segment, cash inflows from direct sales and advertising are identifiable for each title. In addition, although
titles are managed by customer segments, decisions to abandon titles are made on an individual title
basis.
Recoverable amount 3,420
Therefore, it is likely that individual magazine titles generate cash inflows that are largely independent one
Excess of recoverable amount over carrying 1,195 from another and that each magazine title is a separate cash-generating unit.
amount
Question 4
Note: It is assumed that the restriction by the Government has been lifted at the end of the year 2020.
Determination of the amount to be impaired by calculating depreciated historical cost ofthe iden- M Ltd. has three cash-generating units: A, B and C. Due to adverse changes in the technological envi-
tifiable assets without impairment at the end of 2020 (Amount in Rs. lakh) ronment, M Ltd. conducted impairment tests of each of its cash- generating units. On 31st March, 2018,
the carrying amounts of A, B and C are Rs. 100 lakhs, Rs. 150 lakhs and Rs. 200 lakhs respectively.
End of 2020 Identifiable assets
The operations are conducted from a headquarter. The carrying amount of the headquarter assets is
Historical cost 4,000 Rs. 200 lakhs: a headquarter building of Rs. 150 lakhs and a research centre of Rs. 50 lakhs. The relative
Accumulated depreciation (266.67 x 6 years) = (1,600) carrying amounts of the cash-generating units are a reasonable indication of the proportion of the
head-quarter building devoted to each cash-generating unit. The carrying amount of the research
Depreciated historical cost 2,400 centre cannot be allocated on a reasonable basis to the individual cash-generating units.
Carrying amount (in W.N.1) 2,225 Following is the remaining estimated useful life of:
Amount of reversal of impairment loss 175
Notes: A B C Head quarter assets
1. As per para 107 of AS 28, in allocating a reversal of an impairment loss for a cash-generating Remaining estimated useful life 10 20 20 20
unit, the carrying amount of an asset should not be increased above the lower of:
The headquarter assets are depreciated on a straight-line basis.
(a) its recoverable amount (if determinable); and
The recoverable amount of each cash generating unit is based on its value in use sincenet selling
(b) the carrying amount that would have been determined (net of amortisation or depreciation) price for each CGU cannot be calculated. Therefore, Value in use is equal to
had no impairment loss been recognised for the asset in prior accounting periods.
A B C M Ltd. as a whole
Recoverable amount 199 164 271 720*
Hence impairment loss reversal is restricted to Rs. 175 lakh only.
*The research centre generates additional future cash flows for the enterprise as a whole. Therefore,
2. The reversal of impairment loss took place in the 6th year. However, goodwill is amortised in the sum of the value in use of each individual CGU is less than the value in use of the business as a
5 years. Therefore, there would be no balance in the goodwill account in the 6th year even whole. The additional cash flows are not attributable to the headquarter building.
without impairment loss. Hence in W.N. 2 above there is no column for recalculation of good-
will. Calculate and show allocation of impairment loss as per AS 28. Ignore tax effects. (RTP Nov 18)
Answer 4 Allocation of the impairment losses for cash-generating units B and C (Amount in Rs. lakhs)
1. Identification of Corporate Assets of M Ltd. Cash-generating unit B C

Here, the corporate assets are the headquarter building and the research centre. For corporate To headquarter building (12) (42*56/206) (1) (4*75/275)
building
To assets in cash-generating unit (30) (3)
Since, the carrying amount of the headquarter building can be allocated on a reasonable and (42*150/206) (4*200/275)
consistent basis to the cash-generating units under review. Therefore, only a ₹bottom-up₹ test is
(42) (4)
necessary.
Since the research centre could not be allocated on a reasonable and consistent basis to A, B and C₹s
For research centre
CGU, M Ltd. compares the carrying amount of the smallest CGU to which the carrying amount of the re-
Since the carrying amount of the research centre cannot be allocated on a reasonable and con- search centre can be allocated (i.e., M as a whole) to its recoverable amount, in accordance with the
sistent basis to the individual CGU under review. Therefore, a ₹top-down₹ test will be applied in ₹top-down₹ test.
addition to the ₹bottom-up₹ test.
Application of the ₹top-down₹ test (Amount in Rs. lakhs)
2. Allocation of Corporate Assets
Since the estimated remaining useful life of A₹s CGU is 10 years, whereas the estimated 31st March, 2018 A B C Building Research M Ltd.
remaining useful lives of B and C₹s CGU are 20 years, the carrying amount of the head- centre
quarter building is allocated to the carrying amount of each individual cash-generating
Carrying amount 100 150 200 150 50 650
unit on weight basis.
Impairment loss arisingfrom – (30) (3) (13) – (46)
3. Calculation of a weighted allocation of the carrying amount of the headquarter building
the ₹bottom-up₹
(Amount in Rs. lakhs)
test
Carrying amount afterthe 100 120 197 137 50 604
On 31st March, 2018 A B C Total ₹bottom-up₹ test
Carrying amount (A) 100 150 200 450 Recoverable amount 720
Useful life 10 years 20 years 20 years Since recoverable amount is more than the carrying amount of M Ltd., no additional impairment loss
Weight based on useful life 1 2 2 has been resulted from the application of the top- down test. Only an impairment loss of Rs. 46
lakhs will be recognized as a result of the application of the ₹bottom-up₹ test.
Carrying amount after weight 100 300 400 800
Pro-rata allocation of the building 12.5% 37.5% 50% 100% Question 5
(100/800) (300/800) (400/800) M Ltd. produces a single product and owns plants A, B and C. Each plant is located in a different con-
tinent. Plant A produces a component that is assembled in either plant B or plant C. The combined
Allocation of the carrying amount capacity of plants B and C is not fully utilised.M Ltd.₹s products are sold world-wide from either plants
B or C i.e. plant B₹s production can be sold in plant C₹s continent if the products can be delivered
of thebuilding (based on pro-rata above) 18.75 56.25 75 150
fasterfrom plant B than from plant C. Utilisation levels of plant B and plant C depend onthe allocation
(B) of sales between the two sites.
Carrying amount (after allocation of the 118.75 206.25 275 600 For each of the following cases, what are the cash-generating units for plants A, Band C?
building) (A+B)
Case 1: There is an active market for plant A₹s products.
Calculation of Impairment Losses Case 2:There is no active market for plant A₹s products. (RTP May 18)
Application of ₹bottom-up₹ test (Amount in Rs. lakhs)
Answer 5
31st March, 2018 A B C
(a) Case 1: It is likely that A is a separate cash-generating unit because there is an active market
Carrying amount (after allocation of thebuilding)(Refer 118.75 206.25 275 for its products.
point 3 above)
Although there is an active market for the products assembled by B and C, cashinflows for
Recoverable amount (given in the question) 199 164 271 B and C depend on the allocation of production across the two sites. It is unlikely that the future
cash inflows for B and C can be determined individually. Therefore, it is likely that B and C togeth-
Impairment loss 0 (42) (4)
er is the smallest identifiable group of assets that generates cash inflows from continuing use
that are largely independent. Less: Recoverable amount (0.79)

In determining the value in use of A and B plus C, M Ltd. adjusts financial budgets/forecasts to
Impairment loss 0.91
reflect its best estimate of future market prices forA₹s products.
Case 2: It is likely that the recoverable amount of each plant cannot be assessed independently Less: Balance in revaluation reserve as on 31.03.20X6:
because:
Balance in revaluation reserve as on 31.03.20X4 2.10
(a) there is no active market for A’s products. Therefore, A’s cash inflows dependon sales of
the final product by B and C; and Less: Enhanced depreciation met from revaluation reserve
(b) although there is an active market for the products assembled by B and C, cash inflows 20X4-20X5 & 20X5-20X6=[(1.70 – 1.00) x 2 years] (1.40)
forB and C depend on the allocation of production across the two sites. It is unlikely that the
Impairment loss set off against revaluation reserve balance as per
future cash inflows for B and C can be determined individually.
para 58 of AS 28 “Impairment of Assets” (0.70)
As a consequence, it is likely that A, B and C together (i.e., M Ltd. as a whole) is the smallest identifi-
able group of assets that generates cash inflows from continuing use that are largely independent. Impairment Loss to be debited to profit and loss account 0.21
Question 6
Question 7
G Ltd., acquired a machine on 1st April, 20X0 for Rs. 7 crore that had an estimated useful life of 7 years.
The machine is depreciated on straight line basis and does not carry any residual value. On 1st April, C Ltd. acquired S Ltd. business (a cash generating unit) on 31-3-2016 for ₹ 8,000 Lakhs. The details of ac-
20X4, the carrying value of the machine was reassessed at Rs. 5.10 crore and the surplus arising out quisition are us under: -
of the revaluation being credited to revaluation reserve. For the year ended March, 20X6, conditions The anticipated useful life of acquired assets is 5 years Goodwill is to be amortised in 4 years C Ltd. uses
indicating an impairment of the machine existed and the amount recoverable ascertained to be only straight-line method of depreciation with no residual values anticipated. On 31-3-2018, C Ltd. estimat-
Rs. 79 lakhs. You are required to calculate the loss on impairment of the machine and show how this ed the significant decline in production due to change in Government policies. The net selling price of
loss is to be treated in the books of G Ltd. G Ltd., had followed the policy of writing down the revalua- identifiable asset is not determinable. The cash flow forecast based on recent financial budget for next
tion surplus by the increased charge of depreciation resulting from the revaluation.(New SM) (PYP 5 7 years after considering change in Govt. policies are as follows. Incremental financing cost is 8% which
MarksMay ‘18 ) (MTP 4 Marks Oct ‘17) represent current market assessment of the time value of money.
Answer 6 ₹ in Crore1
Statement Showing Impairment Loss Year Cash flow Year Cash flow
(Rs. in crores) 2019 800 2022 600
Carrying amount of the machine as on 1st April, 20X0 7.00 2020 800 2023 600
2021 800 2024 500
Depreciation for 4 years i.e. 20X0-20X1 to 20X3-20X
(4.00) 2025 400
Carrying amount as on 31.03.20X4 3.00 (i) Value in use

Add: Upward Revaluation (credited to Revaluation Reserveaccount) 2.10 (ii) Impairment loss
(iii) Revised carrying amount on 31-3-2018 (PYP Nov 18 5 Marks)
Carrying amount of the machine as on 1st April, 20X4 (revalued) 5.10
Answer 7
Value in Use
Less: Depreciation for 2 years i.e. 20X4-20X5& 20X5-20X6
(3.40) Year ended on 31st March Cash flow Discounting Present Value(₹
(₹ in lakh) factor @ 8% in lakh)
2019 800 0.926 740.80
Carrying amount as on 31.03.20X6 1.70
restriction Himalaya Ltd. impaired its assets. Himalaya Ltd. acquired identifiable assets worth of ₹ 4,000
2020 800 0.857 685.60
lakhs for ₹ 6,000 lakh at the end of the year 2010. The difference is treated as goodwill. The useful life of
2021 800 0.794 635.20 identifiable assets is 15 years and depreciated on straight line basis. When Government put the restric-
2022 600 0.735 441.00 tion at the end of 2014, the company recognised the impairment loss by determining the
2023 600 0.681 408.60 Recoverable amount of assets for ₹ 2,720 lakh. In 2016 Government lifted the restriction imposed the
export and due to this favourable change, Himalaya Ltd. re-estimate recoverable amount, which was
2024 500 0.630 315.00 estimated at ₹ 3,420 lakh.
2025 400 0.583 233.20 Required:
3459.40 (i) Calculation and allocation of impairment loss in 2014.
Impairment loss
(ii) Reversal of impairment loss and its allocation as per AS 28 in 2016. (PYP Nov 17)
Impairment loss = Carrying amount of the asset - Recoverable Amount
Answer 8
= ₹ 4,600 lakhs - ₹ 3,459.40 lakhs (Refer W.N.)
Calculation and allocation of impairment loss in 2014 (Amount in ₹ lakhs)
(i) = ₹ 1,140.60 lakhs
Revised Carrying Amount on 31.3.2018 Goodwill Identifiable Total

assets
(a) As per para 87 of AS 28 ‘Impairment of Assets’, an impairment loss should be allo-
Historical cost 2,000 4,000 6,000
cated to reduce the carrying amount of the assets of CGU in the following order:
Accumulated depreciation/amortisation (4 yrs) (1,600) (1,067) (2,667)
(b) first, to goodwill allocated to the cash-generating unit (if any); and
Carrying amount before impairment 400 2,933 3,333
then, to the other assets of the unit on a pro-rata basis based on the carrying amount of each asset
in the unit. Impairment loss* (400) (213) (613)
Hence, first goodwill is impaired at full value and then identifiable assets are impaired to arrive at Carrying amount after impairment loss 0 2,720 2,720
recoverable value. (₹ in lakh)
* Notes:
Goodwill Identifiable Total 1. As per para 87 of AS 28, an impairment loss should be allocated to reduce the carrying amount
assets of the assets of the unit in the following order:
Useful life 4 years 5 years (a) first, to goodwill allocated to the cash-generating unit (if any); and
Historical cost 2,000 6,000 8,000 (b) then, to the other assets of the unit on a pro-rata basis based on the car-
Accumulated depreciation/amortization(for 2 rying amount of each asset in the unit.
years) (1,000) (2,400) (3,400) Hence, first goodwill is impaired at full value and then identifiable assets are impaired to arrive at
recoverable value.
Carrying amount before impairment 1,000 3,600 4,600
2. Since the goodwill has arisen on acquisition of assets, AS 14 comes into the picture. As per para
Impairment loss (1,000) (140.60) (1,140.60)
19 of AS 14, goodwill shall amortise over a period not exceeding five years unless a somewhat
Revised carrying amount after impairment loss 0 3,459.40 3,459.40 longer period can be justified. Therefore, the amortization period of goodwill is considered as 5
years.
Working Note:
Calculation of Recoverable Amount Carrying amount of the assets at the end of 2016 (Amount in ₹ lakhs)
Recoverable amount = Higher of Asset’s Net Selling Price or Value in Use End of 2016 Goodwill Identifiable Total
Where, Asset’s net selling price is not determinable assets
Recoverable Amount of the asset will be equal to the Value in use ie. ₹ 3,459.40 lakh. Carrying amount in 2016 0 2,225 2,22
5
Question 8
Add: Reversal of impairment loss (W.N.2) - 175 175
Himalaya Ltd. which is in a business of manufacturing and export of its product. Sometimes, back in
2014, the Government put restriction on export of goods exported by Himalaya Ltd. and due to that
Carrying amount after reversal of impairment loss - 2,400 2,40

0 CA CS CMA Mentoring Program Reviews
Working Note:
Calculation of depreciation after impairment till 2016 and reversal of impairment loss in 2016
(Amount in ₹ lakhs)
Goodwill Identifiable Total
assets
Carrying amount after impairment loss in 2014 0 2,720 2,720
Additional depreciation (i.e. (2,720/11) x 2) – (495) (495)

Carrying amount 0 2,225 2,225
Recoverable amount 3,420
Excess of recoverable amount over carrying 1,195

amount
Note: It is assumed that the restriction by the Government has been lifted atthe end of the year 2016.
Determination of the amount to be impaired by calculating depreciated historical cost of the
identifiable assets without impairment at the end of 2016
(Amount in ₹ lakhs)
End of 2016 Identifiable assets

Historical cost 4,000
Accumulated depreciation (266.67 x 6 years) = (1,600)
Depreciated historical cost 2,400
Carrying amount (in W.N. 1) 2,225
Amount of reversal of impairment loss 175
Notes:
1. As per para 107 of AS 28, in allocating a reversal of an impairment loss for a cash-generating
unit, the carrying amount of an asset should not be increased above the lower of:
(a) its recoverable amount (if determinable); and
(b) the carrying amount that would have been determined (net of amor-
tisation or depreciation) had no impairment loss been recognized for
the asset in prior accounting periods.
Hence impairment loss reversal is restricted to Rs. 175 lakhs only.
2. The reversal of impairment loss took place in the 6th year. However, goodwill is amortised in 5
years. Therefore, there would be no balance in the goodwill account in the 6th year even with-
out impairment loss. Hence in W.N. 2 above there is no column for recalculation of goodwill.
Question 9
If there is indication that an asset may be impaired but the recoverable amount of the asset ismore Visit CAmentoringprogram.org or +917890770777
than the carrying amount of the asset, the following are true: o. Goodwill written off can be reversed only if certain conditions are met.
a. No further action is required and the company can continue the asset in p. Goodwill written off can be reversed.
the books at the book value itself.
Ans: (c)
b. The entity should review the remaining useful life, scrap value and method
of depreciation and amortization for the purposes of AS 10. Theoretical Questions Answers
c. The entity can follow either (a) or (b). Questions 13

d. The entity should review the scrap value and method of depreciation and
amortization for the purposes of AS 10. Write short note on impairment of asset and its application to inventory.
Ans: (b) Answers 13

The objective of AS 28 ‘Impairment of Assets’ is to prescribe the procedures that an enterprise applies
Question 10
to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at
In case Goodwill appears in the Balance Sheet of an entity, the following is true: more than its recoverable amount if its carrying amount exceeds the amount to be recovered through
use or sale of the asset. If this is the case, the asset is described as impaired and this Standard requires
e. Apply Bottom up test if goodwill cannot be allocated to CGU (cash generating unit) under the enterprise to recognize an impairment loss.
review.
If carrying amount < = Recoverable amount: Asset is not impaired
f. Apply Top down test if goodwill cannot be allocated to CGU (cash generating unit) under
review.
If carrying amount > Recoverable amount : Asset is impaired Impairment Loss = Carrying
g. Apply both Bottom up test and Top down test if goodwill cannot be Amount – Recoverable Amount Recoverable amount is the higher of net selling price and its
allocated to CGU (cash generating unit) under review. value in use
h. Apply either Bottom up test or Top down test if goodwill cannot be al- This standard should be applied in accounting for the impairment of all assets, other than (i) invento-
located to CGU (cash generating unit) under review. ries (AS 2, Valuation of Inventories); (ii) assets arising from construction contracts (AS 7, Accounting for
Construction Contracts); (iii) financial assets, including investments that are included in the scope of
Ans: (c) AS 13, Accounting for Investments; and (iv) deferred tax assets (AS 22, Accounting for Taxes on Income).
AS 28 does not apply to inventories, assets arising from construction contracts, deferred tax assets or
Question 11 investments because other accounting standards applicable to these assets already contain specific
requirements for recognizing and measuring the impairment related to these assets.
In case of Corporate assets in the Balance Sheet of an entity, the following is true:
i. Apply Bottom up test if corporate assets cannot be allocated to CGU (cash Practical Questions Answers
generating unit) under review.
Question 14
j. Apply Top down test if corporate assets cannot be allocated to CGU (cash
generating unit) under review.
A publisher owns 150 magazine titles of which 70 were purchased and 80 were self-created. The price
k. Apply both Bottom up test and Top down test if corporate assets cannot be paid for a purchased magazine title is recognized as an intangible asset. The costs of creating mag-
allocated to CGU (cash generating unit) under review. azine titles and maintaining the existing titles are recognized as an expense when incurred. Cash
inflows from direct sales and advertising are identifiable for each magazine title. Titles are managed
l. Apply either Bottom up test or Top down test if corporate assets cannot be
by customer segments. The level of advertising income for a magazine title depends on the range
allocated to CGU (cash generating unit) under review.
of titles in the customer segment to which the magazine title relates. Management has a policy to
abandon old titles before the end of their economic lives and replace them immediately with new
Ans: (c)
titles for the same customer segment. What is the cash-generating unit for an individual magazine
title?
Question 12
Answer 14
In case of reversal of impairment loss, which statement is true:
It is likely that the recoverable amount of an individual magazine title can be assessed. Even though the
m. Goodwill written off can never be reversed. level of advertising income for a title is influenced, to a certain extent, by the other titles in the customer
n. Goodwill written off can be reversed without any conditions to be met. segment, cash inflows from direct sales and advertising are identifiable for each title. In addition, al-
thoughtitles are managed by customer segments, decisions to abandon titles are made on an individ-
ual title basis. To Provision for AccumulatedImpairment Loss Account 100

Therefore, it is likely that individual magazine titles generate cash inflows that are largely independent of
each other and that each magazine title is a separate cash-generating unit. (Being theentry for accounting impairment loss)
(ii) Profit and loss account Dr. 100
Question 15
To Impairment loss 100
An asset does not meet the requirements of environment laws which have been recently enacted. The
(Being the entry to transfer impairment loss to
asset has to be destroyed as per the law. The asset is carried in the Balance Sheet at the year end at ₹
profitand loss account)
6,00,000. The estimated cost of destroying the asset is ₹ 70,000. How is the asset to be accounted for?
Balance Sheet of Venus Ltd. as on 31.3.20X1
Answer 15
( ₹ in lakhs)
As per AS 28 “Impairment of Assets”, impairment loss is the amount by which the carrying amount of an
asset exceeds its recoverable amount, where recoverable amount is the higher of an asset’s net selling Fixed Asset
price* andits value in use·. In the given case, recoverable amount will be nil [higher of value in use(nil) Asset less depreciation 500
and net selling price (negative ₹ 70,000)]. Thus impairmentloss will be calculated as ₹ 6,00,000 [carrying
amount (₹ 6,00,000) – recoverable amount (nil)]. Therefore, asset is to be fully impaired and impairment
loss of ₹ 6,00,000 has to be recognized as an expense immediately in the statement of Profit and Loss as 400
per para 58 of AS 28.
Further, as per para 60 of AS 28, When the amount estimated for an impairment loss is greater than the Question 17
carrying amount of the asset to which it relates, an enterprise should recognise a liability if, and only if, that
is required by another Accounting Standard. Hence, the entity should recognize liability for cost of disposal Good Drugs and Pharmaceuticals Ltd. acquired a sachet filling machine on 1st April, 20X1 for ₹ 60
of ₹ 70,000 as per AS 10 & 29. lakhs. The machine was expected to have a productive life of 6 years. At the end of financial year
20X1-20X2 the carrying amount was ₹ 41 lakhs. A short circuit occurred in this financial year but luck-
ily the machine did not get badly damaged and was still in working order at the close of the financial
Question 16
year. The machine was expected to fetch ₹ 36 lakhs, if sold in the market. The machine by itself is not
capable of generating cash flows. However, the smallest group of assets comprising of this machine
Venus Ltd. has a fixed asset, which is carried in the Balance Sheet on 31.3.20X1 at ₹ 500 lakhs. As at that
also, is capable of generating cash flows of ₹ 54 crore per annum and has a carrying amount of ₹
date the value in use is ₹ 400 lakhs and the net selling price is ₹ 375 lakhs.
3.46 crore. All such machines put together could fetch a sum of ₹ 4.44 crore if disposed. Discuss the
From the above data: applicability of Impairment loss.
(i) Calculate impairment loss.
Answer 17
(ii) Prepare journal entries for adjustment of impairment loss.
As per provisions of AS 28 “Impairment of Assets”, impairment loss is not to be recognized for a given
(iii) Show, how impairment loss will be shown in the Balance Sheet. asset if its cash generating unit (CGU) is not impaired. In the given question, the related cash generating
unit which is group of asset to which the damaged machine belongs is not impaired; and the recover-
Answer 16 able amount is more than the carrying amount of group of assets. Hence there is no need to provide for
(ii) Recoverable amount is higher of value in use ₹ 400 lakhs and net selling price ₹ 375 lakhs. impairment loss on the damaged sachet filling machine.
Recoverable amount = ₹ 400 lakhs

Question 18
Impairment loss = Carried Amount – Recoverable amount
= ₹ 500 lakhs – ₹ 400 lakhs = ₹ 100 lakhs. From the following details of an asset
(iii) Journal Entries (i) Find out impairment loss
Dr. Cr. (ii) Treatment of impairment loss

Particulars Amount Amount (iii) Current year depreciationParticulars of asset:
( ₹ in lakhs) ( ₹ in lakhs)
(i) Impairment loss account Dr. 100
Answer 18
According to AS 28 “Impairment of Assets”, an impairment loss on a revalued asset is recognised as an In the given case, recoverable amount (higher of asset’s net selling price and value in use) will be ₹
expense in the statement of profit and loss. However, an impairment loss on a revalued asset is recognised 24.5
directly against any revaluation surplus for the asset to the extent that the impairment loss does not exceed lakhs on 31.3.20X2 according to the provisions of AS 28 [Refer working note].
the amount held in the revaluation surplus for that same asset.
(₹ in lakhs)
Impairment Loss and its treatment ₹
(i) Carrying amount of plant (after impairment) as on 31st 24.50
Current carrying amount (including revaluation amount of ₹ 14 lakhs) 27,30,000
March, 20X2
Less: Current recoverable amount (12,00,000)
(ii) Amount of write off (impairment loss) for the financial year 35.50
Impairment Loss 15,30,000
ended 31st March, 20X2 [₹ 60 lakhs – ₹ 24.5 lakhs]
Impairment loss charged to revaluation reserve 14,00,000
(iii) If the plant had been revalued ten years ago
Impairment loss charged to profit and loss account 1,30,000
Debit to revaluation reserve 12.00
After the recognition of an impairment loss, the depreciation (amortization) charge for the asset should
Amount charged to profit and loss account 23.50
beadjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any),
ona systematic basis over its remaining useful life. (₹ 35.50 lakhs – ₹ 12 lakhs)
In the given case, the carrying amount of the asset will be reduced to ₹ 12,00,000 after impairment. This (iv) If Value in use is zero
amount is required to be depreciated over remaining useful life of 3 years (including current year). There- Value in use (a) Nil
fore, the depreciation for the current year will be ₹ 4,00,000.
Net selling price (b) (-)2.00
Question 19 Recoverable amount [higher of (a) and (b)] Nil

Carrying amount (closing book value) Nil
A plant was acquired 15 years ago at a cost of ₹ 5 crores. Its accumulated depreciation as at 31st March,
20X1 was ₹ 4.15 crores. Depreciation estimated for the financial year 20X1-20X2 is ₹ 25 lakhs. Estimated Amount of write off (impairment loss) (₹ 60 lakhs – Nil) 60.00
Net Selling Price as on 31st March, 20X1 was ₹ 30 lakhs, which is expected to decline by 20 per cent by the Entire book value of plant will be written off and
end of the next financial year.
charged to profit and loss account.
Its value in use has been computed at ₹ 35 lakhs as on 1st April, 20X1, which is expected to decrease by
30 per cent by the end of the financial year.
Working Note:
(i) Assuming that other conditions for applicability of the impairment Accounting Calculation of Closing Book Value, Estimated Net Selling Value andEstimated Value in Use of Plant at
Standard are satisfied, what should be the carrying amount of this plant as at 31st March, 20X2
31st March, 20X2?
(ii) How much will be the amount of write off for the financial year ended 31st March, 20X2? (₹ in lakhs)
(iii) If the plant had been revalued ten years ago and the current revaluation re- Opening book value as on 1.4.20X1 (₹ 500 lakhs – ₹ 415 lakhs) 85
serves against this plant were to be ₹ 12 lakhs, how would you answer to ques- Less: Depreciation for financial year 20X1–20X2 (25)
tions (i) and (ii) above?
Closing book value as on 31.3.20X2 60
If the value in use was zero and the enterprise were required to incur a cost of ₹ 2 lakhs to dispose of the
plant, what would be your response to questions (i) and (ii) above? Estimated net selling price as on 1.4.20X1 30
Less: Estimated decrease during the year (20% of ₹ 30 lakhs) (6)
Answer 19
Estimated net selling price as on 31.3.20X2 24
As per AS 28 “Impairment of Assets”, if the recoverable amount of an asset is less than its carrying amount,
Estimated value in use as on 1.4.20X1 35.0
the carrying amount of the asset should be reduced to its recoverable amount and that reduction is an
impairment loss. An impairment loss on a revalued asset is recognized as an expense in the statement of Less: Estimated decrease during the year (30% of ₹ 35 lakhs) (10.5)
profit and loss. However, an impairment loss on a revalued asset is recognised directly against any reval-
Estimated value in use as on 31.3.20X2 24.5
uation surplus for the asset to the extent that the impairment loss does not exceed the amount held in the
revaluation surplus for that same asset.
Question 20 (Illustration) Depreciation for 3 years = [(40,000-1000) 3/8] = ₹ 14,625 lakhs

Carrying amount on 31-12-20X1 = [40,000-14,625] = ₹ 25,375 lakhs
Ergo Industries Ltd. gives the following estimates of cash flows relating to Property, Plant and Equipment
on 31-12-20X1. The discount rate is 15%.
(a) Value in use = ₹ 19,025 lakhs
(b) Recoverable amount = higher of value in use and net selling price i.e. ₹ 20,000 lakhs.
Year Cash Flow (₹ in lakhs)
Recoverable amount = ₹ 20,000 lakhs
20X2 4000
(d) Impairment Loss = ₹ (25,375-20,000) = ₹ 5,375 lakhs
20X3 6000 (e) Revised carrying amount = ₹ (25,375-5,375) = ₹ 20,000 lakhs

20X4 6000 (f) Depreciation charge for 20X2 = (20,000-1000)/5 = ₹ 3,800 lakhs
20X5 8000
20X6 4000
Residual value at the end of 20X6 = ₹ 1000 lakhs
Property, Plant and Equipment purchased on 1-1-20XX = ₹ 40,000 lakhs X Ltd. is having a plant (asset) carrying amount of which is ₹ 100 lakhs on 31.3.20X1. Its balance
useful life is 5 years and residual value at the end of 5 years is ₹ 5 lakhs. Estimated future cash
Useful life = 8 years flow from using the plant in next 5 years are:
Net selling price on 31-12-20X1 = ₹ 20,000 lakhs For the year ended on Estimated cash flow (₹ in lakhs)
31.3.20X2 50
Calculate on 31-12-20X1:Carrying amount at the end of 20X1
31.3.20X3 30
(a) Value in use on 31-12-20X1 31.3.20X4 30
(b) Recoverable amount on 31-12-20X1 31.3.20X5 20
(c) Impairment loss to be recognized for the year ended 31-12-20X1 31.3.20X6 20
(d) Revised carrying amount Calculate “value in use” for plant if the discount rate is 10% and also calculate the recoverable amount if
net selling price of plant on 31.3.20X1 is ₹ 60 lakhs.
Depreciation charge for 20X2.
Answer 21
Note: The year 20XX is the immediate preceding year before the year 20X0.
Present value of future cash flow
Answer 20 Year Future Discount @ 10% Rate Discounted cash
Calculation of value in use ended Cash Flow flow
Year Cash Flow Discount as per 15% Discounted cash flow 31.3.20X2 50 0.909 45.45
20X2 4,000 0.870 3,480 31.3.20X3 30 0.826 24.78
20X3 6,000 0.756 4,536 31.3.20X4 30 0.751 22.53
20X4 6,000 0.658 3,948 31.3.20X5 20 0.683 13.66
20X5 8,000 0.572 4,576 31.3.20X6 20 0.620 12.40
20X6 4,000 0.497 1,988 118.82
20X6 (residual) 1,000 0.497 497 Present value of residual price on 31.3.20X6 = 5 0.620 3.10
19,025 Present value of estimated cash flow by use of an asset and

residual value, which is called “value in use”. 121.92
If net selling price of plant on 31.3.20X1 is ₹ 60 lakhs, the recoverable amount will be higher of ₹
Calculation of carrying amount:
121.92 lakhs (value in use) and ₹ 60 lakhs (net selling price), hence recoverable amount is ₹ 121.92
Original cost = ₹ 40,000 lakhs lakhs.
Question 22 (Illustration) Question 23 (Illustration)
G Ltd., acquired a machine on 1st April, 20X0 for ₹ 7 crore that had an estimated useful life of 7 years. The X Ltd. purchased a Property, Plant and Equipment four years ago for ₹ 150 lakhs and depreciates itat
machine is depreciated on straight line basis and does not carry any residual value. On 1st April, 20X4, 10% p.a. on straight line method. At the end of the fourth year, it has revalued the asset at ₹ 75 lakhs
the carrying value of the machine was reassessed at ₹ 5.10 crore and the surplus arising out of the re- and has written off the loss on revaluation to the profit and loss account. However, on the date of re-
valuation being credited to revaluation reserve. For the year ended March, 20X6, conditions indicating valuation, the market price is ₹ 67.50 lakhs and expected disposal costs are ₹ 3 lakhs. What will be the
an impairment of the machine existed and the amount recoverable ascertained to be only ₹ 79 lakhs. treatmentin respect of impairment loss on the basis that fair value for revaluation purpose isdeter-
You are required to calculate the loss on impairment of the machine and show how this loss is to be mined by market value and the value in use is estimated at ₹ 60 lakhs?
treated in the books of G Ltd. G Ltd., had followed the policy of writing down the revaluation surplus by
the increased charge of depreciation resulting from the revaluation. Answer 23
Treatment of Impairment Loss
Answer 22
Statement Showing Impairment Loss As per para 57 of AS 28 “Impairment of assets”, if the recoverable amount (higher ofnet selling priceand
its value in use) of an asset is less than its carrying amount, the carrying amount of the asset should be
(₹in crores) reduced to its recoverable amount. In the given case, net selling price is ₹ 64.50 lakhs (₹
Carrying amount of the machine as on 1 April, 20X0 st

7.00 67.50 lakhs – ₹ 3 lakhs) and value in use is ₹ 60 lakhs. Therefore, recoverable amountwill be ₹ 64.50 lakhs.
Impairment loss will be calculated as ₹ 10.50 lakhs [₹ 75 lakhs (Carrying Amount after revaluation - Re-
Depreciation for 4 years i.e. 20X0-20X1 to 20X3-20X fer Working Note) less ₹ 64.50 lakhs (Recoverable Amount)].
(4.00) Thus impairment loss of ₹ 10.50 lakhs should be recognised as an expense in the Statement of Profitand
Loss immediately since there was downward revaluation of asset which was already charged to State-
ment of Profit and Loss.
Carrying amount as on 31.03.20X4 3.00 Working Note:
Add: Upward Revaluation (credited to Revaluation Reserveaccount) 2.10 Calculation of carrying amount of the Property, Plant and Equipment at the end of the fourth year
onrevaluation
Carrying amount of the machine as on 1st April, 20X4 (revalued) 5.10 (₹ in lakhs)
Less: Depreciation for 2 years i.e. 20X4-20X5& 20X5-20X6 Purchase price of a Property, Plant and Equipment 150.00
(3.40) Less: Depreciation for four years [(150 lakhs / 10 years) x 4 years] (60.00)
Carrying value at the end of fourth year 90.00

Carrying amount as on 31.03.20X6 1.70 Less: Downward revaluation charged to profit and loss account (15.00)
Revalued carrying amount 75.00
Less: Recoverable amount (0.79)
Reference: The students are advised to refer the full text of AS 28 “Impairmentof Assets” (issued
Impairment loss 0.91
2002).
Less: Balance in revaluation reserve as on 31.03.20X6:
Balance in revaluation reserve as on 31.03.20X4 2.10
Less: Enhanced depreciation met from revaluation reserve
20X4-20X5 & 20X5-20X6=[(1.70 – 1.00) x 2 years] (1.40)
Impairment loss set off against revaluation reserve balance as per

para 58 of AS 28 “Impairment of Assets” (0.70)
Impairment Loss to be debited to profit and loss account 0.21

Employee Benefits Employee Benefits
Question 1
Coverage Kumar Ltd., is in engineering industry. The company received an actuarial valuation for the first
2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
time for its pension scheme which revealed a surplus of Rs. 6 lakhs. It wants to spread the same
Study over the next 2 years by reducing the annual contribution to Rs. 2 lakhs instead of Rs. 5 lakhs. The
Q.9 TO Q.26
Mat. average remaining life of the employee is estimated to be 6 years. You are required to advise the
Past NO NO NO NO NO NO NO NO NO NO NO NO company. (MTP May 20)
Exams
Answer 1
MTP NO Q.2 NO NO Q.1 NO NO NO NO NO NO NO
According to para 92 of AS 15 (Revised) “Employee Benefits”, actuarial gains and losses should be rec-
RTP Q.7 NO Q.6 Q.5 NO Q.4 NO NO NO NO NO NO
ognized immediately in the statement of profit and loss as income or expense. Therefore, surplus of
Rs. 6 lakhs in the pension scheme on its actuarial valuation is required to be credited to the profit
and loss statement of the current year. Hence, Kumar Ltd. cannot spread the actuarial gain of Rs. 6
lakhs over the next 2 years by reducing the annual contributions to Rs. 2 lakhs instead of Rs. 5 lakhs. It
has to contribute Rs. 5 lakhs annually for its pension schemes.
Question 2
A company has a scheme for payment of settlement allowance to retiring employees. Under the
scheme, retiring employees are entitled to reimbursement of certain travel expenses for class
theyare entitled to as per company rule and to a lump-sum payment to cover expenses on food and
stay during the travel. Alternatively, employees can claim a lump sum amount equal to one
month pay last drawn.
The company’s contentions in this matter are:
(i) Settlement allowance does not depend upon the length of service of employee. It
is restricted to employee’s eligibility under the Travel rule of the company or where
option for lump-sum payment is exercised, equal to the last pay drawn.
(ii) Since it is not related to the length of service of the employees, it is accounted for on
claim basis.
State whether the contentions of the company are correct as per relevant Account-
ing Standard. Give reasons in support of your answer. (MTP 5 Marks Aug 18 )
Answer 2
The present case falls under the category of defined benefit scheme under Para 49 of AS 15 “Employee
Benefits”. The said para encompasses cases where payment promised to be made to an employ-
ee at or near retirement presents significant difficulties in the determination of periodic charge to the
statement of profit and loss. The contention of the Company that the settlement allowance will be ac-
counted for on claim basis is not correct even if company’s obligation under the scheme is uncertain
and requires estimation. In estimating the obligation, assumptions may need to be made regarding
future conditions and events, which are largely outside the company’s control. Thus,
(1) Settlement allowance payable by the company is a defined retirement benefit, covered
by AS 15.
(2) A provision should be made every year in the accounts for the accruing liability on ac-
count of settlement allowance. The amount of provision should be calculated according Less: Unamortised past service cost (150.00 – (131.25)
to actuarial valuation. 18.75)
(3) Where, however, the amount of provision so determined is not material, the company Liability to be recognised in the balance sheet 243.75
can follow some other method of accounting for settlement allowances.
Question 4
Question 3
Luv limited is a private Limited company. As per HR policy of Luv Limited, Grade F employees are
Samvit Ltd. has three business segments which are FMCG, Batteries and Sports Equip- eligible for sabbatical leave (Long term compensated absences as per AS 15). Till previous year,
ment. The Battery segment has been consistently underperforming and Samvit Ltd. af- there were 15 employees who are eligible for Sabbatical leave and company had duly recorded the
ter several discussions with labour unions have finally decided on closure of this segment. liability for long term compensated absences based on the actuarial valuation for eligible em-
Under the agreement with the labour union, the employees of the Battery Segment will ployees. During the current period out of total 15 employees, 13 employees have left the organization
earn no further benefit as the arrangement is a curtailment without settlement wherein and only 2 employees are continuing in LUV Limited. Due to budget constraint, CFO has denied to
the employees of the discontinued segment will continue to receive benefits for services involve actuary and told finance manager to determine the liability based on the recent actuarial
rendered when the segment was functioning. As a result of the curtailment, the company’s report available with them. Finance manager ensured the following:
obligations that were arrived on the basis of actuarial valuations before the curtailment
have come down. The following information is also furnished: - There is no material change in interest rate
- There is no change in fair value of plan assets.
(i) The value of gross obligations before the curtailment calculated on actuarial basis was
Based on that, Finance manager have manually computed an amount of Rs. 5,00,000
Rs. 6,000 lakhs.
(considering last year actuarial report as base) towards long term compensation liability
(ii) The value of unamortized past service costs is Rs. 150 lakhs. without involving Actuary during the period ended 31.03.2020. Is this treatment is in line
(iii) The curtailment will bring down gross obligations by Rs. 750 lakhs and Samvit Ltd. with AS 15? (RTP Nov 20)
anticipates a proportional decline in the value of unamortized past service costs also.
(iv) The fair value of plan assets on date is estimated at Rs. 4,875 lakhs.
Answer 4
You are required to calculate the gain from curtailment and also show the li ability to As per para 58 of the AS 15, the detailed actuarial valuation of the present value of defined benefit ob-
be recognizedin the Balance Sheet of Samvit Ltd. after the curtailment. (Mar 17) (MTP) (5 ligations may be made at intervals not exceeding three years. However, with a view that the amounts
Marks) recognized in the financial statements do not differ materially from the amounts that would be
determined at the balance sheet date, the most recent valuation is reviewed at the balance sheet
date and updated to reflect any material transactions and other material changes in circumstances
Answer 3 (including changes in interest rates) between the date of valuation and the balance sheet date. The
Gain from curtailment fair value ofany plan assets is determined at each balance sheet.
Since AS-15 (Para 58) states that actuarial valuation needs to be done at least once in three years. Since
(Rs. in
management had done the actuarial valuation in Previous Year, they can go ahead with exemption
lakhs
for this year subject to evaluation and conclusion by management as at balance sheet date that
Reduction in gross obligation [(750/6,000) x 100] = 750.00 there are no significant changes in the amount of liability compared to previous year. Hence working
12.5% done by the finance manager is appropriate. It is in line with AS 15, since company had recently done the
actuarial valuation in previous year and there is no material changes in the external environment.
Less: Proportion of unamortised past service cost
(12.5% of Rs. 150) (18.75)
Question 5
Gain from curtailment 731.25
Synergy Ltd., is in engineering industry. The companyreceived an actuarial valuation for the
first time for its pension scheme which revealed a surplus of Rs. 6 lakhs. It wants to spread the
The liability to be recognised after curtailment in the balance sheet of Samvit Ltd. is estimated as under:
same over the next 2 years by reducing the annual contribution to Rs. 2 lakhs instead of Rs. 5 lakhs.
The average remaining life of the employee is estimated to be 6 years.You are required to advise the
Rs.
company. (RTP Nov 19)
Reduced gross obligation (Rs. 6,000 - Rs. 750) 5,250.00
Less: Fair value of plan assets (4,875.00) Answer 5
375.00 According to para 92 of AS 15 (Revised) “Employee Benefits”, actuarial gains and losses should be rec-
ognized immediatelyin the statement of profit and loss as income or expense. Therefore, surplus of
Rs. 6 lakhs in the pension scheme on its actuarial valuation is required to be credited to the profit and Question 7
loss statement of the current year. Hence, Synergy Ltd. cannot spread the actuarial gain of Rs. 6 lakhs
over the next 2 years by reducing the annual contributions to Rs. 2 lakhs instead of Rs. 5 lakhs. It has Neerav Ltd., is in engineering industry. The company received an actuarial valuation for the first
to contribute Rs. 5 lakhs annually for its pension schemes time for its pension scheme which revealed a surplus of ₹ 6 lakhs. It wants to spread the same over
the next 2 years by reducing the annual contribution to ₹ 2 lakhs instead of ₹ 5 lakhs. The average
remaining life of the employee is estimated to be 6 years. You are required to advise the company in
Question 6
accordance with AS 15. (RTP May 18)
Peter Ltd. discontinues a business segment. Under the agreement with employee₹s union, the employ-
ees of the discontinued segment will earn no further benefit. This is a curtailment without settlement, Answer 7
because employees will continue to receive benefits for services rendered before discontinuance of According to para 92 of AS 15 (Revised) “Employee Benefits”, actuarial gains and losses should be rec-
the business segment. Curtailment reduces the gross obligation for various reasons including change ognized immediately in the statement of profit and loss as income or expense. Therefore, surplus of
in actuarial assumptions made before curtailment. If the benefits are determined based on the last
pay drawn by employees, the gross obligation reduces after the curtailment because the last pay ear- ₹ 6 lakhs in the pension scheme on its actuarial valuation is required to be credited to the profit and
lier assumed is no longer valid. loss statement of the current year. Hence, Neerav Ltd. cannot spread the actuarial gain of ₹ 6 lakhs over
the next 2 years by reducing the annual contributions to ₹ 2 lakhs instead of ₹ 5 lakhs. It has to con-
Peter Ltd. estimates the share of unamortized service cost that relates to the part of the obligation
tribute ₹ 5 lakhs annually for its pension schemes.
at Rs. 18 (10% of Rs. 180). Calculate the gain from curtailment and liability after curtailment to be rec-
ognised in the balance sheet of Peter Ltd. on the basis of given information:
(a) Immediately before the curtailment, gross obligation is estimated at Rs. 6,000
Question 8
based on current actuarial assumption.
(b) The fair value of plan assets on the date is estimated at Rs. 5,100. A company has a scheme for payment of settlement allowance to retiring employees. Under the
scheme, retiring employees are entitled to reimbursement of certain travel expenses for the class
(c) The unamortized past service cost is Rs. 180.
they are entitled to as per company rule and to a lump-sum payment to cover expenses on food
(d) Curtailment reduces the obligation by Rs. 600, which is 10% of the gross obli- andstay during the travel. Alternatively, employees can claim a lump-sum amount equal to one
gation. ( RTP May 19)(New SM) month pay last drawn.
Answer 6 The company’s contentions in this matter are:
Gain from curtailment is estimated as under: (i) Settlement allowance does not depend upon the length of service of employees.
It is restricted to employee’s eligibility under the Travel rule of the company or
Rs. where option for lump-sum payment is exercised, equal to the last pay drawn.
Reduction in gross obligation 600 (ii) Since it is not related to the length of service of the employees, it should account
for liability on an actual “on claim” basis.
Less: Proportion of unamortised past service cost (18)
State whether the contentions of the company are correct as per relevant Accounting Standard. Give
Gain from curtaliment 582 reasons in support of your answer. (RTP May 17)
Answer 8
The present case falls under the category of defined benefit scheme under AS 15 “Employee Benefits”.
The liability to be recognised after curtailment in the balance sheet is estimated as under:
The said para encompasses cases where payment promised to be made to an employee at or near
retirement presents significant difficulties in the determination of periodic charge to the Statement of
Rs.
Profit and Loss. The contention of the Company that the settlement allowance will be accounted for ‘on
Reduced gross obligation (90% of Rs. 6,000) 5,400 claim basis’ is not correct even if company’s obligation under the scheme is uncertain and requiresesti-
Less: Fair value of plan assets (5,100) mation. In estimating the obligation, assumptions may need to be made regarding future conditions
and events, which are largely outside the company’s control.
300
Thus,
Less: Unamortised past service cost (90% of Rs. 180) (162)
(1) Settlement allowance payable by the company is a defined retirement benefit, covered
Liability to be recognised in the balance sheet 138 by AS 15.
(2) A provision should be made every year in the accounts for the accruing liability on
account of settlement allowance. The amount of provision should be calculated ac-
cording to actuarial valuation. (g) Cost to Company

(3) Where, however, the amount of provision so determined is not material, the company (h) Employee’s contribution
can follow some other method of accounting for settlement allowances.
Ans: (b)
Question 9
Gratuity and Pension would be examples of:( New SM)

Question 13
(a) Short-term employee benefits
Actuarial gains / losses should be: (New SM)
(b) Long-term employee benefits
(e) Recognized through reserves
(c) Post-employment benefits.
(f) Charged over the expected life of employees
(d) None of the above.
(g) Charged immediately to Profit and Loss Statement
Ans: (c)
(h) Do not charged to Profit and Loss Statement
Question 10 Ans: (c)

Non-accumulating compensating absence is commonly referred to as: (New SM)
Question 14
(a) Earned Leave
(b) Sick Leave What are the types of Employees benefits and what is the objective of Introduction of this Standard
i.e. AS 15? (New SM)
(c) Casual leave
(d) All of the above Answer 14
Ans: (c) There are four types of employee benefits according to AS 15 (Revised 2005). They are:
(a) short-term employee benefits, such as wages, salaries and social security contribu-
Question 11 tions (e.g., contribution to an insurance company byan employer to pay for medi-
cal care of its employees), paid annualleave, profit-sharing and bonuses (if payable
The plans that are established by legislation to cover all enterprises and are operated by Govern- within twelve months of the end of the period) and non-monetary benefits (such
ments include: (New SM) as medicalcare, housing, cars and free or subsidised goods or services) for current
employees;
(a) Multi-Employer (b) post-employment benefits such as gratuity, pension, other retirement benefits,
plans post-employment life insurance and post-employmentmedical care;
(b) State plans (c) other long-term employee benefits, including long-service leave or sabbatical leave,
(c) Insured Benefits jubilee or other long-service benefits, long-term disability benefits and, if they are
not payable wholly within twelve months after the end of the period, profit-sharing,
(d) Employee benefit bonuses and deferred compensation; and termination benefits.
plan
Because each category identified in (a) to (d) above has different characteristics,
Ans: (b) this Statement establishes separate requirements for each category.
The objective of AS 15 is to prescribe the accounting and disclosure for employee benefits.
Question 12 The statement requires an enterprise to recognise:
(a) a liability when an employee has provided service in exchange for employee bene-
Best estimates of the variable to determine the eventual cost of post- employment benefits is re-
fits to be paid in the future; and
ferred to as: (New SM)
(b) an expense when the enterprise consumes the economic benefit arising from
(e) Employer’s contribution
service provided by an employee in exchange foremployee benefits.
(f) Actuarial assumptions
Practical Questions Answers - Benefits paid 2,00,000
Question 15 - Employer contribution 2,80,000

- Fair market value of plan assets on 31.03.20X2 11,40,000
A company has a scheme for payment of settlement allowance to retiring employees. Under the
scheme, retiring employees are entitled to reimbursement of certain travel expenses for class they are - Fair market value of plan assets as on 31.03.20X1 8,00,000
entitled to as per company rule and to a lump-sum payment to cover expenses on food and stayduring
the travel. Alternatively, employees can claim a lump sum amount equal to one month pay last drawn. Answer 16
The company’s contentions in this matter are:
₹
(i) Settlement allowance does not depend upon the length of service of employee. It is re-
stricted to employee’s eligibility under the Travel rule of the company or where option for Fair value of plan assets on 31.3.20X1 8,00,000
lump-sum payment is exercised, equal to the last pay drawn. Since it is not related to the
Add: Employer contribution 2,80,000
length of service of the employees, it is accounted for on claim basis.
State whether the contentions of the company are correct as per relevant Accounting Standard. Give Less: Benefits paid (2,00,000)
reasons in support of your answer. (New SM) (A) 8,80,000
Answer 15 Fair market value of plan 11,40,000

assets at 31.3.20X2
The present case falls under the category of defined benefit scheme under Para 49 of AS 15 (Re- (B)
vised) “Employee Benefits”. The said para encompasses cases where payment promised to be
Actual return on plan assets(B-A) 2,60,000
made to an employee at or near retirement presents significant difficulties in the determination of
periodic charge to
Question 17
the statement of profit and loss. The contention of the Companythat the settlement al-
lowance will be accounted for on claim basis is not correct even if company’s obligation The fair value of plan assets of Anupam Ltd. was ₹ 2,00,000 in respect ofemployee benefit pension
under the scheme is uncertain and requires estimation. In estimating the obligation, as- plan as on 1st April, 20X1. On 30th September, 20X1 the plan paid out benefits of ₹ 25,000 and received
sumptions may need tobe made regarding futureconditions and events, which are large- inward contributions of ₹ 55,000. On 31st March, 20X2 the fair value of plan assets was
ly outside the company’s control. Thus,
₹ 3,00,000. On 1st April, 20X1 the company made the following estimates, based on its market studies
(1) Settlement allowance payable by the company is a defined retirement benefit, and prevailing prices.
covered by AS 15 (Revised).
(2) A provision should be made every year in the accounts for the accruing liability %
on accountof settlement allowance. The amount of provision should be calculat- Interest and dividend income (after tax) payable 10.25
ed according to actuarial valuation. by fund
(3) Where, however, the amount of provision so determined is not material, the com- Realized gains on plan assets (after tax) 3.00
pany can follow some other method of accountingfor settlement allowances.
Fund administrative costs (3.00)
Question 16 Expected rate of return 10.25
The following data apply to ‘X’ Ltd. defined benefit pension plan for the year ended 31.03.20X2
Calculate the expected and actual returns on plan assets as on 31st March,20X2, as per AS 15.
calculate the actual return on plan assets: (New SM)
(NewSM)
Answer 17
Computation of Expected Returns on Plan Assets as on 31st March, 20X2, asper AS 15
Return on opening value of plan assets of ₹ 20,500

2,00,000 (heldfor the year) @ 10.25%
(New SM)
Add: Return on net gain of ₹ 30,000 (i.e. ₹ 55,000 –
₹ 25,000) during the year i.e. held for six months @ 5% 1,500
Answer 19
(equivalent
Paragraph 3(c) of the Standard defines employee benefits to include those informal practices that give
to 10.25% annually, compounded every six months) rise to an obligation where the enterprise has no realistic alternative but to pay employee benefits.
Expected return on plan assets as on 31st March, 20X2 22,000 The historical pattern of granting such benefits, the expectation created and the impact on the
relationship with employees in the event such benefit is withdrawn should be considered in
Computation of Actual Returns on Plan Assets as on 31st March, 20X2, determiningwhether the informal practice gives rise to a benefit covered by the Standard. For
example, where an employer has a practice of making a lumpsum payment on occasion of a
as per AS 15
festival or regularly grants advances against informal benefits to employees it would be nec-
essary to provide for such benefits.
₹ ₹
Careful judgement should be applied in assessing whether an obligation has arisen partic-
Fair value of Plan Assets as on 31st March, 20X2 3,00,000
ularly in instances where an enterprise’s practice is to provide improvements only during the
Less: Fair value of Plan as on Assets 1st April, (2,00,000) collective bargaining process and not during any informal process. If the employer has not set
20X1 a pattern of benefits that can be projected reliably to give rise to an obligation there is no
requirement to providefor the benefits.
Add: Contribution received as on 30th Sep- 55,000 (2,55,000)
tember, 20X1 However, if the practice established by an employer was that of a consistent benefit granted
either as part of union negotiations or otherwise that clearly established a pattern (e.g., a cost
of living adjustment or fixed rupee increase), it could be concluded that an obligation exists
45,000 and that those additional benefits should be included in the measurement of the benefit ob-
ligation.
Add: Benefits paid as on 30th September, 20X1 25,000
Employee benefits include:
Actual returns on Plan as on Assets 70,000
(a) Short-term employee benefits (e.g., wages, salaries, paid annual leave and sick
as on 31st March, 20X2 leave, profit sharing bonuses etc. (payable within 12 months of the year-end) and
non-monetary benefits for current employees.
(b) Post-employment benefits (e.g., gratuity, pension, provident fund, post- employ-
ment medical care etc.).
(c) long-term employee benefits (e.g., long-service leave, long-term disability bene-
What are the kinds of employees covered in the revised AS 15 and whether a formal employer employee fits, bonuses not wholly payable within 12 months of the year end etc.), and
relationship is necessary or not, for benefits to be covered under the Standard? (New SM)
(d) termination benefits (e.g. VRS payments)
Answer 18 The Standard lays down recognition and measurement criteria and dis-
closure requirements for the above four types of employee benefits sep-
The Standard does not define the term “employee”. Paragraph 6 of the Standard states that ‘an em-
arately.
ployee may provide services to an enterprise on a full time, part time, permanent, casual or tem-
porary basis and the term would also include the whole-time directors and other management
personnel. The Standardis applicable to all forms of employer employee relationships. There is Question 20 (Illustration)
no requirement for a formal employer employee relationship. Several factors need tobe consid-
Entity XY is required to pay salary of ₹ 2 crore for the year 20X1-X2. It actually paid a salary of ₹ 1.90
ered to determine the nature of a relationship.
crore up to 31st March 20X2, and balance in April 20X2. Determine the actual costs to be recognized in
Generally, ‘outsourcing contracts’ may not meet the definition of employer - employee relation- the year 20X1-X2 and any amounts to be shown through balance sheet. (New SM)
ship. However, such contracts need to be carefully examined to distinguish between a “contract of
service” and a “contract for services”. A ‘contract for services’ implies a contract for rendering Answer 20
services, e.g., professional, or technical services which is subject to limited direction and control
whereas a ‘contract of service’ implies a relationship of an employer and employee, and the Total expense for the year (20X1-X2) ₹2 crore
person is obliged to obey orders in the work to be performed and as to its mode and manner of Amount to be shown under liability (unpaid) ₹ 2 crore – 1.90 ₹crore
performance.
= ₹10 lakhs
Question19 (Illustration)
Whether an enterprise is required to provide for employee benefits arising from informal practices?
Question 21 (Illustration) carried forward, whether it is required to recognise a provision in respect of carried forward benefits.
(New SM)
Whether an entitlement to earned leave which can be carried forward to future periods is a short -term
employee benefit or a long-term employee benefit. (New SM) Answer 22
Answer 21 A provision should be recognised for all benefits (conditional or unconditional) which an employee
becomes entitled to as a result of rendering of the service and should be recorded as part of the
Paragraph 7.2 of the Standard defines ‘Short-term’ benefits as employee benefits (other than ter- cost of service rendered during the period in which the service was rendered which resulted the
mination benefits) which fall due wholly within twelve months afterthe end of the period in which the entitlement. In estimating thecost of such benefit the probability of the employee availing such
employees render the related service. Paragraph 8(b) of the Standard illustrates the term ‘Short benefit shouldbe considered.
-term benefits’ to include “short term compensated absences (such as paid annual leave) where the
absences are expected to occur within twelve months after the end of the periodin which the employees Question 23 (Illustration)
render the related employee service”.
Omega Limited belongs to the engineering industry. The company received an actuarial valuation
Paragraph 7.2 of the Standard uses “falls due” as the basis, paragraph 8(b) of the Standard uses “expect- for the first time for its pension scheme which revealed a surplus of ₹ 6 lakhs. It wants to spread the
ed to occur” as the basis to illustrate classification of short term compensated absences. A reading same over the next 2 years by reducing the annual contribution to ₹ 2 lakhs instead of ₹ 5 lakhs.
of paragraph 8(b) together with paragraph 7.2 would imply that the classification of short -term The average remaining life of the employees is estimated to be 6 years. You are required to ad-
compensated absences should be only when absences have “fallen due” and are also “expectedto vise the company on the following items from the viewpoint of finalization of accounts, taking
occur”. In other words, where employees are entitled to earned leave which can be carried forward to note of the mandatory accounting standards. (New SM)
encash or utilise the benefit duringthe twelve months after the end of the period when the employee
Answer 23
became entitled to the leave and is also expected to utilise the leave.
According to AS 15 (Revised 2005) ‘Employee Benefits’, actuarial gains and losses
Where there are restrictions on encashment and/or availment, clearly the compensated absence has
should be recognized
not fallen due and the benefit of compensated absences is more likely to be a long-term benefit. For
example, where an employee has 100 days of earned leave which he is entitled to an unlimited carry immediately in the statement of profit and loss as incomeor expense. Therefore,
forward, but the rules of the enterprise allow him to encash/utilise only 30 days during the next twelve surplus amount of
months, the benefit would be considered as a ‘long-term’ benefit. In some situations, where there is no
₹ 6 lakhs is required to be credited tothe profit and loss statement of the current year.
restriction but the absence is not expected to wholly occur in the next twelve months, the benefit should
be considered as ‘long-term’. For example, where an employee has 400 days carry forward earned leave
and the past pattern indicates that the employees are unlikely to avail / encash the entire carry for- Question 24 (Illustration)
ward during the next twelve months, the benefit would not be ‘short-term’.
As on 1st April, 20X1 the fair value of plan assets was ₹ 1,00,000 in respect of a pension plan of Zeleous
Whilst it is necessary to consider the earned leave which “falls due”, the pattern of actual utilisation/ Ltd. On 30th September, 20X1 the plan paid out benefits of ₹ 19,000 and received inward contributions
encashment by employees, although reflective of the behavioural pattern of employees, does de- of ₹ 49,000. On 31st March, 20X2 the fair value of plan assets was₹ 1,50,000 and present value of the
termine the status of the benefit, i.e., whether ‘short-term’ or ‘long-term’. The value of short- term defined benefit obligation was ₹ 1,47,920. Actuarial losses on the obligations for the year 20X1- 20X2
benefits should bedetermined without discounting and if the benefit is determined as long-term, it were ₹ 600.
would be recognised and measured as “Other long-term benefits” in accordancewith paragraph 129 of
On 1st April, 20X1, the company made the following estimates, based on its market studies, under-
the Standard.
standing and prevailing prices.
The categorisation in ‘short-term’ or ‘long-term’ employee benefits should be done on the basis of the
overall behavioural pattern of all the employees of the enterprise and not on individual basis. Interest & dividend income, after tax payable by the 9.25
fund
Realised and unrealised gains on plan assets (after tax) 2.00
Fund administrative costs (1.00)
Expected Rate of Return 10.25
You are required to find the expected and actual returns on plan assets.(New SM)
Answer 24
Question 22 (Illustration) Computation of Expected and Actual Returns on Plan Assets
In case an enterprise allows unutilised employee benefits, e.g., medical care, leave travel, etc., to be
₹ Reduction in gross obligation 600
Return on ₹ 1,00,000 held for 12 months at 10.25% 10,250 Less: Proportion of unamortised past service cost (18)
Return on ₹ 30,000 (49,000-19,000) held for six months at 5% Gain from curtailment 582
(equivalent to 10.25% annually, compounded every six months)
1,500
The liability to be recognised after curtailment in the balance sheet is estimatedas under:
Expected return on plan assets for 20X1-20X2 11,750
₹
Fair value of plan assets as on 31 March, 20X2 1,50,000
Reduced gross obligation (90% of ₹ 6,000) 5,400
Less: Fair value of plan assets as on 1 April,20X1
Less: Fair value of plan assets (5,100)
1,00,000
Contributions received 49,000 (1,49,000) 300
Less: Unamortised past service cost (90% of ₹ 180) (162)
1,000 Liability to be recognised in the balance sheet 138
Add: Benefits paid 19,000
Actual return on plan assets 20,000

Alternatively, the above question may be solved without giving compound effectto rate
of return. An employee Roshan has joined a company XYZ Ltd. in the year 20X1. The annual emoluments of Ro-
shan as decided is ₹ 14,90,210. The company also has a policy of giving a lump sum payment of
25% of thelast drawn annual salary of the employee for each completed year of service if the
employee retires after completing minimum 5 years of service. The salary of the Roshan is ex-
pected to grow @ 10% per annum.
Rock Star Ltd. discontinues a business segment. Under the agreement with employee’s union, the
employees of the discontinued segment will earn no further benefit. This is a curtailment with- The company has inducted Roshan in the beginning of the year and it is expected that he will com-
out settlement, because employees will continue to receive benefits for services rendered before pletethe minimum five year term before retiring. Thus he will get5 yearly increment.
discontinuance of the business segment. Curtailment reduces the gross obligation for various What is the amount the company should charge in its Profit and Loss account every year as cost
reasonsincluding change in actuarial assumptions made before curtailment. If the benefits are deter- for the Defined Benefit obligation? Also calculate the current service cost and the interest cost to be
mined based on the last pay drawn by employees, the gross obligation reduces after the curtailment charged per year assuming a discount rate of 8%. (P.V factor for 8% - 0.735, 0.794, 0.857, 0.926,
because the last pay earlier assumed is no longer valid. 1) (New SM)
Rock Star Ltd. estimates the share of unamortized service cost that relates to the part of the obliga-
tion at ₹ 18 (10% of ₹ 180). Calculate the gain from curtailment and liability after curtailment to be rec- Answer 26
ognised inthe balance sheet of Rock Star Ltd. on the basis of given information:
Calculation of Defined Benefit Obligation (DBO)
(a) Immediately before the curtailment, gross obligation is estimated at ₹ 6,000 Expected last drawn salary = ₹14,90,210 x 110% x 110% x 110% x 110% x 110%
based on currentactuarial assumption.
= ₹24,00,000
(b) The fair value of plan assets on the date is estimated at ₹ 5,100.
Defined Benefit Obligation (DBO) = ₹ 24,00,000 x 25% x 5 = ₹ 30,00,000
(c) The unamortized past service cost is ₹ 180.
Amount of ₹ 6,00,000 will be charged to Profit and Loss Account of the
(d) Curtailment reduces the obligation by ₹ 600, which is 10% of the gross obligation. companyevery year as cost for Defined Benefit Obligation.
(New SM)
Calculation of Current Service Cost
Year Equal apportioned amount of DBO [i.e. ₹ Discounting @8% PV Current service cost
Answer 25 30,00,000/5 years] factor
(Present Value)
Gain from curtailment is estimated as under: a b c d=bxc
1 6,00,000 0.735 (4 Years) 4,41,000
2 6,00,000 0.794 (3 Years) 4,76,400 Chapter 6.2

3 6,00,000 0.857 (2 Years) 5,14,200
AS 29- Provisions, Contingent Liabilities & Contingent Assets
4 6,00,000 0.926 (1 Year) 5,55,600
5 6,00,000 1 (0 Year) 6,00,000
Calculation of Interest Cost to be charged per year Attempts MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
Year Openingbal- Interestcost Currentser- Closing balance
ance vice cost Study Mat. Q.20 TO Q.28
a b c = b x 8% d e=b+c+d Past Q.5

NO NO NO Q.8 NO NO Q.18 Q.16 Q.17 NO NO
Exams Q.15
1 0 0 4,41,000 4,41,000
Q.6
2 4,41,000 35,280 4,76,400 9,52,680 Q.1 Q.4 Q.1 Q.4 Q.7 Q.1
MTP Q.2 Q.2 Q.1 NO NO Q.18
Q.3 Q.5 Q.6 Q.7 Q.8 Q.6
3 9,52,680 76,214 5,14,200 15,43,094 Q.19
Q.5 Q.2
4 15,43,094 1,23,447 5,55,600 22,22,141 RTP NO NO NO Q.7 Q.10 Q.9 Q.13 Q.14 Q.8 Q.19
Q.12 Q.11
5 22,22,141 1,77,859* 6,00,000 30,00,000
*Due to approximations used in calculation, this figure is adjusted accordingly.
Question 3
Chapter 6.2
S Ltd. (a Public Sector Company) provides consultancy and engineering services to its clients. In the
AS 29- Provisions, Contingent Liabilities & Contingent Assets year 2016-17, the Government has set up a commission to decide about the pay revision. The pay will
be revised with respect from 1-1-2012 based on the recommendations of the commission. The com-
Question 1 pany makes the provision of Rs. 680 lakhs for pay revision in the financial year 2016-17 on the esti-
mated basis as the report of the commission is yet to come. As per the contracts with the client on
An airline is required by law to overhaul its aircraft once in every five years. The pacific Airlines which cost plus job, the billing is done on the actual payment made to the employees and allocated to jobs
operate aircrafts does not provide any provision as required by law in its final accounts. You are re- based on hours booked by this employee s on each job.
quired to comment on the validity of the treatment done by the company in line with the provisions of
The company discloses through notes to accounts:
AS 29. (MTP 5 Marks- Oct’19, Aug’18, Nov’21 & April ‘23)
“Salaries and benefits include the provision of Rs. 680 lakhs in respect of pay revision. The amount
Answer 1 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/recognise the income by Rs. 680
A provision should be recognized only when an enterprise has a present obligation arising from a past lakhs in Profit and Loss Account as per the terms of the contract. Otherwise, it will be the violation of
event or obligation. In the given case, there is no present obligation but a future one, therefore no provision matching concept & understatement of profit. Comment on the opinion of the Accountant with ref-
is recognized as per AS 29. The cost of overhauling aircraft is not recognized as a provision because it is a erence to relevant accounting standards. (MTP 5 Marks Oct’18)
future obligation and the incurring of the expenditure depends on the company’s decision to continue op-
erating the aircrafts. Even a legal requirement to overhaul does not require the company to make a pro- Answer 3
vision 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. How- As per AS 29, ‘Provisions, Contingent Liabilities and Contingent Assets’, where some or all of the
ever, an obligation might arise to pay fines or penalties under the legislation aftercompletion of five years. expenditure required to settle a provision is expected to be reimbursed by another party, the re-
Assessment of probability of incurring fines and penalties depends upon the provisions of the legislation imbursement should be recognized when, and only when, it is virtually certain that reimbursement
and the stringency of the enforcement regime. A provision should be recognized for the best estimate of will be received if the enterprise settles the obligation. The reimbursement should be treated as a
any fines and penalties if airline continues to operate aircrafts for morethan five years. separate asset. The amount recognized for the reimbursement should not exceed the amount of
the provision.
Question 2 Accordingly, potential loss to an enterprise may be reduced or avoided because a contingent
liability is matched by a related counter -claim or claim against a third party. In such cases, the
Sun Ltd. has entered into a sale contract of Rs. 5 crores with X Ltd. during 2015-2016 financial year. The amount of the provision is determined after taking into account the probable recovery under the
profit on this transaction is Rs. 1 crore. The delivery of goods to take place during the first month of claim if no significant uncertainty as to its measurability or collectability exists. In this case, the pro-
2016- 2017 financial year. In case of failure of Sun Ltd. to deliver within the schedule, a compensation vision of salary to employees of Rs. 680 lakhs will be ultimately collected from the client, as per the
of Rs. 1.5 crores is to be paid to X Ltd. Sun Ltd. planned to manufacture the goods during the last monthof terms of the contract. Therefore, the liability of Rs. 680 lakhs is matched by the counter claim from
2015- 2016 financial year. As on balance sheet date (31.3.2016), the goods were not manufactured and it the client. Hence, the provision for salary of employees should be matched with the reimbursable
was unlikely that Sun Ltd. will be in a position to meet the contractual obligation. asset to be claimed from the client. It appears that the whole amount of Rs. 680 lakhs is recover-
Should Sun Ltd. provide for contingency as per AS 29? Explain. able from client and there is no significant uncertainty about the collection. Hence, the net charge
to profit and loss account should be nil.
(ii) Should provision be measured as the excess of compensation to be paid over the profit? (MTP 5
Marks Mar’19, Mar’18) (Same concept lesser adjustments RTP Nov’20) The opinion of the accountant regarding recognition of income of Rs. 680 lakhs is not as per AS-29 and
also the concept of prudence will not be followed if Rs. 680 lakhs is simultaneously recognized as in-
Answer 2 come. Rs. 680 lakhs 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. 680 lakhs as in-
(i) AS 29 “Provisions, Contingent Liabilities and Contingent Assets” provides that when an enter-
come will result in the understatement of profit. To avoid this, in the statement of profit and loss, expense
prise has a present obligation, as a result of past events, that probably requires an outflow of
relating to provision may be presented net of the amount recognized for reimbursement.
resources and a reliable estimate can be made of the amount of obligation, a provision should
be recognized. Sun Ltd. has the obligation to deliver the goods within the scheduled time as per
the contract. It is probable that Sun Ltd. will fail to deliver the goods within the schedule and it is Question 4
also possible to estimate the amountof compensation. Therefore, Sun Ltd. should provide for the
contingency amounting Rs. 1.5 crores as per AS 29. (i) XYZ Ltd. is in a dispute with a competitor company. The dispute is regarding alleged
infringement of Copyrights. The competitor has filed a suit in the court of law seeking
(ii) Provision should not be measured as the excess of compensation to be paid over the profit.
damages of Rs. 200 lacs.
The goods were not manufactured before 31st March, 2016 and no profit had accrued for the
financial year 2015- 2016. Therefore, provision should be made for the full amount of com-
The Directors are of the view that the claim can be successfully resisted by the Company.
pensation amounting Rs. 1.50 crores.
How would the matter be dealt in the annual accounts of the Company in the light of AS
29? Explainin brief giving reasons for your answer.(RTP Nov 18, May 19) Question 6
(ii) What is meant by “Restructuring Provision” as per AS 29? What costs are excluded while Saharsh Ltd. is engaged in manufacturing of electric home appliances. The company is in the pro-
computing such provision as per the standard? (MTP 5 Marks April 21, April 22) cess of finalizing its accounts for the year ended 31.3.2022 and needs your expert advice on the fol-
lowing issues in line with the provisions of AS 29:
Answer 4 (i) A case has been filed against the company in the consumer court and a notice for levy
of a penalty of Rs. 20 lakhs has been received. The company has appointed a lawyer to
(i) As per AS 29, ‘Provisions, Contingent Liabilities and Contingent Assets’, a provision should be defend the case for a fee of Rs. 2 lakhs. 50% of the fees has been paid and balance 50%
recognized when will be paid after finalization of the case. There are 75% chances that the penalty may not
฀ an enterprise has a present obligation as a result of a past event; be levied.
฀ it is probable that an outflow of resources embodying economic benefits will be required to (ii) The company had committed to supply a consignment worth Rs. 1 crore to one of its deal-
settle the obligation; and ers by the year-end. As per the contract, if delivery is not made on time, a compensation
of 15% is to be paidon the value of delayed/lost consignment. While the consignment was
฀ a reliable estimate can be made of the amount of the obligation. If these conditions are not in transit, one of the trucks carrying goods worth Rs. 30 lakhs met with an accident. It was
met, no provision should be recognized. however covered by Insurance. According to the surveyor’s report, the policy amount is
In the given situation, since, the directors of the company are of the opinion that the claim can be suc- collectable, subject to 10% deduction. Beforeclosing the books of accounts, the company
cessfully resisted by the company, therefore there will be no outflow of the resources. Hence, no provision has received the information that the policy amount has been processed and the deal-
is required. The company will disclose the same as contingent liability by way of the following note: er has also claimed the compensation for the consignment of goods worth Rs. 30 lakhs
which was in transit. (MTP 5 Marks Oct ’21 ,March ’23 & Oct ‘23)
“Litigation is in process against the company relating to a dispute with a competitor who alleges that the
company has infringed copyrights and is seeking damages of Rs. 200 lakhs. However, the directors are of Answer 6
the opinion that the claim can be successfully resisted by the company.”
(i) As per AS 29, an obligation is a present obligation if, based on the evidence available, its
As per AS 29, a restructuring provision should include only the direct expenditures arising from the restruc- existence at the balance sheet date is considered probable, i.e., more likely than not. Liabil-
turing, which are those that are both: (a) necessarily entailed by the restructuring; and (b) Not associated ity is a present obligationof the enterprise arising from past events, the settlement of which
with the ongoing activities of the enterprise. A restructuring provision does not include such costs as: (a) is expected to result in an outflow from the enterprise of resources embodying economic
Retraining or relocating continuing staff; (b) Marketing; or (c) Investment in new systems and distribution benefits. In the given case, there are 75% chances that the penalty may not be levied.
networks. Accordingly, Saharsh Ltd. should not make the provision for penalty. However, a provision
should be made for remaining 50% fees of the lawyer in the financial statements of finan-
Question 5 cial year 2021-2022.
An organization operates an offshore oilfield where its licensing agreement requires it to

remove the oil rig at the end of production and restore the seabed. Ninety percent of the (ii) Loss due to accident R s
eventual costs relate to the removal of the oil rig and restoration of damage caused by 30,00,000
building it and ten percent arise through the extraction of oil. At the balance sheet date, the
Insurance claim receivable by company = Rs. 30,00,000 x 90% = Rs.
rig has been constructed but no oil has been extracted. With reference to AS 29, how would
27,00,000
you deal with this in the annual accounts of the company at the Balance Sheet date? Ex-
plain. (MTP 5 Marks March 21, RTP May’20, PYP 2.5 Marks Nov’20, Old & New SM) Loss to be recognised in the books for 2019-2020 Rs. 3,00,000 Insurance claim receivable to be re-
corded in the books Rs. 27,00,000
Answer 5
Compensation claim by dealer against company to be provided for in the books
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 = Rs. 30,00,000 x 15% = Rs. 4,50,000
is no obligation to rectify the damage that will be caused by extraction of the oil. An outflow of re-
sources embodying economic benefits in settlement is probable. Thus, a provision is recognized for Question 7
the best estimate of ninety per cent 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. XYZ Ltd. has not made provision for warrantee in respect of certain goods due to the fact that th e
However, thereis no obligation to rectify the damage that will be caused by extraction of oil, as no oil company can claim the warranty cost from the original supplier. Hence the accountant of the com-
has been extractedat the balance sheet date. So, no provision is required for the cost of extraction of pany says that the company is not having any liability for warrantees on a particular date as the
oil at balance sheet date. Ten per cent of costs that arise through the extraction of oil are recognized amount gets reimbursed. You are required to comment on the accounting treatment done by the
as a liability when the oil is extracted. XYZ Ltd. in line with the provisions of AS 29. (MTP 5 Marks Mar’22 & Sep ’22, RTP Nov’19)
Answer 7 Amount debited to profit and loss account 6,450

As per AS 29 “Provisions, Contingent Liabilities and Contingent Assets”, where some or all of the expen- Note: No provision will be made on 31st March, 2021 in respect of sales amounting ₹ 1,20,000 made on
diture required to settle a provision is expected to be reimbursed by another party, the reimbursement 19th January, 2019 as the warranty period of 2 years has already expired.
should be recognised when, and only when, it is virtually certain that reimbursement willbe received if the
enterprise settles the obligation. The reimbursement should be treated as a separate asset. The amount
Question 9
recognised for the reimbursement should not exceed the amount of the provision. It is apparent from
the Question that the company had not made provision for warranty in respect of certain goods consid- A company, incorporated as NPO under the Companies Act, is having main objective to promote the
ering that the company can claim the warranty cost from the original supplier. However, the provision for trade by organizing trade fairs / exhibitions. While organizing the trade fair and exhibitions, it decid-
warranty should have been made as per AS 29 and the amount claimable as reimbursement should be ed to charge 5% contingency charges for the participants/outside agencies on the income received
treated as a separate asset in the financial statements of the company rather than omitting thedisclosure from them by the company, while in the case of fairs organized by outside agencies, 5% contingency
of such liability. Accordingly, it is viewed that the accounting treatment adopted by the company with chargesare levied separately in the invoice, the contingency charges in respect of fairs organized by
respect to warranty is not correct. the company itself are inbuilt in the space rent charged from the participants. Both are credited to
Income and Expenditure Account of the company.
Question 8 The intention of levying these charges is to meet any unforeseen liability, which may arise in future.
The instances of such unforeseen liabilities could be on account of injury/loss of life to visitors/ ex-
A Company dealing in software provides after sales warranty for 2 years to its customer. Based on
hibitors, etc., due to fire, terrorist attack, stampede, natural calamities and other public and third
past experience, the company has been following policy for making provision for warranties on
party liability. The chances of occurrence of these events are high because of large crowds visiting
the invoice amount, on the remaining balance warranty period:
the fair. The decision to levy 5% contingency charges was based on assessment only as actual liabil-
ity on this account cannot be estimated.
Less than 1 year: 3% provision
The accounting treatment and disclosure was made by the company in its financial statements as:
More than 1 year: 4% provision (i) 5% contingency charges are treated as income and matching provision for the same is also being
made in accounts and (ii) suitable disclosure to this effect is also made in the notes forming part of
The company has raised invoices as under:
accounts.
Invoice Date Amount (₹) (a) You are required to comment whether creation of provision for contingencies consid-
19th January, 2019 1,20,000 ering the facts and circumstances of the case is required in line with AS 29.
29th January, 2020 75,000 An oil company has been contaminating land for several years. It does not clean up because there is noleg-
islation requiring cleaning up. On 31st March 2021, it is virtually certain that a law requiring a clean-up of
15th October, 2020 2,70,000
land already contaminated will be enacted shortly after the year end. Is provisioning presently necessary
You are required to calculate the provision to be made for warranty under Accounting Standard 29 as considering the circumstances in line with provisions of AS 29? (RTP Nov ‘21)
at 31st March, 2020 and 31st March, 2021. Also compute the amount to be debited to Profit and Loss Ac-
count for the year ended 31st March, 2021. (MTP 5 Marks Oct’22, PYP 5 Marks Nov ’19, RTP May ’23) Answer 9
Answer 8 As per AS 29 “Provisions, Contingent Liabilities and Contingent Assets”, a provision should be recognized
when (a) An enterprise has a present obligation as a result of a past event and (b) It is probable that
Provision to be made for warranty under AS 29 ‘Provisions, Contingent Liabilities and Contingent an outflow of resources embodying economic benefits will be required to settle the obligation and (c)
Assets’ A reliable estimate can be made of the amount of the obligation. If these conditions are not met, no
provision should be recognized.
As at 31st March, 2020 = ₹ 1,20,000 x .03 + ₹ 75,000 x .04
(a) From the above, it is clear that for the contingencies considered by the company, neither a
= ₹ 3,600 + ₹ 3,000 = ₹ 6,600 present obligation exists because of past event, nor a reliable estimate can be made of the
As at 31st March, 2021 = ₹ 75,000 x .03 + ₹ 2,70,000 x .04 amount of the obligation. Accordingly, a provision cannot be recognized for such contingencies
under the facts and circumstances of the case.
= ₹ 2,250 + ₹ 10,800 = ₹ 13,050
As per AS 29 ‘Provisions, Contingent Liabilities and Contingent Assets’, a past event will lead to present obligation
Amount debited to Profit and Loss Account for year ended 31st March, 2021 when the enterprise has no realistic alternative to settle the obligation created by the past event. How-
ever, when environmental damage is caused there may be no obligation to remedy the consequences.
₹
The causing of the damage will become an obligating event when a new law requires theexisting dam-
Balance of provision required as on 31.03.2021 13,050 age to be rectified. Where details of a proposed new law have yet to be finalised, an obligation arises
Less: Opening Balance as on 1.4.2020 (6,600) only when the legislation is virtually certain to be enacted. In the given case it is virtually certain that law
will be enacted requiring clean-up of a land already contaminated. Therefore, an oil company has to
provide for such clean-up cost in the year in which the law is virtually certain to be enacted.
Question 10 (ii) It is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; or
The company has not made provision for warranty in respect of certain goods considering that the
A reliable estimate of the amount of the obligation cannot be made.
company can claim the warranty cost from the original supplier.
An enterprise should not recognize a contingent liability but should be disclosed. A contingent lia-
(a) You are required to examine in line with the provisions of AS 29. (RTP May 21, May 18)
bility is disclosed, unless the possibility of an outflow of resources embodying economic benefits is
Explain whether provision is required in the following situations in li ne with AS 29: remote.
(i) There is a present obligation that probably requires an outflow of re- Contingent assets usually arise from unplanned or other unexpected events that give rise to the
sources and a reliableestimate can be made of the amount of obligation; possibility of an inflow of economic benefits to the enterprise. An example is a claim that an en-
terprise is pursuing through legal processes, where the outcome is uncertain. An enterprise should
(ii) There is a possible obligation or a present obligation that may, but probably
not recognize a contingent asset, since this may result in the recognition of income that may nev-
will not, require an outflow of resources.
er be realized. However, when the realization of income is virtually certain, then the related asset
There is a possible obligation or a present obligation where the likelihood of an outflow of resources is re- is not a contingent asset and its recognition is appropriate. A contingent asset is not disclosed in
mote. (RTP May 21) the financial statements. It is usually disclosed in the report of the approving authority (Board of
Directors in the case of a company, and, the corresponding approving authority in the case of
Answer 10 any other enterprise), where an inflow of economic benefits is probable. Contingent assets are
assessed continually and if it has become virtually certain that an inflow of economic benefits
As per provisions of AS 29 “Provisions, Contingent Liabilities and Contingent Assets”, where some or all of will arise, the asset and the related income are recognised in the financial statements of the period in
the expenditure required to settle a provision is expected to be reimbursed by another party, the reim- which the change occurs.
bursement should be recognized when, and only when, it is virtually certain that reimbursement will be
AS 29 “Provisions, Contingent Liabilities and Contingent Assets” provides that when an enterprise has a
received if the enterprise settles the obligation. The reimbursement should be treated as a separate asset.
present obligation, as a result of past events, that probably requires an outflow of resources and a re-
The amount recognized for the reimbursement should not exceed the amount of the provision.
liable estimate can be made of the amount of obligation, a provision should be recognized. Alpha Ltd.
It is apparent from the Question that the company had not made provision for warranty in respect of cer- has the obligation to deliver the goods within the scheduled time as per the contract. It is probable that
tain goods considering that the company can claim the warranty cost from the original supplier. However, Alpha Ltd. will fail to deliver the goods within the schedule and it is also possible to estimate the amount
the provision for warranty should have been made as per AS 29 and the amount claimable as reimburse- of compensation. Therefore, Alpha Ltd. should provide for the contingency amounting Rs. 2 crores as per
ment should be treated as a separate asset in the financial statements of the company rather than omit- AS 29.
ting the disclosure of such liability. Accordingly, it can be said that the accounting treatment adopted by
the company with respect to warranty is not correct.
Question 12
(i) (b)
(ii) There is a present obligation that probably requires an outflow of resources and a reliable (i) With reference to AS 29, how would you deal with the following in the annual accounts of
estimate can be made of the amount of obligation – Provision is recognized. Disclosures the company at the Balance Sheet dates:
are required for the provision.
During 2018-19 Ace Ltd. gives a guarantee of certain borrowings of Brew Ltd., whose financial condition at
(iii) There is a possible obligation or a present obligation that may, but probably will not, require that time is sound. During 2019-20, the financial condition of Brew Ltd. deteriorates and on 31st Dec. 2019,
an outflow of resources – No provision is recognised. Disclosures are required for the con- it goes into liquidation. (Balance Sheet date 31-3-19). (RTP May 20)
tingent liability.
There is a possible obligation or a present obligation where the likelihood of an outflow of resources is Answer 12
remote – No provision is recognised. No disclosure is required.
As per AS 29, for a liability to qualify for recognition there must be not only a present obligation but also
the probability of an outflow of resources embodying economic benefits to settle that obligation.
Question 11
The obligating event is the giving of the guarantee by Ace Ltd. for certain borrowings of Brew Ltd.,
(a) How will you distinguish contingent assets with Contingent Liabilities. Explain in brief. (RTP which gives rise to an obligation. No outflow of benefits is probable at 31 March 2019.Thus no provi-
Nov 20) sion is recognized. The guarantee is disclosed as a contingent liability unless the probability of any
outflow is regarded as remote.
Answer 11 During 2019-20, the financial condition of Brew Ltd. deteriorates and finally goes into liquidation.
The obligating event is the giving of the guarantee, which gives rise to a legal obligation. At 31
A Contingent liability is a possible obligation that arises from past events and the existence of March 2020, it is probable that an outflow of resources embodying economic benefits will be re-
which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future quired to settle the obligation. Thus, provision is recognized for the best estimate of the obligation.
events not wholly within the control of the enterprise; or
(i) A present obligation that arises from past events but is not recognized because:
(i) Chaos Limited is in the process of finalizing its accounts for the year ended 31st March, 2020. It (i) Chaos Limited is in the process of finalizing its accounts for the year ended 31st March, 2022. It
seeks your advice in the following cases: seeks your advice in the following cases:
(ii) Chaos Limited has filed a court case in 2014-2015 against its competitors. It became evi- (ii) Chaos Limited entered into an agreement to supply 1 lac face masks to D Limited by 30th
dent to its lawyers during the year ended 31st March, 2020 that Chaos Limited may lose the April, 2022 failing which it will have to pay a penalty of Rs. 10 per item not supplied. On
case and would have to pay Rs. 3,00,000 being the cost of litigation. No entries/provisions 31st March, 2022 Chaos Limited assessed that it could only supply 50,000 face masks to
have been made in the books. D Limited by 30th April, 2022.
(iii) A new regulation has been passed in 2019-2020 by the healthcare ministry to upgrade fa- (iii) Chaos Limited has filed a court case in 2014-2015 against its competitors. It is evident to
cilities. Deadline set by the government is 31.03.2021. The company estimates an expendi- its lawyers that Chaos Limited may lose the case and would have to pay Rs. 3,00,000 be-
ture of Rs. 10,00,000for the said upgrade. ing the cost of litigation. No entries/provisions have been made in the books.
The company gives one year warranty for its healthcare equipment under the contract of sale that it A new regulation has been passed in 2021-22 by the healthcare ministry to upgrade facilities. Dead-
will make good any manufacturing defect by repair or replacement. As per past experience, it is proba- lineset by the government is 31.03.2023. The company estimates an expenditure of Rs. 10,00,000 for
ble that there will be 1% such cases and estimated cost of repair / replacement is estimated at 10% of the said upgrade.
such sale value. During the year, the company has made a sale of Rs. 5 crores.
Kindly give your answer for each of above with proper reasoning according to the relevant Ac-
Kindly give your Answer for each of above with proper reasoning according to the relevant Ac- counting Standard. Also state the principles for recognition of provision, as per AS 29. (RTP
counting Standard. Also state the principles for recognition of provision, as per AS 29. (RTP May’22) Nov’22)
Answer 13 Answer 14
(i) Principles for recognition of provisions: As per AS 29, “a provision shall be recognised when: Principles for recognition of provisions:
(ii) an entity has a present obligation (legal or constructive) as a result of a past event; (a) As per AS 29, “a provision shall be recognised when:
it is probable that an outflow of resources embodying economic benefits will be required to settle the ob- (b) an entity has a present obligation (legal or constructive) as a result of a past
ligation; and provision shall be recognised.” event;
(i) Accounting treatment under the given scenarios: (c) it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
(ii) On 31st March, 2020, since it is evident to the lawyer that Chaos Limited may lose the case and
also a reliable estimate of the outflow can be made as Rs. 3,00,000, there is a present obli- a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no
gation. Hence, provision should be recognised for Rs. 3,00,000 for the amount which may be provision shall be recognised.”
required to settle the obligation.
(i) Accounting treatment under the given scenarios:
(iii) Under new regulation, an entity is required to upgrade its facilities by 31 st March, 2021. How-
ever, on 31st March, 2020, i.e. at the end of the reporting period, there is no obligation because (ii) In this case, there is no present obligation arising out of a past event as the goods
there is no obligating event either for the costs of upgrading the facilities or for fines under are scheduled for delivery on 30th April, 2022 and there is no delay as at 31st March,
the regulations. Hence, no provision should be recognized on 31st March, 2020 for upgrading 2022. Hence, there is no present obligation to pay the penalty in the current year.
the facilities by 31st March, 2021. Therefore, no provision can be recognized in the instant case.
The obligating event is the sale of health care equipment with a warranty, which gives rise to a On 31st March, 2022, since it is evident to the lawyer that Chaos Limited may lose the case and also a re-
legal obligation. Here, an outflow of resources embodying economic benefits in settlement is prob- liable estimate of the outflow can be made as Rs. 3,00,000, there is a present obligation. Hence, provision
able for the warranties as a whole. Hence, a provision is recognized for the best estimate of the should be recognised for Rs. 3,00,000 for the amount which may be required to settle the obligation.
costs of making good under the warranty products sold before the end of the reporting period as
Under new regulation, an entity is required to upgrade its facilities by 31st March, 2023. However, on 31st
follows: Probability of warranty cases for the entity where repair/replacement may be required as
March, 2022, i.e. at the end of the reporting period, there is no obligation because there is no obligating
per past experience
event either for the costs of upgrading the facilities or for fines under the regulations. Hence, no provi-
= 1% of Rs. 5,00,00,000 = Rs. 5,00,000 sion should be recognised on 31st March, 2022 for upgrading the facilities by 31st March, 2023.
Estimated cost of repair / replacement = Rs. 5,00,000 x 10% = Rs. 50,000.

Question 15
With reference to AS 29, how would you deal with the following in the Annual Ac-
counts of the company at the Balance Sheet date:
(i) The Government introduces a number of changes to the taxation laws. As a result of these Question 17
changes, thecompany will need to train a large proportion of its accounting and legal workforce
in order to ensure continued compliances with tax law regulations. At the balance sheet date, no At the end of the financial year ending on 31stMarch, 2022, a company finds that there are twenty law
retraining of staff has taken place.( PYP 2.5 Marks , Nov 20) 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:
Answer 15 Particulars Probability Loss (₹)

As per AS 29, a provision for restructuring costs is recognized only when the recognition criteria for pro- In respect of five cases 100% -
visions are met. A restructuring provision does not include costs as of retraining or relocating continuing
(Win) Next ten cases (Win) 50% -
staff. The expenditures of training the staff related to the future conduct of the business and are not liabil-
ities for restructuring at the balance sheet date. Such expenditures are recognized on the same basis as Lose (Low damages) 40% 12,00,000
if they arose independently of a restructuring. At the balance sheet date, no such expenditure has been
Lose (High damages) 10% 20,00,000
incurred hence no provision is required.
Remaining five cases 50% -
Question 16 Win Lose (Low damages) 30% 10,00,000
I. Alloy Fabrication Limited is engaged in manufacturing of iron and steel rods. The company is in the
Outcome of each case is to be taken as a separate entity. Ascertain the amount of contingent loss
process of finalisation of the accounts for the year ended 31 st March,2022 and needs your advice
and the accounting treatment in respect thereof as per AS - 29. (PYP 5 Marks Nov 22)
on the following issues in line with the provisions of AS-29:
II. On 1stApril,2019, the company installed a huge furnace in their plant. The furnace has a lin- Answer 17
ing 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 lin- According to AS 29 (Revised) ‘Provisions, Contingent Liabilities and Contingent Assets’, contingent
ing of the furnace. liability should be disclosed in the financial statements if following conditions are satisfied:
A case has been filed against the company in the consumer court and a notice for levy of a (i) There is a present obligation arising out of past events but not recognized as pro-
penalty of vision.
(ii) It is not probable that an outflow of resources embodying economic
₹ 50 Lakhs has been received. The company has appointed a lawyer to defend the case for a fee benefits will be required to settle the obligation.
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.. (PYP 5 Marks May’22)
(iii) The possibility of an outflow of resources embodying economic benefits is not re-
mote.
Answer 16 (iv) The amount of the obligation cannot be measured with sufficient reli-
ability to be recognized as provision.
I. A provision should be recognized only when an enterprise has a present obligation arising
In this case, the probability of winning of first five cases is 100% and hence, question of providing for
from a past event or obligation. In the given case, there is no present obligation but a future
contingent loss does not arise. The probability of winning of next ten cases is 50% and for remaining five
one, therefore no provision is recognized as per AS 29. The cost of replacement of lining of
cases is 50%. As per AS 29 (Revised), we make a provision if the loss is probable. As the loss does not
furnace is not recognized as a provision because it is a future obligation. Even a legal require-
appear to be probable and the possibility of an outflow of resources embodying economic benefits is
ment does not require the company to make a provision for the cost of replacement because
remote, therefore disclosure by way of note should be made. For the purpose of the disclosure of con-
there is no present obligation. Even the intention to incur the expenditure depends on the
tingent liability by way of note, amount may be calculated as under:
company deciding to continue operating the furnace or to replace the lining.
Expected loss in next ten cases = 40% of ₹ 12,00,000 + 10% of ₹ 20,00,000
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 = ₹ 4,80,000 + ₹ 2,00,000
obligation of the enterprise arising from past events, the settlement of which is expected to result
= 6,80,000
in an outflow from the enterprise of resources embodying economic benefits.
Expected loss in remaining five cases = 30% of ₹ 10,00,000 + 20% of ₹ 21,00,000
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 = ₹ 3,00,000 + ₹ 4,20,000
contingent liability unless the probability of any outflow is regarded as remote.
= ₹ 7,20,000
However, a provision should be made for remaining 40% fees of the lawyer amounting₹ 2,00,000 in
To disclose contingent liability on the basis of maximum loss will be highly unre-
the financial statements of financial year 2021-2022
alistic. Therefore, the better approach will be to disclose the overall expected loss
of 1,04,00,000 (₹ 6,80,000 X 10 + ₹ 7,20,000 X 5) as contingent liability.
Question 18 Therefore, sale of ₹ 36 lakhs, ₹ 48 lakhs and ₹ 60 lakhs made in the months of January,
February and March will be recognized at full value. Thus, total revenue to be recognized
(Includes concepts from AS 9- Revenue Recognition) for RS. 400 lacs for the year.
Working Note:
A Limited sells goods with unlimited right of return to its customers. The following pattern has been
observed in the Return of Sales: Calculation of Profit % on sales
(₹ in lacs)
Time frame of Return from date of pur- % of Cumulative
chase Sales Sales for the year 400
Between 0-1 month 6% Less: Cost of sales (320)
Between 1-2 months 7% Profit 80
Between 2-3 months 8% Profit mark up on sales (80/400) x 100 = 20%
The Company has made Sales of ₹ 36 Lakhs in the month of January, ₹ 48 Lakhs in the month of
February and of ₹ 60 Lakhs in the month of March. The Total Sales for the Financial Year have been ₹
400 Lakhs and the Cost of Sales was ₹ 320 Lakhs. You are required to determine the amount of Provision Question 19
to be made and Revenue to be recognized as on 31st March. (PYP 5 Marks, July 21, MTP Sep’23)
With reference to AS 29, how would you deal with the following in the Annual Accounts of the
company at the Balance Sheet date:
Answer 18
(i) The company operates an offshore oilfield where its licensing agreement requires it to re-
Amount of provision
move the oil rig at the end of production and restore the seabed. Eighty five percent of the
The goods are sold with a right to return. The existence of such right gives rise to a present obligation eventual
on the company as per AS 29, ‘Provisions, Contingent Liabilities and Contingent Assets’. According costs relate to the removal of the oil rig and restoration of damage caused by building it,
to the standard, a provision should be created on the Balance sheet date, for sales returns after the and fifteen percent arise through the extraction of oil. At the balance sheet date, rig has
Balance Sheet date, at the best estimate of the loss expected, along with any estimated incremental been constructed but no oil has been extracted.
cost that would be necessary to resell the goods expected to be returned.
(ii) The Government introduces a number of changes to the taxation laws. As a result of these
Sales Sales value Sales value Likely Likely Provision @ changes, the company will need to train a large proportion of its accounting and legal work-
during (₹in lacs) (cumulative) returns returns 20%(₹ in lacs) force in order to ensure continued compliances with tax law regulations. At the balance
(%) (ReferW.N.) sheet date, no retraining of staff has taken place.(RTP Nov ’23)(MTP 5 Marks Sep ‘23)
₹ (in lacs) ₹ (in lacs)
March 60 60 6% 3.60 0.720 Answer 19
February 48 108 7% 7.56 1.512 (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,
January 36 144 8% 11.52 2.304 however, there is no obligation to rectify the damage that will be caused by extraction of the
Total 22.68 4.536 oil. An outflow of resources embodying economic benefits in settlement is probable. Thus, a
provision is recognized for the best estimate of 85% of the eventual costs that relate to the re-
Revenue to be recognized
moval 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.
Revenue in respect of sale of goods is recognized fully at the time of sale itself assumed that the compa-
ny has complied with the conditions stated in AS 9 relating to recognition of revenue in the case of sale of
However, there is no obligation to rectify the damage that will be caused by extraction of oil, as nooil
goods. As per AS 9, in a transaction involving the sale of goods, performance should be regarded as being
has been extracted at the balance sheet date. So, no provision is required for the cost of extraction
achieved when the following conditions have been fulfilled:
of oil at balance sheet date. 15% of costs that arise through the extraction of oil are recognized as
(i) Seller of goods has transferred to the buyer the property in the goods for a price or all sig- a liability when the oil is extracted.
nificant risks and rewards of ownership have been transferred to the buyer and the seller
retains no effective control of the goods transferred to a degree usually associated with (ii) As per AS 29, a provision for restructuring costs is recognized only when the recognition criteria
ownership; and forprovisions are met. A restructuring provision does not include costs as of retraining or relo-
cating continuing staff.
(ii) No significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods. AS 9 also provides that in case of retail sales offering a The expenditures of training the staff related to the future conduct of the business and are not
guarantee of ‘money back, if not completely satisfied, it may be appropriate to recognize liabilities for restructuring at the balance sheet date. Such expenditures are recognized on the
the sale but to make a suitable provisionfor returns based on previous experiences. same basis as if they arose independently of a restructuring. At the balance sheet date, no
such expenditure has been incurred hence no provision is required. required to be paid ₹ 5,00,000
What is the appropriate accounting treatment in the books of Z Ltd.?

Question 20
m. Create a Provision of ₹ 5,50,000
Which of the following best describes a provision? n. Make a Disclosure of a contingent liability of ₹ 5,50,000
a. A provision is a liability of uncertain timing or amount. o. Create a Provision of ₹ 50,000 and make a disclosure of contingent liability of ₹
b. A provision is a possible obligation of uncertain timing. 5,00,000
c. A provision is a credit balance set up to offset a contingent as- p. Create a Provision of ₹ 5,00,000
set so that the effecton the statement of financial position is nil.
d. A provision is a possible obligation of uncertain amount.
Answer
Question 24
Question 21 When should provision be recognized as per provisions of AS 29? Explain in brief.
X Co is a business that sells second hand cars. If a car develops a fault within 30 days of the sale, X Answer 24
Co will repair it free of charge. At 1 st March 20X1, X Co had made a provision for repairs of ₹ 25,000. At
31st March20X1, X Co calculated that the provision should be ₹ 20,000. What entry should be made forthe A provision should be recognized only when: (a) An enterprise has a present obligation as
provision in XCo’s income statement for the month 31st March 20X1? a result of a past event; (b) It is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and (c) A reliable estimate can be made of
e. A charge of ₹ 5,000 the amount of the obligation.
f. A credit of ₹ 5,000
g. A charge of ₹ 20,000
Practical Questions
h. A credit of ₹ 25,000
Questions 25
Answer
Sun Ltd. has entered into a sale contract of ₹ 5 crores with X Ltd. during 20X1-20X2 financial
Question 22 year. Theprofit on this transaction is ₹ 1 crore. The delivery of goods to take place during the first
month of 20X2- 20X3 financial year. In case of failure of Sun Ltd. to deliver within the schedule, a
Which of the following item does the statement below describe? “A possible obligation that arises compensation of ₹ 1.5 crores is to be paid to X Ltd. Sun Ltd. planned to manufacture the goods
from past events and whose existence will be confirmed only by theoccurrence or non-occurrence during the last month of 20X1- 20X2 financial year. As on balance sheet date (31.3.20X2), the
of one or more uncertain future events not wholly within the entity’s control” goods were not manufactured, and it was unlikely that Sun Ltd. will be able to meet the con-
tractual obligation.
i. A provision
(i) Should Sun Ltd. provide for contingency as per AS 29?
j. A current liability
(ii) Should provision be measured as the excess of compensation to be paid over the
k. A contingent liability
profit? Answer 25
l. Deferred tax liability
AS 29 “Provisions, Contingent Liabilities and Contingent Assets” provides that when an enter-
Answer prise has a present obligation, as a result of past events, that probably requires an outflow
of resources and a reliable estimate can be made of the amount of obligation, a provision
should be recognized. Sun Ltd. has the obligation to deliver the goods within the scheduled
Question 23 time as per the contract. It is probable that SunLtd. will fail to deliver the goods within the
schedule and it is also possible to estimate the amount of compensation. Therefore, Sun Ltd.
Z Ltd has commenced a legal action against Y Ltd claiming substantial damages for supply of a faulty
should provide for the contingency amounting ₹ 1.5 crores as per AS 29.
product. The lawyers of Y Ltd have advised that the company is likely to lose the case, although the
chances of paying the claim is not remote. The estimated potential liability estimated by the lawyers Provision should not be measured as the excess of compensation to be paid over the profit.
are: The goods were not manufactured before 31st March, 20X2 and no profit had accrued for the
financial year 20X1- 20X2. Therefore, provision should be made for the full amount of compen-
Legal cost (to be incurred irrespective of the outcome of the case) ₹ 50,000 Settlement if the claim is
sation amounting ₹1.50 crores.
Questions 26 (ii) There is a present obligation arising out of past events but not rec-
ognized as provision.
An oil company has been contaminating land for several years. It does not clean (iii) It is not probable that an outflow of resources embodying economic benefits
up because there is no legislation requiring cleaning up. At 31 st March 20X1, it is will be required to settle the obligation.
virtually certain that a law requiring a clean-up of land already contaminated
will be enacted shortly after the year end. Is provisioning presently necessary? (iv) The possibility of an outflow of resources embodying economic
benefits is not remote.
Answer 26 The amount of the obligation cannot be measured with sufficient reliability to be
As per para 29 of AS 29 ‘Provisions, Contingent Liabilities and Contingent Assets’, a past event recognized as provision.
will lead to present obligation when the enterprise has no realistic alternative to settle the In this case, the probability of winning of first five cases is 100% and hence, Question of pro-
obligation created by the past event. viding for contingent loss does not arise. The probability of winning of next ten cases is 50%
However, when environmental damage is caused, there may be no obligation to remedy and for remaining five cases is 50%. As per AS 29 (Revised), we make a provision if the loss is
the consequences. probable. As the loss does not appear to be probable and the possibility of an outflow of re-
sources embodying economic benefits is remote, therefore disclosure by way of note should be
The causing of the damage will become an obligating event when a new law requires the
made. For the purpose of the disclosure of contingent liability by way of note, amount may be
existing damage
calculated as under:
to be rectified. Where details of a proposed new law have yet to be finalised, an obligation
Expected loss in next ten cases = 40% of ₹ 1,20,000 + 10% of ₹ 2,00,000
arises only when the legislation is virtually certain to be enacted.
= ₹ 48,000 + ₹ 20,000 = ₹ 68,000
In the given case it is virtually certain that law will be enacted requiring clean-up of a
land already contaminated. Therefore, an oil company has to provide for such clean-up Expected loss in remaining five cases = 30% of ₹ 1,00,000 + 20% of ₹ 2,10,000
cost in the year in which the law is virtually certain to be enacted. = ₹ 30,000 + ₹ 42,000 = ₹ 72,000
To disclose contingent liability on the basis of maximum loss will be highly unrealis-
tic. Therefore, the better approach will be to disclose the overall expected loss of ₹
10,40,000 (₹ 68,000 X 10 +
At the end of the financial year ending on 31st December, 20X1, a company finds that there are
twenty law suits outstanding which have not been settled till the date of approval of accounts by ₹ 72,000 X 5) as contingent liability.
the Board of Directors. The possible outcome as estimated by the Board is as follows:
Probability Loss (₹ )
(i) EXOX Ltd. is in the process of finalising its accounts for the year ended 31st March, 20X2. The
In respect of five cases (Win) 100% - company seeks your advice on the following:
Next ten cases (Win) 50% - The Company’s sales tax assessment for assessment year 20X1-X2 has been completed on 14th
Lose (Low damages) 40% 1,20,000 February, 20X4 with a demand of ₹ 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 author-
Lose (High damages) 10% 2,00,000 ity wherein the grounds of appeal cover tax on additions made in the assessment order fora
Remaining five cases sum of
Win 50% - (ii) 2.10 crore.
Lose (Low damages) 30% 1,00,000 The Company has entered into a wage agreement in May, 20X2 whereby the labour union has ac-
cepted a revision in wage from June, 20X1. The agreement provided that the hike till May, 20X2 will
not be paid to the employees but will be settled to them at the time of retirement. The company agrees
Outcome of each case is to be taken as a separate entity. Ascertain the amount of contin- to deposit the arrears in Government Bonds by September, 20X2.
gent loss andthe accounting treatment in respect thereof.
Answer 27
According to AS 29 (Revised) ‘Provisions, Contingent Liabilities and Contingent Assets’, contin-
gent
(i) liability should be disclosed in the financial statements if following conditions are satis-
fied:
Chapter 7.1
Answer 28
AS 4- Contingencies & Events occurring after the Balance Sheet Date
(i) Since the company is not appealing against the addition of ₹ 0.66 crore the same
should be provided for in its accounts for the year ended on 31st March, 20X4. The
amount paid under protest can be kept under the heading ‘Loans & Advances’
and also disclosed as a contingent liability of ₹ 2.10 crore.
The arrears for the period from June, 20X1 to March, 20X2 are required to be provided for in the accounts
of the company for the year ended on 31st March, 20X2.
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
Past Q.1
NO Q.13 NO NO NO Q.11 Q.1 NO Q.7 NO NO
Exams Q.12
Q.2
MTP Q.5 Q.5 Q.4 NO Q.1 Q.1 NO NO Q.6 Q.3 Q.2
Q.3
Q.1
RTP Q.1 Q.4 Q.5 Q.3 Q.1 Q.9 Q.8 Q.7 Q.10 NO NO
Q.2
Chapter 7.1 nalized. Therefore, adjustment to assets for sale of immovable property is not necessary in
the financial statements for the year ended 31st March, 2020. Disclosure may be given in
AS 4- Contingencies & Events occurring after the Balance Sheet Date Report of approving Authority.
(v) Non-adjusting event: Adjustments to assets and liabilities are not appropriate for events
Question 1 occurring after the balance sheet date, if such events do not relate to conditions ex-
isting at the balance sheet date. The condition of fire occurrence was not existing on the
The financial statements of Alpha Ltd. for the year 2019-2020 were approved by the Board ofDirectors
balance sheet date. Only the disclosure regarding fire and loss, being completely insured
on 15th July, 2020. The following information was provided:
may be given in the report of approving authority.
(i) A suit against the company’s advertisement was filed by a party on 20 th April, 2020
claimingdamages of Rs. 25 lakhs. Question 2
(ii) The terms and conditions for acquisition of business of another company had been
Tee Ltd. closes its books of accounts every year on 31st March. The financial statements for the year
decided by March, 2020. But the financial resources were arranged in April, 2020 and
ended 31 March 2020 are to be approved by the approving authority on 30 June 2020. During
amount invested was Rs. 50 lakhs.
the first quarter of 2020-2021, the following events / transactions has taken place. The accountant of
(iii) Theft of cash of Rs. 5 lakhs by the cashier on 31st March, 2020, was detected on 16th the company seeks your guidance for the following:
July, 2020.
(i) Tee Ltd. has an inventory of 50 stitching machines costing at Rs. 5,500 per machine as
(iv) The company started a negotiation with a party to sell an immovable property for Rs. on 31 March 2020. On 31 March 2020 the company is expecting a heavy decline in the
40 lakhs in March, 2020. The book value of the property is Rs. 30 lakh on 31st March, demand in next year. The inventories are valued at cost or net realizable value, which-
2020. However, the deed was registered on 15th April, 2020. ever is lower. During the month of April 2020, due to fall in demand, the prices have gone
A major fire had damaged the assets in a factory on 5th April, 2020. However, the as- down drastically. The company has sold 5 machinesduring this month at a price of Rs.
sets were fully insured. With reference to AS 4, state whether the above mentioned 4,000 per machine.
events will be treated as contingencies, adjusting events or non-adjusting events oc- (ii) A fire has broken out in the company’s go down on 15 April 2020. The company has esti-
curring after the balance sheet date. (MTP 5 Marks Oct ’20, May’20, March’22, Old & mated a loss of Rs. 25 lakhs of which 75% is recoverable from the Insurance company.
New SM, RTP-May 20, May 18,PYP 5 Marks July 21, PYP 5 Marks May’19, RTP May’22)
(iii) The company has entered into a sale agreement on 30 March 2020 to sell a property for
a consideration of Rs. 7,50,000 which is being carried in the books at Rs. 5,50,000 at the
Answer 1 year end. The transfer of risk and reward and sale is complete in the month of May 2020
(i) Non-adjusting event: Suit filed against the company is a contingent liability but it was when conveyance and possession get completed.
not existing as on date of balance sheet date as the suit was filed on 20 th April after the (iv) The company has received, during the year 2018-2019, a government grant of Rs. 15
balance sheet date. As per AS 4, ‘Contingencies’ is restricted to conditions or situations lakhs for purchase of a machine. The company has received a notice for refund of the
at the balance sheet date, the financial effect of which is to be determined by future said grant on 15 June, 2020 due to violation of some of the conditions of grant during the
events which may or may not occur. Hence, it will have no effect on financial statement year 2019-2020. You are required to state with reasons, how the above transactions will
and will be a non-adjusting event. be dealt with in the financial statement for the year ended 31st March 2020. (MTP 5 Marks
(ii) Adjusting event: In the given case, terms and conditions for acquisition of business Oct ’21 & Oct ‘23, RTP May’22)
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
Answer 2
April, 2020. Hence, necessary adjustment to assets and liabilities for acquisition of busi- Events occurring after the balance sheet date are those significant events, both favourable and unfa-
ness is necessary in the financial statements for the year ended 31st March 2020. vorable, that occur between the balance sheet date and the date on which the financial statements are
(iii) Non-adjusting event: Only those events which occur between the balance sheet date approved by the Board of Directors in the case of a company, and by the corresponding approving au-
and the date on which the financial statements are approved, may indicate the need thority in the case of any other entity. Assets and liabilities should be adjusted for events occurring after
for adjustments to assets and liabilities as at the balance sheet date or may require the balance sheet date that provide additional evidence to assist the estimation of amounts relating to
disclosure. In the given case, as the theft of cash was detected on 16th July, 2020 ie after conditions existing at the balance sheet date or that indicate that the fundamental accounting assump-
approval of financial statements, no adjustment is required. tion of going concern is not appropriate. In the given case, financial statements are approved by
the approving authority on 30 June 2020. On the basis of above principles, following will be the
(iv) Non-adjusting event: Adjustments to assets and liabilities are not appropriate for events accounting treatment in the financial statements for the year ended at 31 March 2020:
occurring after the balance sheet date, if such events do not relate to conditions exist-
ing at the balance sheet date. In the given case, sale of immovable property was under (i) Since on 31 March 2020, Tee Ltd. was expecting a heavy decline in the demand of the
proposal stage (negotiations only started) on the balance sheet date, and was not fi- stitching machine. Therefore, decline in the value during April, 2020 will be considered as
an adjusting event. Hence, Tee Ltd. needs to adjust the amounts recognized in its financial
statements w.r.t. net realizable value at the end of the reporting period. Accordingly, in-
ventory should be written down to Rs. 4,000 per machine. Total value of inventory in the Answer 4
books will be 50 machines x Rs. 4,000 = Rs. 2,00,000.
As per AS 4 ‘Contingencies and Events Occurring After the Balance Sheet Date’, adjustment to assets and
(ii) A fire took place after the balance sheet date i.e. during 2020 -2021 financial year. Hence, liabilities are required for events occurring after the balance sheet date that provide additional informa-
corresponding financials of 2019-2020 financial year should not be adjusted for loss oc- tion materially affecting the determination of the amounts relating to conditions existing at the Balance
curred due to fire. However, in this circumstance, the going concern assumption will be Sheet date. A debtor for Rs. 20,00,000 suffered heavy loss due to earthquake in the last week of Febru-
evaluated. In case the going concern assumption is considered to be appropriate even ary, 2016 which was not covered by insurance. This information with its implications was already known
after the occurrence of fire, no disclosure of the same is required in the financial state- to the company. The fact that he became bankrupt in April, 2016 (after the balance sheet date) is only
ments. Otherwise, disclosure be given. an additional information related to the condition existing on the balance sheet date. Accordingly, full
provision for bad debts amounting Rs. 20,00, 000 should be made, to cover the loss arising due to
(iii) Since the transfer of risk and reward and sale was complete in the month of
the insolvency of a debtor, in the final accounts for the year ended 31st March 2016. Since the company
May, 2020 when conveyance and possession got complete, no revenue should be rec-
has already made 5% provision of its total debtors, additional provision amounting Rs. 19,00,000 shall be
ognized with respect to it in the financial statements of 2019-2020. However, a disclosure
made (20,00,000 x 95%).
for the same should be given by the entity.
(iv) Since the notice has been received after 31 March but before 30 June 2020 (approval Question 5
date), the said grant shall be adjusted in the financial statements for financial year 2019
-2020 because the violationof the conditions took place in the financial year 2019 -2020 The Board of Directors of New Graphics Ltd. in its Board Meeting held on 18th April, 2017, considered and
and the company must be aware of it. approved the Audited Financial results along with Auditors Report for the Financial Year ended 31st
March, 2017 and recommended a dividend of Rs. 2 per equity share (on 2 crore fully paid up equity
Question 3 shares of Rs. 10 each) for the year ended 31st March, 2017 and if approved by the members at the forth-
coming Annual General Meeting of the company on 18th June, 2017, the same will be paid to all the
An earthquake destroyed a major warehouse of PQR Ltd. on 30.4.2021. The accounting year of the eligible shareholders. Discuss on the accounting treatment and presentation of thesaid proposed div-
company ended on 31.3.2021. The accounts were approved on 30.6.2021. The loss from earthquake is idend in the annual accounts of the company for the year ended 31st March, 2017 as per the applicable
estimated at Rs. 25 lakhs. State with reasons, whether the loss due to earthquake is an adjusting or Accounting Standard and other Statutory Requirements. (MTP 5 Marks Aug’18,Mar’18, RTP May’19)
non-adjusting event and how the fact of loss is to be disclosed by the company. (MTP 5 Marks Nov ’21
& April ’23, RTP Nov 19, Old & New SM) Answer 5
As per the amendment in AS 4 “Contingencies and Events Occurring After the Balance Sheet Date” vide
Answer 3
Companies (Accounting Standards) Amendments Rules, 2016 dated 30th March, 2016, the events which
AS 4 “Contingencies and Events Occurring after the Balance Sheet Date”, states that adjustments to assets take place after the balance sheet date, are sometimes reflected in the financial statements because of
and liabilities are not appropriate for events occurring after the balance sheet date, if such events do statutory requirements or because of their special nature. However, dividends declared after the bal-
not relate to conditions existing at the balance sheet date. The destruction of warehousedue to earth- ance sheet date but before approval of financial statements are not recognized as a liability at the bal-
quake did not exist on the balance sheet date i.e. 31.3.2021. Therefore, loss occurred due to earth- ance sheet date because no statutory obligation exists at that time. Hence such dividends are disclosed
quake is not to be recognized in the financial year 2020-2021. However, according the standard, in the notes to financial statements. No, provision for proposed dividends is not required to be made. Such
unusual changes affecting the existence or substratum of the enterprise after the balance sheet date proposed dividends are to be disclosed in the notes to financial statements. Accordingly, the dividend
may indicate a need to consider the use of fundamental accounting assumption of going con- of Rs. 4 crores recommended by New Graphics Ltd. in its Board meeting on 18th April, 2017 shall not be
cern in the preparation of the financial statements. As per the information given in the Question, the accounted for in the books for the year 2016- 17 irrespective of the fact that it pertains to the year 2016-17
earthquake has caused major destruction; therefore, fundamental accounting assumption of going and will be paid after approval in the Annual General Meeting of the members / shareholders.
concern is called upon. Hence, the fact of earthquake together with an estimated loss of Rs. 25 lakhs
should be disclosed in the Report of the Directors for the financial year 2020-2021. Question 6
Question 4 State with reasons, how the following events would be dealt with in the financial statements of HariLtd.
for the year ended 31st March, 2022 (accounts were approved on 25th July, 2022):
While preparing its final accounts for the year ended 31st March, 2016, a company made provision for
(1) Negotiations with another company for acquisition of its business was started on 21st
bad debts @ 5% of its total debtors. In the last week of February, 2016 a debtor for Rs. 20 lakhs had suf-
January, 2022. Hari Ltd. invested ₹ 40 lakh on 22nd April, 2022.
fered heavy loss due to an earthquake; the loss was not covered by any insurance policy. In April, 2016
the debtor became a bankrupt. Can the company provide for the full loss arising out of insolvency of the (2) The company made a provision for bad debts @ 4% of its total debtors (as per trend fol-
debtor in the final accounts for the year ended 31 st March, 2016? Comment with reference to relevant lowed from the previous years). In the second week of March 2022, a debtor for ₹ 2,50,000
Accounting Standard. (MTP 5 Marks March 19, April’19, RTP Nov 18) had suffered heavy loss due to an earthquake; the loss was not covered by any insurance
policy. In May, 2022 the debtorbecame bankrupt.
(3) During the year 2021-22, Hari Ltd. was sued by a competitor for ₹ 13 lakhs for infringement
of a trademark. Based on the advice of the company’s legal counsel, Hari Ltd. provid-
ed for a sum of ₹ 8 lakhs in its financial statements for the year ended 31st March, 2022.
On 26th May, 2022, the Courtdecided in favour of the party alleging infringement of the Question 7
trademark and ordered Hari Ltd. to pay the aggrieved party a sum of ₹ 12 lakhs.
XYZ Ltd. operates its business into various segments. Its financial year ended on 31st March, 2020 and
(4) Cashier of Hari Ltd. embezzled cash amounting to ₹ 3,00,000 during March, 2022. How- the financial statements were approved by their approving authority on 15th June, 2020. Thefollowing
ever the same comes to the notice of Company management during August, 2022. material events took place:
(5) Cheques dated 31st March, 2022 collected in the month of April, 2022. All cheques are a. A major property was sold (it was included in the balance sheet at Rs. 25,00,000) for
presented to the bank in the month of April, 2022 and are also realized in the same which contracts had been exchanged on 15th March, 2020. The sale was completed on
month in the normal course after deposit in the bank.(MTP 5 Marks Sep’22, Old & New 15th May, 2020 at a price of Rs. 26,50,000.
SM)
b. On 2nd April, 2020, a fire completely destroyed a manufacturing plant of the entity.
Answer 6 It was expected that the loss of Rs. 10 million would be fully covered by the insurance
company.
I. As per AS 4‘Contingencies and Events Occurring After the Balance Sheet Date’, disclosure
should be made in the report of the approving authority of those events occurring after c. A claim for damage amounting to Rs. 8 million for breach of patent had been received by
the balance sheet date that represent material changes and commitments affecting the entity prior to the year-end. It is the director’s opinion, backed by legal advice that
the financial position of the enterprise, the investment of ₹ 40 lakhs in April, 2022 in the the claim will ultimatelyprove to be baseless. But it is still estimated that it would involve
acquisition of another company should be disclosed in the report of the Board of Direc- a considerable expenditure on legal fees.
tors to enable users of financial statements to make proper evaluations and decisions. You are required to state with reasons, how each of the above items should be dealt with
II. As per AS 4, adjustment to assets and liabilities are required for events occurring af- in the financial statements of XYZ Ltd. for the year ended 31st March, 2020. (RTP Nov 21,
ter the balance sheet date that provide additional information materially affecting the PYP 5 Marks Nov’22)
determination of the amounts relating to conditions existing at the Balance Sheet date. A
debtor for ₹ 2,50,000 suffered heavy loss due to earthquake in the second week of March, Answer 7
2022 which was not covered by insurance. This information with its implications was already
Treatment as per AS 4 ‘Contingencies and Events Occurring After the Balance Sheet Date’
known to the company. The fact that he became bankrupt in May, 2022 (after the balance
sheet date) is only an additional information related to the existing condition on the balance
(a) The sale of property should be treated as an adjusting event since contracts had been
sheet date. Accordingly, full provision for bad debts amounting ₹ 2,50,000 should be made,
exchanged prior to the year-end. The effect of the sale should be reflected in the finan-
to cover the loss arising due to the insolvency of a debtor, in the final accounts for the year
cial statements ended on 31.3.2020 and the profit on sale of property Rs.
ended 31st March 2022.
1,50,000 would be considered.
III. As per AS 4, adjustments to assets and liabilities are required for events occurring after the
balance sheet date that provide additional information materially affecting the determina- (b) The event is a non-adjusting event since it occurred after the year-end and does not
tion of the amounts relating to conditions existing at the balance sheet date. In the given case, relate to the conditions existing at the year-end. However, it is necessary to considerthe
since Hari Ltd. was sued bya competitor for infringement of a trademark during the year 2021- 22 validity of the going concern assumption having regard to the extent of insurancecover.
for which the provision was also made by it, the decision of the Court on 26 th May, 2022, for pay- Also, since it is said that the loss would be fully recovered by the insurance
ment of the penalty will constituteas an adjusting event because it is an event occurred before company, the fact should be disclosed by way of a note to the financial statements.
approval of the financial statements. Therefore, Hari Ltd. should adjust the provision upward by
₹ 4 lakhs to reflect the award decreed by the Court to be paid by them to its competitor. (c) On the basis of evidence provided, the claim against the company will not succeed.
Thus, Rs. 8 million should not be provided in the account, but should be disclosed by
IV. As the embezzlement of cash comes to the notice of company management only after ap- means of a contingent liability with full details of the facts. Provision should be madefor
proval of financial statements by board of directors of the company, then the treatment will legal fee expected to be incurred to the extent that they are not expected to be
be done as per the provisions of AS 5 “Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies” and the same will not be adjusted in the financial statements recovered.
for the year ended 31st March,2022. This being an extra-ordinary item should be disclosed in the
statement of profit and loss as a part of loss for the year ending March, 2023, in a manner, that Question 8
its impact on current profit or loss can be perceived.
A case is going on between ABC Ltd. and Tax department on claiming the exemption for certain items, for
V. Collection of cheques after balance sheet date is not an adjusting event even if the cheques
the year 2019-2020. The court has issued the order on 15th April and rejected the claim of the com-
bear the date of 31st March. Recognition of cheques in hand is therefore not consistent with
pany. Accordingly, company is liable to pay the additional tax. The financial statements wereapproved
requirements of AS 4. Moreover, the collection of cheques after balance sheet date does not
on 31st May, 2020. Shall company account for such tax in the year 2019-2020 or shall it account for in
represent any material change or commitments affecting financial position of the enter-
the year 2020-2021? (RTP May ‘21)
prise and no disclosure of such collections in the Directors’ Report is necessary.
Answer 8 Answer 11
(i) If dividends are declared after the balance sheet date but before the financial statements
To decide whether, the event is adjusting or not adjusting two conditions need to be satisfied,
are approved, the dividends are not recognized as a liability at the balance sheet date
(a) There has to be evidence because no obligation exists at that time unless a statute requires otherwise. Such divi-
(b) The event must have been related to period ending on reporting date. dends are disclosed in the notes. Thus, no liability for dividends needs to be recognized in
financial statements for financial year ended 31 st March, 2021 and declaration of dividend
Here both the conditions are satisfied. Court order is a conclusive evidence which has been received is non-adjusting event.
before approval of the financial statements since the liability is related to earlier year. The event will be
considered as an adjusting event and accordingly the amount will be adjusted in accounts of 2019- (ii) As per AS 4 ‘Contingencies and Events occurring after the Balance Sheet Date’ an event
2020. 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
Question 9 balance sheet date but before approval of the financial statements, it is necessary to rec-
ognize the loss. Thus loss amounting Rs. 53,000 should be adjusted in the accounts of the
A fire, on 2nd April, 2020, completely destroyed a manufacturing plant of Omega Ltd. whose financial year
company for the year ended 31st March, 2021 as it is adjusting event.
ended on 31st March, 2020, the financial statements were approved by their approving authority on 15th
June, 2020. It was expected that the loss of Rs. 10 million would be fully covered by the insurance compa- (iii) AS 4 states that adjustments to assets and liabilities are not appropriate for events occur-
ny. How will you disclose it in the financial statements of Omega Ltd. for the year ended 31st March, 2020. ring after the balance sheet date, if such events do not relate to conditions existing at the
(RTP Nov 20) 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
Answer 9 financial year 2020-2021 as it is non-adjusting event.
The event is a non-adjusting event since it occurred after the year-end and does not relate to the conditions However, according to the standard, unusual changes affecting the existence or substratum of
existing at the year-end. However, it is necessary to consider the validity of the going concern assumption the enterprise after the balance sheet date may indicate a need to consider the use of funda-
having regard to the extent of insurance cover. Also, since it is said that the loss would be fully recovered mental accounting assumption of going concern in the preparation of the financial statements.
by the insurance company, the fact should be disclosed by way of anote to 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. Consider-
ing that the going concern assumption is still valid, the fact of fire together with an estimated loss
Question 10
of Rs. 81 lakhs should be disclosed in the report of the approving authority for financial year 2020
AS 4 Contingencies and Events occurring after the Balance Sheet Date -21 to enable users of financialstatements to make proper evaluations and decisions.
Explain accounting treatment of Contingent Gains as per AS 4 “Contingencies and Events occurring
after the Balance Sheet Date”. (RTP Nov’22)
Question 12
As per the provisions of AS-4, a contingency is a condition or situation, the ultimate outcome of which
Answer 10
(gain or loss) will be known or determined only on the occurrence of one or more uncertain future
Accounting Treatment of Contingent Gains Contingent gains are not recognised in financial statements events (PYP 1 Mark, May’19)
since their recognition may result in the recognition of revenue which may never be realised. However, when
the realisation of a gain is virtually certain, then such gain is not a contingency and accounting for the gain Answer 12
is appropriate
False: A contingency is a condition or situation, the ultimate outcome of which, gain or loss, will be known
or determined only on the occurrence, or non-occurrence, of one or more uncertain future events.
Question 11
As per the provision of AS 4, you are required to state with reason whether the following transactions are
Question 13
adjusting event or non-adjusting event for the year ended 31.03.2021 in the books of NEW Ltd. (accounts
The accounting year of Dee Limited ended on 31st March, 2018 but the accounts were approved on 30th
of the company were approved by board of directors on 10.07.2021):
April, 2018. On 15th April, 2018 a fire occurred in the factory and office premises. The loss by fire is of such
1. Equity Dividend for the year 2020-21 was declared at the rate of 7% on 15.05.2021. a magnitude that it was not possible to expect the enterprise Dee Limited to start operation again. State
with reasons, whether the loss due to fire is an adjusting or non- adjusting event and how the fact of
2. On 05.03.2021, Rs. 53,000 cash was collected from a customer but not deposited
loss is to be disclosed by the company in the context of the provisions of AS-4 (Revised). (PYP 5 Marks,
by the cashier. This fraud was detected on 22.06.2021.
Nov 18)
3. One building got damaged due to occurrence of fire on 23.05.221. Loss was esti-
mated to be Rs. 81,00,000. (PYP 5 Marks Dec ’21)
Answer 13
Question 16
As per AS 4 (Revised) “Contingencies and Events occurring after the Balance Sheet Date”, an event oc-
curring after the balance sheet date should be an adjusting event even if it does not reflect any condition AS 4 does not apply to
existing on the balance sheet date, if the event is such as to indicate that the fundamental accounting
i. Obligation under retirement benefit plans.
assumption of going concern is no longer appropriate.
j. Commitments arising from long term lease contracts
The fire occurred in the factory and office premises of an enterprise after 31 March, 2018 but before ap-
proval of financial statement of 30.4.18. The loss by fire is of such a magnitude that it is not reasonable to k. liabilities of life assurance and general insurance enterprises arising from policies issued
expect the Dee Ltd. to start operations again, i.e., the going concern assumption is not valid. Since
l. Both (a) & (b).
the fire occurred after 31/03/18, the loss on fire is not a result of any condition existing on 31/03/18. But the
loss due to fire is an adjusting event the entire accounts need to be prepared on a liquidation basis with Ans: (d)
adequate disclosures by the company by way of note in itsfinancial statements in the following man-
ner: “Major fire occurred in the factory and office premises on 15th April, 2018 which has made impossible
for the enterprise to start operations again. Therefore, the financial statements have been prepared on Question 17
liquidation basis.”
A Ltd. sold its building for Rs. 50 lakhs to B Ltd. and has also given the possession to B Ltd. The book
value of the building is Rs. 30 lakhs. As on 31st March, 20X1, the documentation and legal formalities
Question 14 are pending.
For the financial year ended 31st March, 20X1
Cash amounting to Rs. 4 lakhs, stolen by the cashier in the month of March 20X1, was detected in April, 20X1.
The financial statements for the year ended 31st March, 20X1 were approved by the Board of Directors on a. The company should record the sale.
15th May, 20X1. As per Accounting Standards, this is for the financial statements year ended on 31st March,
b. The company should recognise the profit of Rs. 20
20X1.
lakhs in its profit and loss account.
a. An Adjusting event.
c. Both (a) and (b).
b. Non-adjusting event.
d. The company should disclose the profit of Rs. 20 lakhs in notes to accounts.
c. Contingency.
Ans: (c)
d. Provision
Ans: (a) Practical Questions
As per Accounting Standards, events occurring after the balance sheet date are A Ltd. has sold its building for Rs. 50 lakhs to B Ltd. and has also given the possession to B Ltd. The
book value of the building is Rs. 30 lakhs. As on 31st March, 20X1, the documentation and legal for-
e. Only favourable events that occur between the balance sheet date and the date when the
malities arepending. The company has not recorded the sale and has shown the amount received as
financial statements are approved by the Board of directors.
advance. Do you agree with this treatment?
f. Only unfavourable events that occur between the balance sheet date and the date when
the financial statements are approved by the Board of directors. Answer 18
g. Those significant events, both favourable and unfavourable, that occur between the bal- The economic reality and substance of the transaction is that the rights and beneficial interest in the
ance sheet date and the date on which the financial statements are approved by the property has been transferred although legal title has not been transferred. A Ltd. should record the sale
Board of directors. and recognise the gain of Rs. 20 lakhs in its profit and loss account. The building should be derecognized
h. Those significant events, both favourable and unfavourable, that occur between the bal- in the financial statements.
ance sheet date and the date on which the financial statements are not approved by the
Board of directors. Question 19
Ans: (c) During the year 20X1-20X2, Raj Ltd. was sued by a competitor for ₹ 15 lakhs for infringement of a trade-
mark. Based on the advice of the company’s legal counsel, Raj Ltd. provided for a sum of ₹ 10 lakhs in
its financial statements for the year ended 31st March, 20X2. On 18th May, 20X2, the Court decided in
favour of the party alleging infringement of the trademark and ordered Raj Ltd. to pay the aggrieved
party a sum of ₹ 14 lakhs. The financial statements were prepared by the company’s management
on 30th April, 20X2, and approved by the board on 30th May, 20X2. ering that the going concern assumption is still valid, the fact of earthquake together with an
estimated loss of ₹ 30 lakhs should be disclosed in the report of the approving authority for
Answer 19 financial year 20X1-X2 to enable users of financial statements to make proper evaluations and
decisions.
As per AS 4 (Revised), adjustments 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 20X1-X2 for which the provision A company has filed a legal suit against the debtor from whom ₹ 15 lakh is recoverable as on 31.3.20X1.
was also made by it, the decision of the Court on 18th May, 20X2, for payment of the penalty will consti- The chances of recovery by way of legal suit are not good as per legal opinion given by the counsel in
tute as an adjusting event because it is an event occurred before approval of the financial statements. April, 20X1. Can the company provide for full amount of ₹ 15 lakhs as provision for doubtful debts? Dis-
Therefore, Raj Ltd. should adjust the provision upward by ₹ 4 lakhs to reflect the award decreed by the cuss.
Court to be paid by them to its competitor.
Had the judgment of the Court been delivered on 1st June, 20X2, it would be considered as an event Answer 22
occurring after the approval of the financial statements which is not covered by AS 4 (Revised). In that
As per AS 4 (Revised) “Contingencies and Events Occurring After the Balance Sheet Date”, assets and
case, no adjustment in the financial statements of 20X1-X2 would have been required.
liabilities should be adjusted for events occurring after the balance sheet date that provide additional
evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date.
Question 20 (Illustration) In the given case, company should make the provision for doubtful debts, as legal suit has been filed on
31st March, 20X1 and the chances of recovery from the suit are not good. Though, the actual result of legal
In X Co. Ltd., theft of cash of ₹ 5 lakhs by the cashier in January, 20X1 was detected only in May, 20X1. suit will be known in future yet situation of non-recovery from the debtors exists before finalisation of
The accounts of the company were not yet approved by the Board of Directors of the company. De- financial statements. Therefore, provision for doubtful debts should be made for the year ended on 31st
cide whether the theft of cash has to be adjusted in the accounts of the company for the year ended March, 20X1.
31.3.20X1.
Answer 20
As per AS 4 (Revised) ‘Contingencies and Events occurring after the Balance Sheet Date’, an event oc- In preparing the financial statements of R Ltd. for the year ended 31st March, 20X1, you come across
curring after the balance sheet date may require adjustment to the reported values of assets, liabilities, the following information. State with reasons, how you would deal with this in the financial statements:
expenses or incomes. The company invested 100 lakhs in April, 20X1 before approval of Financial Statements by the Board of
directors in the acquisition of another company doing similar business, the negotiations for which had
If a fraud of the accounting period is detected after the balance sheet date but before approval of started during the year.
the financial statements, it is necessary to recognise the loss amounting ₹ 5,00,000 and adjust the ac-
counts of the company for the year ended 31st March, 20X1. Answer 23
AS 4 (Revised) defines “Events Occurring after the Balance Sheet Date” as those significant events, both
favourable and unfavourable, that occur between the balance sheet date and the date on which the financial
An earthquake destroyed a major warehouse of ACO Ltd. on 20.5.20X2. The accounting year of the statements are approved by the Approving Authority in the case of a company. Accordingly, the acquisition of
company ended on 31.3.20X2. The accounts were approved on 30.6.20X2. The loss from earthquake another company is an event occurring after the balance sheet date. However, no adjustment to assets and
is estimated at ₹ 30 lakhs. State with reasons, whether the loss due to earthquake is an adjusting or liabilities is required as the event does not affect the determination and the condition of the amounts stated in
non-adjusting event and how the fact of loss is to be disclosed by the company. the financial statements for the year ended 31st March, 20X1. The disclosure should be made in the report of the
approving authority of those events occurring after the balance sheet date that represent material changes
Answer 21 and commitments affecting the financial position of the enterprise, the investment of ₹ 100 lakhs in April, 20X1
for the acquisition of another company should be disclosed in the report of the Approving Authority to enable
AS 4 (Revised) “Contingencies and Events Occurring after the Balance Sheet Date”, states that adjust- users of financial statements to make proper evaluations and decisions.
ments 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 destruction of warehouse
due to earthquake did not exist on the balance sheet date i.e. 31.3.20X2. Therefore, loss occurred due to
earthquake is not to be recognised in the financial year 20X1-20X2. However, according to the standard, A Limited Company closed its accounting year on 30.6.20X1 and the accounts for that period were con-
unusual changes affecting the existence or substratum of the enterprise sidered and approved by the board of directors on 20th August, 20X1. The company was engaged in
after the balance sheet date may indicate a need to consider the use of fundamental account- laying pipeline for an oil company deep beneath the earth. While doing the boring work on 1.9.20X1 it
ing assumption of going concern in the preparation of the financial statements. As per the had met a rocky surface for which it was estimated that there would be an extra cost to the tune of ₹
information given in the Question, the earthquake has caused major destruction; therefore, 80 lakhs. You are required to state with reasons, how the event would be dealt with in the financial
fundamental accounting assumption of going concern would have to be evaluated. Consid- statements for the year ended 30.6.20X1.
Answer 24
Chapter 7.2
AS 4 (Revised) on Contingencies and Events Occurring after the Balance Sheet Date defines ‘events
occurring after the balance sheet date’ as ‘significant events, both favourable and unfavourable, that AS 5- Net Profit or Loss for the period, Prior period items & Changes inAccounting policies
occur between the balance sheet date and the date on which financial statements are approved by
the Board of Directors in the case of a company’. The given case is discussed in the light of the above-
mentioned definition and requirements given in AS 4 (Revised). In this case the incidence, which was
expected to push up cost, became evident after the date of approval of the accounts. So it is not an Attempts MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV
‘event occurring after the balance sheet date’.
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
Study
Question 25 (Illustration) Q.12 TO Q.23
Mat.
While preparing its final accounts for the year ended 31st March, 20X1 a company made a provision Past
Q.10 NO Q.9 NO NO NO Q.8 NO Q.11 Q.4 NO NO
for bad debts @ 5% of its total trade receivables. In the last week of February, 20X1 a trade receivable Exams
for ₹ 2 lakhs had suffered heavy loss due to an earthquake; the loss was not covered by any insur- Q.1 Q.2
ance policy. In April, 20X1 the trade receivable became a bankrupt. Can the company provide for the MTP NO Q.4 Q.4 Q.4 NO NO Q.3 Q.5 NO NO
Q.4 Q.3
full loss arising out of insolvency of the trade receivable in the final accounts for the year ended 31st
March, 20X1? RTP Q.7 Q.4 Q.10 Q.4 Q.6 Q.4 Q.1 Q.6 Q.4 Q.7 Q.8 NO
Answer 25
As per Accounting Standard 4, Assets and Liabilities should be adjusted for events occurring after the
balance sheet date that provide additional evidence to assist estimation of amounts relating to con-
ditions existing at the balance sheet date. So full provision for bad debt amounting to ₹ 2 lakhs should
be made to cover the loss arising due to the insolvency in the Final Accounts for the year ended 31st
March, 20X1. It is because earthquake took place before the balance sheet date. Had the earthquake
taken place after 31st March, 20X1, then this would have been treated as non-adjusting event and only
disclosure required as per AS 4 (Revised), would have been sufficient.
Y Ltd. has book debts and has a doubt over recoverability of some of the book debts. The amount that
cannot be recovered is not quantifiable. Thus, Y Ltd. is of the opinion that provision for doubtful debts
should not be created. Y Ltd. creates provision for certain other expenses on estimated basis.
Whether contention of Y Ltd. is correct?
Answer: 26
As per AS 4, “Contingencies and Events Occurring After the Balance Sheet Date” if it is likely that a con-
tingency will result in a loss to an entity then it should create provision for that contingency on the es-
timated basis.
Based on the above, the contention that provision for doubtful debt is not be created merely because
the amount is not quantifiable is not correct. Hence Y Ltd. should make provision in the books on the
basis of estimation.
Reference:
The students are advised to refer the full text of AS 4 (Revised) “Contingencies and Events occur-
ring after the Balance Sheet Date”.
Chapter 7.2 As per the standard, the effect of a change in an accounting estimate should be classified using the
same classification in the statement of profit and loss as was used previously for the estimate. Prior
AS 5- Net Profit or Loss for the period, Prior period items & Changes inAccounting policies 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. Thus, revision of an estimate
by its nature i.e. the difference of Rs. 2 lakhs, is not a prior period item. Therefore, in the given case ex-
Question 1 penses amounting Rs. 2,00,000 (i.e. Rs. 9,00,000 – Rs. 7,00,000) recorded in the current year, should not
be regarded as prior period item.
(Also includes concepts from AS 29-Provisions, Contingent Liabilities & Contingent Assets) EXOX
Ltd. is in the process of finalizing its accounts for the year ended 31 st March, 2017. The company seeks
your advice on the following: Question 3
(i) The Company’s sales tax assessment for assessment year 2014-15 has been completed A company created a provision of Rs. 7,50,000 for staff welfare while preparing the financial state-
on 14th February, 2017 with a demand of Rs. 2.76 crore. The company paid the entire due ments for the year 2020-21. On 31st March 2021, in a meeting with staff welfare association, it was
under protest without prejudice to its right of appeal. The Company files its appeal be- decided to increase the amount of provision for staff welfare to Rs. 10,00,000. The accounts wereap-
fore the appellate authoritywherein the grounds of appeal cover tax on additions made proved by Board of Directors on 15th April, 2021. You are required to explain the treatment of such re-
in the assessment order for a sum of 2.10 crore. (RTP May’21) vision in financial statements for the year ended 31st March 2021 in line with the provisions of AS 5?
(MTP 4 Marks March 21, MTP 5 Marks April 22)
(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 Answer 3
till May, 2017 will not be paid to the employees but will be settled to them at the time of re-
tirement. The company agrees to deposit the arrears in Government Bonds by Septem- As per AS 5 “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”, the
ber, 2017. change in amount of staff welfare provision amounting Rs. 2,50,000 is neither a prior
period item nor an extraordinary item. It is a change in estimate, which has been occurred in the year
2020-21. As per the provisions of the standard, normally, all items of income and expense which are
You required to examine and give suggestions in line with the relevant Accounting Stan-
recognized in a period are included in the determination of the net profit or loss for the period. This
dards. (MTP 5 Marks April ’19)
includes extraordinary items and the effects of changes in accounting estimates. However, the effect of
such change in accounting estimate should be classified using the same classification in the statement
Answer 1 of profit and loss, as was used previously, for the estimate.
(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 on 31st March, 2017. The Question 4
amount paid under protest can be kept under the heading ‘Loans & Advances’ and
disclosed along with the contingent liability of Rs. 2.10 crore. The Accountant of a company has sought your opinion with relevant reasons, whether the following
will be treated as change in Accounting Policy or not for the year ended 31st March, 2020. Please advise
(ii) The arrears for the period from June, 2016 to March, 2017 are required to be provided him in the following situations in accordance with the provisions of relevant Accounting Standard;
for in the accounts of the company for the year ended on 31st March, 2017.
(i) Provision for doubtful debts was created @ 2% till 31st March, 2019. From the Financial
Question 2 year 2019 - 2020, the rate of provision has been changed to 3%.
(ii) During the year ended 31st March, 2020, the management has introduced a formal gra-
S.T.B. Ltd. makes provision for expenses amounting Rs. 7,00,000 as on March 31, 2020, but the actual tuity scheme in place of ad-hoc ex-gratia payments to employees on retirement.
expenses during the year ending March 31, 2021 comes to Rs. 9,00,000 against provision made during
the last year. State with reasons whether difference of Rs. 2,00,000 is to be treated as prior period (iii) Till the previous year the furniture was depreciated on straight line basis over a period of
item as per AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Poli- 5 years. From current year, the useful life of furniture has been changed to 3 years.
cies’ (MTP 5 Marks April 21) (iv) Management decided to pay pension to those employees who have retired after com-
pleting 5 years of service in the organization. Such employees will get pension of Rs.
Answer 2 20,000 per month. Earlier there was no such scheme of pension in the organization.
As per AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, as During the year ended 31st March, 2020, there was change in cost formula in measuring the cost of
a result of the uncertainties inherent in business activities, many financial statement items cannot be inventories. (MTP 5 Marks Oct’19, May’20, Mar’19, Oct’18, Old & New SM, RTP May 22, RTP Nov 18, RTP
measured with precision but can only be estimated. The estimation process involves judgments based Nov 19, RTP Nov ’20, RTP May’20, PYP 5 Marks Nov’22)
on the latest information available. The use of reasonable estimates is an essential part of the prepara-
tion of financial statements and does not undermine their reliability. Estimates may have to be revised, Answer 4
if changes occur regarding the circumstances on which the estimate was based, or as a resultof new
(i) In the given case, company has created 2% provision for doubtful debts till 31st March, 2019.
information, more experience or subsequent developments.
Subsequently in 2019-20, the company revised the estimates based on the changed cir-
cumstances and wants to create 3% provision. Thus change in rate of provision of doubtful new pension scheme is not a change in accounting policy.
debt is change in estimate and is not change in accounting policy. This change will affect
(iii) In the given case, company has created 2.5 % provision for doubtful debts till 31st March, 2020.
only current year.
Subsequently from 1st April, 2020, the company revised the estimates based on the changed
(ii) As per AS 5, the adoption of an accounting policy for events or transactions that differ in circumstances and wants to create 5% provision. Thus change in rate of provision of doubtful
substance from previously occurring events or transactions, will not be considered as a debt is change in estimate and is not change in accounting policy. This change will affect
change in accounting policy. Introduction of a formal retirement gratuity scheme by an only current year.
employer in place of ad hoc ex-gratia payments to employees on retirement is a transac-
(iv) Change in cost formula used in measurement of cost of inventories is a change in account-
tion which is substantially different from the previous policy, will not be treated as change
ing policy.
in an accounting policy.
(v) Change in useful life of computers from 5 years to 3 years is a change in estimate and is not
(iii) Change in useful life of furniture from 5 years to 3 years is a change in estimate and is not a
a changein accounting policy.
change in accounting policy.
(iv) Adoption of a new accounting policy for events or transactions which did not occur previ- Question 6
ously should not be treated as a change in an accounting policy. Hence the introduction
of new pension scheme is not a change in accounting policy.
a) There was a major theft of stores valued at Rs. 10 lakhs in the preceding year which was
(v) Change in cost formula used in measurement of cost of inventories is a change in ac- detected only during current financial year (2020-2021). How will you deal with this infor-
counting policy. mation in preparing the financial statements of R Ltd. for the year ended 31st March, 2021.
(RTP Nov 21)
Question 5 b) Management decided to pay pension to those employees who have retired after complet-
ing 5 years of service in the organization. Such employees will get pension of Rs. 20,000 per
The management of Pluto Limited has sought your opinion with relevant reasons, whether the fol- month. Earlier there was no such scheme of pension in the organization. Explain whether
lowing transactions will be treated as changes in Accounting Policy or not for the year ended 31st this will constitute a change in accounting policy or not as per AS 5. (RTP Nov 21, May 20)
March, 2021. Please advise them in the following situations in accordance with the provisions of Ac-
counting Standard 5: Answer 6
During the year ended 31st March, 2021, the management has introduced a formal retiremen
a) Due to major theft of stores in the preceding year ( 2019-2020) which was detected only during
gratuity scheme in place of ad-hoc ex-gratia payments to its employees on retirement.
the current financial year (2020–2021), there was overstatement of closing inventory of stores
(i) Management decided to pay pension to those employees who have retired after com- in the preceding year. This must have also resulted in the overstatement of profits of previous
pleting 5 years of service in the organization. Such employees would receive a pension year, brought forward to the current year. The adjustments are required to be made in the
of ₹ 25,000 per month. Earlier there was no such scheme of pension in the organization. current year as ‘Prior Period Items’ as per AS 5 (Revised) on Net Profit or Loss for the Period,
(ii) Provision for doubtful Trade Receivables was created @2.5% till 31 st March, 2020. From 1st Prior Period Items and Changes in Accounting Policies. Accordingly, the adjustments relating
April,2020, the rate of provision has been changed to 5% to both opening inventory of the current year and profit brought forward from the previous
year should be separately disclosed in the statement of profit and loss together with their
(iii) For the year ended 31st March,2021 there was change in the cost formula in measuring the nature and amount in a manner that their impact on the current profit or loss can be per-
cost of Inventories. ceived. Alternatively, it may be assumed that in the preceding year, the value of inventory of
(iv) Till the end of the previous year, Computers were depreciated on Straight Line Basis over stores as found out by physical verification of inventories was considered in the preparation
a period of 5 years. From current year, the useful life of Computers has been changed to of financial statements of the preceding year. In such a case, only the disclosure as to the
3 years.(MTP 5 MarksOct’22) theft and the resulting loss is required in the notes to the accounts for the current year i.e, year
ended 31st March, 2021.
b) As per AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Pol-
Answer 5 icies’, the
(i) As per AS 5, the adoption of an accounting policy for events or transactions that differ in adoption of an accounting policy for events or transactions that differ in substance from
substance from previously occurring events or transactions, will not be considered as a previously occurring events or transactions, will not be considered as a change in accounting
change in accounting policy. Introduction of a formal retirement gratuity scheme by an policy. Accordingly, the adoption of a new accounting policy of paying pension to retired em-
employer in place of ad hoc ex-gratia payments to employees on retirement is a transac- ployees is a policy for events or transactions which did not occur previously. Hence, it will not
tion which is substantially different from the previous transaction, will not be treated as be treated as a change in an accounting policy.
change in an accounting policy.
(ii) Adoption of a new accounting policy for events or transactions which did not occur previ-
ously should not be treated as a change in an accounting policy. Hence the introduction of
Question 7
Answer 8
Bela Ltd. has a vacant land measuring 20,000 sq. mts, which it had no intention to use in the future.
Classification of given items is as follows:
The Company decided to sell the land to tide over its liquidity problems and made a profit of Rs.10
Lakhs by selling the said land. Moreover, there was a fire in the factory and a part of the unused factory
shed valued at Rs. 8 Lakhs was destroyed. The loss from fire was set off against the profit from sale Sr. Particulars Remarks
ofland and profit of Rs. 2 lakhs was disclosed as net profit from sale of assets. You are required to ex- No.
amine the treatment and disclosure done by the company and advise the company in line with AS 5.
(RTP May 18 & Nov 22) (i) Actual bad debts turning out to be more Change in Accounting Estimates
than provisions
Answer 7
(ii) Change from Cost model to Revaluation Change in Accounting Policy
As per AS 5 “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies” Ex-
model for measurement of carrying amount
traordinary items should be disclosed in the statement of profit and loss as a part of net profit orloss
of PPE
for the period. The nature and the amount of each extraordinary item should be separately disclosed in
the statement of profit and loss in a manner that its impact on current profit or loss canbe perceived. (iii) Government grant receivable as compen- Extra -ordinary Items
In the given case the selling of land to tide over liquidation problems as well as fire in the Factory does sation for expenses incurred in previous ac-
not constitute ordinary activities of the Company. These items are distinct from the ordinary activities counting period
of the business. Both the events are material in nature and expected not to recur frequently or regularly. (iv) Treating operating lease as finance lease. Prior- period Items
Thus, these are Extraordinary Items.
(v) Capitalization of borrowing cost on work- Prior-period Items (as interest on work-
Therefore, in the given case, disclosing net profits by setting off fire losses against profit from sale of ing capital ing capital loans is not
land is not correct. The profit on sale of land, and loss due to fire should be disclosed separately in the eligible for
statement of profit and loss .
capitalization)
Question 8 (vi) Legislative changes having long Ordinary Activity

term retrospective application
State whether the following items are examples of change in Accounting Policy / Change in Account- (vii) Change in the method of depreciation Change in Accounting Estimates
ing Estimates / Extraordinary items / Prior period items / Ordinary Activity: from straight line to WDV
(i) Actual bad debts turning out to be more than provisions. (viii) Government grant becoming refundable Extra -ordinary Items
(ii) Change from Cost model to Revaluation model for measurement of carrying amountof PPE. (ix) Applying 10% depreciation instead of 15% Prior- period Items
(iii) Government grant receivable as compensation for expenses incurred in previousaccount- on furniture
ing period. (x) Change in useful life of fixed assets Change in Accounting Estimates
(iv) Treating operating lease as finance lease.
Question 9
(v) Capitalization of borrowing cost on working capital.
(vi) Legislative changes having long term retrospective application. As per the provisions of AS-5, extraordinary items should not be disclosed in the statement of
(vii) Change in the method of depreciation from straight line to WDV. profit and loss as a part of net profit or loss for the period. (PYP 1 Mark, May 19)
(viii) Government grant becoming refundable.

Answer 9
(ix) Applying 10% depreciation instead of 15% on furniture.
False: The nature and the amount of each extraordinary item should be separately disclosed in the statement
(x) Change in useful life of fixed assets. (RTP May ’23, PYP 5 Marks Jan 21) of profit and loss in a manner that its impact on current profit or loss can be perceived.
Question 10
(i) PQR Ltd. is in the process of finalizing its accounts for the year ended 31 st March, 2018.
The company seeks your advice on the following:
(ii) Goods worth Rs. 5,00,000 were destroyed due to flood in September, 2015. A claim was
lodged with insurance company. But no entry was passed in the books for insurance mined in the current period.
claim in the financial year 2015-16. In March, 2018, the claim was passed and the com-
It is given that revision of wages took place in April, 2022 with retrospective effect from 1st January, 2022.
pany received a payment of Rs. 3,50,000 against the claim. Explain the treatment of such
Therefore, wages payable for the period from 1 01.2022 to 31.3.2022
receipt in final account for the year ended 31 st March, 2018.
cannot be taken as an error or omission in the preparation of financial statements and hence this expen-
Company created a provision for bad and doubtful debts at 2.5% on debtors in preparing the financial
diture cannot be taken as a prior period item. The full amount of wages payable to workers will be treated
statements for the year 2017-18.
as an expense of current year and it will be charged to profit & loss account for the year 2022-23 as normal
Subsequently, on a review of the credit period allowed and financial capacity of the customers, expenses.
the company decides to increase the provision to 8% on debtors as on 31.03.2018. The accounts
It may be mentioned that additional wages is an expense arising from the ordinary activities of the com-
were not approved by the Board of Directors till the date of decision. While applying the rel-
pany. Such an expense does not qualify as an extraordinary item. Therefore, finance manager is incorrect
evant accounting standard, can this revision be considered as an extra ordinary item or prior
in treating increase as extraordinary item. However, as per AS 5, when items of income and expense within
period item? (PYP 5 Marks, May 18, RTP May 19)
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
Answer 10 be disclosed separately.
As per the provisions of AS 5 “Net Profit or Loss for the Period, Prior Period Items and Changes in Account- Therefore, additional wages liability of ₹ 30 lakhs should be disclosed separately in the financial
ing Policies”, prior period items are income or expenses, which arise, in the current period as a result of statements of TQ Cycles Ltd. for the year ended 31st March, 2023.
error or omissions in the preparation of financial statements of one or more prior periods. Further, the
nature and amount of prior period items should be separately disclosed in the statement of profit and Question 12
loss in a manner that their impact on current profit or loss can be perceived. In the given instance, it is
clearly a case of error/omission in preparation of financial statements for the year 2015- A change in the estimated life of the asset, which necessitates adjustment in the depreciation is an
(i) 16. Hence, claim received in the financial year 2017- 18 is a prior period item and should be sep- example of
arately disclosed in the statement of Profit and Loss. a. Prior period item.
In the given case, a limited company created 2.5% provision for doubtful debts for the year 2017- b. Ordinary item.
2018.
c. Extraordinary item.
Subsequently, the company revised the estimates based on the changed circumstances
and wants to create 8% provision. As per AS 5, the revision in rate of provision for doubtful d. Change in accounting estimate.
debts will be consider as change in estimate and is neither a prior period item nor an ex-
traordinary item.
Ans: (d)
The effect of such change should be shown in the profit and loss account for the year ending 31st
Question 13
March, 2018.
Which of the following is considered as an extraordinary item as per AS 5?
Question 11
e. Write down or write-off of receivables, inventory and intangible assets.
TQ Cycles Ltd. is in the manufacturing of bicycles, a labour intensive manufacturing sector. In April f. Gains and losses from sale or abandonment of equipment used in a business.
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 g. Effects of a strike, including those
January 2022 to March 2022 amounted to ₹ 30 lakhs. The management asked the Finance manager against competitors and major suppli-
to charge ₹ 30 lakhs as prior period item while finalizing financial statements for the year 2022-23. ers.
Further, the Finance manager is of the view that this amount being abnormal should be disclosed as Flood damage from unusually heavy rain or a normally dry environment.
extra-ordinary item in the Profit and loss account for the financial year 2021-22.
Ans: (d)
Discuss with reference to applicable Accounting Standards. ( PYP 5 Marks May’22)
Question 14
Answer 11
As per AS 5 “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies” prior Which one of the following is an example of extraordinary item?
period items are income or expenses which arise in the current period as a result of errors or omissions
a. The write down of inventories to their net realisable value
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 deter- b. Reversal of write down of inventories
c. Government grants become refundable

Answer: 17
d. Reversal of provisions.
No, payment of tax cannot be recognised as an extraordinary item.
Ans: (c)
As per AS 5, “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”
an extraordinary item is income or expenses that arise from events or transactions that are clearly dis-
Question 15 tinct from ordinary activities of the enterprise and, therefore, are not expected to recurfrequently or
regularly.
Extraordinary items are income or expenses
In the given case, providing consultancy service is an ordinary activity of Z Ltd. Thus, GST paid pursuant to
e. That arise from events clearly distinct from the ordinary activities of the enterprise. the demand raised by GST department is also a part of an ordinary activity of Z Ltd. Recognising such
f. That are not expected to recur frequently or regularly. payments as an extra-ordinary item is contrary to AS 5.
g. Both (a) and (b).

Questions 18 (Illustration)
h. None of the three.
From the past 5 financial years, an old outstanding balance of Rs. 50,000 was still appearing as sundry
Ans: (c) creditor in the current year balance sheet of People Ltd. The company is certain that this amount is not
payable due to one or more reasons. Therefore, it decided to write off the said amount in its current
Question 16 year’s books of accounts and recognize it as income. The company treated the amount of Rs. 50,000
written off as a prior period item and made the adjustments accordingly.
An audit stock verification during the year ended 31st March, 20X1 revealed that opening stock of the The company is of the view that since sundry balances were recognized in the prior period(s), its relat-
year was understated by Rs. 5 lakhs due to wrong counting. While finalizing accounts, your opinion ed written-off amount should be treated as a prior period item.
willbe
i. It is not a prior period item and no separate disclosure is required Answer: 18
It should be treated as a prior period adjustment and should be separately disclosed in the No, the company is not correct in treating the amount written off as a prior period item. As per AS 5, prior
current period items are income or expenses which arise in a current year due to errors or omissions in the prepa-
ration of the financial statements of one or more prior period(s).
j. year’s financial statement
Writing off an old outstanding balance in the current year which is appearing in its books of accounts from
k. The adjustment of Rs. 5 lakhs in both opening stock of current year and profit brought the past 5 financial years does not mean that there has been an error or omission in the preparation
forward from previous year should be made offinancial statements of prior period(s). It is just a practice adopted by the company to write off the
l. Both (b) and (c). old outstanding balances of more than 5 years in its current year books of accounts. Therefore, the
amount written off is not treated as a prior period item.
Ans: (d) Hence, adjusting the amount Rs. 50,000 written off as a prior period item on the basis that sundry
balances were recognized in prior period(s) is not in line with AS 5.
Questions 19 (Illustration)
Practical Questions
In the current year, A Ltd. changed the depreciation method from the Straight Line Method (SLM)
Questions 17 to Written Down Value (WDV) method. When A Ltd. recomputed depreciation retrospectively as
per thenew method, deficiency arose in depreciation in respect of past years. Therefore, it reduced the
carrying amount of the asset by the amount of deficiency and such change in carrying amount
A company (Z Ltd.) is engaged in the business of providing consultancy services. A few
(deficiency amount) has been debited to the statement of profit and loss as an extraordinary ex-
days back, it received a notice from GST department raising a demand of GST on consultan-
pense.
cy services provided by itfor Rs. 500,000. Recently Z Ltd. paid the demand. In the books, the
payment is recorded as an extraordinary expenditure. Whether the change in the carrying amount of assets due to the change in depreciation method
Whether payment of tax demand raised by the taxation authority can be recognised as an should be treated as an extraordinary item?
extraordinary item?
Answer: 19
No.
As per AS 5, “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Pol-
icies” extraordinary items are income or expenses that arise from events or transactions that are Answer 21
clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to
recur frequently or regularly. Although the case under consideration does not relate to extraordinary item, but the nature and amount
of such item may be relevant to users of financial statements in understanding the financial position
A change in the method of charging depreciation is not an event that is clearly distinct from the ordinary and performance of an enterprise and in making projections about financial position and perfor-
activities of the entity. In the instant case, A Ltd. has changed the depreciation method and treated the mance. AS 5 on ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Poli-
reduction in carrying amount (or amount of deficiency in depreciation) of the asset as an extraordinary cies’ states that: “When items of income and expense within profit or loss from ordinary activities are
expense. This is not correct. Such deficiency should be treated as a normal expense. of such size, nature or incidence that their disclosure is relevant to explain the performance of the
A change in the estimated useful life of a depreciable asset (i.e. change in depreciation method) enterprise for the period, the nature and amount of such items should be disclosed separately.” Cir-
affects the depreciation in the current period and in each period during the remaining useful life cumstances which may require separate disclosure of items of income and expense in accordance
of the asset. In both cases, the effect of the change relating to the current period is recognised as with AS 5 include the write-down of inventories to net realisable value as well as the reversal of
income or expense in the current period. The effect, if any, on future periods, is recognised in future such write-downs.
periods. It is given that revision of wages took place on 1st September, 20X2 with retrospective effect from
The change in depreciation method is considered as a change in accounting estimate as per the pro- 30.9.20X1. Therefore wages payable for the half year from 1.10.20X1 to 31.3.20X2 cannot be taken as an
visions of AS 5. error or omission in the preparation of financial statements and hence this expenditure cannot be
taken as a prior period item. Additional wages liability of ₹ 7,50,000 (for 1½ years @ ₹ 5,00,000 per an-
Reference: num) should be included in current year’s wages. It may be mentioned that additional wages is an
The students are advised to refer the full text of AS 5” Net Profit or Loss for the Period, Prior Period expense arising from the ordinary activities of the company. Such an expense does not qualify as an
Items and Changes in Accounting Policies”. 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 dis-
closed separately.
Fuel surcharge is billed by the State Electricity Board at provisional rates. Final bill for fuelsurcharge
of ₹ 5.30 lakhs for the period October, 20X1 to September, 20X7 has been received and paid in Feb- Question 22 (Illustration)
ruary, 20X8. However, the same was accounted in the year 20X8-X9. Comment on the accounting
treatment done in the said case. The company finds that the inventory sheets of 31.3.20X1 did not include two pages con-
taining details of inventory worth ₹ 14.5 lakhs. State, how you will deal with the following
Answer 20 matters in the accounts of Omega Ltd. for the year ended 31st March, 20X2.
The final bill having been paid in February, 20X8 should have been accounted for in the annual
Answer 22
accounts of the company for the year ended 31st March, 20X8. However, it seems that as a
result of error or omission in the preparation of the financial statements of prior period i.e., AS 5 on ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Poli-
for the year ended 31st March 20X8, this material charge has arisen in the current period i.e., cies’, defines Prior Period items as “income or expenses which arise in the current period as
year ended 31st March, 20X9. Therefore it should be treated as ‘Prior period item’ as per AS a result of errors or omissions in the preparation of the financial statements of one or more
5. As per AS 5, prior period items are normally included in the determination of net profit or prior periods”. Rectification of error in inventory valuation is a prior period item vide AS 5.
loss for the current period. An alternative approach is to show such items in the statement Separate disclosure of this item as a prior period item is required as per AS 5.
of profit and loss after determination of current net profit or loss. In either case, the objective
is to indicate the effect of such items on the current profit or loss. It may be mentioned that it Question 23 (Illustration)
is an expense arising from the ordinary course of business. Although abnormal in amount or
infrequent in occurrence, such an expense does not qualify an extraordinary item as per AS
(i) Explain whether the following will constitute a change in accounting policy
5. For better understanding, the fact that power bill is accounted for at provisional rates billed
or not as per AS 5.
by the state electricity board and final adjustment thereof is made as and when final bill is
received may be mentioned as an accounting policy. (ii) Introduction of a formal retirement gratuity scheme by an em-
ployer in place of ad hoc ex- gratia payments to employees on re-
tirement.
Management decided to pay pension to those employees who have retired after completing 5
(i) During the year 20X1-20X2, a medium size manufacturing company wrote down its years of service in the organization. Such employees will get pension of ₹ 20,000 per month. Earlier
inventories to net realisable value by ₹ 5,00,000. Is a separate disclosure necessary? there was no such scheme of pension in the organization.
A company signed an agreement with the Employees Union on 1.9.20X2 for revision of wages with ret-
rospective effect from 30.9.20X1. This would cost the company an additional liability of ₹ 5,00,000 per
annum. Is a disclosure necessary for the amount paid in 20X2-X3?
Answer 23
(i) As per AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Account- Chapter 7.3
ing 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 AS 11- The Effects of Changes in Foreign Exchange rates
a change in accounting policy.
(ii) Accordingly, introduction of a formal retirement gratuity scheme by an em-

ployer in place of ad hoc ex-gratia payments to employees on retirement is not
a change in an accounting policy. Attempts MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV
Similarly, the adoption of a new accounting policy for events or transactions which did not occur Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
previously or that were immaterial will not be treated as a change in an accounting policy. Study
Q.19 TO Q.35
Mat.
Past Q.14 Q.12 Q.1

Q.4 NO Q.13 NO NO NO NO Q.17 NO
Exams Q.15 Q.14 Q.16
Q.2 Q.4 Q.3

MTP NO NO NO NO Q.1 Q.2 NO NO NO
Q.3 Q.5 Q.14
Q.5
RTP Q.8 Q.7 Q.1 Q.8 Q.7 Q.6 Q.1 Q.9 Q.10 Q.11 NO
Q.15
US $ x (62.00-60.00) = ₹ 80 lakh. So, ₹ 80 lakh should also be added to cost of an item of property, plant
Chapter 7.3 and equipment with corresponding credit to outstanding loan in addition to ₹ 20 lakh on account of ex-
change loss on payment of instalment. The total cost of an item of property, plant and equipment to be
AS 11- The Effects of Changes in Foreign Exchange rates increased by ₹ 100 lakh. Total depreciation to be provided for the year 2019 - 2020 = 20% of (₹ 3,000 Each
+ 100 lakh) = ₹ 620 lakh.
Question 2
Question 3
Rau Ltd. purchased a plant for US$ 1,00,000 on 01st February 2020, payable after three months. Com-
pany entered into a forward contract for three months @ Rs. 49.15 per dollar. Exchange rate per dollar “Explain “monetary item” as per Accounting Standard 11. How are foreign currency monetary items to
on 01st Feb. was Rs. 48.85. How will you recognize the profit or loss on forward contract in the books be recognized at each Balance Sheet date? Classify the following as monetary or non- monetary item:
of Rau Ltd.? (MTP 5 Marks, May ’20, RTP Nov’21, RTP May’19, Old & New SM)(Same concept different
figures PYP 2.5 Marks Nov’22) (i) Share Capital
(ii) Trade Receivables
Answer 1
(iii) Investments
Forward Rate Rs. 49.15 (iv) Property Pant & Equipment. (MTP 5 Marks Nov ’21 & April ‘23)
Less: Spot Rate (Rs. 48.85)
Answer 3
Premium on Contract Rs. 0.30
As per AS 11‘The Effects of Changes in Foreign Exchange Rates’, Monetary items are money held and
Contract Amount US$ 1,00,000 assets and liabilities to be received or paid in fixed or determinable amounts of money.
Total Loss (1,00,000 x 0.30) Rs. 30,000 Foreign currency monetary items should be reported using the closing rate at each balance sheet date.
Contract period 3 months However, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amount
in reporting currency that is likely to be realized from, or required to disburse, a foreign currency monetary
Two months falling in the year ended 31st March, 2020; therefore, loss to be recognized (30,000/3) x 2 item at the balance sheet date. In such circumstances, the relevant monetary item should be reported in
= Rs. 20,000. Balance amount of Rs. 10,000 will be recognized in the following financial year. the reporting currency at the amount which is likely to be realized from or required to disburse, such item
at the balance sheet date.
Question 2
Share capital Non-monetary
Om Ltd. purchased an item of property, plant and equipment for US $ 50 lakhs on 01.04.2019 and the
Trade receivables Monetary
same was fully financed by the foreign currency loan [US $] repayable in five equal instalments an-
nually. (Exchange rate at the time of purchase was 1 US $ = ₹ 60]. As on 31.03.2020 the first instalment Investments Non-monetary
was paid when 1 US $ fetched ₹ 62.00. The entire loss on exchange was included in cost ofgoods sold. Fixed assets Non-monetary
Om Ltd. normally provides depreciation on an item of property, plant and equipment at 20% on WDV
basis and exercised the option to adjust the cost of asset for exchange difference arisingout of loan
Question 4
restatement and payment. Calculate the amount of exchange loss, its treatment and depreciation
on this item of property, plant and equipment. (MTP 5 Marks Oct 20, Oct 21)
ABC Ltd. borrowed US $ 5,00,000 on 01/01/2021, which was repaid as on 31/07/2021. ABC Ltd. prepares
financial statement ending on 31/03/2021. Rate of Exchange between reporting currency (INR) and for-
Answer 2
eign currency (USD) on different dates are as under:
Exchange differences arising on restatement or repayment of liabilities incurred for the purpose of ac-
quiring an item of property, plant and equipment should be adjusted in the carrying amount of the 01/01/2021 1 US$ = Rs. 68.50
respective item of property, plant and equipment as Om Ltd. has exercised the option and it is long 31/03/2021 1 US $ = Rs. 69.50
term foreign currency monetary item. Thus, the entire exchange loss due to variation of ₹ 20 lakh on
31/07/2021 1 US $ = Rs. 70.00
31.03.2020 on payment of US $ 10 lakhs, should be added to the carrying amount of an item of property,
plant and equipment and not to the cost of goods sold. Further, depreciation on the unamortized de- You are required to pass necessary journal entries in the books of ABC Ltd. as per AS 11. (MTP 5 Marks
preciable amount should also be provided. , Sep ’22, PYP May ‘18, 5 Marks)(Same concept different figures as Old & New SM)
Calculation of Exchange loss:
Foreign currency loan (in ₹) = (50 lakhs $ x ₹ 60) = ₹ 3,000 lakh
Exchange loss on outstanding loan on 31.03.2020 = ₹ 40 lakh
Question 6
Answer 4
Journal Entries in the Books of ABC Ltd. (a) Classify the following items into Monetary and Non-monetary:
(i) Share capital; (ii) Trade Payables; (iii) Cash balance; (iv) Property, plant and equip-
Date Particulars Rs. (Dr.) Rs. (Cr.) ment
Jan. 01, 2021 Bank Account (5,00,000 x 68.50) Dr. 342,50,000 (b) Trade payables of CAT Ltd. include amount payable to JBB Ltd., Rs. 10,00,000 recorded at
the prevailing exchange rate on the date of transaction, transaction recorded at US $1 = Rs.
To Foreign Loan Account 342,50,000
80.00. The exchange rate on balance sheet date (31.03.2020) was US $1 = Rs. 85.00. You are
March 31, Foreign Exchange Difference Account Dr. 5,00,000 required to calculate the amount of exchange difference and also explain the accounting
2021 treatment needed for this as per AS 11 in the books of CAT Ltd. (RTP May ’21)
To Foreign Loan Account 5,00,000 Answer 6

[5,00,000 x (69.50-68.50)]
(a) Share capital - Non-monetary; Trade Payables - Monetary
Jul. 31, 2021 Foreign Exchange Difference Account 2,50,000
Cash balance – Monetary; Property, plant and equipment - Non-monetary
[5,00,000 x (70-69.5)] Dr.
(b) Amount of Exchange difference and its Accounting Treatment
Foreign Loan Account Dr. 347,50,000
To Bank Account 350,00,000 Foreign Rs.
Currency Rate
Question 5 Trade payables

Initial recognition US $ 12,500 (Rs.10,00,000/80) 1 US $ = Rs. 80 10,00,000
Assets and liabilities and income and expenditure items in respect of integral foreign operations are
translated into Indian rupees at the prevailing rate of exchange at the end of the year. The resultant Rate on Balance sheet date 1 US $ = Rs. 85
exchange differences in the case of profit, is carried to other Liabi lities Account and the Loss, if any, Exchange Difference loss US $ 12,500 x Rs. (85-80) 62,500
is charged to revenue. You are required to comment in line with AS 11. (MTP 5 Marks Oct ’22)(RTP May
Treatment: Debit Profit and Loss A/c by Rs. 62,500and
20, Old & New SM)
Credit Trade Payables
Answer 5 Thus, Exchange Difference on trade payables amounting Rs. 62,500 is required to be transferred to
Profit and Loss.
Financial statements of an integral foreign operation (for example, dependent foreign branches)
should be translated using the principles and procedures of AS 11 (Revised 2003). The individual items
Question 7
in the financial statements of a foreign operation are translated as if all its transactions had been
bentered into by the reporting enterprise itself. Individual items in the financial statements of the
(a) Classify the following items as monetary or non-monetary item: Share Capital, Trade
foreign operation are translated at the actual rate on the date of transaction. The foreign currency
Receivables,Investment in Equity shares & Fixed Assets. (RTP Nov 20, Nov 18, Old & New
monetary items (for example cash, receivables, payables) should be reported using the closing
SM)
rate at each balance sheet date. Non-monetary items (for example, fixed assets, inventories, in-
vestments in equity shares) which are carried in terms of historical cost denominated in a for- (b)
eign 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 Exchange Rate per $
date of purchase of the asset if asset is carried at cost. If the fixed asset is carried at fair value, Goods purchased on 1.1.2019 for US $ 15,000 ₹ 75
translation should be done using the rate existed on the date of the valuation. The cost of invento-
Exchange rate on 31.3.2019 ₹ 74
ries is translated at the exchange rates that existed when the cost of inventory was incurred and
realizable value is translated applying exchange rate when realizable value is determined which is Date of actual payment 7.7.2019 ₹ 73
generally closing rate. Exchange difference arising on the translation of the financial statements
of integral foreign operation should be charged to profit and loss account.
Thus, the treatment by the management of translating all assets and liabilities; income and expendi-
ture 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 AS 11 (Revised 2003).
You are required to ascertain the loss/gain to be recognized for financial years 2018- 19 and 2019-20
as per AS 11. (RTP Nov 20, Nov 18, Old & New SM)
₹
Answer 7 Forward contract rate 64.25
(a) Less: Spot rate (61.50)
Share capital Non-monetary Loss on forward contract 2.75
Trade receivables Monetary Forward Contract Amount $ 50,000
Investment in equity shares Non-monetary Total loss on entering into forward contract = ($ 50,000 × Rs.2.75) ₹1,37,500
Fixed assets Non-monetary Contract period 6 months
(b) Loss for the period 1st November, 2018 to 31st March, 2019 i.e. 5 months falling 5 months
in the year 2018-2019
As per AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’, all foreign currency transac-
tions should be recorded by applying the exchange rate on the date of transactions. Thus, goods 5 Rs.1,14,583
purchased on 1.1.2019 and corresponding creditors would be recorded at ₹ 11,25,000 (i.e. Hence, Loss for 5 months will be Rs.1,37,500× = 6
$15,000 × ₹ 75) According to the standard, at the balance sheet date all monetary transactions should Thus, the loss amounting to Rs.1,14,583 for the period is to be recognized in the year ended 31st March, 2019.
be reported using the closing rate. Thus, creditors of US $15,000 on 31.3.201 9 will be reported at ₹ 11,10,000
(i.e. $15,000 × ₹ 74) and exchange profit of ₹ 15,000 (i.e. 11,25,000 – 11,10,000) should be credited to Profit
Question 9
and Loss account in the year 2018-19. On 7.7.2019, creditors of $15,000 is paid at the rate of ₹ 73. As per
AS 11, exchange difference on settlement of the account should also be transferred to Profit and Loss Kumar Ltd. borrowed US $ 3,00,000 on 31-12-2020 which will repaid as on 30-06-2021. Kumar Ltd. pre-
account. Therefore, ₹ 15,000 (i.e. 11,10,000 – 10,95,000) will be credited to Profit and Loss account in the pares its financial statements ending on 31-03-2021. Rate of exchange between reporting currency(Ru-
year 2019-20. pee) and foreign currency (US$) on different dates are as under:
Question 8 31-12-2020 1 US $ = ₹ 44.00

31-03-2021 1 US $ = ₹ 44.50
(i) Trade receivables as on 31.3.2019 in the books of XYZ Ltd. include an amount receivable
from Umesh Rs.5,00,000 recorded at the prevailing exchange rate on the date of sales, 30-06-2021 1 US $ = ₹ 44.75
i.e. at US $ 1= Rs.58.50. US $ 1 = Rs.61.20 on 31.3.2019. Explain briefly the accounting treat-
ment needed in this case as per AS 11 as on 31.3.2019. (RTP Nov 19) Calculate Borrowings in reporting currency to be recognized in the books on above mentioned dates
(ii) Power Track Ltd. purchased a plant for US$ 50,000 on 31st October, 2018 payable after 6 and also show journal entries for the same.
months. The company entered into a forward contract for 6 months @Rs.64.25 per Dol-
(i) if borrowings were repaid on 28-2-2021 on which date exchange rate was 1 US $ =
lar. On 31st October, 2018, the exchange rate was ₹61.50 per Dollar. You are required to
₹ 44.20 then what entry should be passed? (RTP May ’22)
recognise the profit or loss on forward contract in the books of the company for the year
ended 31st March, 2019. (RTP Nov 19, May 18) Answer 9
Answer 8 (i) As per AS 11 ‘The Effect of Changes in Foreign Exchange Rates”, a foreign currency transaction
should be recorded, on initial recognition in the reporting currency, by applying to the foreign
(I) As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences aris-
currency amount theexchange rate between the reporting currency and the foreign currency
ing on the settlement of monetary items or on reporting an enterprise’s monetary items at rates
at the date of the transaction. Moreover, at each balance sheet date, foreign currency mon-
different from those at which they were initially recorded during the period, or reported in
etary items should be reported using the closing rate. Accordingly, on 31.12.2020 borrowings
previous financial statements, should be recognized as income or as expenses in the pe-
will be recorded at ₹ 1,32,00,000 (i.e., ₹ 3,00,000 × ₹ 44.00). On 31.3.2021 borrowings (monetary
riod in which they arise. Accordingly, exchange difference on trade receivables amounting
items) will be recorded at ₹ 1,33,50,000 (i.e. $ 3,00,000 × ₹ 44.50).
Rs.23,076 {Rs.5,23,076(US $ 8547 x Rs.61.20) less Rs. 5,00,000} should be charged to profit &
Loss account.
(II) Calculation of profit or loss to be recognized in the books of Power Track Limited
Journal of Kumar Ltd.

Answer 10
Date Particular Dr. (₹) Cr. (₹) As per AS 11 (revised 2003), ‘The Effects of Changes in Foreign Exchange Rates’, monetary items denom-
31-12-2020 Bank A/c Dr. 1,32,00,000 inated in a foreign currency should be reported using the closing rate at each balance sheet date. The
effect of exchange difference should be taken into profit and loss account. Trade payables isa monetary
To Foreign Loan Account 1,32,00,000 item, hence should be valued at the closing rate i.e, Rs. 48 at 31st March, 2022 irrespective of the pay-
31-03-2021 Foreign Exchange Difference Account A/c 1,50,000 ment for the same subsequently at lower rate in the next financial year. The difference of Rs. 5 (Rs. 48-Rs.
Dr. 43) per US dollar should be shown as an exchange loss in the profit and loss account for the year ended
31st March, 2022 and is not to be adjusted against the cost of raw materials. In the subsequent year, the
company would record an exchange gain of Rs. 1 per US dollar, i.e., the difference between Rs. 48 and Rs.
30-06-2021 Foreign Loan Account A/c Dr. 1,33,50,000 47 per US dollar. Hence, the accounting treatment adopted by the company is incorrect.
Foreign Exchange Difference Account A/c 75,000
Dr. Question 11
To Bank A/c 1,34,25,0000
ABC Builders Limited had borrowed a sum of US $ 15,00,000 at the beginning of Financial year 2020- 21
In case borrowings were repaid before Balance Sheet Date, then the entry would be as follows: for its residential project at London Interbank Offered Rate (LIBOR) + 4 %. The interest is payable at the
end of the Financial Year. At the time of availing the loan, the exchange rate was ₹ 72 per US $ and the
Date Particular Dr. (₹) Cr. (₹) rate as on 31st March, 2021 was ₹ 76 per US $. If ABC Builders Limited borrowed the loan in Indian Rupee
28-02-2021 Foreign Loan Account A/c Dr. 1,32,00,000 equivalent, the pricing of loan would have been 9.50%. Compute Borrowing Cost and exchange differ-
ence for the year ending 31st March, 2021 as per applicable Accounting Standards. (Applicable LIBOR is
Foreign Exchange DifferenceAc- 60,000
1%).(RTP May 23)
count A/c Dr.
To Bank A/c 1,32,60,000 Answer 11
(i) Interest for the period 2020-21
Working Notes:
= US $ 15 lakhs x 5% × ₹ 76 per US $ = ₹ 57 lakhs
(i) The exchange difference of ₹ 1,50,000 is arising because the transaction has been reported
at different rate (₹ 44.50 = 1 US $) from the rate initially recorded (i.e., ₹ 44 = 1 US $) from the (ii) Increase in the liability towards the principal amount
rate initially recorded (i.e., ₹ 44 = 1 US $) = US $ 15 lakhs × ₹ (76 - 72) = ₹ 60 lakhs
(ii) The exchange difference of ₹ 75,000 is arising because the transaction has been settled (iii) Interest that would have resulted if the loan was taken in Indian currency
at an exchange rate (₹ 44.75 = 1 US$) different from the rate at which reported in the last
financial statements (₹ 44.50 = 1 US$). = US $ 15 lakhs × ₹ 72 x 9.5% = ₹ 102.60 lakhs
(iii) The exchange difference of ₹ 60,000 is arising because the transaction has been (iv) Difference between interest on local currency borrowing and foreign currency borrowing = ₹
settled at a different rate (i.e., ₹ 44.20 = 1 US $) than the rate at which initially re- 102.60 lakhs less ₹ 57 lakhs = ₹ 45.60 lakhs.
corded (1 US $ = ₹ 44.00)
Therefore, out of ₹ 60 lakhs increase in the liability towards principal amount, only ₹ 45.60 lakhs
will be considered as the borrowing cost. Thus, total borrowing cost would be ₹ 102.60 lakhs being the
Question 10
aggregate of interest of ₹ 57 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
A company had imported raw materials worth US Dollars 6,00,000 on 5th January, 2022, when the
borrowing of ₹ 45.60 lakhs.
exchange rate was Rs. 43 per US Dollar. The company had recorded the transaction in the books at
the above mentioned rate. The payment for the import transaction was made on 5th April, 2022 when Hence, ₹ 102.60 lakhs would be considered as the borrowing cost to be accounted for as per AS 16
the exchange rate was Rs. 47 per US Dollar. However, on 31st March, 2022, the rate of exchange was Rs. “Borrowing Costs” and the remaining ₹ 14.4 lakhs (60 - 45.60) would be considered as the exchange
48 per US Dollar. The company passed an entry on 31st March, 2022 adjusting the cost of raw materi- difference to be accounted for as per AS 11 “The Effects of Changes in Foreign Exchange Rates”.
als consumed for the difference between Rs. 47 and Rs. 43 per US Dollar.
In the background of the relevant accounting standard, is the company’s accounting treatment cor- Question 12
rect? Discuss (RTP Nov’22)
Explain briefly the accounting treatment needed in the following cases as per AS 11 as on
31.03.2020
Debtors include amount due from Mr. S ₹ 9,00,000 recorded at the prevailing exchange Thus, Exchange Difference on Long term loan amounting ₹ 67,987.48 may either be charged to Profit and
rate on the date of sales, transaction recorded at US $1 = ₹ 72.00 US $ 1=₹73.50 on 31st Loss A/c or to Foreign Currency Monetary Item Translation Difference Account but exchange difference on
March,2020 US $ 1= ₹ 72.50 on 1st April,2019. debtors amounting ₹ 18,750 is required to be transferred to Profit and Loss A/c.
(i) Long term loan taken on 1st April, 2019 from a U.S. company amounting to ₹ 75,00,000. NOTE 1: *Exchange Difference Loss (net of adjustment of exchange gain on repayment of ₹ 5,00,000)
₹5,00,000 was repaid on 31st December, 2019, recorded at US $ 1 = ₹ 70.50. interest has been has been calculated in the above solution. Alternative considering otherwise also possible.
paid as and when debitedby the US company. US $1= ₹ 73.50 on 31st March,2020 US $1=1₹ NOTE 2: Date of sales transaction of ₹ 9 lakhs have not been given in the question and hence it has
72.50 on 1st April, 2019. (PYP 5 Marks Jan ‘21) (Same concepts different figures Old & New been assumed that the transaction took place during the year ended 31 March 2020.
SM)
Answer 12 Question 13
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences arising on Karan Enterprises having its Head office in Mangalore, Karnataka has a branch in Greenville, USA. Fol-
the settlement of monetary items or on reporting an enterprise’s monetary items at rates different lowing is the trial balance of Branch as at 31-3-2019:
from those at which they were initially recorded during the period, or reported in previous financial
statements, should be recognized as income or as expenses in the period in which they arise. Particulars Amount ($) Dr. Amount ($) Cr.
However, at the option of an entity, exchange differences arising on reporting of long - term foreign
currency monetary items at rates different from those at which they were initially recorded during Fixed assets 8,000
the period, or reported in previous financial statements, in so far as they relate to the acquisition Opening inventory 800
of a non- depreciable capital asset can be accumulated in a “Foreign Currency Monetary Item
Translation Difference Account” in the enterprise’s financial statements and amortized over the Cash 700
balance period of such long-term asset/ liability, by recognition as income or expense in each of Goods received form Head Office 2,800
such periods.
Sales 24,050
Foreign Cu rency Rate ₹ Purchases 11,800
Debtors Expenses 1,800
Initial recognition US $12,500 (9,00,000/72) 1 US $ = ₹72 9,00,000 Remittance to head office 2,450
Rate on Balance sheet date 1 US $ = ₹ 73.50 Head office account 4,300

28,350 28,350
Exchange Difference Gain US $ 12,500 X (73.50- 72) 18,750
Treatment: Credit Profit and Loss A/c by ₹ 18,750 (i) Fixed assets were purchased on 1st April, 2019Depreciation at 10% p.a. is to be charged on
fixed assets on straight line method,
Long term Loan
(ii) Closing inventory at branch is $ 700 as on 31-3-2019.
Initial recognition US $ 1,03,448.28 1 US $ = ₹ 73.50 75,00,000
(75,00,000/72.50) (iii) Goods received form Head Office (HO) were recorded at Rs. 1,85,500 in HO books.
Rate on Balance sheet date 1 US $ = ₹ 73.50 (iv) Remittances to HO were recorded at Rs. 1,62,000 in HO books.
Exchange Difference Loss after adjustment of ex- (v) HO account is recorded in HO books at Rs. 2,84,500.
change gain on repayment of ₹ 5,00,000 Exchange rates of US Dollar at different dates can be taken as:1-4-2015 Rs. 63; 1-4-2018 Rs. 65 and
₹ 67,987.48 [82,171.88 (US $ 96,356.08 X ₹ 73.5 31-3-2019 Rs . 67.
less ₹ 70,00,000) less profit 14,184.40 Prepare the trial balance after been converted into Indian rupees in accordance with AS-11.
[US $ 7,092.2 (5,00,000/70.5) X ₹ 2)] NET LOSS 67,987.48* (PYP Nov.’19,5 Marks)
Treatment: Credit Loan A/c and

Debit FCMITD A/C or Profit and Loss A/c by
₹ 67,987.48
Answer 13 Answer 14
Trial Balance of Foreign Branch (converted into Indian Rupees) as on March 31, 2019 Amount of Exchange difference and its Accounting Treatment
Long term Loan Foreign Rs.

Particulars $ (Dr.) $ (Cr.) Conversion Rate ₹ (Dr.) ₹ (Cr.) Currency
Basis Rate
Fixed Assets 8,000 Transaction (i) Initial recognition US $50,000 Rs. 1 US $ = Rs. 60 30,00,000
Date (30,00,000/60)
Rate 63 5,04,000 Rate on Balance sheet date 1 US $ = Rs. 62
Open- 800 Opening Rate 65 52,000 Exchange Difference Loss Us $ 50,000 X Rs. 1,00,000
ing In- (62 - 60)
ventory Treatment: Credit Loan A/c and Debit FCMITD
Goods Received Actuals 1,85,500 A/c or Profit and Loss A/c by Rs. 1,00,000
from HO 2,800 Trade receivables
Sales 24,050 Average Rate 66 15,87,300 (ii) Initial recognition US $ 16,949.152* (Rs. 1 US $ = Rs. 59 10,00,000
10,00,000/59)
Purchases 11,800 Average Rate 66 7,78,800
Rate on Balance sheet date 1 Us $ = Rs. 62
Expenses 1,800 Average Rate 66 1,18,800
Exchange Difference Gain US $ 16,949.152* x 50,847.456*
Cash 700 Closing Rate 67 46,900
Rs. (62-59)
Remittance to 2,450 Actuals 1,62,000
Treatment: Credit Profit and Loss A/c by ₹
HO
50,847.456* And Debit Trade Receivables
HO Account 4,300 Actuals 2,84,500
Thus, Exchange Difference on Long term loan amounting Rs. 1,00,000 may either be charged to Profit and
Exchange Rate
Loss A/c or to Foreign Currency Monetary Item Translation Difference Account but exchange difference on
Difference Balancing Figure 23,800 trade receivables amounting Rs. 50,847.456 is required to be transferred to Profit and Loss A/c.
28,350 28,350 18,71,800 18,71,800 Question 15

Closing Stock 700 Closing Rate 67 46,900
AXE Limited purchased fixed assets costing $ 5,00,000 on 1st Jan. 2018 from an American company M/s
Depreciation 800 Fixed Asset Rate 63 50,400 M&M Limited. The amount was payable after 6 months. The company entered into a forward contract
on 1st January 2018 for five months @ f 62.50 per dollar. The exchange rate per dollar was as follows:
Question 14 On 1st January, 2018 Rs. 60.75 per dollar
ABC Ltd. an Indian Company obtained long term loan from WWW private Ltd., a U.S. company amount- On 31st March, 2018 Rs. 63.00 per dollar
ing to Rs.30,00,000. It was recorded at US $1 = Rs.60.00, taking exchange rate prevailing at the date of You are required to state how the profit or loss on forward contract would be recognized in the booksof
transaction. The exchange rate on balance sheet data (31.03.2018) was US $1 = Rs. 62.00. AXE Limited for the year ending 2017-18, as per the provisions of AS 11. (PYP Nov.’18, 5 Marks, RTPMay 20)
Trade receivable includes amount receivable from Prakash Ltd., Rs. 10,00,000 recorded at the prevail-
ing exchange rate on the date of sales, transaction recorded at US $1 = Rs. 59.00. The exchange rate on Answer 15
balance sheet data (31.03.2018) was US $1 = Rs. 62.00. As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, an enterprise may enter into a forward
You are required to calculate the amount of exchange difference and also explain the accounting exchange contract to establish the amount of the reporting currency required, the premium or discount
treatment needed in the above two cases as per AS 11 in the books of ABC Ltd. arising at the inception of such a forward exchange contract should be amortized as expenses or income
over the life of the contract.
(PYP Nov.’18, 5 Marks)(Same concept different figures -PYP Dec’21 5 Marks, MTP 5 Marks Apr’23)
Forward Rate Rs.62.50
Less: Spot Rate (Rs. 60.75)
Date Rs. /£
Premium on Contract Rs. 1.75
31st March,2023 97
Contract Amount US$5,00,000
30th September, 2023 99
Total Loss (5,00,000 x 1.75) ₹ 8,75,000
You are required to give your opinion to Trower Limited on which of the above two options to be
Contract period 5 months 3 months falling in the year 2017-18; therefore, loss to be rec- chosen. (PYP 5 Marks May ‘23)
ognizeding 2017-18 (8,75,000/5) x 3 = Rs. 5,25,000. Rest Rs. 3,50,000 will be recognized in the
following year 2018- 19. Answer 17
Option
Question 16
(i) Pay immediately with Cash discount of 1% on the payable
Trade Payables of Jared Limited includes amount due to Sterling Limited ₹ 9,75,000 recorded at the
prevailing exchange rate on the date of purchase; transaction recorded at US $ 1 = ₹ 75.00. The ex- ₹
change rate on Balance Sheet date (31st March,2022) was US $ 1 = 79.00 The payment was made on 1st
Total amount payable as on 31.3.2023 (50,000 x Rs. 97) 48,50,000
May,2022 when the exchange rate was US $ 1 = ₹ 78.30.
You are required to calculate the amount of exchange difference on 31st March, 2022 and 1st May, Less: Cash discount (48,500)
2022 and also explain the accounting treatment needed in the above case as per AS 11 in the books of 48,01,500
Jared Limited. (PYP 2.5 Marks Nov ’22)
Add: Borrowing cost @ 15% p.a. for 6 months 3,60,112
Answer 16 If payment made immediate 51,61,612
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences arising on the set- (ii) Option
tlement of monetary items or on reporting an enterprise’s monetary items at rates different from those
Pay after 6 months with interest @ 5% p.a. on the payable
at which they were initially recorded during the period, or reported in previous financial statements,
should be recognized as income or as expenses in the period in which they arise.
₹
Trade payables Foreign Cur- Amount Total amount payable as on 31.3.2023 (50,000 x Rs. 99) 49,50,000
rency
₹ Interest for 6 months @ 5% 1,23,750
Rate
If payment made after 6 months 50,73,750
Initial recognition US $13,000 (9,75,000/75) 1 US $ = ₹ 75
Thus, Option
Exchange Rate on Balance sheet date 1 US $ = ₹ 79
(iii) is beneficial to Trower Limited as the Rupee outflow will be lower by Rs. (51,61,612 –
Exchange Difference Loss US $ 13,000 X (79-75) 52,000
50,73,750) = Rs. 87,862 in option (ii).
Exchange Rate on Settlement date 1 US $ = ₹ 78.30
Note: The above answer be presented in the alternative manner given as below: Option
Exchange Difference Profit US $ 13,000x(79- 78.30) 9,100 (i) Pay immediately with Cash discount of 1% on the payable
For the year ended 31st March, 2022 exchange diffefence loss amounting ₹ 52,000 will be charged to ₹
statement of Profit & Loss A/c.
Total amount payable on 31.3.2023 50,000
However, there is exchange difference gain of ₹ 13,000 x (79-78.30) = 9,100 on 1st May, 2022. Thus gain of
Less: Cash discount (50,000 x 1 / 100) (500)
₹ 9,100 will be credited to statement of Profit & Loss A/c for the year ended 31st March, 2023.
49,500
Question 17 48,01,500
Trower Limited is an Indian importer. It imports goods from True View Limited situated at London. 49,500 x Rs. 97 3,60,112
Trower Limited has a payable of £50,000 to True View Limited as on 31st March, 2023. True View Lim- Add: Borrowing cost @ 15% p.a. for 6 months If payment made Rs. 51,61,612
ited has given Trower Limited the following two options: immediate
(i) Pay immediately with a cash discount of 1% on the payable.
Pay after 6 months with interest @ 5% p.a. on the payable.The borrowing rate for Trower Limited in
rupees is 15% p.a. The following are the exchange rates:
Option (ii) Ans: (c)

Pay after 6 months with interest @ 5% p.a. on the payable
Questions 20
Rs.
The debit or credit balance of “Foreign Currency Monetary Item Translation Difference Account”
Total amount payable on 31.3.2023 50,000
Interest for 6 months @ 5% (50,000 x 5 / 100 x 6 / 12) 1.250 a. Is shown as “Miscellaneous Expenditure” in the Balance Sheet
51,250 b. Is shown under “Reserves and Surplus” as a separate line item
If payment made after 6 months (51,250 x 99) 50,73,750 c. Is shown as “Other Non-current” in the Balance Sheet
Thus, Option (ii) is beneficial to Trower Limited as the Rupee outflow will be lower by Rs. (51,61,612 – d. Is shown as “Current Assets” in the Balance Sheet
50,73,750) = Rs. 87,862 in option (ii). Ans: (b)
Question 18
Questions 21
Explain “monetary item” as per Accounting Standard 11.
If asset of an integral foreign operation is carried at cost, cost and depreciation of tangible fixed asset
How are foreign currency monetary items to be recognized at each Balance Sheet date? Classify the istranslated at
following monetary or non-monetary item:
a. Average exchange rate b. Closing exchange rate
Share Capital. Trade Receivables.Investments.
c. Exchange rate at the date of pur- d. Opening exchange rate
Fixed Assets. (Nov ’23)
chase of asset
Answer 18 Ans: (c)
As per AS 11, Monetary items are money held and assets and liabilities to be received or paid in fixed or
determinable amounts of money. Questions 22
Foreign currency monetary items should be reported using the closing rate at each balance sheet date.
However, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amount Which of the following can be classified as an integral foreign operation?
in reporting currency that is likely to be realized from, or required to disburse, a foreign currency monetary
item at the balance sheet date. a. Branch office serving as an extension of the head office in terms of operations
In such circumstances, the relevant monetary item should be reported in the reporting currency at the b. Independent subsidiary of the parent company
amount which is likely to be realized from or required to disburse, such item at the balance sheet date. c. Branch office independent of the head office in terms of operational decisions
Classification of items as monetary or non-monetary item: d. None of the above
Share capital Non-monetary
Ans: (a)
Investments Non-monetary Fixed Questions 23

Assets (PPE) Non-monetary Which of the following items should be converted to closing rate for the purposes of financial reporting?
Questions 19 a. Items of Property, Plant and Equipment b. Inventory

c. Trade Payables, Trade Receivables d. All of the above
As per AS 11 assets and liabilities of non-integral foreign operations shouldbe converted at rate
and
a. Opening b. Average Foreign Currency Borrowings
c. Closing d. Transaction
Ans: (c)
Theoretical Questions Answers a depreciable capital asset can be added to or deducted from the cost of the asset and should be
depreciated over the balance life of the asset, and in other cases, can be accumulated in a “Foreign
Questions 24 Currency Monetary Item Translation Difference Account” in the enterprise’s financial statements and
amortised over the balance period of such long-term asset/ liability, by recognition as income or ex-
Explain “monetary item” as per Accounting Standard 11. How are foreign currency monetary items to pense in each of such periods.
be recognized at each Balance Sheet date?
Answers 24
Trade receivables Foreign Currency Rate ₹
As per AS 11 ‘The Effects of Changes in Foreign Exchange Rates’, Monetary items are money held and
assets Initial recognition US $8,547 1 US $ = Rs. 58.50 5,00,000
and liabilities to be received or paid in fixed or determinable amounts of money. (5,00,000/58.50)
Foreign currency monetary items should be reported using the closing rate at each balance sheet Rate on Balance sheet date 1 US $ = Rs. 61.20
date. However, in certain circumstances, the closing rate may not reflect with reasonable accura- Exchange Difference Gain US $ 8,547 X 23,077
cy the amount in reporting currency that is likely to be realized from, or required to disburse, a foreign
currency monetary item at the balance sheet date. In such circumstances, the relevant monetary (61.20-58.50)
item should be reported in the reporting currency at the amount which is likely to be realized from or Treatment: Credit Profit and Loss A/c by
required to disburse, such item at the balance sheet date.
Rs. 23,077
Long term Loan
Questions 25
Initial recognition US $ 1,07,913.67 1 US $ = Rs. 55.60 60,00,00
Distinguish Non-Integral Foreign Operation (NFO) with Integral Foreign Operation (IFO) as per AS 11.
0
Answers 25 (60,00,000/55.60)
As per AS 11, Integral foreign operation (IFO) is a foreign operation, the activities of which are an integral Rate on Balance sheet date 1 US $ = Rs. 61.20
part of those of the reporting enterprise. A foreign operation that is integral to the operations of the Exchange Difference Loss US $ 6,04,317
reporting enterprise carries on its business as if it were an extension of the reporting enterprise’s
operations. In contrast, a non-integral foreign operation (NFO) is a foreign operation that is not an
1,07,913.67 X (61.20 – 55.60)
integral operation. For details, refer para 2.5 of chapter.
Treatment: Credit Loan A/c
Practical Questions Answers And Debit FCMITD A/C or Profit and Loss
A/c by Rs. 6,04,317
Questions 26
Explain briefly the accounting treatment needed in the following cases as per AS 11 as on 31.3. 20X1. Thus Exchange Difference on Long term loan amounting Rs. 6,04,317 may either be charged
Trade receivables include amount receivable from Umesh Rs. 5,00,000 recorded at the prevailing to Profit and Loss A/c or to Foreign Currency Monetary Item Translation Difference Account but
exchange rate on the date of sales, transaction recorded at US $ 1= Rs. 58.50. exchange difference on debtors amounting Rs. 23,077 is required to be transferred to Profit and
Loss A/c.
Long term loan taken from a U.S. Company, amounting to Rs. 60,00,000. It was recorded at US $ 1 = Rs.
55.60, taking exchange rate prevailing at the date of transaction. US $ 1 = Rs. 61.20 was on 31.3. 20X1.
Answers 26
Classify the following items as monetary or non-monetary item:
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences arising on
Inventories Trade Receivables Investment inEquity shares Property, Plant and Equipment.
the settlement of monetary items or on reporting an enterprise’s monetary items at rates different
from those at which they were initially recorded during the period, or reported in previous financial
statements, should be recognised as income or as expenses in the period in which they arise.
However, at the option of an entity, exchange differences arising on reporting of long-term foreign
currency monetary items at rates different from those at which they were initially recorded during
the period, or reported in previous financial statements, in so far as they relate to the acquisition of
Answers 29
Answers 27
Journal Entries in the Books of Kalim Ltd.
Inventories Non-monetary
Date Particulars Rs. (Dr.) Rs. (Cr.)
20X1 216,00,000
Investment in equity shares Non-monetary
Jan. 01 Bank Account (4,50,000 x 48) Dr.
Property, Plant and Equipment Non-monetary
Question 28 (Illustration) March 31 Foreign Exchange Difference Account Dr. 4,50,000

To Foreign Loan Account [4,50,000 x 4,50,000
(49-48)]
Exchange Rate per $
Goods purchased on 1.1.20X1 for US $ 15,000 RS 75 July 01 Foreign Exchange Difference Account Dr. [4,50,000 2,25,000
Exchange rate on 31.3.20X1 RS 74 x (49.5-49)]
RS 73 Foreign Loan Account Dr. 220,50,000

Date of actual payment 7.7.20X1 To Bank Account 2,22,75,000
You are required to ascertain the loss/gain to be recognized for financial years ended 31st March,
20X1 and 31st March, 20X2 as per AS 11. Question 30 (Illustration)
Answers 28 Rau Ltd. purchased a plant for US$ 1,00,000 on 01st February 20X1, payable after three months. Compa-
As per AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’, all foreign currency transactions ny entered into a forward contract for three months @ Rs. 49.15 per dollar. Exchange rate per dollar
should be recorded by applying the exchange rate on the date of transactions. Thus, goods purchased on 01st Feb. was Rs. 48.85. How will you recognise the profit or loss on forward contract in the books of
on 1.1.20X1 and corresponding creditors would be recorded at Rs. 11,25,000 (i.e. $15,000 × Rs. 75) Rau Ltd.?
According to the standard, at the balance sheet date all monetary transactions should be report- Answers 30
ed using the closing rate. Thus, creditors of US $15,000 on 31.3.20X1 will be reported at Rs. 11,10,000 (i.e.
$15,000 × Rs. 74) and exchange profit of Rs. 15,000 (i.e. 11,25,000 – 11,10,000) should be credited to Profit
and Loss account in the year ended 31st March, 20X1. Forward Rate Rs. 49.15
On 7.7.20X1, creditors of $15,000 is paid at the rate of Rs. 73. As per AS 11, exchange difference on set- Less: Spot Rate (Rs. 48.85)
tlement of the account should also be transferred to Profit and Loss account. Therefore, Rs. 15,000 (i.e. Premium on Contract Rs. 0.30
11,10,000 – 10,95,000) will be credited to Profit and Loss account in the year ended 31st March, 20X2.
Contract Amount US$ 1,00,000
Question 29 (Illustration) Total Loss (1,00,000 x 0.30) Rs. 30,000
Contract period 3 months (2 months falling in the year ended 31st March, 20X1)
Kalim Ltd. borrowed US$ 4,50,000 on 01/01/20X1, which will be repaid as on 31/07/20X1. Kalim Ltd. pre-
pares financial statement ending on 31/03/20X1. Rate of exchange between reportingcurrency Loss to be recognised (30,000/3) x 2 = Rs. 20,000 in the year ended 31st March, 20X1. Rest Rs. 10,000 will
(INR) and foreign currency (USD) on different dates are as under: be recognised in the following year.
01/01/20X1 1 US$ = Rs. 48.00 In recording a forward exchange contract intended for trading or speculation purposes, the premium
31/03/20X1 1 US$ = Rs. 49.00 or discount on the contract is ignored and at each balance sheet date, the value of the contract is
marked to its current market value and the gain or loss on the contract is recognised.
31/07/20X1 1 US$ = Rs. 49.50
Mr. A bought a forward contract for three months of US$ 1,00,000 on 1 st December at 1 US$ = Rs.
47.10 when exchange rate was US$ 1 = Rs. 47.02. On 31st December when he closed his books exchange
rate was US$ 1 = Rs. 47.15. On 31st January, he decided to sell the contract at Rs. 47.18 perdollar. Show Question 33 (Illustration)
how the profits from contract will be recognised in the books.
A business having the Head Office in Kolkata has a branch in UK. The following is the trial balance of
Answers 31 Branch as at 31.03.20X4:
Since the forward contract was for speculation purpose the premium on contract i.e. the difference
Account Name Amount in £
between the spot rate and contract rate will not be recorded in the books. Only when the contract is sold
the difference between the contract rate and sale rate will be recorded in the Profit & Loss Account. Dr. Cr.
Sale Rate Rs. 47.18 Machinery (purchased on 01.04.20X1) 5,000
Less: Contract Rate (Rs. 47.10) Debtors 1,600
Premium on Contract Rs. 0.08 Opening Stock 400
Contract Amount US$ 1,00,000 Goods received from Head Office Account 6,100
Total Profit (1,00,000 x 0.08) Rs. 8,000 (Recorded in HO books as Rs. 4,02,000)
Sales 20,000
Purchases 10,000
Assets and liabilities and income and expenditure items in respect of foreign branches (integral for- Wages 1,000
eign operations) are translated into Indian rupees at the prevailing rate of exchange at the endof the
Salaries 1,200
year. The resultant exchange differences in the case of profit, is carried to other Liabilities Account
and the Loss, if any, is charged to the statement of profit and loss. Comment. Cash 3,200
Remittances to Head Office (Recorded in HO books as 2,900
Answers 32
Rs. 1,91,000)
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 Head Office Account (Recorded in HO books as 7,400
financial statements of a foreign operation are translated as if all its transactions had been entered into Rs. 4,90,000)
by the reporting enterprise itself.
Creditors 4,000
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 ฀ Closing stock at branch is £ 700 on 31.03.20X4.Depreciation @ 10% p.a. is to be charged on
of transaction is often used, for example, an average rate for a week or a month may be used for Machinery.
all transactions in each foreign currency during the period. The foreign currency monetary items ฀ Prepare the trial balance after been converted in Indian Rupees.
(for example cash, receivables, payables) should be reported using the closing rate at each bal-
ance sheet date. Non-monetary items (for example, fixed assets, inventories, investments in equity Exchange rates of Pounds on different dates are as follow: 01.04.20X1– Rs. 61; 01.04.20X3– Rs. 63 &
shares) which are carried in terms of historical cost denominated in a foreign currency should be 31.03.20X4 – Rs. 67
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 Answers 33
is carried at cost. If the fixed asset is carried at fair value, translation should be done using the rate Trial Balance of the Foreign Branch converted into Indian Rupees as on March 31, 20X4
existed on the date of the valuation. The cost of inventories is translated at the exchange rates that ex-
isted when the cost of inventory was incurred and realizable value is translated applying exchange Particulars £ (Dr.) £ (Cr.) Conversion Basis Rs. (Dr.) Rs. (Cr.)
rate when realizable value is determined which is generally closing rate. Transaction date
Exchange difference arising on the translation of the financial statements of integral foreign oper- Machinery 5,000 rate 3,05,000
ation 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 AS22 Debtors 1,600 Closing Rate 1,07,200
‘Accounting for Taxes on Income’. Opening Stock 400 Opening Rate 25,200
Thus, the treatment by the management of translating all assets and liabilities; income and expendi- Goods Received from HO 6,100 Actuals 4,02,000
ture items in respect of foreign branches at the prevailing rate at the year end and also thetreatment of
Sales 20,000 Average Rate 13,00,000
resultant exchange difference is not in consonance with AS 11.
Purchases 10,000 Average Rate 6,50,000
Wages 1,000 Average Rate 65,000 Question 35 (Illustration)
Salaries 1,200 Average Rate 78,000 A Ltd. has borrowed USD 10,000 in foreign currency on April 1, 20X1 at 5% p.a. annual interest and ac-
Cash 3,200 Closing Rate 2,14,400 quired a depreciable asset. The exchange rates are as under:
01/04/20X1 1 US$ = Rs. 48.00
Remittance to HO 2,900 Actuals 1,91,000
31/03/20X2 1 US$ = Rs. 51.00
HO Account 7,400 Actuals 4,90,000
Creditors 4,000 Closing Rate 2,68,000 (i) You are required to pass the journal entries in the following cases:
Exchange Rate Difference Balancing Figure 20,200 (ii) Option under Para 46A is not availed.
31,400 31,400 20,58,000 20,58,000 (iii) Option under Para 46A is availed.
Closing Stock 700 Closing Rate 46,900 The loan was taken to finance the operations of the entity (and not to procure a depreciableasset).
Depreciation 500 Fixed Asset Rate 30,500 In all cases, assume interest accrued on 31 March 20X2 is paid on the same date.
Answers 35
(i) Journal Entries in the Books of A Ltd.
A Ltd. purchased fixed assets costing Rs. 3,000 lakhs on 1.1.20X1 and the same was fully financed by
Option under Para 46A is not availed
foreign currency loan (U.S. Dollars) payable in three annual equal instalments. Exchange rates were 1
Dollar = Rs. 40.00 and Rs. 42.50 as on 1.1.20X1 and 31.12.20X1 respectively. First instalment was paidon Date Particulars Rs. Rs.
31.12.20X1. The entire difference in foreign exchange has been capitalised. (Dr.) (Cr.)
You are required to state, how these transactions would be accounted for. 20X1
Bank Account (10,000 x 48) Dr.
Answers 34 Apr. 01 4,80,000
To Foreign Loan Account
As per AS 11 ‘The Effects of Changes in Foreign Exchange Rates’, exchange differences arising on the set- 4,80,000
tlement of monetary items or on reporting an enterprise’s monetary items at rates different fromthose Finance Cost (USD 10,000 x 5% x Rs. 51) To Bank
Mar 31 Account 25,500
at which they were initially recorded during the period, or reported in previous financial statements,
should be recognised as income or expenses in the period in which they arise. Thus exchange differ- Foreign Exchange Difference Account (P/L) Dr. 25,500
ences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets are rec-
Mar 31 To Foreign Loan Account [10,000 x (51-48)] 30,000
ognised as income or expense.
Calculation of Exchange Difference: 30,000
In this case, since the option under Para 46A is NOT availed, the Exchange Loss of Rs. 30,000 is rec-
ognised as an expense in the Statement of Profit and Loss for the year ending 31 March 20X2.Option
under Para 46A is availed
Note:
The above answer has been given on the basis that the company has not exercised the option of capi-
talisation available under paragraph 46 of AS 11. However, if the company opts to avail the benefit given in
paragraph 46A, then nothing is required to be done since the company has done the correct treatment.
Chapter 7.4
Date Particulars Rs. (Dr.) Rs. (Cr.)
AS 22- Accounting for Taxes on Income
20X1
Apr. 01 Bank Account (10,000 x 48) Dr. 4,80,000
To Foreign Loan Account
4,80,000
Finance Cost (USD 10,000 x 5% x Rs. 51) To Attempts MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV
Mar 31 Bank Account 25,500
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
Foreign Exchange Difference Account Dr. To Foreign 25,500 Study

Q.12 TO Q.24
Loan Account [10,000 x (51-48)] Property, Plant and Mat.
Mar 31 30,000
Equipment Dr. Q.4
Past
To Foreign Exchange Difference Account 30,000 Exams
Q.4 NO Q.10 NO Q.10 Q.9 Q.8 NO Q.3 NO NO
Q.11
Mar 31 30,000 MTP NO NO NO Q.1 NO NO NO NO NO NO NO NO
30,000 RTP NO Q.1 Q.6 Q.10 Q.9 Q.4 Q.3 Q.2 Q.5 Q.7 NO Q.10
In this case, since the option under Para 46A is availed, the Exchange Loss of Rs. 30,000 is capitalized
in the cost of Property, Plant and Equipment, which will indirectly get recognized in the Profit & Loss
A/c by way of increased depreciation over the remaining useful life of the asset.
(ii) Option under Para 46A is availed
Date Particulars Rs. Rs. (Cr.)

(Dr.)
20X1
Apr. 01 Bank Account (10,000 x 48) Dr. 4,80,000
Finance Cost (USD 10,000 x 5% x Rs. 51) To Bank
Mar 31 25,500
Account
25,500
Foreign Exchange Difference Account Dr. ToForeign
Mar 31 Loan Account [10,000 x (51-48)] 30,000
Foreign Currency Monetary Item Translation Differ- 30,000
ence A/c (FCMITDA) Dr.
Mar 31 30,000
To Foreign Exchange Difference Account
30,000
In this case, since the option under Para 46A is availed, the Exchange Loss of Rs. 30,000 is accumulated
in the FCMITD A/c, which will be subsequently spread over and debited to P&L A/c over the tenure
of the loan.
Reference:
The students are advised to refer the full text of AS 11 “The Effects of Changes in Foreign Exchange
Rates”.
Question 3
Chapter 7.4
AS 22- Accounting for Taxes on Income (a) The following information is furnished in respect of Slate Ltd. for the year ending 31-3-2019:
(i) Depreciation as per books Rs. 2,80,000
Question 1 Depreciation for tax purpose Rs. 1,90,000
The above depreciation does not include depreciation on new additions.
Beta Ltd. is a full tax free enterprise for the first ten years of its existence and is in the second year
of its operation. Depreciation timing difference resulting in a tax liability in year 1 and 2 is Rs. 1,000
(ii) A new machinery purchased on 1.4.18 costing Rs. 1,20,000 on which 100% depreciation
lakhs and Rs. 2,000 lakhs respectively. From the third year it is expected that the timing difference
is allowed in the 1st year for tax purpose whereas Straight-line method is considered
would reverse each year by Rs. 50 lakhs. Assuming tax rate of 40%, find out the deferred tax liability
appropriate for accounting purpose with a life estimation of 4 years.
at the end of the second year and any charge to the Profit and Loss account. (MTP Oct 19 5 Marks, RTP
Nov’18)( Same concept different figures Old & New SM) (iii) The company has made a profit of Rs. 6,40,000 before depreciation and taxes.
(iv) Corporate tax rate of 40%.
Answer 1
Prepare relevant extract of statement of Profit and Loss for the year ending 31-3-2019 and also
As per para 13 of Accounting Standard (AS) 22, Accounting for Taxes on Income”, deferred tax in respect show the effect of above items on deferred tax liability/asset as per AS 22.
of timing differences which originate during the tax holiday period and reverse during the tax holiday
period, should not be recognized to the extent deduction from the total income of an enterprise is al- (b) What are the disclosure requirements for deferred tax assets and deferred tax liabilities in
lowed during the tax holiday period as per the provisions of sections 10A and 10B of the Income-tax Act. the balancesheet as per AS 22? (RTP May 21, PYP 5 Marks Nov ’22)
Deferred tax in respect of timing differences which originate during the tax holiday period but reverse
after the tax holiday period should be recognized in the year in which the timing differences originate. Answer 3
However, recognition of deferred tax assets should be subject to the consideration of prudence. For this
purpose, the timing differences which originate first should be considered to reverse first. (a) Statement of Profit and Loss for the year ended 31st March, 2019 (Extract)
Out of Rs. 1,000 lakhs depreciation, timing difference amounting Rs. 400 lakhs (Rs. 50 lakhs x 8 years) Rs
will reverse in the tax holiday period and therefore, should not be recognized. However, for Rs. 600 lakhs
Profit before depreciation and taxes 6,40,000
(Rs. 1,000 lakhs . Rs. 400 lakhs), deferred tax liability will be recognized for Rs. 240 lakhs (40% of Rs. 600
lakhs) in first year. In the second year, the entire amount of timing difference of Rs. 2,000 lakhs will re- Less: Depreciation for accounting purposes (2,80,000+30,000) (3,10,000
verse only after tax holiday period and hence, will be recognized in full. Deferred tax liability amounting
Rs. 800 lakhs (40% of Rs. 2,000 lakhs) will be created by charging it to profit and loss account and the Profit before taxes (A) 3,30,000
total balance of deferred tax liability account at the end of second year will be Rs. 1,040 lakhs (240 lakhs Less: Tax expense (B)
+ 800 lakhs).
Current tax (W.N.1) (3,30,000 x 40%) Deferred tax (W.N.2) 1,32,000 ,32,000
Question 2 Profit after tax (A-B) NIL 1,98,000
Can an enterprise offset deferred tax assets and deferred tax liabilities? If yes, prescribe the conditions Working Notes:
required for such offset as per provisions of AS 22. ? (RTP Nov ‘21)
1. Computation of taxable income
Answer 2
Amount (Rs.)
Yes. It can offset deferred tax assets and deferred tax liabilities.
Profit before depreciation and tax 6,40,000
As per AS 22, an enterprise should offset deferred tax assets and deferred tax liabilities if:
Less: Depreciation for tax purpose (1,90,000 + 1,20,000) (3,10,000)
(i) the enterprise has a legally enforceable right to set off assets against liabilities represent-
ing current tax; and Taxable income 3,30,000
Tax on taxable income @ 40% 1,32,000
(ii) the deferred tax assets and the deferred tax liabilities relate to taxes on income levied
by the same governing taxation laws. 2. Impact of various items in terms of deferred tax liability / deferred tax asset
S. Transactions Analysis Nature Effect Amount reversal in one or more subsequent periods. For e.g., Depreciation, Bonus, etc.
ofdiffer- (b) Table showing calculation of deferred tax asset / liability
No. (Rs.)
ence
(i) Difference in Generally, written down Responding Reversal (2,80,000 Particulars Amount Timing dif- Deferred tax Amount
depreciation value method of de- timing differ- of DTL - 1,90,000) ferences @ 30%
preciation is adopted ence x 40% = Rs. Rs.
under IT Act which (36,000)
Excess depreciation as per tax 4,00,000 Timing Deferred tax 1,20,000
leads to higher depre-
records (Rs. 10,00,000 – liability
ciation in earlier years
of useful life of the Rs. 6,00,000)
asset in compari son to Unamortized preliminary 60,000 Timing Deferred tax
later years. expenses as per tax records asset (18,000)
(ii) Depreciation on Due to allowance of full Timing Creation of (1,20,000
Net deferred tax liability 1,02,000
new machinery amount as expenditure difference DTL – 30,000) x
under IT Act, tax payable in 40% = 36,000 Question 5

the earlier years is less.
Net impact NIL The following transactions were reported by PQR Ltd. during the year 2020-2021:
i. Tax Rate 30%

b. The break-up of deferred tax assets and deferred tax liabilities into major components of the respec-
tive balance should be disclosed in the notes to accounts. Deferred tax assets and liabilities should ii. Items disallowed in 2019-2020 and allowed for tax purposes in 2020- (Rs. in lakh)
be distinguished from assets and liabilities representing current tax for the period. Deferred tax assets 2021.
20.00
and liabilities should be disclosed under a separate heading in the balance sheet of the enterprise,
separately from current assets and current liabilities. The nature of the evidence supporting the rec- iii. Interest to Financial Institutions accounted in the books on accrualba-
ognition of deferred tax assets should be disclosed, if an enterprise has unabsorbed depreciation sis, but actual payment was made before the due date of filing 20.00
or carry forward of losses under tax laws. return and allowed for tax purpose also.
iv. Donations to Private Trust made in 2020-2021 (not allowed under 10.00
Question 4 Income Tax Laws).
(a) Write short note on Timing differences and Permanent differences as per AS 22 You are required to show impact of the above items in terms of Deferred Tax Assets/Deferred Tax Lia-
bility for the year ended 31.03.2021. (RTP May 22)
(b) Rama Ltd., has provided the following information:
Answer 5
Rs.
Impact of various items in terms of deferred tax liability/deferred tax asset as per AS 22
Depreciation as per accounting records 6,00,000
Depreciation as per income tax records 10,00,000 Transactions Analysis Nature Effect Amount
of differ-
Unamortized preliminary expenses as per tax record 60,000 ence
There is adequate evidence of future profit sufficiency. You are required to calculate the amount
Disallowanc- Tax payable for the earlier year Timing Reversal Rs. 20
of deferred tax asset/liability to be recognized as transition adjustment assuming Tax rate as 30%.
es, as per IT was higher on this account. differ- of DTA lakh X
(RTP Nov 20, PYP 5 Marks May’18, Old & New SM, PYP 5 Marks May’19)(Same concept different figures
Act, ence
May’18, Old & New SM)
of earlier 30% = Rs. 6
Answer 4 years lakh
(a) Accounting income and taxable income for a period are seldom the same. Permanent
differences are those which arise in one period and do not reverse subsequently. For
e.g., an income exempt from tax or an expense that is not allowable as a deduction for
tax purposes. Timing differences are those which arise in one perio d and are capable of
Interest to It is allowed as deduction under IT No tim- Not ap- Not ap-

financial Act, if the payment is made before ing differ- plicable plicable
(i) Depreciation as per books was ₹ 70 Lakhs whereas Depreciation for Tax purposes
was ₹ 42 Lakhs. There were no additions to Fixed Assets during the year.
institutions the due date of filing the return of ence
income
(ii) Expenses disallowed in 2019-20 and allowed for tax purposes in 2020-21 were ₹ 14 Lakhs.
Donation to Not an allowable Perma- Not ap- Not ap- (iii) Share issue expenses allowed under section 35(D) of the Income Tax Act, 1961 for the
private trusts expenditure under IT Act. nen t plicable plicable year 2020-21 (1/10th of ₹ 70.00 lakhs incurred in 2019-20).
difference (iv) Repairs to Plant and Machinery were made during the year for ₹ 140.00 Lakhs and
was spread over the period 2020-21 and 2021-22 equally in the books. However, the
entire expenditure was allowed for income-tax purposes in the year 2020-21.
Question 6
Tax Rate to be taken at 40%. You are required to show the impact of above items on Deferred Tax Assets
and Deferred Tax Liability as on 31st March, 2021. (PYP 5 Marks July 21)
Is it permissible not to recognize deferred tax liability on the ground that the Company expects
that there will be losses both for accounting and tax purposes in near future? You are required
Answer 8
to give advice to the company. (RTP May 19)
Impact of various items in terms of deferred tax liability/deferred tax asset on 31.3.21
Answer 6 Transactions Analysis Nature Effect Amount (₹)
The Company should provide for deferred tax liability on the timing differences irrespective for the of differ-
fact that these timing differences will reverse in the period in which the Company expects to be in loss both ence
from the accounting as well as tax point of view. It may, however, be added that the deferred tax liability Difference in Generally, written down Responding Reversal of 28 lakhs X 40%
recognized at the balance sheet date will give rise to future taxable income at the time of reversal thereof. value method of depreci-
depreciation timing differ- DTL = ₹ 11.20 lakhs
ation is adopted under IT
ence
Act which leads to high-
Question 7 er depreciation in earlier
years of useful life of the
(i) Define followings as per AS 22: asset in comparison to
(ii) Accounting income (loss) later years.
(iii) Taxable income (tax loss) Disallowances, Tax payable for the Respond- Reversal 14 lakhs X 40%
as per IT Act, of earlier year was higher ing timing of DTA
Tax expense (tax saving) (RTP Nov’22) = 5.6 lakhs
earlier years on this account. difference
Share issue Due to disallowance of Responding Reversal of 7 lakhs X 40%
Answer 7 full expenditure under
expenses timing DTA = ₹ 2.8 lakhs
Accounting income (loss) is the net profit or loss for a period, as reported in the statement of profit IT Act, tax payable in
the earlier years was difference
and loss, before deducting income-tax expense or adding income tax saving.
higher.
Taxable income (tax loss) is the amount of the income (loss) for a period, determined in accordance
with the tax laws, based upon which income-tax payable (recoverable) is determined. Repairs to Due to allowance of Originat- Increase 70 lakhs X 40%
plant and ma- full expenditure under ing timing in DTL
Taxable expenses is the aggregate of current tax and deferred tax charged or credited to the =28 lakhs
chinery IT Act, tax payable of differ-
statement of profit and loss for the period.
the current year will be ence
less.
Question 8
Question 9
The following particulars are stated in the Balance Sheet of Deep Limited as on 31st March, 2020:
The following particulars are stated in the Balance Sheet of HS Ltd. as on 31 -3-2019 :
(₹ In Lakhs)
Deferred Tax Liability (Cr.) 28.00 Particulars (₹ in
lakhs)
Deferred Tax Assets (Dr.) 14.00
Deferred Tax Liability (Cr.) 60.00
The following transactions were reported during the year 2020 -2021:
Deferred Tax Assets (Dr.) 30.00

Answer 10
The following transactions were reported during the year 2019-20 :
Tax as per accounting profit 15,00,000X20%= ₹ 3,00,000
Depreciation as per accounting records 160.00
Tax as per Income-tax Profit 2,50,000X20% =₹ 50,000 Tax as per MAT 7,50,000X7.50%= ₹ 56,250
Depreciation as per income tax records 140.00
Tax expense= Current Tax +Deferred Tax
Items disallowed for tax purposes in 2018-19 but allowed in 2019-20 20.00
₹ 3,00,000 = ₹ 50,000+ Deferred tax Therefore, Deferred Tax liability as on 31-03-2020
Donation to Private Trust 20.00 = ₹ 3,00,000 – ₹ 50,000 = ₹ 2,50,000
Tax rate 30% Amount of tax to be debited in Profit and Loss account for the year 31-03-2020 Current Tax + Deferred
There were no additions to fixed assets during the year. You are required to show the impact of various Tax liability + Excess of MAT over current tax
items on Deferred Tax Assets and Deferred Tax Liability as on 31-3-2020 as per AS-22. (PYP 5 Marks Jan = ₹ 50,000 + ₹ 2,50,000 + ₹ 6,250 (56,250 – 50,000) = ₹ 3,06,250
21, RTP May 20)
Question 11
Answer 9
Impact of various items in terms of AS 22 deferred tax liability/deferred tax asset Write short note on Timing difference and Permanent Difference as per AS 22. (PYP 5 Marks, May 19)
Answer 11
(1) Difference in Depreciation- Generally, written down value method of depreciation is adopt-
ed under income Tax Act which leads to higher depreciation in earlier years of useful life of Matching of taxes against revenue for a period poses special problems arising from the fact that in
the asset in comparison to later years. It is timing difference for which reversal of Deferred number of cases, taxable income may be different from the accounting income. The divergence between
tax liability is required. Reversal of DTL= ₹ (160 – 140) Lakhs X 30% = ₹6 Lakhs taxable income may be different from the accounting income arises due to two main reasons: Firstly,
(2) Disallowances, as per IT Act of earlier years- Due to disallowance tax payable for the there are differences between items of revenue and expenses as appearing in the statement of profit
earlier years was higher on this account. It is responding timing difference which required and loss and the items which are considered as revenue, expenses or deductions for tax purposes, known
Reversal of Deferred tax assets. as Permanent Difference. Secondly, there are differences between the amount in respect of a particular
item of revenue or expense as recognised in the statement of profit and loss and the corresponding
Reversal of Deferred tax assets = ₹20 Lakhs X 30% = ₹ 6 Lakhs
amount which is recognised for the computation of taxable incom e, known as Timing Difference.
(3) Donations to private trusts is not an allowable expenditure under IT Act. It is Permanent differences are the differences between taxable income and accounting income which arise
permanent difference. Hence, no reversal of tax is required.
in one accounting period and do not reverse subsequently. For example, an income exempt from tax or
an expense that is not allowable as a deduction for tax purposes.
Question 10
Timing differences are those differences between taxable income and accounting income which arise in
From the following details of Aditya Limited for accounting year ended on 31st March, 2020: one accounting period and are capable of reversal in one or more subsequent periods. For e.g., Depreci-
ation, Bonus, etc.
Particulars ₹
Question 12
Accounting profit 15,00,000
Book profit as per MAT 7,50,000 As per AS 22 on ‘Accounting for Taxes on Income’, tax expense is
Profit as per Income tax Act 2,50,000 a. Current tax + deferred tax charged to profit and loss account
Tax Rate 20% b. Current tax-deferred tax credited to profit and loss account
MAT Rate 7.5% c. Either (a) or (b)
Calculate the deferred tax asset/liability as per AS 22 and amount of tax to be debited to the profit and
loss account for the year. (PYP 5 Marks, Nov 20) (Same concept different figures RTP Nov’19 & Nov ‘23, Ans: (c)
PYP 5 Marks Nov’19, Old & New SM)
Question 13
G Ltd. has provided the following information:
Depreciation as per accounting records =Rs. 2,00,000
Depreciation as per tax records = Rs. 5,00,000 Answer 16

There is adequate evidence of future profit sufficiency.
In current practices, companies, in general, prepare books of accounts as per Companies Act, 2013 gener-
How much deferred tax asset/liability should be recognized as transitionadjustment when the tax ating Accounting Profit/Loss and Income-tax Act, 1961 generating Taxable Profit/Loss. Accounting income
rate is 50%? and taxable income for a period are seldom the same. Permanent differences are those which arise in one
period and do not reverse subsequently. For e.g., an income exempt from tax or an expense that is not
d. Deferred Tax asset = Rs. 2,70,000.
allowable as a deduction for tax purposes. Timing differences are those which arise in one period and are
e. Deferred Tax asset = Rs. 1,35,000. capable of reversal in one or more subsequent periods. For e.g., Depreciation etc.
f. Deferred Tax Liability = Rs. 2,70,000
g. Deferred Tax Liability = Rs. 1,35,000.
Ans: (d) Question 17
Y Ltd. is a full tax free enterprise for the first ten years of its existence and is in the second year of its
Question 14 operation. Depreciation timing difference resulting in a tax liability in year 1 and 2 is ₹ 200 lakhs and ₹
400 lakhs respectively. From the third year it is expected that the timing difference would reverse each
State which of the followings statements are correct: year by ₹ 10 lakhs. Assuming tax rate of 40%, find out the deferred tax liability at the end of the second
year and any charge to the Profit and Loss account.
(1) There are no pre-conditions required to recognize deferred tax liability,
(2) Deferred tax asset under all circumstances can only be created if andonly if there is rea- Answer 17
sonable certainty that future taxable income will arise.
As per AS 22, ‘Accounting for Taxes on Income’, deferred tax in respect of timing differences which origi-
a. Both are correct. nate during the tax holiday period and reverse during the tax holiday period, should not be recognised to
b. Only (1) is correct. the extent deduction from the total income of an enterprise is allowed during the tax holiday period as per
the provisions of sections 10A and 10B of the Income-tax Act. Deferred tax in respect of timing differences
c. Only (2) is correct. which originate during the tax holiday period but reverse after the tax holiday period should be recognised
d. None of the statements are correct. in the year in which the timing differences originate. However, recognition of deferred tax assets should
be subject to the consideration of prudence. For this purpose, the timing differences which originate first
Ans: (a) should be considered to reverse first.
Out of ₹ 200 lakhs timing difference due to depreciation, difference amounting ₹ 80 lakhs (₹ 10 lakhs x
Question 15
8 years) will reverse in the tax holiday period and therefore, should not be recognised. However, for ₹ 120
lakhs (₹ 200 lakhs – ₹ 80 lakhs), deferred tax liability will be recognised for ₹ 48 lakhs (40% of ₹ 120 lakhs)
Which of the following statement are incorrect:
in first year. In the second year, the entire amount of timing difference of ₹ 400 lakhs will reverse only after
h. Only timing differences result in creation of deferred tax. tax holiday period and hence, will be recognised in full. Deferred tax liability amounting ₹ 160 lakhs (40%
of ₹ 400 lakhs) will be created by charging it to profit and loss account and the total balance of deferred
i. Permanent differences do not result in recognition of deferred tax.
tax liability account at the end of second year will be ₹ 208 lakhs (48 lakhs + 160 lakhs).
j. The tax rate used for measurement of deferred tax is substantively enacted tax rate.
k. The entity has to recognize deferred tax liability/asset arising out of timing difference. There Question 18
are no conditions which are required to evaluated for their recognition.
Ultra Ltd. has provided the following information:
Ans: (d) Depreciation as per accounting records =₹ 4,00,000 Depreciation as per tax records =₹ 10,00,000
Unamortized preliminary expenses as per tax record = ₹ 30,000 There is adequate evidence of future
Theoretical Questions Answers profit sufficiency. How much deferred tax asset/liability should be recognized as transition adjustment
when the tax rate is 50%?
Question 16
Write short note on Timing differences and Permanent differences as per AS 22.
Sony Limited 1
Answer 18
Total 10
Calculation of difference between taxable income and accounting income
During the FY 2019-2020, Venture Capital had sold their investment in Star Limited and realised an
amount of Rs. 8 Crores on sale of shares of star Limited and entire proceeds of Rs. 8 Crores have been
Particulars Amount (₹ )
transferred by Venture Capital to ABC Company Limited.
Excess depreciation as per tax ₹ (10,00,000 – 4,00,000) 6,00,000
The accounts manager has received the following additional information from ven-
Less: Expenses unamortized in tax records (30,000) ture capital on 31.03.2020:
Timing difference 5,70,000
(1) 8 Crores has been deducted from the cost of investment and carrying amount of
Tax expense is more than the current tax due to timing difference. Therefore deferred tax lia- investment asat year end is 2 Crores.
bility
(2) Company had to pay a capital gain tax @ 20% on the net sale consideration of Rs. 4
= 50% x 5,70,000 = ₹ 2,85,000 Crores.
(3) Due to COVID-19, the remaining start- ups (i.e. Oscar Limited, Zee Limited, and
Questions 19 Sony Limited) are not performing well and will soon wind up their operations.
Venture capital is monitoring the situation and if required they will provide an
Saras Ltd. closes its books as on 31st March 20X2. They have accrued Rs. 5,00,000 towards GST impairment loss in June 2020 Quarter.
Liability for the month of March 20X2 by debiting their Profit and loss statement which is expected
You need to suggest the accounts manager what should be the correct accounting treatment as
to be paid off by 21st April20X2 . As per the provisions of Section 43B of the Income Tax Act, 1961 – Any
per AS 22 “Accounting for Taxes on Income”.
expenditure of the nature mentioned in section 43B (e.g. taxes, duty, cess, fees, etc.) accrued in the
statement of profit and loss on mercantile basis willbe allowed for tax purposes in subsequent years
Answer: 20
on payment basis only. Assuming a Tax rate of 30% determine the Deferred Tax Asset/Liability as
at31st March 20X2. As company had to pay capital gain tax @ 20% on the net sale consideration as per income tax laws, the
company has to recognise a current tax liability of 0.8 Crores computed as under:
Answer 19
Particulars Amount (Rs. in Crores)
Calculation of difference between taxable income and ac-
counting income Sales Consideration 8
Particulars Amount (Rs. ) Cost of Investment 4
GST Liability debited in books 5,00,000 Net gain on Sale 4
Less: GST Liability allowed under Income Tax Act (Section 43B) Timing Nil Tax @ 20% 0.8
difference As per AS 22, Timing differences are those differences between taxable income and accounting income
5,00,000
for a period that originate in one period and are capable of reversal in one or more subsequent periods.
Tax expense is less than the current tax due to timing difference. Therefore, deferred tax
Asset = 30% x 5,00,000 = 1,50,000 Particulars Amount (Rs. in Crores) Rationale
Questions 20 Taxable Income 4 As per income tax laws
ABC Company limited had an investment in Venture Capital amounting Rs. 10 Crores. Venture AccountingIncome Nil As the same is deductedfrom
capital in turn had invested in the below portfolio companies (New Start- ups) on behalf of the cost of investment
ABC Limited:
Timing Difference 4
Amount of investment As per AS 22, deferred tax assets should be recognised and carried forward only to the ex-
Portfolio Companies (Rs. in Crores) tent that there is a reasonable certainty that sufficient future taxable income will be available
against which such deferred tax assets canbe realised.Since in current scenario, due to Covid
Oscar Limited 2 19 the portfolio companies are not performing well, thus the company may not have sufficient
Zee Limited 3 future taxable income which will reverse deferred tax assets. Therefore, the company should not
recognise DTA of Rs. 0.8 Crores and company should recognise only current tax liability of Rs.
Star Limited 4
0.8 Crores.
PQR Ltd.’s accounting year ends on 31st March. The company made a loss of ₹ 2,00,000 for the year end-
Rama Ltd., has provided the following information:
ing 31.3.20X1. For the years ending 31.3.20X2 and 31.3.20X3, it made profits of ₹ 1,00,000 and
₹ ₹ 1,20,000 respectively. It is assumed that the loss of a year can be carried forward for eight years and
tax rate is 40%. By the end of 31.3.20X1, the company feels that there will be sufficient taxable income in
Depreciation as per accounting records = 2,00,000
the future years against which carry forward loss can be set off. There is no difference between taxable
Depreciation as per income tax records = 5,00,000 income and accounting income except that the carry forward loss is allowed in the years ending 20X2
and 20X3 for tax purposes. Prepare a statement of Profit and Loss for the years ending 20X1, 20X2 and
Unamortised preliminary expenses as per tax record = 30,000
20X3.
There is adequate evidence of future profit sufficiency. How much deferred tax asset/liability should be
recognised as transition adjustment? Tax rate 50%. Answer 23
Answer 21 Statement of Profit and Loss
Table showing calculation of deferred tax asset / liability 31.3.20X1 31.3.20X2 31.3.20X3
Particulars Amount Timing Deferred Amount ₹ ₹ ₹

differences tax @ 50% Profit (Loss) (2,00,000) 1,00,000 1,20,000
₹ ₹ Less: Current tax (20,000 x 40%) (8,000)
Excess depreciation as per tax 3,00,000 Timing Deferred 1,50,000 Deferred tax:
tax liability
records (₹ 5,00,000 – ₹ 2,00,000) Tax effect of timing differences originating 80,000
Unamortized preliminary 30,000 Timing Deferred during the year (2,00,000 x 40%)
(15,000) Tax effect of timing differences reversed/
expenses as per tax records tax asset
adjusted during the year (1,00,000 x (40,000) (40,000)
Net deferred tax liability 1,35,000 40%)
Profit (Loss) After Tax Effect (1,20,000) 60,000 72,000
From the following details of A Ltd. for the year ended 31-03-20X1, calculate the deferred tax asset/ Question 24 (Illustration)
liability as per AS 22 and amount of tax to be debited to the Profit and Loss Account for the year.
Omega Limited is working on different projects which are likely to be completed within 3 years period.
It recognises revenue from these contracts on percentage of completion method for financial state-
Particulars ₹
ments during 20X0-20X1, 20X1-20X2 and 20X2-20X3 for ₹ 11,00,000, ₹ 16,00,000 and ₹ 21,00,000 respec-
Accounting Profit 6,00,000 tively. However, for Income-tax purpose, it has adopted the completed contract method under which it
Book Profit as per MAT 3,50,000 has recognised revenue of ₹ 7,00,000, ₹ 18,00,000 and ₹ 23,00,000 for the years 20X0-20X1, 20X1-20X2
and 20X2-20X3 respectively. Income-tax rate is 35%. Compute the amount of deferred tax asset/
Profit as per Income Tax Act 60,000 liability for the years 20X0-20X1, 20X1- 20X2 and 20X2-20X3.
Tax rate 20%
MAT rate 7.50%
Answer 22
Tax as per accounting profit 6,00,000 X 20%= ₹ 1,20,000 Tax as per Income-tax Profit
60,000 X 20% =₹ 12,000
Tax expense= Current Tax +Deferred Tax ₹ 1,20,000 = ₹ 12,000+ Deferred tax Therefore, Deferred Tax lia-
bility as on 31-03-20X1 = ₹ 1,20,000 – ₹ 12,000 = ₹ 1,08,000
Amount of tax to be debited in Profit and Loss account for the year 31-03-20X1 Current Tax Deferred
Tax liability + Excess of MAT over current tax
= ₹ 12,000 + ₹ 1,08,000 + ₹ 14,250 (26,250 – 12,000) = ₹ 1,34,250
Answer 24 Chapter 8.1

Calculation of Deferred Tax Asset/Liability in Omega Limited
AS 7- Construction Contracts
Year Accounting Taxable Timing Timing Deferred Deferred
Income Income Difference Difference Tax Tax
(balance)
Liability
(balance) Attempts MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV
20X0- 11,00,000 7,00,000 4,00,000 4,00,000 1,40,000 1,40,000 Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
20X1 Study Mat. Q.16 TO Q.33
20X1- 16,00,000 18,00,000 (2,00,000) 2,00,000 (70,000) 70,000 Past

Q.3 NO Q.13 NO NO Q.14 NO Q.7 NO NO Q.3 NO
20X2 Exams
20X2- 21,00,000 23,00,000 (2,00,000) NIL (70,000) NIL Q.3

Q.1 Q.3 Q.6 Q.5
MTP Q.1 NO Q.1 NO Q.5 Q.5 Q.3
20X3 48,00,000 48,00,000 Q.2 Q.4
Q.5
Q.7 Q.14
Q.15
Q.9 Q.9
RTP Q.10 Q.10 Q.1 Q.6 Q.11 Q.10 Q.9 Q.8 Q.12 Q.6
Q.13 Q.13
Revenue recognized (72.73% of 150) 109 (approx)

Chapter 8.1 Total foreseeable loss (165 – 150) 15
AS 7- Construction Contracts Less: Loss for the current year (120 – 109) 11
Loss to be provided for in the P&L statement _4
Question 1
Question 3
X Ltd. negotiates with Bharat Petroleum Corporation Ltd (BPCL), for construction of “Franchise Retail
Petrol Outlet Stations”. Based on proposals submitted to different Zonal offices of BPCL, the final ap-
PRZ & Sons Ltd. are Heavy Engineering contractors specializing in construction of dams. From the
proval for one outlet each in Zone A, Zone B, Zone C, Zone D, is awarded to X Ltd. Agreement (in single
records of the company, the following data is available pertaining to year ended 31st March, 2021:
document) is entered into with BPCL for Rs. 490 lakhs. The agreement lays down values for each of
the four outlets (Rs. 88 + 132 + 160 + 110 lakhs) in addition to individual completion time. You are re- (Rs. crore)
quiredto examine and comment whether X Ltd., will treat it as a single contract or four separate con-
tracts. (MTP Oct ‘19, MTP Mar’18, MTP Aug’18 5 Marks) (Same concepts different figures RTP May’19) Total Contract Price 2,400
Work Certified 1,250
Answer 1
Work pending certification 250
As per AS 7 on ‘Construction Contracts’, when a contract covers a number of assets, the construction
Estimated further cost to completion 1,750
of each asset should be treated as a separate construction contract when:
Stage wise payments received 1,100
(a) separate proposals have been submitted for each asset;
Progress payments in pipe line 300
(b)each asset has been subject to separate negotiation and the contractor and cus-
tomer have been able to accept or reject that part of the contract relating to each Using the given data and applying the relevant Accounting Standard you are required to:Compute the
asset; and amount of profit/loss for the year ended 31st March, 2021.
(c) the costs and revenues of each asset can be identified. (i) Arrive at the contract work in progress as at the end of financial year 2020-21.
In the given case, each outlet is submitted as a separate proposal to different Zonal Office, which canbe (ii) Determine the amount of revenue to be recognized out of the total contract value.
separately negotiated, and costs and revenues thereof can be separately identified. Hence, each asset Work out the amount due from/to customers as at year end. (MTP 5 Marks Oct ’21 & April ‘23)(Same
will be treated as a “single contract” even if there is one document of contract. Therefore, four separate concept different figures MTP 5 Marks Mar’22, PYP 5 Marks May’18 & May ‘23)
contract accounts have to be recorded and maintained in the books of X Ltd. For each contract,princi-
ples of revenue and cost recognition have to be applied separately and net income will be determined Answer 3
for each asset as per AS 7.
(i) Calculation of profit/ loss for the year ended 31st March, 2021 (Rs. in crores)
Question 2 Total estimated cost of construction (1,250 + 250 + 1,750) 3,250
M/s Highway Constructions undertook the construction of a highway on 01.04.2016. The contract Less: Total contract price (2,400)
was to be completed in 2 years. The contract price was estimated at Rs.150 crores. Up to 31.03.2017 Total foreseeable loss to be recognized as expense 850
the company incurred Rs. 120 crores on the construction. The engineers involved in the project esti-
According to AS 7 (Revised 2002) “Construction Contracts”, when it is probable that total contract
mated that a further Rs. 45 crores would be incurred for completing the work. What amount should be
costs will exceed total contract revenue, the expected loss should be recognized as an expense im-
charged to profit and loss statement for the year 2016 -17 as per the provisions of Accounting Stan-
mediately.
dard 7 “Construction Contracts”? (MTP Oct’18 5 Marks)
Answer 2
Statement showing amount to be charged to Profit and Loss Statement as per AS 7 (ii) Contract work-in-progress i.e. cost incurred to date (Rs. in crores)
Rs. in crores Work certified 1,250
Cost of construction incurred upto 31.03.2017Add: 120 Work not certified 250
Estimated future cost 45 1,500
Total estimated cost of construction 165 (iii) Proportion of total contract value recognized as revenue
Degree of completion (120/165 x 100) 72.73% Percentage of completion of contract to total estimated cost of construction
= (1,500 / 3,250) X 100 = 46.15%

According to AS 7 “Construction Contracts”, when it is probable that total contract costs will exceed total
Revenue to be recognized till date = 46.15% of Rs. 2,400 crores = Rs. 1,107.60 crores. contract revenue, the expected loss should be recognized as an expense immediately.
(iv) Amount due from / to customers = Contract costs + Recognized profits – Rec- (iii) Amount due from / to customers = Contract costs incurred till date + Recognized profits –
ognized losses – (Progresspayments received + Progress payments to be received) Recognized losses – (Progress payments received + Progress payments to be received)
= Rs. [1,500 + Nil – 850 – (1100 + 300)] crores = Rs. [(250 + 80) + Nil – 50 – (200 + 70)] crore = Rs. [330 – 50 – 270] crore
= Rs. [1,500 – 850 – 1,400] crores Amount due from customers (shown as an asset) = Rs. 10 crore.
Amount due to customers (shown as liability) = Rs. 750 crores. (iv) The relevant disclosures under AS 7 (Revised) are given below:
Question 4 Rs. in crores

Contract revenue till 31st March, 2021 300
A contractor firm obtained a contract for construction of bridge. The following details are available
in the records kept for the year ended March 31, 2021: Contract expenses till 31st March, 2021 330
Recognized losses for the year 31st March, 2021 50
(Rs. In Crore)
Progress billings Rs. (200+ 70) 270
Total Contract Price 500
Progress (billed but not received from contractee) 70
Work Certified 250
Gross amount due from customers 10
Work not Certified 80
Estimated further Cost to Completion 220 Question 5
Progress Payment Received 200
Bricks Ltd. signed on 01/04/21, a construction contract for Rs. 1,50,00,000. Following particulars are
Payment to be Received 70 extracted in respect of contract, for the period ending 31/03/22:
You are required to calculate :
Materials issued Rs. 75,00,000
The amount of revenue to be recognized.
(i) The amount of profit or loss to be recognized. Labour charges paid Rs. 36,00,000
(ii) The amount due from/ to customers. Hire charges of plant Rs. 10,00,000
Also present relevant disclosures as per AS-7 (Revised). (MTP 5 Marks Nov ’21)(Same concept differ-
ent figures Old & New SM) Other contract cost incurred Rs. 15,00,000
Answer 4 Out of material issued, material lying unused at the end of period is Rs. 4,00,000
(i) Proportion of total contract value recognized as revenue Labour charges of Rs. 2,00,000 are still outstanding on 31.3.22.
- It is estimated that by spending further Rs. 33,50,000 (including material unused Rs.
Percentage of completion of contract to total estimated cost of construction = [(250 + 80) / (250 +80
4,00,000), the work can be completed in all respect. You are required to compute profit/
+ 220)]X 100 = 60% Revenue to be recognized till date = 60% of Rs. 500 crore = Rs. 300 crore.
loss to be taken to Profit & Loss Account and additional provision for foreseeable loss as
(ii) per AS 7. (MTP 5 Marks April 22, Mar 21 ,Oct 20 & Oct ‘23 Old & New SM)
Answer 5
Calculation of profit/ loss for the year ended 31st March, 2021 (Rs. in crore)
Statement showing the amount of profit/loss to be taken to Profit and Loss Account and additional
Total estimated cost of construction provision for the foreseeable loss as per AS 7
Work certified 250
Cost of Construction Rs. Rs.
Work not certified 80
Material Issued 75,00,000
Estimated further cost to completion 220 550
Less: Unused Material at the end of period 4,00,000 71,00,000
Less: Total contract price (500)
Labour Charges paid 36,00,000
Total foreseeable loss to be recognized as expense 50
at the endof the period.

Add: Outstanding on 31.03.2022 2,00,000 38,00,000
(iii) Labour Expenses for workers engaged at site - ₹ 16 Lakhs (out of which ₹ 1 Lakh is still un-
paid)
Hire Charges of Plant 10,00,000
(iv) Specific Contract Costs = ₹ 5 Lakhs
Other Contract cost incurred 15,00,000
(v) Sub-Contract Costs for work executed - ₹ 7 Lakhs, Advances paid to Suh-Contractors - ₹
Cost incurred upto 31.03.2022 1,34,00,000
4 Lakhs
Add: Estimated future cost 33,50,000
(vi) Further Cost estimated to be incurred to complete the contract - ₹ 35 Lakhs
Total Estimated cost of construction 1,67,50,000
You are required to compute the Percentage of Completion, the Contract Revenue and
Degree of completion (1,34,00,000/1,67,50,000 x 100) 80% Cost to berecognized as per AS-7.(MTP 5 Marks Oct’22, PYP 5 Marks July 21)
Revenue recognized (80% of 1,50,00,000) 1,20,00,000
Total foreseeable loss (1,67,50,000 - 1,50,00,000) 17,50,000
Answer 7
Computation of contract cost
Less: Loss for the current year (1,34,00,000 - 1,20,00,000) 14,00,000
Loss to be provided for 3,50,000 ₹ Lakh ₹
Lakh
Question 6 Material cost incurred on the contract (net of closing stock) 21-4 17
On 1st December, 2019, Mahindra Construction Co. Ltd. undertook a contract to construct a building Add labour cost incurred on the contract (including outstanding amount) 16Pa
for ₹ 170 lakhs. On 31st March, 2020, the company found that it had already spent ₹ 1,29,98,000 on the Specified contract cost giv- 5
construction. Prudent estimate of additional cost for completion was ₹ 64,02,000. Calculate total es- en
timated loss on contract and what should be shown in statement of profit and loss account as contract
Sub-contract cost (advances should not be considered) 7
revenue and contract cost in the final accounts for the year ended 31 st March, 2020, as per provision
of Accounting Standard 7 (Revised).(MTP 5 Marks Sep’22) (Same concept different figures Old & New Cost incurred (till date) 45
SM, RTP Nov’19, Nov’22)
Add: further cost to be incurred 35
Answer 6 Total contract cost 80
Percentage of completion = Cost incurred till date/Estimated total cost
₹
= ₹ 45,00,000/₹ 80,00,000
Cost incurred till 31st March, 2020 129,98,000
= 56.25%
Prudent estimate of additional cost for completion 64,02,000
Total cost of construction 194,00,000 Contract revenue and costs to be recognized
Less: Contract price (170,00,000) Contract revenue (₹ 85,00,000x56.25%) = ₹ 47,81,250
Total foreseeable loss 24,00,000 Contract costs = ₹ 45,00,000
As per AS 7 Construction Contracts, when it is probable that total contract costs will exceed total
contract revenue, the expected loss should be recognized as an expense immediately. Hence the Question 8
foreseeable loss of ₹ 24,00,000 should be recognized as an expense immediately in the year ended
31st March 2020. (a) In the case of a fixed price contract, the outcome of a construction contract can be estimated
reliably only when certain conditions prescribed under AS 7 are satisfied. You are required to
Contract work in progress = 129,98,000/194,00,000 X 100= 67% Proportion of contract value recognized
describe these conditions mentioned in the standard.
as turnover as per AS 7 = 67% of ₹ 170,00,000 = ₹ 113,90,000.
(b) Mr. ‘X’ as a contractor has just entered into a contract with a local municipal body for building
a flyover. As per the contract terms, ‘X’ will receive an additional Rs. 2 crore if the construction
Question 7 of the flyover were to be finished within a period of two years of the commencement of the
contract. Mr. X wants to recognize this revenue since in the past he has been able to meet sim-
The following data is provided for M/s. Raj Construction Co.
ilar targets very easily. Is X correct in his proposal? Discuss. (RTP Nov ‘21)
(i) Contract Price - ₹ 85 lakhs
(ii) Materials issued - ₹ 21 Lakhs out of which Materials costing ₹ 4 Lakhs is still lying unused.
Answer 8 (b) As per AS 7 ‘Construction Contracts’, when a contract covers a number of assets, the construction of
eachasset should be treated as a separate construction contract when:
(a) In the case of a fixed price contract, the outcome of a construction contract can be estimated reli-
ably when all the following conditions are satisfied: (a) separate proposals have been submitted for each asset;
(i) total contract revenue can be measured reliably; (b) each asset has been subject to separate negotiation and the contractor and customer
have been able to accept or reject that part of the contract relating to each asset; and
(ii) it is probable that the economic benefits associated with the contract will flow to the en- the costs and revenues of each asset can be identified.
terprise;
(c) ABC Ltd. has submitted separate proposals for each of the 3 units of commercial com-
(iii) both the contract costs to complete the contract and the stage of contract completion at plex. Also the revenue and completion time has been laid down for each unit separately
the reporting date can be measured reliably; and which implies separate negotiation for them.
(iv) the contract costs attributable to the contract can be clearly identified and measured reli- Therefore, ABC Ltd. is required to treat construction of each unit as a separate construction contract
ably so that actual contract costs incurred can be compared with prior estimates. as the above-mentioned conditions of AS 7 are fulfilled in the given case.
(b) According to AS 7 (Revised) ‘Construction Contracts’, incentive payments are additional amounts pay-
able to the contractor if specified performance standards are met or exceeded. For example, a con- Question 10
tract may allow for an incentive payment to the contractor for early completion of the contract. In-
centive payments are included in contract revenue when: (i) the contract is sufficiently advanced Uday Constructions undertake to construct a bridge for the Government of Uttar Pradesh. The con-
that it is probable that the specified performance standards will be met or exceeded; and (ii) the struction commenced during the financial year ending 31.03.2019 and is likely to be completed by the
amount of the incentive payment can be measured reliably. In the given problem, the contract has next financial year. The contract is for a fixed price of Rs. 12 crore with an escalation clause. You are giv-
not even begun and hence the contractor (Mr. X) should not recognize any revenue of this contract. en the following information for the year ended 31.03.2019:
Cost incurred upto 31.03.2019 Rs. 4 crore

Question 9
Further cost estimated to complete the contract Rs. 6 crore
(a) Sky Limited belongs to Heavy Engineering Contractors specializing in construction of Flyovers. Escalation in cost was by 5%. Hence, the contract price is also increased by 5%.
The company just entered into a contract with a local municipal corporation for building a fly-
over. No activity has started on this contract. You are requir
As per the terms of the contract, Sky Limited will receive an additional Rs. 50 lakhs if the con- ed to ascertain the stage of completion and compute the amount of revenue and profit to be recog-
struction of the flyover were to be finished within a period of two years from the commencement nized for the year as per AS 7. (RTP Nov’20, Nov ’18 & May ‘18)
of the contract. The Accountant of the entity wants to recognize this revenue since in the past the
company has been able to meet similar targets very easily. Give your opinion on this treatment.
Answer 10
(b) ABC Ltd., a construction contractor, undertakes the construction of commercial complex for XYZ Rs. in crore
Ltd. ABC Ltd. submitted separate proposals for each of 3 units of commercial complex. A single
agreementis entered into between the two parties. The agreement lays down the value of each Cost of construction of bridge incurred upto 31.3.2019 4.00
of the 3 units i .e. Rs. 50 lakh, Rs. 60 lakh and Rs. 75 lakh respectively. Agreement also lays down Add: Estimated future cost 6.00
the completion time for each unit. Comment, with reference to AS 7, whether ABC Ltd., should
Total estimated cost of construction 10.00
treat it as a single contract or three separate contracts. (RTP May ‘21 May ’23 & Nov ’23)
Contract Price (12 crore x 1.05) 12.60 crore
Answer 9
Stage of completion
(a) According to AS 7 ‘Construction Contracts’, incentive payments are additional amounts payable to
Percentage of completion till date to total estimated cost of construction
the contractor if specified performance standards are met or exceeded. For example, a contract
may allow for an incentive payment to the contractor for early completion of the contract. Incentive = (4/10)X100 = 40%
payments are included in contract revenue when both the conditions are met: Revenue and Profit to be recognized for the year ended 31st March, 2019 as per AS 7:
(i) the contract is sufficiently advanced that it is probable that the specified performance Proportion of total contract value recognized as revenue
standards will be met or exceeded; and
= Contract price x percentage of completion
the amount of the incentive payment can be measured reliably.
= Rs. 12.60 crore x 40% = Rs. 5.04 crore Profit for the year ended 31st March, 2019 = Rs. 5.04 crore – Rs.4 crore
(a) In the given problem, the contract has not even begun and hence the contractor (Sky Limited) = 1.04 crore.
should not recognize any revenue of this contract. Therefore, the accountant’s contention for
recognizing Rs. 50 lakhs as revenue is not correct.
Less: Estimated profit for whole 950 1,000 1,000

Question 11
contract
A construction contractor has a fixed price contract for Rs. 9,000 lacs to build a bridge in 3 years time Estimated total cost of the con- 8,050 8,200 8,200
frame. A summary of some of the financial data is as under: tract (A)
(Amount Rs. in lacs) Actual cost incurred upto the 2,093 6,068 8,200
reporting
Year 1 Year 2 Year 3
date (B) (6,168 -100) (8,100+100)
Initial Amount for revenue agreed in contract 9,000 9,000 9,000
Degree of completion (B/A) 26% 74% 100%
Variation in Revenue (+) - 200 200
Contracts costs incurred up to the reporting date 2,093 6,168* 8,100** Question 12
Estimated profit for whole contract 950 1,000 1,000
B Ltd. undertook a construction contract for Rs. 50 crores in April, 2020. The cost of construction was
*Includes Rs. 100 lacs for standard materials stored at the site to be used in year 3 to complete the initially estimated at Rs. 35 crores. The contract is to be completed in 3 years. While executing the con-
work.**Excludes Rs. 100 lacs for standard material brought forward from year 2. The variation in cost tract, the company estimated that the cost of completion of the contract would be Rs. 53 crores.
andrevenue in year 2 has been approved by customer. Can the company provide for the expected loss in the financial Statements for the year ended 31st
Compute year wise amount of revenue, expenses, contract cost to complete and profit or March, 2021? Explain. (RTP May 22)
loss to be recognized in the Statement of Profit and Loss as per AS -7 (revised). (RTP May’20,
Old & New SM) Answer 12
As per para 35 of AS 7 “Construction Contracts”, when it is probable that total contract costs will exceed
Answer 11 total contract revenue, the expected loss should be recognized as an expense immediately. Therefore,
the foreseeable loss of Rs. 3 crores (Rs. 53 crores less Rs. 50 crores) should be recognized as an expense
The amounts of revenue, expenses and profit recognized in the statement of profit and loss in three
immediately in the year ended 31st March, 2021. The amount of loss is determined irrespective of
years are computed below: (Amount in Rs. Lakhs)
(i) Whether or not work has commenced on the contract;
Up to the Recognized Recognized
(ii) Stage of completion of contract activity; or
reporting inprevious incurrent
date years year (iii) The amount of profits expected to arise on other contracts which are not treated as a
single construction contract in accordance provisions of AS 7.
Year 1
Revenue (9,000 x 26%) 2,340 - 2,340
Question 13
Expenses (8,050 x 26%) 2,093 - 2,093
On 1st December, 2021, GR Construction Co. Ltd. undertook a contract to construct a building for Rs. 45
Profit 247 - 247
lakhs. On 31st March, 2022, the company found that it had already spent Rs. 32.50 lakhs on theconstruc-
Year 2 tion. Additional cost of completion is estimated at Rs. 15.10 lakhs. What amount should be charged to
revenue in the final accounts for the year ended 31st March, 2022 as per provisions of AS-7? (RTP May ’23
Revenue (9,200 x 74%) 6,808 2,340 4,468
& Nov ’23 , PYP 5 Marks May ’19)
Expenses (8,200 x 74%) 6,068 2,093 3,975
Profit 740 247 493 Answer 13
Year 3 Rs. in lakhs
Revenue (9,200 x 100%) 9,200 6,808 2,392 Cost of construction incurred till date 32.50
Expenses (8,200 x 100%) 8,200 6,068 2,132 Add: Estimated future cost 15.10
Profit 1,000 740 260 Total estimated cost of construction 47.60
Working Note:
Percentage of completion till date to total estimated cost of construction
= (32.50/47.60)X 100 = 68.28%
Revenue after considering 9,000 9,200 9,200
Proportion of total contract value recognized as revenue for the year ended 31st March,2022 per AS 7 (Re-
variations
vised)
= Contract price x percentage of completion
= Rs. 45 lakh x 68.28% = Rs. 30.73 lakhs.
(Rs. in lakhs)
Total cost of construction 47.60
Less: Total contract price (45.00)
Total foreseeable loss to be recognized as expense 2.60
According to of 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.
Question 14
Year 2
Rajendra undertook a contract ₹ 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 remaining Year 3
20% be retained until the Contract was completed. In Year 1, the amounts expended were ₹ 8,60,000,
Whole contract got completed therefore total contract value less revenue recognized up to year
the workwas certified for ₹ 8,00,000 and 80% of this was paid as agreed. It was estimated that future
2 will be amount of revenue to be recognized in year 3 i.e. 20,00,000 – 15,39,000 (9,24,800 + 6,14,200)
expenditure to complete the Contract would be ₹ 10,00,000. In Year 2, the amounts expended were ₹
4,75,000. Three-fourth of the work under contract was certified as done by December 31st and 80% = ₹ 4,61,000. Note: Calendar year has been considered as accounting year.
of this was received accordingly. It was estimated that future expenditure to complete the Contract
would be ₹ 4,00,000. In Year 3, the amounts expended were ₹ 3,10,000 and on June 30th, the whole Question 15
Contract was completed. Show how Contract revenue would be recognized in the P & L A/c of Mr. Ra-
jendra each year. (PYP 5 Marks , Nov 20)(MTP 5 Marks Sep ’23) Grace Ltd., a firm of contractors provided the following information in respect of a contract for the year
ended on 31st March,2022:
Answer 14
Particulars (₹ in
(a) Year 1 ₹ ‘000)
Actual expenditure 8,60,000 Fixed Price Contract with an escalation clause Work Certified 35,000
Future estimated expenditure 10,00,000 Work not Certified (includes ₹ 26,25,000 for materials issued, out of which 17,500
material
Total Expenditure 18,60,000
lying unused at the end of the period is ₹ 1,40,000)
Estimated further cost to completion 3,815
Progress Payment Received Payment to be Received 17,325
Escalation in cost is by 8% and accordingly the contract price is increased by 14,000
8%
4,900
From the above information, you are required to:
I. Compute the contract revenue to be recognized.

II. Calculate Profit /Loss for the year ended 31st March,2022 and additional provision for loss
to be made, if any, for the year ended 31st March,2022.(MTP 5 Marks May’22)
Answer 15 Question 16
Calculation of total estimated cost of construction Revenue to be recognized by XY Ltd. for the year ended 31st March 20X2 is
₹ in thousand l. ₹ 28 lakh
Cost of Contract incurred till date m. ₹ 42 lakh
Work certified 17,500 n. ₹ 30 lakh
Work not certified (3,815 thousand – 140 thousand) 3,675 21,175 o. ₹ 32 lakh
Add: Estimated future cost 17,325 Ans: (a)

Total estimated cost of construction 38,500
Contract Price (35,000 thousand x 1.08) 37,800 Question 17
Stage of completion Total expense to be recognised in Year 1 is

Percentage of completion till date to total estimated cost of construction = [Cost of work com- e. ₹ 30 lakh
pleted till date / total estimated cost of the contract] x 100
f. ₹ 120 lakh
= [₹ 21,175 thousand / ₹ 38,500 thousand] x 100= 55%
g. ₹ 38 lakh
Revenue to be recognized for the year ended 31stMarch, 2022
h. ₹ 36 lakh
Proportion of total contract value recognized as revenue = Contract price x percentage of com-
pletion = ₹ 37,800 thousand x 55% = ₹ 20,790 thousand Ans: (d)
Loss to be recognized for the year ended 31st March, 2022
Question 18
Loss for the year ended 31stMarch, 2022 = Cost incurred till date – Revenue to be
Revenue to be recognised for year 2 is
recognized for the year ended 31st March, 2022
i. ₹ 84 lakh
= ₹ 21,175 thousand – ₹ 20,790 thousand = ₹ 385 thousand
j. ₹ 42 lakh
Provision for loss to be made at the end of 31stMarch, 2022
k. ₹ 56 lakh
₹ in thou- l. ₹ 28 lakh
sand
Ans: (c)
Total estimated loss on the contract
Total estimated cost of the contract 38,500
Below information relates to Questions 19 – 20
Less: Total revised contract price (37,800) 700
M/s AV has presented the information for Contract No.XY123:
Less: Loss recognized for the year ended 31st March, 2022 (385)
Total contract value ₹ 370 lakh
Provision for loss to be made at the end of 31stMarch, 2022 315
Certified work completed ₹ 320 lakh
Costs incurred to date ₹ 360 lakh
Multiple Choice Questions (MCQ)
Progress Payments received ₹ 300 lakh
The below information relates to Questions 16– 18: Expected future costs to beincurred ₹ 50 lakh
XY Ltd. agrees to construct a building on behalf of its client GH Ltd. on 1st April 20X1. The
expected completion time is 3 years. XY Ltd. incurred a cost of ₹ 30 lakh up to 31st March Question 19
20X2. It is expected that additional costs of ₹ 90 lakh. Total contract value is ₹ 112 lakh. As at
31st March 20X2, XY Ltd. hasbilled GH Ltd. for ₹ 42 lakh as per the agreement. Assume that Revenue to be recognised by M/s AV is
the work is completed to the extent of75% by the end of Year 2.
m. ₹ 320 lakh Theory Questions
n. ₹ 370 lakh Questions 22

o. ₹ 360 lakh
It is argued that profit on construction contracts should not be recognised until the contract is com-
p. ₹ 400 lakh pleted. Please explain whether you believe that this suggestion would improve the quality of finan-
cial reporting for long-term construction contracts.
Ans: (a)
Answer: 22
Question 20
Usually, construction contracts are long term nature i.e., the contracts areentered in one accounting pe-
Total expense to be recognised by M/s AV is riod, however, the work performed will flow into more than one accounting year. If the profit on construc-
tion contracts is not recognised over the construction period, then the costs incurred during the earlier
q. ₹ 360 lakh years of the contract would be recognised without any corresponding revenue. This will result in losses
for initial years followed high profits in future years.
r. ₹ 400 lakh
The current treatment under AS 7 results in matching of revenue and associated costs as they are rec-
s. ₹ 320 lakh
ognised during the same period. Also, the current accounting incorporates the prudence concept as
t. ₹ 360 lakh any foreseeable losses are accounted for immediately.
Ans: (d) Therefore, AS 7 results in a fair representation of the underlying financialsubstance of the transaction.
Question 21 Questions 23
A contractor has entered into a contract with a municipal body for construction of a flyover. As per
LP Contractors undertakes a fixed price contract of ₹ 200 lakh. Transactions related to the contract
the contract terms, the contractor will receive an additional ₹ 2 Crore as incentive if the construction
include:
of the flyover were to be finished within a period of two years from the start of the contract. The con-
Material purchased: ₹ 80 lakh tractor wants to recognize this revenue since in the past he has been able to meet similar targets
Unused material: ₹ 30 lakh very easily.Explain whether the contractor’s view-point is correct?
Labour charges: ₹ 60 lakh
Answer: 23
Machine used for 3 years for the contract. Original cost of the machine is ₹ 100lakh.
The contractor’s view is not entirely correct in considering the variation as apart of contract revenue.
Expected useful life is 15 years.
There is an argument that he has been able tocomplete similar contracts within stipulated time. However,
Estimated future costs to be incurred to complete the contract: ₹ 80 lakh. each contract needs to be assessed in isolation with respect to the specific challenges associated with
Losson contract to be recognised is: the timing and uncertainty in completion.
u. ₹ 40 lakh Accordingly, the contractor needs to validate the assumptions with respect to the specific contract. Only
after that assessment is done, the incentive of ₹ 2 crore may be included within the contract revenue.
v. ₹ 10 lakh
w. ₹ 90 lakh Question 24
x. ₹ 50 lakh
A construction contractor has a fixed price contract for ₹ 9,000 lacs to build a bridge in 3 years time
frame. A summary of some of the financial data is as under:
Ans: (b)
(Amount ₹ in lacs)
Initial Amount for revenue agreed in contract 9,000 9,000 9,000
Variation in Revenue (+) - 200 200
Contracts costs incurred up to the reporting date 2,093 6,168* 8,100**
Estimated profit for whole contract 950 1,000 1,000
*Includes ₹ 100 lacs for standard materials stored at the site to be used in year 3 to complete thework.
Question 25
**Excludes ₹ 100 lacs for standard material brought forward from year 2. The variation in cost and
revenue in year 2 has been approved by customer. Akar Ltd. Signed on 01/04/X1, a construction contract for ₹ 1,50,00,000. Following particulars are
Compute year wise amount of revenue, expenses, contract cost to complete and profit or loss tobe extracted in respect of contract, for the year ended 31/03/X2.
recognized in the Statement of Profit and Loss as per AS-7 (revised). - Materials used ₹ 71,00,000
Answer 24 - Labour charges paid ₹ 36,00,000
The amounts of revenue, expenses and profit recognized in the statement of profit and loss in three - Hire charges of plant ₹ 10,00,000
years are computed below: (Amount in ₹ lakhs) - Other contract cost incurred ₹ 15,00,000
Up to the Recognized Recognized in - Labour charges of ₹ 2,00,000 are still outstanding on 31.3.X2.
reporting in previous current year It is estimated that by spending further ₹ 33,50,000 the work can be completed in all
date years respect.
Year 1 2,340 2,340 You are required to compute profit/loss for the year to be taken to Profit & Loss Account
and anyprovision for foreseeable loss to be recognized as per AS 7.
Revenue (9,000 x 26%) 2,093 - 2,093
Answer 25
Expenses (8,050 x 26%) -
Profit 247 - 247 Statement showing the amount of profit/loss to be taken to Profit and Loss Account and additionalpro-
vision for the foreseeable loss as per AS 7
Year 2
Revenue (9,200 x 74%) 6,808 2,340 4,468 Cost of Construction ₹ ₹
Expenses (8,200 x 74%) 6,068 2,093 3,975 Material used 71,00,000
Profit 740 247 493 Labour Charges paid 36,00,000
Year 3 Add: Outstanding on 31.03.20X2 2,00,000 38,00,000
Revenue (9,200 x 100%) 9,200 6,808 2,392 Hire Charges of Plant 10,00,000
Expenses (8,200 x 100%) 8,200 6,068 2,132 Other Contract cost incurred 15,00,000
Profit 1,000 740 260

Working Note: Cost incurred upto 31.03.20X2 1,34,00,000
Add: Estimated future cost 33,50,000
Revenue after considering variations 9,000 9,200 9,200
TotalEstimatedcostofconstruction 1,67,50,000
950 1,000 1,000
Less: Estimated profit for whole
Degree of completion (1,34,00,000/1,67,50,000 x 100) 80%
contract
Revenue recognized (80% of 1,50,00,000) 1,20,00,000
Estimated total cost of the contract (A) 8,050 8,200 8,200
Total foreseeable loss (1,67,50,000 - 1,50,00,000) 17,50,000
Actual cost incurred upto the report- 2,093 6,068 8,200
ing date (B) Less: Loss for the current year (1,34,00,000 - 1,20,00,000) 14,00,000
(6,168-100) (8,100+100)
Degree of completion (B/A) 26% 74% 100%
Loss to be provided for 3,50,000
Questions 26 (₹ in lakhs)
Total Contract Price 1,000
RT Enterprises has entered into a fixed price contract for construction of a tower with its custom-
er. Initial tender price agreed is ₹ 220 crore. At the start of the contract, it is estimated that total Work Certified for the cost incurred 500
costs tobe incurred will be ₹ 200 crore. At the end of year 1, this estimate stands revised to ₹ 202 crore.
Work yet not Certified for the cost incurred 105
Assume that the construction is expected to be completed in 3 years.During year 2, the customer
has requested for a variation in the contract. As a result of that, the total contract value will in- Estimated further Cost to Completion 495
crease by ₹ 5 crore and the costs will increase by ₹ 3 crore.
Progress Payment Received 400
RT has decided to measure the stage of completion on the basis of the proportion of contract
costsincurred to the total estimated contract costs. Contract costs incurred at the end of each year
To be Received 140
is: The firm seeks your advice and assistance in the presentation of accounts keeping in view the require-
Year 1: ₹52.52 crore ments of AS 7 issued by your institute.
Year 2: ₹ 154.20 crore (including unused material of 2.5 crore)Year 3: ₹205 crore. Answer 27
(a) Stage of completion for each year.

(a) Amount of foreseeable loss (₹ in lakhs)
(b) Profit to be recognised for each year.
Total cost of construction (500 + 105 + 495) 1,100
Answer: 26 Less: Total contract price (1,000)
a) Stage of completion = Costs incurred to date / Total estimated costsYear 1:
Total foreseeable loss to be recognized as expense 100
52.52 crore / 202 crore = 26%
According AS 7, when it is probable that total contract costs will exceed total contract revenue, the ex-
Year 2: (154.20 crore – 2.50 crore) / 205 crore = 74% pected loss should be recognized as an expense immediately.
Year 3: 205 crore / 205 crore = 100% (b) Contract work-in-progress i.e. cost incurred to date are ₹ (₹ in lakhs)
b) Profit for the year 605 lakhs
Work certified 500
Work not certified 105
Contract Reve- 57.20 crore 109.30 crore 58.50 crore
nue (1) 605
(220 crore x 26%) (225 crore x 74% - (225 crore x 100% - This is 55% (605/1,100 100) of total costs of construction.
57.20 crore) 109.30 crore – (c) Proportion of total contract value recognised as revenue: 55% of ₹
57.20 crore) 1,000 lakhs = ₹ 550 lakhs
Contract Cost (2) 52.52 crore 99.18 crore 53.30 crore (d) Amount due from/to customers = (Contract costs + Recognised prof-
(202 crore x 26%) (205 crore x 74% - (205 crore x 100% - its – Recognised Losses) – (Progress payments received + Progress
payments to be received)
52.52 crore) 99.18 crore – 52.52
crore) = (605 + Nil – 100) – (400 + 140) ₹ in lakhs
Contract Profit (1) 4.68 crore 10.12 crore 5.20 crore = [505 – 540] ₹ in lakhs Amount
– (2) due to customers = ₹ 35 lakhs
The amount of ₹ 35 lakhs will be shown in the balance sheet as liability.
(e) The relevant disclosures under AS 7 are given below:
A firm of contractors obtained a contract for construction of bridges across river Revathi. The fol-
lowing details are available in the records kept for the year ended 31st March, 20X1.
(c) each asset has been subject to separate negotiation and the contractor and customer
₹ in lakhs have been able to accept or reject that part of the contract relating to each asset;and
the costs and revenues of each asset can be identified.
Contract revenue 550
Therefore, XYZ Ltd. is required to treat construction of each unit as a separate construction con-
Contract expenses 605
tract.
Recognised profits less recognised losses (100)
Progress billings ₹ (400 + 140) 540 Questions 30(Illustration 9)
Retentions (billed but not received from contractee) 140
AB contactors enters into a contract on 1st January 20X1 with XY to construct a 5- storied build-
Gross amount due to customers 35 ing. Under the contract, AB is required to complete the construction in 3 years (i.e., by 31st December
20X3). The following information is relevant:
Question 28(Illustration Fixed price (agreed) ₹5 crore
Material cost escalation (to the extent of 20% of increase in material cost) Labour cost escalation (up
On 1st December, 20X1, Vishwakarma Construction Co. Ltd. undertook a contract to construct a build-
to 30% of increase in minimum wages)
ing for ₹ 85 lakhs. On 31st March, 20X2, the company found that it had already spent ₹ 64,99,000 on
the construction. Prudent estimate of additional cost for completion was ₹ 32,01,000. What amount In case AB is able to complete the construction in less than 2 years and 10 months, it will be entitled
should be recognized in the statement of profit and loss for the year ended 31st March, 20X2 as per for an additional incentive of ₹50 lakh. However, in case the construction is delayed beyond 3 years
provisions of Accounting Standard 7 (Revised)? and 2 months, XY will charge a penalty of ₹20 lakh. At the start of the contract, AB has a reason to
believe that construction will be completed in2 years and 8 months. Assume that the construction
Answer 28 was actually completed in 2 years 9 months.
Labour cost was originally estimated to be ₹1.20 crore (based on initial minimum wages). However,
₹ the costs have increased by 25% during the construction period.
Cost incurred till 31st March, 20X2 64,99,000 Material costs have increased by 40% due to short-supply. The total increase in material cost due to
Prudent estimate of additional cost for completion 32,01,000 the 40% escalation is ₹80 lakh.
Total cost of construction 97,00,000 You are required to suggest what should be the contract revenue in above case?
Assume that in year 20X2, XY has requested AB to increase the scope of the contract. An additional
Less: Contract price (85,00,000)
floor is required to be constructed and there is an increase in contract fee by ₹1 crore.
Total foreseeable loss 12,00,000
AB has incurred a cost of ₹20 lakh for getting the local authority approvals which it will be entitled
to claim from XY in addition to the increase in the fixed fee.
Also measure the total contract revenue in this case.
Answer: 30
Total Revenue after considering the escalation costs, claims and incentives:
Questions 29 (Illustration 8) ₹
Fixed Price: 5.00 crore
XYZ construction Ltd, a construction company undertakes the construction of an industrial com-
plex. It has separate proposals raised for each unit to be constructed in the industrial complex. Incentive for early completion 0.50 crore
Since each unit is subject to separate negotiation, he is able to identify the costs and revenues at- Material costs recovery (to the extent of 20%) 0.40 croreLabour
tributable to each unit. Should XYZ Ltd, treat construction of each unit as a separate construction
contract according to AS 7? costs recovery (Actual increase is less than 30%) 0.30 crore [1.20
crore x 25%]
Answer: 29
Total Contract Revenue 6.20 crore
As per AS 7 ‘Construction Contracts’, when a contract covers a number of assets, the
Add: Variation to the contract 1.00 crore
(a) construction of each asset should be treated as a separate construction contract when:
Add: Claims recoverable from XY 0.20 crore
(b) separate proposals have been submitted for each asset;
Total Contract Revenue 7.40 crore
(a) Contract costs should comprise:

20X2-X3 To Balance b/d 11 20X2-X3
(i) costs that relate directly to the specific contract;
To Contract 110 By Bank 121
(ii) costs that are attributable to contract activity in general and can be allocated to the
contract; and Price
(iii) such other costs as are specifically chargeable to the customer undertheterms of the 121 121
contract. (a) AS 7 provides that the percentage completion method should not be applied iftheoutcome of
a construction contract cannot be estimated reliably. In such cases:
Questions 31 (Percentage completion method)
(b) revenue should be recognised only to the extent of contract costs incurredofwhich re-
X Ltd. commenced a construction contract on 01-04-20X1. The fixed contract price agreed was
covery is probable; and contract costs should be recognised as an expense in the period in
whichtheyare incurred.
₹2,00,000. The company incurred ₹81,000 in 20X1-X2 for 45% work and received ₹79,000 as
progress payment from the customer. The cost incurred in 20X2-X3 was ₹89,000 to complete An expected loss on the construction contract should be recognised as anexpense immedi-
the rest of work. Show the extract of the Profit and Loss Account and Customer’s Account for the ately inaccordance with paragraph 35.
related years.
Questions Illustration 32
Answer: 31
PQ & Associates undertakes a construction contract the details of which are provided below:
Profit & Loss Account
Total Contract Value ₹40 lakh
Year ₹000 Year ₹ 000
Costs incurred to date ₹3 lakh
20X1-X2 To Construction 81 20X1-X2 By Contract Price 90 Estimated future costs of completion ₹30 lakh
Costs (for 45% (45% of Contract Work completed 10%
work) Price)
The work has started some time ago and there is an uncertainty with respect to the outcome
To Net profit 9 of the contract due to expected changes in regulations. PQ is certain that it would be able to
recover the costs incurred to date.
(for 45% work)
90 90 Answer: 32
20X2- To Construction 89 20X2-X3 By Contract Price 110 In the given case, revenue and costs can only be recognised to the extent of the costs incurred and
X3 those which are expected to be recovered. Therefore, the profit & loss statement would appear as under:
costs (55% of Contract Contract Revenue ₹3 lakh

(for 55% work) Price) Contract Costs ₹3 lakh
To Net Profit 21 Contract Profit Nil
(for 55% work) When the uncertainties that prevented the outcome of the contract being estimated reliably cease to
110 110 exist, revenue and expenses associated with the construction contract should be recognised by the
percentage completion method.
Customer’s Account
Year ₹ 000 Year ₹ 000 Questions Illustration 33
20X1-X2 To Contract 90 20X1-X2 By Bank 79 (Stage of completion for a loss-making contract)

Price Show Profit & Loss A/c (Extract) in books of a contractor in respect of the following data for Year 1.
By Balance 11
Contract price (Fixed) 600
c/d
Cost incurred to date 390
90 90
Estimated cost to complete 260
Assume that the contract period is 2 years. The contract is 100% completed by Year 2. Actual
Chapter 8.2
costs incurred is the same as total estimated costs to complete (Cost incurred to date plus
AS 9- Revenue Recognition
estimated cost to complete).
Answer: 33
Amount INR ₹ 000 Attempts MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV
Year Total up to Year 2 Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
(1) Year2 (2)
(2) – (1) Study
Q.18 TO Q.31
Mat.
A. Cost incurred to date (390) (650) (260)
Past
NO NO Q.8 Q.15 NO NO Q.16 NO NO Q.17 Q.4 NO
B. Estimate of cost to completion (260) - - Exams
Q.2 Q.4 Q.5 Q.3

C. Estimated total cost (650) 650 650 MTP NO Q.2 Q.4 NO Q.3 NO Q.3 Q.8
Q.4 Q.6 Q.6 Q.16
D. Degree of completion (A/C) 60% 100% 40%
Q.12
E. Revenue Recognised RTP Q.11 Q.4 Q.10 Q.9 NO Q.4 Q.5 Q.7 Q.13 Q.14 Q.1
Q.15
(60% of 600) 360
(100% of 600) 600 240
Total foreseeable loss (650 – 600) 50
Less: Loss for current year (E – A) (30)
Expected loss to be recognised immediately (20)
Reversal of Loss provision in Year 2 20
Profit & Loss A/c (Year 1)
₹ ₹
To Construction costs To Pro- 390 By Contract Price By 360
vision for loss Net Loss
20 50
410 410
Profit & Loss A/c (Year 2)
₹ ₹
To Construction costs 260 By Contract Price 240
By Reversal of Provision for 20
loss
260 260
Question 2
Chapter 8.2
Ruby Ltd. sold goods through its agent. As per terms of sales, consideration is payable within one
AS 9- Revenue Recognition month. In the event of delay in payment, interest is chargeable @ 10% p.a. from the agent. The compa-
ny has not realized interest from the agent in the past. For the year ended 31st March, 2017 interest due
from agent (because of delay in payment) amounts to Rs. 5 lakhs. The accountant of Ruby Ltd. booked
Question 1 Rs. 5 lakhs as interest income in the year ended 31st March, 2017. Examine and discuss the contention of
the accountant with reference to AS 9 “Revenue Recognition”. ( MTP 5 Marks Apr’19, Oct’18)
Given below are the following information of B.S. Ltd.
(i) Goods of ₹ 50,000 were sold on 18-03-2023 but at the request of the buyer these were deliv- Answer 2
ered on 15-04-2023.
As per AS 9 “Revenue Recognition”, “where the ability to assess the ultimate collection with reasonable
(ii) On 13-01-2023 goods of ₹ 1,25,000 are sent on consignment basis of which 20% of the goods certainty is lacking at the time of raising any claim, the revenue recognition is postponed to the extent of
unsold are lying with the consignee as on 31-03-2023. uncertainty involved. In such cases, the revenue is recognized only when it is reasonably certain that the
ultimate collection will be made”. In this case, the company never realized interest for the delayed pay-
(iii) ₹ 1,00,000 worth of goods were sold on approval basis on 01-12-2022. The period of approval
ments made by the agent. Hence, based on the past experience, the realization of interest for the delayed
was 3 months after which they were considered sold. Buyer sent approval for 75% goods up
payments by the agent is very much uncertain. The interest should be recognized only if the ultimate
to 31-01-2023 and no approval or disapproval received for the remaining goods till 31-03-
collection is certain. Therefore, the interest income of Rs. 5 lakhs should not be recognized in the books
2023.
for the year ended 31st March, 2017. Thus the contention of accountant is incorrect. However, if the agents
You are required to advise the accountant of B.S. Ltd., with valid reasons, the amount to be recog- have agreed to pay the amount of interest and there is an element of certainty associated with these re-
nized as revenue for the year ended 31st March, 2023 in above cases in the context of AS- 9.(RTP Nov ceipts, the accountant is correct regarding booking of Rs. 5 lakhs as interest amount.
’23) Old & New SM)
Question 3
Answer 1
As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance should be New Era Publications publishes a monthly magazine on 15th of every month. It sells advertising space in
regarded as being achieved when the following conditions are fulfilled: 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 2020 issue was madein February 2020.
(i) the seller of goods has transferred to the buyer the property in the goods for a price or all signif- The magazine was published on its scheduled date. It received Rs. 2,40,000 on 10.3.2020 and Rs. 60,000 on
icant risks and rewards of ownership have been transferred to the buyer and the seller retains
10.4.2020 for the March, 2020 issue. Discuss in the context of AS 9 the amount of revenue to be recognized
no effective control of the goods transferred to a degree usuallyassociated with ownership; and
and the treatment of the amount received from advertisers for the year ending 31.3.2020. What will be the
(ii) no significant uncertainty exists regarding the amount of the consideration that will be derived treatment if the publication is delayed till 2.4.2020? (MTP 5 Marks Oct 20, Mar 22 & Oct ‘23)
from the sale of the goods.
Answer 3
Case (i)
As per AS 9 ‘Revenue Recognition’, in a transaction involving the rendering of services, performance should
The sale is complete but delivery has been postponed at buyer’s request. B.S. Ltd. should
be measured either under the completed service contract method or under the proportionate comple-
recognize the entire sale of ₹ 50,000 for the year ended 31st March, 2023. Case (ii) tion method as the service is performed, whichever relates the revenue to the work accomplished. In
the given case, income accrues when the related advertisement appears before public.The advertisement
In case of consignment sale revenue should not be recognized until the goods are sold to a third
service would be considered as performed on the day the advertisement is published and hence revenue
party.20% goods lying unsold with consignee should be treated as closing inventory and sales
is recognized on that date. In this case, 15.03.20 20 is the date of publication of the magazine. Hence, Rs.
should be recognized for ₹ 1,00,000 (80% of ₹ 1,25,000).
3,00,000 (Rs. 2,40,000 + Rs. 60,000) is recognized as income in March, 2020. The terms of payment are not
Case (iii) relevant for considering the date on which revenue is to be recognized. Since, the revenue of Rs. 3,00,000
In case of goods sold on approval basis, revenue should not be recognized until the goods have will be recognized in the March, 2020, Rs. 60,000 will be treated as amount due from advertisers as on
been formally accepted by the buyer or the buyer has done an act adopting the transaction or 31.03.20 20 and Rs. 2,40,000 will be treated as payment received against the sale. However, if the publi-
the time period for rejection has elapsed or where no time has been fixed, a reasonable time has cation is delayed till 02.04.2020 revenue recognition will also be delayed till the advertisements get pub-
elapsed. Therefore, revenue should be recognized for the total sales amounting ₹ 1,00,000 as the lished in the magazine. In that case revenue of Rs. 3,00,000 will be recognized in the year ended 31.03.2020
time period for rejecting the goods had expired. after the magazine is published on 02.04.2020. The amount received from sale of advertising space on
10.03.2020 of Rs. 2,40,000 will be considered as an advance from advertisers as on 31.03.2020.
Thus total revenue amounting ₹ 2,50,000 (50,000 + 1,00,000+ 1,00,000) will be recognizedfor the year
ended 31st March, 2023 in the books of B.S. Ltd.
(ii) On 10th January, 2022, Tonk Tanner supplied shoes worth ₹ 4,50,000 to Shani Shoes and
Question 4
1. concurrently agrees to re-purchase the same goods on 11th April. 2022.
Fashion Limited is engaged in manufacturing of readymade garments. They provide you the follow-
ing information on 31st March, 2021: (iii) On 21st March, 2022 shoes worth ₹ 1,60,000 were sold to Shoe Shine but due to refurbishing
(i) On 15th January, 2021 garments worth Rs. 4,00,000 were sent to Anand on consignment 2. of their showroom being underway, on their request, shoes were delivered on 12 th April, 2022.
basis of which 25% garments unsold were lying with Anand as on 31st March, 2021. You are required to advise the accountant of Tonk Tanners when amount is to be rec-
ognised as revenue in 2021-2022 in above cases in the context of AS 9. (MTP 5 Marks March
(ii) Garments worth Rs. 1,95,000 were sold to Shine boutique on 25th March, 2021 but at the
’23, RTP May ’21)
request of Shine Boutique, these were delivered on 15th April, 2021.
(iii) On 1st November, 2020 garments worth Rs. 2,50,000 were sold on approval basis. The pe- Answer 5
riod of approval was 4 months after which they were considered sold. Buyer sent ap-
proval for 75% goods up to 31st December, 2020 and no approval or disapproval received i. Shoes sent to Mohan Shoes (consignee) for consignment sale
for the remaining goods till 31st March, 2021.
In case goods are sent for consignment sale, revenue is recognized when significant risks of
You are required to advise the accountant of Fashion Limited, the amount to be ownership have passed from seller to the buyer.
recognized as revenue in above cases in the context of AS 9. (MTP 5 Marks Nov ’21, Oct’19,
In the given case, Mohan Shoes is the consignee i.e. an agent of Tonk Tanners and not the
Aug’18, RTP Nov’18, RTP Nov’20)(PYP 5 Marks May ’23)
buyer. Therefore, the risk and reward is considered to vest with Tonk Tanners only till the time
the sale is made to the third party by Mohan Shoes; although the goods are held by Mohan
Answer 4 Shoes. Hence, in the year 2021-2022, the sale will be recognized for the amount of goods sold
by Mohan Shoes tothe third party i.e. for ₹ 3,20,000 x 75% = ₹ 2,40,000.
As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, perfor-
mance should be regarded as being achieved when the following conditions are fulfilled: ii. Sale/repurchase agreements i.e. where seller concurrently agrees to repurchase the same
goods at a later date
(i) the seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the seller For such transactions that are in substance a financing agreement, the resulting cash inflow
retains no effective control of the goods transferred to a degree usually associated with is not revenue and should not be recognized as revenue in the year 2021 -2022. Hence, sale
ownership; and of ₹ 4,50,000 to Shani Shoes should not be recognized as revenue.
(ii) no significant uncertainty exists regarding the amount of the consideration that will be de- iii. Delivery is delayed at buyer’s request
rived from thesale of the goods.
On 21st March, 2022, if Shoe Shine takes title and accepts billing for the goods then it is implied
Case (i): 25% goods lying unsold with consignee should be treated as closing inventory and that the sale is complete and all the risk and rewards of ownership has been transferred
sales shouldbe recognized for Rs. 3,00,000 (75% of Rs. 4,00,000) for the year ended on 31.3.21. to the buyer. In case no significant uncertainty exists regarding the amount of consideration
In case of consignment sale revenue should not be recognized until the goods are sold to for sale, revenue shall be recognized in the year 2021 -2022 irrespective of the fact that the
a third party. delivery is delayed on the request of Shoe Shine.
Case (ii): The sale is complete but delivery has been postponed at buyer’s request. Fashion
Ltd. should recognize the entire sale of Rs.1,95,000 for the year ended 31st March, 2021. Question 6
Case (iii): In case of goods sold on approval basis, revenue should not be recognized until Old Era Publication Publishes a popular monthly magazine on 15 th of every month. The publication
the goods havebeen formally accepted by the buyer or the buyer has done an act adopting sells the advertising space on terms of 90% payable in advance and the balance 10% payable with-
the transaction or the time period for rejection has elapsed or where no time has been fixed, in 30 days of release of the publication. The space for March 2023 issue of the magazine was sold in
a reasonable time has elapsed. Therefore, revenue should be recognized for the total sales the month of February, 2023. The magazine was published as per schedule on 15th of the month. The
amounting Rs. 2,50,000 as the time period for rejecting the goods had expired. Thus total amount of ₹ 2,70,000 has been received upto 31st March, 2023 and ₹ 30,000 was received on 10th April,
revenue amounting Rs. 7,45,000 (3,00,000+1,95,000+2,50,000) will be recognized for the year 2023 for advertisement published in the March issue of the publication.
ended 31st March, 2021 in the books of Fashion Ltd.
Please advise the accountant the amount of revenue to be recognized in the context of the provisions of
AS 9 ‘Revenue Recognition’ during the year ending on 31 st March, 2023. (MTP 5 Marks April ’23, Oct’21)
Question 5
Answer 6
Tonk Tanners is engaged in manufacturing of leather shoes. They provide you the following informa-
tion for the year ended 31st March, 2022: Definition: As per AS 9 ‘Revenue Recognition’, in a transaction involving the rendering of services, perfor-
mance should be measured either under the completed service contract method or under the propor-
(i) On 31st December, 2021 shoes worth ₹ 3,20,000 were sent to Mohan Shoes for sale on consign- tionate completion method, whichever relates the revenue to the work accomplished.
ment basis of which 25% shoes were unsold and lying with Mohan Shoes as on 31 st March, 2022.
Analysis of given case: In the given case, income accrues when the related advertisement appears be-
fore public. The advertisement service would be considered as performed on the day the advertisement Question 8 (Last Day Revision)
is appeared for public and hence revenue is recognized on that date. In this case, it is 15.03.2023, the
date of publication of the magazine. The following information of Meghna Ltd. is provided:
Accounting treatment for given situation: Hence, ₹ 3,00,000 (₹ 2,70,000 + ₹ 30,000) is recognized
as income in March, 2023. The terms of payment are not relevant for considering the date on which (i) Goods of Rs. 60,000 were sold on 20-3-2019 but at the request of the buyer these were deliv-
revenue is to be recognized. ₹ 30,000 is treated as amount due from advertisers as on 31.03.2023 and ₹ ered on10-4-2019.
2,70,000 will be treated as payment received against the sale. (ii) On 15-1-2019 goods of Rs. 1,50,000 were sent on consignment basis of which 20% of the
goods unsold are lying with the consignee as on 31 -3-2019.
Question 7
(iii) Rs. 1,20,000 worth of goods were sold on approval basis on 1 -12-2018. The period of approval
was 3 months after which they were considered sold. Buyer sent approval for 75% goods up
(a) How will you recognize revenue in the following cases: to 31-1-2019 and no approval or disapproval received for the remaining goods till 31-3-
1. Installation Fees; 2019.
2. Advertising and insurance agency commissions; (iv) Apart from the above, the company has made cash sales of Rs. 7,80,000 (gross). Trade dis-
count of 5% was allowed on the cash sales.
3. Subscriptions for publications.
You are required to advise the accountant of Meghna Ltd., with valid reasons, the amount
(b) Shipra Ltd., has been successful jewellers for the past 100 years and sales are against to be recognized as revenue in above cases in the context of AS -9. (RTP May’20)(Same
cash only (returns are negligible). The company also diversified into apparels. A young
concept different figures MTP 5 Marks Oct’22, PYP 5 Marks May ’19)
senior executive was put in charge of Apparels business and sales increased 5 times.
One of the conditions for sales is that dealers can return the unsold stocks within one
month of the end of season. Sales return for the year was 25% of sales. Suggest a suit- Answer 8
able Revenue Recognition Policy, with reference to AS 9. (RTP Nov ‘21) As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance
should
Answer 7
be regarded as being achieved when the following conditions are fulfilled:
(a) Installation Fees: In cases where installation fees are other than incidental to the sale of a
product, they should be recognized as revenue only when the equipment is installed and (i) the seller of goods has transferred to the buyer the property in the goods for a price or all
accepted by the customer. significant risks and rewards of ownership have been transferred to the buyer and the seller
retains no effectivecontrol of the goods transferred to a degree usually associated with own-
Advertising and insurance agency commissions: Revenue should be recognized when the service is
ership; and
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 (ii) no significant uncertainty exists regarding the amount of the consideration that will be de-
the agency, as opposed to production commission, which will be recognized when the project is com- rived from the sale of the goods.
pleted. Insurance agency commissions should be recognized on the effective commencement or re- Case (i) The sale is complete but delivery has been postponed at buyer ’s request. M/s Paper Prod-
newal dates of the related policies. uctsLtd. should recognize the entire sale of Rs.60,000 for the year ended 31st March, 2019.
Subscription for publications: Revenue received or billed should be deferred and recognized either Case (ii) 20% goods lying unsold with consignee should be treated as closing inventory and sales
on a straight-line basis over time or, where the items delivered vary in value from period to period, should be recognized for Rs. 1,20,000 (80% of Rs. 1,50,000). In case of consignment sale revenue
revenue should be based on the sales value of the item delivered in relation to the total sales val- should not be recognized until the goods are sold to a third party.
ue of all items covered by the subscription.
Case (iii) In case of goods sold on approval basis, revenue should not be recognized until the goods
(b) As per AS 9 “Revenue recognition”, revenue recognition is mainly concerned with the timing of have been formally accepted by the buyer or the buyer has done an act adopting the transaction
recognition of revenue in statement of profit and loss of an enterprise. The amount of revenue or the time period for rejection has elapsed or where no time has been fixed, a reasonable time has
arising on a transaction is usually determined by the agreement between the parties involved elapsed. Therefore, revenue should be recognized for the total sales amounting Rs. 1,20,000 as the
in the transaction. When uncertainties exist regarding the determination of the amount, or its time period for rejecting the goods had expired.
associated costs, these uncertainties may influence the timing of revenue recognition.
Case (iv) Trade discounts given should be deducted in determining revenue. Thus Rs. 39,000 should
Effect of Uncertainty- In the case of the jewellery business the company is selling for cash be deducted from the amount of turnover of Rs. 7,80,000 for the purpose of recognition of revenue.
and returns are negligible. Hence, revenue can be recognized on sales. On the other hand, in Thus,revenue should be Rs. 7,41,000.
Apparels Industry, the dealers have a right to return the unsold goods within one month of the
end of the season. In this case, the company is bearing the risk of sales return and therefore,
the company should not recognize the revenue to the extent of 25% of its sales. The company
may disclose suitable revenue recognition policy in its financial statements separately for both
Jewellery and Apparels business.
The Board of Directors decided on 31.3.2019 to increase the sale price of certain items retrospectively A manufacturing company has the following stages of production and sale in manufacturing fine pa-
from 1st January, 2019. In view of this price revision with effect from 1st January 2019, the company per rolls:
has to receive Rs. 15 lakhs from its customers in respect of sales made from 1st January, 2019 to 31st
March, 2019. Accountant cannot make up his mind whether to include Rs. 15 lakhs in the sales for Date Activity Cost to Net Realizable
2018-2019. Advise. (RTP Nov’19) Date(Rs.)
Value(Rs.)
15.1.16 Raw Material 1,00,000 80,000
Answer 9
20.1.16 Pulp (WIP 1) 1,20,000 1,20,000
Price revision was effected during the current accounting period 2018-2019. As a result, the company
stands to receive Rs. 15 lakhs from its customers in respect of sales made from 1st January, 2019 to 31st 27.1.16 Rough & thick paper (WIP 2) 1,50,000 1,80,000
March, 2019. If the company is able to assess the ultimate collection with reasonable certainty, then 15.2.16 Fine Paper Rolls 1,80,000 3,50,000
additional revenue arising out of the said price revision may be recognized in 2018 - 2019 vide para 10
of AS 9. 20.2.16 Ready for sale 1,80,000 3,50,000
15.3.16 Sale agreed and invoice raised 2,00,000 3,50,000
Question 10 02.4.16 Delivered and paid for 2,00,000 3,50,000
Raj Ltd. entered into an agreement with Heena Ltd. to dispatch goods valuing Rs. 5,00,000 every
month for next 6 months on receipt of entire payment. Heena Ltd. accordingly made the entire pay- Explain the stage on which you think revenue will be generated and calculate how much would be net
ment of Rs. 30,00,000 and Raj Ltd. started dispatching the goods. In fourth month, due to fire in prem- profit for year ending 31.3.16 on this product as per AS 9. (RTP May’18)
ise of Heena Ltd., Heena Ltd. requested to Raj Ltd. not to dispatch goods worth Rs. 15,00,000 ready for
dispatch. Raj Ltd. accounted Rs. 15,00,000 as sales and transferred the balance to Advance received Answer 11
against Sales account. Comment upon the above treatment by Raj Ltd. with reference to theprovision
of AS-9. (RTP May’19) According to AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, per-
formance should be regarded as being achieved when the following conditions have been
Answer 10 fulfilled:
As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance should be (i) the seller of goods has transferred to the buyer the property in the goods for a price or all
regarded as being achieved when the following conditions are fulfilled: significant risks and rewards of ownership have been transferred to the buyer and the seller
retains no effective control of the goods transferred to a degree usually associated with own-
(i) the seller of goods has transferred to the buyer the property in the goods for a price or all ership; and
significant risks and rewards of ownership have been transferred to the buyer and the seller
retains no effective control of the goods transferred to a degree usually associated with (ii) no significant uncertainty exists regarding the amount of the consideration that will be de-
ownership; and rived from the sale of the goods.
(ii) no significant uncertainty exists regarding the amount of the consideration that will be de-
rived from the sale of the goods. Thus, sales will be recognized only when following two conditions are satisfied:
In the given case, transfer of property in goods results in or coincides with the transfer of (i) The sale value is fixed and determinable.
significant risks and rewards of ownership to the buyer. Also, the sale price has been recov-
ered by the seller. Hence, the sale is complete but delivery has been postponed at buyer’s (ii) Property of the goods is transferred to the customer.
request. Raj Ltd. should recognizethe entire sale of Rs. 30,00,000 (Rs. 5,00,000 x 6) and no Both these conditions are satisfied only on 15.3.2016 when sales are agreed upon at a price and
part of the same is to be treated as Advance Received against Sales. goodsare allocated for delivery purpose through invoice. The amount of net profit Rs. 1,50,000
(3,50,000 –2,00,000) would be recognized in the books for the year ending 31stMarch, 2016.
Question 12
An infrastructure company has constructed a mall and entered into agreement with tenants towards
license fee (monthly rental) and variable license fee, a percentage on the turnover of the tenant (on
an annual basis). Chief Financial Officer of the company wants to account/recognize license fee as
income for 12 months during current year and variable license fee as income during next year, since
invoice is raised in the subsequent year. Comment whether the treatment desired by the CFO is correct
or not. (RTP May 22)
Answer 12 Answer 14
AS 9 on Revenue Recognition, is mainly concerned with the timing of recognition of revenue in the State- As per AS 9 ‘Revenue Recognition’, where the ability to assess the ultimate collection with reasonable cer-
ment of Profit and Loss of an enterprise. The amount of revenue arising on a transaction is usuallydeter- tainty is lacking at the time of raising any claim, e.g. for escalation of price, export incentives, interest etc.,
mined by agreement between the parties involved in the transaction. However, when uncertainties exist revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appro-
regarding the determination of the amount, or its associated costs, these uncertainties may influence priate to recognise revenue only when it is reasonably certain that the ultimate collection will be made.
the timing of revenue recognition. Further, as per accrual concept, revenueshould be recognized as and Where there is no uncertainty as to ultimate collection, revenue is recognised at the time of sale or ren-
when it is accrued i.e. recorded in the financial statements of the periods to which they relate. In the dering of service even though payments are made by instalments.
present case, monthly rental towards license fee and variable license feeas a percentage on the turn- Thus, PQR Ltd. cannot recognise the interest amount unless the company actually receives it. 10% rate of
over of the tenant (though on annual basis) is the income related to commonfinancial year. recovery on overdue outstanding is also an estimate based on previous record and is not certain. Hence,
Therefore, recognizing the fee as revenue cannot be deferred simply because the invoice is raised the company is advised to recognise interest receivable only on receipt basis.
in subsequent period. Hence it should be recognized in the financial year of accrual. Therefore, the con-
tention of the Chief Financial Officer is not in accordance with AS 9. Question 15
Question 13 Indicate in each case whether revenue can be recognized and when it will be recognized as per As -9.
(1) Trade discount and column received.

When revenue will be recognized in the following situation:
(2) Whether goods are sold to distributor or others for resale.
(i) Where the purchaser makes a series of installment payments to the seller and the seller
deliverthe goods only when the final payment is received. (3) Whether seller concurrently agrees to repurchase the same goods at a late date.
(ii) Where seller concurrently agrees to repurchase the same goods at a later date. (4) Insurance agency commission for rendering services.
(iii) Where goods are sold to distributors, dealers or others for resale. (5) On 11-3-2019 cloths worth Rs. 50,000 were sold to X mart, but due to refurbishing of their
showroom being underway, on their request cloths were delivered on 12-04-2019. (PYP 5
(iv) Commissions on service rendered as agent on insurance business. (RTP Nov’22) Marks Nov’19, RTP May’22)
Answer 13 Answer 15
i. Revenue from sales where the purchaser makes a series of instalment payments to the (1) Trade discounts and volume rebates received are not encompassed within the definition of
seller, and the seller delivers the goods only when the final payment is received, should not revenue, since they represent a reduction of cost. Trade discounts and volume rebates given
be recognised until goods are delivered. However, when experience indicates that most should be deducted in determining revenue.
such sales have been consummated, revenue may be recognised when a significant de-
posit is received. (2) When goods are sold to distributor or others, revenue from such sales can generally be rec-
ognized if significant risks of ownership have passed; however, in some situations the buyer
ii. For sale where seller concurrently agrees to repurchase the same goods at a later date, may in substancebe an agent and in such cases the sale should be treated as a consign-
such transactions are in substance a financing agreement. In such a situation, the result- ment sale.
ing cash inflow should not be recognised as revenue.
(3) For transactions, where seller concurrently agrees to repurchase the same goods at a later
iii. Revenue from sales of goods to distributors, dealers or others for resale can generally be date that are in substance a financing agreement, the resulting cash inflow is not revenue
recognised if significant risks of ownership have passed. However, in some situations the as defined and should not be recognized as revenue.
buyer may in substance
(4) Insurance agency commissions should be recognized on the effective commencement or
be an agent and in such cases the sale should be treated as a consignment sale. renewal dates of the related policies.
ommissions on service rendered as agent on insurance business should be recognised as (5) On 11.03.2019, if X mart takes title and accepts billing for the goods then it is implied that the
revenue when the service is completed. Insurance agency commissions should be rec- sale is complete and all risk and reward on ownership has been transferred to the buyers.
ognised on the effective commencement or renewal dates of the related policies.
Revenue should be recognized for year ended 31st March, 2019 notwithstanding that physical de-
livery has not been completed so long as there is every expectation that delivery will be made
Question 14
and itemswere ready for delivery to the buyer at the time.
PQR Ltd., sells agriculture products to dealers. One of the conditions of sale is that interest is at the
rate of 2% p.m., for delayed payments. Percentage of interest recovery is only 10% on such overdue
outstanding due to various reasons. During the year 2021-22 the company wants to recognize the
entire interest receivable. Do you agree? (RTP May ’23)
Question 16
Question 17
Given the following information of Rainbow Ltd.
Indicate in each case whether revenue can be recognized and when it will be recognized as per AS-9.
(i) On 15th November, goods worth ₹ 5,00,000 were sold on approval basis. The period of ap- (i) Delivery is delayed at buyer’s request but buyer takes title and accepts billing.
proval 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 (ii) Instalment Sales.
goods till 31st March. (iii) Trade discounts and volume rebates.
(ii) On 31st March, goods worth ₹ 2,40,000 were sold to Bright Ltd. but due to refurnishing of (iv) Insurance agency commission for rendering services.
their show-room being underway, on their request, goods were delivered on 10th April.
(v) Advertising commission. (PYP 5 Marks Nov 22)
(iii) Rainbow Ltd. supplied goods worth ₹ 6,00,000 to Shyam Ltd. and concurrently agrees to
re-purchasethe same goods on 14th April. Answer 17
(iv) Dew Ltd, used certain assets of Rainbow Ltd. Rainbow Ltd. received ₹ 7.5 lakhs and ₹ 12 as (i) Delivery is delayed at buyer’s request and buyer takes title and accepts billing : Revenue
interest and royalties respectively from Dew Ltd. during the year 2020 -21. should be recognized notwithstanding that physical delivery has not been completed so
(v) On 25th December, goods of ₹ 4,00,000 were sent on consignment basis of which 40% of long as there is every expectation that delivery will be made. However, the item must be on
the goods unsold are lying with the consignee at the year-end on 31st March. 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 deliv-
In each of the above cases, you are required to advise, with valid reasons, the amount to be ery.
recognized as revenue under the provisions of AS-9.(PYP 5 Marks Dec ’21)(MTP 5 Marks Sep
’23) (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 el-
ement should be recognized as revenue, proportionately to the unpaid balance due to the
Answer 16 seller.
(i) As per AS 9 “Revenue Recognition”, in case of goods sold on approval basis, revenue should (iii) Trade discounts and volume rebates: Trade discounts and volume rebates received are not
not be recognized until the goods have been formally accepted by the buyer or the buyer encompassed within the definition of revenue, since they represent a reduction of cost. Trade
has done an act adopting the transaction or the time period for rejection has elapsed or discounts and volume rebates given should be deducted in determining revenue.
where no time has been fixed, a reasonable time has elapsed. Therefore, revenue should be
recognized for the total sales amounting (iv) Insurance agency commissions for rendering services: Insurance agency commissions
shouldbe recognized on the effective commencement or renewal dates of the relatedpolicies.
₹ 5,00,000 as the time period for rejecting the goods had expired.
(v) Advertising commission: Revenue should be recognized when the service is completed. For
(ii) The sale is complete but delivery has been postponed at buyer’s request. The entity should advertising agencies, media commissions will normally be recognized when the related ad-
recognize vertisement or commercial appears before the public and the necessary intimation is re-
the entire sale of ₹ 2,40,000 for the year ended 31st March. ceived by the agency, as opposed to production commission, which will be recognized when
the project is completed.
(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
Question 18
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.
Which of the conditions mentioned below must be met to recognize revenuefrom the sale ofgoods?
(iv) Revenue arising from the use by others of enterprise resources yielding interest and royalty
(i) the entity selling does not retain any continuing influence or controlover the goods;
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 (ii) when the goods are dispatched to the buyer;
amount outstanding and rate applicable. The royalty should be recognized on accrual ba-
(iii) revenue can be measured reliably;
sis in accordance with the terms of relevant agreement.
(iv) the supplier is paid for the goods;
(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 reve- (v) it is reasonably certain that the buyer will pay for the goods;
nue should not be recognized until the goods are sold to a third party.
(vi) the buyer has paid for the goods.
(a) (i), (ii) and (v)
(b) (ii), (iii) and (iv)
(c) (i), (iii) and (v)

Question 22
(d) (i), (iv) and (v)
FlixNet International offers a subscription fee model to allow the paid subscribers an annual viewingof
Ans: (a) movies, sports events and other content. It allows users to register for free and have access to limited
content for one month without any charges. The customer has a right to cancel the subscription within
a month’s time but is required to pay for 1 year subscription fee after the free period.
Question 19
XY has subscribed for free viewing on 1st March 20X1. After 1 month, he has agreed to pay the annu-
Consignment inventory is an arrangement whereby inventory is held by one party but owned by an- almembership and has paid ₹ 1,200 on 31st March 20X1 for the subscription that is valid up to 31st
other party. Which of the following indicates that the inventory in question is a consignment inven- of March 20X2.
tory?
Revenue that can be recognized by FlixNet for the year ended 31st March 20X2 is
(a) Manufacturer cannot require the dealer to return the inventory
(a) ₹ 100 (b) ₹ 1,200
(b) Dealer has the right to return the inventory
(c) Nil
(c) Manufacture is responsible for the pricing of goods and any changes inthe pricing can
(d) ₹ 1,100
only be approved by the manufacturer.
(d) Manufacture is responsible for the holding the goods and any changesin the pricing Ans: (b)
can only be approved by the dealer Practical Questions Answers
Ans: (c) Questions 22
Question 20 GH manufactures and sells televisions. The televisions are shipped to the customer by sea. In order
to transfer risk related to the shipment of the televisions, GH also gets an insurance coverage for the
Which of the following transactions qualify as revenue for M/s AB Enterprises? goods while they arein transit from the factory to customer’s location.
(a) Sales of ₹ 20 lakhs made under consignment sales. The insurance policy will reimburse GH for the value of the goods in the event of loss or damage arising
anytime up to these goods reaching customer’s location. The legal title passes when the goodsarrive at
(b) Sale of an old machine amounting ₹ 5 lakhs the customer’s premises one month later.
(c) Services provided to the customer in the normal course of business. Sales recorded is ₹ When should Entity GH recognize revenue in its books?
50,000.
(d) Sales of ₹ 25 lakhs made under consignment sales Answer: 22
GH should recognize revenue for the sale when the goods arrive at the customer’s premises. GH has not
Ans: (c) transferred the televisions’ significant risks and rewards of ownership to the customer when the goods
depart from the factory. This is evidenced by the fact that any insurance proceeds receivedfrom
Question 21 the goods’ damage or destruction will be repaid to GH. Further, thelegal title does not pass until the
goods arrive at the customer’s premises.
The Accounting Club has 100 members who are required to pay an annual membership fee of ₹ 5,000
each. During the current year, all members have paid the fee. However, 5 members have paid an
Questions: 23
amount of ₹ 10,000 each. Of these, 3 members paid the current year’s fee and also the previous year’s
dues. Remaining 2 members have paid next years’ fee of ₹ 5,000 in advance. Revenue from member- For the year ended 31st March 20X1, KY Enterprises has entered into the following transactions.
ship fee for the current year to be recognised will be:
On 31 March 20X1, KY supplied two machines to its customer ST. Both machines were accepted by ST
(a) ₹ 5,25,000 on 31 March 20X1. Machine 1 was a machine
(b) ₹ 5,10,000 that was routinely supplied by KY to many customers and the installation process was very simple.
(c) ₹ 5,00,000 Machine 1 was installed on 2 April 20X1 by ST’s employees.
(d) ₹ 5,15,000 Machine 2 being more specialised in nature requires an installation process which is morecomplicat-
ed, requiring significant assistance from KY. Machine2 was installed between 2 and 5
Ans: (c) April 20X1. Details of costs and sales prices are as follows:
Machine 1 Machine 2
Sale Price 3,20,000 3,00,000 You are required to advise the accountant of Meghna Ltd., with valid reasons, the amount to be recog-
Cost of production 1,60,000 1,50,000 nized as revenue in above cases in the context of AS 9.
Installation fee nil 10,000
How should above transactions be recognized by KY Enterprises for theyear ended 31st Answer 24
March 20X1?
As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance should
Answer: 23 be regarded as being achieved when the following conditions are fulfilled:
Machine 1: As the installation process is simple, revenue from Machine 1 will be recognized on (i) the seller of goods has transferred to the buyer the property in the goods for a price or all
31 March 20X1. significant risks and rewards of ownership have been transferred to the buyer and the
Revenue (Machine 1) ₹ 3,20,000 seller retains no effective control of the goods transferred to a degree usually associated
with ownership; and
Cost of Goods Sold ₹ 1,60,000
(ii) no significant uncertainty exists regarding the amount of the consideration that will be
Profit during the period ₹ 1,60,000 derived from the sale of the goods.
Since the question specifies that the machine is already accepted by ST on 31 March Case (i) The sale is complete but delivery has been postponed at buyer’s request. The entity should rec-
20X1, the revenue arising from sale of the machine needs to be recognized for the year ognize the entire sale of ₹ 60,000 for the year ended 31st March, 20X2.
ending 31 March 20X1. This is because acceptance
Case (ii) 20% goods lying unsold with consignee should be treated as closing inventory and sales should
of the machine indicates that the risks and rewards pursuant to the ownership are be recognized for ₹ 1,20,000 (80% of ₹ 1,50,000). In case of consignment sale revenue should not be recog-
transferred to ST. nized until the goods are sold to a third party.
Machine 2: Installation process for Machine 2 is more complicated, requiring significant as- Case (iii) In case of goods sold on approval basis, revenue should not be recognized until the goods have
sistance from KY Ltd. However, question specifies that the machine is already accepted by ST been formally accepted by the buyer or the buyer has done an act adopting the transaction or the time
on 31 March 20X1. Assumingthat there is no further approval/acceptance required from the period for rejection has elapsed or where no time has been fixed, a reasonable time has elapsed. There-
buyer for the Machinesold, revenue from sale of Machine 2 can be recognized for theyear fore, revenue should be recognized for the total sales amounting ₹ 1,20,000 as the time period for rejecting
ending 31 March 20X1. the goods had expired.
Revenue (Machine 2) ₹ 3,00,000 Case (iv) Trade discounts given should be deducted in determining revenue. Thus ₹ 39,000 should be de-
Cost of Goods Sold ₹ 1,50,000 ducted from the amount of turnover of ₹ 7,80,000 for the purpose of recognition of revenue. Thus, revenue
should be ₹ 7,41,000.
Profit during the period ₹ 1,50,000
However, installation fee which is for rendering installation services cannotbe recognized until Questions Illustration 25
the installation is complete. Since the machine is pending installation, the revenue in respect
of installation charges ₹10,000 needs to be recognized on 5 April 20X1 once the installation Zigato runs a food-delivery business. As per the arrangement, Zigato allows customers to order food
process gets completed. from local restaurants and is responsible the delivery of the food within stipulated time. During a partic-
ular year, it collects the money on orders made online as under:
Question 24 Total price for the food item - ₹ 200 lakhs
The following information of Meghna Ltd. is provided: Delivery charges - ₹ 60 lakhs
(vii) Goods of ₹ 60,000 were sold on 20-3-20X2 but at the request of the buyer these were GST - ₹ 40 lakhs
delivered on 10-4-20X2. Total - ₹ 300 lakhs
(viii) On 15-1-20X2 goods of ₹ 1,50,000 were sent on consignment basis of which 20% of Zigato has received ₹ 300 lakhs for the above orders from customers and the orderswere delivered
the goods unsold are lying with the consignee as on 31-3-20X2. to the customer in stipulated time.
(ix) ₹ 1,20,000 worth of goods were sold on approval basis on 1-12-20X1. The period ofap- How much revenue should be recognised by restaurants and how much revenue should berecognised
proval was 3 months after which they were considered sold. Buyer sent approval for by Zigato for the year?
75% goods up to 31-1-20X2 and no approval or disapproval received for the remain-
ing goods till 31-3-20X2. Answer 25
(x) Apart from the above, the company has made cash sales of ₹ 7,80,000 (gross). The risks and rewards associated with the food item are not with Zigato. When a customer has ordered
Trade discount of 5% was allowed on the cash sales. a food item, whether the item will be prepared or not is the responsibility of the restaurant and not
Zigato. Similarly, the responsibility to deliver the food item is with Zigato and the restaurant does
not undertake responsibility for the same. Bad Debts A/c Dr. ₹ 2 lakhs
Therefore, the restaurant undertakes the principal’s responsibility to prepare thefood and ensure To CD A/c (Receivables)A/c ₹ 2 lakhs
its quality. Zigato, on the other hand, is only responsible to deliver the food. Thus, Zigato is acting
(Being receivables from CD written off dueto its
as an agent. Hence, it can only recognize revenue relating to that activity (which it does in the or-
liquidation)
dinary course of business). The revenue for Zigato, therefore, is ₹ 60 lakhs, whereas, the revenue for
restaurants will be ₹200 lakhs.
It may be noted that the GST of ₹ 40 lakhs is a liability payable to the Government (third party), hence
it does not form part of revenue. During the year ended 31st March 20X1, ZX Enterprises has recognized ₹ 100 lakhs on accrual basis in-
come from dividend on units of mutual funds held by it. The dividends on mutual funds were declared
Questions Illustration 26 on 15th June, 20X1. The dividend wasproposed on 10th April, 20X1.
Whether the above treatment is as per the relevant Accounting Standard?
AB sells goods to CD on 1st March 20X1. CD is having significant cash flows issues since last few
months. However, it is trying to raise funding through bank loan to be able to run its operations in fu-
Answer 28
ture. On 5th of May 20X1, CD is able to seek the funding and is expected to be able to pay for the goods
in future. Dividends from investments in shares are not recognized in the statement of profit and loss until a right to
receive payment is established. In the given situation, the dividend is proposed on 10th April, 20X1, while
At the time of sale, it is difficult for AB to ascertain whether it will be able to collectthe amount from CD
it is declared on 15th June, 20X1. Thus, the right to receive the payment of dividend gets established on 15th
due to poor financial conditions.
June, 20X1.
Explain how the recognition of revenue be done by AB?
The recognition of ₹ 100 lakhs on accrual basis in the financial year 20X0-20X1 is not correct as per AS 9
Answer 26 ‘Revenue Recognition’.
In the above case, AB should not recognise any revenue on 1st of March and until that uncertainty of re-
covery is clear. Hence, the revenue can only be recognisedby AB on 5th of May 20X1. The inventory trans-
ferred to CD until that date is required to be shown as its own inventory [inventory lying with customers]. Y Ltd., used certain resources of X Ltd. In return X Ltd. received ₹ 10 lakhs and ₹ 15 lakhs as interest and
royalties respective from Y Ltd. during the year 20 X1-X2. Youare required to state whether and on what
Questions Illustration 27 basis these revenues can be recognizedby X Ltd.
AB sells goods to CD on 1st January 20X1 for ₹ 2 lakhs. After the sale was made, CDis having sig- Answer 29
nificant cash flows issues. It is trying to raise funding through bank loan to be able to run its op-
As per AS 9 on Revenue Recognition, revenue arising from the use by others of enterprise resources yield-
erations in future. However, it is unable to do so andhas gone under liquidation on 15th of March
ing interest and royalties should only be recognized when no significant uncertainty as to measurability
20 X1.
or collectability exists. These revenues are recognized on the following bases:
At the time of sale, there was no reason for AB to believe that it will not be able to collect the amount
from CD in future. (i) Interest: on a time proportion basis taking into account the amount outstanding and
the rate applicable. Therefore X Ltd. should recognize interest revenue of ₹ 10 Lakhs
Explain how the recognition of revenue be done by AB for the year ended 31st March 20X1?
(ii) Royalties: on an accrual basis in accordance with the terms of the relevant agree-
Answer 27 ment. X Ltd. therefore should recognize royalty revenue of ₹ 15 Lakhs.
In the above case, at the time of sale, it was not unreasonable for AB to expect ultimate collection from
CD. Therefore, AB should recognise the revenue of ₹ 2 lakhs on 1st of January 20X1 and recognise a re- Questions Illustration 30
ceivable for the same amount.
The Board of Directors decided on 31.3.20X2 to increase the sale price of certain items retrospectively
Later, since CD went into liquidation, AB should write off the receivables and booka loss in his books. from 1st January, 20X2. In view of this price revision with effect from 1st January 20X2, the company
Accounting in the books of AB 1st January 20X1 has to receive ₹ 15 lakhs from its customers in respect of sales made from 1st January, 20X2 to 31st
March, 20X2.
CD A/c (Receivables) Dr. ₹ 2 lakhs
Accountant cannot make up his mind whether to include ₹ 15 lakhs in the sales for20X1- 20X2.Advise.
To Revenue A/c (Being goods ₹ 2 lakhs
sold to CD Ltd)
15th March 20X1
Answer 30
Chapter 9.1
Price revision was affected during the current accounting period 20 X1-20X2. As a result, the com- AS 12-Accounting for Government Grants
pany stands to receive ₹ 15 lakhs from its customers in respect of sales made from 1st January, 20X2 to
31st March, 20X2. If the company is able to assess the ultimate collection with reasonable certainty,
only then additional revenue arising out of the said price revision may be recognized in 20X1-20X2.
If the company is not reasonably certain on ultimate collection ₹ 15 lakhs from its customers in respect
of sales made from 1st January, 20X2 to 31st March, 20X2, it shall postpone recognition of revenue and
disclose it in financial statements for year 20X1-20X2 as per AS 1 MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV
2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
Questions Illustration 31 Study
Q.18 TO Q.35
Mat.
A claim lodged with the Railways in March, 20X1 for loss of goods of ₹ 2,00,000 had been passed
Past Q.5 Q.5
for payment in March, 20X3 for ₹ 1,50,000. No entry was passed in the books of the Company, when NO Q.13 NO NO Q.4 Q.14 Q.15 NO Q.16 NO
the claim was lodged. Advise P Co. Ltd. about the treatment of the following in the Final State- Exams Q.12 Q.12
ment of Accounts for the year ended31st March, 20X3.
Q.5 Q.1 Q.3 Q.2 Q.1 Q.3
MTP NO NO Q.2 NO Q.1 Q.2
Answer 31 Q.12 Q.2 Q.4 Q.5 Q.12 Q.8 Q.6
AS 9 on ‘Revenue Recognition’ states that where the ability to assess the ultimate collection with RTP Q.6 Q.10 Q.1 Q.9 Q.8 Q.8 Q.7 Q.6 Q.11 Q.9 NO Q.17
reasonable certainty is lacking at the time of raising any claim, revenue recognition is postponed to
the extent of uncertainty involved. When recognition of revenue is postponed due to the effect
of uncertainties, it is considered as revenue of the period in which it is certain to be collected. In
thiscase it may be assumed that collectability of claim was not certain in the earlier periods. This
is supposed from the fact that only ₹ 1,50,000 were collected againsta claim of ₹2,00,000. So this
transaction can not be taken as a Prior Period Item.
Hence receipt of ₹ 1,50,000 shall be recognized as revenue in year ended 31st March, 20X3
In the light of AS 5, it will not be treated as extraordinary item. However, AS 5states that when items
of income and expense within profit or loss from ordinary activities are of such size, nature, or in-
cidence that their disclosure is relevant to explain the performance of the enterprise for the period,
the nature and amountof such items should be disclosed separately. Accordingly, the nature and
amount of this item should be disclosed separately.
Depreciation for each year = (Rs. 80 lakhs – Rs.8 lakhs)/4 years = Rs. 18 lakhs per year
Chapter 9.1
Book value of fixed assets after two years = Rs. 80 lakhs – (Rs. 18 lakhs x 2 years) = Rs. 44 lakhs
AS 12-Accounting for Government Grants 1. Value of Fixed Assets after refund of grant
On refund of grant the balance of deferred grant account will become nil. The fixed
Question 1
assets will continue to be shown in the books at Rs. 44 lakhs.
Viva Ltd. received a specific grant of Rs. 30 lakhs for acquiring the plant of Rs. 150 lakhs during 2018-19 2. Amount of depreciation for remaining two years
having useful life of 10 years. The grant received was credited to deferred income in the balance sheet
Depreciation will continue to be charged at Rs. 18 lakhs per annum for the remaining two years.
and was not deducted from the cost of plant. During 2021-22, 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 Rs. 21 lakhs and written down value of plant was Rs. 105 lakhs. Question 3
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 2021-22 in profit and loss account? (MTP 5 Caseworker Limited received a specific grant of ₹ 6 crore for acquiring the plant of ₹ 30 crore on 1.4.2016
Marks , Sep ’22 May 20 ,March ’21 ,RTP May ’19) having useful life of 10 years. At the beginning of the financial year 2021-2022, due to non- compliance of
conditions laid down for the grant of ₹ 6 crore, the company had to refund the grant tothe Government.
Answer 1 What should be the treatment of the refund if grant was deducted from the cost of the plant during fi-
nancial year 2016-2017? Assume depreciation is charged on fixed assets as per Straight Line Method.
As per AS-12, ‘Accounting for Government Grants’, “the amount refundable in respect of a grant related (MTP 5 Marks April 23 & Nov ‘21)
to specific fixed asset should be recorded by reducing the deferred income balance. To the extent the
amount refundable exceeds any such deferred credit, the amount should be charged to profit and loss Answer 3
statement.
As per AS 12, the amount refundable in respect of grant related to specific fixed assets should be recorded
In this case the grant refunded is Rs. 30 lakhs and balance in deferred income is Rs. 21 lakhs, Rs. 9 lakhs by increasing the book value of the asset or by reducing the capital reserve or the deferred income bal-
shall be charged to the profit and loss account for the year 2021-22. There will be no effect on the cost ance, as appropriate, by the amount refundable. Where the book value of the asset is increased, depreci-
of the fixed asset and depreciation charged will be on the same basis as charged in the earlier years. ation on the revised book value should be provided prospectively over the residual useful life of the asset.
Where grant was deducted from the cost of the asset, initial value of the plant after deduction of grant
Question 2
amount of Rs. 6 crore would have been = Rs. 30 crore — Rs. 6 crore = Rs. 24 crore.
Ram Ltd. purchased machinery for Rs. 80 lakhs (useful life 4 years and residual value Rs. 8 lakhs). Carrying value of the plant after 5 years on 1.4.2021 = [(Rs. 24 crore / 10 years) x 5 years] = Rs. 12 crore. An-
Government grant received was Rs. 32 lakhs. The grant had to be refunded at the beginning of third nual depreciation charge would be Rs. 2.4 crore.
year. Show the Journal Entry to be passed at the time of refund of grant and the value of the fixed as-
On refund of grant to the Government, the book value of the plant shall be increased by Rs. 6 crore i.e. Rs. 12
sets in the third year and the amount of depreciation for remaining two years, if the grant had been
crore + Rs. 6 crore = Rs. 18 crore. The increased cost of Rs. 18 crore of the plant should be amortisedprospec-
credited to Deferred Grant A/c. (MTP 5 Marks April 21, April 19, April 22 & Oct ‘23)
tively over remaining 5 years of useful residual life. Depreciation charge in the year 2021-2022 would be Rs.
18 crore 15 years = Rs. 3.6 crore instead of earlier Rs. 2.4 crore.
Answer 2
As per AS 12 ‘Accounting for Government Grants,’ income from Deferred Grant Account is allocated to Question 4
Profit and Loss account usually over the periods and in the proportions in which depreciation on related
assets is charged. Accordingly, in the first two years (Rs. 32 lakhs /4 years) = Rs. 8 lakhs x 2 years= Rs. Darshan Ltd. purchased a Machinery on 1st April, 2016 for ₹ 130 lakhs (Useful life is 4 years). Government
16 lakhs will be credited to Profit and Loss Account and Rs. 16 lakhs will be the balance of Deferred Grant grant received is ₹ 40 lakhs for the purchase of above Machinery.
Account after two years. Therefore, on refund of grant, following entry will be passed:
Salvage value at the end of useful life is estimated at ₹ 60 lakhs. Darshan Ltd. decides to treat the grant
as deferred income. Your are required to calculate the amount of depreciation and grant to be recog-
Rs. Rs.
nized in profit & loss account for the year ending 31st March, 2017,31st March, 2018, 31st March, 2019 & 31st
Deferred Grant A/c Dr. 16 lakhs March, 2020. Darshan Ltd. follows straight line method for charging depreci tion.(MTP 5 Marks Oct ’21,
Profit & Loss A/c Dr. 16 lakhs PYP 5 Marks Jan ‘21)
To Bank A/c 32 lakhs Answer 4

(Being Government grantrefund-
As per 12 “Accounting for government grants”, grants related to depreciable assets, if treated as deferredin-
ed)
come are recognized in the profit and loss statement on a systematic and rational basis over the usefullife
Value of Fixed Assets after two years but before refund of grant of the asset. Amount of depreciation and grant to be recognized in the profit and loss account each year
Fixed assets initially recorded in the books = Rs. 80 lakhs
Question 6
Depreciation per year:
D Ltd. acquired a machine on 01-04-2017 for ₹ 20,00,000. The useful life is 5 years. The company had
₹in lakhs
applied on 01-04-2017, for a subsidy to the tune of 80% of the cost. The sanction letter for subsidy was
Cost of the Asset 130 received in November 2020. The Company’s Fixed Assets Account for the financial year 2020-21 shows
Less: Salvage value (60) a credit balance as under:
70 Particulars ₹
Depreciation per year (70lakhs / 4) 17.50 Machine (Original Cost) 20,00,000
Less: Accumulated Depreciation (from 2017-18- to 2019-20
₹ 17.50 Lakhs depreciation will be recognized for the year ending 31st March, 2017, 31st March, 2018, on Straight Line Method) 12,00,000
31st March, 2019 and 31st March, 2020.
8,00,000
Amount of grant recognized in Profit and Loss account each year:
Less: Grant received (16,00,000)
40 lakhs /4 years = ₹ 10 Lakhs for the year ending 31st March, 2017, 31st March, 2018, 31st March, 2019 and
Balance (8,00,000)
31st March, 2020.
You are required to explain how should the company deal with this asset in its accounts for 2020-21? (MTP
5 Marks March ’23) (RTP Nov 21 ,May 18)
Question 5
Answer 6
On 01.04.2018, 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 assets. The life span of the From the above account, it is inferred that the Company has deducted grant from the book value of as-
machinery is 5 years. The machinery is depreciated at 20% on WDV method. The company had to set for accounting of Government Grants. Accordingly, out of the ₹ 16,00,000 that has been received, ₹
refund the entire grant in 2nd April, 2021 due to non-fulfilment of certain conditions which was im- 8,00,000 (being the balance in Machinery A/c) should be credited to the machinery A/c. The balance ₹
posed by the government at the time of approval of grant. How do you deal with the refund of grant to 8,00,000 may be credited to P&L A/c, since already the cost of the asset to the tune of ₹ 12,00,000 had been
the Government in the books of XYZ Ltd. as per AS 12? (MTP 5 Marks, Mar’22, MTP 5 Marks Oct 20)(PYP debited to P&L A/c in the earlier years by way of depreciation charge, and ₹ 8,00,000 transferred to P&L A/c
5 Marks May ’18 & Nov ’20) now would be partial recovery of that cost.
There is no need to provide depreciation for 2020-21 or 2021-22 as the depreciable amount is now Nil.
Answer 5
According to AS 12 on Accounting for Government Grants, the amount refundable in respect of a grant Question 7
related to a specific fixed asset (if the grant had been credited to the cost of fixed asset at the time of
receipt of grant) should be recorded by increasing the book value of the asset, by the amount refundable. (i) Hygiene Ltd. had received a grant of Rs. 50 lakh in 2012 from a State Government towards
Where the book value is increased, depreciation on the revised book value should be provided prospec- installation of pollution control machinery on fulfilment of certain conditions. The com-
tively over the residual useful life of the asset. pany, however, failed to comply with the said conditions and consequently was required
to refund the said amount in 2020. The company debited the said amount to its machinery
(₹ in lakhs) account in 2020 on payment of the same. It also
1st April, 2018 Acquisition cost of machinery (₹ 500 – ₹ 100) 400.00 Reworked the depreciation for the said machinery from the date of its purchase and
31st March, 2019 Less: Depreciation @ 20% (80) passed adjusting entries in the year 2020 to incorporate the retrospective impact of the
same. State whether the treatment done by the company is correct or not. (RTP May ’21,
1st April, 2019 Book value 320.00
May’23)
31st March, 2020 Less: Depreciation @ 20% (64)
(ii) ABC Ltd. received two acres of land received for set up of plant. It also received Rs.2 lakhs
received for purchase of machinery of Rs. 10 lakhs. Useful life of machinery is 5 years. De-
31st March, 2021 Less: Depreciation @ 20% (51.20) preciation on this machinery is to be charged on straight-line basis. How should ABC Ltd.
1st April, 2021 Book value 204.80 recognize these government grants in its books of accounts? (RTP May ’21)
2nd April, 2021 Add: Refund of grant 100.00 Answer 7

Revised book value 304.80 (i) As per the facts of the case, Hygiene Ltd. had received a grant of Rs. 50 lakh in 2012 from a
Depreciation @ 20% on the revised book value amounting ₹ 304.80 lakhs is to be provided prospectively State Government towards installation of pollution control machinery on fulfilment of certain
over the residual useful life of the asset. conditions. However, the amount of grant has to be refunded since it failed to comply with the
prescribed conditions. In such circumstances, AS 12, “Accounting for Government Grants”,

as a credit in the profit and
requires that the amount refundable in respect of a government grant related to a specific
fixed asset is recorded by increasing the book value of the asset or by reducing the capital Loss statements, either separately or under a general heading such as ‘Other Income’. Alternatively,
reserve or the deferred income balance, as appropriate, by the amount refundable. The Rs.351 May be deducted in reporting the related expense i.e. employee benefit expenses.
Standard further makes it clear that in the first alternative, i.e., where the book value of the
(ii) As per AS 12 ‘Accounting for Government Grants’, where the government grants are in the
asset is increased, depreciation on the revised book value should be provided prospective-
nature of promoters’ contribution, i.e. they are given with reference to the total investment in
ly over the residual useful life of the asset. Accordingly, the accounting treatment given by
an undertaking or by way of contribution towards its total capital outlay and no repayment
Hygiene Ltd. of increasing the value of the plant and machinery is quite proper. However,
is ordinarily expected in respect thereof, the grants are treated as capital reserve which can
the accounting treatment in respect of depreciation given by the company of adjustment
be neither distributed as dividend nor considered as deferred income. In the given case,
of depreciation with retrospective effect is improper and constitutes violation of AS 12.
the subsidy received from the Central Governmentfor setting up a unit in notified backward
(ii) ABC Ltd. should recognize the grants in the following manner: area is neither in relation to specific fixed asset nor in relation to revenue. Thus, amount of
Rs.100 lakhs should be credited to capital reserve.
● As per AS 12, government grants may take the form of non-monetary assets, such as land
or other resources, given at concessional rates. In these circumstances, it is usual to ac- (iii) Rs.10 lakhs grant received for installation anti-pollution equipment is a grant related to spe-
count for such assets at their acquisition cost. Non-monetary assets given free of cost are cific fixed asset. Two methods of presentation in financial statements of grants related to
recorded at a nominal value. Accordingly, land should be recognized at nominal value in specific fixed assets are regarded as acceptable alternatives. Under first method, the grant
the balance sheet. is shown as a deduction from the gross value of the asset concerned in arriving at its book
value. The grant is thus recognized in the profit and loss statement over the useful life of a de-
● The standard provides option to treat the grant either as a deduction from the gross value
preciable asset by way of a reduced depreciation charge. Under the second method, grants
of the asset or to treat it as deferred income as per provisions of the standard. Under first
related to depreciable assets are treated as deferred income which is recognised in the profit
method, the grant is shown as a deduction from the gross value of the asset concerned in
and loss statement on a systematic and rational basis over the useful life of the asset.
arriving at its book value. The grant is thus recognised in the profit and loss statement over
the useful life of a depreciable asset by way of a reduced depreciation charge. According- Thus, Rs.10 lakhs may either be deducted from the cost of equipment or treated as deferred
ly, the grant of Rs. 2 lakhs is deducted from the cost of the machinery. Machinery will be income to be recognized on a systematic basis in profit & Loss A/c over the useful life of
recognised in the books at Rs. 10 lakhs – Rs. 2 lakhs = Rs. 8 lakhs and depreciation will be equipment.
charged on it as follows:
Rs. 8 lakhs/ 5 years = Rs. 1.60 lakhs per year. Question 9
Under the second method, grants related to depreciable assets are treated as deferred Samrat Limited has set up its business in a designated backward area which entitles the company
income which is recognised in the profit and loss statement on a systematic and rational for subsidy of 25% of the total investment from Government of India. The company has invested Rs.80
basis over the useful life of the asset. Such allocation to income is usually made over the pe- crores in the eligible investments. The company is eligible for the subsidy and has received Rs.20 crores
riods and in the proportions in which depreciation on related assets is charged. Rs. 2 lakhs from the government in February 2019. The company wants to recognize the said subsidy as its income
should be recognised as deferred income and will be transferred to profit and loss over the to improve the bottom line of the company. Do you approve the action of the company in accordance
useful life of the asset. In this case, Rs. 40,000 [Rs. 2 lakhs / 5 years] should be credited with the Accounting Standard? (RTP Nov’19, Nov’22)
to profit and loss each year over the period of 5 years.
Answer 9
Question 8
As per AS 12 “Accounting for Government Grants”, where the government grants are in the nature of pro-
moters’ contribution, i.e., they are given with reference to the total investment in an undertaking orby way
How would you treat the following in the accounts in accordance with AS 12 ‘Govern-
of contribution towards its total capital outlay (for example, Central Investment Subsidy Scheme) and no
ment Grants’?
repayment is ordinarily expected in respect thereof, the grants are treated as capital reserve which can
be neither distributed as dividend nor considered as deferred income. The subsidy received by Samrat
(i) Rs.35 Lakhs received from the Local Authority for providing Medical facilities to the em-
Ltd. for setting up its business in a designated backward area will be treated as grant by the government
ployees. (RTP Nov 20, RTP May 20, MTP Oct’22, 5 Marks, Old & New SM)
in the nature of promoter’s contribution as the grant is given with reference to the total investment in an
(ii) Rs.100 Lakhs received as Subsidy from the Central Government for setting up a unit in a undertaking i.e. subsidy is 25% of the eligible investment and also no repayment is apparently expected
notified backward area. (RTP Nov 20, RTP May 20, MTP Oct’22, 5 Marks, Old & New SM) in respect thereof. US $ 8,547 = 5,00,000/58.50 Since the subsidy received is neither in relation to specific
fixed assets nor in relation to revenue. Thus, the company cannot recognize the said subsidy as income in
(iii) Rs.10 Lakhs Grant received from the Central Government on installation of anti- pollution
its financial statements in the given case. It should be recognized as capital reserve which can be neither
equipment. (RTP May 20, MTP Oct’22, 5 Marks)
distributed as dividend nor considered as deferred income.
Answer 8
(i) Rs.35 lakhs received from the local authority for providing medical facilities to the employ-
ees is a grantreceived in the nature of revenue grant. Such grants are generally presented
Question 10
Answer 11
A specific government grant of ₹ 15 lakhs was received by USB Ltd. for acquiring the Hi-Tech Diary plant
of ₹ 95 lakhs during the year 2014-15. Plant has useful life of 10 years. The grant received was credited Journal Entries
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 Year Particulars ₹ in lakhs ₹ in lakhs
deferred income on that date was ₹ 10.50 lakhs and written down value of plant was ₹ 66.50 lakhs.
(Dr.) (Cr.)
(i) What should be the treatment of the refund of the grant and the effect on cost of plant
2nd Fixed Asset Account Dr. 7.5
and the amount of depreciation to be charged during the year 2017 -18 in profit and loss
account? To Bank Account 7.5
(ii) What should be the treatment of the refund, if grant was deducted from the cost of the (Being government grant on asset partly re-
plant during 2014-15 assuming plant account showed the balance of ₹ 56 lakhs as on funded which increased the cost of fixed asset)
1.4.2017? You are required to explain in the line with provisions of AS 12. (RTP Nov 18)
Depreciation Account (W.N.) Dr. 5.5
Answer 10 To Fixed Asset Account 5.5
As per para 21 of AS 12, ‘Accounting for Government Grants’, “the amount refundable in respect of a (Being depreciation charged on SLM on re-
vised value of fixed asset prospectively)
Grant related to specific fixed asset should be recorded by reducing the deferred income balance. the
extent the amount refundable exceeds any such deferred credit, the amount should be charged Profit & Loss Account Dr. 5.5
to profit and loss statement. To Depreciation Account 5.5
(i) In this case the grant refunded is ₹ 15 lakhs and balance in deferred income is ₹ 10.50 lakhs, (Being depreciation transferred to Profit and
₹ 4.50 lakhs shall be charged to the profit and loss account for the year 2017-18. There will be Loss Account at the end of year 2)
no effect on the cost of the fixed asset and depreciation charged will be on the same basis
Working Note:
as charged in the earlier years.
(ii) If the grant was deducted from the cost of the plant in the year 2014-15 then, para 21 of Depreciation for Year 2
AS 12 states that the amount refundable in respect of grant which relates to specific fixed
₹ in lakhs
assets should be recorded by increasing the book value of the assets, by the amount re-
fundable. Where the book value of the asset is increased, depreciation on the revised book Cost of the Asset 30
value should be provided prospectively over the residual useful life of the asset. Therefore, Less: Government grant received (12)
in this case, the book value of the plant shall be increased by ₹ 15 lakhs. The increased
cost of ₹ 15 lakhs of the plant should be amortized over 7 years (residual life). Depreciation 18
charged during the year 2017-18 shall be (56+15)/7 years = ₹ 10.14 lakhs presuming the d Less: Depreciation for the first year [ 18-6 / 4 ] 3
preciation is charged on SLM.
15
Question 11 Add: Government grant refundable 7.5

Depreciation for the second year [ 22.5-6 / 3 ] 22.5
A fixed asset is purchased for ₹ 30 lakhs. Government grant received towards it is ₹ 12 lakhs. Residual
Value is ₹ 6 lakhs and useful life is 4 years. The company charges depreciation based on Straight-
Question 12
Line method. Asset is shown in the balance sheet net of grant. After 1 year, grant becomes refundable
to the extent of ₹ 7.5 lakhs due to non-compliance with certain conditions. You are required to give
On 1st April, 2016, Mac Ltd. received a Government Grant of ₹ 60 lakhs for acquisition of machinery cost-
necessary journal entries for second year. (RTP May ’22)
ing ₹ 300 lakhs. The grant was credited to the cost of the asset. The estimated useful life of the machin-
ery is 10 years. The machinery is depreciated @ 10% on WDV basis. The company had to refund the grant
in June 2019 due to non- compliance of certain conditions. How the refund of the grant is dealt with in
the books of Mac Ltd. assuming that the company did not charge any depreciation for theyear 2019-20.
Pass necessary Journal Entries for the year 2019-20. (PYP 5 Marks Nov ’20) (Same concept different
figures MTP 5 Marks, Mar’22, MTP 5 Marks Oct 20, PYP 5 Marks May’18)
Answer 12
Answer 13
(₹ in lakhs) True: When grants in the nature of promoters’ contribution becomes refundable, in part or in full to the
1st April, 2016 Acquisition cost of machinery Less: Government 300.00 government on non-fulfillment of some specified conditions, the relevant amount refundable to the gov-
Grant ernment is reduced from the capital reserve.
60.00
240.00 Question 14
31st March, 2017 Less: Depreciation @ 10% (24.00)
Alps Limited has received the following Grants from the Government during the year ended 31st March,
2021:
31st March, 2018 Less: Depreciation @ 10% (21.60)
(i) ₹ 120 Lacs received as Subsidy from the Central Government for setting up an Industrial un-
1st April, 2018 Book value 194.40 dertakingin Medak, a notified backward area.
31st March, 2019 Less: Depreciation @ 10% (19.44) (ii) ₹ 15 Lacs Grant received from the Central Government on installation of Effluent Treatment
1st April, 2019 Book value 174.96 Plant.
Less: Depreciation @10% for 2 months (2.916) (iii) ₹ 25 Lacs received from State Government for providing Medical facilities to its workmen
during thepandemic.
1st June, 2019 Book value 172.044
Advise Alps Limited on the treatment of the above Grants in its books of Account in accor-
June 2019 Add: Refund of grant* 60.00
dance with AS-12 “Government Grants”. (PYP July’21, 5 Marks)
Revised book value 232.044
Depreciation @10% on the revised book value amounting to ₹ 232.044 lakhs is to be providedpro- Answer 14
spectively over the residual useful life of the machinery.
(i) As per AS 12 ‘Accounting for Government Grants’, where the government grants are in the na-
*considered refund of grant at beginning of June month and depreciation for two months already ture of promoters’ contribution i.e., they are given with reference to the total investment in an
charged. Alternative answer considering otherwise also possible. undertaking or by way of contribution towards its total capital outly and no repayment is ordi-
narily expected in respect thereof, the grants are treated as capital reserve which can be nei-
Journal Entries
ther distributed as dividend nor considered as deferred income. In the given case, the subsidy
received from the Central Government for setting up an industrial undertaking in Medak is nei-
Machinery Account Dr. 60 ther in relation to specific fixed asset nor in relation in revenue. Thus, the amount of ₹ 120 Lacs
To Bank Account 60 should be credited to capital reserve. (Note: Subsidy for setting up an industrial undertaking is
considered to be in the nature of promoter’s contribution)
(Being government grant on asset partly refunded
which increased the cost of fixed asset) (ii) As per AS 12 ‘Accounting for Government Grants’, two methods of presentation in financial state-
ments of grants related to specific fixed assets are regarded as acceptable alternatives –
Depreciation Account Dr. 19.337
a. The grant is shown as a deduction from the gross value of the asset concerned in arriving at
To Machinery Account 19.337 its book value. The grant is thus recognised in the profit and loss statement over the useful
(Being depreciation charged on revised value of fixed life of a depreciable asset by way of a reduced depreciation charge. Where the grant equals
asset prospectively for 10 months) the whole, or virtually the whole, of the cost of the asset, the asset is shown in the balance
sheet at a nominal value.
Profit & Loss Account Dr. 22.253
b. Grants related to depreciable asset are treated as deferred income which is recognised in
To Depreciation Account 22.253
the profit and loss statement on a systematic and rational basis over the useful life of the
(Being depreciation transferred to Profit and Loss Account asset.
amounting to ₹ (2.916 + 19.337= 22.253)
In the given case, ₹ 15 Lacs was received as grant from the Central Government for installa-
tion of Effluent Treatment Plant. Since the grant was received for a fixed asset, either of the
Question 13 above methods can be adopted.
State whether the following statements are ‘True’ or ‘False’. Also give reason for your answer. As per (iii) ₹ 25 lacs received from State Government for providing medical facilities to its workmen
the provisions of AS-12, government grants in the nature of promoters’ contribution which become during the pandemic is a grant received in nature of revenue grant. Such grants are gener-
refundable should be reduced from the capital reserve. (PYP May ‘19, 1 Mark) ally presented as a creditin the profit and loss statement, either separately or under a gen-
eral heading such as “Other Income”.Alternatively, ₹ 25 lacs may be deducted in reporting
the related expense i.e., employee benefit expense.
(v) ₹ 500 Lakhs will be reduced from the renovation cost of power plant or will be treated as de-
Question 15 ferred income irrespective of the expenditure done by the entity out of it as it was specifically
received for the purpose major renovation of power plant. However, it may be, later on, decided
Answer the following Questions: by the Govt. whether the grant will have to be refunded or not due to non- compliance of con-
ditions attached to the grant.
(a) Suraj Limited provides you the following information:
Question 16
(i) It received a Government Grant @40% towards the acquisition of Machinery worth
₹ 25 Crores. On 1stApril 2021, Eleanor Limited purchased a manufacturing Plant for Rs. 60 lakhs, which has an esti-
mated useful life of Rs. 10 years with a salvage value of Rs. 10 lakhs. On purchase of the Plant, a grant of
(ii) It received a Capital Subsidy of ₹ 150 Lakhs from Government for setting up a Plant Rs. 20 lakhs was received from the government.
costing ₹ 300 Lakhs in a notified backward region. You are required to calculate the amount of depreciation as per AS-12 for the financial year 2022-23 in
(iii) It received ₹ 50 Lakhs from Government for setting up a project for supply of arsenic the following cases:
free waterin a notified area. (i) If the grant amount is deducted from the value of Plant.
(iv) It received ₹ 5 Lakhs from the Local Authority for providing Corona Vaccine free of (ii) If the grant is treated as deferred income.
charge to its employees and their families.
(iii) If the grant amount is deducted from the value of Plant, but at the end of the year 2022
(v) It also received a performance award of ₹ 500 Lakhs from Government with a condi- -2023grant is refunded to the extent of Rs. 4 lakhs, due to non-compliance of certain con-
tion of major renovation in the Power Plant within 3 years. Suraj Limited incurred 90% ditions.
of amount towards Capital expenditure and balance for Revenue Expenditure.
(iv) If the grant is treated as the promoter’s contribution.
State, how you will treat the above in the books of Suraj Limited.(PYP 5 Marks, May’22)
(Assume depreciation on the basis of Straight-Line Method.) (PYP 5 Marks May ‘23)
Answer 15
Answer 16
a)
Calculation of depreciation as per AS 12 for the financial year 2022-23:
(i) As per AS 12 “Accounting for Govt. Grants”, two methods of presentation in financial state-
ments of grants related to specific fixed assets are regarded as acceptable alternatives. (i) If the grant amount is deducted from the value of Plant, then the amount of deprecation will
Under the first alternative, the grant of ₹ 10 crores (40% of 25 crores) is shown as a deduction be Rs. 3,00,000 p.a. (Rs. 60,00,000 - Rs. 10,00,000 - Rs. 20,00,000) / 10 year.
from the gross value of the asset concerned in arriving at its book value. The grant is thus (ii) If the grant is treated as deferred income, then amount of depreciation will be Rs. 5,00,000 p.a.
recognized the profit and loss statement over the useful (Rs. 60,00,000 - Rs. 10,00,000) / 10 year.
life of a depreciable asset by way of a reduced depreciation charge. Under second alternative (iii) If the grant amount is deducted from the value of plant, but at the end of the year 2022-
method, grant amounting ₹ 10 crores is treated as deferred income which is recognized in the 23 grant is refunded to the extent of Rs. 4 lakh then the amount of depreciation will be Rs.
profit and loss statement on a systematic and rational basis over the useful life of the asset. 3,00,000 p.a. (Rs. 60,00,000 - Rs. 10,00,000 - Rs. 20,00,000) /10 year for year 202122 and for
(ii) In the given case, the grant amounting ₹ 150 lakhs received from the Central Government the year 2022-23 Depreciation will be Rs. 3,00,000 calculated as follows, (Rs.60,00,000 - Rs.
for setting up a plant in notified backward area may be considered as in the nature of pro- 10,00,000 - Rs. 20,00,000– Rs. 3,00,000) / 10 years.
moters’ contribution. Thus, amount of ₹ 150 lakhs should be credited to capital reserve and Note: It is assumed that the depreciation for the year has been charged on the book value
the plant will be shown at ₹ 300 lakhs. on the plant before making adjustment for grant. Alternatively, if it is considered otherwise
(iii) ₹ 50 lakhs received from Govt. for setting up a project for supply of arsenic free water in no- then the depreciation will be charged after making adjustment for grant. In that case de-
tified area should be credited to capital reserve. preciation for the year 2022-23 will be as Rs. 3,44,444 calculated as follows, (Rs. 60,00,000 -
Rs.10,00,000 - Rs. 20,00,000 + 4,00,000– Rs. 3,00,000 / 9 years
Alternatively, if it is assumed that the project consists of capital asset only, then the
amount of ₹ 50 lakhs received from Govt. for setting up a project for supply of arsenic free (iv) If the grant is treated as promoter’s contribution, then the amount of depreciation will be Rs.
water should either be deducted from cost of asset of the project concerned in the balance 5,00,000 p.a. (Rs. 60,00,000 -10,00,000) /10 year.
sheet or treated as deferred income which is recognized in the profit and loss statement on NOTE: The answer can be presented in the following alternative manner:
a systematic and rational basis over the useful life of the asset.
(iv) ₹ 5 lakhs received from the local authority for providing corona vaccine to the employees is
a grant received in nature of revenue grant. Such grants are generally presented as a credit
in the profit and loss account, either separately or under a general heading ‘Other Income’.
Alternatively, ₹ 5 lakhs may be deducted in reporting the related expense i.e. employee ben-
efit expenses.
2022-23 will be as:

(i) (ii) (iii) (iv)
Date Particulars Grant Grant Grant Refunded Grant is
Value treatedas treated Cost of Plant 60,00,000
deducted as Pro-
Deferred Less: Salvage 10,00,000
from Plant moter’s
Income 50,00,000
Contribu-
tion Less: Grant 20,00,000
01.04.2021 Cost of Plant Less: 60,00,000 60,00,000 60,00,000 60,00,000 30,00,000
Salvage
10,00,000 10,00,000 10,00,000 10,00,000 Add: Grant Refundable 4,00,000
50,00,000 50,00,000 50,00,000 50,00,000 34,00,000
01.04.2021 Less: Grant 20,00,000 - 20,00,000 - Less: Depreciation For 2021-22 3,00,000
30,00,000 50,00,000 30,00,000 50,00,000 31,00,000
Useful Life (years) 10 10 10 10 Useful Life (years) 9

Depreciation For 2022-23 3,44,444
31.03.2022 Depreciation FY
2021-22 3,00,000 5,00,000 3,00,000 5,00,000 Question 17
1.4.2022 Cost of Plant Less: 60,00,000 S Ltd. has received a grant of 18 crores from the Government for setting up a factory in a backward
Salvage area. Out of this grant, the company distributed 12 crores as dividend.
10,00,000
Also, S Ltd. received land free of cost from the State Government but it has not recorded it at all in the
50,00,000
books as no money has been spent.
Less: Grant 20,00,000 In the light of AS-12 examine, whether the treatment of both the grants is correct. (RTP Nov ’23)
Less: 30,00,000
Answer 17
Depreciation FY 3,00,000
2022-23 As per AS 12, when government grant is received for a specific purpose, it should be utilized for the
same.
27,00,000
Thus, the grant received for setting up a factory is not available for distribution of dividend.As per AS-12,
Book value at the 4,00,000 if an asset is acquired free of cost it is to be recorded at a nominal value.
time of refund o f
Thus, even if the company has not spent money for the acquisition of land, land should be recorded in
grant i.e. at the end
of period the books of accounts at a nominal value.
The treatment of both the elements of the grant is incorrect as per AS 12.
Add: Grant Refund- 31,00,000
able at endof 22-23 Question 18
Book value
To encourage industrial promotion, IDCI offers subsidy worth Rs. 50 lakhs to all new industries set up
in the specified industrial areas. This grant is in the nature of promoter’s contribution. How such sub-
available for sidy shouldbe accounted in the books?
remining 8 years. a. Credit it to capital reserve

b. Credit it as ‘other income’ in the profit and loss account in the year of commencement
Note:It is assumed that the depreciation for the year has been charged on the book value on the of commercial operations
plant before making adjustment for grant. Alternatively, if it is considered otherwise then the de-
preciation will be charged after making adjustment for grant. In that case depreciation for the year c. Both (a) and (b) are permitted
Ans: (a)
a. ₹ 10 crore b. ₹ 6 crore
Question 19 c. ₹ 2 crore d. ₹ 8 crore
Government grants that are receivable as compensation for expenses or losses incurred in a previ- Ans: (c)
ous accounting period or for the purpose of giving immediate financial support to the enterprise with Theoretical Questions Answers
no further related costs, should be
Questions 23
d. recognised and disclosed in the Statement of Profit and Loss of the period in which they
are receivable as an ordinary item.
AS 12 deals with recognition and measurement of government grants. Please elaborate
e. recognised and disclosed in the Statement of Profit and Loss of the period in which the the parameterswhich are required to be met before an entity can recognise government
losses or expenses were incurred. grants in its books?
f. recognised and disclosed in the Statement of Profit and Loss of the period in which they
are receivable, as an extraordinary item if appropriate as per AS 5. Answer 23
A government grant is recognised when there is reasonable assurance that:
Ans: (c)
฀ the enterprise will comply with the conditions attaching to it; and
Question 20 ฀ the grant will be received.
Receipt of a grant is not of itself conclusive evidence that the conditions attaching to the
Which of the following is an acceptable method of accounting presentation for a government grant
grant have been or will be fulfilled.
relatingto an asset?
g. Show the grant as part of Capital Reserve

h. Reduce the grant from the cost of the asset or show it separately as a deferred income on the
Liability side of the Balance Sheet. Question 24
i. Show the grant as part of general Reserve
Supriya Ltd. received a grant of Rs. 2,500 lakhs during the accounting year 20X1-20X2 from govern-
Ans: (c) ment for welfare activities to be carried on by the company for its employees. The grant pre-
scribed conditions for its utilization. However, during the year 20X2-20X3, it was found that the
conditions ofgrants were not complied with and the grant had to be refunded to the government
Question 21 in full. Elucidatethe current accounting treatment, with reference to the provisions of AS-12
X Ltd. has received a grant of ₹ 20 crore for purchase of a qualified machine costing ₹ 80 crore.
Answer 24
X Ltd has a policy to recognise the grant as a deduction from the cost of the asset. The expected
remaining useful lifeof the machine is 10 years. Assume that there is no salvage value and the As per AS 12 ‘Accounting for Government Grants’, Government grants sometimes become refundable
depreciation method is straight- line. The amount of annual depreciation to be charged as an ex- because certain conditions are not fulfilled. A government grant that becomes refundable is treated as
pense in Profit and Loss Statement will be: an extraordinary item as per AS 5.
The amount refundable in respect of a government grant related to revenue is applied first against any
a. ₹ 10 crore b. ₹ 6 crore
unamortized deferred credit remaining in respect of the grant. To the extent that the amount refundable
c. ₹ 2 crore d. ₹ 8 crore exceeds any such deferred credit, or where no deferred credit exists, the amount is chargedimmediately
to profit and loss statement.
Ans: (b)
In the present case, the amount of refund of government grant should be shown in the profit & loss ac-
count of the company as an extraordinary item during the year.
Question 22
X Ltd has received a grant of ₹ 20 crore for purchase of a qualified machine costing ₹ 80 crore. X Ltd.
Question 25 -Illustration
has a policy to recognise the grant as deferred income. The expected remaining useful life of the ma-
Co X runs a charitable hospital. It incurs salary of doctors, staff etc to the extent of ₹ 30 lakhs per an-
chine is 10years. Assume that there is no salvage value and the depreciation method is straight-line.
num. As a support, the local govt grants a lumpsum payment of ₹90 lakhs to meet the salary expense
The amount ofother income to be to be recognised in Profit and Loss Statement will be:
for a period of next 5 years.
You are required to pass the necessary journal entries in the books of the company for first year
if thegrant is: lakhs. Pass the necessary journal entries in the books of the company for first two years if the grant
(a) Shown separately as Other Income; and amount is deducted from the value of fixed asset.
(b) Deducted against the Salary costs. Answer 26

Answer 25 (a) Journal in the books of Z Ltd.
Particulars ₹ (Dr.) ₹ (Cr.) Year Particulars Rs. (Dr.) Rs. (Cr.)
Bank Account 90,00,000 1st Fixed Assets Account To Bank Account Dr. 50,00,000
To Deferred Income Account Dr. 90,00,000 (Being Fixed Assets purchased) 50,00,000
(Being receipt of grant from government) Bank Account Dr. 10,00,000
Salary Expense Account To Dr. To Fixed Assets Account 10,00,000
To Deferred Income Account (Being grant received from the government)

Bank Account 30,00,000 Depreciation Account Dr. 7,00,000
(Being Salary expense paid for the year) Dr. 30,00,000 To Fixed Assets Account 7,00,000
(Being Depreciation charged on SLM)
Deferred Income Account
Profit & Loss Account Dr. 7,00,000
To Other Income Account 18,00,000
(Being Year 1 Grant income recognised in Profit & Loss) 18,00,000 To Depreciation Account 7,00,000
Note: (Being Depreciation transferred to P/L Account)
The grant has been spread on a straight-line basis over a period of 5 years [₹90,00,000/5 years = ₹ 2nd Depreciation Account Dr. 7,00,000
18,00,000]. To Fixed Assets Account

(Being Depreciation charged on SLM) 7,00,000
Particulars ₹ (Dr.) ₹ (Cr.)
Profit & Loss Account Dr. 7,00,000
Bank Account Dr. 90,00,000
To Depreciation Account 7,00,000
To Deferred Income Account 90,00,000
(Being Depreciation transferred to P/L Account)
(Being receipt of grant from government)
Salary Expense Account Dr. 12,00,000 Question 27 -Illustration
To Bank Account 12,00,000 Z Ltd. purchased a fixed asset for Rs. 50 lakhs, which has the estimated useful life of 5 years with the
salvage value of Rs. 5,00,000. On purchase of the assets government granted it a grant for Rs. 10 lakhs.
(Being Salary expense paid (net of grant income) for the year)
Pass the necessary journal entries in the books of the company for first two years if the grant is treated
as deferred income.
Deferred Income Account Dr. 18,00,000
Answer 27
To Salary Expense Account 18,00,000
Journal in the books of Z Ltd.
(Being Year 1 grant adjusted against Salary expense for the year)
Year Particulars Rs. (Dr.) Rs. (Cr.)
Question 26(Illustration) 1st Fixed Assets Account Dr. 50,00,000

To Bank Account 50,00,000
Z Ltd. purchased a fixed asset for Rs. 50 lakhs, which has the estimated useful life of 5 years with the
salvage value of Rs. 5,00,000. On purchase of the assets government granted it a grant for Rs. 10 (Being fixed assets purchased)
Bank Account Dr. 10,00,000 Question29 Illustration
To Deferred Government Grant Account (Being grant 10,00,000 Top & Top Limited has set up its business in a designated backward area which entitles the
received from the government) company to receive from the Government of India a subsidy of 20% of the cost of invest-
ment, for which no repayment was ordinarily expected. Moreover, there was no condition
Depreciation Account Dr. 9,00,000
that the company should purchase any specified assets for this subsidy. Having fulfilled all
To Fixed Assets Account 9,00,000 the conditions under the scheme, the company on its investment of Rs. 50 crore in capital
assets received Rs. 10 crore from the Government in January, 20X2 (accounting period be-
(Being depreciation charged on SLM)
ing 20X1-20X2). The company wants to treat thisreceipt as an item of revenue and thereby
Profit & Loss Account Dr. 9,00,000 reduce the losses on profit and loss account for the year ended 31st March, 20X2. Keeping in
To Depreciation Account 9,00,000 view the relevant Accounting Standard, discuss whether this action is justified or not.
(Being depreciation transferred to P/L Account) Answer 29

Deferred Government Grants Account Dr. 2,00,000 As per para 10 of AS 12 ‘Accounting for Government Grants’, where the government grants are of the
To Profit & Loss Account 2,00,000 nature of promoters’ contribution, i.e. they are given with reference to the total investment in an un-
dertaking or by way of contribution towards its total capital outlay (for example, central investment
(Being proportionate government grant taken to
subsidy scheme) and no repayment is ordinarily expected in respect thereof, the grants are treated
P/L Account)
as capital reserve which can be neither distributed as dividend nor considered as deferred income.
2nd Depreciation Account Dr. 9,00,000
In the given case, the subsidy received is neither in relation to specific fixed asset nor in relation
To Fixed Assets Account 9,00,000 to revenue. Thus, it is inappropriate to recognise government grants in the profit and loss state-
(Being depreciation charged on SLM) ment, since they are not earned but represent an incentive provided by government without
related costs. The correct treatment is to credit the subsidy to capital reserve. Therefore, the
Profit & Loss Account Dr. 9,00,000 accounting treatment desired by the company is not proper.
To Depreciation Account 9,00,000
(Being depreciation transferred to P/L Account) Question 30 Illustration
Deferred Government Grant Account Dr. (i) How would you treat the following in the accounts in accordance with AS 12 ‘Government Grants’?
(ii) Rs. 35 Lakhs received from the Local Authority for providing Medical facilities to the em-
To Profit & Loss Account 2,00,000 ployees.
(Being proportionate government grant taken to 2,00,000
Rs. 100 Lakhs received as Subsidy from the Central Government for setting up a unit in notified back-
P/L Account) ward area. This subsidy is in nature of nature of promoters’ contribution.
Question 28 -Illustration Answer 30

Rs. 35 lakhs received from the local authority for providing medical facilities to the employees is a grant
Santosh Ltd. has received a grant of Rs.8 crores from the Government for setting up a factory in a received in nature of revenue grant. Such grants are generally presented as a credit in the
backward area. Out of this grant, the company distributed Rs.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 profit and loss statement, either separately or under a general heading such as ‘Other Income’.
no money has been spent. In the light of AS 12 examine, whether the treatment of both the grants is Alternatively, Rs. 35 lakhs may be deducted in reporting the related expense i.e. employee benefit expens-
correct. es.
As per AS 12 ‘Accounting for Government Grants’, where the government grants are in the nature of pro-
Answer 28 moters’ contribution, i.e. they are given with reference to the total investment in an undertaking or by way
As per AS 12 ‘Accounting for Government Grants’, when government grant is received for a specific pur- of contribution towards its total capital outlay and no repayment is ordinarily expected in respect thereof,
pose, it should be utilised for the same. So the grant received for setting up a factory is not available for the grants are treated as capital reserve which can be neither distributed as dividend nor considered as
distribution of dividend. deferred income. In the given case, the subsidy received from the Central Government for setting up a
unit in notified backward area is neither in relation to specific fixed asset nor in relation to revenue. Thus,
In the second case, even if the company has not spent money for the acquisition of land, land amount of Rs.100 lakhs should be credited to capital reserve.
should be recorded in the books of accounts at a nominal value. The treatment of both the ele-
ments of the grant is incorrect as per AS 12.
Question 31-Illustration To Depreciation Account 2
Z Ltd. purchased a fixed asset for Rs. 50 lakhs, which has the estimated useful life of 5 (Being depreciation transferred to Profit and
years with thesalvage value of Rs. 5,00,000. On purchase of the assets government grant- Loss Account at the end of year 1)
ed it a grant for Rs. 10 lakhs (This amount was reduced from the cost of fixed asset). Grant Fixed Asset Account Dr.
was considered as refundable in the end of 2nd year to the extent of Rs. 7,00,000. Pass the
journal entry for refund of the grant as per the first method. To Bank Account
(Being government grant on asset partly refunded
Answer 31
which increased the cost of fixed asset)
Fixed Assets Account Dr. 7,00,000 Depreciation Account (W.N.2) Dr. 5
Rs.
To Fixed Asset Account 5
To Bank Account Rs. 7,00,000
(Being depreciation charged on SLM on re-
(Being government grant on asset refunded) vised value of fixed asset prospectively)
Profit & Loss Account Dr. 3.67
Question 32-Illustration
To Depreciation Account 3.67
A fixed asset is purchased for Rs. 20 lakhs. Government grant received towards it is Rs. 8 lakhs. Re-
(Being depreciation transferred to Profit and
sidual Value is Rs. 4 lakhs and useful life is 4 years. Assume depreciation on the basis of Straight Line
Loss Account at the end of year 2)
method. Asset is shown in the balance sheet net of grant. After 1 year, grant becomes refundableto the
extent of Rs. 5 lakhs due to non- compliance with certain conditions. Pass journal entries for first two 1. Working Notes:Depreciation for Year 1
years.
Rs. in lakhs
Answer 32 Cost of the Asset 20
Journal Entries Less: Government grant received (8)
Year Particulars Rs. in lakhs Rs. in 12

lakhs
(Dr.)
(Cr.) Depreciation 12-4/4
1 Fixed Asset Account Dr. 20 2
Depreciation for Year 2
To Bank Account 20
Rs. in lakhs
(Being fixed asset purchased)
Cost of the Asset 20
Bank Account Dr. 8
Less: Government grant received (8)
To Fixed Asset Account 8 12
(Being grant received from the government 2
reduced the cost of fixed asset)
Less: Depreciation for the first year
Depreciation Account (W.N.1) Dr. 2
10
To Fixed Asset Account 2 Add: Government grant refundable 5
(Being depreciation charged on Straight
Line method (SLM)) 10
Profit & Loss Account Dr. 2 3.67

2 Depreciation for the second year
Question 33 -Illustration
Rs. Rs.
On 1.4.20X1, ABC Ltd. received Government grant of Rs. 300 lakhs for acquisition of machinery cost-
ing Rs. 1,500 lakhs. The grant was credited to the cost of the asset. The life of the machinery is 5
I Fixed Assets A/c Dr. 16 lakhs
years. The machinery is depreciated at 20% on WDV basis. The Company had to refund the grant in To Bank A/c (Being grant refunded) 16 lakhs
May 20X4 due to non-fulfilment of certain conditions.
How you would deal with the refund of grant in the books of ABC Ltd. assuming that the company did
II The balance of fixed assets after two years depreciation will be Rs.16 lakhs (W.N.1) and after refund of
not charge any depreciation for year 20X4?
grant it will become (Rs.16 lakhs + Rs.16 lakhs)
Answer 33 = Rs.32 lakhs on which depreciation will be charged for remaining two years. Depreciation = (32-8)/2 =
Rs.12 lakhs p.a. will be charged for next two years.
According to para 21 of AS 12 on Accounting for Government Grants, the amount refundable in respect of
a grant related to a specific fixed asset should be recorded by increasing the book value of the asset or (2) If the grant is credited to Deferred Grant Account:
by reducing deferred income balance, as appropriate, by the amount refundable. Where the book value
is increased, depreciation on the revised book value should be provided prospectively over the residual
useful life of the asset. As per para 14 of AS 12 ‘Accounting for Government Grants,’ income from Deferred Grant Account is allo-
cated to Profit and Loss account usually over the periods and in the proportions in which depreciation on
related assets is charged. Accordingly, in the first two years (Rs.16 lakhs /4 years) = Rs.4 lakhs p.a. x 2 years
= Rs.8 lakhs were credited to Profit and Loss Account and Rs.8 lakhs was the balance of Deferred Grant
(Rs. in lakhs)
Account after two years.
1st April, 20X1 Acquisition cost of machinery (Rs. 1,500 – 1,200.00
Therefore, on refund in the 3rd year, following entry will be passed:
Rs. 300)
Rs. Rs.
31st March, 20X2 Less: Depreciation @ 20% (240.00)
1 Deferred Grant A/c Dr. 8 lakhs
Book value 960.00
31st March, 20X3 Less: Depreciation @ 20% (192.00) Profit & Loss A/c Dr 8 lakhs
Book value 768.00
To Bank A/c
31st March, 20X4 Less: Depreciation @ 20% (153.60)
1st April, 20X4 Book value 614.40 (Being Government grant refunded) 16 lakhs
May, 20X4 Add: Refund of grant 300.00
II Deferred grant account will become Nil. The fixed assets will continue to be shown in the books at Rs.24
Revised book value 914.40 lakhs (W.N.2) and depreciation will continue to be charged atRs.8 lakhs per annum for the remaining two
Depreciation @ 20% on the revised book value amounting Rs. 914.40 lakhs is to be provided prospectively years.
over the residual useful life of the asset. Working Notes:
1. Balance of Fixed Assets after two years but before refund (under first alternative) Fixed
Question 34-Illustration assets initially recorded in the books = Rs.40 lakhs – Rs.16 lakhs = Rs.24 lakhsDepreciation p.a.
= (Rs.24 lakhs – Rs.8 lakhs)/4 years = Rs.4 lakhs per year Value of fixed assets after two
A Ltd. purchased a machinery for Rs. 40 lakhs. (Useful life 4 years and residual value Rs. 8 lakhs)
years but before refund of grant = Rs.24 lakhs – (Rs.4 lakhs x 2 years) = Rs.16 lakhs
Government grant received is Rs. 16 lakhs. Show the Journal Entry to be passed at thetime of refund
of grant in the third year and the value of the fixed assets, if: 2. Balance of Fixed Assets after two years but before refund (under secondalternative)
(1) the grant is credited to Fixed Assets A/c. Fixed assets initially recorded in the books = Rs.40 lakhs
(2) the grant is credited to Deferred Grant A/c. Depreciation p.a. = (Rs.40 lakhs – Rs.8 lakhs)/4 years = Rs.8 lakhs per year Book value of fixed
assets after two years = Rs.40 lakhs – (Rs.8 lakhs x 2 years) = Rs.24 lakhs
Answer 34 Note: Value of fixed assets given above is after refund of government grant.
In the books of A Ltd. Journal Entries (at the time of refund of grant)
(1) If the grant is credited to Fixed Assets Account:
Chapter 9.2
Question 35–Illustration
AS 14- Accounting for Amalgamation
Co X runs a charitable hospital. It incurs salary of doctors, staff etc to the extent of ₹ 30 lakhs per an-
num. As a support, the local govt grants a lumpsum payment of ₹90 lakhs to meet the salary expense
for a period of next 5 years.
At the start of Year 4, Co X is unable to meet the conditions attached to the grant and is required
torefund the entire grant of 90 lakhs. Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
You are required to pass the necessary journal entries in the books of the company for refund of Study
Q.2 TO Q.14
thegrant if the grant was shown separately as Other Income. Mat.
Past
Answer 35 Exams
NO NO Q.2 NO NO NO NO NO NO NO NO NO
MTP NO NO NO NO NO NO NO NO NO NO NO Q.1
₹ ₹
RTP NO NO NO NO NO NO NO NO NO NO NO NO
Deferred Grant A/c Dr. 36 lakhs

Profit & Loss A/c Dr. 54 lakhs
To Bank A/c 90 lakhs
(Being Government grant refunded)
Workings:
Total grant received: ₹ 90 Lakhs Grant recognised as
income for first 3 years: ₹ 18 lakhs × 3 = ₹ 54 lakhs
Remaining Deferred Income = ₹ 90 Lakhs – 54 lakhs = ₹ 36 lakhs
Reference: The students are advised to refer the full text of AS 12 “Accounting for Government
Grants”.
Number of Only one resul- No new re- Only one resultant

Chapter 9.2 new resultant tant Company is sultantcompany company is formed.
companies formed. Two com- is formed. Under this case a newly
AS 14- Accounting for Amalgamation panies are wound formed company takes
up to form a single over the business of
Question 1 resultant company. an existing company.
Objective Amalgamation is Absorption is done to External reconstruction is
Briefly explain the methods of accounting for amalgamation as per Accounting Stan- done to cut compe- cut competition and done to reorganise the
dard-14. (New SM)(MTP 4 Marks Oct ’23) tition and reap the reap the economies financial structure of the
economies in large in large scale. company.
scale.
Answer 1
Example A Ltd. and B A Ltd. takes over B Ltd. is formed to take
As per AS 14 on ‘Accounting for Amalgamations’, there are two main methods of accounting for amal-
Ltd.amalgamate to thebusiness of over the business of an
gamations:
form C Ltd. another existing existing company A Ltd.
The Pooling of Interest Method company B Ltd.
Under this method, the assets, liabilities and reserves of the transferor company are recorded by the
transferee company at their existing carrying amounts (after making the necessary adjustments). Question 3
If at the time of amalgamation, the transferor and the transferee companies have conflicting ac- Which of the following statement is correct:
counting policies, a uniform set of accounting policies is adopted following the amalgamation. The
effects on the financial statements of any changes in accounting policies are reported in accordance (a) In case of merger – ESH can be issued only equity shares as a part of Purchase consider-
with AS 5 on ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’. The ation.
Purchase Method (b) In case of purchase – ESH can be issued Preference shares also as a part of Purchase consid-
Under the purchase method, the transferee company accounts for the amalgamation either by incor- eration.
porating the assets and liabilities at their existing carrying amounts or by allocating the consideration (c) Both (a) and (b) are correct.
to individual identifiable assets and liabilities of the transferor company on the basis of their fair values
at the date of amalgamation. The identifiable assets and liabilities may include assets and liabilities (d) Both (a) and (b) are incorrect.
not recorded in the financial statements of the transferor company.
Ans: (b)
Question 2
Question 4
Distinguish between Amalgamation, Absorption and External Reconstruction of Company. (PYP
5 Marks May ’19) State which statement is correct:
(e) In case of merger – assets and liabilities can only be taken over at book values.
Answer 2
(f) In case of purchase – assets and liabilities can be taken over at book values or agreed
Difference between Amalgamation, Absorption and External Reconstruction values.
(g) Both (a) and (b) are correct.
Basis Amalgamation Absorption External Reconstruction
(h) Both (a) and (b) are incorrect.
Meaning Two or more com- In this case, an exist- In this case, a newly
panies are wound up ing company takes formed company takes Ans: (c)
and a new compa- over the business of over the business of an
ny is formed to take one or more existing existing company.
Question 5
over their business. companies.
Minimum At least three are At least two compa- Only two companies State which statement is correct:
number of companies in- nies are involved. are involved.
(i) In case of merger – All Reserves and surplus of vendor company are taken over by Pur-
Companies volved.
chasing company.
involved
(j) In case of Purchase – None of the Reserves and surplus of vendor company are taken
over by Purchasing company. Theoretical Questions Answers

(k) Both (a) and (b) are correct.
Question 8
(l) Only (a) is correct.
Briefly describe the disclosure requirements for amalgamation including additional
Ans: (d) disclosure, if any, for different methods of amalgamation as per AS 14 (Revised).
Question 6 Answer 8
The disclosure requirements for amalgamations have been prescribed in paragraphs 43
State which statement is correct:
to 46 of AS 14 (Revised) on Accounting for Amalgamation. For all amalgamations, the fol-
(m) In case of merger – We use pooling of interest method for accounting. lowing disclosures are considered appropriate in the first financial statements following
the amalgamation:
(n) In case of Purchase We use purchase method or pooling of interest method de-
pending upon whether it is take over at agreed values or book values. (a) Names and general nature of business of the amalgamating companies;
(o) Both (a) and (b) are correct. (b) Effective date of amalgamation for accounting purposes;
(p) Only (a) is correct. (c) The method of accounting used to reflect the amalgamation; and
Particulars of the scheme sanctioned under a statute.
Ans: (d) (d)
For amalgamations accounted for under the pooling of interests method, the following
additional disclosures are considered appropriate in the first financial statements follow-
Question 7
ing the amalgamation:
State which statement is incorrect: (a) Description and number of shares issued, together with the percentage of each com-
(q) In case of merger – We can issue either preference shares or equity shares to PSH. pany’s equity
(r) In case of Purchase – We can issue either preference shares or equity shares to PSH. shares exchanged to effect the amalgamation;
(s) In case of merger – We can issue only preference shares to PSH. (b) The amount of any difference between the consideration and the value of net identifiable
assets acquired, and the treatment thereof. For amalgamations accounted for under the
(t) none of the above. purchase method, the following additional disclosures are considered appropriate in the
first financial statements following the amalgamation:
Ans: (c)
(a) Consideration for the amalgamation and a description of the consideration paid or con-
tingently payable; and
(b) The amount of any difference between the consideration and the value of net identifiable
assets acquired, and the treatment thereof including the period of amortisation of any
goodwill arising on amalgamation.
Question 9
List the conditions to be fulfilled as per AS 14 (Revised) for an amalgamation to be in the

nature of merger, in the case of companies. (Ch 13 )
Answer 9
An amalgamation should be considered to be an amalgamation in the nature of merger if
the specified conditions are satisfied. Amalgamation in the nature of merger is an amalga-
mation which satisfies all the following conditions.
(i) All the assets and liabilities of the transferor company become, after amalgamation, the
assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares of the trans-
feror company (other than the equity shares already held therein, immediately before the
amalgamation, by the transferee company or its subsidiaries or their nominees) become

equity shareholders of the transferee company by virtue of the amalgamation.
Answer 11
(iii) The consideration for the amalgamation receivable by those equity shareholders of the
transferor company who agree to become equity shareholders of the transferee com-
Particulars Rs.
pany is discharged by the transferee company wholly by the issue of equity shares in the
transferee company, except that cash may be paid in respect of any fractional shares. Purchase consideration = 5,00,000 x 11/10 = 55,000 55,00,000
(iv) The business of the transferor company is intended to be carried on, after the amalgama- shares of Rs. 10 each 50,00,000
tion, by the transferee company.
Less: Share capital of X Co. Ltd.
(v) No adjustment is intended to be made to the book values of the assets and liabilities of the
transferor company when they are incorporated in the financial statements of the trans- Difference Adjusted through General Reserve 5,00,000
feree company except to ensure uniformity of accounting policies.
Question 12
Question 10
On 1st April, 2018, Tina Ltd. take over the business of Rina Ltd. and discharged purchase
Briefly explain the methods of accounting for amalgamation as per Accounting Standard-14. consideration as follows:
Answer 10 (i) Issued 50,000 fully paid Equity shares of Rs. 10 each at a premium of Rs. 5 per share
to the equityshareholders of Rina Ltd.
As per AS 14 on ‘Accounting for Amalgamations’, there are two main methods of accounting for amal-
(i) Cash payment of Rs. 50,000 was made to equity shareholders of Rina Ltd.
gamations:
(ii) Issued 2,000 fully paid 12% Preference shares of Rs. 100 each at par to discharge the
The Pooling of Interest Method
preference shareholders of Rina Ltd.
Under this method, the assets, liabilities and reserves of the transferor company are recorded by the
(iii) Debentures of Rina Ltd. 20,000) will he converted into equal number and amount
transferee company at their existing carrying amounts (after making the necessary adjustments).
of 10%debentures of Tina Ltd.
If at the time of amalgamation, the transferor and the transferee companies have conflicting account- Calculate the amount of Purchase consideration as per AS-14 and pass Journal Entry relating to dis-
ing policies, a uniform set of accounting policies is adopted following the amalgamation. The effects on charge of purchase consideration in the books of Tina Ltd.
the financial statements of any changes in accounting policies are reported in accordance with AS 5 on
‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’. Answer 12
The Purchase Method As per AS 14, consideration for the amalgamation means the aggregate of the shares and other securi-
Under the purchase method, the transferee company accounts for the amalgamation either by incor- ties issued and the payment made in the form of cash or other assets by the transferee company to the
porating the assets and liabilities at their existing carrying amounts or by allocating the consideration shareholders of the transferor company.
to individual identifiable assets and liabilities of the transferor company on the basis of their fair values Computation of PurchaseConsideration
at the date of amalgamation. The identifiable assets and liabilities may include assets and liabilities not
recorded in the financial statements of the transferor company. Particulars Rs.
Equity Shares (50,000x 15) 7,50,000
Practical Questions Answers Cash payment 50,000
Question 11 12% Preference Share Capital 2,00,000

Purchase Consideration 10,00,000
X Co. Ltd. having share capital of Rs. 50 lakhs divided into equity shares of Rs. 10 each was taken over
by Y Co. Ltd. Y Co. Ltd. issued 11 equity shares of Rs. 10 each for every 10 shares of X Co. Ltd.
Note: Payment to debenture holders are not covered by the term ‘consideration’.
Explain how the difference will be adjusted in the books of Y Co. Ltd. for the shares issued under the
‘Pooling of interests method’ of amalgamation as per AS 14.
Journal entry
Particulars Rs. Rs. Questions Illustration 14

Liquidation of Rina Ltd. A/c 10,00,000
A Ltd. and B Ltd. were amalgamated on and from 1st April, 20X1. A new company C Ltd. was formed to
To Equity share capital A/c 5,00,000
take over the business of the existing companies. A Ltd. and B Ltd. have the following ledger balances
To 12% Preference share capital A/c To Secu- 2,00,000 as on 31st March, 20X1:
rities premium A/c 2,50,000
A Ltd. B Ltd.
To Bank/Cash A/c 50,000
(Rs. in (Rs. in
(Being payment of cash and issue of shares for discharge of
lakhs) lakhs)
purchase consideration)
Land and Building 550 400
Plant and Machinery 350 250
Investments (Non-current) 150 50
A Ltd. take over B Ltd. on April 01, 20X1 and discharges consideration for the business Inventory 350 250
as follows:
Trade Receivables 300 350
(i) Issued 42,000 fully paid equity shares of Rs. 10 each at par to the equity share-
Cash and Bank 300 200
holders of B Ltd.
Share Capital:
(ii) Issued fully paid up 15% preference shares of Rs. 100 each to discharge the pref-
erenceshareholders (Rs. 1,70,000) of B Ltd. at a premium of 10%. Equity Shares of Rs. 100 each 800 750
(iii) It is agreed that the debentures of B Ltd. (Rs. 50,000) will be converted into equal 12% Preference shares of Rs. 100 each 300 200
number andamount of 13% debentures of A Ltd. Reserves and Surplus:
Determine the amount of purchase consideration as per AS 14. Revaluation Reserve 150 100
Answer 13 General Reserve 170 150

Investment Allowance Reserve 50 50
Particulars Rs.
Profit and Loss Account 50 30
Equity Shares (42,000 x 10) 4,20,000
Secured Loans:
15% Preference Share Capital 1,70,000
10% Debentures (Rs. 100 each) 60 30
Add: Premium on Redemption 17,000
Trade Payables 420 190
Purchase Consideration 6,07,000 Additional Information:
Note: As per AS 14, consideration for the amalgamation means the aggregate ofthe shares and
(1) 10% Debenture holders of A Ltd. and B Ltd. are discharged by C Ltd. issuingsuch number
other securities issued and the payment made in the form of cashor other assets by the transferee
of its 15% Debentures of Rs. 100 each so as to maintain the same amount of interest.
company to the shareholders of the transferor company. Thus, payment to debenture holders are not
covered by the term ‘consideration’. (2) Preference shareholders of the two companies are issued equivalent numberof 15%
preference shares of C Ltd. at a price of Rs. 150 per share (face value of Rs. 100).
(3) C Ltd. will issue 5 equity shares for each equity share of A Ltd. and 4 equity shares for each
equity share of B Ltd. The shares are to be issued @ Rs. 30 each, having a face value of Rs. 10
per share.
(4) Investment allowance reserve is to be maintained for 4 more years.
Prepare the Balance Sheet of C Ltd. as on 1st April, 20X1 after the amalgamationhas been
carried out on the basis of Amalgamation in the nature of purchase.
Answer1 4 2. Reserves and surplus
Particulars Note No. (Rs.in Securities Premium Account (W.N.3) (950 + 700) 1,650
lakhs) Investment Allowance Reserve (50 +50) 100
I. Equity and Liabilities Amalgamation Adjustment Reserve(50 + 50) 100 1,650
(1) Shareholder’s Funds 3. Long-term borrowings
1 1,200
(a) Share Capital 15 % Debentures 60
2 1,650
(b) Reserves and Surplus 4. Property, Plant and Equipment
3 60
Land and Building (550 + 400) 950
(2) Non-Current Liabilities Long-term borrow- 8 610 Plant and Machinery (350 + 250) 600 1,550
ings
5. Intangible assets
(3) Current Liabilities Trade payables 3,520 Goodwill [W.N. 2] (110 – 90) 20
Total 6. Non-current Investments

Investments (150 + 50) 200
II. Assets
7. Trade receivables (300 + 350) 650
Trade payables (420 + 190) 610
(a) Property, Plant andEquipment 1,550
(b) Intangible assets

Working Notes:
(c) Non-current investments
4 (Rs. in lakhs)
(2) Current assets
20 A Ltd. B Ltd.
(a) Inventory (350 + 250)
5 1. Computation of Purchase consideration
(b) Trade receivables
6 200 a) Preference shareholders:
(c) Cash and bank balances (300 + 200)
(3,00,00,000 i. e 3,00,000 𝑠ℎ𝑎𝑟e𝑠) × ₹ 150 each 450
600
100
Total 7 650
(2,00,00,000 i. e 2,00,000 𝑠ℎ𝑎𝑟e𝑠) × ₹ 150 each 300
500 100
3,520 b) Equity shareholders:

Notes to Accounts (8,00,00,000 ×5 i. e 40,00,000 𝑠ℎ𝑎𝑟e𝑠) × ₹ 30 each 1,200
100
(Rs.in lakhs) (Rs.in lakhs)
(7,50,00,000 × 4 i. e 3,00,000 𝑠ℎ𝑎𝑟e𝑠) × ₹ 30 each 900
1. Share Capital
100
Equity share capital (W.N.1)
Amount of Purchase Consideration 1,650 1,200
70,00,0001 Equity shares of Rs.10 each 700
2. Net Assets Taken Over
5,00,0002 Preference shares of Rs.100 each 500 Assets taken over:
(all the above shares are allotted as fully paid-up pur- 1,200 Land and Building 550 400
suant to contracts without payment being
received in cash)
Investments 150 50
Chapter 10.1
Inventory 350 250 As – 21 Consolidated Financial Statements
Trade receivables 300 350
Cash and bank 300 200
2000 1500
Less: Liabilities taken over: 20
Debentures 40 190
Trade payables 420 460 210 Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
Net assets taken over 1540 1290 Study
Q.26 TO Q.51
Purchase consideration 1650 1200 Mat.
Q.10 Q.19
Goodwill 110 Past
Q.4 Q.22 Q.1 NO Q.12 Q.9 NO Q.23 Q.24 NO
Exams Q.11 Q.20
Capital reserve 90
Q.5
Computation of securities premiumOn Q.2 Q.1 Q.5 Q.8 Q.4 Q.10Q.11
MTP Q.3 Q.1 Q.7 Q.4 Q.9 Q.8
3. preference share capital Q.3 Q.2 Q.6 Q.9 Q.10 Q.5 Q.12
Q.10Q.12
A Ltd.- 3,00,000 x 50 150
Q.11
B Ltd.- 2,00,000 x 50 100 RTP Q.3 Q.16 Q.11 Q.4 Q.17 Q.14 Q.13 Q.17 Q.18 Q.1 Q.25
Q.15
On equity share capitalA
Ltd.- 40,00,000 x 20 800
B Ltd.- 30,00,000 x 20 600
Total 950 700
Note: For problems based on practical application of AS 14 (Revised) students are advised to refer
Chapter 14 ‘Accounting for Amalgamation of Companies’ of the study material.
Chapter 10.1 Balance Nil (3,71,000)
As – 21 Consolidated Financial Statements 2013-14 (1,20,000) (36,000) (84,000) 2,44,000

Loss of minority 36,000 (36,000) 6,000 57,000
borne by Holding
Question 1 Co.
Balance Nil (1,20,000)
A Ltd. acquired 70% of equity shares of B Ltd. on 1.4.2010 at cost of Rs. 10,00,000 when B Ltd. had an
equity share capital of Rs. 10,00,000 and reserves and surplus of Rs. 80,000. In the four consecu- 2014-15 50,000 15,000 35,000 2,44,000
tive years, B Ltd. fared badly and suffered losses of Rs. 2,50,000, Rs. 4,00,000, Rs. 5,00,000 and Rs. Profit share of mi- (15,000) 15,000 15,000) 42,000
1,20,000respectively. Thereafter in 2014-15, B Ltd. experienced turnaround and registered an annual nority adjusted
profit ofRs. 50,000. In the next two years i.e. 2015-16 and 2016-17, B Ltd. recorded annual profits of Rs.
1,00,000and Rs. 1,50,000 respectively. Show the minority interests and cost of control at the end of against losses
each year for the purpose of consolidation. (MTP 10 Marks Mar 19, MTP 12 Marks Oct 19, RTP May ’23, of minority
PYP 10 Marks May ’19, Old & New SM)
absorbed by Nil 50,000
Answer 1
Holding Co.
The losses applicable to the minority in a consolidated subsidiary may exceed the minority interest in
the equity of the subsidiary. The excess, and any further losses applicable to the minority, are adjusted 2015-16 1,00,000 30,000 70,000
against the majority interest except to the extent that the minority has a binding obligation to, and is Profit share of (30,000) 30,000 (30,000) 12,000 2,44,000
able to, make good the losses. If the subsidiary subsequently reports profits, all such profits are allocated minority adjusted
to the majority interest until the minority’s share of losses previously absorbed by the majority has been
against losses
recovered. Accordingly, the minority interests will be computed as follows:
of minority ab-
Year Profit/(Loss) Minori- Additional Minority’s Share Cost sorbed by Hold-
Interest (30%) ty P& L Consoli- oflosses borne of ing Co.
(Dr.) dated byA Ltd. Con- Balance Nil 100,000
trol
Cr. Rs. Balance 2016-17 1,50,000 45,000 1,05,000 (12,000) Nil 2,44,000
At the 3,24,000 (12,000) 12,000
time of (W.N.) Balance 33,000 1,17,000
acquisi-
tion
in 2010 -
2010-11 (2,50,000) (75,000) (1,75,000) 2,44,000
(W.N.)
Balance 2,49,000
2011-12 (4,00,000) (1,20,000) (2,80,000) 2,44,000
Balance 1,29,000
2012-13 (5,00,000) (1,50,000) (3,50,000) 2,44,000
(21,000)
Loss of minority 21,000 (21,000) 21,000 21,000
borne by Holding
Co.
Working Note:
Rs. 3,20,000 [2,00,000 + 1,20,000] 64,000
100% Share of Hold- Minority Interest 31st December, 2016: 20% of Rs. 3,00,000
(Rs. ) ing Co. 30% (Rs. )
[2,00,000 + 1,20,000 + 40,000 – 60,000] 60,000
70% (Rs. )
Share Capital 10,00,000 7,00,000 3,00,000
Question 3
Reserve 80,000 56,000 24,000
7,56,000 3,24,000 Given below are the Profit & Loss Accounts of Hello Ltd. and its subsidiary Sun Ltd. for the year ended
31st March, 2017:
Less: Cost of investment (10,00,000)
Goodwill 2,44,000 Hello Ltd. (Rs. in lacs) Sun Ltd. (Rs. in lacs)
Incomes:
Question 2
Sales and other income 10,000 2,000
XYZ Ltd. purchased 80% shares of ABC Ltd. on 1st January, 2016 for Rs. 2,80,000. The issued capital of Increase in Inventory 2,000 400
ABCLtd., on 1st January, 2016 was Rs. 2,00,000 and the balance in the Profit & Loss Account was Rs.
12,000 2,400
1,20,000. During the year ended 31st December, 2016, ABC Ltd. earned a profit of Rs. 40,000 and at
year end,declared and paid a dividend of Rs. 60,000. Show by an entry how the dividend should be Expenses :
recorded in the books of XYZ Ltd. What is the amount of minority interest as on 1st January, 2016 and
Raw material consumed 1,600 400
31st December, 2016? (MTP 5 Marks, Apr 19, Mar 18) (Same concept different figures New SM)
Wages and Salaries 1,600 300
Answer 2 Production expenses 400 200
Total dividend paid = Rs. 60,000 Administrative Expenses 400 200
Out of post-acquisition profit = Rs. 40,000 Out of pre-acquisition profit = Rs. 20,000 Selling and Distribution Expenses 400 100
Hence, 2/3rd of dividend received by XYZ will be credited to P & L and 1/3rd will be credited to Invest- Interest 200 100
ment. XYZ Ltd.’s share of dividend = Rs. 60,000 X 80% = Rs. 48,000
Depreciation 200 100
In the books of XYZ Ltd.
4,800 1,400
Profit before tax 7,200 1,000
Rs. Rs.
Provision for tax 2,400 400
Bank A/c Dr. 48,000
Profit after tax 4,800 600
To Profit & Loss A/c 32,000
Dividend paid 2,400 300
To Investments in ABC Ltd. 16,000
Balance of Profit 2,400 300
(Dividend received from ABC Ltd. 1/3 credited to investment
A/c being out of capital profits – as explained above)
Other Information:
Goodwill on Consolidation: Rs.
Hello Ltd. sold goods to Sun Ltd. of Rs. 240 lacs at cost plus 20%. Inventory of Sun Ltd. includes such
Cost of shares less dividend out of capital profits 2,64,000 goods valuing Rs. 48 lacs. Administrative expenses of Sun Ltd. include Rs. 10 lacs paid to Hello Ltd. as
Less: Face value of capital i.e. 80% of capital 1,60,000 consultancy fees. Selling and distribution expenses of Hello Ltd. include Rs. 20 lacs paid to Sun Ltd. as
commission. Hello Ltd. holds 80% of equity share capital of Rs. 2,000 lacs in Sun Ltd. prior to 2015- 2016.
Add: Share of capital profits [1,20,000-20,000 Hello Ltd. took credit to its Profit and Loss Account, the proportionate amount of dividend declared and
paid by Sun Ltd. for the year 2015-2016.
(dividend portion out of pre-acquisition profits)] X 80 % 80,000 2,40,000
You are required to prepare a consolidated profit and loss account of Hello Ltd. and its subsidiary
Goodwill 24,000 Sun Ltd. for the year ended 31st March, 2017. (MTP 16 Marks Aug 18, RTP- May 18) (Same concept
Minority interest on: 1st January, 2016: 20% of different figures to MTP 12 Marks Mar’18 & Oct ‘18)
Notes to Accounts
Answer 3
Rs. in Lacs Rs. in Lacs
Consolidated Profit & Loss Account of Hello Ltd. and its subsidiary Sun Ltd. for the year
ended on 31stMarch, 2017 1. Revenue from Operations
Sales and other income
Particulars Note No. Rs. in Lacs Hello Ltd. 10,000
I. Revenue from operations 1 11,730 Sun Ltd. 2,000
II. Total revenue 11,730 12,000
III. Expenses Less: Inter-company Sales (240)

Consultancy fees received by Hello Ltd. from Sun Ltd. (10)
Cost of Material purchased/Consumed 3 2,360 Commission received by Sun Ltd. from Hello Ltd. (20) 11,730
Changes of Inventories of finished goods 2 (2,392) 2. Increase in Inventory
Employee benefit expense 4 1,900 Hello Ltd. 2,000
Finance cost 6 300 Sun Ltd. 400

2,400
Depreciation and amortization expense 7 300
Other expenses 5 1,070

Less: Unrealized profits Rs. 48 lacs ×20/120 (8) 2,392
Total expenses 3,538 14,122
IV. Profit before Tax(II-III) 8,192 3. Cost of Material purchased/consumed
V. Tax Expenses 8 2,800 Hello Ltd. 1,600
VI. Profit After Tax 5,392 Sun Ltd. 400
Profit transferred to Consolidated Balance Sheet 2,000
Profit After Tax 5,392 Less: Purchases by Sun Ltd. from Hello Ltd. (240) 1,760
Dividend paid
Di- Expenses
Hello Ltd. 2,400 rect
Sun Ltd. 300 Hello Ltd. 400
2,700 Sun Ltd. 200 600

2,360
Less: Share of Hello Ltd. in dividend of Sun Ltd.
4. Employee benefits and expenses
80% of Rs. 300 lacs (240) (2,460)
Wages and Salaries:
Profit to be transferred to consolidated balance 2,932
Hello Ltd. 1,600
sheet
Sun Ltd. 300 1,900
5. Other Expenses
Administrative Expenses
Cr. Balance in Profit and Loss Account

Hello Ltd. 400
Current Liabilities
Sun Ltd. 200
Trade Payables 3,22,000 1,23,000
600
Non-Current Assets
Less: Consultancy fees received by Hello Ltd. from Sun (10) 590
Ltd.
Property, Plant and Equipment
Selling and Distribution Expenses:
Machinery 6,40,000 1,80,000
Hello Ltd. 400
Furniture 3,75,000 34,000
Sun Ltd. 100
Non-Current Investments
500
Shares in S Ltd. - 16,000 shares @ Rs. 20 each 3,20,000 -
Less: Commission received from Sun Ltd. from Hello (20) 480
Current Assets
Ltd.
Inventories 2,68,000 62,000
1,070
Trade Receivables 4,70,000 2,35,000
6. Finance Cost
Cash and Bank 1,64,000 32,000
Interest:
Hello Ltd. 200
H Ltd. acquired the 80% shares of S Ltd. on 1st April, 2020. On the date of acquisition, General Reserve and
Sun Ltd. 100 300 Profit Loss Account of S Ltd. stood at Rs. 50,000 and Rs. 30,000 respectively.Machinery (book value Rs.
7. Depreciation and Amortization 2,00,000) and Furniture (book value Rs. 40,000) of S Ltd. were revalued at Rs. 3,00,000 and Rs. 30,000 re-
spectively on 1st April,2020 for the purpose of fixing the price of its shares (rates of depreciation on W.D.V
Depreciation:
basis: Machinery 10% and Furniture 15%). Trade Payables of H Ltd. include Rs. 35,000 due to S Ltd. for goods
Hello Ltd. 200 supplied since the acquisition of the shares. These goods are charged at 10% above cost. The inventories
Sun Ltd. 100 300 of H Ltd. includes goods costing Rs. 55,000 (cost to H Ltd.) purchased from S Ltd. st
You are required to prepare the Consolidated Balance Sheet of H Ltd. With its subsidiary as at 31
8. Provision for tax
March, 2021. (MTP 16 Marks April 21, MTP 15 Marks Mar 22, RTP Nov 19, PYP 20 Marks May 18)
Hello Ltd. 2,400
Sun Ltd. 400 2,800
Answer 4
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as at 31st March, 2021
Note: Since the amount of dividend received by Hello Ltd. for the year 2015-2016 is not given, it has not Particulars Note (Rs.)
been deducted from ‘sales and other income’ in consolidated profit and loss account and not added to No.
consolidated opening retained earnings (which is also not given).
I. Equity and Liabilities
Question 4 (1) Shareholder’s Funds

(a) Share Capital 12,00,000
H Ltd. and its subsidiary S Ltd. Give the following information as on 31st March, 2021:
(1,20,000 equity shares of Rs. 10 each)
(b) Reserves and Surplus 1 8,16,200
H Ltd. (Rs.) S Ltd. (Rs.)
(2) Minority Interest (W.N.4) 99,300
Share Capital
(3) Current Liabilities
Equity Share Capital (fully paid up shares of Rs. 10 each) 12,00,000 2,00,000
(a) Trade Payables 2 4,10,000
Reserves and Surplus 4,35,000 1,55,000
Total 25,25,500
General Reserve 2,80,000 65,000
II. Assets
Goodwill [WN 5] 24,000

(i) Property, plant and equipment 3 13,10,500
5. Inventories
(ii) Intangible assets 4 24,000
H Ltd. 2,68,000
(2) Current assets
S Ltd. 62,000 3,30,000
(i) Inventories 5 3,25,000
Less: Inventory reserve (5,000)
(ii) Trade Receivables 6 6,70,000
6. Trade Receivables 3,25,000
(iii) Cash at Bank 7 1,96,000
H Ltd. 4,70,000
Total 25,25,500
S Ltd. 2,35,000
Notes to Accounts
7,05,000
Rs. Less: Mutual transaction (35,000)
1. Reserves and Surplus 7. Cash and Bank 6,70,000
General Reserves 4,35,000 H Ltd. 1,64,000

S Ltd. 1,96,000
Add: 80% share of S Ltd.’s postacquistion 84,000 5,19,000 32,000
reserves (W.N.3)
1. Working Notes:Profit or loss on revaluation of assets in the books of S Ltd. and their book
Profit and Loss Account 2,80,000 values as on1.4.2020
Add: 80% share of S Ltd’s postacquistion 21,200
Rs.
profits (W.N.3)
Machinery
Less: Unrealised gain (4,000) 17,200 2,97,200
Revaluation as on 1.4.2020 3,00,000
2. Trade Payables 8,16,200
Less: Book value as on 1.4.2020 (2,00,000)
H Ltd. 3,22,000
Profit on revaluation 1,00,000
S Ltd. 1,23,000
Furniture
Less: Mutual transaction (35,000) 4,10,000
Revaluation as on 1.4.2020 30,000
3. Property, plant and equipment
Less: Book value as on 1.4.2020 (40,000)
Machinery
Loss on revaluation (10,000)
H Ltd. 6,40,000
2. Calculation of short/excess depreciation
S Ltd. 2,00,000
Machinery Furniture
Add: Appreciation 1,00,000
Upward/ (Downward) Revaluation 1,00,000 (10,000)
3,00,000
Rate of depreciation 10% p.a. 15% p.a.
Less: Depreciation (30,000) 2,70,000 9,10,000
Difference [(short)/excess] (10,000) 1,500
Furniture
H. Ltd. 3,75,000
S Ltd. 40,000
Less: Decrease in value (10,000)
30,000
Less: Depreciation (4,500) 25,500 4,00,500
4. Intangible assets 13,10,500
5. Cost of Control or Goodwill

3. Analysis of reserves and profits of S Ltd. as on 31.03.2021
Cost of Investment 3,20,000
Pre- acqui- Post-acquisition profits
sitionprofit (1.4.2020 – 31.3.2021) Less: Paid-up value of 80% shares 1,60,000
upto 80% share of pre-acquisition profits and re- 1,36,000 (2,96,000)
1.4.2020 serves (Rs. 64,000 + Rs.72,000)
24,000
(Capital General Profit and loss account Cost of control or Goodwill
profits) Reserve
General reserve as on 31.3.2021 50,000 1,05,000 Question 5
Profit and loss account as on 31.3.2021 30,000 35,000
A Ltd. holds 80% of the equity capital and voting power in B Ltd. A Ltd sells inventories costingRs.
Upward Revaluation of machinery as on 1,00,000 180 lacs to B Ltd at a price of Rs. 200 lacs. The entire inventories remain unsold with B Ltd at the finan-
1.4.2020 cial year end i.e. 31 March 2020. What will be the accounting treatment for this transaction in the
consolidated financial statements of A Ltd? (MTP 5 Marks Oct 20, MTP 4 Marks Mar 22 & Oct ‘23)
Downward Revaluation of Furniture as on (10,000)
1.4.2020 Answer 5
Short depreciation on machinery (10,000) This would be the case of downstream transaction. In the consolidated profit and loss account for the
Excess depreciation on furniture 1,500 year ended 31 March 2020, entire transaction of sale and purchase of Rs. 200 lacs each, would be
eliminated by reducing both sales and purchases (cost of sales). Further, the unrealized profits
Total 26,500 of Rs. 20 lacs (i.e. Rs. 200 lacs – Rs. 180 lacs), would be eliminated from the consolidated financial
statements for financial year ended 31 March 2020, by reducing the consolidated profits/ increas-
1,70,000 1,05,000 ing the consolidated losses, and reducing the value of closing inventories as of 31 March 2020.
4. Minority Interest
Question 6
Rs.
Paid-up value of (2,00,000 x 20%) 40,000 Hemant Ltd. purchased 80% shares of Power Ltd. on 1st January, 2019 for Rs. 2,10,000. The issued cap-
ital of Power Ltd., on 1st January, 2019 was Rs. 1,50,000 and the balance in the Profit & Loss Account
Add: 20% share of pre-acquisition profits and reserves was Rs. 90,000. During the year ended 31st December, 2019, Power Ltd. earned a profit of Rs. 30,000
[(20% of (50,000 + 30,000)] 16,000 and at year end, declared and paid a dividend of Rs. 22,500. What is the amount of minority interest
as on 1st January, 2019 and 31st December, 2019? Also compute goodwill/ capital reserve at the date
20% share of profit on revaluation 18,000
of acquisition. (MTP 6 Marks Oct 20, Old & New SM)
20% share of post-acquisition reserves 21,000
20% share of post-acquisition profit 5,300 Answer 6
1,00,300 Total dividend paid is Rs. 22,500 (out of post-acquisition profits), hence dividend received by Hemant
will be credited to P & L account.
Less: Unrealised Profit on Inventory
Hemant Ltd.’s share of dividend = Rs. 22,500 X 80% = Rs. 18,000
(55,000 x 10/110) x 20% (1,000)
99,300
(iii) Selling and distribution expenses of A Ltd include Rs.15 Lakhs paid to B Ltd as commission.
(iv) A Ltd. holds 72% of the Equity Capital of B Ltd. The Equity Capital of B Ltd prior to 2018-19 is
Goodwill on consolidation (at the date of acquisition): Rs. Rs.
Rs.1,500 Lakhs. Prepare a consolidated Profit and Loss Account of A Ltd. with its subsidiary
Cost of shares 2,10,000 B Ltd. for the year ended 31st March, 2020. (MTP 15 Marks May 20)
Less: Face value of capital i.e. 80% of capital 1,20,000
Answer 7
Add: Share of capital profits [90,000 X 80 %] 72,000 (1,92,000)
Consolidated Profit & Loss Account of A Ltd. and its subsidiary B Ltd. for the year ended on 31st March,
Goodwill 18,000 2020
Minority interest on:
Particulars Note No. Rs. in Lacs
- 1st January, 2019:
I. Revenue from operations 1 8,797
20% of Rs. 2,40,000 [1,50,000 + 90,000] 48,000
II. Total revenue 8,797
- 31st December, 2019: 49,500
III. Expenses
20% of Rs.2,47,500 [1,50,000 + 90,000 + 30,000 – 22,500]
Cost of Material purchased/consumed 3 1,770
Changes of Inventories of finished goods 2 (1,794)
Question 7
Employee benefit expense 4 1,425
The summarized Profit and Loss Accounts of A Ltd. and its subsidiary B Ltd. for the year ended 31st
Finance cost 6 225
March, 2020 are given below:
Rs. in Lakhs
Other expenses 5 802
Incomes A Ltd. B Ltd. Total expenses 2,653
Sales and other income 7,500 1,500 IV. Profit before Tax(II-III) 6,144
Increase in Inventory 1,500 300 V. Tax Expenses 8 2,100
Total 9,000 1,800 VI. Profit After Tax 4,044
Expenses Notes to Accounts
Raw material consumed 1,200 300 Rs. in Lacs Rs. in Lacs

Wages and Salaries 1,200 225 1. Revenue from Operations
Production expenses 300 150 Sales and other income
Administrative expenses 300 150 A Ltd. 7,500
Selling and distribution expenses 300 75 B Ltd. 1,500
Interest 150 75 9,000
Depreciation 150 75 Less: Inter-company Sales (180)
Total 3,600 1,050 Consultancy fees received by A Ltd. from B Ltd. (8)
Profit before tax 5,400 750 Commission received by B Ltd. from A Ltd. (15) 8,797
Provision for tax 1,800 300 2. Increase in Inventory
Profit after tax 3,600 450 A Ltd. 1,500
The following information is also given: B Ltd. 300
(i) A Ltd sold goods of Rs. 180 Lakhs to B Ltd at cost plus 25% (1/6 of such goods were still in 1,800
inventory of B Ltd at the end of the year).
(ii) Administrative expenses of B Ltd include Rs. 8 Lakhs paid to A Ltd as consultancy fees.
Less: Unrealized profits Rs. 180×1/6 x 25/125 (6) 1,79 8. Provision for tax
3. Cost of Material purchased/consumed 4 A Ltd. 1800
A Ltd. 1,200 B Ltd. 300 2100
B Ltd. 300
Question 8
1,500
Less: Purchases by B Ltd. from A Ltd. (180) 1,320 A Ltd. had acquired 80% shares of B Ltd. for Rs. 15 lakhs at the beginning of year. During the year,
Direct Expenses A Ltd. sold the investment for Rs. 30 lakhs and net assets of B Ltd. on the date of disposal was Rs.
35 lakhs. Calculate the profit or loss on disposal of this investment to be recognized in the Finan-
A Ltd. 300 cial Statements of A Ltd. (MTP 4 Marks Oct ’21 & Oct ‘23)
B Ltd. 150 450
1,770 Answer 8
Calculation of Profit/Loss on disposal of investment in subsidiary
Wages and Salaries: Particulars Rs.
A Ltd. 1,200 Proceeds from the sale of Investment 30,00,000
B Ltd. 225 1,425 Less: A Ltd.’s share in net assets of B Ltd. (28,00,000)
5. Other Expenses 2,00,000

Working Note:
Administrative Expenses
A Ltd.’s share in net assets of B Ltd.
A Ltd. 300
B Ltd. 150 Rs.
450 Net Assets of B Ltd. on the date of disposal 35,00,000
Less: Consultancy fees received by A Ltd. from B Ltd. (8) 442 Less: Minority Interest (20% of Rs. 35 lakhs) (7,00,000)
Selling and Distribution Expenses: A Ltd.’s share in the net assets of B Ltd. 28,00,000
A Ltd. 300
Question 9
B Ltd. 75
375 On 31st March, 2023 H Ltd. and its subsidiary S Ltd. give the following information:
Less: Commission received from B Ltd. from A Ltd. (15) 360
H Ltd. S Ltd.
802
Rs. Rs.
6. Finance Cost
Shareholders’ Fund:
Interest:
Equity shares of Rs. 10 each 13,40,000 2,40,000
A Ltd. 150
B Ltd. 75 225
Profit & Loss Account 2,40,000 60,000
7. Depreciation and Amortization
Secured Loans:
Depreciation:
12% Debentures 1,00,000 -
A Ltd. 150
Current Liabilities:
B Ltd. 75 225
Creditors 2,00,000 1,22,000
Bank Overdraft 1,00,000 -

Bills Payable 60,000 14,800 (a) Trade Payables 3 3,84,800
Property, Plant & Equipment: (b) Short term Borrowings (Bank) 1,00,000
Machinery 7,20,000 2,16,000
Total 28,67,400
Furniture 3,60,000 40,800
II. Assets
Investments:
1 Non-current assets
Investments in S Ltd. 3,84,000 -
(19,200 shares at Rs. 20 each)
Current Assets: (a)
Inventories 6,00,000 2,00,000 (i) Property, Plant and 4 14,34,600
Trade Receivables 3,00,000 90,000 Equipment
Bill Receivables 1,00,000 30,000 (ii) Intangible assets 5 28,800
Cash at Bank 56,000 40,000 2 Current assets

The following information is also provided to you: (a) Inventory (6,00,000+2,00,000) 8,00,000
(a) H Ltd. purchased 19,200 shares of S Ltd. on 1st April, 2019, when the balances of Reserves (b) Trade Receivables 6 5,08,000
& Surplus and Profit & Loss Account of S Ltd. stood at Rs. 60,000 and Rs. 36,000 respec-
(c) Cash and Cash equivalents 96,000
tively.
Total 28,67,400
(b) Machinery (Book value Rs. 2,40,000) and Furniture (Book value Rs. 48,000) of S Ltd were
revalued at Rs. 3,60,000 and Rs. 36,000 respectively on 1st April, 2019, for the purpose of Notes to Accounts
fixing the price of its shares. (Rates of depreciation computed on the basis of useful lives:
Rs.
Machinery 10%, Furniture 15%).
1. Share Capital Equity
(c) On 31st March, 2022, Bills payable of Rs. 12,000 shown in S Ltd.’s Balance Sheet had been share capital 13,40,000
accepted in favour of H Ltd.
1,34,000 shares of Rs. 10 each fully paid up
(d) You are required to prepare Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as at 31st March, 2023.(MTP 20 Marks Nov ’21 & March ’23 & April ’23, PYP 20 Marks Jan
21) 2. Reserves and Surplus
Reserves 4,80,000
Answer 9
Add: 4/5th share of S Ltd.’s post-
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as at 31st March, 2023 acquisition reserves (W.N.3) 96,000 5,76,000
Profit and Loss Account 2,40,000
Particulars Note No. (Rs.)
Add: 4/5th share of S Ltd.’s post-
I. Equity and Liabilities acquisition profits (W.N.4) 11,040 2,51,040
1 Shareholder’s Funds
8,27,040
(a) Share Capital 1 13,40,000 3. Trade Payables
(b) Reserves and Surplus 2 8,27,040 Creditors
2 (Minority Interest 1,15,560 H Ltd. 2,00,000
3 Non- Current Liabilities S Ltd. 1,22,000 3,22,000
(a) 12% Debentures 1,00,000 Bills Payables
4 Current Liabilities H Ltd. 60,000
S Ltd. 14,800 74,800
Net Profit on revaluation 1,08,000

3,96,800
H Ltd.’s share 4/5 × 1,08,000 86,400
Less: Mutual Owings (12,000) 3,84,800
Minority Interest 1/5 × 1,08,000 21,600
4. Property Plant and Equipment
Machinery
3. Post-acquisition reserves of S Ltd. Total re-
H. Ltd. 7,20,000 serves
1,80,000
S Ltd. 2,40,000 Less: Pre- acquisition reserves
(60,000)
Add: Appreciation 1,20,000
Post-acquisition reserves 1,20,000
3,60,000
H Ltd.’s share 4/5 × 1,20,000 96,000
Less: Depreciation (3,60,000 X 10%) (36,000) 3,24,000
Minority interest 1/5 × 1,20,000 24,000
Furniture
4. Post -acquisition profits of S Ltd.
H. Ltd. 3,60,000
Post-acquisition profits (Profit & loss account balance less pre- acqui- 24,000
S Ltd. 48,000 sition profits = Rs. 60,000 – 36,000)
Less: Decrease in value (12,000) Add: Excess depreciation charged on furniture @ 15%
36,000 on Rs. 12,000 i.e. (48,000 – 36,000) 1,800
Less: Depreciation (36,000 X 15%) 5,400 30,600 14,34,600 Less: Under depreciation on machinery @ 10% 25,800
on Rs. 1,20,000 i.e. (3,60,000 – 2,40,000) (12,000)
Adjusted post-acquisition profits 13,800
6. Trade receivables
H Ltd.’s share 4/5 × 13,800 11,040
H Ltd. 3,00,000 Minority Interest 1/5 × 13,800 2,760
S Ltd. 90,000 3,90,000 5. Minority Interest
Bills Receivables Paid-up value of (24,000 – 19,200) = 4,800 shares
H Ltd. 1,00,000 held by outsiders i.e. 2,40,000 X 20% 48,000
S Ltd. 30,000 1,30,000 Add: 1/5th share of pre-acquisition profits and reserves 19,200
5,20,000 1/5th share of profit on revaluation 21,600
Less: Mutual Owings (12,000) 5,08,000 1/5th share of post-acquisition reserves 24,000
Working Notes: 1/5th share of post-acquisition profit 2,760
1. Pre-acquisition profits and reserves of S Ltd. Rs.
6. Cost of Control or Goodwill 1,15,560
Reserves 60,000
Profit and Loss Account 36,000 Price paid by H Ltd. for 19,200 shares (A) 3,84,000
96,000 Less: Intrinsic value of the shares
H Ltd.’s = 4/5 (or 80%) × 96,000 76,800 Paid-up value of shares held by H Ltd. i.e. 2,40,000 X 80% 1,92,000
Minority Interest= 1/5 (or 20%) × 96,000 19,200 Add: 4/5th share of pre-acquisition profits and reserves 76,800
2. Profit on revaluation of assets of S Ltd. 4/5th share of profit on the revaluation 86,400
Profit on Machinery Rs. (3,60,000 – 2,40,000) 1,20,000 Intrinsic value of shares on the date of acquisition (B) 3,55,200
Less: Loss on Furniture Rs.(48,000 –36,000) Cost of control or Goodwill B) (A-B) 28,800
(12,000)
Question 10
tion for the purpose of consolidation. Such restatement is necessary to make the accounting policies
adopted by LTC Ltd. and MNT Ltd. uniform.(MTP 10 Marks Sep’22, MTP 16 Marks Oct ’21 & Oct ’23, PYP 10
Consider the following information of subsidiary MNT Ltd.
Marks Nov ’19) (Same concept different figures MTP 12 Marks Apr 19)
2020-21 2021-22
Answer 10
Amount in ₹ Amount in ₹
Restated Balance Sheet of MNT Ltd. as at 31st March, 2022
Share Capital
Issued and subscribed 7500 Equity Shares of ₹ 100 each 7,50,000 7,50,000 Particulars Note No. (₹)
Reserve and Surplus I. Equity and Liabilities
Revenue Reserve 2,14,000 5,05,000 (1) Shareholder’s Funds
Securities Premium 72,000 2,07,000 (a) Share Capital 7,50,000
Current Liabilities and Provisions (b) Reserves and Surplus 1 7,18,500
Trade Payables 2,90,000 2,46,000 (2) Current Liabilities
Bank Overdraft - 1,70,000 (a) Short term borrowings 2 1,70,000
Provision for Taxation 2,62,000 4,30,000 (b) Trade Payables 2,46,000
Non-current assets (c) Short-term provision 3 4,30,000
Property, Plant and equipment (Cost) 9,20,000 9,20,000 Total 23,14,500
Less: Accumulated Depreciation (1,70,000) (2,82,500) II. Assets
7,50,000 6,37,500 (1) Non-current assets
Investment at Cost - 5,30,000 (a) Property, Plant & Equipment 4 6,37,500
Current Assets (b) Non-current Investment 5,30,000
Inventory 4,12,300 6,90,000 (2) Current assets
Trade Receivable 2,95,000 3,43,000 (a) Inventories (6,90,000 +12,000) 5 7,02,000
Prepaid expenses 78,000 65,000 3,43,000 3,50,000
Cash at Bank 52,700 42,500 (b) Trade Receivables × 100
Other Information: 98
(1) MNT Ltd. is a subsidiary of LTC Ltd. (c) Cash & Cash Equivalents 42,500
(2) LTC Ltd. values inventory on FIFO basis, while MNT Ltd. used LIFO basis. To bring MNT Ltd.’s (d) Other current assets 6 52,500
inventories values in line with those of LTC Ltd., its value of inventory is required to be re- Total 23,14,500
duced by ₹ 5,000 at the end of 2020-21 and increased by ₹ 12,000 at the end of 2021-22. Notes to Accounts
(Inventory of2020-21 has been sold out during the year 2021-22)
₹
(3) MNT Ltd. deducts 2% from Trade Receivables as a general provision against doubtful
debts. 1. Reserves and Surplus
(4) Prepaid expenses in MNT Ltd. include Sales Promotion expenditure carried forward Revenue Reserve (refer W.N.) 5,11,500
of ₹ Securities Premium 2,07,000 7,18,500
25,000 in 2020-21 and ₹ 12,500 in 2021-22 being part of initial Sales Promotion expenditure 2. Short term borrowings
of
Bank overdraft 1,70,000
₹ 37,500 in 2020-21, which is being written off over three years. Similar nature of Sales Promotion ex- 3. Short-term provision
penditure of LTC Ltd. has been fully written off in 2020-21.
Provision for taxation 4,30,000
Restate the balance sheet of MNT Ltd. as on 31st March, 2022 after considering the above informa-
Answer 11
4. Property, Plant and Equipment
Minority Interest = Equity attributable to minorities
Cost 9,20,000
Equity is the residual interest in the assets of an enterprise after deducting all its liabilities i.e. in this case, it
Less: Depreciation to date (2,82,500) 6,37,500
should be equal to Share Capital + Profit & Loss A/c
5. Inventories 6,90,000
A = Share capital on 1.1.2021
Increase in value as per FIFO 12,000 7,02,000
B = Profit & loss account balance on 1.1.2021 C = Share capital on 31.12.2021D = Profit & loss account balance
6. Other current assets on 31.12.2021
Prepaid expenses (After adjusting salespromotion ex- 52,500
penses to be written off each year) (65,000 -12,500) Minority % Minority interest as Minority interest as at
at the date of acqui- the date of consoli-
Working Note: Shares
sition dation
Owned
Adjusted revenue reserves of MNT Ltd.: [E] x [A + [E] X [C +
[E]
B] ₹ D] ₹
₹ ₹
Case i [100-85] 15% 29,250 30,750
Revenue reserves as given 5,05,000
Case ii [100-70] 30% 51,000 39,000
Add: Provision for doubtful debts [3,43,000 X 2/98) 7,000
Case iii [100-65] 35% 10,500 10,500
Add: Increase in value of inventory 12,000 19,000
Case iv [100-90] 10% 6,500 8,500
5,24,000
Case v [100-100] NIL NIL NIL
Less: Sales Promotion expenditure to be written off (12,500)
Adjusted revenue reserve 5,11,500 Question 12
Question 11 Sun Ltd. acquired 3,200 ordinary shares of ₹ 100 each of Star Ltd. on 1st October, 2021. On 31stMarch,
2022, the balance sheets of the two companies were as given below:
From the following data, determine Minority Interest on the date of acquisition and on the date of Balance Sheet of Sun Ltd. and its subsidiary, Star Ltd. as at 31st March, 2022
consolidation in each case:
Particulars Note Sun Ltd. (₹) Star Ltd. (₹)
Case Subsidiary % of Cost Date of Acquisition Consolidation date No.
Company
Share I. Equity and Liabilities
Owned
(1) Shareholder’s Funds
01-01-2021 31-12-2021
(a) Share Capital 1 10,00,000 4,00,000
Share Profit Share Profit
(b) Reserves and Surplus 2 5,94,400 3,64,000
Capital andLoss Capital andLoss
A/c A/c (2) Current Liabilities
₹ ₹ ₹ ₹ (a) Trade Payables 94,200 34,800
Case-i X 85% 1,85,000 1,35,000 60,000 1,35,000 70,000 (b) Short term borrowings 3 1,60,000 -
Case-ii Y 70% 1,60,000 1,25,000 45,000 1,25,000 5,000 Total 18,48,600 7,98,800
Case-iii Z 65% 83,000 25,000 5,000 25,000 5,000
Case-iv M 90% 60,000 45,000 20,000 45,000 40,000
Case-v N 100% 85,000 25,000 25,000 25,000 50,000
(MTP 5 Marks Sep’22, PYP 5 Marks Nov ’19, RTP Nov 20, Old SM) (Same concept different figures RTP May’19)
II. Assets Answer 12

(1) Non-current assets Consolidated Balance Sheet of Sun Ltd.and its subsidiary, Star Ltd. as at 31st March, 2022
(a) Property, Plant andEquipment 4 7,80,000 6,30,000
Particulars Note No. (₹)
(b) Non-current Investments 5 6,80,000 I. Equity and Liabilities
(2) Current assets
(a) Inventories 2,40,000 72,800
(a) Share Capital 1 10,00,000
(b) Trade receivables 1,19,600 80,000
(c) Cash & Cash equivalents 6 29,000 16,000
(2) Minority Interest 1,67,200
Total 18,48,600 7,98,800
Notes to Accounts (a) Trade Payables 3 1,29,000
Sun Ltd. Star Ltd.. (b) Short term borrowings 4 1,60,000
Rs. Rs. Total 20,73,800

II. Assets
1 Share Capital
10,00,000 (1) Non-current assets
10,000 shares of Rs. 100 each, fully paid up
(a) Property, Plant and Equipment 5 14,82,000
4,000 shares of Rs. 100 each, fully paid up 4,00,000
(b) Intangible assets 6 34,400
Total 10,00,000 4,00,000
(2) Current assets
2 Reserves and Surplus
(a) Inventories 7 3,12,800
General Reserves 4,80,000 2,00,000
(b) Trade receivables 8 1,99,600
Profit & loss 1,14,400 1,64,000
(c) Cash & Cash equivalents 9 45,000
Total 5,94,400 3,64,000
Total 20,73,800
3 Short term borrowings
Notes to Accounts
Bank overdraft 1,60,000
4 Property plant and equipment 1 Share Capital

Land and building 3,00,000 3,60,000 10,000 shares of ₹ 100 each
Plant & Machinery 4,80,000 2,70,000 2 Reserves and Surplus
Total 7,80,000 6,30,000 Reserves 4,80,000
5 Non-current Investments Profit & loss (Refer to W.N 8) 1,37,600
Investment in Star Ltd. (at cost) 6,80,000 Total 6,17,600
6 Cash & Cash equivalents 3 Trade Payables
Cash 29,000 16,000 Sun Ltd. 94,200
The Profit & Loss Account of Star Ltd. showed a credit balance of ₹ 60,000 on 1st April, 2021 out of which Add: Star Ltd. 34,800 1,29,000
a dividend of 10% was paid on 1st November, 2021; Sun Ltd. credited the dividend received to its Profit & Total
Loss Account. The Plant & Machinery which stood at ₹ 3,00,000 on 1st April, 2021 was considered as worth
₹ 3,60,000 on 1st October, 2021; this figure is to be considered while consolidating the Balance Sheets.
The rate of depreciation on plant & machinery is 10% (computed on the basis of useful lives).Prepare Bank overdraft 1,60,000
consolidated Balance Sheet as at 31st March, 2022. (MTP 20 Marks Oct’22)(Same concept different fig-
5 Property, plant and equipment
ures PYP 15 Marks Nov’20, MTP 15 Marks Sep’23, Old & New SM)
Land and building- Sun Ltd. 3,00,000

3. Capital profits of Star Ltd.
Add: Land and building- Star Ltd. 3,60,000 6,60,000
Plant & Machinery (Refer to W.N 7) 8,22,000 ₹ ₹
Total 14,82,000 Reserve on 1st April, 2021 (Assumed there is no movement in 2,00,000
6 Intangible assets - reserves during the year and hence balance as on 1st April 2021 is
Goodwill (refer to W.N 6) 34,400 same as of 31st March, 2022)
7 Inventories Profit & Loss Account Balance on 1st April, 2021 60,000
Sun Ltd. 2,40,000 Less: Dividend paid (40,000) 20,000
Star Ltd.. 72,800 Profit for 2021-22:
Total 3,12,800 Total ₹ 1,64,000
8 Trade Receivables Less: (₹ 20,000)
Sun Ltd. 1,19,600 ₹ 1,44,000
Star Ltd. 80,000 Proportionate upto 1st Oct, 2021 on time basis (₹ 1,44,000/2) 72,000
Total Appreciation in value of Plant & Machinery 75,000
1,99,600 3,67,000
9 Cash & Cash equivalents Less: 20% due to outsiders (73,400)
Cash of Sun Ltd 29,000 Holding company’s share 2,93,600
Add: cash of Star Ltd.. 16,000 4. Revenue profits of Star Ltd.:

Total - 45,000
Profit after 1st Oct, 2021 [(1,64,000 – 20,000) x ½] 72,000
Share holding Pattern
Less: Depreciation
Total Shares of Star Ltd. 4,000 shares
10% depreciation on ₹ 3,60,000 for 6 months 18,000
Shares held by Sun Ltd 3,200 shares i.e. 80 %
Less: Depreciation already charged for 2nd half year on 3,00,000 (3,000)
Minority Shareholding 800 shares i.e. 20 %
(15,000)
69,000
Working Notes:
Less: 1/5 due to outsiders (13,800)
1. The dividend @ 10% on 3,200 shares - ₹32,000 received by Sun Ltd. should have been credited
to the investment A/c, being out of pre-acquisition profits. Sun Ltd., must pass a rectification Share of Sun Ltd. 55,200
entry, viz. 5. Minority interest:
Profit & Loss Account Dr. ₹ 32,000 Par value of 800 shares (4,00,000 X 20%) 80,000
To Investment ₹ 32,000 Add: 1/5Capital Profits [WN 3] 73,400

1/5 Revenue Profits [WN 4] 13,800
2.. The Plant & Machinery of Star Ltd. would stand in the books at ₹ 2,85,000 on 1st Oct, 2021, considering
only six months’ depreciation on ₹ 3,00,000 total depreciation being ₹ 30,000. The value put on 1,67,200
the assets being ₹ 3,60,000, there is an appreciation to the extent of ₹ 75,000 (3,60,000 – 2,85,000).
6. Cost of Control: Pre-incorporation profits – 30,000
Amount paid for 3,200 shares 6,80,000 General Reserve 60,00,000 19,05,000
Profit and Loss Account 15,75,000 4,20,000
Less: Dividend out of pre-acquisition profits (32,000) 6,48,000
Trade payables 5,55,000 2,10,000
Par value of shares 3,20,000 -
Property, plant and equipment 79,20,000 23,10,000
Capital Profits –share of Sun Ltd. [WN 3] 2,93,600 (6,13,600)
Investment: 1,05,000 Equity shares in Q Ltd. at cost 12,00,000 –
Cost of Control or Goodwill 34,400
7. Value of Plant & Machinery: Current Assets 44,10,000 17,55,000
Directors of Q Ltd. made bonus issue on 31.3.2021 in the ratio of one equity share of Rs. 10 each fully paid
Sun Ltd. 4,80,000 for every two equity shares held on that date. Bonus shares were issued out of post- acquisition profits
Star Ltd. 2,70,000 by using General Reserve.
Add: Appreciation on 1st Oct, 2021 [3,60,000 – (3,00,000 – 15,000)] 75,000 Calculate as on 31st March, 2021 (i) Cost of Control/Capital Reserve; (ii) Minority Interest; (iii)Consoli-
dated Profit and Loss Account in each of the following cases:
3,45,000
(a) Before issue of bonus shares.
Add: Deprecation for 2nd half charged on pre-revalued value 15,000
(b) Immediately after issue of bonus shares. (RTP Nov 21, Old & New SM)
Less: Depreciation on ₹3,60,000 for 6 months (18,000) 3,42,000
8,22,000 Answer 13
8. Profit & Loss Account (Consolidated):
Shareholding pattern
Sun Ltd.as given 1,14,400
Particulars Number of Shares % of holding
Less: Dividend transferred to Investment A/c (32,000 ) 82,400
a. P Ltd.
Share of Sun Ltd.in revenue profits of Star Ltd.(WN 4) 55,200 1,05,000
(i) Purchased on 31.03.2015
1,37,600
(ii) Bonus Issue (1,05,000/2) 52,500
Question 13 Total 1,57,500 70%

b. Minority Interest 67,500 30%
On 31st March, 2015, P Ltd. acquired 1,05,000 shares of Q Ltd. for Rs. 12,00,000. The position of Q Ltd. on
Calculations of (i) Cost of Control/Capital Reserve; (ii) Minority Interest; (iii) Consolidated Profit and
that date was as under:
Loss Account as on 31st March, 2021:
Rs. (a) Before issue of bonus shares
Property, plant and equipment 10,50,000
(i) Cost of control/capital reserve Rs. Rs.
Current Assets 6,45,000
Investment in Q Ltd. 12,00,000
1,50,000 equity shares of Rs. 10 each fully paid 15,00,000
Less: Face value of investments 10,50,000
Pre-incorporation profits 30,000
Capital profits (W.N.) 63,000 (11,13,000)
Profit and Loss Account 60,000
Cost of control 87,000
Trade payables 1,05,000
(ii) Minority Interest Rs.
P Ltd. and Q Ltd. give the following information on 31st March, 2021:
Share Capital 4,50,000
P Ltd. Q Ltd.
Capital profits (W.N.) 27,000
Rs. Rs.
Revenue profits (W.N.) 6,79,500
Equity shares of Rs. 10 each fully paid (before bonus issue) 45,00,000 15,00,000
11,56,500
Securities Premium 9,00,000 –
(iii) Consolidated profit and loss account – P Ltd. Rs.
Balance 15,75,000 22,65,000 15,15,000

Add: Share in revenue profits of Q Ltd. (W.N.) 15,85,500 P Ltd.’s share (70%) 63,000 15,85,500 10,60,500
31,60,500 Minority’s share (30%) 27,000 6,79,500 4,54,500
Immediately after issue of bonus shares
*Share of P Ltd. in General reserve has been adjusted in Consolidated Profit and Loss Account.
Question 14
Face value of investments (Rs. 10,50,000 + Rs. 15,75,000
5,25,000) A Ltd. acquired 70% equity shares of B Ltd. @ Rs.20 per share (Face value - Rs.10) on 31st March, 2021at a
Capital Profits (W.N.) 63,000 16,38,000 cost of Rs. 140 lakhs. Calculate the amount of share of A Ltd. and minority interest in the net assets of B
Ltd. on this date. Also compute goodwill/capital reserve for A Ltd. on acquisition of shares of B Ltd. from
Less: Investment in Q Ltd. (12,00,000)
the following information available from the balance sheet of B Ltd. as on 31st March, 2021: (RTP May 21)
Capital reserve 4,38,000
Rs. in lakhs
Property, plant and equipment 360
Share Capital (Rs. 4,50,000 + Rs. 2,25,000) 6,75,000
Investments 90
Capital Profits (W.N.) 27,000
Current Assets 140
Revenue Profits (W.N.) 4,54,500
Loans & Advances 30
11,56,500
15% Debentures 180
(iii) Consolidated Profit and Loss Account – P Ltd. Rs.
Current Liabilities 100
Balance 15,75,000
Add: Share in revenue profits of Q Ltd. (W.N.) 10,60,500 Answer 14
Net assets of B Ltd. as on 31st March, 2021
26,35,500
Working Note:Analysis of Profits of Q Ltd. Rs. in lakhs Rs. in lakhs
Capital Prof- Revenue Profits
Investments 90
its
Current Assets 140
(Before and Be- After Bo-
after issue of fore nusIssue Rs. Loans and Advances 30
bonus Bo- Total Assets 620
nus
shares) Rs. Less: 15% Debentures 180.0
Issue Rs.
Current Liabilities 100.0 (280)
Equity / Net Worth 340
Profit and loss account on 31.3.2015 60,000

Share of Minority Interest in net assets (30% of 340) 102
90,000
A Ltd.’s share in net assets (70% of 340) 238
General reserve* 19,05,000 19,05,000
A Ltd.’s cost of acquisition of shares of B Ltd.
Less: Bonus shares (7,50,000)
(Rs.140 lakhs) (140)
11,55,000
Capital reserve 98
st 3,60,000 3,60,000
Profit for period of 1st April, 2015 to 31
Question 15
March, 2021 (Rs. 4,20,000 – Rs. 60,000)
A Ltd holds 75% of the equity capital and voting power in B Ltd. A Ltd purchases inventories costing
Rs. 150 lacs from B Ltd at a price of Rs. 200 lacs. The entire inventories remain unsold with A Ltd at Equity share of Rs. 10 each, fully paid up 15,000 6,000
the financial year end i.e. 31 March 2019. Suggest the accounting treatment for this transaction in
the consolidated financial statements of A Ltd giving reference of the relevant accounting standard. 15% preference shares of Rs. 10 each, fully paid up 4,000 1,000
(RTP Nov 20) General Reserves 2,500 1,450
Profit & Loss Account 2,750 1,250
Answer 15
Trade payables 1,646 1,027
As per para provisions of AS 21, Intragroup balances and intragroup transactions and resulting unreal-
ized profits should be eliminated in full. Unrealized losses resulting from intragroup transactions should 25,896 10,727
also be eliminated unless cost cannot be recovered. Intragroup balances and intragroup transactions, ASSESTS
including sales, expenses and dividends, are eliminated in full. Unrealised profits resulting from intra-
group transactions that are included in the carrying amount of assets, such as inventory and Property, Land & Building 3,550 1,510
Plant & Equipment, are eliminated in full. Unrealised losses resulting from intragroup transactions that Plant & Machinery 5,275 3,600
are deducted in arriving at the carrying amount of assets are also eliminated unless cost cannot be
Furniture & Fittings 1,945 655
recovered. One also needs to see whether the intragroup transaction is “upstream” or “downstream”. Up-
stream transaction is a transaction in which the subsidiary company sells goods to holding company. Investment in Y Ltd.: 450 Lakh Equity share in
While in the downstream transaction, holding company is the seller and subsidiary company is the
Y Ltd. purchased on 1st April, 2016 6,800
buyer.
Inventory 4,142 2,520
In the case of upstream transaction, since the goods are sold by the subsidiary to holding company;
profit is made by the subsidiary company, which is ultimately shared by the holding company and the Trade Receivables 3,010 1,882
minority shareholders. In such a transaction, if some goods remain unsold at the balance sheet date, Cash and Bank Balance 1,174 560
the unrealized profit on such goods should be eliminated from minority interest as well as from con-
25,896 10,727
solidated profit on the basis of their share-holding besides deducting the same from unsold inventory.
But in the case of downstream transaction, the whole profit is earned by the holding company, therefore,
(a) The following information is also given to you
whole unrealized profit should be adjusted from unsold inventory and consolidated profit and loss ac- (b) 10% dividend on Equity shares was declared by Y Ltd. on 31st March, 2016 for the year ended
count only irrespective of the percentage of the shares held by the parent. 31stMarch, 2016. X Ltd. credited the dividend received to its Profit & Loss Account.
The case given in the Question is the case of upstream transaction. In the consolidated profit and (c) Credit Balance of Profit & Loss account of Y Ltd. as on 1st April, 2016 was Rs. 650 Lakhs.
loss account for the year ended 31 March 2019, entire transaction of sale and purchase of Rs. 200
(d) General Reserve of Y Ltd. stood at same Rs. 1,450 Lakhs as on 1st April, 2016.
lacs each, would be eliminated by reducing both sales and purchases (cost of sales). Further, the
unrealized profits of Rs. 50 lacs (i.e. Rs. 200 lacs – Rs. 150 lacs), would be eliminated in the con- (e) Y Ltd.’s Plant & machinery showed a balance of Rs. 4,000 Lakh on 1st April 2016. At the time
solidated financial statements for financial year ended 31 March 2019, by reducing the value of of purchase of shares in Y Ltd., X Ltd. revalued Y’s Ltd. Plant & Machinery upward by Rs.
closing inventories by Rs. 50 lacs as of 31 March 2019. In the consolidated balance sheet as of 31 1,000 Lakh.
March 2019, A Ltd’s share of profit from B Ltd will be reduced by Rs. 37.50 lacs (being 75% of Rs. 50
(f) Included in Trade Payables of Y Ltd. are Rs. 50 Lakh for goods supplied by X Ltd.
lacs) and the minority’s share of the profits of B Ltd would be reduced by Rs. 12.50 lacs (being 25%
of Rs. 50 lacs). On 31st March, 2017, Y’s ltd. inventory included goods for Rs. 150 lakhs which it had purchased from X
Ltd. X Ltd. sold goods to Y Ltd. at cost plus 25%.
Question 16
You are required to prepare a Consolidated Balance Sheet of X Ltd. and its subsidiary Y Ltd.
The Summarised Balance Sheet of X Ltd. and its subsidiary Y Ltd. as on 31st March, 2017 are as follows: as on31stMarch, 2017 giving working notes. (Ignoring dividend on preference shares). (RTP Nov
18)
Particulars Amounts as at 31st March, 2017
X Ltd. Y Ltd.(Rs. Answer 16
(Rs. in lakhs) in lakhs) Consolidated Balance Sheet of X Ltd. and its subsidiary Y Ltd. as on 31st March, 2017
LIABILITIES
Particulars Note No. Rs. in lakhs
Share Capital:
I Equity and Liabilities
Authorised 20,000 8,000
1 Shareholders’ Funds
Issues and subscribed:
(a) Share Capital 1 19,000
(b) Reserves and Surplus 2 5,620

X Ltd. 1,646 3,400
2. Minority interest 3 3,400
Y Ltd. 1,027
3. Current Liabilities
2,673
(a) Trade payables 4 2,623
Less: Mutual owing 50 2,623
Total 30,643
5. Tangible Assets
II Assets
Land & Building
1 Non Current Assets
X Ltd. 3,550
Property, Plant & Equipment
Y Ltd 1,510 5,060
(i) Tangible Assets 5 17,435
Plant & Machinery
2 Current Assets
X Ltd. 5,275
(a) Inventories 6 6,632
Y Ltd (Working note v) 4,500 9,775
(b) Trade Receivables 7 4,842
Furniture & Fixtures
(c) Cash and Cash equivalents 8 1,734
X Ltd. 1,945
30,643
Y Ltd 655 2,600
Notes to Accounts
6. Inventories 17,435
Rs. in lakhs X Ltd. 4,142
Y Ltd 2,520
1. Share Capital
6,662
Issued, Subscribed and Paid up (1,500 lakh Equity Shares of 15,000
Rs. 10 each fully paid up) Less: Unrealized Profit (30) 6,632
400 lakh Preference Shares of Rs. 10 each fully paid up 4,000
2. Reserves and Surplus
Credit Balance of Profit & Loss Account 2,750 19,000
Working Notes:
Less: Capital Receipt wrongly credited (Dividend @ 10% on 450
Rs. 4500 Lakh Equity Shares) i. Calculation of Revenue Profits Y’s Ltd Profit & Loss Account
2,300 Rs. in lakh Rs. in lakh
Add: Share in Y Ltd. Revenue Profit (Working Note i) 825 To Equity Dividend By Balance b/d 650
3,125 10 % of 6,000 lakh 600 By Net profit for the year (Bal 1,200
Less: Unrealised Profit (Working Note iv) 30 3,095 Fig.)
Capital Reserve (Working Note iii) 25 To balance c/d 1,250
General Reserve 2,500 2,525 1,850 1,850
3. Minority interest 5,620

100 Lakh Preference Shares of Rs. 10 fully paid up 1,000
Depreciation provided on Plant & Machinery
150 Lakh Equity Shares of Rs.10 each fully paid up 1,500 2,500 4,000
Balance as on 1st April, 2016
Share in Revenue Profits (Working Note i) 275
Less Balance as 31st March 2017 3,600
Share in Capital Profit (working Note ii) 625 900
400
4. Trade payables
Hence rate of Depreciation = 400/4000 x 100 10%
Beta Ltd. Gamma Ltd.
Net Profit for the year ended 31st March 2017 1,200
Rs. Rs.
Less: Additional Depreciation 100
Share Capital:
Revenue Profit 1,100
Shares of Rs. 100 each 15,00,000 2,50,000
X Ltd’s share- 1100 x 450/600 825
Reserves 5,00,000 1,87,500
Y Ltd’s share = 1100 x150/600 275
Profit and Loss Account 2,50,000 62,500
ii. Calculation of Capital Profits Trade Payables 3,75,000 1,42,500
650 Property, plant and Equipment:

Profit & Loss Balance as on 1st April, 2016
Machinery 7,50,000 2,25,000
Less: Dividend Paid 600
Furniture 3,75,000 42,500
50
Other non-current assets 11,00,000 3,75,000
Add: General Reserve as on 1st April, 2016 1,450
Non-current Investments:
Add: Profit on Revaluation of Plant & machinery 1,000
Shares in Gamma Ltd.: 2,000 shares at Rs. 200 each 4,00,000
Capital Profit 2,500
X Ltd’s Share in Capital Profit = 2,500 x 450/600 1,875
Y Ltd’s Share in Capital Profit = 2,500 x 150/600 625 Other information:Reserves and Profit and Loss Account of Gamma Ltd. stood at Rs. 62,500 and Rs.
37,500 respectivelyon the date of acquisition of its 80% shares by Beta Ltd. on 1st April, 2020.
iii. Calculation of Capital Reserve
Machinery (Book-value Rs. 2,50,000) and Furniture (Book value Rs. 50,000) of Gamma Ltd. were reval-
Paid up value of 450 Lakh equity shares 4,500 ued at Rs. 3,75,000 and Rs. 37,500 respectively on 1st April, 2020 for the purpose of fixing the price of its
Add: Share in Capital Profits 1,875 shares. [Rates of depreciation computed on the basis of useful lives: Machinery 10%, Furniture 15%.]
(RTP May 22, RTP May’20, Old & New SM)
6,375
Amount Paid to acquire the 450 Lakh Equity Shares 6,800 Answer 17
Less: Dividend received out of Pre acquisition profits 450 Consolidated Balance Sheet of Beta Ltd. and its Subsidiary Gamma Ltd. as at 31st March, 2021
6,350 Particulars Note No. (Rs.)

Capital Reserve = 6,375-6,350 25 I. Equity and Liabilities
iv. Unrealized Profit (1) Shareholder’s Funds
Rs. 150 Lakh x 25/125* = 30 lakh (a) Share Capital 15,00,000
Plant & Machinery of Y Ltd.
Balance as on 31st March, 2017 3,600 (2) Minority Interest (W.N.5) 1,20,375
Add: Addition due to revaluation 1,000 (3) Current Liabilities
Less: Depreciation on additional Value of Plant & Machinery @ 10 % 100 900 (a) Trade Payables 2 5,17,500
4,500 Total 29,99,375

* Rs. 150 lakh considered as cost to Y Ltd. II. Assets
Question 17
(a) (i) Property, Plant & Equipment 3 14,94,375
From the following information of Beta Ltd. and its subsidiary Gamma Ltd. drawn up at 31st March, (ii) Intangible assets 4 30,000
2021, prepare a consolidated balance sheet as at that date:
(b) Other non- current assets 5 14,75,000 1,00,000

Total 29,99,375 Beta Ltd.’s = 4/5 × 1,00,000 80,000
Notes to Accounts
Minority Interest = 1/5 × 1,00,000 20,000
Rs. 2. Profit on revaluation of assets of Gamma Ltd.
1. Reserves and Surplus Profit on Machinery Rs. (3,75,000 – 2,50,000) 1,25,000
Reserves 5,00,000 Less: Loss on Furniture Rs. (50,000 – 37,500) 12,500
Add: 4/5th share of Gamma Ltd.’s 1,00,000 6,00,000 Net Profit on revaluation 1,12,500
post- acquisition reserves (W.N.3) Beta Ltd.’s share 4/5 × 1,12,500 90,000
Profit and Loss Account 2,50,000 Minority Interest 1/5 × 1,12,500 22,500
Add: 4/5th share of Gamma Ltd.’s 11,500 2,61,500 3. Post-acquisition reserves of Gamma Ltd.
post- acquisition profits (W.N.4)
Post-acquisition reserves (Total reserves less pre-acquisition reserves = Rs. 1,25,000
2. Trade Payables 8,61,500 1,87,500 – 62,500)
Beta Ltd. 3,75,000 Beta Ltd.’s share 4/5 × 1,25,000 1,00,000
Gamma Ltd. 1,42,500 5,17,500 Minority interest 1/5 × 25,000 25,000
3. Property, Plant & Equipment 4. Post -acquisition profits of Gamma Ltd.
Machinery Post-acquisition profits (Profit & loss account balance less pre- acquisition 25,000
Beta Ltd. 7,50,000 profits = Rs. 62,500 – 37,500)
Gamma Ltd. 2,50,000 Add: Excess depreciation charged on furniture @ 15%
Add: Appreciation 1,25,000 on Rs. 12,500 i.e. (50,000 – 37,500) 1,875
3,75,000 Less: Under depreciation on machinery @ 10% 26,875
Less: Depreciation (37,500) 3,37,500 on Rs. 1,25,000 i.e. (3,75,000 – 2,50,000) (12,500)
Furniture Adjusted post-acquisition profits 14,375
Beta Ltd. 3,75,000 Beta Ltd.’s share 4/5 × 14,375 11,500

Minority Interest 1/5 × 14,375 2,875
Gamma Ltd. 50,000
Less: Decrease in value (12,500)
Paid-up value of (2,500 – 2,000) = 500 shares
37,500
held by outsiders i.e. 500 × Rs. 100 50,000
Add: 1/5th share of pre-acquisition profits and reserves 20,000
1/5th share of profit on revaluation 22,500
1/5th share of post-acquisition reserves 25,000
5. Other non-current assets
1/5th share of post-acquisition profit 2,875
Beta Ltd. 11,00,000
6. Cost of Control or Goodwill 1,20,375
Gamma Ltd. 3,75,000 14,75,00
Paid-up value of 2,000 shares held by Beta Ltd. i.e. 2,000 × Rs. 100 2,00,000
Working Notes:
Add: 4/5th share of pre-acquisition profits and reserves 80,000
1. Pre-acquisition profits and reserves of Gamma Ltd. Rs. 4/5th share of profit on the revaluation 90,000
Reserves 62,500 Intrinsic value of shares on the date of acquisition 3,70,000
Price paid by Beta Ltd. for 2,000 shares 4,00,000

Sundry creditors 487 427
Less: Intrinsic value of the shares (3,70,000)
Cost of control or Goodwill 30,000 611 507
Trade receivables
Question 18 Debtors 700 683
Bills Receivables 120 95
On 31st March, 2022, H Ltd. and S Ltd. give the following information:
820 778
H Ltd. (Rs. in 000’s) S Ltd. (Rs. in 000’s) Prepare a consolidated Balance Sheet as on 31st March, 2022. (RTP Nov’22)
Equity Share Capital – Authorised 5,000 3,000

Answer 18
Issued and subscribed in Equity Shares of 4,000 2,400 Consolidated Balance Sheet of H Ltd. with its subsidiary S Ltd. as at 31st March, 2022
Rs. 10 each fully paid
Particulars Note No. (Rs. in 000’s)
General Reserve 928 690
Profit and Loss Account (Cr. Balance) 1,305 810
Trade payables 611 507
(a) Share Capital 1 4,000
Provision for Taxation 220 180
(a) Reserves and Surplus 2 3,063
Other Provisions 65 17
(2) Minority Interest (W.N.6) 1,560
Plant and Machinery 2,541 2,450
Furniture and Fittings 615 298
Trade payables 3 1,118
Investment in the Equity Shares of S Ltd. 1,500 -
Short term provisions 4 482
Inventory 983 786
Total 10,223
Trade receivables 820 778
II. Assets
Cash and Bank Balances 410 102
Sundry Advances (Dr. balances) 260 190
PPE 5 5,904
Following Additional Information is available:
(2) Current assets
(a) H Ltd. purchased 90 thousand Equity Shares in S Ltd. on 1st April, 2021 at which date the
followingbalances stood in the books of S Ltd.: (a) Inventories 6 1,759
General Reserve Rs. 1,500 thousand; Profit and Loss Account Rs. 633 thousand. (b) Trade receivables 7 1,598
(c) Cash and cash equivalents 8 512
(b) On 14th July, 2021 S Ltd. declared a dividend of 20% out of pre-acquisition profits. H Ltd.
(d Short term loans and advances 9 450
credited the dividend received to its Profit and Loss Account.
Total 10,223
(c) On 1st November, 2021, S Ltd. issued 3 fully paid Equity Shares of Rs. 10 each, for every
Notes to Accounts
5 shares held as bonus shares out of pre-acquisition General Reserve.
(d) On 31st March, 2021, the Inventory of S Ltd. included goods purchased for Rs. 50 thou- (Rs. in 000’s) (Rs. in 000’s)
sand from HLtd., which had made a profit of 25% on cost.
1. Share Capital
(e) Details of Trade payables and Trade receivables:
Authorised share capital
H Ltd. (Rs. in 000’s) S Ltd. (Rs. in 000’s) 5 lakhs equity shares of Rs. 10 each 5,000
Trade payables Issued, Subscribed and Paid up
Bills Payable 124 80 4 lakhs equity shares of Rs. 10 each fully paid 4,000
2. Reserves and surplus S Ltd. 102 512

Capital Reserve (Note 5) 679.8 9. Short term loans and advances
General Reserve 928 Sundry Advances H Ltd. 260
Profit and Loss Account: S Ltd. 190 450
H Ltd. Rs. 1,305
Working Notes:Share holding pattern
Add: Share in S Ltd Rs. 340.20 *2,40,000 is after issue of bonus shares as per balance sheet as at 31.3.2022
Rs. 1,645.20 1.S Ltd. General Reserve
Less: Dividend wrongly credited Rs. (180)
(Rs. in 000) (Rs. in 000)
Rs. 1,465.20
To Bonus to equity shareholders 900 By Balance b/d 1,500
Less: Unrealised profit (50 X 1/5) Rs. (10) 1,455.20 3,063 By
2,400 × 3 Profit and Loss A/c
3. Trade payables
8
H Ltd. 611
To Balance c/dType equation here. 690 (Balancing figure) 90
S Ltd. 507 1,118 1,590 1,590
4. Short –term provisions 2.S Ltd.’s Profit and Loss Account
Provision for Taxation H Ltd. Rs. 220

(Rs. in (Rs. in 000)
S Ltd. Rs. 180 400 000)
Other Provisions H Ltd Rs. 65 To General Reserve 90 By Balance b/d 633
S Ltd. Rs. 17 82 482
To Dividend paid on 14.7.2021 300 By Net Profit for the year
5. PPE 1,500 X 20 (Balancing figure) 567*
Plant and Machinery 100
H Ltd. Rs. 2,541 To Balance c/d 810
S Ltd. Rs. 2,450 4,991 1,200 1,200
Furniture and fittings 3. * Out of Rs. 5,67,000 profit for the year, Rs. 90,000 has been transferred to reserves by S Ltd.Distribu-
H Ltd. Rs. 615 tion of Revenue Profits
S Ltd. Rs. 298 913 5,904 Rs. in ’000

6. Inventories Revenue Profit as above 567.00
Inventory 1,769 Share of H Ltd. (60%) 340.20
H Ltd. Rs. 983S Share of Minority shareholders ( 567– 340.20) 226.80
Ltd. Rs.786
4. Computation of Capital Profits
Less: Unrealised profit (Rs. 50 x 1/5) (10) 1,759
Rs. in 000 Rs. in 000
7. Trade receivables
General Reserve on the date of acquisition 1,500
H Ltd. 820
Less: Bonus issue of shares (900)
S Ltd. 778 1,598
Profit and Loss Account balance on the date of acquisition 633 600
8. Cash and cash equivalents
Cash and Bank Balances H Ltd 410 Less: Dividends paid (300) 333
933
Question 19
Share of H Ltd. (60%) 559.80
Share of Minority shareholders 373.20 G Ltd.. and its subsidiary K Ltd. give the following information for the year ended 31stMarch, 2023:
5. Computation of Capital Reserve

Particulars G Ltd. K Ltd
Rs. in ’000 Sales and other Income 3000 750
60% of share capital of S Ltd. 1,440
Increase in Inventory 750 100
Add: Share of H Ltd. in the capital profits as in working note (4) 559.80
Raw material consumed 600 100
Less: Investments in S Ltd. 1,500 1,999.80
Wages and Salaries 600 75
Less: Dividends received out of pre- acquisition profits (180) (1,320)
Production expenses 100 50
Administrative expenses 75 50
Rs.30 × 60 679.80
Selling and Distribution expenses 100 25
100
Interest 75 30
6. Calculation of Minority Interest
Depreciation 75 30
Rs. in ’000
40% of share capital of S Ltd. 960.00 (i) The following information is also given:G sold goods of Rs. 200 crores to K Ltd. at cost plus
25%. (1/5th of such goods were still in inventoryof K Ltd. at the end of the year)
Add: Share of Revenue Profits (Note 3) 226.80
(ii) G Ltd. holds 75% of the Equity share capital of K Ltd. and the Equity share capital of K
Share of Capital Profits (Note 4) 373.20 Ltd. is Rs.800 crores on 01.04.2022 (date of acquisition of shares)
1,560.00 Administrative expenses of K Ltd. include Rs. 5 crore paid to G Ltd. as consultancy fees. Also, sellingand
distribution expenses of G Ltd. include Rs. 20 crores paid to K Ltd. as commission.
Prepare a consolidated statement of Profit and Loss of G Ltd. with its subsidiary K. Ltd. for the year end-
ed 31st March, 2023. (PYP 15 Marks May ’23) (Same concept different figures MTP 15 Marks March 21, Apr
22, Old & New SM)
Answer 19
Consolidated statement of profit and loss of G Ltd. and its subsidiary K Ltd. for the year endedon 31st
March, 2023
Particulars Note No. Rs. in Crores

I. Revenue from operations 1 3,525
II. Total Income 3,525
III. Expenses
Cost of material purchased/consumed 2 650
Changes of inventories of finished goods 3 (842)

Employee benefit expense 4 675
Finance cost 5 105
Total expenses 918
IV. Profit before tax (II-III) 2,607
Notes to Accounts
7. Other expenses Administrative
Rs. in Crores Rs. in Crores expenses
1. Revenue from operations Sales G Ltd. 75

and other income K Ltd. 50
G Ltd. 3,000 125
K Ltd. 750 Less: Consultancy fees received by G Ltd. from K Ltd. (5) 120
3,750 Selling and distribution Expenses:
Less: Inter-company sales (200) G Ltd. 100
Consultancy fees received by G Ltd. from K Ltd. (5) K Ltd. 25
Commission received by K Ltd. from G Ltd. (20) 3,525 125
Less: Commission received by K Ltd. from G Ltd. (20) 105
2. Cost of material purchased/consumed
600 225
G Ltd.
Note: The information (i) given in the question states that G Ltd. sold goods of Rs. 200 crores to K Ltd.
K Ltd. 100 at cost plus 25%. In the above solution it has been considered that the amount of Rs. 200 crores is sale
700 value. Alternatively, Rs. 200 crores may be assumed as the cost of the goods sold. In that case, the
solution will differ and will be as follows:Alternative solution:
Less: Purchases by K Ltd. from G Ltd. (200) 500
Consolidated statement of profit and loss of G Ltd. and its subsidiary K Ltd. for the year ended on 31st
Direct expenses (Production) March, 2023
G Ltd. 100
Particulars Note Rs. in Crores
K Ltd. 50 150
650 No.
3. Changes of inventories of finished goods I. Revenue from operations 1 3,475
G Ltd. 750
II. Total Income 3,475
K Ltd. 100
III. Expenses
850 2 600
Cost of material purchased/consumed
Less: Unrealized profits Rs. 40 crores × 25/125 (8) 842
Changes of inventories of finished goods 3 (840)
4. Employee benefits and expenses Wages and
salaries:
Finance cost 5 105
G Ltd. 600
K Ltd. 75 675
5. Finance cost Interest:
Total expenses 870
G Ltd.
75
K Ltd. 30 105
6. Depreciation
G Ltd. 75
K Ltd. 30 105
7. Other expenses Administrative

expenses
Notes to Accounts
G Ltd. 75
Rs. in Rs. in Crores
Crores K Ltd. 50
1. Revenue from operations Sales 125

and other income Less: Consultancy fees received by G Ltd. from K Ltd. (5) 120
G Ltd. 3,000
Selling and distribution Expenses:
K Ltd. 750
G Ltd. 100
3,750
K Ltd. 25
Less: Inter-company sales (250)
125
Consultancy fees received by G Ltd. from K Ltd. (5)
Less: Commission received by K Ltd. from G Ltd. (20) 105
Commission received by K Ltd. from G Ltd. (20) 3,475
225
2. Cost of material purchased/consumed
G Ltd. 600
Question 20
K Ltd. 100
H Ltd acquired 15000 shares in S Ltd. for 1,55,000 on July 1, 2022. The Balance sheet of the twocompa-
700
nies as on 31st March, 2023 were as follows:
Less: Purchases by K Ltd. from G Ltd. (250) 450
Direct expenses (Production) G Ltd. 100 H Ltd.Rs. S Ltd.Rs.
Equity and Liabilities:
K Ltd. 50 150
Equity Share Capital 9,00,000 2,50,000
600
(Fully paid shares of Rs. 10 each)
3. Changes of inventories of finished goods G Ltd. 750
K Ltd. 100 Surplus i.e., Balance in Statement of Profit and 80,000 25,000
850 Loss 40,000 20,000
Less: Unrealized profits Rs. 40 crores × 25/100 (10) 840 Bills payable 50,000 30,000
4. Employee benefits and expenses Wages and Trade Creditors

salaries: Total 12,30,000 3,65,000
G Ltd. 600 Assets
K Ltd. 75 675 Machinery 7,00,000 1,50,000
5. Finance cost Interest: G Ltd. 75 Furniture 1,00,000 70,000
Investment in Equity Shares of S Ltd. 1,55,000 -
K Ltd. 30 105
Stock-in Trade 1,00,000 50,000
6. Depreciation Trade Debtors 60,000 35,000
G Ltd. 75 Bills Receivable 25,000 20,000
K Ltd. 30 105 Cash at Bank 90,000 40,000
Total 12,30,000 3,65,000
The following additional information is provided to you:
(i) General reserve appearing in the Balance Sheet of S Ltd. remained unchanged since 31st 2. Reserves and Surplus
March,2022.
General Reserves 1,60,000
(ii) Profit earned by S Ltd. for the year ended 31st March, 2023 amounted to Rs. 20,000.
Profit and Loss Account (W.N.5) 88,500
(iii) H Ltd. sold goods to S Ltd. costing Rs. 8,000 for Rs. 10,000, 25% of these goods remained
unsold with S Ltd. on 31st March, 2023. Capital Reserve (W.N. 4) 25,000 2,73,500
(iv) Creditors of S Ltd. include Rs. 4000 due to H Ltd. on account of these goods. 3. Minority interest in S Ltd. (WN 3) 1,26,000
4. Trade pay-
(v) Out of Bills payable issued by S Ltd. Rs. 15,000 are those which have been accepted in
ablesBills
favour of H Ltd. Out of these, H Ltd. had endorsed by 31st March, 2023, Rs. 8000 worth
Payable
of bills receivable in favour of its creditors. 40,000
You are required to draw a consolidated Balance Sheet as on 31st March, 2023. (PYP 15 Marks May H Ltd.
S Ltd. 20,000
’23)
Less: Mutual pay- 60,000
Answer 20 ables (7,000) 53,000
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as at 31st March, 2023
Trade Creditors H Ltd.
S Ltd. 50,000
9,00,000 Less: Mutual owing
(a) Share Capital 1
30,000 76,000 1,29,000
(2) Minority Interest 3 1,26,000 80,000
(3) Current Liabilities (4,000)
(a) Trade Payables 4 1,29,000 Property, plant and equipment

5. Machinery H Ltd. 7,00,000
14,28,500
S Ltd. 1,50,000
Total
8,50,000
II. Assets
Furniture H Ltd.S Ltd. 1,00,000
70,000 1,70,000 10,20,000
(2) Current assets
6. InventoryH
(i) Inventory 6 1,49,500
Ltd. 1,00,000
(ii) Trade Receivables 7 1,29,000
S Ltd. 50,000
(iii) Cash & cash equivalent 8 1,30,000
Less: Unrealized profit (2,000x 25%) 500 1,49,500
Total 14,28,500
Notes to Accounts
Rs.
1. Share capital
Authorised, issued, subscribed and paid up capital
90,000 equity shares of Rs. 10 each, fully paid up 9,00,000
7. Trade receivablesBills receivable

H Ltd.S Ltd. H Ltd.’s share (60%) Minority Inter- 30,000 9,000
est (40%)
20,000 6,000
Less: Mutual payables Minority Interest
25,000
38,000
20,000
Paid up value of 10,000 shares @ Rs. 10 each Rs. 1,00,000
45,000
Add: Share in pre-acquisition profits and reserve (40%) Rs. 20,000
(7,000)
Add: Share in post-acquisition profits (40%) Rs.
DebtorsH Ltd.S Ltd.
6,000 Rs.
60,000
1,26,000
Less: Mutual owing Capital Reserve for H Ltd.
35,000
91,000 1,29,000 (A) Cost of acquiring 15,000 shares of S Ltd. Rs. 1,55,000
95,000
(B) Paid up value of 15,000 shares of S Ltd. @ Rs. 10 Rs. 1,50,000
(4,000)
each Rs.
8. Cash & cash equivalent Cash at
Bank H Ltd. Add: Share in pre-acquisition profit and 30,000 Rs.
90,000
reserves of S Ltd. 1,80,000
S Ltd. 40,000 1,30,000
Capital Reserve (B-A) Rs. 25,000
Working Notes: Consolidated Balance of Profits of H Ltd.
1. Percentage of holding Balance as per Statement of Profit and Rs. 80,000

No. of Shares Percentage Loss Add: Share in post-acquisition Rs. 9,000
Holding Co. : 15,000 (60%) profits of S Ltd. Rs.
Minority shareholders : 10,000 (40%) Less: Unrealised Profit in unsold stock of S Ltd. (500) Rs.
88,500
Total Shares : 25,000
2. Analysis of Profits
Question 21
Pre-acquisition Post- acquisi- The Trial Balances of X Limited and Y Limited as on 31st March, 2021 were as under:
profits and reserves of tionprofits of S
S Ltd. Ltd. X Limited (Rs. Y Limited (Rs. In 000)
In000)
(Rs.) (Rs.)
Dr. Cr. Dr. Cr.
General Reserve 40,000 --- Equity Share capital (Share of Rs. 100 each) 2,000 400
Opening balance of Profit and 5,000 --- 7% Preference share capital - 400
Reserves 600 200
Loss 5,000 15,000
6% Debentures 400 400
Current Year’s profit (in 1:3) 50,000 15,000
Trade Receivables/Trade Payables 160 180 100 120
Profit & Loss A/c balance 40 30
Other expenses 6 2,80,000

Purchases /Sales 1,000 1,800 1,200 1,900
Total expenses 33,65,000
IV. Profit before Tax (II-III) 2,15,000
Debenture Interest 24 24 Profit transferred to Consolidated Balance Sheet

Profit After Tax 2,15,000
General Expenses 160 120
Preference dividend 7,000
Preference share dividend up to 30.09.2020 7 14
Preference dividend payable 7,000 (14,000)
2,01,000
Inventory (as on 31.03.2021) 200 100
Share in pre-acquisition loss (WN 3) 1,800
Cash at Bank 27 12
Share of Minority interest in losses (WN 1) 1,800
Investment in Y Limited 1,056 -
Less: Investment Account- dividend for 3 months (prior to acquisi- (3,500)
Property, Plant & Equipment 2,200 1,580
tion)
Total 5,027 5,027 3,450 3,450
Inventory reserve (WN 2) (6,000)
Profit to be transferred to consolidated balance sheet 1,95,100
- Investment in Y Limited was acquired on 1st July, 2020 and consisted of 80% of Equity Share Cap- Notes to Accounts
ital and 50% of Preference Share Capital.After acquiring control over Y Limited, X Limited
supplied to Y Limited goods at cost plus 25%, the total invoice value of such goods being Rs. Rs.
Rs. 1,20,000, one fourth of such goods were still lying in inventory at the end of the year.
1 Revenue from Operations
Depreciation to be charged @ 10% in X Limited and @ 15% in Y Limited on Property, Plant & Equip-
ment. X Ltd. 18,00,000
Y Ltd. 19,00,000
You are required to prepare the Consolidated Statement of Profit and Loss for the year ended
on 31st March, 2021. (15 Marks , July 21) Total 37,00,000
Less: Intra-group sales (X sold to Y) (1,20,000) 35,80,000
Answer 21
2 Cost of Materials Purchased/Consumed
Consolidated Profit and Loss Account of X Ltd. and Y Ltd. for the year ended 31st March, 2021
X Ltd. 10,00,000
Y Ltd. 12,00,000
Particulars Note No. Rs. Total 22,00,000
I. Revenue from operations 1 35,80,000 Less: Intra-group sales (X sold to Y) (1,20,000) 20,80,000
II. Total revenue 35,80,000 3 Employee benefit and expenses
III. Expenses Wages and salaries
Cost of Material purchased/Consumed 2 20,80,000 H Ltd. 2,00,000
S Ltd. 3,00,000 5,00,000
Changes of Inventories of finished goods -
4 Finance cost
Employee benefit expense 3 5,00,000
Interest
Finance cost 4 48,000
H Ltd. 24,000
Depreciation and amortization expense 5 4,57,000
S Ltd. 24,000 48,000
5 Depreciation
H Ltd. 2,20,000
S Ltd. 2,37,000 4,57,000 Total 9,000 1,800

6 Other expenses Expenses
H Ltd. 1,60,000 Raw material consumed 1,200 300
S Ltd. 1,20,000 2,80,000 Wages and Salaries 1,200 225
Working Note1. Administrative expenses 300 150
Profit of Subsidiary Rs. Selling and distribution expenses 300 75
Revenue from Operations 19,00,000 Interest 150 75
Less: Expenses Depreciation 150 75
Cost of Material purchased/Consumed 12,00,000 Total 3,600 1,050
Changes of Inventories of finished goods - Profit before tax 5,400 750
Employee benefit expense 3,00,000 Provision for tax 1,800 300
Finance cost 24,000 Profit after tax 3,600 450
Depreciation and amortization expense 2,37,000 Dividend paid 1,800 225
Other expenses 1,20,000 Balance of Profit 1,800 225
Total expenses (18,81,000) The following information is also given:

A Ltd sold goods of Rs. 180 Lakhs to B Ltd at cost plus 25%. (1/6 of such goods were still in inventory of B
Profit Before Tax 19,000
Ltd at the end of the year)
Less: Preference Dividend 14,000
Administrative expenses of B Ltd include Rs. 8 Lakhs paid to A Ltd as consultancy fees.
Less: Preference Dividend Payable 14,000 (28,000)
Selling and distribution expenses of A Ltd include Rs. 15 Lakhs paid to B Ltd as commission.
Profit available for shareholders (9,000)
(i) A Ltd holds 72% of the Equity Capital of B Ltd. The Equity Capital of B Ltd prior to 2016-17 is Rs.
Minority Share (20% of loss Rs. 9,000) (1,800) 1,500 Lakhs
Prepare a consolidated Profit and Loss Account for the year ended 31st March, 2018. [PYP 10 Marks , Nov
‘18]
2. Inventory reserve =
3. Pre-acquisition loss = 80% of 3 month’s profit up to 30th June,2020 i.e. 80 % of ¼ of loss Rs.
9,000. Hence, pre-acquisition loss = Rs. 1,800
4. Investment account includes Preference dividend for 3 months prior to acquisition i.e. Rs.
4,00,000 X 50% X 7% X1/4 = Rs. 3,500
Question 22
The Profit and Loss Accounts of A Ltd. and its subsidiary B Ltd. for the year ended 31st March, 2018
aregiven below :
Rs. in
Incomes A Ltd. Lakhs
B Ltd.
Increase in Inventory 1,500 300
1,500
Answer 22 Less: Purchases by B Ltd. from A Ltd. (180) 1,320

Consolidated Profit & Loss Account of A Ltd. and its subsidiary B Ltd.for the year ended on 31st Direct Expenses
March, 2018
A Ltd. 300
Particulars Note No. Rs.in Lacs BLtd. 150 450
I. Revenue from operations 1 8,797 1,770
II. Total revenue 8,797 4. Employee benefits and expenses
III. Expenses Wages and Salaries:
Cost of Material purchased/Consumed 3 1,770 A Ltd. 1,200
Changes of Inventories of finished goods ex- 2 (1,794)
B Ltd. 225 1,425
pense
Employee benefit expense 4 1,425

5. Other Expenses
Finance cost 6 225 Administrative Expenses
Depreciation and amortization e 7 225 A Ltd. 300
Other expenses 5 802 B Ltd. 150
Total expenses 2,653 450
IV. Profit before Tax(II-III) 6,144 Less: Consultancy fees received by A Ltd. from BLtd. (8) 442
V. Tax Expenses 8 2,100 Selling and Distribution Expenses:

Notes to Accounts A Ltd. 300
Rs. in Lacs Rs. in Lacs B Ltd. 75
1. Revenue from Operations 375
Sales and other income Less: Commission received from B Ltd. from A Ltd. (15) 360
A Ltd. 7,500 802
B Ltd. 1,500 6. Finance Cost
9,000 Interest:
Less: Inter-company Sales (180) A Ltd. 150
Consultancy fees received by A Ltd. from B Ltd. (8) B Ltd. 75 225
Commission received by B Ltd. from A Ltd. (15) 8,797 7. Depreciation and Amortisation
2. Increase in Inventory Depreciation:
A Ltd. 1,500 A Ltd. 150
B Ltd. 300 B Ltd. 75 225
1,800 8. Provision for tax
Less: Unrealised profits Rs. 180×1/6 x 25/125 (6) 1,794

A Ltd. 1800
3. Cost of Material purchased/consumed
B Ltd. 300 2100
A Ltd. 1,200
Note: it is assumed that dividend adjustment has not be done in sales & other income of A Ltd i.e. dividend
B Ltd. 300 received from B Ltd is not included in other income of A Ltd. Alternative Answer is possible considering is
otherwise.
Question 23 You are required to prepare consolidated Balance Sheet of the group as on 31st March,2021 as per
the requirement of Schedule III of the Companies Act, 2013.(PYP 15 Marks May ‘22)
White Ltd. acquired 2,250 shares of Black Ltd. on 1st October,.2020. The summarized balance sheets
of both the companies as on 31st March, 2021 are given below: Answer 23
Consolidated Balance Sheet of White Ltd. and its Subsidiary Black Ltd.as at 31st March, 2021
White Ltd. (₹) Black Ltd. (₹)
(I) Equity and Liabilities Particulars Note No. (₹)
(1) Shareholder’s fund I. Equity and Liabilities
Share capital (Equity shares of ₹ 100 each fully
paidup) (1) Shareholder’s Funds
Reserves and Surplus General Re- 6,50,000 3,00,000 (a) Share Capital 1 6,50,000
serveProfit and loss account (b) Reserves and Surplus 2 2,55,000
60,000 30,000
(2) Current Liabilities (2) Minority Interest 3 1,05,000
1,50,000 90,000
Trade payables Due to White Ltd. (3) Current Liabilities
1,15,000 75,000
- 30,000
Total 12,00,000
Total 9,75,000 5,25,000
II. Assets
(II) Assets:
Non-current assets
Property, Plant and Equipment 5,80,000 3,51,000
(2) Current assets
Investments
(i) Inventory 6 1,70,000
Shares in Black Ltd. (2,250 shares) 2,70,000
(ii) Cash & cash equivalent 7 99,000
Current assets
Total 12,00,000
Inventories 50,000 1,20,000 Notes to Accounts
Due from Black Ltd. 36,000
₹
Cash and Cash equivalents 39,000 54,000
1. Share capital
Total 9,75,000 5,25,000
6,500 equity shares of ₹ 100 each, fully paid up 6,50,000
Other information:
Total 6,50,000
(i) During the year, Black Limited fabricated a machine, which is sold to White Ltd. for
₹ 39,000, the transaction being completed on 30th March,2021.
General Reserves 60,000
(ii) Cash in transit from Black Ltd. to White Ltd. was ₹ 6,000 on 31st March,2021. Profits
during theyear 2020-2021 were earned evenly Profit and Loss Account 1,50,000
(iii) The balances of Reserve and Profit and Loss account as on 1st April,2020 were as Add: 75% share of Black Ltd.’s post-acquisition profits (W.N.1)
follows: 37,500 1,87,500
Capital reserve (W.N. 5) 7,500
Reserves Profit and Loss A/c
Total 2,55,000
₹ ₹
3. Minority interest in Black Ltd. (WN 4) 1,05,000
White Ltd. 30,000 15,000 Profit
4. Trade payables
Black Ltd. 30,000 10,000 Loss
White Ltd. 1,15,000
Black Ltd. 75,000 1,90,000

Intrinsic value of the shares-
White Ltd. 5,80,000
Paid-up value of 2,250 shares held by White Ltd. i.e. 2,250 × 2,25,000
Black Ltd. 3,51,000 9,31,000 ₹
6 Inventory
100
White Ltd. 50,000
Add 75% share of pre-acquisition reserves & profit
Black Ltd. 1,20,000 1,70,000 (70,000 x 75%) 52,500 (B) 2,77,500
7 Cash & cash equivalent Capital reserve (A – B) 7,500
White Ltd. 39,000
Black Ltd. 54,000 Question 24
Cash in transit 6,000 99,000 H Ltd. and S Ltd. provide the following information as at 31st March,2022:
Working Notes:
H Ltd.₹ S Ltd.₹
1. Post-acquisition profits of Black Ltd. ₹ Property, Plant and Equipment 2,00,000 2,60,000
profits earned during the year = ₹ 90,000 + ₹10,000 1,00,000 Investments (14,000 Equity Shares of S Ltd.) 2,52,000 -
Pre-acquisition profits (1.4.20 to 30.9.20) 50,000 Current Assets 1,48,000 1,40,000
Post-acquisition profits (1.10.20 to 31.3.21) 50,000 Share capital (Fully paid equity shares of ₹ 10 each) 3,00,000 2,00,000
White Ltd.’s share 75% of 50,000 37,500 Profit and loss account 1,00,000 80,000
Minority Interest 25% of 50,000 12,500
Additional information:
2. Pre-acquisition profits and reserves of Black Ltd. H Ltd. acquired the shares of S Ltd. on 1stJuly, 2021 and Balance of profit and loss account of S Ltd. on
Reserves as on 1.4.2020 30,000 1stApril, 2021 was ₹ 60,000. Prepare consolidated balance sheet of H Ltd. and its subsidiary as at 31st
March, 2022. (PYP 15 Marks Nov ‘22)
[10,000 (loss as on 1.4.20) +50,000 (6 month Adjusted pre-acquisition profits)] Answer 24
70,000 Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March, 2022
White Ltd.’s = (75%) × 70,000 52,500
Note Amount
Minority Interest= (25%) × 70,000 17,500 No
(₹)
3. Post-acquisition reserves of Black Ltd.
Post-acquisition reserves (Total reserves less pre-acquisition reserves = ₹ nil
1 Shareholders’ Fund:
30,000
– 30,000)
(b) Reserve and Surplus 2 1,10,500
Paid-up value of (3,000 – 2,250) = 750 shares
2 Minority interest 3 84,000
held by outsiders i.e. 750 × ₹ 100 75,000
3 Current Liabilities
Add: 25% share of pre-acquisition reserves & Profit 17,500
Trade payables 4 3,20,000
25% share of post-acquisition profit 12,500
Total 8,14,500
5. Capital Reserve 1,05,000
II Assets
Price paid by White Ltd. for 2,250 shares (A) 2,70,000 1 Non-Current Assets:
Property, plant and equipment 5 4,60,000
Intangible Asset 6 66,500 2. Calculation of Minority Interest

2 Current Assets 7 2,88,000
Share capital (30% of ₹ 2,00,000) 60,000
Total 8,14,500 84,000
Share in Profit and loss account (₹ 80,000 X 30%) 24,000
Notes to Accounts
Calculation of Cost of Control (Goodwill)
Amount (₹)
1 Share capital 3,00,000 Cost of Investment 2,52,000
30,000 Equity Shares @ ₹10 each Less: Paid up value of shares (70% of ₹ 2,00,000) (1,40,000)
2 Reserve and Surplus Share in pre-acquisition profits
Profit and loss account (₹ 1,00,000 + 70% of 9/12 x 20,000

70% of [60,000+3/12(80,000-60,000)] (45,500)
i.e. ₹ 10,500) 1,10,500
66,500
3 Minority Interest (W/N 2) 84,000
4 Trade payables H Ltd. Question 25
S Ltd. 2,00,000
Chand Ltd. and its subsidiary Sitara Ltd. provided the following information for the year ended 31st
1,20,000 March, 2023:
3,20,000
Particulars Chand Ltd (₹) Sitara Ltd. (₹)
5 Property, plant and equipment H Ltd.
S Ltd. 2,00,000
Finished Goods Inventory as on 01.04.2022 4,20,000 3,01,000
2,60,000
Finished Goods Inventory as on 31.03.2023 8,57,500 3,76,250
4,60,000
Dividend Income 1,68,000 43,750
6 Intangible Asset:
Other non-operating Income 35,000 10,500
Goodwill (W/N 3) 66,500
Raw material consumed 13,93,000 4,72,500
7 Current Assets
Selling and Distribution Expenses 3,32,500 1,57,500
H Ltd. 1,48,000
Production Expenses 3,15,000 1,40,000
S Ltd. 1,40,000
Loss on sale of investments 26,250 Nil
2,88,000
Sales and other operating income 33,25,000 19,07,500
Working Notes:
Wages and Salaries 13,30,000 2,45,000
1. Percentage of holding
General and Administrative Expenses 2,80,000 1,22,500
No. of Shares Percentage
Royalty paid Nil 5,000
Holding Co. : 14,000 (70%) Depreciation 31,500 14,000
Minority shareholders: 6,000 (30%) Interest expense 17,500 5,250
Total Shares : 20,000 Other information
฀ On 1st September 2020 Chand Ltd., acquired 5,000 equity shares of ₹ 100 each fully paid up in
Sitara Ltd.
฀ Sitara Ltd. paid a dividend of 10% for the year ended 31st March 2022. The dividendwas co rectly
accounted for by Chand Ltd.
฀ Chand Ltd. sold goods of ₹ 1,75,000 to Sitara Ltd. at a profit of 20% on selling price. Notes to Accounts:
Inventory of Sitara Ltd. includes goods of ₹ 70,000 received from Chand Ltd. ₹ ₹
1. Revenue from operations
฀ Selling and Distribution expenses of Sitara Ltd. include ₹ 21,250 paid to Chand Ltd. asbro-
kerage fees. Sales and other operating revenues
฀ General and Administrative expenses of Chand Ltd. include ₹ 28,000 paid to SitaraLtd. as Chand Ltd. 33,25,000
consultancy fees. Sitara Ltd. 19,07,500
฀ Sitara Ltd. used some resources of Chand Ltd., and Sitara Ltd. paid ₹ 5,000 to ChandLtd. as 52,32,500
royalty.
Less: Inter-company sales (1,75,000)
Consultancy fees, Royalty and brokerage received is to be considered as operating revenues.
Consultancy feesreceived (28,000)
Prepare Consolidated Statement of Profit and Loss of Chand Ltd. and its subsidiary Sitara Ltd. for the
year ended 31st March, 2023 as per Schedule III to the Companies Act, 2013.(RTP Nov ’23)(Same con- by Sitara Ltd. from
cepts different figures PYP 15 Marks Dec’21) Chand Ltd.
Answer 25 Royalty received by Chand Ltd. from (5,000)

Sitara Ltd.
Consolidated statement of profit and loss of Chand Ltd. and its subsidiary Sitara Ltd. for the yearend-
ed on 31st March, 2023 Brokage received by Chand Ltd. from (21,250)
50,03,250
Sitara Ltd.
Particulars Note ₹ 2. Other Income
No. 1,68,000
Dividend income:
Revenue from operations 1 50,03,250 Sitara Ltd. 43,750 2,11,750
Loss on sale of investments Sitara Ltd. (26,250)
Other Income 2 1,81,000
Other Non-operating Income
Total revenue (I) 51,84,250
Chand Ltd. 35,000
Expenses:
Sitara Ltd. 10,500
Cost of material purchased/consumed 3 21,45,500
Less: Dividend realized from Sitara Ltd. (50,000) 4,500 1,81,000
Changes (Increase) in inventories of finished goods 4 (4,98,750) (5,00,000 x 10%)
Employee benefit expense 5 15,75,000 3. Cost of material purchased/
Finance cost 6 22,750 consumed
Depreciation and amortization expense 7 45,500 Chand Ltd. 13,93,000
Other expenses 8 8,43,250 Sitara Ltd. 4,72,500
Total expenses (II) 41,33,250 18,65,500
Profit before tax (II-III) 10,51,000 Less: Purchases by Sitara Ltd. From Chand
(1,75,000) 16,90,500
Ltd.
Direct expenses (Production)
Chand Ltd. 3,15,000
Sitara Ltd. 1,40,000 4,55,000 21,45,500
4. Changes (Increase) in inventories of fin- Question 26

ished goods
Minority interest should be presented in the consolidated balance sheetAs a part of liabilities.
Chand Ltd. 4,37,500
(a) As a part of equity of the parent’s shareholders.
Sitara Ltd. 75,250
(b) Separately from liabilities and the equity of the parent’s shareholders.
5,12,750
(c) As a part of assets.
Less: Unrealized profits ₹ 7,00,00 × (14,000) 4,98,750
20/100 Ans: (c)
Question 27
Wages and salaries:
Chand Ltd. 13,30,000 Minority of the subsidiary is entitled to
Sitara Ltd. 2,45,000 15,75,000 (a) Capital profits of the subsidiary company.
6 Finance cost (b) Revenue profits of the subsidiary company.

Interest: (c) Both capital and revenue profits of the subsidiary company.
Chand Ltd. 17,500 (d) Neither capital nor revenue profits of the subsidiary.
Sitara Ltd. 5,250 22,750
Ans: (c)
7. Depreciation
Chand Ltd. 31,500 Question 28
Sitara Ltd. 14,000 45,500
In consolidation of accounts of holding and subsidiary company is eliminated in full.
8. Other expenses
(a) Current liabilities of subsidiary company.
General & Administrative expenses:
(b) Reserves and surplus of both holding and subsidiary company.
Chand Ltd. 2,80,000
(c) Mutual indebtedness.
Sitara Ltd. 1,22,500
(d) Nothing.
4,02,500
Less: Consultancy fees received by Sitara (28,000) 3,74,500 Ans: (c)
Ltd. from Chand Ltd.
Royalty: Question 29
Sitara Ltd. 5,000

In consolidated balance sheet, the share of the outsiders in the net assets of the subsidiary must be
Less: Received by Chand Ltd. Selling and (5,000) Nil shown as
distribution Expenses: (e) Minority interest.
Chand Ltd. 3,32,500
(f) Capital reserve.
Sitara Ltd. 1,57,500
(g) Current liability.
4,90,000
(h) Current assets.
Less: Brokerage received by Chand Ltd. (21,250) 4,68,750
from Sitara Ltd. Ans: (a)
Question 30
8,43,250
Provision for Tax made by the subsidiary company will appear in the consolidated balance sheet as an
item of
Question 32
(i) Current liability.
(j) Revenue profit. King Ltd. acquires 70% of equity shares of Queen Ltd. as on 31st March, 20X1 at a cost of ₹ 140
lakhs. The following information is available from the balance sheet of Queen Ltd. as on 31st
(k) Capital profit. March, 20X1:
(l) Current assets.
₹ in lakhs
Ans: (a) Property, plant and equipment 240
Investments 110
Question 31
Current Assets 140
Hemant Ltd. purchased 80% shares of Power Ltd. on 1st January, 20X1 for ₹ 2,10,000. Loans & Advances 30
TheIssued capital of Power Ltd., on 1st January, 20X1 was ₹ 1,50,000 and the balance in the Profit &
15% Debentures 180
Loss Account was ₹ 90,000. During the year ended 31st December, 20X1, Power Ltd. earned
a profit of ₹ 30,000 and at year end,declared and paid a dividend of ₹ 22,500. What is the Current Liabilities 100
amount of minority interest as on 1st January, 20X1 and 31st December, 20X1? Also compute The following revaluations have been agreed upon (not included in the above figures):
goodwill/ capital reserve atthe date of acquisition.
Property, plant and equipment- up by 20% and Investments- down by 10%. King Ltd. purchased
Answer 31 the shares of Queen Ltd. @ ₹20 per share (Face value - ₹10). Calculate the amount of goodwill/
capital reserve on acquisition of shares of Queen Ltd.
Total dividend paid is ₹ 22,500 (out of post-acquisition profits), hence dividend received by
Hemant will be credited to P & L account. Hemant Ltd.’s share of dividend = ₹ 22,500 X 80% Answer 32
= ₹ 18,000
Revalued net assets of Queen Ltd. as on 31st March, 20X1
Goodwill on consolidation (at the dateofacquisi- ₹ ₹ ₹ in lakhs ₹ in lakhs

tion):
PPE [240 X 120%] 288
Cost of shares 2,10,000
Investments [110 X 90%] 99
Less: Face value of capital i.e. 80% of capital 1,20,000
Current Assets 140
Add: Share of capital profits [90,000 X 80 %] 72,000 (1,92,000)
Loans and Advances 30
Goodwill 18,000
Total Assets after revaluation 557
Less: 15% Debentures 180.0
- 1st January, 20X1:
Current Liabilities 100.0 (280)
20% of ₹ 2,40,000 [1,50,000 + 90,000] 48,000
Equity / Net Worth 277
- 31st December, 20X1:
King Ltd.’s share of net assets (70% of 277) 193.9
20% of ₹2,47,500 [1,50,000 + 90,000 + 30,000 – 22,500] 49,500
King Ltd.’s cost of acquisition of shares of Queen Ltd.
(₹140 lakhs) (140)
Capital reserve 53.9
Question 33
Particulars Note A Ltd. B Ltd.
From the following information, determine Minority Interest on the date of acquisition and No. (Rs.) (Rs.)
on the dateof consolidation in each case: I. Equity and Liabilities
Case Subsidi- % of Cost Date of Consolidation date (1) Shareholder’s Funds
aryCom- 1 5,00,000 2,00,000
Share Acquisition (a) Share Capital
pany
owned 2 2,97,200 1,82,000
(b) Reserves and Surplus
01-01-20X1 31-12-20X1
Share Profit Share Profit
Capi- andLoss Capi- andLoss
tal A/c tal A/c
Rs. Rs. Rs. Rs.
(a) Trade Payables 47,100 17,400
Case-A X 90% 2,00,000 1,50,000 75,000 1,50,000 85,000
(b) Short term borrowings 3 80,000
Case-B Y 75% 1,75,000 1,40,000 60,000 1,40,000 20,000
Total 9,24,300 3,99,400
Case-C Z 70% 98,000 40,000 20,000 40,000 20,000
II. Assets
Case-D M 95% 75,000 60,000 35,000 60,000 55,000
Answer 33
(a) Property, Plant andEquip-
Minority Interest = Equity attributable to minorities ment 4
Equity is the residual interest in the assets of an enterprise after deducting all its liabili- (b) Non-current Investments 3,90,000 3,15,000
ties i.e. in this case, it should be equal to Share Capital + Profit & Loss A/c
(2) Current assets 5
A = Share capital on 1.1.20X1 Inventories
(a) 3,40,000
B = Profit & loss account balance on 1.1.20X1 C = Share capital on 31.12.20X1 D = Profit & loss Trade receivables
(b) --
account balance on 31.12.20X1
(c) Cash & Cash equivalents
Minority Minority interest Minority interest as at the Total 1,20,000
as at the date of date of consolidation [E] X
% Shares
[C + D] Rs. 6 59,800 36,400
Owned acquisition
[E] 14,500 40,000
[E] x [A + B] Rs.
8,000
Case A [100-90] 10 % 22,500 23,500 9,24,300 3,99,400
Case B [100-75] 25 % 50,000 40,000 Notes to Accounts
Case C [100-70] 30 % 18,000 18,000
A Ltd. B Ltd.
Case D [100-95] 5% 4,750 5,750
Rs. Rs.
1. Share Capital
Question 34
5,000 shares of Rs. 100 each, fully paid up 5,00,000 -
A Ltd acquired 1,600 ordinary shares of Rs.100 each of B Ltd on 1st July, 20X1. On 31st December, 20X1,
2,000 shares of Rs. 100 each, fully paid up - 2,00,000
the balance sheets of the two companies were as given below:
Balance Sheet of A Ltd. and its subsidiary, B Ltd. as at 31st December, 20X1 Total 5,00,000 2,00,000
General Reserves 2,40,000 1,00,000
II. Assets
Profit & loss 57,200 82,000 (1) Non-current assets
Total 2,97,200 1,82,000 (a) Property, PlantEquip- and 5 7,41,000
ment
3. Short term borrowings 6 17,200
(b) Intangible assets
Bank overdraft 80,000 --
(2) Current assets
4. Property plant and equipment
Land and building 1,50,000 1,80,000
(b) Trade receivables 8 99,800
Plant & Machinery 2,40,000 1,35,000
Total 3,90,000 3,15,000 (c) Cash & Cash equivalents 9 22,500
Total 10,36,900
5. Non-current Investments
Investment in B Ltd (at cost) 3,40,000 -- Notes to Accounts
6. Cash & Cash equivalents

Rs.
Cash 14,500 8,000
1. Share Capital
The Profit & Loss Account of B Ltd. showed a credit balance of Rs.30,000 on 1st January, 20X1 out of 5,00,000
which a dividend of 10% was paid on 1st August, 20X1; A Ltd. credited the dividend received
2. 5,000 shares of Rs. 100 each
to its Profit & Loss Account. The Plant & Machinery which stood at Rs. 1,50,000 on 1st Janu-
ary, 20X1 was considered as worth Rs. 1,80,000 on 1st July, 20X1; this figure is to be considered Reserves and Surplus 2,40,000
while consolidating the Balance Sheets. The rate of depreciation on plant & machinery is 10%
Reserves 68,800
(computed on the basis of useful lives).
Profit & loss (Refer to W.N 8) 3,08,800
Prepare consolidated Balance Sheet as at 31st December, 20X1.
Total
Answer 34
Consolidated Balance Sheet of A Ltd. and its subsidiary, B Ltd. as at 31st December, 20X1 3. Trade Payables
A Ltd. 47,100
Add: B Ltd 17,400
Total 64,500
4. Short term borrowings
Bank overdraft 80,000
(2) Minority Interest 83,600
(3) Current Liabilities Land and building- A Ltd 1,50,000

(a) Trade Payables 3 64,500 Add: Land and building- B Ltd 1,80,000 3,30,000
(b) Short term borrowings 4 80,000 Plant & Machinery (Refer to W.N 7) 4,11,000
Total 10,36,900 Total 7,41,000
Goodwill (refer to W.N 6) 17,200
7. Inventories
A Ltd. 1,20,000
B Ltd. 36,400 Profit for 20X1:
Total 1,56,400 Total Rs.82,000

8 Trade Receivables Less: Rs.10,000
A Ltd. 59,800 Rs.72,000
B Ltd. 40,000
Proportionate upto 1st July, 20X1 on time
Total 99,800 basis (Rs. 72,000/2) 36,000
9 Cash & Cash equivalents Appreciation in value of Plant & Machinery 37,500
Cash of A Ltd 14,500 1,83,500
Add: cash of B Ltd. 8,000 Less: 20% due to outsiders (36,700)
Total 22,500 Holding company’s share 1,46,800
Share holding Pattern 1. Revenue profits of B Ltd.:
Total Shares of B Ltd 2,000 shares Profit after 1st July, 20X1 [(82,000 – 10,000) x ½] 36,000
Shares held by A Ltd 1,600 shares i.e. 80 % Less: Depreciation
Minority Shareholding 400 shares i.e. 20 % 10% depreciation on Rs.1,80,000 for 6 months 9,000
Less: Depreciation already charged for 2 nd

half
Working Notes:
year on 1,50,000 (7,500) (1,500)
1. The dividend @ 10% on 1,600 shares - Rs. 16,000 received by A Ltd. should have been cred-
34,500
ited to the investment A/c, being out of pre-acquisition profits. A Ltd., must pass a rectifi-
cation entry, viz. Less: 1/5 due to outsiders (6,900)
Profit & Loss Account Dr. Rs. 16,000 To Investment Share of A Ltd. 27,600
Rs.16,000
2. Minority interest:
2. The Plant & Machinery of B Ltd. would stand in the books at Rs. 1,42,500 on 1st July, 20X1,
considering only six months’ depreciation on Rs. 1,50,000 total depreciation being Par value of 400 shares (2,00,000 X 20%) 40,000
Rs. 15,000. The value put on the assets being Rs. 1,80,000, there is an appreciation tothe extent
Add: 1/5Capital Profits [WN 3] 36,700
of Rs.37,500 (1,80,000 – 1,42,500).
3. Capital profits of B Ltd. 1/5 Revenue Profits [WN 4] 6,900
83,600
Rs. Rs.
3. Cost of Control:
Reserve on 1st January, 20X1 (Assumed there 1,00,000
is no movement in reserves during the year Amount paid for 1,600 shares 3,40,000
and hence balance as on 1 st

January 20X1 is Less: Dividend out of pre-acquisition profits (16,000) 3,24,000
same as of 31st December 20X1) Par value of shares 1,60,000
Profit & Loss Account Balance on 1st January, 30,000

Capital Profits –share of A Ltd. [WN 3] 1,46,800 (3,06,800)
20X1
Cost of Control or Goodwill 17,200
Less: Dividend paid (20,000) 10,000
4. Value of plant & Machinery:
Notes to Accounts
2,40,000
B Ltd. 1,35,000 H Ltd. (Rs. S Ltd. (Rs.
inlacs) inlacs)
Add: Appreciation on 1st July, 20X1 [1,80,000
– (1,50,000 – 7,500)] 37,500 1. Share Capital Authorized share
1,72,500 capital
15,000 6,000
Equity shares of Rs. 10 each, fully paid up Issued
Add: Deprecation for 2nd half charged on pre-
and Subscribed:
revalued value 7,500
Equity shares of Rs. 10 each, fully paid up
Less: Depreciation on Rs.1,80,000 for 6 months (9,000) 1,71,000 12,000 4,800
Reserves and surplus General
4,11,000 2. Reserve
5. Profit & Loss Account (Consolidated): Profit and Loss Account:Total 2,784 1,380
Trade Payables
A Ltd. as given 57,200 2,715 1,620
Less: Dividend transferred to Investment A/c (16,000) 41,200 5,499 3,000

Creditors
Share of A Ltd. in revenue profits of B Ltd. 27,600
3.
(WN 4)
Bills Payable 1,461 854
68,800
372 160
Question 35
1,833 1,014
On 31st March, 20X1, the Balance Sheets of H Ltd. and its subsidiary S Ltd. stood as follows:
4. Short term provisions Provision
Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March, 20X1
for Taxation
855 394
Property, plant and equipmentLand and
5.
Non-current Investments 3,000 Buildings
(Shares in S Ltd.) 2,718 -
Plant and Machinery Furniture
(2) Current assets and Fittings 4,905 4,900
3,949 1,956 Total 1,845 586

(a) Inventories
Trade receivablesDebtors 9,468 5,486
(b) Trade receivables 6 2,960 1,562
6. Bills ReceivableTotal
(c) Cash and cash equivalents 1,490 204
Short term loans and advances 2,600 1,363
(d) Short term loans andadvances 7 520
360 199
Total
21,387 9,208 2,960 1,562
7.
Sundry Advances 520 --
The following information is also provided to you:

(b) Trade receivables 8 4,477
(a) H Ltd. purchased 180 lakh shares in S Ltd. on 31st March, 20X0 when the balances of General Reserve
(c) Short term loans and advances 9 520
and Profit and Loss Account of S Ltd. stood at Rs. 3,000 lakh and Rs. 1,200 lakh respectively.
(b) On 1st April, 20X0, S Ltd. declared a dividend @ 20% for the year ended 31st March, 20X0. H Ltd. cred-
(d) Cash and cash equivalents 10 1,694
ited the dividend received by it to its Profit and Loss Account. Total 27,530
(c) On 1st January, 20X1, S Ltd. issued 3 fully paid-up bonus shares for every 5 shares held out of balanc-
es of its general reserve as on 31st March, 20X0.
Notes to Accounts
(d) On 31st March, 20X1, all the bills payable in S Ltd.’s balance sheet were acceptances in favour of H
Ltd. But on that date, H Ltd. held only Rs. 45 lakh of these acceptances in hand, the rest having been (Rs. in (Rs. in
endorsed in favour of its trade payables. lacs) lacs)
(e) On 31st March, 20X1, S Ltd.’s inventory included goods which it had purchased for Rs. 100 lakh from H 1. Share Capital
Ltd. which made a profit @ 25% on cost.
Authorized share capital 15,000
Prepare a Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March, 20X1.
Equity shares of Rs.10 each, fully paid upIssued
Answer35 and Subscribed:
Equity shares of Rs. 10 each, fully paid up Total 12,000
Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March, 20X1
Reserves and surplus 12,000
Particulars Note (Rs. in 2.
No. Lacs) Capital Reserve (Note 5) General Re-
serve (2,784 + 108) Profit and Loss Ac-
I. Equity and Liabilities count:
(1) Shareholder’s Funds H Ltd. 2,715
Share Capital 1 12,000
(a) Less: Dividend wrongly credited 360 Unrealized
(b) Reserves and Surplus Profit 20 ( 380)
7,159
(2) Minority Interest [W.N.6] 2,335
3,120
(3) Current Liabilities Add: Share in S Ltd.’s Revenue profits 612 Total
(a) Trade payables 1,320

2,802
(b) Short term provisions 2,892 7,159
1,249
2
3 2,947
4 3. Trade payables
(c) Other current liabilities 5 1,200 Creditors
27,530 H Ltd. 1,461

Total S Ltd. 854 2,315
II. Assets Bills Payable
(1) Non-current assets 6 14,954 H Ltd. Rs. 372
Property, Plant and Equipment S Ltd. Rs. 160
(2) Current assets Rs. 532

Less: Mutual owing Rs. (45) 487 2,802
(a) Inventories 7 5,885
4. Short term provisions 10. Cash and cash equivalents

Provision for Taxation Cash and Bank Balances 1,694
H Ltd. 855
S Ltd. 394 Share holding pattern of S Ltd.
Total 1,249 Shares as on 31st March, 20X1 (Includes bonusshares 480 lakh shares (4,800 lakhs/
issued on 1st January, 20X1)
5. Other current liabilities Rs. 10)
Dividend payable H Ltd.’s holding as on 1st April, 20X0 180 lakhs
H Ltd. 1,200 Add: Bonus received on 1st January, 20X1 108 lakhs (180 / 5 × 3)
6. Property, plant and equipment Total H Ltd.’s holding as on 31st March, 20X1 288 lakhs i.e. 60 %
Land and Buildings [288/480×100]
H Ltd. 2,718 Minority Shareholding 40%
Plant and Machinery Working Notes:

S Ltd.’s General Reserve Account
H Ltd. Rs. 4,905
Rs. in lakhs Rs. in
S Ltd. Rs. 4,900 9,805 lakhs
Furniture and Fittings
To Bonus to equity By Balance b/d 3,000
H Ltd. Rs. 1,845
shareholders (WN-8) 1,800 By Profit and Loss A/c 180
S Ltd. Rs. 586 2,431
(Balancing figure)
To Balance c/d 1,380
Total 14,954
7. Inventories
Stock
H Ltd. 3,949
S Ltd. 1,956 _
5,905 3,180 3,180

Less: Unrealized profit (20) 5,885 S Ltd.’s Profit and Loss Account
8. Trade receivables Rs. in lakhs Rs. in
Debtors lakhs
H Ltd. Rs. 2,600 To General Reserve By Balance b/d 1,200
S Ltd. Rs. 1,363 3,963 [WN 1] 180 By Net Profit for the
year*
Bills Receivable To Dividend paid 1,200
(Balancing figure)
H Ltd. Rs. 360 (20% on Rs.3,000 lakhs) 600
S Ltd. Rs. 199 To Balance c/d 1,620
Rs. 559
Less: Mutual Owing Rs. (45) 514 4,477 2,400 2,400
9. Short term loans and advances
*Out of Rs. 1,200 lakhs profit for the year, Rs. 180 lakhs has been transferred to reserves. Distri-
Sundry Advances 520
bution of Revenue profits
Note: The question can also be solved by taking Rs. 1,020 lakhs as post acquisition Profit and Loss bal- Question 36 Illustration
ance and Rs. 180 lakhs as post acquisition General Reserve balance. The final answer will be same.
From the following data, determine in each case:
Calculation of Capital Profits
(1) Minority interest at the date of acquisition and at the date of consolidation.
Rs. in
lakhs (2) Goodwill or Capital Reserve.
General Reserve on the date of acquisition less bonus 1,200 (3) Amount of holding company’s profit in the consolidated Balance Sheet assuming
holding company’s own Profit & Loss Account to be Rs. 2,00,000 ineach case:
shares (Rs. 3,000 – Rs. 1,800)
Profit and loss account on the date of acquisition less 600 Sub- % Cost Date of Consolidation
sidiary acquisition
dividend paid (Rs. 1,200 – Rs. 600) shares Date
Com-
owned
pany
1,800 1.1.20X1 31.12.20X1
H Ltd.’s share = 60% of Rs. 1,800 lakhs = Rs. 1,080 lakhs Minority interest = Rs.1,800 – Rs. 1,080 = Rs. 720 Case Share Profit & Share Profit &
lakhs Capital Capital
Loss Loss
Calculation of capital reserve Ac- Ac-
count count
Rs. in lakhs Rs. Rs.
Rs. Rs. Rs.
Paid up value of shares held (60% of Rs.4,800) 2,880
Case 1 A 90% 1,40,000 1,00,000 50,000 1,00,000 70,000
Add: Share in capital profits [WN 4] 1,080 Case 2 B 85% 1,04,000 1,00,000 30,000 1,00,000 20,000
3,960 Case 3 C 80% 56,000 50,000 20,000 50,000 20,000

Case 4 D 100% 1,00,000 50,000 40,000 50,000 55,000
Less: Cost of shares less dividend received (Rs. 3,000 – Rs. 360) (2,640)
Capital reserve 1,320
Calculation of Minority Interest Answer 36
II Rs. in lakhs (1)

Minority Interest = Equity attributable to minorities
40% of share capital (40% of Rs. 4,800) 1,920
Equity is the residual interest in the assets of an enterprise after deducting all its liabilities i.e. inthis
Add: Share in revenue profits [WN 3] 480
case it should be equal to Share Capital + Profit & Loss A/c
Share in capital profits [WN 4] 720
Minority % Minority Minority interest as
3,120 interest as at
Shares at the date of
the date of
Owned consolidation
acquisition
[E] x [A + B] Rs.
[E] [E] X [C + D] Rs.
Case 1 [100-90] 10 % 15,000 17,000
Case 2 [100-85] 15 % 19,500 18,000
Case 3 [100-80] 20 % 14,000 14,000
Case 4 [100-100] NIL Nil Nil
A = Share capital on 1.1.20X1

B = Profit & loss account balance on 1.1.20X1C = Share capital on 31.12.20X1
D = Profit & loss account balance on 31.12.20X1

- Rs. 10 per share). Exe Ltd. purchased the shares of Zed Ltd. @ Rs. 20 per share. Calculate the
(2) Calculation of Goodwill or Capital Reserve amount of goodwill/capital reserve on acquisition of shares of Zed Ltd.
Shareholding Cost Total Equity Parent’s Goodwill Capi- Answer 37

talRe-
Portion of Revalued net assets of Zed Ltd. as on 31st March, 20X1
serve
equity
Rs. in lakhs Rs. in lakhs
% [F] [G] [A] + [B] = [F] x Rs. [G] –
Rs. [H] – Property, plant and equipment [120 X 120%] 144.0
[C]
[C] [H]
[G] Investments [55 X 90%] 49.5
=H
Case 1 90 % 1,40,000 1,50,000 1,35,000 5,000 — Current Assets 70.0
Case 2 85 % 1,04,000 1,30,000 1,10,500 — 6,500 Loans and Advances 15.0
Case 3 80 % 56,000 70,000 56,000 Nil Nil Total Assets after revaluation 278.5
Case 4 100 % 1,00,000 90,000 90,000 10,000 — Less: 15% Debentures 90.0
(3) The balance in the Profit & Loss Account on the date of acquisition (1.1.20X1) is Capital prof- Current Liabilities 50.0 (140.0)
it, as such the balance of Consolidated Profit & Loss Account shall be equal to Holding
Equity / Net Worth 138.5
Co.’s profit.
On 31.12.20X1 in each case the following amount shall be added or deducted from the balance of hold- Exe Ltd.’s share of net assets (70% of 138.5) 96.95
ing Co.’s Profit & Loss account. Exe Ltd.’s cost of acquisition of shares of Zed Ltd.
(Rs. 70 lakhs – Rs. 7 lakhs*) 63.00

Question 37 Illustration
Capital reserve 33.95
Exe Ltd. acquires 70% of equity shares of Zed Ltd. as on 31st March, 20X1 at a cost of Rs. 70 lakhs. Thefol-
lowing information is available from the balance sheet of Zed Ltd. as on 31st March, 20X1: * Total Cost of 70 % Equity of Zed Ltd Rs. 70 lakhs
Purchase Price of each share Rs. 20 Number of

Rs. in lakhs
shares purchased [70 lakhs /Rs. 20] 3.5 lakhs
Dividend @ 20 % i.e. Rs. 2 per share Rs. 7 lakhs
Investments 55
Since dividend received is for pre-acquisition period, it has been reduced from the cost of in-
Current Assets 70 vestment
Loans & Advances 15 in the subsidiary company.
15% Debentures 90
Current Liabilities 50
A Ltd. acquired 70% of equity shares of B Ltd. on 1.4.20X1 at cost of Rs. 10,00,000 when B Ltd. had an
equity share capital of Rs. 10,00,000 and reserves and surplus of Rs. 80,000. In the four consecutive
The following revaluations have been agreed upon (not included in the above figures): years,B Ltd. fared badly and suffered losses of Rs. 2,50,000, Rs. 4,00,000, Rs. 5,00,000 and Rs. 1,20,000
respectively. Thereafter in 20X5- X6, B Ltd. experienced turnaround and registered an annual prof-
Property, plant and equipment Up by 20%
it of Rs. 50,000. In the next two years i.e. 20X6-X7 and 20X7-X8, B Ltd. recorded annual profits of Rs.
Investments Down by 10% 1,00,000 and Rs. 1,50,000 respectively. Show the minority interests and cost of control at the end of
Zed Ltd. declared and paid dividend @ 20% on its equity shares as on 31st March, 20X1 (Face value each year for the purpose of consolidation.
Answer 38
The losses applicable to the minority in a consolidated subsidiary may exceed the minority interest in
the equity of the subsidiary. In such cases, AS 21 prescribes that the excess, and any further losses ap-
plicable to the minority, are adjusted against the majority interest except to the extent that the minority
Balance Nil (1,20,000)
has a binding obligation to, and is able to, make good the losses. If the subsidiary subsequently reports
profits, all such profits are allocated to the majority interest until the minority’s share of losses previously 20X5-X6 50,000 15,000 35,000 2,44,000
absorbed by the majority has been recovered.
Profit share (15,000) 15,000 (15,000) 42,000
aWhere the minority interest has a binding obligation (say by way of a shareholders’ agreement), then
of minority
the share of losses will be attributed to the minority interest even if it exceeds the minority interest in the
equity (i.e., debit balance in minority interest). Since information on the existence of a binding obligation adjusted
is not given in the question, we solve as if such obligation does not exist, and hence the minority interests against
will be computed as follows:
losses of
Year Profit/ Minority Additional Minority’s Share of Cost minority
(Loss) Interest Consolidated P losses borne by of
(30%) & L (Dr.) A Ltd. Con- absorbed
trol by
Cr. (for the
year ended Holding Co.
balance) Balance Nil 50,000

20X6-X7 1,00,000 30,000 70,000
Rs. Balance
Profit share (30,000) 30,000 (30,000) 12,000 2,44,000
At the time -
of minority
of 3,24,000
adjusted
acquisition -
in 20X1 (W.N.) against
losses of
20X1-X2 (2,50,000) (75,000) (1,75,000) 2,44,000
minority
(W.N.)
absorbed
Balance 2,49,000 by
20X2-X3 (4,00,000) (1,20,000) (2,80,000) 2,44,000 Holding Co.
Balance 1,29,000 Balance Nil 100,000
20X3-X4 (5,00,000) (1,50,000) (3,50,000) 2,44,000 20X7-X8 1,50,000 45,000 1,05,000 (12,000) Nil 2,44,000
(21,000) (12,000) 12,000
Loss of 21,000 (21,000) 21,000 21,000 Balance 33,000 1,17,000
minority
Working Note:
borne by
Holding Co. Calculation of Minority interest and Cost of control on 1.4.20X1
Balance Nil (3,71,000) Share of Minority

Holding Interest
20X4-X5 (1,20,000) (36,000) (84,000) 2,44,000
Co.
100% 70% 30%
Loss of
(Rs.) (Rs.) (Rs.)
minority 36,000 (36,000) 36,000 57,000
Share Capital 10,00,000 7,00,000 3,00,000
borne by
Reserve 80,000 56,000 24,000
Holding Co.
7,56,000 3,24,000
Less: Cost of investment (10,00,000) 2,25,000

Goodwill 2,44,000
Total 10,55,000
Question 39 Illustration II ASSETS

1. Non-Current Assets
Prepare consolidated balance sheet of H Ltd. and its subsidiary as at 31 March, 20X1 from the following
information: PPE 5 8,00,000
2. Current Assets 6 2,55,000

H Ltd. S Ltd.
Total 10,55,000
Rs. Rs.
PPE 5,00,000 3,00,000 Notes to Accounts
Investments Amounts (Rs.)
(20,000 equity shares of S Ltd.) 2,20,000
1 Share capital
Current Assets 1,55,000 1,00,000
50,000 Equity Shares @ Rs.10 each 5,00,000
Share capital (Fully paid equity shares of Rs. 10 5,00,000 2,50,000
2 Reserve and Surplus
each)
Profit and loss account 2,00,000 1,00,000 Capital Reserve (W.N. ) 60,000
Trade Payables 1,75,000 50,000 Profit and loss account 2,00,000
2,60,000
H Ltd. acquired the shares of S Ltd. on 31st March, 20X1.
3 Minority Interest
Answer 39 Paid up value of shares 50,000
Percentage of holding: Add: Share in Profit and loss account 20,000 70,000
No. of Shares Percentage 4 Trade payables
Holding Co : 20,000 (80%) H Ltd. 1,75,000
Minority shareholders : 5,000 (20%) S Ltd. 50,000
TOTAL SHARES : 25,000 2,25,000

5 PPE
Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd.as at 31st March,20X1 H Ltd. 5,00,000
S Ltd. 3,00,000
Note No Amount (Rs.)
8,00,000
I EQUITY AND LIABILITIES
1 Shareholder’s Fund 6 Current Assets
H Ltd. 1,55,000
S Ltd. 1,00,000
(b) Reserve and Surplus 2 2,60,000
2,55,000
2 Minority interest 3
Working Note:
3 Current Liabilities 70,000
(a) Trade payables 4 Determination of Goodwill/(Capital Reserve) (Rs.)
Cost of investment 2,20,000
(a) Trade payables 4 1,60,000
Less: Paid up value of shares (80% of 2,50,000) 2,00,000
Total 3,94,000
Share in pre-acquisition profits (80% of 1,00,000) 80,000
II ASSETS
(2,80,000)
1 Non-Current Assets:
Capital Reserve (60,000)
PPE 5 2,30,000
Intangible Asset 6 20,000
2 Current Assets 7 1,44,000
H Ltd. and S Ltd. provide the following information as at 31st March,20X2:
Total 3,94,000
H Ltd. S Ltd. Notes to Accounts
Rs. Rs. Amount

(Rs.)
PPE 1,00,000 1,30,000
Investments (8,000 equity shares of S Ltd.) 1,26,000 1 Share capital 1,50,000
15,000 Equity Shares @ Rs.10 each
Current Assets 74,000 70,000
Share capital (Fully paid equity shares of Rs.10 each) 1,50,000 1,00,000
Profit and loss account 50,000 40,000 Profit and loss account (Rs. 50,000+ 80% of 9/12 x 10,000) 56,000
3 Minority Interest
Trade Payables 1,00,000 60,000
Additional information:H Ltd. acquired the shares of S Ltd. on 1-7-20X1 and Balance of profit and loss
account of S Ltd. on 1-4- 20X1 was 30,000.
Prepare consolidated balance sheet of H Ltd. and its subsidiary as at 31st March, 20X2.
Answer 40
Percentage of holding:
No. of Shares Percentage

Holding Co. : 8,000 (80%)
Minority shareholders : 2,000 (20%)
TOTAL SHARES : 10,000
Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March, 20X2
Note No Amount (Rs.)

I EQUITY AND LIABILITYES
1 Shareholder’s Fund
(b) Reserve and Surplus 2 56,000
2 Minority interest 3 28,000
Share capital (20% of Rs. 1,00,000) 20,000Share in

Particulars Note Virat Ltd. Anushka Ltd. (Rs.)
Profit and loss account (Rs. 40,000 X 20%) 8,000 28,000 No. (Rs.)
4 Trade payables H Ltd.
S Ltd. 1,00,000
60,000 1 6,00,000 4,00,000
(a) Share Capital
PPE 1,60,000 2 1,00,000 1,00,000
5 H Ltd.
(2) Non-current Liabilities Long
S Ltd. 1,00,000 Term Borrowings
2,00,000 1,00,000
1,30,000 (3) Current Liabilities
2,30,000 (a) Trade Payables
1,00,000 1,00,000
6 Total
10,00,000 7,00,000
Intangible Asset 1,26,000 II. Assets
Cost of Investment (1) Non-current assets
Less: Paid up value of shares (80% of Rs. 1,00,000) Share in (80,000) (a) Property, Plant andEquip- 4,00,000 3,00,000
pre-acquisition profits ment
(26,000)
80% of [30,000+3/12(40,000-30,000)]
20,000
Goodwill Current Assets
7 H Ltd. (b) Non-current
74,000 investments 3 3,20,000 -
S Ltd.
70,000 (2) Current Assets
1,44,000 Inventories
(a) 1,60,000 2,00,000
(b) Trade Receivables
Question 41 Illustration 80,000 1,40,000
(c) Cash & Cash Equivalents
40,000 60,000
From the Balance Sheets and information given below, prepare Consolidated Balance Sheet of Virat
Ltd. and Anushka Ltd. as at 31st March. Virat Ltd. holds 80% of Equity Shares in Anushka Ltd. since its 10,00,000 7,00,000
(Anushka Ltd.’s) incorporation. Total
Balance Sheet of Virat Ltd. and Anushka Ltd. as at 31st March, 20X1
Notes to Accounts
Particulars (Rs.) Virat Ltd. Anushka Ltd.

(Rs.) (Rs.)
1. Share capital
60,000 equity shares of Rs. 10 each fully paid 6,00,000 --
up
40,000 equity shares of Rs. 10 each fully paid -- 4,00,000
up
Total 6,00,000 4,00,000

Notes to Accounts
General Reserve 1,00,000 1,00,000 Particulars Rs. Rs.
Total 1,00,000 1,00,000 1. Share capital
3. Non-current investments 60,000 equity shares of Rs.10 each fully paid upRe- 6,00,000
2. serves and Surplus
Shares in Anushka Ltd 3,20,000 --
1,00,000
Answer 41 General Reserve 80,000
Consolidated balance Sheet of Virat Ltd. and its Subsidiary Anushka Ltd. as at 31st March, 20X1 Add: General reserve of Anushka Ltd (80%) Total 1,80,000
3. Minority interest
Particulars Note Amount (Rs.)
1,00,000
I EQUITY AND LIABILITIES:
4 20% share in Anushka Ltd (WN 3)
(1) Shareholders’ Funds: 2,00,000
Long term borrowings
Long term borrowings of Virat 1,00,000
(b) Reserve and Surplus 2 1,80,000 Add: Long term borrowings of Anushka 3,00,000
(2) Minority Interest 3 1,00,000 Total
(3) Non-Current Liabilities: 5. Trade payables
Long Term Borrowings 4 3,00,000 Trade payables of Virat 1,00,000
(4) Current Liabilities: Add: Trade payables of Anushka 1,00,000

Trade Payables 5 2,00,000 Total 2,00,000
6. Property, Plant and Equipment (PPE)

Total 13,80,000
PPE of Virat Ltd 4,00,000
II ASSETS: Add: PPE of Anushka Ltd 3,00,000
(1) Non-Current Assets
Total 7,00,000
Property, Plant & Equipment 6 7,00,000
7. Inventories
(2) Current Assets:
(a) Inventories Inventories of Virat Ltd 1,60,000
(b) Trade receivables 7 3,60,000 Add: Inventories of Anushka Ltd 2,00,000
(c) Cash and Cash Equivalents 8 2,20,000 Total 3,60,000

9 1,00,000 8. Trade receivables
Total 13,80,000 Trade receivables of Virat Ltd 80,000
Add: Trade receivables of Anushka Ltd 1,40,000
Total 2,20,000
holds 75% of the equity capital and voting power in B Ltd. A Ltd. purchases inventories costing Rs.
150 lacs from B Ltd at a price of Rs. 200 lacs. The entire inventories remain unsold with ALtd. at the
9 Cash and cash equivalents
financial year end i.e. 31 March 20X1.
Cash and cash equivalents of Virat Ltd 40,000 Suggest the accounting treatment for the above mentioned transactions in the consolidated finan-
cialstatements of A Ltd. giving reference of the relevant guidance/standard.
Add: Cash and cash equivalents of Anushka Ltd 60,000
Total 1,00,000 Answer 42
Working Notes:Basic Information As per para 16 and 17 of AS 21, intragroup balances and intragroup transactionsand resulting unrealized
profits should be eliminated in full. Unrealized losses resulting from intragroup transactions should also
Company Status Dates Holding Status be eliminated unless cost cannot be recovered.
Intragroup balances and intragroup transactions, including sales, expenses and dividends, are elimi-
Holding Co. = Virat Ltd. Acquisition: Holding Company = 80%
nated in full. Unrealized profits resulting from intragroup transactions that are included in the carrying
Anushka’s Minority Interest = 20%
Subsidiary = AnushkaLtd. amount of assets, such as inventory and fixed assets, are eliminated in full. Unrealized losses resulting
Incorporation
from intragroup transactions that are deducted in arriving at the carrying amount of assets are also
eliminated unless cost cannot be recovered.
Consolidation: 31st
March, 20X1 One also needs to see whether the intragroup transaction is “upstream” or “down-stream”. Up-
stream transaction is a transaction in which the subsidiary company sells goods to holding company.
Analysis of General Reserves of Anushka Ltd While in the downstream transaction, holding company is the seller and subsidiary company is the
Since Virat holds shares in Anushka since its incorporation, the entire Reserve balance of Rs.1,00,000 buyer.
will be Revenue.
In the case of upstream transaction, since the goods are sold by the subsidiary to holding compa-
Consolidation of Balances ny; profit is made by the subsidiary company, which is ultimately shared by the holding company
and the minority shareholders. In such a transaction, if some goods remain unsold at the balance
Holding- 80%, Total Minority Holding Company sheet date, the unrealized profit on such goods should be eliminated from minority interest as well
Interest as from consolidated profit on the basis of their share-holding besides deducting the same from
Minority - 20%
unsold inventory.
Equity Capital 4,00,000 80,000 3,20,000 - But in the case of downstream transaction, the whole profit is earned by the holding company, there-
fore, whole unrealized profit should be adjusted from unsold inventory and consolidated profit and loss
General account only irrespective of the percentage of the shares held by the parent.
Reserves 1,00,000 20,000 Nil (pre-acq) 80,000 (post-acq) Using above mentioned guidance, following adjustments would be required:
Total 1,00,000 3,20,000 80,000 a. This would be the case of downstream transaction. In the consolidated profit and loss ac-
Cost of count for the year ended 31 March 20X1, entire transactionof sale and purchase of Rs. 200
lacs each, would be eliminated by reducingboth sales and purchases (cost of sales).
Investment (3,20,000) -
Further, the unrealized profits of Rs. 20 lacs (i.e. Rs. 200 lacs – Rs. 180 lacs), would be elimi-
Goodwill/capit NIL
nated from the consolidated financial statements for financial year ended 31 March 20X1,
al reserve
by reducing the consolidated profits/ increasing the consolidated losses, and reducing the
Parent’s 1,00,000 value of closing inventories as of 31 March 20X1.
Balance b. This would be the case of upstream transaction. In the consolidated profitand loss ac-
count for the year ended 31 March 20X1, entire transaction ofsale and purchase of Rs. 200
Amount for 1,80,000
lacs each, would be eliminated by reducing both sales and purchases (cost of sales).
Consolidated
Further, the unrealized profits of Rs. 50 lacs (i.e. Rs. 200 lacs – Rs. 150 lacs), would be elim-
Balance Sheet inated in the consolidated financial statements for financial year ended 31 March 20X1, by
reducing the value of closing inventories by Rs.50 lacs as of 31 March 20X1. In the consoli-
Question 42Illustration dated balance sheet as of 31 March 20X1, A Ltd.’s share of profit from B Ltd will be reduced
by Rs. 37.50lacs (being 75% of Rs. 50 lacs) and the minority’s share of the profits of B Ltd
A Ltd. holds 80% of the equity capital and voting power in B Ltd. A Ltd. sells inventories costing Rs. 180 would be reduced by Rs.12.50 lacs (being 25% of Rs.50 lacs).
lacs to B Ltd at a price of Rs. 200 lacs. The entire inventories remain unsold with B Ltd. at the A Ltd.
Finance cost 5 150

H Ltd and its subsidiary S Ltd provide the following information for the year ended 31st March, 20X3:
H Ltd. S Ltd.
Total expenses 1,769
(Rs. in lacs) (Rs. in lacs)
Notes to Accounts
Increase in Inventory (closing less opening) 1,000 200 Rs. in Rs. in

Lacs Lacs
Raw material consumed 800 200
1. Revenue from operations Sales

and other incomeH Ltd.
Administrative Expenses 200 100 S Ltd. 5,000
Selling and Distribution Expenses 200 50 1,000
Interest 100 50 Less: Inter-company sales 6,000
Consultancy fees received by H Ltd. from S Ltd.Com- (120)

Depreciation 100 50
mission received by S Ltd. from H Ltd.
(5)
Other Information:
Cost of material purchased/consumed HLtd.
(10) 5,865
H Ltd. sold goods to S Ltd. of Rs. 120 lacs at cost plus 20%. Inventory of S Ltd. includes such goods valuing Rs. S Ltd.
24 lacs. Administrative expenses of S Ltd. include Rs. 5 lacs paid to H Ltd. as consultancy fees. Selling and 2.
distribution expenses ofH Ltd. include Rs.10 lacs paid to S Ltd. as commission.
800
H Ltd. holds 80% of equity share capital of Rs.1,000 lacs in S Ltd. prior to 20X1-20X2.H Ltd. took credit to its
200
Profit and Loss Account, the proportionate amount of dividend declared and paid by S Ltd. for the year Less: Purchases by S Ltd. from H Ltd.Direct
20X1-20X2. expenses (Production) 1,000
Prepare a consolidated statement of profit and loss.. H Ltd.S Ltd. (120) 880
Answer 43 Changes of inventories of finished goods HLtd.

200
Consolidated statement of profit and loss of H Ltd. and its subsidiary S Ltd. for the year ended on 31st S Ltd.
100 300
March, 20X3 20
1,180
Particulars Note No. Rs. in Lacs Less: Unrealized profits Rs. 24 lacs × 120
3.
I. Revenue from operations 1 5,865 1,000
II. Total Income 5,865 200
III. Expenses (4) 1,196
Cost of material purchased/consumed 2 1,180
Changes of inventories of finished goods 3 (1,196)
4. Employee benefits and expensesWages
CA CS CMA Mentoring Program Reviews and salaries:

H Ltd.S Ltd.
800
Finance cost Interest:H Ltd.
150 950
S Ltd.
5.
DepreciationH Ltd.
S Ltd.
100
Other expenses Administrativeexpenses
50 150
H Ltd.S Ltd.
6.
Less: Consultancy fees received by H Ltd. from S Ltd.Sell-
ing and distribution Expenses: 100
H Ltd. 50 150
7.
200
100
(5) 295
S Ltd.
Less: Commission received by S Ltd. from H Ltd. 200
50
(10) 240
535
Question 44 Illustration 20X0 20X1
Subsidiary B Ltd. provides the following balance sheet: (Rs.) (Rs.)
Particulars Note No. 20X0 20X1 1. Share capital
(Rs.) (Rs.) 5,000 equity shares of Rs.10 each, fully paid upReserves and
2. Surplus
General Reserves Short term bor-
I. Equity and Liabilities rowingsBank overdraft
3.
(1) Shareholder’s Funds Short term provisions
(a) Share Capital 1 5,00,000 5,00,000
5,00,000
7,14,000 4.
(b) Reserves and Surplus 5,00,000
(2) Current Liabilities 2,86,000
(a) Short term borrowings 1,70,000 7,14,000
(b) Trade Payables 4,94,000 --
(c) Short-term provisions 4,30,000 1,70,000
Total 23,08,000
2
Provision for taxation Property, 3,10,000 4,30,000
2,86,000 plant and equipment
5.
Cost
3,20,000 3,20,000
3 Less: DepreciationTotal (48,000) (96,000)
Other current AssetsPre- 2,72,000 2,24,000
-- paid expenses
6.
4,90,000
72,000 48,000
4
(a) Also consider the following information:
3,10,000
(b) B Ltd. is a subsidiary of A Ltd. Both the companies follow calendar year as the account-
15,86,000 ingyear.
II. Assets A Ltd. values inventory on weighted average basis while B Ltd. used FIFO basis. To bring B
(1) Non-current assets Ltd.’s values in line with those of A Ltd, its value of inventory is required to be reduced by
(a) Property, PlantEquip- and 5 2,72,000 2,24,000
(c) Rs.12,000 at the end of 20X0 and Rs. 34,000 at the end of 20X1.
ment 6
(d) B Ltd. deducts 1% from Trade Receivables as a general provision against doubtful debts.
(b) Non-current Investment
4,00,000 Prepaid expenses in B Ltd. include advertising expenditure carried forward of Rs. 60,000 in 20X0an-
(2) Current assets dRs. 30,000 in 20X1, being part of initial advertising expenditure of Rs. 90,000 in 20X0 which is being
(a) Inventories written off over three years. Similar amount of advertising expenditure of A Ltd. has been fully written
5,97,000 7,42,000 off in 20X0.
5,94,000 8,91,000 Restate the balance sheet of B Ltd. as at 31st December, 20X1 after considering the above information,
(c) Cash & CashEquiv- for the purpose of consolidation. Would restatement be necessary to make the accounting poli-
alents 51,000 3,000 cies adopted by A Ltd. and B Ltd. uniform.
(d) Other current assets 72,000 48,000
Total 15,86,000 23,08,000
Answer 44 Restated Balance Sheet of B Ltd. as at 31st December, 20X1
As per para 20 and 21 of AS 21, Consolidated financial statements: Particulars Note No. (Rs.)
Consolidated financial statements should be prepared using uniform accounting policies for like I. Equity and Liabilities
transactions and other events in similar circumstances. If it is not practicable to use uniform ac-
counting policies in preparing the consolidated financial statements, that fact should be disclosed (1) Shareholder’s Funds
together with the proportions of the items in the consolidated financial statements to which the (a) Share Capital 1 5,00,000
different accounting policies have been applied.
If a member of the group uses accounting policies other than those adopted inthe consolidated fi-
nancial statements for like transactions and events in similar circumstances, appropriate adjustments
are made to its financial statements when they are used in preparing the consolidated financial (a) Short term borrowings
statements.
(b) Trade Payables
Accordingly, in the given case, restatement would be required to make the accounting policies of A Ltd
(c) Short-term provision
and B Ltd uniform.
Adjusted reserves of B Ltd.:
Total
II. Assets
Rs. Rs.
Reserves as given 7,14,000
(a) Property, Plant and Equipment
Add: Provision for doubtful debts
(b) Non-current Investment
{[8,91,000 / 99 X 100]-8,91,000} 9,000
(2) Current assets
7,23,000
(a) Inventories
Less: Reduction in value of Inventory 34,000
Advertising expenditure to be written off 30,000 (64,000)
2 6,59,000
Adjusted reserves 6,59,000
Note: No adjustment would be required in respect of opening inventory of B Ltd as that will not have
any impact on P&L. 3 1,70,000
4,94,000
4 4,30,000
22,53,000
5 2,24,000
4,00,000
6 7,08,000
7 9,00,000
(c) Cash & Cash Equivalents 3,000
(d) Other current assets 8 18,000
Total 22,53,000
ceived by XYZ will be credited to P & L.

Notes to Accounts
XYZ Ltd.’s share of dividend = Rs. 15,000 X 80% = Rs. 12,000
20X1 (Rs.)
In the books of XYZ Ltd.
1. Share capital Rs. Rs.
5,000 equity shares of Rs 10 each, fully paid upReserves 5,00,000 Bank A/c Dr. 12,000
and Surplus To Profit & Loss A/c 12,000
2.
General Reserves (refer to WN)Short 6,59,000 (Dividend received from ABC Ltd credited to
term borrowings
3. P&L A/c being out of post-acquisition profits –
Bank overdraft
1,70,000 as explained above)
Short term provisions Provision for
4. Goodwill on consolidation (at the date of Rs. Rs.
taxation Property, plant and equip-
ment 4,30,000 acquisition):
5. Cost Cost of shares 1,40,000

Less: DepreciationTotal 3,20,000 Less: Face value of capital i.e. 80% of capital 80,000
Inventory (96,000) Add: Share of capital profits [60,000X 80 %] 48,000 (1,28,000)
Actual inventory 2,24,000 Goodwill 12,000
6.
- 1st January, 20X1:
7,42,000
20% of Rs. 1,60,000 [1,00,000 + 60,000] 32,000
Less: Change in method of valuationTotal (34,000) - 31st December, 20X1: 33,000
Trade receivables 7,08,000 20% of Rs. 1,65,000 [1,00,000 + 60,000 +
7. Actual trade receivables 20,000 – 15,000]
Add: Adjustment for provisionTotal 8,91,000
9,000 Question 46 Illustration
Other current Assets
Prepaid expenses 9,00,000 Variety Ltd. holds 46% of the paid-up share capital of VR Ltd The shares were acquired at a market
8. price of Rs. 17 per share. The balance of shares of VR Ltd. are held by a foreign collaborating company.
A memorandum of understanding has been entered into with the foreign company providing for the
48,000 following:
(a) The shares held by the foreign company will be sold to Variety Ltd. The price per
share will be calculated by capitalising the yield at 15%. Yield, for this purpose, would
mean 40% of the average of pre-tax profits for the last 3 years, which were Rs. 30
XYZ Ltd. purchased 80% shares of ABC Ltd. on 1st January, 20X1 for Rs. 1,40,000. The issued capital of
lakhs, Rs. 40 lakhs and Rs. 65 lakhs.
ABC Ltd., on 1st January, 20X1 was Rs. 1,00,000 and the balance in the Profit & Loss Account was
Rs. 60,000. (b) The actual cost of the shares to the foreign company was Rs. 5,40,000 only. The
During the year ended 31st December, 20X1, ABC Ltd. earned a profit of Rs. 20,000 and at year end, profit that would accrue to them would be taxable at an average rate of 30%. The tax
declared and paid a dividend of Rs. 15,000. payable will be deducted from the proceeds and Variety Ltd. will pay it to the Govern-
ment.
Show by an entry how the dividend should be recorded in the books of XYZ Ltd.
(c) Out of the net consideration, 50% would be remitted to the foreign company immedi-
What is the amount of minority interest as on 1st January, 20X1 and 31st December, 20X1?
ately and the balance will be an unsecured loan repayable after two years.
Also please check whether there should be any goodwill/ capital reserve at the date of acquisition.
The above agreement was approved by all concerned for being given effect to on 1.4.20X1. The total
Answer 45 assets of VR Ltd. as on 31st March, 20X1 was Rs. 1,00,00,000. It was decided to write down Property, Plant
and Equipment by Rs. 1,75,000. Current liabilities of VR Ltd. as on the same date were Rs. 20,00,000. The
Total dividend paid is Rs. 15,000 (assumed to be out of post-acquisition profits), hence dividend re-
paid-up share capital of VR Ltd. was Rs. 20,00,000 divided into 2,00,000 equity shares of Rs. 10 each. Question 47 Illustration
Find out goodwill/capital reserve to Variety Ltd. on acquiring wholly the shares of VR Ltd.
A Ltd. acquired 60% shares of B Ltd. @ Rs. 20 per share. Following is the extract of Balance Sheet of B Ltd.:
Answer 46 Rs.
10,00,000 Equity Shares of Rs. 10 each 1,00,00,000
Trade Payables 55,00,000
Property, Plant and Equipment 70,00,000
Investments 45,00,000
Current Assets 68,00,000
Loans and Advances 22,00,000

On the same day B Ltd. declared dividend at 20% and as agreed between both the companies Property,
Plant and Equipment were to be depreciated @ 10% and investment to be taken at market value of
Rs.60,00,000. Calculate the Goodwill or Capital Reserve to be recorded in Consolidated Financial
Statements.
Answer 47
Since dividend is declared by B Ltd. on the date of acquisition itself, it would be out of the divisible profits of
B Ltd. existing on the date of acquisition i.e., pre- acquisition profits from the perspective of A Ltd. Accord-
ingly, as per AS 13, such pre-acquisition dividend would be reduced from the cost of investment, as seen
below in the determination of Goodwill on the date of acquisition.
Rs. Rs.
Assets
Property, Plant and Equipment 70,00,000
Less: Value written off (Rs. 70 lakhs x 10%) (7,00,000)
Rs. in lakhs 63,00,000
Total Assets 100.00 Investments at Market Value 60,00,000
Less: Reduction in Value of Property, Plant and (1.75) Current Assets 68,00,000
Equipment Loans and Advances 22,00,000 2,13,00,000
98.25 Less: Liabilities
Less: Current Liabilities (20.00) Trade Payables 55,00,000
Net Assets of VR Ltd. on Date of Acquisition 78.25 10% Debentures 10,00,000 (65,00,000)
Purchase Consideration: 54% purchased from Foreign 64.80 Net Assets of B Ltd. 1,48,00,000
Share of A Ltd. in Net Assets of B Ltd.: 60% 88,80,000
Co.
Less: Cost of Investment in B Ltd. (60% stake):
Investment: 46% existing stake 15.64 (80.44)
10,00,000 Equity Shares x 60% x Rs. 20 per share 1,20,00,000
Goodwill on Date of Acquisition 2.19
Less: Pre-acquisition dividend: 6,00,000 shares x (12,00,000) (1,08,00,000) (2) Later profits have been utilised first and then pre- acquisition profits.
Rs. 2 In such a case, the whole of Rs. 75,000 (share of H Ltd. in profits of S Ltd., after 31.7.20X1) would be
received and treated as revenue income; the remaining dividend, Rs.45,000 (Rs.1,20,000 less Rs.
Goodwill on Date of Acquisition 19,20,000
75,000) would be capital receipt. The entry would be:
Question 48 Illustration Rs. Rs.
H Ltd. acquired 3,000 shares in S Ltd., at a cost of Rs. 4,80,000 on 31.7.20X1. The capital of S Bank Dr. 1,20,000
Ltd. consisted of 5,000 shares of Rs. 100 each fully paid. The Profit & Loss Account of this
To Investment Account 45,000
company for 20X1 showed anopening balance of Rs. 1,25,000 and profit for the year was Rs.
3,00,000. At the end of the year, it declareda dividend of 40%. Record the entry in the books To Profit & Loss Account 75,000
of H Ltd., in respect of the dividend. Assume the profit is accruing evenly and calendar year
as financial year. Note: Point (2) discussed above can arise only if there is definiteinformation about the profits
utilized. In practice, such treatment is rare.
Answer 48
The profits of S Ltd., have to be divided between capital and revenue profits from the point of view of
A Ltd. and B Ltd. provide the following information:
the holding company:
Rs. ‘000s
Capital Profit Revenue
(Pre- acqui- Profit A Ltd. B Ltd.
sition) (Post-acqui- Equity Shares 6,000 5,000
sition)
Rs. 6% Preference Shares NIL 1,000
Rs.
General Reserve 1,200 800
Balance on 1.1.20X1 1,25,000 —
Profit and Loss Account 1,020 1,790
Profit for 20X1 (3,00,000 × 7/12) 1,75,000 (3,00,000×5/12) 1,25,000
Trade Payables 3,850 3,410
Total 3,00,000 1,25,000
Dividend Payable 600 500
Proportionate share of H Ltd. (3/5) 1,80,000 75,000
Goodwill 100 20
Total dividend declared = Rs. 5,00,000 X 40 % = Rs. 2,00,000
Property, Plant and Equipment 3,850 2,750
H Ltd.’s share in the dividend = Rs. 2,00,000 X 3/5 = Rs. 1,20,000
Investment 1,620 1,100
There can be two situations as regards the treatment of dividend of Rs. 1,20,000:
(1) The profit for 20X1 has been utilised to pay the dividend.
Trade Receivables 4,600 4,080
The share of H Ltd in profit for the first seven months of S Ltd = Rs. 1,05,000 (i.e. Rs. 1,75,000 ×
3/5) Profit for the remaining five months = Rs. 75,000 (i.e.Rs. 1,25,000 × 3/5). Cash & Bank 600 400
A Ltd. purchased 3/4th interest in B Ltd. at the beginning of the year at the premium of 25%. Following
The dividend of Rs. 1,20,000 will be adjusted in this ratio of 1,05,000: 75,000 = Rs. 70,000 out of
other information is available:
profits up to 31.7.20X1 and Rs. 50,000 out of profits after that date.
The dividend out of profits subsequent to 31.7.20X1 will be revenue income and that out of a. Profit & Loss Account of B Ltd. includes ₹ 1,000 thousands bought forward from the pre-
earlier profits will be capital receipt. Hence the entry will be: vious year.
b. The General Reserve balance is brought forward from the previous year.
Rs. Rs.
c. The directors of both the companies have declared a dividend of 10% on equity share
Bank Dr. 1,20,000
capital for the previous and current year.
To Investment Account 70,000 From the above information calculate Pre- and Post-acquisition Profits, Minority Interest and
To Profit and Loss Account 50,000 Cost ofControl.
Answer 49 On 31st March, 20X1, P Ltd. acquired 1,05,000 shares of Q Ltd. for Rs. 12,00,000. The position of Q Ltd.on that
Calculation of Pre- and Post-Acquisition Profits: date was as under:
Pre-Acquisition Post-Acquisition Rs.
Profits (₹) Profits (₹) Property, plant and equipment 10,50,000
Profit & Loss Account 10,00,000 7,90,000 Current Assets 6,45,000
General Reserve 8,00,000 NIL 1,50,000 equity shares of Rs. 10 each fully paid 15,00,000
18,00,000 7,90,000
Less: Share of Minority Interest: (¼) (4,50,000) (1,97,500)
Attributable to Parent 13,50,000 5,92,500
P Ltd. and Q Ltd. give the following information on 31st March, 20X3:
(Cost of Control) (Post-acquisition P Ltd. Q Ltd.

Profits) Rs. Rs.
Calculation of Minority Interest: Equity shares of Rs. 10 each fully paid (before bonus 45,00,000 15,00,000
issue)
Particulars ₹
Securities Premium 9,00,000 –
Paid-up Equity Share Capital (₹ 50,00,000 x ¼) 12,50,000
Pre-incorporation profits – 30,000
Paid-up Preference Share Capital 10,00,000
General Reserve 60,00,000 19,05,000
Share in Reserves:
Profit and Loss Account 15,75,000 4,20,000
Profit & Loss Account: ₹ 17,90,000 x ¼ 4,47,500
General Reserve: ₹ 8,00,000 x ¼ 2,00,000
Minority Interest 28,97,500
Investment: 1,05,000 Equity shares in Q Ltd. at cost 12,00,000 –
Calculation of Goodwill/Capital Reserve
Current Assets 44,10,000 17,55,000
₹ ₹
Cost of Investment in Subsidiary: 46,87,500
₹ 50,00,000 x 75% x 125% (cost + 25%
premium)
Less: Pre-acquisition dividend (3,75,000) 43,12,500
Less: Net Worth of B Ltd. on Date of Acquisition
(attributable to A Ltd.):
Paid-up Capital 37,50,000
Pre-acquisition Reserves 13,50,000 (51,00,000)
Capital Reserve 7,87,500
(a) Directors of Q Ltd. made bonus issue on 31.3.20X3 in the ratio of one equity share of Rs. 10 each Immediately after issue of bonus shares
fully paid for every two equity shares held on that date. Bonus shares were issued out of post-ac-
quisition profits by using General Reserve.Calculate as on 31st March, 20X3 (i) Cost of Control/ (i) Cost of control/capital reserve Rs. Rs.
Capital Reserve; (ii) Minority Interest; (iii) Consolidated Profit and Loss Account in each of the
Face value of investments (Rs. 10,50,000 +
following cases:
(b) Before issue of bonus shares; Immediately After issue of bonus shares. Rs.5,25,000) 15,75,000
Capital Profits (W.N.) 63,000 16,38,000
Answer 50
Less: Investment in Q Ltd. (12,00,000)
Shareholding pattern
Particulars Number of Shares % of holding (ii) Minority Interest Rs.

a. P Ltd. Share Capital (Rs. 4,50,000 + Rs.2,25,000) 6,75,000
(i) Purchased on 31.03.20X1 1,05,000
Capital Profits (W.N.) 27,000
(ii) Bonus Issue (1,05,000/2) 52,500
Total 1,57,500 70% Revenue Profits (W.N.) 4,54,500
b. Minority Interest 67,500 30% 11,56,500

Calculations of (i) Cost of Control/Capital Reserve; (ii) Minority Interest; (iii) Consolidated Profit andLoss (iii) Consolidated Profit and Loss Account – Rs.
Account as on 31st March, 20X3:
P Ltd.
(a) Before issue of bonus shares
Balance 15,75,000
Add: Share in revenue profits of Q Ltd.

(W.N.) 10,60,500
Investment in Q Ltd. 12,00,000
26,35,500
Less: Face value of investments (ShareCapital) Capi- 10,50,000
tal profits (W.N.) Working Note:
Cost of control (i.e., Goodwill) Analysis of Profits of Q Ltd.

63,000 (11,13,000)
87,000 Capital Profits Revenue Profits
(Pre-acquisition) (Post-acquisition)
Share Capital 4,50,000 Before After Bonus
(Before and after Bonus
Capital profits (W.N.) 27,000 Issue
issue of bonus Issue
Revenue profits (W.N.) 6,79,500
shares)
11,56,500 Rs.
Rs. Rs.
(iii) Consolidated profit and loss account – Rs. Pre-incorporation profits 30,000
P Ltd. Profit and loss account on 60,000
Balance 15,75,000 31.3.20X1
Add: Share in revenue profits of Q Ltd. 15,85,500

90,000
(W.N.)
General reserve* 19,05,000 19,05,000
31,60,500
Less: Bonus shares (7,50,000) Notes to Accounts

11,55,000
Rs. H Ltd. S Ltd.
Profit for period of 1st
(Rs.) (Rs.)
April, 20X1 to 31st March, 3,60,000 3,60,000
1. Share capital
20X3
6,000 equity shares of Rs. 100 each, fully paid 6,00,000 --
(Rs.4,20,000 – Rs.60,000)
up
22,65,000 15,15,000
1,000 equity shares of Rs. 100 each, fully paid
P Ltd.’s share (70%) 63,000 15,85,500 10,60,500
up -- 1,00,000
Minority’s share (30%) 27,000 6,79,500 4,54,500
Total 6,00,000 1,00,000
*Share of P Ltd. in General reserve has been adjusted in Consolidated Profitand Loss Ac-
count. 2. Reserves and Surplus
General reserves 2,00,000 75,000
Profit and loss account 25,000
(i) From the following balance sheets of H Ltd. And its subsidiary S Ltd. drawn up at 31st March, 20X1, 1,00,000
prepare a consolidated balance sheet as at that date, having regard to the following:
Total 3,00,000 1,00,000
(ii) Reserves and Profit and Loss Account of S Ltd. stood at Rs. 25,000 and Rs. 15,000 re-
spectively on thedate of acquisition of its 80% shares by H Ltd. on 1st April, 20X0.
Machinery 3,00,000 90,000
Machinery (Book-value Rs. 1,00,000) and Furniture (Book value Rs. 20,000) of S Ltd. were revalued at Rs.
1,50,000 and Rs. 15,000 respectively on 1st April, 20X0 for the purpose of fixing the price of itsshares. [Rates Furniture 1,50,000 17,000
of depreciation computed on the basis of useful lives: Machinery 10%, Furniture 15%.]
Total 4,50,000 1,07,000
Balance Sheet of H Ltd. and S Ltd. as at 31st March, 20X1
4. Other Non-current investments
Particulars Note H Ltd. (Rs.) S Ltd. (Rs.)
Non-current Investments 4,40,000 1,50,000
No.
Shares in S Ltd.
(800 shares at Rs.200 each) 1,60,000 --
(1) Shareholder’s Funds 1 6,00,000 1,00,000
Total 6,00,000 1,50,000
(a) Share Capital 2 3,00,000 1,00,000
(b) Reserves and Surplus Answer 51
(2) Current Liabilities Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.as at 31st March, 20X1
(a) Trade Payables 1,50,000 57,000
Particulars Note (Rs.)
Total 10,50,000 2,57,000
No.
II. Assets
(a) Property, Plant andEquip- 3 4,50,000 1,07,000
ment (a) Share Capital 1 6,00,000
(b) Other non- currentinvest- 4 6,00,000 1,50,000 (b) Reserves and Surplus 2 3,44,600
ments (2) Minority Interest 3 48,150
Total 10,50,000 2,57,000
(a) Trade Payables 2,07,000 on Rs.50,000 i.e. (1,50,000 – 1,00,000) (5,000)
Total 11,99,750 Adjusted post-acquisition profits 5,750
II. Assets H Ltd.’s share 4/5 × 5,750 4,600

(1) Non-current assets 5. Minority Interest

Paid-up value of (1,000 – 800) = 200 shares
(b) Intangible assets 5 12,000
held by outsiders i.e. 200 × Rs.100 (or 1,00,000 X 20%) 20,000
(c) Other non-current investments 6 5,90,000 Add: 1/5th share of pre-acquisition profits and reserves 8,000
Total 11,99,750 1/5th share of profit on revaluation 9,000
1/5th share of post-acquisition reserves 10,000
Working Notes: 1/5th share of post-acquisition profit 1,150
48,150
1. Pre-acquisition profits and reserves of S Ltd. Rs. 6. Cost of Control or Goodwill
Reserves 25,000 Price paid by H Ltd. for 800 shares(A) 1,60,000
Profit and Loss Account 15,000 Intrinsic value of the shares-
40,000 Paid-up value of 800 shares held by H Ltd. i.e. 800 × Rs.100 80,000
H Ltd.’s = 4/5 (or 80%) × 40,000 32,000 (or 1,00,000 X 80%)
Minority Interest= 1/5 (or 20%) × 40,000 8,000 Add: 4/5th share of pre-acquisition profits and reserves 32,000
2. Profit on revaluation of assets of S Ltd. 4/5th share of profit on the revaluation 36,000
Intrinsic value of shares on the date of acquisition (B) 1,48,000
Profit on Machinery Rs.(1,50,000 – 1,00,000) 50,000
Cost of control or Goodwill (A – B) 12,000
Less: Loss on Furniture Rs.(20,000 – 15,000) 5,000
Net Profit on revaluation 45,000
H Ltd.’s share 4/5 × 45,000 36,000
3. Post-acquisition reserves of S Ltd.
Post-acquisition reserves (Total reserves lessreserves pre-acquisition 50,000

= Rs.75,000 – 25,000)
H Ltd.’s share 4/5 × 50,000 40,000
Minority interest 1/5 × 50,000 10,000

4. Post -acquisition profits of S Ltd.
Post-acquisition profits (Profit & loss account balance lesspre- acquisi-
tion profits = Rs.25,000 – 15,000) 10,000
Add: Excess depreciation charged on furniture @ 15%on Rs. 750
5,000 i.e. (20,000 – 15,000) 10,750
Less: Under depreciation on machinery @ 10%

As 23 Accounting for Investments in Associates in Consolidated FinancialStatements As 23 Accounting for Investments in Associates in Consolidated FinancialStatements
Question 1
Long Limited acquired 60% stake in Short Limited for a consideration of Rs. 112 lakhs. On the date of
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
acquisition Short Limited’s Equity Share Capital was Rs. 100 lakhs, Revenue Reserve was Rs. 40 lakhs
Study Mat. Q.2 TO Q.12 and balance in Profit & Loss Account was Rs. 30 lakhs. From the above information you are required to
calculate Goodwill / Capital Reserve in the following situations:
Past
NO NO NO NO NO NO NO Q.1 NO NO NO NO (i) On consolidation of Balance Sheet.
Exams
MTP NO NO NO NO NO NO NO NO NO NO NO NO (ii) If Long Limited showed the investment in subsidiary at a carrying amount of Rs. 104 lakhs.
RTP NO NO NO NO NO NO NO NO NO NO NO NO (iii) If the consideration paid for acquiring the 60% stake was Rs. 92 lakhs. (PYP 5 Marks, July 21)
Answer 1
Rs.
60% of the Equity Share Capital Rs. 100 Lakhs 60
60% of Accumulated Reserve Rs. 70 Lakhs (40+30) Lakhs 42
Book value of shares of Short Ltd. 102
Goodwill / Capital Reserve computation on consolidation of balance sheet
Long Ltd. paid a positive differential of Rs. 10 Lakhs (112 - 102). This differential Rs. 10 Lakhs is
called goodwill and is shown in the balance sheet under the head intangibles
(i) If Long Ltd. showed the investment in Short Ltd. at carrying amount of Rs. 104 Lakhs,
then the goodwill will be Rs. 2 Lakhs.
(ii) If the consideration paid is Rs. 92 lakhs, then there would have been capital reserve amount-
ing Rs. 10 Lakhs (102- 92).
Question 2
Identity which of the statements are correct.

An enterprise can influence the significant economic decision making by many ways like:
(i) Representation on the board of directors or governing body of the investee.

(ii) Participation in policy-making processes.
(iii) Interchange of managerial personnel.
(iv) Provision of essential technical information.
(a) Statement (i) and (ii) are correct.
(b) Statement (i), (ii) and (iii) are correct.
(c) Statement (i), (ii), (iii) and (iv) are correct.
(d) Statement (ii) and (iii) are correct.
Ans: (c) Ans: (a)
A Ltd. is holding 90% share in B Ltd. and 10% shares in C Ltd., and B Ltd. is holding 11% shares in C Ltd. Identity which of the statements are correct.
Identity which of the statements are incorrect.
(viii) In case an associate has made a provision for proposed dividend (i.e. dividend de-
(v) In this case, A Ltd. is parent of B Ltd. clared after the reporting period but it pertains to that reporting year) in its financial
statements, the investor’s share of the results of operations of the associate should be
(vi) As far as the relationship between A Ltd. and C Ltd. is concerned; A Ltd. has a total
computed without taking into consideration the proposed dividend.
of direct and indirect holding of (10% + 90% of 11%) 19.9 %in C Ltd.
(ix) In case an associate has made a provision for proposed dividend (i.e. dividend de-
(vii) C Ltd. is an associate of A Ltd.
clared after the reporting period but it pertains to that reporting year) in its financial
(a) Statement (ii) is incorrect. statements, the investor’s share of the results of operations of the associate should be
computed after taking into consideration the proposed dividend.
(b) Statement (iii) is incorrect.
(x) The potential equity shares of the investee held by the investor shouldnot be taken into
(c) Statement (ii) and (iii) both are incorrect.
account for determining the voting power of the investor.
(d) All statements are incorrect.
(xi) The potential equity shares of the investee held by the investor shouldbe taken into
Ans: (a) account for determining the voting power of the investor.
(a) Statement (i) and (iii).
Question 4 (b) Statement (ii) and (iv).
A Ltd. acquired 10% stake of B Ltd. on April 01 and further 15% on October 01 of the same year. Other (c) Statement (i) only.
information is as follows: (d) Statement (iii) only.
Cost of Investment for 10% Rs. 1,00,000 and for 15% Rs. 1,55,000
Ans: (a)
Net asset on April 01 Rs. 8,50,000 and on October 01 Rs. 10,00,000.
What is the amount of goodwill or capital reserve arising on significantinfluence?
(a) Goodwill = Rs. 10,000.
Question 7
(b) Goodwill = Rs. 20,000.
(c) Capital Reserve = Rs. 10,000. Describe the cases when AS 23 does not allow the use of equity method of accounting?
Ans: (b) Answer 7

Equity method of accounting is to be followed by all the enterprises having significant influ-
Question 5
ence on their associates except in the following cases:
Capital Reserve = Rs. 20,000. 4. A Ltd. acquired 10% stake of B Ltd. on April 01 and further 15% on Octo- a. Control is intended to be temporary because the investment is acquired and held ex-
ber 01 during the same year. Other information is as follow: clusively with a view to its subsequent disposal inthe near future.
Cost of Investment for 10% Rs. 1,00,000 and for 15% Rs. 1,45,000 The term ‘Near Future’ is explained with AS 21. Or;
Net asset on April 01 Rs. 8,50,000 and on October 01 Rs. 10,00,000. b. It operates under severe long-term restrictions, which significantly impair its ability to
What is the amount of goodwill or capital reserve arising on significantinfluence? transfer funds to the investor.
(a) Goodwill = Rs. 10,000. In both the above cases, investment of investor in the share of theinvestee is treated as
investment according to AS 13.
(b) Goodwill = Rs. 20,000.
(c) Capital Reserve = Rs. 10,000.
(d) Capital Reserve = Rs. 20,000.
Question 8 Carrying amount as on 31.3.20X2 2,60,000
When is an investor required to discontinue the use of the equity method of accounting? Carrying amount of investment in Consolidated Financial Statement of Bright Ltd. as on
30.6.20X2 as per AS 23
Answer 8
An investor should discontinue the use of the equity method from the date that: Rs.
a. It ceases to have significant influence in an associate but retains, either in whole or in part, Carrying amount as on 31.3.20X2 2,60,000
its investment. Less: Dividend received (Rs.60,000 x 30%) (18,000)
b. The use of the equity method is no longer appropriate because the associate operates Carrying amount as on 30.6.20X2 2,42,000
under severe long-term restrictions that significantly impair its ability to transfer funds to
the investor.
Question 10
From the date of discontinuing the use of the equity method, investments in such associates should be
accounted for in accordance with AS 13,Accounting for Investments. For this purpose, the carrying
A Ltd. acquired 25% of shares in B Ltd. as on 31.3.20X1 for Rs. 3 lakhs. The Balance Sheet of B Ltd. as on
amount of the investment at that date should be regarded as cost thereafter.
X1 is given below:
Rs.
Question 9
Bright Ltd. acquired 30% of East India Ltd. shares for Rs. 2,00,000 on 01-06-20X1. By such an acqui-
sition Bright can exercise significant influence over East India Ltd. During the financial year ending Reserves and Surplus 5,00,000
on 31-03- 20X1 East India earned profits Rs. 80,000 and declared a dividend of Rs. 50,000 on 12- 10,00,000
08-20X1. East India reported earnings of Rs. 3,00,000 for the financial year ending on 31-03-20X2
(assume profits to accrueevenly) and declared dividends of Rs. 60,000 on 12-06-20X2. Fixed Assets 5,00,000
Calculate the carrying amount of investment in: Investments 2,00,000
Separate financial statements of Bright Ltd. as on 31-03-20X2; Consolidated financial statements II. Current Assets 3,00,000
of Bright Ltd.; as on 31-03-20X2;
10,00,000
What will be the carrying amount as on 30-06-20X2 in consolidated financial statements?
(i) During the year ended 31.3.20X2 the following are the additional information available:A Ltd. re-
Answer 9
ceived dividend from B Ltd., for the year ended 31.3.20X1 at40% from theReserves.
(i) Carrying amount of investment in Separate Financial Statement of Bright Ltd. as
(ii) B Ltd., made a profit after tax of Rs. 7 lakhs for the year ended 31.3.20X2.
on 31.03.20X2
B Ltd., declared a dividend @ 50% for the year ended 31.3.20X2 on 30.4.20X2.
Rs.
(i) A Ltd. is preparing Consolidated Financial Statements in accordance with AS21 for its varioussubsid-
Amount paid for investment in Associate (on 1.06.20X1) 2,00,000 iaries. Calculate:
(ii) Goodwill if any on acquisition of B Ltd.’s shares.

Less: Pre-acquisition dividend (Rs. 50,000 x 30%) (15,000)
(iii) How A Ltd., will reflect the value of investment in B Ltd., in the Consolidated Finan-
Carrying amount as on 31.3.20X2 as per AS 13 1,85,000 cialStatements?
Carrying amountof investment in Consolidated Financial Statements * of Bright How the dividend received from B Ltd. will be shown in the Consolidated Financial Statements?
Ltd. as on 31.3.20X2 as per AS 23
Answer 10
Rs.
(i) In terms of AS 23, B Ltd. will be considered as an associate company ofA Ltd. as shares acquired
Carrying amount as per separate financial statements 1,85,000 represent to more than 20%.
Add: Proportionate share of 10-month profit of Calculation of Goodwill (Rs. in lakhs)
investee as per equity method (30% of Amount paid towards acquisition of stake in B Ltd. 3.00 Less: Pre-acquisition dividend
Rs.3,00,000 x 10/12) 75,000 (Rs.5,00,000 x 40% x 25%) 0.50 Cost of Investment in B Ltd. 2.50
Less: Share in the value of Equity of B Ltd.as at the date of investment [25% of Rs.10 lakhs
(Rs.5 lakhs + Rs.5 lakhs)] (2.50)
(ii) Goodwill NIL Answer11

A Ltd. Consolidated Calculation of Goodwill/Capital Reserve under Equity Method
Profit and Loss Account for the year ended 31stMarch, 20X2 (An extract)
Particulars Rs. Rs.
Rs. in lakhs
Investment in B Ltd. (A) 15,00,000
Other income:
Equity Shares 10,00,000
Share of profits in B Ltd. 1.75
Security Premium 1,00,000
Pre-acquisition Dividend received from
Reserves & Surplus 5,00,000
B Ltd. 0.50
Net Assets 16,00,000
Transfer to investment A/c (0.50) Nil
45% of Net Asset (B) 7,20,000
(iii) A Ltd.
Goodwill (A-B) 7,80,000
Consolidated Balance Sheet as on 31.3.20X2 (An extract)
Calculation of Carrying Amount of Investment in the year ended on 31st March, 20X2
Rs. in lakhs
Particulars Rs.
Non-current investments
Investment in Associate as per AS 23:
Investment in B Ltd.
Share of Net Assets on 1 April 20X1 7,20,000
Cost of Investment in B Ltd. 2.50
Add: Goodwill 7,80,000
Share of profit for year 20X1 – 20X2 1.75
Cost of Investment 15,00,000
4.25
Add: Goodwill NIL 4.25 Add: Profit during the year (3,00,000 x 45%) 1,35,000
Working Notes: Less: Dividend paid (1,00,000 x 45%) (45,000)
1. Pre-acquisition dividend received from B Ltd. amounting to Rs. 0.50 lakhs will Carrying Amount of Investment 15,90,000
be reduced from investment value in the books of A Ltd.
2. B Ltd. made a profit of Rs.7 lakhs for the year ended 31st March, 20X2. A Ltd.’s share in the Question 12 (Illustration)
profits of Rs. 7 lakhs is Rs. 1.75 lakhs.
A Ltd. acquired 40% share in B Ltd. on April 01, 20X1 for Rs. 10 lacs. On that date B Ltd. had 1,00,000
Investment in B Ltd. will be increased by Rs. 1.75 lakhs and consolidated profit and loss ac-
equity shares of Rs. 10 each fully paid and accumulated profits of Rs. 2,00,000. During the year 20X1-
count of A Ltd. will be credited with Rs. 1.75 lakhs in the consolidated financial statement of
20X2, B Ltd. suffered a loss of Rs. 10,00,000; during 20X2-20X3 loss of Rs. 12,50,000 and during 20X3-
A Ltd.
20X4 again a loss of Rs. 5,00,000. Show the extract of consolidated balance sheet of A Ltd. on all the
3. Dividend declared on 30th April, 20X2 will not be recognized in the consolidated financial four dates recording the above events.
statement of A Ltd.
Answer 12
Question 11 (Illustration) Calculation of Goodwill/Capital Reserve under Equity Method
A Ltd. acquire 45% of B Ltd. shares on April 01, 20X1, the price paid was Rs. 15,00,000. Following are the Particulars Rs.
extracts of balance sheet of B Ltd. as of 1 April 20X1: Paid up Equity Share Capital Rs. 10,00,000 Equity Shares 10,00,000
Securities Premium Rs. 1,00,000
Reserves & Surplus 2,00,000
Reserve & Surplus Rs. 5,00,000
Net Assets 12,00,000
B Ltd. has reported net profits of Rs. 3,00,000 and paid dividends of Rs. 1,00,000 for the year ended
40% share of Net Assets 4,80,000
31 March 20X2. Calculate the amount at which the investment in B Ltd. should be shown in the
consolidated balance sheet of A Ltd. as on March 31, 20X2. Less: Cost of Investment (10,00,000)
Goodwill 5,20,000
Consolidated Balance Sheet (Extract) as on April 01, 20X1: ASSETS Investment in Associate as per AS 23 Rs.
Investment in Associate as per AS 23 Rs. Rs. Carrying Amount of Investment 1,00,000
Share of Net Assets on April 1 4,80,000 Less: Loss for the year (5,00,000 x 40% = 2,00,000, restricted to Carry-
ing amount of Investment in B Ltd.) -refer note below Carrying Amount
Add: Goodwill 5,20,000 10,00,000
of Investment
Calculation of Carrying Amount of Investment as at 31 March 20X2:
Consolidated Balance Sheet (Extract) as on March 31, 20X4: ASSETS
Investment in Associate as per AS 23 Rs.
Investment in Associate as per AS 23 Rs.
Share of Net Assets on 1 April, 20X1 4,80,000
Investment in B Ltd. -
If, under the equity method, an investor’s share of losses of an associate equals or exceeds the
Cost of Investment 10,00,000 carrying amount of the investment, the investor ordinarily discontinues recognising its share
Less: Loss for the year (10,00,000 x 40%) (4,00,000) of further losses and the investment is reported at nil value. Additional losses are provided for
to the extent that the investor has incurred obligations or made payments on behalf of the as-
Carrying Amount of Investment 6,00,000
sociate to satisfy obligations of the associate that the investor has guaranteed or to which the
Consolidated Balance Sheet (Extract) as on March 31, 20X2: ASSETS investor is otherwise committed. If the associate subsequently reports profits, the investor re-
sumes including its share of those profits only after its share of the profits equals the share of net
Investment in Associate as per AS 23 Rs. Rs. losses that have not been recognised.
Share of Net Assets on 1 April, 20X1 4,80,000 ฀ As far as possible the reporting date of the financial statements should be same for con-
Less: Share of Loss as above (4,00,000) solidated financial statement. If practically it is not possible to draw up the financial state-
ments of one or more enterprise to such date and, accordingly, those financial state-
80,000 ments are drawn up to reporting dates different from the reporting date of the investor,
Add: Goodwill 5,20,000 6,00,000 adjustments should be made for the effects of significant transactions or other events
Calculation of Carrying Amount of Investment as at 31 March 20X3: that occur between those dates and the date of the consolidated financial statements.
In any case, the difference between reporting dates of the concern and consolidated fi-
Investment in Associate as per AS 23 Rs. nancial statement should not be more than six months.
Carrying Amount of Investment as on 31 March 20X2 6,00,000 ฀ Accounting policies followed in the preparation of the financial statements of the inves-
Less: Loss for the year (12,50,000 x 40%) (5,00,000) tor, investee and consolidated financial statement should be uniform for like transactions
and other events in similar circumstances.
Carrying Amount of Investment 1,00,000
If accounting policies followed by different enterprises in the group are not uniform, then ad-
Consolidated Balance Sheet (Extract) as on March 31, 20X3: ASSETS
justments should be made in the items of the individual financial statements to bring it in line
with the accounting policy of the consolidated statement.
Investment in Associate as per AS 23 Rs. Rs.
฀ The carrying amount of investment in an associate should be reduced to recognise a
Share of Net Assets on 1 April, 20X1 4,80,000 decline, other than temporary, in the value of the investment, such reduction being deter-
mined and made for each investment individually.
Less: Share of Loss as above 4,00,000 +
(Rs.5,00,000) (4,20,000)
Calculation of Carrying Amount of Investment as at 31 March 20X4:
Question 1
Chapter 10.3
State which of the following statements are incorrect.
AS 27- FINANCIAL REPORTING OF INTERESTS IN JOINT VENTURES
(i) The requirements relating to accounting for joint ventures in consolidated financial
statements according to proportionate consolidation method, as contained in AS 27,
appliesonly when consolidated financial statements are prepared by venturer.
(ii) The requirements relating to accounting for joint ventures in consolidated financial
statements according to proportionate consolidation method, as contained in AS 27,
Attempts MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV applies irrespectivewhether consolidated financial statements are prepared by ven-
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023 turer or not.
Study (iii) An investor in joint venture, which does not have joint control, should report its interest
Q.1 TO Q.12
Mat. in ajoint venture in its consolidated financial statements in accordance with AS 13, AS 21
Past NO NO NO NO NO NO NO NO NO NO NO NO
and AS 23 as the case may be.
Exams
(a) Point (i) is incorrect.
MTP NO NO NO NO NO NO NO NO NO NO NO NO (b) Point (ii) is incorrect.

RTP NO NO NO NO NO NO NO NO NO NO NO NO (c) Point (iii) is incorrect.
(d) None of the above.
Ans: (b)
Question 2
Identify which of the following is not a feature of a Jointly controlledoperations (JCO):
(a) Each venturer has his own separate business.

(b) There is a separate entity for joint venture business.
(c) Each venturer record only his own transactions without any separately set of books main-
tained for the joint venture business.
(d) There is a common agreement between all of them.
Ans: (b)
Question 3
Identify which of the following is/are not a feature of a Jointly controlled assets (JCA):
(iv) There is a separate legal identity.

(v) There is a common control over the joint assets.
(vi) Expenses on jointly held assets are shared by the venturers as per the contract.
(vii) In their financial statement, venturer shows only their share of the asset and total income
earned by them along with total expenses incurred by them.
(a) Point no. (i) only.
(b) Point no. (i) and (iii).
(c) Point no. (iii) and (iv).
(d) Point (i) and (ii).
Ans: (a)
Question 4
Question 6
Identify which is/ are features of a Jointly controlled entity (JCE):
Describe the cases when AS 27 does not allow the use of Proportionate consolidation method ofac-
(viii) Venturer creates a new entity for their joint venture business. counting?
(ix) All the venturers pool their resources under new banner and this entity purchases its
own assets, create its own liabilities, expenses are incurredby the entity itself and Answer 6
sales are also made by this entity. Proportionate consolidation method of accounting is to be followed except in the following cases:
(x) The revenues and expenses of the entity is shared by the venturers inthe ratio a. Investment is intended to be temporary because the investment is acquired and held
agreed upon in the contractual agreement. exclusively with a view to its subsequent disposal in the near future.
(a) Point no. (i) only. The term ‘Near Future’ is explained with AS 21.
(b) Point no. (i) and (ii). Or
(c) Point no. (iii). b. Joint venture operates under severe long-term restrictions, which significantly impair its abil-
(d) Point no. (iii). ity to transfer funds to the venturers.
In both the above cases, investment of venturer in the share of the investeeis treated as investment ac-
Ans: (c) cording to AS 13.
Identify the correct statements. When is a venturer required to discontinue the use of the proportionate consolidation method?
From the date of discontinuing the use of the proportionate consolidationmethod:
Answer 7
(xi) If interest in entity is more than 50%, investments in such joint ventures should be ac-
counted for in accordance with AS 21, Consolidated Financial Statements. A venturer should discontinue the use of the proportionate consolidationmethod from the date that:
(xii) If interest is 20% or more but upto 50%, investments are to be accounted for in ac- a. It ceases to have joint control in the joint venture but retains, either in whole or in part, its
cordance with AS 23, Accounting for Investment in Associates in Consolidated Financial investment.
Statements. b. The use of the proportionate consolidation method is no longer appropriate because the
(xiii) For all other cases investment in joint venture is treated as per AS 13, Accounting for joint venture operates under severe long- term restrictions that significantly impair its
Investments. ability to transfer funds to the venturers.
(xiv) For this purpose, the fair value of the investment at the date on whichjoint venturerela- From the date of discontinuing the use of the proportionate consolidation method,
tionship ceases to exist should be regarded as cost thereafter. a. If interest in entity is more than 50%, investments in such joint ventures should be accounted
(a) Point no. 1 and 2. for in accordance with AS 21, Consolidated Financial Statement.
(b) Point no. 1, 2 and 3. b. If interest is 20% or more but up to 50%, investments are to be accounted for in accordance
with AS 23, Accounting for Investment in Associates in Consolidated Financial Statement.
(c) Point no. 1, 2, 3 and 4.
c. For all other cases investment in joint venture is treated as per AS 13, Accounting for Invest-
(d) None of the above. ment.
Ans: (b) d. For this purpose, the carrying amount of the investment at the date on which joint ven-
ture relationship ceases to exist should be regarded as cost thereafter.
Practical Questions Answers You are required to prepare the draft Consolidated Profit & Loss Account and Joint Venture Account in
the books of each venturer.
Question 8
Answer 9
JVR Limited has made investments of ₹ 97.84 crores in equity shares of QSR Limited in pursuance of
Draft Consolidated Profit & Loss Account
Joint Venture agreement till 20X1-X2 (i.e., more than 12 months). The investment has been made
at par. QSRLimited has been in continuous losses for the last 2 years. JVR Limited is willing to re-
Particulars ₹ ₹ Particulars ₹ ₹
assess the carryingamount of its investment in QSR Limited and wish to provide for diminution
in value of investments. However, QSR Limited has a futuristic and profitable business plans and To Purchase of By Sale of
projection for the coming years. Discuss whether the contention of JVR Limited to bring down the Flats:
Land:
carrying amount of investment in QSR Limited is in accordance with the Accounting Standard.
Mr. A
Mr. A 60,00,000 40,00,000
Mr. B
Answer 8 To Registration 20,00,000
As per para 26 of AS 27 “Financial Reporting of Interests in Joint Ventures”,in a venturer’s separate Fees:
financial statements, interest in a jointly controlled entity should be accounted for as an investment Mr. C
in accordance with AS 13 ‘Accounting for Investments’. Mr. A 60,000 10,00,000 70,00,000
By Flats taken
As per para 17 of AS 13 “Accounting for Investments”, long-term investments are usually carried To Materials: by Venturers:
at cost. However, when there is a decline, other than temporary, in the value of a long-term in- Mr. A
vestment, the carrying amount is reduced to recognize the decline. Indicators of the value of an Mr. B
investment are obtained by reference to its market value, the investee’s assets and results and the Mr. B 9,50,000 10,00,000
expected cash flows from the investment. Thetype and extent of the investor’s stake in the investee
To Other 10,00,000
are also taken into account. However, where there is a decline, other than temporary, in the carrying Mr. C
amounts of long- term investments, the resultant reduction in the carrying amount is charged to Expenses:
the profit and loss statement. Mr. C 9,00,000 10,00,000 30,00,000
Since the investment was made in the year 20X1-20X2 i.e., more than a year,it is a long-term in-
To Bank
vestment. In the given case, though the QSR Ltd. is in continuous losses for past 2 years, yet it has a
futuristic and profitable business plans and projections for the coming years. Here, one of the indi- Interest:
cators i.e. ‘losses incurred to the company’ may lead to diminution inthe value of the shares while Mr. A 2,00,000
the other indicator that ‘the company has positive expected cash flows from its business plans’
does not lead to decline in the value of shares. To Profits:
Considering both the facts, in case the expectation of profitable business plans and positive cash flows Mr. A 6,30,000
is based reliable presumptions (such as tender in favour of QSR Ltd., strong order book etc.), the
Mr. B 6,30,000
decline will be regarded as temporary in nature and the investment in equity shares will continue
to be carried at cost only.
Mr. C 6,30,000 18,90,000
However, should the aforesaid presumptions be based on projections without reasonable evidence
backing the claims, the decline could be regarded as non-temporary in nature in which case the write
down of the carrying amount become necessary in line with AS 13, thereby implying the contention ofQSR 1,00,00,000 1,00,00,000
Ltd. to be correct.
In the Books of Mr. A Joint Venture Account
Particulars ₹ Particulars ₹
Mr. A, Mr. B and Mr. C entered into a joint venture to purchase a land, construct and sell flats. Mr.
A purchased a land for ₹ 60,00,000 on 01.01.20X1 and for the purpose he took loan from a bank To Bank Loan (Purchase of 50,00,000 By Bank (Sale of Flats) 40,00,000
for ₹ 50,00,000 @ 8% interest p.a. He also paid registering fees ₹ 60,000 on the same day. Mr. B Land)
supplied the materials for ₹ 4,50,000 from his godown and further he purchased the materials
for ₹ 5,00,000 for the joint venture. Mr. C met all other expenses of advertising, labour and other To Bank:(Purchase of Land) By Land & Building 10,00,000
incidentalexpenses which turnout to be ₹ 9,00,000. On 30.06.20X1 each of the venturer agreed to 10,00,000
take away oneflat each to be valued at ₹ 10,00,000 each flat and rest were sold by them as follow: Mr.
To Bank (Registration Fees) By Bank (Received from 14,20,000
A for ₹ 40,00,000; Mr. B for ₹ 20,00,000 and Mr. C for ₹ 10,00,000. Loan was repaid on the same day
by Mr. A along withthe interest and net proceeds were shared by the partners equally.
Note (₹)
60,000 Mr. B)
I Equity and liabilities
To Bank (Bank Interest) 2,00,000 By Bank (Received from 4,70,000
Shareholders’ funds:
Mr. C)
Share Capital 1 71,40,000
To Profit on JV 6,30,000
71,40,000
II Assets
68,90,000 68,90,000
In the Books of Mr. B Joint Venture Account Non-current Assets
Property, Plant and Equipment: 2 71,40,000
71,40,000
Particulars ₹ Particulars ₹
Notes to Accounts
To Purchases (Material 4,50,000 By Bank (Sale of
Supplied) Flats) 20,00,000 (₹)
To Bank (Materials) 5,00,000 By Land & Building 10,00,000 1. Share capital A Ltd.
To Profit on JV 6,30,000
To Bank (Paid to Mr. A) 14,20,000 23,80,000
B Ltd. 23,80,000
30,00,000 30,00,000 C Ltd. 23,80,000 71,40,000
In the Books of Mr. C Joint Venture Account
Land & Building:
Particulars ₹ Particulars ₹ A Ltd.
To Bank (Misc. Expenses) 9,00,000 By Bank (Sale of 10,00,000 3,80,000

Flats) B Ltd. 3,80,000
To Profit on JV 6,30,000 By Land & Building 10,00,000 C Ltd. 3,80,000 11,40,000
To Bank (Paid to Mr. A) 4,70,000 Plant & Machinery:
20,00,000 20,00,000 A Ltd.
17,00,000
B Ltd. 17,00,000
C Ltd. 17,00,000 51,00,000
A Ltd., B Ltd. and C Ltd. decided to jointly construct a pipeline to transport the gas from one place Computers:
to another that was manufactured by them. For the purpose following expenditure was incurred by
A Ltd.
them: Buildings ₹ 12,00,000 to be depreciated @ 5% p.a., Pipeline for ₹ 60,00,000 to be depreciat-
ed @ 15% p.a., computers and other electronics for ₹ 3,00,000 to be depreciated @ 40% p.a. and 60,000
various vehiclesof ₹ 9,00,000 to be depreciated @ 20% p.a. B Ltd. 60,000
They also decided to equally bear the total expenditure incurred on the maintenance of the pipeline C Ltd. 60,000 1,80,000
that comes to ₹ 6,00,000 each year.
Vehicles:
You are required to show the consolidated balance sheet and the extract of Statement of Profit & Loss
and Balance Sheet for each venturer. A Ltd.
2,40,000
Answer 10
B Ltd. 2,40,000
Consolidated Balance Sheet
In the Books of B Ltd.

C Ltd. 2,40,000 7,20,000
In the Books of A Ltd. Extract of draft Profit & Loss Account
Extract of statement of Profit & Loss Particulars Note No. ₹
Particulars Note No. ₹ Depreciation and amortisation expense 1 4,20,000

Other operating Expenses (Pipeline Expenses) 200,000
Depreciation and amortisation expense 1 4,20,000
Extract of Balance Sheet
Note No. ₹
Assets
Note No. ₹
Non-current assets
Assets
Non-current assets 2 23,80,000
Property, Plant and Equipment Notes to Accounts
2 23,80,000
Notes to Accounts ₹ ₹
1. Depreciation and amortisation expense

₹ ₹
Land & Building
1. Depreciation and amortisation expense 20,000
Land & Building
Plant & Machinery 3,00,000
20,000
Computers 40,000
Vehicles 60,000 4,20,000
Computers 40,000
2. Land & Building 4,00,000
Vehicles 60,000 4,20,000
Less: Depreciation (20,000) 3,80,000
2. Land & Building 4,00,000 Plant & Machinery 20,00,000
Less: Depreciation (20,000) 3,80,000 Less: Depreciation (3,00,000) 17,00,000
Plant & Machinery 20,00,000 Computers 1,00,000
Less: Depreciation (3,00,000) 17,00,000 Less: Depreciation (40,000) 60,000
Vehicles 3,00,000
Computers 1,00,000
Vehicles 3,00,000
In the Books of C Ltd.
23,80,000 Extract of Draft Profit & Loss Account Note No. ₹
Depreciation and amortisation expense 1 4,20,000

Sales 13,05,000
Note No. ₹ Property, Plant and Equipment 6,00,000
Assets Current Assets 2,00,000
Non-current assets Unsecured Loans 2,00,000
Current Liabilities 1,00,000
2 23,80,000
Notes to Accounts Capital 4,01,000
₹ ₹ Closing inventory was valued at ₹ 1,00,000.

You are required to prepare the Consolidated Financial Statement.
1. Depreciation and amortisation expense
Land & Building 20,000 Answer 11
Plant & Machinery 3,00,000 Consolidated Profit & Loss Account
Computers 40,000
Particulars Note No. (₹ )
Vehicles 60,000 4,20,000
Revenue from operations 1 13,05,000
2. Land & Building 4,00,000 Total Revenue (A) 13,05,000
Less: Depreciation (20,000) 3,80,000 Less: Expenses
Purchases 2 9,00,000
Less: Depreciation 17,00,000
(3,00,000) Changes in inventories of finished goods 4 (1,00,000)
Computers 1,00,000
Total Expenses (B) 11,06,000
Less: Depreciation (40,000) 60,000
Profit Before Tax (A-B) 1,99,000
Vehicles 3,00,000
Consolidated Balance Sheet
Note No. (₹)
23,80,000
1. Shareholders’ funds:
A Ltd. a UK based company entered into a joint venture with B Ltd. in India, wherein B Ltd.
Reserves and Surplus 6 1,99,000
will import the goods manufactured by A Ltd. on account of joint venture and sell them in
India. A Ltd. and B Ltd.agreed to share the expenses & revenues in the ratio of 5:4 respective- 2. Non-current liabilities
ly whereas profits are distributed equally. A Ltd. invested 49% of total capital but has equal
Long term borrowings 7 2,00,000
share in all the assets and is equally liable forall the liabilities of the joint venture. Following
is the trial balance of the joint venture at the end of thefirst year: 3. Current Liabilities 8 1,00,000
9,00,000
Particulars Dr. (₹ ) Cr. (₹ ) II Assets
Purchases 9,00,000 Non-current Assets
Other Expenses 3,06,000 Property, Plant and Equipment 9 6,00,000
Current Assets 9. Property, Plant and Equipment

Inventories 10 1,00,000 A Ltd. 3,00,000
Other current assets 11 2,00,000
B Ltd. 3,00,000 6,00,000
9,00,000
10. Inventories
Notes to Accounts 50,000
A Ltd.
Particulars (₹) B Ltd. 50,000 1,00,000
1. Revenue from operations 11. Other Current Assets
Sales: A Ltd. 7,25,000 1,00,000
A Ltd.
B Ltd. 5,80,000 13,05,000
B Ltd. 1,00,000 2,00,000
2. Purchases
A Ltd. 5,00,000 Question 12 (Illustration)
B Ltd. 4,00,000 9,00,000 A Ltd. entered into a joint venture with B Ltd. on 1:1 basis and a new company C Ltd. was formed for
3. Other expenses the same purpose and following is the balance sheet of all the three companies:
A Ltd. 1,70,000
Particulars A Ltd. B Ltd. C Ltd.
B Ltd. 1,36,000 3,06,000 Share Capital 10,00,000 7,50,000 5,00,000

4. Closing Inventory Reserve & Surplus 18,00,000 16,00,000 12,00,000
A Ltd. 50,000 Loans 3,00,000 4,00,000 2,00,000
B Ltd. 50,000 1,00,000 Current Liabilities 4,00,000 2,50,000 1,00,000
Property, Plant and Equipment 30,50,000 26,25,000 19,50,000

5. Share Capital
Investment in JV 2,50,000 2,50,000 -
A Ltd. 1,96,490
Current Assets 2,00,000 1,25,000 50,000
B Ltd. 2,04,510 4,01,000
Prepare the balance sheet of A Ltd. and B Ltd. under proportionate consolidation method.
6. Reserves and Surplus Profit & Loss
Account: Answer 12
A Ltd. 99,500 Balance Sheet of A Ltd.
B Ltd. 99,500 1,99,000 Note No. (₹)
7. Long Term Borrowings Unsecured Loans: I Equity and liabilities

A Ltd. 1. Shareholders’ funds:
1,00,000 Share Capital Reserves 10,00,000
B Ltd. 1,00,000 2,00,000 and Surplus 1 24,00,000
8. Current Liabilities ALtd. 2. Non-current liabilities 2 4,00,000

50,000 3. Current Liabilities 3 4,50,000
B Ltd. 50,000 1,00,000 TOTAL 42,50,000
II Assets II Assets
Non-current Assets 1. Non-current Assets
Property, Plant and Equipment: 4 40,25,000 Property, Plant and Equipment
Current Assets 5 2,25,000 4 36,00,000
42,50,000 2. Current Assets 5

Notes to Accounts 1,50,000
37,50,000
₹ ₹
Notes to Accounts
1. Reserves and Surplus A Ltd.
18,00,000 ₹ ₹
C Ltd. 6,00,000 24,00,000 1. Reserves and Surplus A Ltd.

2. Long Term Borrowings Loans: A Ltd. 16,00,000
C Ltd. 6,00,000 22,00,000
3,00,000 Long Term Borrowings Loans: A Ltd. 4,00,000
C Ltd. 1,00,000 4,00,000 C Ltd.
3. Current Liabilities: A Ltd. 1,00,000 5,00,000
4,00,000 3. Current Liabilities:
C Ltd. 50,000 4,50,000 2,50,000
A Ltd.C Ltd.
4. Property, Plant and Equipment: A Ltd.
Property, Plant and Equipment: A Ltd. 50,000 3,00,000
30,50,000
4. C Ltd. Current Assets:
C Ltd. 9,75,000 40,25,000
A Ltd. 26,25,000
5. Current Assets:A Ltd.
2,00,000 C Ltd. 9,75,000 36,00,000
C Ltd. 25,000 2,25,000 5. 1,25,000

Balance Sheet of B Ltd. 25,000 1,50,000
Note No. (₹)

1. Shareholders’ funds:

2. Non-current liabilities 2 5,00,000
3. Current Liabilities 3
3,00,000
37,50,000
Balance Sheet of B Ltd.

Chapter 11.1
Preparation o f Financial Statements
₹ ₹
Equity and liabilities

1. Shareholders’ funds: 7,50,000
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
Share Capital
Study Q.18 TO Q33
Mat.
2. Non-current liabilities 2 5,00,000 Past NO NO NO Q.2 NO NO Q.14 Q.13 NO Q.15 Q.16 NO
3. Current Liabilities 3 3,00,000 Exams
NO Q.2 Q.2 Q.1 Q.2 Q . 4 Q.2 Q.3 Q.5 Q.2 Q.7 Q.5
37,50,000
Q.10
ii Assets MTP Q.3 Q.5 Q.7 Q.6 Q.10
1. Non-current Assets Q.6
Q.10 Q.5 Q.9 Q.12 Q.2 NO Q.6 Q.8 Q.11 Q.12 Q.2 NO
Property, Plant and Equipment 4 36,00,000 RTP
Q.10
2. Current Assets 5 1,50,000
37,50,000
Chapter 11.1 Trade receivables 10,00,000

Short term Advances 2,13,500
Preparation Financial Statements
Profit & Loss Account 4,33,500
Question 1 Cash in Hand 1,50,000
Cash at Bank 12,35,000
Future Ltd. had the following items under the head “Reserves and Surplus” in the Balance Sheet as
on 31st March, 2019: Unsecured Loan 6,05,000
Trade payables (for Goods and Expenses) 8,00,000
Amount Rs. in lakhs
Loans & advances from related parties 2,00,000
Securities Premium Account 80
The following additional information is also provided:
Capital Reserve 60
(i) 10,000 Equity shares were issued for consideration other than cash,
General Reserve 90
(ii) Trade receivables of Rs. 2,60,000 are due for more than 6 months,
The company had an accumulated loss of Rs. 250 lakhs on the same date, which it has disclosed un-
der the head “Statement of Profit and Loss” as asset in its Balance Sheet. Comment on accuracy of this
(iii) The cost of the Assets were: Building Rs. 30,00,000, Plant & Machinery Rs. 35,00,000
treatment in line with Schedule III to the Companies Act, 2013. (MTP Oct. ‘19, 4 Marks, Old & New SM)
and Furniture Rs. 3,12,500
(iv) The balance of Rs. 7,50,000 in the Loan Account with State Finance Corporation is inclu-
Answer 1 sive of Rs. 37,500 for Interest Accrued but not Due. The loan is secured by hypothecation of
Plants Machinery.
Note 6 (B) given under Part I of Schedule III to the Companies Act, 2013 provides that debit balance of
Statement of Profit and Loss (after all allocations and appropriations) shall be shown as a negative (v) Balance at Bank includes Rs. 10,000 with Omega Bank Ltd., which is not a Scheduled Bank,
figure under the head ‘Surplus’. Similarly, the balance of ‘Reserves and Surplus’, after adjusting negative
(vi) Transfer Rs. 20,000 to general reserve is proposed by Board of directors
balance of surplus, shall be shown under the head ‘Reserves and Surplus’ even if the resulting figure
is in the negative. In this case, the debit balance of profit and loss i.e. Rs. 250 lakhs exceeds the total of (vii) Board of directors has declared dividend of 5% on the paid up capital. The dividend distri-
all the reserves i.e. Rs. 230 lakhs. Therefore, balance of ‘Reserves and Surplus’ after adjusting debit bal- bution tax liability is Corporate Dividend Tax Rate @ 17.304 (wherein Base Rate is 15%) As
anceof profit and loss is negative by Rs. 20 lakhs, which should be disclosed on the face of the balance per amendment (17.472%).
sheet. Thus the treatment done by the company is incorrect. (MTP March ‘19,20 Marks, MTP Aug’18 16 Marks, MTP Apr‘19 16 Marks, MTP March ’18 15 Marks, MTP Oct
18 15 Marks, MTP March 21, 15 Marks, Old & New SM)(Same concept different figures and fewer adjust-
Question 2 ments MTP 15 Marks Sep’22, RTP May’20, RTP May’23, PYP Nov’19 10 Marks)
From the following particulars furnished by Alpha Ltd., prepare the Balance Sheet as on 31stMarch20X1 Answer 2
as required by Part I, Schedule III of the Companies Act, 2013. Alpha Ltd. Balance Sheet as on 31st March, 20X1
Particulars Debit Rs. Credit Rs. Particular Notes Rs.

Equity Share Capital (Face value of Rs. 100 each) 50,00,000 Equity and Liabilities
Call in Arrears 5,000 1 Shareholders’ funds
Land & Building 27,50,000 a Share capital 1 49,95,000
Plant & Machinery 26,25,000 b Reserves and Surplus (amended) 2 12,33,750
Furniture 2,50,000
2 Non-current liabilities
General Reserve 10,50,000
Long-term borrowings 3 13,17,500
Loan from State Financial Corporation 7,50,000
3 Current liabilities
Inventory:
a Trade Payables 8,00,000
Raw Materials 2,50,000
b Other Current liabilities (amended) 4 2,87,250
Finished Goods 10,00,000 12,50,000
C Short term provisions 5 6,40,000
Provision for Taxation 6,40,000
Short term borrowings 2,00,000

State Financial Corporation Loan (7,50,000-
94,73,500 37,500)
Assets (Secured by hypothecation of Plant and 7,12,500
1 Non-current assets Machinery)
Property, Plant & equipment Unsecured Loan 6,05,000
Tangible assets 6 56,25,000 Total 13,17,500
2 Current assets 4 Other current liabilities
a Inventories 12,50,000 Interest accrued but not due on loans 37,500
(SFC)
b Trade receivables 10,00,000
Dividend (Refer W N) 2,49,750
c Cash and bank balances 13,85,000
DOT on dividend (Refer W N) (as per 50,843 2,49,750
d Short-term loans and advances 2,13,500
amendment of change in rate of SHEC the
(51,337)
e Total 94,73,500 DDT rate is 17.472%)
Notes to accounts 2,87,250
Rs. 5 Short-term provisions
1. Share Capital Provision for taxation 6,40,000
Equity share capital 6 Tangible assets
Issued & subscribed & called up Land and Building 30,00,000
50,000 Equity Shares of Rs. 100 each Less; Depreciation (2,50,000) 27,50,000
(of the above 10,000 shares have been (b.f.)

issued for Plants Machinery 35,00,000
consideration other than cash) 50,00,000 Less; Depreciation (8,75,000) 26,25,000
Less; Calls in arrears (5,000) 49,95,000 (b.f.)
Total 49,95,000 Furniture & Fittings 3,12,500
2 Reserves and Surplus Less; Depreciation (62,500) (b.f.) 2,50,000
General Reserve 10,50,000 Total 56,25,000
Add: current year transfer 20,000 10,70,000 7 Inventories
Profit & Loss balance Raw Materials 2,50,000
Profit for the year 4,33,500 Finished goods 10,00,000
Less; Appropriations: Total 12,50,000
Transfer to General reserve (20,000) 8 Trade receivables
Dividend Payable (Refer W N) (2,49,750) Outstanding for a period exceeding six 2,60,000
DOT on dividend (Refer W N) (As per (50,843) 1,63,750 months
amendment) (51,337) Other Amounts 7,40,000
Total 12,33,750 Total 10,00,000
3 Long-term borrowings 9 Cash and bank balances
Secured Term Loan Cash and cash equivalents
Cash at bank Provision for Taxation 3,80,000

with Scheduled Banks 12,25,000 Dividend payable 70,000
with others (Omega Bank Ltd.) 10,000 12,35,000 Cash in Hand 70,000
Cash in hand 1,50,000 Balances with Banks 4,14,000
Other bank balances Nil Total 1,76,24,000 1,76,24,000
13,85,000 The following additional information was also provided in respect of the above balances:
(1) 50,000 fully paid equity shares were allotted as consideration for land.
Working Note :Calculation of grossing-up of dividend
(2) The cost of assets were:
Particlars Rs.
Building Rs.
Dividend distributed Alpha Ltd. (5% of 49,95,000) 2,49,750 32,00,000
Add : Increases for the purpose of grossing up of dividend 15/100- 44,074 Plant and Machinery Rs.
15 X 2,49,750 30,00,000
Gross dividend 2,93,824 Furniture and Fixture Rs.
16,50,000
Question 3 Trade Receivables for Rs. 4,86,000 due for more than 6 months.
Balances with banks include Rs. 56,000, the Naya bank, which is not a scheduled bank.
On 31st March, 2020, SR Ltd. provides the following ledger balances after preparing its Profit &Loss
Account for the year ended 31st March, 2020. Loan from Public Finance Corporation repayable after 3 years.
The balance of Rs. 26,30,000 in the loan account with Public Finance Corporation is inclusive of
Particulars Amount (Rs.) Rs. 1,34,000 for interest accrued but not due. The loan is secured by hypothecation of land.
Debit Credit Other long-term loans (unsecured) include:
Equity Share Capital, fully paid shares of Rs. 50 each 80,00,000 (i) Loan Taken from Nixes Bank - Rs 13,80,000 (Amount repayable within 1 year Rs 4,80,000)
Calls in arrear 15,000 (ii) Loan taken from Directors Rs. 8,50,000
Land 25,00,000
Buildings 30,00,000 Bills Receivable for Rs. 1,60,000 maturing on 15th June, 2020 has been discounted.
Plant & Machinery 24,00,000 Short term borrowings include:
Furniture &Fixture 13,00,000 (iii) Loan Taken from Naya Bank - Rs 1,16,000 (Secured)
Securities Premium 15,00,000 (iv) Loan taken from Directors Rs. 48,000
General Reserve 9,41,000 Transfer of Rs. 35,000 to general reserve has been proposed by the Board of directors out of theprofits
for the year.
Inventory of finished goods includes loose tools costing Rs. 5 lakhs (which do not meet definition of
Loan from Public Finance Corporation (Secured 26,30,000
property, plant & equipment as per AS 10)
byHypothecation of Land)
You are required to prepare the Balance Sheet of the Company as on March 31st 2020 as required under
Other Long Term Loans 22,50,000
Part – I of Schedule III of the Companies Act, 2013. Ignore previous year figures.(MTP 20 Marks May ’20,
Short Term Borrowings 4,60,000 MTP 16 Marks Oct’21, Old & New SM)
Inventories: Finished goods 45,00,000
Raw materials 13,00,000
Trade Receivables 17,50,000
Advances: Short Term 3,75,000
Less: Calls in arrears (15,000) 79,85,000
Answer 3 2. Reserves and Surplus
SR Ltd. Balance Sheet as on 31st March, 2020 General Reserve 9,41,000

Add: Transferred from Profit and loss ac- 35,000 9,76,000
Particulars Notes Figures at the end of currentreport- count Securities premium
ing period (Rs.) Surplus (Profit & Loss A/c) 5,80,000 15,00,000
Equity and Liabilities Less: Appropriation to General Reserve (proposed) (35,000) 5,45,000
1 Shareholders’ funds 30,21,000
a Share capital 1 79,85,000 3. Long-term borrowings
b Reserves and Surplus 2 30,21,000 Secured: Term Loans
2 Non-current liabilities Loan from Public Finance Corporation [repayable after 3 24,96,000
a Long-term borrowing 3 42,66,000 years (Rs. 26,30,000 - Rs. 1,34,000 for interest accrued but
not due)]
3. Current liabilities
Secured by hypothecation of land Unsecured
a Short-term borrowings 4 4,60,000
Bank Loan (Nixes bank) 9,00,000
b Trade Payables 8,13,000
(Rs. 13,80,000 - Rs. 4,80,000 repayable within 1 year)
c Other current liabilities 5 6,84,000
Loan from Directors 8,50,000
d Short-term provisions 6 3,80,000
Others 20,000 17,70,000
Total 1,76,09,000
Total 42,66,000
Assets
4. Short-term borrowings
1. Non-current assets
Loan from Naya bank (Secured) 1,16,000
A PPE 7 92,00,000
Loan from Directors 48,000
2 Current assets
Others 2,96,000 4,60,000
A Inventories 8 58,00,000
5. Other current liabilities
B Trade receivables 9 17,50,000
Loan from Nixes bank repayable within one year 4,80,000
C Cash and cash equivalents 10 4,84,000
Dividend payable 70,000
D Short-term loans and ad- 3,75,000
vances Interest accrued but not due on borrowings 1,34,000 6,84,000
Total 1,76,09,000 6. Short-term provisions

Notes to accounts
7. PPE
Rs. Land 25,00,000
1. Share Capital Buildings 32,00,000
Equity share capital Less: Depreciation (2,00,000) 30,00,000
Issued, subscribed and called up Plant & Machinery 30,00,000
1,60,000 Equity Shares of Rs. 50 each (Out of the above Less: Depreciation (6,00,000) 24,00,000
50,000 shares have been issued for consideration other 80,00,000 Furniture & Fittings 16,50,000
than cash)
Less: Depreciation (3,50,000) 13,00,000
Total 92,00,000 Question 5
8. Inventories You are required to prepare a Balance Sheet as at 31st March 2020, as per Schedule III of the Companies
Raw Material 13,00,000 Act, 2013, from the following information of Mehar Ltd.:
Finished goods 40,00,000 Particulars Amount Particulars Amount

(Rs.)
Loose tools 5,00,000 58,00,000 (Rs.)
Trade receivables Term Loans (Secured) 40,00,000 Investments (Non-cur- 9,00,000

rent)
Outstanding for a period exceeding six months 4,86,000
Trade payables 45,80,000 Profit for the year 32,00,000
Others 12,64,000
Cash and Bank Balances 38,40,000 Trade receivables 49,00,000
Total 17,50,000
Staff Advances 2,20,000 Miscellaneous Expenses 2,32,000
Cash and cash equivalents
Other advances (given by Co.) 14,88,000 Loan from other parties 8,00,000
Balances with banks
Provision for Taxation 10,20,000 Provision for Doubtful 80,000
with Scheduled Banks 3,58,000 Debts
with others banks 56,000 4,14,000 Securities Premium 19,00,000 Stores 16,00,000
Cash in hand 70,000 Loose Tools 2,00,000 Finished Goods 30,00,000
Total 4,84,000 General Reserve 62,00,000 Plant and Machinery 2,14,00,000
(WDV)
Note: There is a Contingent Liability amounting Rs. 1,60,000 Additional Information: -
Question 4 1. Share Capital consists of-

(a) 1,20,000 Equity Shares of Rs. 100 each fully paid up.
Medha Ltd. took a loan from bank for ₹ 10,00,000 to be settled within 5 years in 10 equal half
(b) 40,000, 10% Redeemable Preference Shares of Rs. 100 each fully paid up.
yearly instalments with interest. First instalment is due on 30.09.20 20 of ₹ 1,00,000. Determine
how the loan will be classified in preparation of Financial Statements of Medha Ltd. for the year 2. Write off the amount of Miscellaneous Expenses in full, amounting
ended 31st March, 2020 according to Schedule III.(MTP 4 Marks , Oct 20) Rs. 2,32,000. (MTP 14 Marks April 22 , April 21 & Oct ‘23)(Same con-
cept different figures RTP Nov’18)
Answer 4
(v) As per Schedule III, a liability should be classified as current when it satisfies any of the following
criteria: Answer 5
(vi) it is expected to be settled in the company’s normal operating cycle;
(vii) it is held primarily for the purpose of being traded;
(viii) it is due to be settled within twelve months after the reporting date; or
the company does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting date.
In the given case, instalments due on 30.09.2020 and 31.03.2021 will be shown under the head
‘other current liabilities’. Therefore, in the balance sheet as on 31.3.2020, ₹ 8,00,000 (₹ 1,00,000 x 8
instalments) will be shown under the heading ‘Long term Borrowings’ and ₹ 2,00,000 (₹ 1,00,000 x
2 instalments) will be shown under the heading ‘Other Current Liabilities’ as current maturities of loan
from bank.
Balance Sheet of Mehar Ltd. as at 31st March, 2020 2. Reserves and Surplus
Securities Premium Account 19,00,000
Note ₹ General reserve 62,00,000
I EQUITY AND LIABILITIES: Profit & Loss Balance
(1) (a) Share Capital 1 1,60,00,000 Opening balance -
(b) Reserves and Surplus 2 110,68,000 Profit for the period 32,00,000
(2) Non-current Liabilities Less: Miscellaneous Expenditure
Long term Borrowings- Terms 40,00,000 written off (2,32,000) 29,68,000 110,68,000
Loans (Secured)
Loan from other parties 8,00,000
(a) Trade Payables 45,80,000
(b) Other current liabilities 3 8,00,000 214,00,000
Plant and Machinery (WDV)
(c) Short-term Provisions (Provision for taxation) 10,20,000
5. Inventories
Total 3,74,68,000
Finished Goods 30,00,000
II ASSETS
Stores 16,00,000
(1) Non-current Assets
Loose Tools 2,00,000 48,00,000
6. Trade Receivables
(b) Non- current Investments 9,00,000
Trade receivables 49,00,000
(2) Current Assets:
Less: Provision for Doubtful Debts (80,000) 48,20,000
(b) Trade Receivables 6 48,20,000 7. Short term loans & Advances
(c) Cash and Cash Equivalents 38,40,000 Staff Advances* 2,20,000
(d) Short-term Loans and Advances 7 17,08,000 Other Advances* 14,88,000 17,08,000
Total 3,74,68,000 *Considered to be short term.

Notes to accounts
( Rs.) Question 6
1. Share Capital XYZ Ltd. proposes to declare 10% dividend out of General Reserves due to inadequacy of profits inthe
Authorized, issued, subscribed & called up year ending 31-03-2020.
1,20,000, Equity Shares of Rs. 100 each 1,20,00,000 From the following particulars ascertain the amount that can be utilized from general reserves,
40,000 10% Redeemable Preference Shares of 100 each 40,00,000 1,60,00,000

according to the Companies Rules, 2014: (Rs.)
8,00,000 Equity Shares of Rs. 10 each fully paid up 80,00,000
General Reserves 25,00,000
Revaluation Reserves 6,50,000
Net profit for the year 1,42,500
Average rate of dividend during the last five years has been 12%.. (MTP 5 Marks April 21, MTP 5Marks April Answer 7
22, RTP May’21)
Extract of Balance Sheet of A Ltd
Answer 6 Particulars Note No. Amount
Amount that can be drawn from reserves for (10% dividend on Rs. 80,00,000 i.e. Rs. 8,00,000) Non - Current
Profits available Liabilities 1 16,03,000
Current year profit Rs. 1,42,500 Long term borrowings
Amount which can be utilized from reserves (Rs. 8,00,000 – 1,42,500) Rs.6,57,500 Con- Current Liabilities
ditions as per Companies (Declaration of dividend out of Reserves) Rules, 2014: Condition I
Short term borrowings 2 4,34,000
Since 10% is lower than the average rate of dividend (12%), 10% dividend can be declared. Notes to Accounts
Condition II
1. Long-Term Borrowings
Maximum amount that can be drawn from the accumulated profits and reserves should not Term loans — Secured
exceed 10% of paid up capital plus free reserves ie. Rs. 10,50,000 [10% of (80,00,000 + 25,00,000)]
- From banks 8,95,000
Condition III
- From other parties 9,17,000
The balance of reserves after drawl Rs. 18,42,500 (Rs. 25,00,000 - Rs. 6,57,500) should not fall below 18,12,000
15 % of its paid up capital ie. Rs. 12,00,000 (15% of Rs. 80,00,000] Less: Current maturities of long-term debt (Refer Note 3) (2,09,000)
Since all the three conditions are satisfied, the company can withdraw Rs. 6,57,500 from accu- 16,03,000
mulated reserve (as per Declaration and Payment of Dividend Rules, 2014).
2. Short-Term Borrowings
(Unsecured loan)
Question 7 - from bank 2,25,000

Current maturities of long-term debt
From the following information, prepare extract of Balance Sheet of A Limited along with notes
making necessary compliance of Schedule III to the Companies Act, 2013: - From banks 1,24,000
- From others 85,000
Amount (₹)
4,34,000
Loan Funds
(a) Secured Loans 18,12,000 Question 8
(b) Unsecured Loan - Short term from bank 2,25,000
State under which head these accounts should be classified in Balance Sheet, as per Schedule III of
Other information is as under: the Companies Act, 2013:
Secured Loans (i) Share application money received in excess of issued share capital.
Term Loans from: (ii) Share option outstanding account.
Banks 8,95,000 (iii) Unpaid matured debenture and interest accrued thereon.
Others 9,17,000
18,12,000
(v) Calls unpaid. (RTP Nov 21, Old & New SM)
Current Maturities of long-term loan from Bank 1,24,000
Current Maturities of long- term loan from Others 85,000
There was no interest accrued / due as at the end of the year. Current maturities of long-term
loans amounting ₹ 2,09,000 is included in the value of secured loans of ₹ 18,12,000. (MTP 5 Marks
April 23& MTP 5 Marks Nov 21)
Bank overdraft secured by hypothecation of stocks 4,50,000

and receivables
Answer 8
Technical knowhow fees at cost paid during the year 4,50,000
(i) Current Liabilities/ Other Current Liabilities
Audit fees 18,000
Total 44,72,850 44,72,850
You are required to prepare the Profit and Loss Statement for the year ended 31st March, 2018 and
(iv) Contingent Liabilities and Commitments the Balance Sheet as on 31st March, 2018 as per Schedule III of the Companies Act, 2013 after taking
(v) Shareholders’ Fund / Share Capital into account the following –
1. Closing Stock was valued at Rs. 4,27,500.

Question 9
2. Purchases include Rs. 15,000 worth of goods and articles distributed among
valued customers.
Shweta Ltd. has the Authorized Capital of Rs. 15,00,000 consisting of 6,000 6% Preference shares of
Rs. 100 each and 90,000 equity Shares of Rs.10 each. The following was the Trial Balance of the Com- 3. Salaries and Wages include Rs. 6,000 being Wages incurred for installation
pany as on 31st March, 2018: of Electrical Fittings which were recorded under “Furniture”.
4. Bills Receivable include Rs. 4,500 being dishonoured bills. 50% of which had
Particulars Dr. Cr.
been considered irrecoverable.
Investment in Shares at cost 1,50,000
5. Bills Receivable of Rs. 6,000 maturing after 31st March were discounted.
Purchases 14,71,500
6. Depreciation on Furniture to be charged at 10% on Written Down Value.
Selling Expenses 2,37,300
7. Investment in shares is to be treated as non-current investments.
Inventory as at the beginning of the year 4,35,600
8. Interest on Debentures for the half year ending on 31st March was due on that date.
Salaries and Wages 1,56,000
9. Provide Provision for taxation Rs.12,000.
Cash on Hand 36,000
10. Technical Knowhow Fees is to be written off over a period of 10 years.
Interim Preference dividend for the half year to 30th 18,000
11. Salaries and Wages include Rs. 30,000 being Director’s Remuneration.
September
12. Trade receivables include Rs. 18,000 due for more than six months. (RTP May 19) (Same
Bills Receivable 1,24,500
concept different figures & lesser adjustments Nov 21)
Interest on Bank overdraft 29,400
Answer 9
Interest on Debentures upto 30th Sep (1st half year) 11,250
Debtors 1,50,300
Statement of Profit and Loss of Shweta Ltd. for the year ended 31st March, 2018
Balance sheet of Shweta Ltd. as on 31st March, 2018
Freehold property at cost 10,50,000
Furniture at cost less depreciation of Rs. 45,000 1,05,000 Particulars as on 31st March Note
6% Preference share capital 6,00,000 I
Equity share capital fully paid up 6,00,000 (1) Shareholders’ funds:
5% mortgage debentures secured on Freehold properties 4,50,000 (a) Share capital 1 12,00,000
(b) Reserves and surplus 2 66,150
Income tax paid in advance for the current year 30,000
(2) Non current liabilities:
Dividends 12,750
Profit and Loss A/c (opening balance) 85,500
(3) Current liabilities:
Sales (Net) 20,11,050
(a) Short term borrowings 4 4,50,000
(b) Trade payables 2,63,550

Secured Borrowings: Loans Repayable on Demand Overdraft
(c) Other current liabilities 5 29,250 from Banks (Secured by Hypothecation of Stocks & Receiv- 4,50,000
Total 24,58,950 ables)
II ASSETS 5. Other Current liabilities
(1) Non-current Assets Interest Accrued and due on Borrowings (5% De- 11,250
bentures)
(a) Property, Plant & Equipment
Unpaid Preference Dividends 18,000 29,250
(i) Tangible assets 6 11,49,900
6. Tangible Property, Plant & Equipment
(ii) Intangible assets 7 4,05,000
Furniture
(b) Non current investments (Shares at cost) 1,50,000
Current Assets: Furniture at Cost Less depreciation Rs. 45,000 (as given in 1,05,000
(a) Inventories 4,27,500 Trial Balance
(b) Trade receivables 8 2,72,550 Add: Depreciation 45,000
(c) Cash and Cash equivalents – Cash on hand 36,000 Cost of Furniture 1,50,000
(d) Short term loans and advances –Income tax 18,000 Add: Installation charge of Electrical Fittings wrongly 6,000
(paid 30,000-Provision 12,000) included under the heading Salaries and Wages
Total 24,58,950 Total Gross block of Furniture A/c 1,56,000
Note: There is a Contingent liability for Bills receivable discounted with Bank Rs. Accumulated Depreciation Account: Opening Balance-
6,000.Notes to accounts given in Trial Balance 45,000
Depreciation for the year:
(Rs.)
On Opening WDV at 10% i.e.
1. Share Capital
(10% x 1,05,000) 10,500
Authorized
On additional purchase during the year
90,000 Equity Shares of Rs. 10 each 9,00,000
at 10% i.e. (10% x 6,000) 600
6,000 6% Preference shares of Rs. 100 each 6,00,000 15,00,000
Less: Accumulated Depreciation 56,100 99,900
Issued, subscribed & called up
Freehold property (at cost) 10,50,000
60,000, Equity Shares of Rs. 10 each 6,00,000
11,49,900
6,000 6% Redeemable Preference Shares of 100 each 6,00,000 12,00,000
7. Intangible Fixed Assets
2. Reserves and Surplus Technical knowhow 4,50,000
Balance as on 1st April, 2017 85,500 Less: Written off 45,000 4,05,000
Add: Surplus for current year 16,650 1,02,150 8. Trade Receivables
Less: Preference Dividend 36,000 Sundry Debtors (a) Debt outstanding for more than six 18,000
Balance as on 31st March, 2018 66,150 months

3. Long Term Borrowings (b) Other Debts (refer Working Note) 1,34,550
5% Mortgage Debentures (Secured against Freehold 4,50,000 Bills Receivable (1,24,500 -4,500) 1,20,000 2,72,550
Properties) 9. Employee benefit expenses
4. Short Term Borrowings Amount as per Trial Balance 1,56,000
Less: Wages incurred for installation of electrical fittings to be 6,000
capitalised
Less: Directors’ Remuneration shown separately 30,000 Furniture & Fixtures 1,50,000 (2,00,000 shares of Rs. 10 each)
Balance amount 1,20,000 Purchases 12,32,500 Bank Overdraft 12,67,000
10. Finance Costs Wages 13,68,000
Interest on bank overdraft 29,400 Freehold Land 16,25,000 Trade Payables (for goods) 2,40,500
Interest on debentures 22,500 51,900 Plant & Machinery 7,50,000 Sales 36,17,000
11. Other Expenses Engineering Tools 1,50,000 Rent (Cr.) 30,000
Payment to the auditors 18,000 Trade Receivables 4,00,500 Transfer fees received 6,500
Director’s remuneration 30,000 Advertisement 15,000 Profit & Loss A/c (Cr.) 67,000
Selling expenses 2,37,300 Commission & Brokerage 67,500 Repairs to Building 56,500
Technical knowhow written of (4,50,000/10) 45,000 Business Expenses 56,000 Bad debts 25,500
Advertisement (Goods and Articles Distributed) 15,000
Bad Debts (4,500 x50%) 2,250 3,47,550
The inventory (valued at cost or market value, which is lower) as on 31st March, 2017 was Rs. 7,08,000.
Outstanding liabilities for wages Rs. 25,000 and business expenses Rs. 36,000. Dividend declared @ 12% on
Working Note paid-up capital and it was decided to transfer to reserve @ 2.5% of profits. Chargedepreciation on closing
written down amount of Plant & Machinery @ 5%, Engineering Tools @ 20%; Patterns @ 10%; and Furniture &
Calculation of Sundry Debtors-Other Debts Fixtures @10%. Provide 25,000 as doubtful debts after writing off Rs.16,000 as bad debts. Provide for income
tax @ 30%. Corporate Dividend Tax Rate @ 17.304 (wherein Base Rate is 15%).
Sundry Debtors as given in Trial Balance 1,50,300
Add Back: Bills Receivables Dishonoured 4,500
You are required to prepare Statement of Profit & Loss for the year ended 31st March, 2017 and Balance
Sheet as on that date. (RTP May 18)(Same concept different figures lesser adjustments RTP May’21,MTP
1,54,800
16 Marks Oct 20, MTP 16 Marks Mar 22)
Less: Bad Debts written off – 50% Rs. 4,500 (2,250)
Adjusted Sundry Debtors 1,52,550
Less: Debts due for more than 6 months (as per (18,000)
information given)
Total of other Debtors i.e. Debtors outstanding for less 1,34,550
than 6 months
Question 10
Kapil Ltd. has authorized capital of Rs. 50 lakhs divided into 5,00,000 equity shares of Rs. 10 each.
Their books show the following balances as on 31st March, 2017:
Rs. Rs.
Inventory 1.4.2016 6,65,000 Bank Current Account 20,000
Discounts & Re- 30,000 Cash in hand 8,000
batesallowed
Carriage Inwards 57,500 Interest (bank overdraft) 1,11,000
Patterns 3,75,000 Calls in Arrear @ Rs. 2 per share
10,000
Rate, Taxes and Insurance 55,000 Equity share capital 20,00,000
Total Expenses 32,53,500

Answer 10
V Profit before Tax (III-IV) 4,00,000
Kapil Ltd. Balance Sheet as at 31st March, 2017
VI Tax Expenses @ 30% (1,20,000)
VII Profit for the period 2,80,000
Particulars Note (Rs.) Notes to Accounts:
No. Share Capital
Authorized Capital
5,00,000 Equity Shares of Rs. 10 each 50,00,000
(a)Share Capital
1 19,90,000 Issued Capital
(b) Reserves and Surplus (as per amendment) 2 1,08,200 2,00,000 Equity Shares of Rs. 10 each 20,00,000
(2) Current Liabilities Subscribed Capital and fully paid
(a) Trade Payables 2,40,500 1,95,000 Equity Shares of Rs.10 each 19,50,000
(b) Other Current Liabilities 3 13,28,000 Subscribed Capital but not fully paid
(c) Short-Term Provisions (as per amendment) 4 3,58,800 5,000 Equity Shares of Rs.10 each Rs. 8 paid 40,000
Total 40,25,500 (Call unpaid Rs.10,000) 19,90,000
II ASSETS Reserves and Surplus
(1) Non-Current Assets General Reserve 7,000
(a) Property, Plant & Equipment Surplus i.e. Balance in Statement of Profit & Loss:
(i) Tangible Assets 5 29,30,000 Opening Balance 67,000
(2) Current Assets Add: Profit for the period 2,80,000
(a) Inventories 7,08,000 Less: Transfer to Reserve @ 2.5% (7,000)
(b) Trade Receivables 6 3,59,500 Less: Equity Dividend [12% of (20,00,000-10,000)] (2,38,800)
(c) Cash and Cash Equivalents 7 28,000 Less: Corporate Dividend Tax (Working note) (as peramend- (48,614) 101200
Total 40,25,500 ment)
(49,086)
Kapil Ltd.Statement of Profit and Loss for the year ended 31st March, 2017 108200
Particulars Note No. (Rs.) Other Current Liabilities
I Revenue from Operations 36,17,000 Bank Overdraft 12,67,000
II Other Income 8 36,500 Outstanding Expenses [25,000+36,000] 61,000
III Total Revenue [I + II] 36,53,500 13,28,000

Short-term Provisions
IV Expenses:
Provision for Tax 1,20,000
Cost of purchases 12,32,500
Equity Dividend payable 2,38,800
Changes in Inventories [6,65,000-7,08,000] (43,000)
Corporate Dividend Tax (as per amendment) 48,614
Employee Benefits Expenses 9 13,93,000
49,086
Finance Costs 10 1,11,000
3,58,800
Depreciation and Amortization Expenses 1,20,000
1. Tangible Assets
Other Expenses 11 4,40,000
Bad Debts [25,500+16,000] 41,500

Particulars Value given Deprecia- Depreciation Written down
tionrate Charged(Rs.) Provision for Doubtful Debts 25,000
(Rs.) value at the
end(Rs.) 4,40,000
Land 16,25,000 - 16,25,000 Working Note

Plant & Machinery 7,50,000 5% 37,500 7,12,500
Calculation of grossing-up of dividend:
Furniture & Fixtures 1,50,000 10% 15,000 1,35,000
Particulars Rs.
Patterns 3,75,000 10% 37,500 3,37,500
Dividend distributed by Company 2,38,800
Engineering Tools 1,50,000 20% 30,000 1,20,000
Add: Increase for the purpose of grossing up of dividend 2,38,800 x[15/(100- 42,141
30,50,000 1,20,000 29,30,000 15)]
Trade Receivables
Gross dividend 2,80,941
Trade receivables (4,00,500-16,000) 3,84,500 Dividend distribution tax @ 17.304% (as per amendment @ 17.472%) 48,614
Less: Provision for doubtful debts (25,000) 49,086
3,59,500
Cash & Cash Equivalent Question 11
Cash Balance 8,000
(a) Following is the trial balance of Delta limited as on 31.3.2021. (Figures in ₹ ‘000)
Bank Balance in current A/c 20,000
28,000
Other Income Particulars Debit Particulars Credit
Land at cost 800 Equity share capital (shares of 500
Miscellaneous Income (Transfer fees) 6,500
₹ 10 each)
Rental Income 30,000
Calls in arrears 5 10% Debentures 300
36,500
Cash in hand 2 General reserve 150
Employee benefits expenses
Plant & Machinery at cost 824 Profit & Loss A/c (balance on 1.4.20) 75
Wages 13,68,000
Trade receivables 120 Securities premium 40
Add: Outstanding wages 25,000
Inventories (31-3-21) 96 Sales 1200
13,93,000 Cash at Bank 28 Trade payables 30

Adjusted Purchases 400 Provision for depreciation 150
2. Finance Cost
Factory expenses 80 Suspense Account 10
Interest on Bank overdraft 1,11,000
Administrative expenses 45
Other Expenses
Selling expenses 25
Carriage Inward 57,500
Debenture Interest 30
Discount & Rebates 30,000
2455 2455
Advertisement 15,000
Rate, Taxes and Insurance 55,000 Additional Information :
Repairs to Buildings 56,500 (i) The authorized share capital of the company is 80,000 shares of ₹ 10 each.
Commission & Brokerage 67,500 (ii) The company revalued the land at ₹ 9,60,000.
Miscellaneous Expenses [56,000+36,000] (Business Expenses) 92,000
(b) Trade Receivables 6 120.00

(iii) Equity share capital includes shares of ₹ 50,000 issued for consideration other than
cash. (c) Cash and Cash equivalents 7 30.00
(iv) Suspense account of ₹ 10,000 represents cash received from the sale of some of the Total 1,796.00
machineryon 1.4.2020. The cost of the machinery was ₹ 24,000 and the accumulated
Statement of Profit and Loss for the year ended 31st March 2021
depreciation thereon being ₹ 20,000. The balance of Plant & Machinery given in trial
balance is before adjustment of sale of machinery. Particulars Note No. (₹ in ‘000)
(v) Depreciation is to be provided on plant and machinery at 10% on cost. I. Revenue from Operations 1200.00
(vi) Balance at bank includes ₹ 5,000 with ABC Bank Ltd., which is not a Scheduled Bank. II. Other Income 8 6.00
(vii) Make provision for income tax @30%.
III. Total Income (I +II) 1,206.00
(viii) Trade receivables of ₹ 50,000 are due for more than six months.
IV. Expenses:
Purchases (adjusted) 400.00
You are required to prepare Delta Limited’s Balance Sheet as at 31.3.2021 and Statement Finance Costs 9 30.00
ofProfit and Loss with notes to accounts for the year ended 31.3. 2021 as per Schedule Ill. Ignore
previous year’s figures & taxation. Depreciation (10% of 800) 80.00
Other expenses 10 150.00
(b) “Current maturities of long term borrowing are disclosed separately under the head Other
current liabilities in the balance sheet of a company.” You are required to comment in line Total Expenses 660.00
with schedule III tothe Companies Act 2013. (RTP May ’22) (Same concept different figures- V. Profit / (Loss) for the period before tax (III – IV) 546.00
Old & New SM)
VI. Tax expenses @30% 163.80
Answer 11(a) VII Profit for the period 382.20
Delta Limited Notes to Accounts

Particulars (₹ in ‘000)
Balance Sheet as at 31st March 2021
1 Share Capital
Particulars Note No. (₹ in ‘000) Equity Share Capital
A. Equity and Liabilities Authorised
1. Shareholders’ funds 80,000 Shares of ₹ 10/- each
(a) Share Capital 1 495.00 800
(b) Reserves and Surplus 2 807.20 Issued, Subscribed and Called-up
2. Non-Current Liabilities 50,000 Shares of ₹ 10/- each 500
(a) Long Term Borrowings 3 300.00 (Out of the above 5,000 shares have been issued
3. Current Liabilities for consideration other than cash)
(a) Trade Payables 30.00 Less: Calls in arrears (5) 495
(b) Short- term provision 4 163.80 2 Reserves and Surplus
Total 1,796.00 Securities Premium 40.00
B. Assets Revaluation Reserve ₹ (960 – 800) 160.00
1. Non-Current Assets General Reserve 150.00
(a) Property, Plant and Equipment 5 1,550.00 Surplus i.e. Profit & Loss Account Balance
2. Current Assets Opening Balance 75.00
(a) Inventories 96.00 Add: Profit for the period 382.20 457.20
er current liabilities’ as per the amendment to Schedule III vide MCA notification dated 24th March, 2021.
807.20 Hence the statement given in the question is not valid.
3 Long-Term Borrowings
Question 12
10% Debentures 300
4. Short – term provision The following balance appeared in the books of Oliva Ltd. as on 31-03-2022.
Provision for tax 163.80
5 Property, plant & equipment Particulars Rs. Particulars Rs.
Land Inventory 01-04-2021 Sales 17,10,000
Opening Balance 800 -Raw Material 30,000 Interest 3,900
Add: Revaluation adjustment 160 -Finished goods 46,500 76,500 Profit and Loss A/c 21,000
Closing Balance 960 Purchases of 12,60,000 Share Capital 3,15,000
raw material
Plant and Machinery
Manufacturing Ex- 2,70,000 Secured Loans:
Opening Balance 824
penses 4,500
Short–
Less: Disposed off (24)
term 21,000 25,500
800 Long-
Less: Depreciation ₹ (150 – 20 + 80) (210) term
Closing Balance 590 Fixed Deposits (unse-

cured)
Total 1,550
Salaries and wag- 40,200 Short -term 1,500
es
6 Trade receivables
General Charges 16,500 Long - term 3,300 4,800
Debits outstanding for a period exceeding six months 50
Building 1,01,000 Trade payables 3,27,000
Other debts 70 120
7 Cash and Cash Equivalents Plant
andMachinery 70,400
Cash at Bank With scheduled banks 23
Furniture 10,200
With others (ABC Bank Limited) 5
Cash in hand 2 30 Motor Vehicles 40,800
8 Other Income
Investments: Current 4,500
Profit on sale of machinery
Sale value of machinery 10 Non-Current 7,500 12,000
Less: Book value of machinery (24 – 20) (4) 6
9 Finance Costs
Debenture Interest 30 Cash in Bank 2,71,100
10 Other Expenses: 24,07,200 24,07,200

Factory expenses 80
1. From the above balance and the following information, prepare the company’s statement of Profit
Selling expenses 25
andLoss for the year ended 31st March, 2022 and company’s Balance Sheet as on that date:
Administrative expenses 45 150
Current maturities of loan term borrowing are shown under ‘short term borrowings’ and not under ‘Oth-
2. Inventory on 31st March,2022- Raw material Rs. 25,800 and finished goods Rs. 60,000. Answer 12
3. Outstanding Expenses: Manufacturing Expenses Rs. 67,500 & Salaries & Wages Rs. 4,500. Oliva Ltd.
4. Interest accrued on Securities Rs. 300.
Balance Sheet as at 31.03.2022
5. General Charges prepaid Rs. 2,490.
6. Provide depreciation: Building @ 2% p.a., Machinery @ 10% p.a., Furniture @ 10% p.a. & Particulars Note Amount
MotorVehicles @ 20% p.a.
(1) Equity and Liabilities
7. Current maturity of long term loan is Rs. 1,000.
(i) Shareholders’ funds
The Taxation provision of 40% on net profit is considered. (RTP Nov’19, Nov’22)
(a) Share Capital 3,15,000
(b) Reserves and surplus 1 50,430
(2) Non-current liabilities
(a) Long-term borrowings 2 23,300
(a) Short -term borrowings 3 7,000
(b)Trade payables 3,27,000
(c) Other current liability 4 72,000
(d) Short term provision 5 19,620
II ASSETS 8,14,350
(a) Property, Plant & equipment 6 2,04,160
(b) Non-current investments 7,500
(2) Current assets
(a) Current investments 4,500
(b) Inventories 7 85,800
(c) Trade receivables 2,38,500
(d) Cash and cash equivalents 2,71,100
(e) Short-term loans and advances 8 2,490
(f) Other current assets 9 300
8,14,350
Oliva Ltd.
Current maturities of long term borrowings 1,000 7,000
Statement of Profit and loss for the year ended 31.03.2022
( Rs.)
Expenses Payable (67,500 + 4,500) 72,000 72,000
Particulars Note Amount 5. Short term provisions
I Revenue from operations 17,10,000 Provision for Income tax 19,620
II Other income (3,900 +300) 4,200 6. Property, plant and equipment
III Total income (I +II) 17,14,200 Building 1,01,000
IV Expenses: Less: Depreciation @ 2% ( 2,020) 98,980
Cost of materials consumed 10 12,64,200 Plant & Machinery 70,400
Purchases of inventory-in-trade -- Less: Depreciation @10% (7,040) 63,360
Changes in inventories of finished goods, work-in-progress and 11 (13,500) Furniture 10,200
inventory-in-Trade
Employee benefit expenses 12 44,700 Less: Depreciation @10% (1,020) 9,180
Finance costs -- Motor vehicles 40,800
Depreciation and amortization expenses 18,240 Less: Depreciation @20% (8,160) 32,640 2,04,160
Other expenses 13 3,51,510 7 Inventory
Total Expenses 16,65,150 Raw Material 25,800
V Profit before exceptional and extraordinary items and tax 49,050 Finished goods 60,000 85,800
VI Exceptional items -- 8. Short term Loans & Advances
VII Profit before extraordinary items and tax 49,050 General Charges prepaid 2,490
VIII Extraordinary items -- 9. Other Current Assets
IX Profit before tax 49,050 Interest accrued 300
X Tax expense (40% of 49,050) 19,620 10. Cost of material consumed
XI Profit/Loss for the period from continuing operations 29,430 Opening inventory of raw Material 30,000
Add: Purchases 12,60,000 12,90,000
Notes to accounts Less: Closing inventory (25,800) 12,64,200
11. Changes in inventory of Finished Goods & WIP
No. Particulars Amount Amount
Closing Inventory of Finished Goods 60,000
1. Reserve & Surplus
Less: Opening Inventory of Finished Goods (46,500) 13,500
Profit & Loss Account: Balance b/f 21,000
12. Employee Benefit expenses
Net Profit for the year 29,430 50,430
Salary & Wages (40,200 + 4,500) 44,700
2. Long term borrowings
13. Other Expenses:
Secured loans (21,000 less current maturities 1,000) 20,000
Manufacturing Expenses (2,70,000 + 67,500) 3,37,500
Fixed Deposits: Unsecured 3,300 23,300
General Charges (16,500 – 2,490) 14,010 3,51,510
3. Short term borrowings
Secured loans 4,500 Question 13
Fixed Deposits -Unsecured 1,500
The following is the Trial Balance of H Ltd., as on 31st March, 2021:
Dr. Cr. You are required to prepare H Limited’s Balance Sheet as on 31-3-2021 and Statement of Profit
and Loss with notes to accounts for the year ended 31-3-2021 as per Schedule III of the Compa-
Equity Capital (Shares of ₹ 100 each) 8,05,000 nies Act , 2013. Ignore previous years’ figures & taxation. (PYP July’21,20 Marks)
5,000, 6% preference shares of ₹ 100 each 5,00,000
9% Debentures 4,00,000 Answer 13
General Reserve 40,00,000 H Ltd Balance Sheet as at 31st March 2021
Profit & Loss A/c (of previous year) 72,000
Particulars Note No Amount in ₹
Sales 60,00,000
Equity and Liabilities
I. Shareholders’ Funds
Provision for Depreciation on Plant & Machinery 1,72,000
a. Share Capital 1 13,00,000
Suspense Account 40,000
b. Reserves and Surplus 2 53,91,900
Land at cost 24,00,000
II. Non-Current Liabilities
Plant & Machinery at cost 7,70,000
a. Long Term Borrowings 3 4,00,000
III. Current Liabilities
Inventories (31-03-2020 ) 9,50,000
a. Trade Payables 4 10,40,000
Bank 2,30,900
b. Other Current Liabilities 5 70,000
Adjusted Purchases 22,32,100
Total 82,01,900
Factory Expenses 15,00,000
Assets
Administration Expenses 3,00,000
I. Non-Current Assets
Selling Expenses 14,00,000
a. Property, Plant and Equipment 6 40,61,000
Debenture Interest 36,000
b. Intangible Assets 7 10,00,000
Goodwill 12,50,000
II. Current Assets
1,30,29,000 1,30,29,000 a. Inventories 9,50,000
Additional Information:The authorised share capital of the company is: b. Trade Receivables 19,60,000
5,000, 6% preference shares of ₹ 100 each 5,00,000
c. Cash and Cash equivalents 2,30,900
10,000, equity shares of ₹ 100 each 10,00,000
Total 82,01,900
(i) Issued equity capital as on 1st April 2020 stood at ₹ 7,20,000, that is 6,000 shares fully paid Statement of Profit and Loss for the year ended 31st March 2021
and 2,000 shares ₹ 60 paid. The directors made a call of ₹ 40 per share on 1st October 2020.
A shareholder could not pay the call on 100 shares and his shares were then forfeited and Particulars Note No Amount in ₹
reissued @ ₹ 90 per share as fully paid. I. Revenue from operations 60,00,000
(ii) On 31st March 2021, the Directors declared a dividend of 5% on equity shares, trans- Total Revenue 60,00,000
ferring any amount that may be required from General Reserve. Ignore Taxation.
II. Expenses
(iii) The company on the advice of independent value wishes to revalue the land at ₹
36,00,000.
Purchases (adjusted) 22,32,100
(iv) Suspense account of ₹ 40,000 represents amount received for the sale of some of the Finance Costs 8 36,000
machinery on 1-4-2020. The cost of the machinery was ₹ 1,00,000 and the accumulat-
ed depreciation thereon being ₹ 30,000. Depreciation and Amortization 9 3,17,000
(v) Depreciation is to be provided on plant and machinery at 10% on cost. Other Expenses 10 32,30,000
Amortize 1/5th of Goodwill. Total Expenses 58,15,100
III. Profit/(Loss) for the period 1,84,900 Less: Disposed off (1,00,000)
Notes to Accounts (Amount in ₹) Depreciation (2,09,000)
1 Share Capital Closing Balance 4,61,000
a. Authorized Capital Total 40,61,000
5,000, 6% Preference shares of ₹ 100/- each 5,00,000 7 Intangible Assets
10,000 Equity Shares of ₹100/- each 10,00,000 Goodwill 12,50,000
15,00,000 Less: Amortized (1/5the) (2,50,000)
b. Issued & Subscribed Capital
Total 10,00,000
5,000, 6% Preference shares of ₹100/- each 5,00,000
8 Finance Costs
8,000, Equity shares of ₹100/- each 8,00,000
Total 13,00,000 Debenture Interest 36,000
2 Reserves & Surplus 9 Depreciation and Amortization
Capital Reserve (100 X (90-40)) 5,000 Plant and Machinery 67,000
Revaluation Reserve (36,00,000-24,00,000) 12,00,000 Goodwill 2,50,000
General Reserve 40,00,000 Total 3,17,000
Surplus 1,84,900 10 Other Expenses
Add: Balance from previous year 72,000 Factory Expenses 15,00,000
Less: Selling Expenses 14,00,000
Dividends declared (70,000) Administrative Expenses 3,00,000
Profit/(Loss) carried forward to Balance Sheet 1,86,900 Loss on sale of Plant and Machinery
Total 53,91,900 Book Value
3 Long-Term Borrowings (1,00,000-30,000) 70,000
Secured Less: Sale Value (40,000) 30,000
9% Debentures 4,00,000 Total 32,30,000
4 Trade Payables 10,40,000 1.1.20 NoteThe inventories (31.3.20) amounting ₹ 9, 50,000 (given in the trial balance of the Ques-
tion) should have been as closing inventory i.e. as on 31.3.21. In the above solution, this inven-
5 Other Current Liabilities
tory has been considered as closing inventory i.e. for 31.3.21. If this is considered as inventory of
Dividend Payable 31.3.20, the closing inventory (as on 31.3.21) will not be available for the balance sheet as on
Preference Dividend 30,000 and in that case, the balance sheet will not tally without using suspense account amounting
₹ 9,50,000.
Equity Dividend 40,000
The financial statements given in the above Answer include adjustment for dividend declared on 31st
Total 70,000 March, 2021, strictly, as per the information given in the Question. However, practically dividends are de-
6 Property, Plant and Equipment clared in the annual general meetings which take place after the reporting date.
Land
Question 14
Opening balance 24,00,000
Add: Revaluation Adjustment 12,00,000 A company sold 20% of the Goods on Cash Basis and the balance on Credit basis.
Closing Balance 36,00,000 Debtors are allowed 1.5 month’s credit and their balance as on 31st March, 2021 is ₹ 1,50,000. Assume
that sale is evenly spread throughout the year.
Plant and Machinery
Purchases during the year ₹ 9,50,000 Closing stock is ₹ 10,000 less than the Opening Stock. Average
Opening Balance 7,70,000 stock maintained during the year ₹ 60,000. Direct Expenses amounted to ₹ 35,000 Calculate Credit
sales, Total sales and Gross profit for the year ended 31 st March, 2021. (PYP 5 Marks , Dec ‘21) Question 15
Answer 14 Debit Balance Amount (₹) Credit Balances Amount (₹)

Calculation of Credit Sales, Total Sales and Gross Profit
Credit Sales for the year ended 31st March , 2021 = Debtors X Purchases 82,95,000 Sales Commis- 1,25,87,000
= 1,50,000 X sion
Wages and Salaries 12,72,000 72,500
= Rs. 12,00,000 Equity Share Capital
Rent 2,20,000 10,00,000
General Reserve
Total Sales for the year ended 2020-21 = Credit Sales X Rates and Taxes 50,000 10,00,000
Surplus (P&L A/c) 01.04.2021
= Rs. 12,00,000 X Selling & Distribution 4,36,000 8,75,500
= Rs. 15,00,000 Expenses
Securities Premium Term
Directors Fees 32,000 Loan from PublicSector 2,50,000
Trading Account for the year ended 31st March, 2021 Bad Debts 38,500 Bank 1,02,00,000
Interest on Term Loan 8,05,000 Trade Payables
₹ ₹
Land 24,00,000 Provision for Depreciation:On 55,08,875
Plant & Machinery
To Opening stock 65,000 By Sales 15,00,000 Factory Building Plant 36,80,000
On Furniture and FittingsOn
To Direct expenses 35,000 By Closing Stock 55,000 and Machinery 62,50,000 9,37,500
Factory Building
To Purchases 9,50,000 Furniture and Fittings 8,25,000 82,500
To Gross profit 5,05,000 Trade Receivables 64,75,000 1,84,000
15,55,000 15,55,000
Advance Income Tax Paid 37,500 Provision for Doubtful Debts 25,000
Working Note:Calculation of opening stock and closing stock Stock (1st April,2021) 9,25,000 Bills Payable 1,25,000
If closing stock is x then opening stock is x+10,000 Bank Balances 9,75,000
Cash on Hand 1,31,875
Average stock ₹ 60,000 Total 3,28,47,875 Total 3,28,47,875
Average stock = Opening stock + Closing stock /2 Following information is provided:
Thus Opening stock is ₹ 65,000 and closing stock is ₹ 55,000. (1) The Authorized Share Capital of the Company is 2,00,000 Equity Shares of ₹ 10 each. The
Company has issued 1,00,000 Equity Shares of ₹ 10 each.
(2) Rent of ₹ 20,000 and Wages of ₹ 1,56,500 are outstanding as on 31st March, 2022.
(3) Provide Depreciation @ 10% per annum on Plant and Machinery, 10% on Furniture andFittings
and 5% on Factory Building on written down value basis.
(4) Closing Stock as on 31st March, 2022 is ₹ 11,37,500.
(5) Make a provision for Doubtful Debt @ 5% on Debtors.
(6) Make a provision of 25% for Corporate Income Tax.
(7) Transfer ₹ 1,00,000 to General Reserve.
(8) Term Loan from Public Sector Bank is secured against Hypothecation of Plant andMachinery.
Installment of Term Loan falling due within one year is ₹ 17,00,000.
(9) Trade Receivables of ₹ 85,600 are outstanding for more than six months.
(10) The Board declared a dividend @10% on Paid up Share Capital on 5 th April, 2022.
You are required to prepare Balance Sheet as on 31st March 2022 and Statement of Profit and Loss with
Note to Accounts for the year ending 31st March, 2022 as per Schedule III of the Companies Act, 2013. Statement of Profit and Loss of Anmol Ltd. for theyear ended 31st March, 2022
Ignore previous years’ figures. (PYP 20 Marks Nov ‘22)
Particulars Notes Amount
Answer 15
I. Revenue from operations 1,25,87,000
Balance Sheet of Anmol Ltd. as at 31st March, 2022
II. Other income (Commission income) 72,500
Particulars Note ₹
No III. Total Income (I + II) 1,26,59,500
Equity and Liabilities IV. Expenses:
1 Shareholders’ funds Purchases of Inventory-in-Trade 82,95,000
a Share capital 1 10,00,000 Changes in inventories of finished goods work-in- prog- 9 (2,12,500)
ress and Inventory-in-Trade
b Reserves and Surplus 2 24,76,462
Employee benefits expense 10 14,28,500
Finance costs (interest on term loan) 8,05,000
a Long-term borrowings 3 85,00,000
Depreciation 7,80,300
Other operating expenses 11 10,95,250
a Short term borrowings (Installment of term loan 17,00,000
falling due in one year) Total expenses 1,21,91,550
b Trade Payables 4 56,33,875 V. Profit (Loss) for the period (III - IV) 4,67,950
c Other current liabilities 5 1,76,500 VI. (-) Tax (25%) (1,16,988)
d Short term provisions (provision for tax) 1,16,988 VII. PAT 3,50,962
Total 1,96,03,825
ASSETS Notes to accounts
₹
a PPE 6 1,11,70,700
1 Share Capital
2 Current assets
Equity share capital
a Inventories 11,37,500
Authorized
b Trade receivables 7 61,51,250 20,00,000
2,00,000 equity shares of ₹ 10 each
c Cash and bank balances 8 11,06,875
Issued & subscribed
d Short term loans & advances (Advance tax paid) 37,500 10,00,000
1,96,03,825
Add: current year transfer 1,00,000 11,00,000
Profit & Loss balance
Opening balance: Surplus P & L A/c 8,75,500
Profit for the year 3,50,962
Less: Appropriations:
Transfer to General reserve (1,00,000) 11,26,462
Securities premium 2,50,000
24,76,462 Rates and Taxes 50,000

3 Long-term borrowings Selling & Distribution expenses 4,36,000
Term loan from public sector bank (Secured by 1,02,00,000 Bad debts 38,500
hypothecation)
Provision for Doubtful Debts (3,23,750-25,000) 2,98,750
Less: Installment of Term loan falling due within one (17,00,000)
year Director’s fee 32,000
Total 85,00,000 Total 10,95,250

Note:
4 Trade payables
Trade payables 55,08,875 The final dividend will not be recognized as a liability at the balance sheet date (even if it is declared
after reporting date but before approval of the financial statements) as per Accounting Standards. Hence,
Bills payable 1,25,000 56,33,875 it has not been recognized in the financial statements for the year ended 31 March, 2022. Such dividends
5 Other current liabilities will be disclosed in notes only.
1. Calculation of depreciation:
Rent outstanding 20,000
Book Accumulat- WDV Current year Current year
Wages and Salaries Outstanding 1,56,500 1,76,500
ed
value Depreciation WDV
6 PPE (Note 2)
depreciation
Land 24,00,000
Land 24,00,000 - 24,00,000 - 24,00,000
Factory Buildings 33,21,200
Factory building 36,80,000 1,84,000 34,96,000 1,74,800 33,21,200
Plant & 62,50,000 9,37,500 53,12,500 5,31,250 47,81,250
Furniture & Fittings 6,68,250 Machin-
Total 1,11,70,700 ery
7 Trade receivables Furniture & 8,25,000 82,500 7,42,500 74,250 66850
Debtors Outstanding for period exceeding 6 months 85,600 Fittings
Other debts 63,89,400 Total 7,80,300 1,11,70,700
Less: Provision for doubtful debt (3,23,750) 61,51,250

Question 16
8 Cash and bank balances
Cash and cash equivalents The following balances are extracted from the books of Travese Limited as on 31st March 2023:
Bank balance 9,75,000

Particulars Amount ( Rs.)
Cash on hand 1,31,875 11,06,875
9 Changes in Inventories Debit Credit
Opening Inventory 9,25,000 7% Debentures 48,45,000

Less: Closing Inventory (11,37,500)
Plant & Machinery (at cost) 37,43,400
Change (2,12,500)
10 Employee benefit expense Trade Receivable 35,70,000
Wages and Salaries 12,72,000
Land 97,37,000
Add: Wages and Salaries Outstanding 1,56,500 14,28,500
11 Other operating expenses Debenture Interest 3,39,150
Rent 2,20,000
Bank Interest 13,260
Add: outstanding 20,000 2,40,000
Sales 47,22,600 Particulars Notes Amount
Transfer Fees 38,250 I. Revenue from operations 1 47,22,600
Discount received 66,300 II. Other income Total 2 1,61,465
III. Income (I + II)

Purchases 28,86,600
IV. Expenses: 48,84,065
Inventories 1.04.2022 4,97,250
Purchases of Inventory-in-Trade 28,86,600
Factory Expenses 2,58,060
Changes in inventories of finished goods, work- 3 20,400
Rates, Taxes and Insurance 65,025 inprogress and Inventory-in-Trade
Repairs 1,49,685 Finance costs 4 3,52,410
Sundry Expenses 1,27,500 Depreciation and amortization expenses 5 3,57,765
Selling Expenses 26,520 Other expenses 6 6,65,040
Directors Fees 38,250 Total expenses 42,82,215

Profit (Loss) for the period (III - IV) before tax
Interest on Investment for the year 55,000
2022-2023 V. 6,01,850
Provision for depreciation 5,96,700 VI Provision for tax (1,50,463)
Miscellaneous receipts 1,42,800 VII Profit for the period
Additional information: 4,51,387

(i) Closing inventory on 31.03.2023 is Rs. 4,76,850,
Notes to accounts
(ii) Miscellaneous receipts represent cash received from the sale of the Plant on
01.04.2022. Thecost of the Plant wasRs. 1,65,750 and the accumulated depre- Rs.
ciation thereon is Rs. 24865.
1 Revenue from operations Sale 47,22,600
(iii) The Land is re-valued at 1,08,63,000.
(iv) Depreciation is to be provided on Plant & Machinery at 10% p.a. on cost.
(v) Make a provision for income tax @ 25%. 2 Other Income
Transfer fees 38,250
(vi) The Board of Directors declared a dividend of 10% on Equity shares on 4th April, 2023.
You are required to prepare a Statement of Profit and Loss as per Schedule III of the Companies Act,
Discount received 66,300
2013 for the year ended 31.03.2023. (Ignore previous year figures) (PYP 10 Marks May ‘23)
Answer 16 Interest on Investment 55,000
Statement of Profit and Loss of Travese Limited. for the year ended 31st March, 2023
Profit on sale of plant 1,915 Question 17
Total From the following particulars furnished by Ambience Ltd., prepare the Balance Sheet as on 31stMarch
1,61,465
Changes in inventories of finished goods, work-in- 2023 as required by Division I of Schedule III of the Companies Act, 2013.
3 progress and Inventory-in-Trade
Particulars Debit ₹ Credit ₹
Opening Inventory
Equity Share Capital (Face value of ₹ 100 each) 25,00,000
4,97,250
Less: Closing Inventory (4,76,850) 20,400 Call in Arrears 2,500
Land & Building 13,75,000
Total
20,400 Plant & Machinery 13,12,500
Finance costs
4 3,39,150 Furniture 1,25,000
Interest on Debentures
Bank Interest 13,260 Loan from State Financial Corporation 3,75,000
Inventories: Raw
Total 3,52,410
Materials
5 Depreciation and Amortization expenses Depreciation on
3,57,765
(10% x 37,43,400 - 1,65,750) Finished Goods 5,00,000 6,25,000
6 Other expenses Trade receivables 5,00,000
Factory expense Advances 1,06,750
2,58,060 Profit & Loss Account 2,16,750
Rent, Taxes and Insurance 65,025 Cash in Hand 75,000
Repairs 1,49,685
Unsecured Loan 3,02,500
Sundry expenses 1,27,500 Trade creditors (for Goods and Expenses) 5,00,000
Selling expenses 26,520 47,39,250 47,39,250

The following additional information is also provided:
Director’s fees 38,250 (i) 5,000 Equity shares were issued for consideration other than cash.
Total 6,65,040 (ii) Trade receivables of ₹ 1,30,000 are due for more than 6 months.
(iii) The cost of the Assets were:
Note:
Building ₹ 15,00,000, Plant & Machinery ₹ 17,50,000 and Furniture ₹ 1,56,250
The final dividend will not be recognized as a liability at the balance sheet date (even if it is de-
clared after reporting date but before approval of financial statements) as per accounting stan- (iv) The balance of ₹ 3,75,000 in the Loan Account with State Finance Corporation
dards. Hence, it is not recognized in the financial statement for the year ending 31st March 2023. is inclusive of ₹18,750 for Interest Accrued but not Due. The loan is secured by
Such dividend willbe disclosed in notes only. hypothecation of Plant & Machinery.
(v) Balance at Bank includes ₹ 5,000 with Global Bank Ltd., which is not a Scheduled Bank.
Bills Receivable for 1,60,000 maturing on 15th June, 2023 has been discounted.
Provide to doubtful debts @ 5% on trade receivables.(Nov ’23)
Answer 17 Notes to accounts
Ambience Ltd. ₹
Balance Sheet as on 31st March, 2023 1 Share Capital
Particulars Notes ₹ Equity share capital
Equity and Liabilities Issued & subscribed & called up & paid-up
1 Shareholders’ funds 25,000 Equity Shares of ₹ 100 each
a Share capital 1 24,97,500 (of the above 5,000 shares have been issued for
consideration other than cash) 25,00,000
Total 24,97,500
Surplus (Profit & Loss A/c 2,16,750
b Other current liabilities 4 18,750
Less: provision for debtors 25,000 1,91,750
c Short-term provisions 5 3,20,000
Total 7,16,750
Total 47,11,750
Assets 3 Long-term borrowings
1 Non-current assets Secured Term Loan
Property, Plant and 6 28,12,500 State Financial Corporation Loan (3,75,000-18,750) (Secured 3,56,250
Equipment by hypothecation of Plant and Machinery)
2 Current assets Unsecured Loan 3,02,500
a Inventories 7 6,25,000 Total 6,58,750
b Trade receivables 8 4,75,000 4 Other current liabilities
c Cash and cash equivalents 9 6,92,500 Interest accrued but not due on loans (SFC) 18,750
d Short-term loans 1,06,750 5 Short-term provisions
and advances
Total 47,11,750
6 Property, Plant and Equipment
Contingent Liabil-
ities and Commit- Land and Building 15,00,000
1,60,000
ments (to the extent Less: Depreciation (1,25,000) 13,75,000
not provided for)
Contingent Liabili-
ties: Bills discounted Less: Depreciation (4,37,500) 13,12,500
but not matured
Furniture & Fittings 1,56,250
Total 28,12,500
7 Inventories
Finished goods 5,00,000
Total 6,25,000 Question 20
8 Trade receivables “Fixed assets held for sale” will be classified in the company’s balance sheet as
Outstanding for a period exceeding six months 1,30,000 a. Current asset
Other Amounts 3,70,000 b. Non-current asset
Less: Provision for doubtful debts (25,000) c. Capital work- in- progress
Total 4,75,000
d. Deferred tax assets
Ans: (a)
Cash at bank
with Scheduled Banks 6,12,500
Question 21
with others (Global Bank Ltd.) 5,000 6,17,500
Current maturities of long term debt will come under
Cash in hand 75,000
e. Current Liabilities.
Total 6,92,500
f. Short term borrowings.
Question 18 g. Long term borrowings.
Trade payables as per Schedule III will include: h. Short term Provisions
a. Dues payable in respect to statutory obligation Ans: (b)

b. Interest accrued on trade payables
Question 22
c. Bills payables.
d. Bills receivables Declaration of dividends for current year is made after providing for
i. Depreciation of past years only.

Ans: (c)
j. Depreciation on assets for the current year and arrears of depreciation of past years (if
any).
Question 19
k. Depreciation on current year only and by forgoing arrears of depreciation of past years.
Securities Premium Account is shown on the liabilities side in the Balance Sheet under the heading:
l. Excluding current year depreciation
a. Reserves and Surplus.
Ans: (b)
b. Current Liabilities.
c. Share Capital.
d. Share application money pending allotment Question 23
Ans: (a) (i) State under which head these accounts should be classified in Balance Sheet, as per Schedule III
of the Companies Act, 2013:
Share application money received in excess of issued share capital.
(ii) Share option outstanding account.

(iii) Unpaid matured debenture and interest accrued thereon.
(v) Calls unpaid.
Money received against share warrant.
Answer 23 Cash in hand 2,10,000

(i) Current Liabilities/ Other Current Liabilities Balances with banks 17,29,000
Preliminary Expenses 93,100
Patents & Trademarks 4,00,000
(iv) Contingent Liabilities and Commitments
1,33,63,000
(v) Shareholders’ Fund / Share Capital
The following additional information is also provided in respect of the above balances:4,20,000 fully
Shareholders’ Fund / Money received against share warrants paid equity shares were allotted as consideration for land & buildings.
(i) Cost of Building Rs. 28,00,000

(ii) Cost of Plant & Machinery Rs. 49,00,000 Cost of Furniture & Fixture Rs. 4,37,500
Question 24
(iii) Trade receivables for Rs. 3,80,000 are due for more than 6 months.
On 31st March, 20X1 Bose and Sen Ltd. provides to you the following ledger balances after preparing (iv) The amount of Balances with Bank includes Rs. 18,000 with a bank which is not a sched-
its Profit and Loss Account for the year ended 31st March, 20X1: uled Bank and the deposits of Rs. 5 lakhs are for a period of 9 months.
Credit Balances:
(v) Unsecured loan includes Rs. 2,00,000 from a Bank and Rs. 1,00,000 from related parties.
Rs. Entire amount of Preliminary expenses to be written off, by adjusting from opening balance of General
Equity shares capital, fully paid shares of Rs. 10 each 70,00,000 Reserve.
You are not required to give previous year’s figures. You are required to prepare the Balance Sheetof the
Company as on 31stMarch, 20X1 as required under Schedule III to the Companies Act, 2013.
Loan from State Finance Corporation 10,50,000
(Secured by hypothecation of Plant & Machinery Repayable Answer 24
Bose and Sen Ltd.
within one yearRs. 2,00,000)
Balance Sheet as at 31st March, 20X1
Loans: Unsecured (Long term) 8,47,000
Sundry Creditors for goods &expenses 14,00,000 Particulars Notes Figures at the
end of current
(Payable within 6 months)
reporting period
(Rs.)
1,33,63,000
1 Shareholders’ funds
Debit Balances:
a Share capital 1 69,93,000
Rs.
Calls in arrear 7,000
Land 14,00,000
Buildings 20,50,000
Plant and Machinery 36,75,000
Furniture& Fixture 3,50,000
b Short term borrowings 4 2,00,000
Inventories: Finished goods 14,00,000
c Short-term provisions 5 8,16,900
Total 1,32,62,900
Assets
Advances: Short-term 2,98,900
a PPE 6 74,75,000 Loan from related parties 1,00,000

b Intangible assets (Patents & TradeMarks) 4,00,000 Others 5,47,000 8,47,000
Total 16,97,000
2 Current assets
a Inventories 7 17,50,000
Current maturities of long-term debt- loan 2,00,000
b Trade receivables 8 14,00,000 Instalment repayable within one year
c Cash and bank balances 9 19,39,000 5 Short-term provisions
d Short-term loans and advances 2,98,900 Provision for taxation 8,16,900
Total 1,32,62,900 6 Property, plant and equipment
Notes to accounts Land 14,00,000
Rs. Buildings 28,00,000
1 Share Capital Less: Depreciation (7,50,000) (b.f.) 20,50,000
Equity share capital Plant & Machinery 49,00,000
Issued, subscribed and called up 7,00,000 Eq- 70,00,000 Less: Depreciation (12,25,000) (b.f.) 36,75,000
uity Shares of Rs. 10 each (Out of the above Furniture & Fittings 4,37,500
4,20,000 shares have been issued forconsider-
ation other than cash) Less: Depreciation (87,500) (b.f.) 3,50,000
Total 74,75,000
7 Inventories
Raw Material 3,50,000
Total 69,93,000
17,50,000
8 Trade receivables
General Reserve 15,49,100 Debts outstanding for a periodexceed- 3,80,000

ing six months
Less: Preliminary expenses (93,100) 14,56,000 Other Debts 10,20,000
Total 14,00,000
Surplus (Profit & Loss A/c) 7,00,000
Total 21,56,000
Cash and cash equivalents
3 Long-term borrowings
Cash at bank with Scheduled Banks 12,11,000
Secured
with others 18,000 12,29,000
Term Loans Cash in hand 2,10,000
Loan from State Finance Corporation (Rs. 8,50,000 Other bank balances 5,00,000
10,50,000 - Rs. 2,00,000) (Secured by
Bank deposits for period of 9 months 5,00,000
hypothecation of Plant and Machinery)
Total 19,39,000
Unsecured
Bank Loan 2,00,000 Question 25
From the following particulars furnished by Alpha Ltd., prepare the Balance Sheet as on 31st March20X1
as required by Part I, Schedule III to the Companies Act, 2013. Answer 25

Particulars Debit Rs. Credit Rs. Alpha Ltd.
Equity Share Capital (Face value of Rs. 100each) 50,00,000 Balance Sheet as at 31st March, 20X1
Call in Arrears 5,000

Particulars Notes Rs.
1 Equity and Liabilities
Furniture 2,50,000 a Shareholders’ funds 1 49,95,000
General Reserve 10,50,000 b Share capital 2 14,83,500
Loan from State Financial Corporation 7,50,000 Reserves and Surplus
Inventory: 12,50,000 2 Non-current assets

Raw Materials Finished 2,50,000 a Long-term borrowings 3 13,17,500
Goods 10,00,000
b Short term provision 5 6,40,000
Short term Advances 2,13,500
Profit & Loss Account 4,33,500 c Short term borrowings 4 2,37,500

(2,00,000+37,500)
Cash in Hand 1,50,000
Cash at Bank 12,35,000 Total

94,73,500
Assets
1
Trade payables (for Goods and Expenses) 8,00,000
Non-current assets 6 56,25,000
Loans & advances from related parties 2,00,000
(a) PPE
94,78,500 94,78,500 2 current assets 7 12,50,000
The following additional information is also provided:10,000 Equity shares were issued for consid- (a) Inventory 8 10,00,000
eration other than cash.
(i) Trade receivables of Rs. 2,60,000 are due for more than 6 months. (b) Trade receivables 9 13,85,000
The cost of the Assets were: (c) Cash and Cash equivalents 2,13,500
(ii) Building Rs. 30,00,000, Plant & Machinery Rs. 35,00,000 and Furniture Rs. 3,12,500 (d) Short-term loans and advances 94,73,500
(iii) The balance of Rs. 7,50,000 in the Loan Account with State Finance Corporation is in-
clusive of Rs. 37,500 for Interest Accrued but not Due. The loan is secured by hypotheca- Total
tion of Plant & Machinery. Notes to accounts
(iv) Balance at Bank includes Rs. 10,000 with Omega Bank Ltd., which is not a Scheduled-
Bank. Rs.
(v) Transfer Rs. 20,000 to general reserve is proposed by Board of directors. 1 Share Capital
Board of directors declared dividend of 5% on the paid up capital on 2nd April, 20X1. Equity share capital
Issued & subscribed & called up 50,000 Equity Shares of Furniture & Fittings 3,12,500
Rs. 100 each (of the above 10,000 shares have been 50,00,000 Less: Depreciation (62,500) 2,50,000
issued for consideration other than cash)
(b.f.)
Total 56,25,000
Total 49,95,000
7 Inventories
Add: current year transfer 20,000 10,70,000
Total 12,50,000
Profit & Loss balance
8 Trade receivables
Profit for the year 4,33,500
Outstanding for a period exceeding six months 2,60,000
Less: Appropriations:
Other Amounts 7,40,000
Transfer to General reserve (20,000)
Total 10,00,000
4,13,500
Total 14,83,500
Cash and cash equivalents Cash
3 Long-term borrowings at bank
Secured Term Loan with Scheduled Banks 12,25,000
State Financial Corporation Loan (7,50,000- 37,500) with others (Omega Bank Ltd.) 10,000 12,35,000
(Secured by hypothecation of Plant andMachin- 7,12,500 Cash in hand 1,50,000
ery)
Other bank balances Nil

Total 13,17,500 Total 13,85,000

4 Short term Borrowings Note: The final dividend will not be recognized as a liability at the balance sheet date (even if it is declared
after reporting date but before approval of the financial statements) as per Accounting Standards.
Loans and advances Hence, it has not been recognized in the financial statements for the year ended 31 March, 20X1. Such div-
2,00,000 idends will be disclosed in notes only.
Interest accrued but not due on loans (SFC) 37,500
Question 26
2,37,500
5 Short-term provisions Ring Ltd. was registered with a nominal capital of Rs. 10,00,000 divided into shares of Rs. 100 each. The
following Trial Balance is extracted from the books on 31st March, 20X2:
6 Property, plant and equipment Particulars Rs. Particulars Rs.
Land and Building 30,00,000 Buildings 5,80,000 Sales 10,40,000
Less: Depreciation (2,50,000) 27,50,000 Machinery 2,00,000 Outstanding Expenses 4,000
(b.f.) Closing Stock 1,80,000 Provision for Doubtful 6,000

Loose Tools 46,000 Debts (1-4-20X1)
Purchases (finished 4,20,000 Equity Share Capital 4,00,000
Less: Depreciation (8,75,000) 26,25,000 goods)
(b.f.) Salaries 1,20,000 General Reserve 80,000
Directors’ Fees 20,000 Profit and Loss A/c 50,000 Depreciation and Amortisation Expenses 40,000
Rent 52,000 (1-4-20X1) Other Expenses 8 1,24,000
Depreciation 40,000 Creditors 1,84,000 Total Expenses 7,60,000
Bad Debts 12,000 Provision for depreciation: V Profit before Tax (III-IV) 3,04,000
VI Tax Expenses @ 30% (91,200)
Investment 2,40,000 On Building 1,00,000
VII Profit for the period 2,12,800
Interest accrued on 4,000 On Machinery 1,10,000 2,10,000
Balance Sheet of Ring Ltd. as at 31ST March, 20X2
investment
Debenture Interest 56,000 14% Debentures 4,00,000 Particulars Notes Rs.
Advance Tax 1,20,000 Interest on Debentures 28,000 I Equity and Liabilities
Sundry expenses 36,000 accrued but not due 1 Shareholders’ funds 1 4,00,000
Debtors 2,50,000 Interest on Investments 24,000 a Share capital 2 3,42,800
Bank 60,000 Unclaimed dividend 10,000
24,36,000 24,36,000 b Reserves and Surplus
Answer 26 a Long-term borrowings 4,00,000
(a) You are required to prepare statement of Profit and Loss for the year ending 31st March, 20X2 3 Current liabilities
and Balance sheet as at that date after taking into consideration the following informa- a Trade Payables 1,84,00,000
tion:
(b) Closing stock is more than opening stock by Rs. 1,60,000; b Other Current Liabilities 3 42,000
(c) Provide to doubtful debts @ 4% on Debtors

c Short-Term Provisions 4 91,200
(d) Make a provision for income tax @30%.
(e) Depreciation expense included depreciation of Rs. 16,000 on Building and that Total 14,60,000
of Rs.24,000 on Machinery.
Assets
(f) The directors declared a dividend @ 25% on 2nd April, 20X2 and transfer to General II
Reserve @ 10%.
Bills Discounted but not yet matured Rs. 20,000.
a PPE 5 5,70,000
26 Ring Ltd. Profit and Loss Statement for the year ended31st March, 20X2
Particulars Note No. (Rs. In lacs) b Non-current Investments 2,40,000
I Revenue from operations 10,40,000 2 current assets 2,26,000

II Other income (interest on investment) 24,000
a Inventory 6 2,40,000
III Total income [I + II] 10,64,000
IV Expenses: b Trade receivables 7 2,26,000
Cost of purchase [4,20,000+ 1,60,000] 5,80,000
c Cash and bank balances 2,40,000
Changes in inventories [20,000-1,80,000] (1,60,000)
Employee Benefits Expense 1,20,000 d Short-term loans and Ad- 60,000
Finance Costs (debenture interest) 56,000 vances(Advance Payment of Tax)
e Other Current Assets 4,000 Sundry Debtors 2,50,000

(Interest accrued on investments) Less: Provision for Doubtful Debts (10,000) 2,40,000
Total 14,60,000 8. Other Expenses
Note: There is a Contingent Liability for bills discounted but not yet matured amounting to Rs. 20,000. Rent 52,000
Notes to Accounts:
Directors’ Fees 20,000
1. Share Capital Bad Debts 12,000

Authorised Capital Provision for Doubtful Debts (4% of Rs. 2,50,000 less Rs. 4,000
6,000)
Sundry Expenses 36,000
Issued Capital
1,24,000
Note: The final dividend will not be recognized as a liability at the balance sheet date (even if it is
Subscribed Capital and fully paid
declared after reporting date but before approval of the financial statements) as per Accounting
4,000 Equity Shares of Rs. 100 each 4,00,000 Standards. Hence, it has not been recognized in the financial statements for the year ended 31 March,
20X2. Such dividends will be disclosed in notes only.
2. Reserve and Surplus
General Reserve [Rs. 80,000 + Rs. 21,280] 1,01,280
Balance of Statement of Profit & Loss Account
Opening Balance 50,000

Add: Profit for the period 2,12,800 2,41,520
Appropriations 2,62,800
Transfer to General Reserve @ 10% (21,280)
3. Other Current Liabilities 3,42,800

Unclaimed Dividend 10,000
Outstanding Expenses 4,000
Interest accrued on Debentures 28,000
4. Short-Term Provision 42,000
Provision for Tax 91,200
Buildings 5,80,000
Less: Provision for Depreciation 1,00,000 4,80,000
Plant and Equipment 2,00,000
Less: Provision for Depreciation 1,10,000 90,000
6 Inventories 5,70,000
Closing Stock of Finished Goods 1,80,000
Loose Tools 46,000 2,26,000
7 Trade Receivables
Question 27 (6) The balance of Rs. 26,30,000 in the loan account with Public Finance Corporation is
inclusive of Rs.1,34,000 for interest accrued but not due. The loan is secured by hy-
On 31st March, 20X1, SR Ltd. provides the following ledger balances after preparing its Profit & Loss pothecation of land.
Account for the year ended 31st March, 20X1.
(7) Other long term loans (unsecured) includes:
Debit Credit
Loan taken from Nixes Bank Rs. 13,80,000
Equity Share Capital, fully paid shares of Rs. 50 each 80,00,000
(Amount repayable within one year Rs. 4,80,000)
Calls in arrear 15,000
Loan taken from Directors Rs. 8,50,000
Land 25,00,000
(8) Bills Receivable for Rs. 1,60,000 maturing on 15th June, 20X1 has been discounted.
Buildings 30,00,000
(9) Short term borrowings includes:
Furniture & Fixture 13,00,000
Securities Premium 15,00,000 Loan from Naya bank Rs. 1,16,000 (Secured)
General Reserve 9,41,000 Loan from directors Rs. 48,000
Profit & Loss Account 5,80,000 (10) Transfer of Rs. 35,000 to general reserve has been proposed by the Board of directors
out of the profits for the year.
Loan from Public Finance Corporation (Secured byHy- 26,30,000
pothecation of Land) Inventory of finished goods includes loose tools costing Rs. 5 lakhs (which do not meet definition of
property, plant & equipment as per AS 10)
Other Long Term Loans 22,50,000
You are required to prepare the Balance Sheet of the Company as on March 31st 20X1 as re-
Short Term Borrowings 4,60,000
quired under Part - I of Schedule III of the Companies Act, 2013. You are not required to give
Inventories: Finished goods 45,00,000 previous year figures.
Raw materials 13,00,000
Answer 27
Trade Receivables 17,50,000 SR Ltd.
Advances: Short Term 3,75,000 Balance Sheet as at 31st March, 20X1
Particulars Notes Figures at the end of current
reporting period (Rs.)
Unpaid Dividend 70,000
Cash in Hand 70,000
Balances with Banks 4,14,000
a Share capital 1 79,85,000
Total 1,76,24,000 1,76,24,000
(1) The following additional information was also provided in respect of the above balanc-
es:50,000 fully paid equity shares were allotted as consideration for land.
(2) The cost of assets were:
Building Rs. 32,00,000 a Short-term borrowings 4 9,40,000
Plant and Machinery Rs. 30,00,000 b Trade Payables 8,13,000
Furniture and Fixture Rs. 16,50,000 c Other current liabilities 5 2,04,000
(3) Trade Receivables for Rs. 4,86,000 due for more than 6 months. d Short-term provisions 6 3,80,000
(4) Balances with banks include Rs. 56,000, the Naya bank, which is not a scheduled bank. Total 1,76,09,000
(5) Loan from Public Finance Corporation repayable after 3 years. Assets
1 Non-current assets Unsecured

a PPE 7 92,00,000
Bank Loan (Nixes bank) 9,00,000
2 Current assets
(Rs. 13,80,000 - Rs. 4,80,000 repayable within 1 year)
b Trade receivables 9 17,50,000
Loan from Directors 8,50,000
c Cash and cash equivalents 10 4,84,000
Others 20,000 17,70,000
d Short-term loans andad- 3,75,000
vances Total 42,66,000
Total 1,76,09,000 4. Short-term borrowings

Notes to accounts Loan from Naya bank (Secured) 1,16,000
Loan from Nixes bank repayable within one year 4,80,000
(Current maturity of Long term borrowing)
Rs.
1. Share Capital Loan from Directors 48,000
Others 2,96,000 9,40,000
Equity share capital 80,00,000
Issued, subscribed and called up
Unpaid dividend 70,000
1,60,000 Equity Shares of Rs. 50 each (Out of the
above 50,000 shares have been issued for con- Interest accrued but not borrowings 1,34,000 2,04,000
sideration other than cash) Due on

6. Short-term provisions
7. PPE
Add: Transferred from Profit and loss Account 35,000 9,76,000 Land 25,00,000
Securities premium Buildings 32,00,000
15,00,000 Less: Depreciation (2,00,000) 30,00,000
Surplus (Profit & Loss A/c) 5,80,000 Plant & Machinery 30,00,000
Less: Appropriation to General Reserve (35,000) 5,45,000 Less: Depreciation (6,00,000) 24,00,000
(proposed) Furniture & Fittings 16,50,000
Less: Depreciation (3,50,000) 13,00,000
30,21,000 Total 92,00,000
3. Long-term borrowings 8. Inventories
Secured: Term Loans
Raw Material 13,00,000
Loan from Public Finance Corporation [repayable
after 3years (Rs. 26,30,000 - Rs. 1,34,000 for interest 24,96,000
accrued but not due)] (secured by hypothecation of Loose tools 5,00,000 58,00,000
land) 9. Trade receivables
Outstanding for a period exceeding six months 4,86,000 Answer 28
Others 12,64,000 Amount that can be drawn from reserves for 10% dividend
Total 17,50,000
10% dividend on Rs. 80,00,000 Rs.
10. Cash and cash equivalents 8,00,000
Balances with banks Profits available

Current year profit 3,00,000
with Scheduled bank 3,58,000
Less: Preference dividend (1,57,500) (1,42,500)
4,14,000 Amount which can be utilised from reserves 6,57,500
with others banks 56,000
Cash in hand 70,000
The following is the Trial Balance of Omega Limited as on 31.3.20X2:
Total 4,84,000 (Figures inRs. ‘000)
=Note: There is a contingent liability amounting to Rs. 1,60,000
Debit Credit
Land at cost 220 Equity Capital (Shares of Rs. 10 each) 300
Due to inadequacy of profits during the year ended 31st March, 20X2, XYZ Ltd. proposes to de- Plant & Machinery at cost 770 10% Debentures 200
clare10% dividend out of general reserves. From the following particulars, ascertain the amount
Trade Receivables 96 General Reserve 130
that canbe utilised from general reserves, according to the Companies (Declaration of dividend
out of Reserves) Rules, 2014: Inventories (31.3.X2) 86 Profit & Loss A/c 72
Bank 20 Securities Premium 40
Rs.
Adjusted Purchases 320 Sales 700
17,500 9% Preference shares of Rs. 100 each, fully paid up 17,50,000
Factory Expenses 60 Trade Payables 52
8,00,000 Equity shares of Rs. 10 each, fully paid up 80,00,000
Administration Expenses 30 Provision for Depreciation 172
General Reserves as on 1.4.20X1 25,00,000 Selling Expenses 30 Suspense Account 4
Capital Reserves as on 1.4.20X1 3,00,000 Debenture Interest 20
Revaluation Reserves as on 1.4.20X1 3,50,000 Interim Dividend Paid 18
Net profit for the year ended 31st March, 20X2 3,00,000 1670 1670
Average rate of dividend during the last three years has been 12%. Additional Information:
(i) The authorised share capital of the company is 40,000 shares of Rs. 10 each.
(ii) The company on the advice of independent valuer wish to revalue the land at Rs. 3,60,000.
(iii) Declared final dividend @ 10% on 2nd April, 20X2.
(iv) Suspense account of Rs. 4,000 represents cash received for the sale of some of the
machineryon 1.4.20X1. The cost of the machinery was Rs. 10,000 and the accumulat-
ed depreciation thereon being Rs. 8,000.
(v) Depreciation is to be provided on plant and machinery at 10% on cost.
You are required to prepare Omega Limited’s Balance Sheet as on 31.3.20X2 and
Statement of Profit and Loss with notes to accounts for the year ended 31.3.20X2 as
per Schedule III. Ignore previous years’ figures & taxation.
Answer 29 (Rs. in 000)

Omega Limited 1. Share Capital
Balance Sheet as at 31st March, 20X2
Particulars Note No. (Rs. in 000) Authorised
Equity and Liabilities 40,000 shares of Rs.10 each 400
1. Shareholders’ funds
a Share capital 1 300 Issued & subscribed & called up
b Reserves and Surplus 2 530 30,000 shares of Rs.10 each 300
2. Non-Current liabilities 2. Reserves and Surplus
a Long term borrowings 3 200 Securities Premium Account 40
3. Current liabilities Revaluation reserve (360 – 220) 140

a Trade Payables 52 General reserve 130
Total 1082 Profit & loss Balance
Assets Opening balance 72
1. Non-current assets Profit for the period 166 238
A PPE (Property, Plant & Equipment) 4 880 Less: Appropriations
2. Current assets Interim Dividend (18) 220
A Inventories 86 530
B Trade receivables 96 3. Long term borrowing
C Cash and bank balances 20
10% Debentures 200
Total 1082
4. PPE
Omega Limited
Land
Statement of Profit and Loss for the year ended 31st March, 20X2
Opening balance 220
Particulars Notes (Rs. in 000)
Add: Revaluation adjustment 140
I. Revenue from operations 700
Closing balance 360
II. Other Income 5 2
Plant and Machinery
III Total Income 702
Opening balance 770
IV Expenses:
Less: Disposed off (10)
Purchases 320
760
Finance costs 6 20
Less: Depreciation (172-8+76) (240)
Depreciation (10% of 760*) 76
Closing balance 520
Total 880
Total Expenses 536
5. Other Income
V. Profit (Loss) for the period (III – IV) 166 Profit on sale of machinery:
Sale value of machinery 4
Notes to accounts
Less: Book value of machinery (10-8) (2) 2 Goodwill 2,65,000

6. Finance costs Trade receivables 4,40,000
Debenture interest 20 Dealer aids 21,000
7. Other expenses: Transit insurance 30,000
Factory expenses 60 Trade expenses 37,000
Selling expenses 30 Distribution freight 54,000
Administrative expenses 30 120 Debenture interest 55,000

85,35,000 85,35,000
Note: The final dividend will not be recognized as a liability at the balance sheet date (even
Additional information: Closing Inventory on 31-3-20X1: Rs. 8,23,000.
if it is declared after reporting date but before approval of the financial statements) as per
Accounting Standards. Hence, it has not been recognized inthe financial statements for the
Answer 30
year ended 31 March, 20X2. Such dividends willbe disclosed in notes only.*770 (Plant and ma-
chinery at cost) – 10 (Cost of plant and machinery sold) Haria Chemicals Ltd. Balance Sheet as at 31st arch, 20X1
ScheduleNo.(1) Rupees as at the end of

31st March 20X1(2)
You are required to prepare Balance sheet and statement of Profit and Loss from the following trial
balance of Haria Chemicals Ltd. for the year ended 31st March, 20X1. Equity and Liabilities
Haria Chemicals Ltd. Trial Balance as at 31st March, 20X1
1) Shareholders’ funds :
Particulars Rs. Particulars Rs. (a) Share Capital 1 25,00,000
Inventory 6,80,000 Equity Shares (b) Reserves and Surplus 2 7,40,000
Furniture 2,00,000 Capital (Shares of Rs. 10 each) 25,00,000 (2) Non Current Liabilities
Discount 40,000 11% Debentures 5,00,000 (a) Long term borrowings 3 11,45,000
Loan to Directors 80,000 Bank loans 6,45,000 (3) Current Liabilities
Advertisement 20,000 Trade payables 2,81,000 (a) Trade payables 2,81,000
Bad debts 35,000 Sales 42,68,000 Total 46,66,000
Commission 1,20,000 Rent received 46,000 (1) AssetsNon current assets
Materials consumed 23,19,000 Transfer fees 10,000
(a) PPE 4 30,05,000
Plant and Machinery 8,60,000 Profit & Loss account 1,39,000
(b) Intangible assets (goodwill) 2,65,000
Rentals 25,000 Depreciation provision:
(2) Current assets
Current account 45,000 Machinery 1,46,000
(a) Inventories 8,23,000
Cash 8,000
(b) Trade receivables 4,40,000
Interest on bank loans 1,16,000
(c) Cash and bank balances 5 53,000
Preliminary expenses 10,000
(d) Short term loans and advances 6 80,000
Fixtures 3,00,000
Total 46,66,000
Wages 9,00,000
Haria Chemicals Ltd. Statement of Profit and Loss for the year ended 31st March, 20X1
Consumables 84,000
Freehold land 15,46,000 Schedule Figures
Tools & Equipment 2,45,000 Revenue from operations 42,68,000
Other income 7 56,000 Total 31,51,000 1,46,000 30,05,000

(A) 43,24,000 5. Cash and bank balances
Expenses Cash and cash equivalents 45,000
Cost of materials consumed 23,19,000

Current account balance 8,000
Change in inventory of finished goods 8 (1,43,000)
Cash Nil
Employee benefit expenses 9 9,00,000
Other bank balances 53,00 0
Finance cost 10 1,71,000
6. Short-term loans and Advances
Loan to directors 80,000
(B) 37,23,000
7. Other Income
Profit before tax (A – B) 6,01,000
Provision for tax — Rent received 46,000
Profit for the period 6,01,000 Transfer fees 10,000
Notes to Accounts 8. Changes in inventory of finished goods, WIP & Stock in trade 56,000
1. Share capital Rs. Opening inventory 6,80,000
Authorised: Closing inventory (8,23,000) (1,43,000)

9. Employee benefit expense
Equity share capital of Rs.10 each 25,00,000
Wages 9,00,000
Issued and Subscribed:
10. Finance cost
Equity share capital of Rs.10 each 25,00,000
Interest on bank loans 1,16,000
Debenture interest 55,000
Balance as per last balance sheet 1,39,000
1,71,000
Balance in profit and loss account 6,01,000
11. Other Expenses
7,40,000
Consumables 84,000
3. Long term Borrowings
Preliminary expenses 10,000
11% Debentures 5,00,000 Bad debts 35,000
Discount 40,000
Bank loans (assumed long-term) 6,45,000 Rentals 25,000
4. PPE 11,45,000 Commission 1,20,000
Gross Depreciation Net Block Advertisement 20,000
block
Dealers’ aids 21,000
Freehold land 15,46,000 15,46,000 Transit insurance 30,000
Trade expenses 37,000
Furniture 2,00,000 2,00,000
Distribution freight 54,000
Fixtures 3,00,000 3,00,000
4,76,000
Plant & Machinery 8,60,000 1,46,000 7,14,000
Tools & Equipment 2,45,000 2,45,000
Preliminary and formation expenses 8,000

You are required to prepare a Statement of Profit and Loss and Balance Sheet fromthe followingTrial 2,00,000
2,000 Debentures of Rs. 100 each (6%)
Balance extracted from the books of the International Hotels Ltd.,on 31st March, 20X2:
Dr.Rs. Cr.Rs.
Trade payables 42,000
Authorised Capital-divided into 5,000 6% Preference 15,00,000
Trade receivables 19,260
Sharesof Rs. 100 each and 10,000 equity Shares of Rs. 100
each Investments 2,72,300
Goodwill at cost 5,00,000
Subscribed Capital -
5,000 6% Preference Shares of Rs. 100 each 5,00,000 19,75,000 19,75,000
Wages and Salaries Outstanding 1,280
Equity Capital 8,05,000
Inventory on 31st March, 20X2
Purchases - Wines, Cigarettes, Cigars, etc. 45,800 22,500
Wines, Cigarettes and Cigars, etc.
- Foodstuffs 36,200
Foodstuffs 16,400
Wages and Salaries 28,300
Depreciation : Furniture and Fittings @ 5% p.a. : Land and Building @ 2% p.a.
Rent, Rates and Taxes 8,900
The Equity capital on 1st April, 20X1 stood at Rs. 7,20,000, that is 6,000 shares fully paid and 2,000 shares
Laundry 750 Rs. 60 paid. The directors made a call of Rs. 40 per share on 1st October 20X1. A shareholder could not
pay the call on 100 shares and his shares were then forfeited and reissued @ Rs. 90 per shareas fully paid.
Sales - Wines, Cigarettes, Cigars, etc. 68,400
The Directors declared a dividend of 8% on equity shares on 2nd April, 20X2, transferring any amount
- Food 57,600 that may be required from General Reserve. Ignore Taxation.
Coal and Firewood 3,290
Answer 31
Carriage and Cooliage 810
Balance Sheet of International Hotels Ltd. as at 31st March, 20X2
Sundry Expenses 5,840
Advertising 8,360 Particulars Note Rs.
No
Repairs 4,250
Rent of Rooms 48,000 1 Shareholders’ funds
Billiard 5,700 a Share capital 1 13,00,000
Miscellaneous Receipts 2,800 b Reserves and Surplus 2 2,68,745
Discount received 3,300 2 Non-current liabilities
Transfer fees 700
Freehold Land and Building 8,50,000
Furniture and Fittings 86,300
a Trade Payables 4 42,000
Inventory on hand, 1st April, 20X1Wines, Cigarettes. 12,800
Cigars, etc. b Other current liabilities 5 13,280
Foodstuffs 5,260 Total 18,24,025
Cash in hand 2,200

Cash with Bankers 76,380 ASSETS
i PPE 6 9,14,985 Authorised

ii Intangible assets (Goodwill) 5,00,000 5,000 6% Preference shares of Rs.100 each 5,00,000
iii Non-current investments 2,72,300 Issued & subscribed
2 Current assets 5,000 6% Preference shares of Rs.100 each (B) 5,00,000
i Inventories 7 38,900 Total (A + B) 13,00,000

ii Trade receivables 19,260 2 Reserves and Surplus
iii Cash and bank balances 8 78,580 Capital reserve [100 x (90 – 40)] 5,000
Total 18,24,025 General reserve 2,00,000
2,00,000
Statement of Profit and Loss of International Hotels Ltd.for the year ended 31st March,20X2 Surplus (Profit & Loss A/c) 22,245
Add: Balance from previous year 41,500
Particulars Notes Amount
63,745
I. Revenue from operations 9 1,79,700
Total 2,68,745
II. Other income 10 6,800
III. Total Income (I + II) 1,86,500
Secured
IV. Expenses:
Cost of materials consumed 11 25,060
Total 2,00,000
Purchases of Inventory-in-Trade 12 45,800
4 Trade Payables 42,000
Changes in inventories of finished goods work-in- 13 (9,700)
progress and Inventory-in-Trade 5 Other current liabilities
Employee benefits expense 14 29,580 Wages and Salaries Outstanding 1,280
Other operating expenses 15 18,000 Interest on debentures 12,000 13,280
Selling and administrative expenses 16 14,200 Total 13,280
Finance costs 17 12,000 6 PPE
Depreciation and amortisation expense 18 21,315 Freehold land & Buildings 8,50,000
Other expenses (Preliminary expenses written off) 8,000 Less: Depreciation (17,000) 8,33,000
Total expenses 1,64,255 Furniture and Fittings 86,300
V. Profit (Loss) for the period (III - IV) 22,245 Less: Depreciation (4,315) 81,985
Notes to accounts Total 9,14,985
Rs. 7 Inventories
1 Share Capital Wines, Cigarettes & Cigars, etc. 22,500
Equity share capital Foodstuffs 16,400
Authorised Total 38,900
10,000 Equity shares of Rs.100 each 10,00,000 8 Cash and bank balances
Issued & subscribed Cash and cash equivalents
8,000 Equity Shares of Rs.100 each (A) 8,00,000 Cash at bank 76,380
Preference share capital
Cash in hand 2,200 Total 29,580

Other bank balances Nil 15 Other operating expenses
Total 78,580 Rent, Rates and Taxes 8,900
9 Revenue from operations Coal and Firewood 3,290
Laundry 750
Sale of products
Carriage and Cooliage 810
Wines, Cigarettes, Cigars etc. 68,400 1,26,000
Repairs 4,250
Food 57,600 Total 18,000
Sale of services 16 Selling and administrative expenses
Room Rent 48,000 Advertising 8,360
Billiards 5,700 53,700 Sundry Expenses 5,840
Total 1,79,700 Total 14,200
10 Other Income
17 Finance costs
Transfer fees 700
Interest on Debentures (2,00,000 x 6%) 12,000
Miscellaneous Receipts 2,800
Total 12,000
Discount received 3,300 18 Depreciation and amortisation expense
Total 6,800
Land and Buildings (8,50,000 x 2%) 17,000
11 Cost of materials consumed
Furniture & Fittings (86,300 x 5%) 4,315 21,315
Opening Inventory 5,260
Total 21,315
Add: Purchases during the year 36,200
Note: The final dividend will not be recognized as a liability at the balance sheet date (even if it is declared
Less: Closing Inventory (16,400) 25,060 after reporting date but before approval of the financial statements) as per Accounting Standards.
Hence, it has not been recognized inthe financial statements for the year ended 31 March, 20X2.
Total 25,060 Such dividends willbe disclosed in notes only.
12 Purchases of Inventory-in-Trade
Wines, Cigarettes etc. 45,800 Question 32(Illustration)
Total 45,800 From the following particulars furnished by Pioneer Ltd., prepare the Balance Sheet as at 31st March,
13 Changes in inventories of finished goodswork-in- 20X1 as required by Schedule III of the Companies Act. Give notesat the foot of the Balance Sheet as may
progress and Inventory-in-Trade be found necessary -
Wines, Cigarettes etc. Debit Credit

Rs. Rs.
Opening Inventory 12,800 (9,700)
Equity Capital (Face value of Rs. 100) 10,00,000
Less: Closing Inventory (22,500)
Calls in Arrears 1,000
Total (9,700)
Land 2,00,000
14 Employee benefits expense
Building 3,50,000
Wages and Salaries 28,300
Plant and Machinery 5,25,000
Add: Wages and Salaries Outstanding 1,280 29,580
Furniture 50,000
General Reserve 2,10,000 b Reserves and Surplus 2 2,96,700

Loan from State Financial Corporation 1,50,000 2 Non-current liabilities
Inventory : a Long-term borrowings 3 2,63,500
Finished Goods 2,00,000 3 Current liabilities
Raw Materials 50,000 2,50,000 a Trade Payables 2,00,000
Provision for Taxation 68,000 b Other current liabilities 4 67,500
Trade receivables 2,00,000 c Short-term provisions 5 68,000
Advances 42,700 Total 18,94,700
Dividend Payable 60,000 Assets
a PPE 6 11,25,000
2 Current assets
Cash Balance 30,000
b Trade receivables 8 2,00,000
Loans (Unsecured) 1,21,000
c Cash and bank balances 9 2,77,000
Trade payables (For Goods and Expenses) 2,00,000
d Short-term loans and advances 42,700
18,95,700 18,95,700
Total 18,94,700
The following additional information is also provided : Notes to accounts
2,000 equity shares were issued for consideration other than cash.
Rs.
(1) Trade receivables of Rs. 52,000 are due for more than six months.
1 Share Capital
(2) The cost of assets:
Building Rs. 4,00,000
Plant and Machinery Rs. 7,00,000 Issued & subscribed & called up
Furniture Rs. 62,500 10,000 Equity Shares of Rs. 100 each (Of the above 10,00,000 9,99,000
(3) The balance of Rs. 1,50,000 in the loan account with State Finance Corporationis in- 2,000 shares have been issued for
clusive of Rs. 7,500 for interest accrued but not due. The loan is secured by hypotheca- consideration other than cash)
tion of the Plant and Machinery.
Less: Calls in arrears (1,000)
(4) Balance at Bank includes Rs. 2,000 with Perfect Bank Ltd., which is not a Scheduled
Bank. Total 9,99,000
(5) The company had contract for the erection of machinery at Rs. 1,50,000 which is still 2 Reserves and Surplus
incomplete.
Answer 32
Surplus (Profit & Loss A/c) 86,700
Pioneer Ltd. Balance Sheet as at 31st March, 20X1
Total 2,96,700
Equity and Liabilities 3 Long-term borrowings
1 Shareholders’ funds Secured
a Share capital 1 9,99,000 Term Loans
Loan from State Financial Corporation (1,50,000 1,42,500 Other bank balances Nil
– 7,500)
Total 2,77,000
(Secured by hypothecation of Plant and Ma-
chinery)
Note: Estimated amount of contract remaining to be executed on capital account and not provided for
Unsecured loan 1,21,000
Rs. 1,50,000. It has been assumed that the company had given this contract for purchase of machinery.
Total 2,63,500
4 Other current liabilities Question 33(Illustration)
Interest accrued but not due on loans (SFC) 7,500
Following is the trial balance of Delta limited as on 31.3.20X2.
Dividend Payable 60,000 (Figures in Rs. ‘000)
Total 67,500
Particulars Debit Particulars Credit
5 Short-term provisions
Land at cost 800 Equity share capital 500
Provision for taxation 68,000
(shares of
Total 68,000
Rs. 10 each)
6 PPE
Calls in arrears 5 10% Debentures 300
Land 2,00,000
Cash in hand 2 General reserve 150
Buildings 4,00,000
Plant & Machinery at cost 824 Profit & Loss A/c (balance 75
Less: Depreciation (50,000) (b.f.) 3,50,000
on 1.4.X1)
Trade receivables 120 Securities premium 40
Less: Depreciation (1,75,000) (b.f.) 5,25,000
Inventories (31-3-X2) 96 Sales 1200
Furniture & Fittings 62,500
Cash at Bank 28 Trade payables 30
Less: Depreciation (12,500) (b.f.) 50,000
Adjusted Purchases 400 Provision for depreciation 150
Total 11,25,000
Factory expenses 80 Suspense Account 10
7 Inventories
Raw Material 50,000
Selling expenses 25
Debenture Interest 30
Total 2,50,000
2455 2455
8 Trade receivables
Debts outstanding for a period exceeding six months 52,000
(i) The authorized share capital of the company is 80,000 shares of Rs. 10 each.
Other Debts 1,48,000 (ii) The company revalued the land at Rs. 9,60,000.
Total 2,00,000
(iii) Equity share capital includes shares of Rs. 50,000 issued for consideration other than cash.
(iv) Suspense account of Rs. 10,000 represents cash received from the sale of some of the
Cash and cash equivalents machinery on 1.4.20X1. The cost of the machinery was Rs. 24,000 and the accumulated de-
preciation thereon being Rs. 20,000. The balance of Plant & Machinery given in trial bal-
Cash at bank
ance is before adjustment of sale of machinery.
with Scheduled Banks 2,45,000
(v) Depreciation is to be provided on plant and machinery at 10% on cost.
with others (Perfect Bank Ltd.) 2,000 2,47,000
(vi) Balance at bank includes Rs. 5,000 with ABC Bank Ltd., which is not a Scheduled Bank.
Cash in hand 30,000
(vii) Make provision for income tax @30%.
(viii) Trade receivables of Rs. 50,000 are due for more than six months. Depreciation (10% of 800) 80.00
You are required to prepare Delta Limited’s Balance Sheet as at 31.3.20X2 and Statement Other expenses 10 150.00
of Profit andLoss with notes to accounts for the year ended 31.3.20X2 as per Schedule Ill.
Ignore previous year’s figures & taxation. Total Expenses 660.00
V.Profit / (Loss) for the period before tax (III –IV) 546.00
Answer 33
VI. Tax expenses @30% 163.80
Delta Limited VII Profit for the period 382.20
Balance Sheet as at 31st March 20X2
Notes to Accounts
Particulars Note No. (Rs. in ‘000)
Particulars ( Rs.in ‘000)
A. Equity and Liabilities
1 Share Capital Equity
1. Shareholders’ funds Share Capital Authorised
(a) Share Capital 80,000 Shares of Rs. 10/- each Issued,
800
(b) Reserves and Surplus 1 495.00
2. Non-Current Liabilities 2 807.20

500
(a) Long Term Borrowings
3. Current Liabilities 3 300.00 Subscribed and Called-up
50,000 Shares of Rs. 10/- each (5) 495
(a) Trade Payables
30.00 2 (Out of the above 5,000 shares have been issued
(b) Short- term provision
4 163.80 for consideration other than cash) 40.00
Total
1,796.00 Less: Calls in arrears Reserves and Sur- 160.00
B. Assets plus Securities Premium
150.00
1. Non-Current Assets Revaluation Reserve Rs. (960 – 800) General Re-
(a) Property, Plant and Equipment serve
5 1,550.00
75.00
2. Current Assets Surplus i.e. Profit & Loss AccountBal-
ance 382.20 457.20
(a) Inventories
96.00 Opening Balance 807.20
6 120.00 Add: Profit for the period
(c) Cash and Cash equivalents
7 30.00
Total
1,796.00
Statement of Profit and Loss for the year ended 31st March 20X2
Particulars Note No. (Rs. in ‘000)

I. Revenue from Operations 1200.00
II. Other Income 8 6.00
III. Total Income (I +II) 1,206.00
IV. Expenses:
Purchases (adjusted) 400.00
Finance Costs 9 30.00
3 Long-Term Borrowings 10% Debentures Chapter 11.2

Short – term provision Pro- 300
vision for tax Cash Flow Statement
4.
Property, plant & equipment Land Open- 163.80
ing Balance
5
Add: Revaluation adjustment Closing Balance Attempts MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV
800
Plant and Machinery Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
160
Opening Balance Less: Study
Disposed off 960 Q.10 TO Q.34
Mat.
824 Past
NO NO Q.9 NO NO Q.3 NO NO NO NO NO NO
Less: Depreciation Rs. (150 – 20 + 80) Clos- (24) Exams
ing Balance 800 Q.2

MTP NO NO NO Q.1 NO NO NO Q.3 NO Q.1 Q.3
Total (210) Q.3
Trade receivables 590 RTP NO Q.2 Q.1 Q.5 Q.3 NO Q.4 Q.6 Q.7 Q.2 Q.8 NO
Debits outstanding for a periodex- 1,550

ceeding six months
6
Other debts
50
Cash and Cash Equivalents 70 120
7 Cash at Bank With scheduled banks With oth-
ers (ABC Bank Limited) Cash in hand
23
Other Income
5
Profit on sale of machinery Sale value
of machinery 2 30
8 Less: Book value of machinery (24– 20) Fi-
nance Costs 10
Debenture Interest (4) 6
9
30
10 Other Expenses: Factory ex-

penses Selling expenses 80
45 150
Chapter 11.2 Answer 1

Cash Flow Statement as per AS 3
Cash Flow Statement
Rs. in lacs
Question 1
Cash flows from operating activities: 36,000
J Ltd. presents you the following information for the year ended 31st March, 2019: Net profit before tax provision
(Rs. in lacs) Add: Non cash expenditures:
(i) Net profit before tax provision 36,000 Depreciation 24,000
(ii) Dividend paid 10,202 Loss on sale of assets 48
(iii) Income-tax paid 5,100 Interest expenditure (non operating 12,000 36,048
activity)
(iv) Book value of assets sold 222
72,048
Loss on sale of asset 48
Less: Non cash income
(v) Depreciation debited to P & L account 24,000
Amortization of capital grant received (10)
(vi) Capital grant received - amortized to P & L A/c 10
Profit on sale of investments (non operating in- (120)
(vii) Book value of investment sold 33,318
come)
Profit on sale of investment 120
Interest income from investments (non operating (3,000) 3,130
(viii) Interest income from investment credited to P & L A/c 3,000 income)
(ix) Interest expenditure debited to P & L A/c 12,000 Operating profit 68,918
(x) Interest actually paid (Financing activity) 13,042 Less: Increase in working capital (67,290)
(xi) Increase in working capital 67,290 Cash from operations 1,628
[Excluding cash and bank balance] Less: Income tax paid (5,100)
Net cash generated from operating activities (3,472)
(xii) Purchase of Property, Plant & Equipment 22,092
Cash flows from investing activities:
(xiii) Expenditure on construction work 41,688
Sale of assets (222 . 48) 174
(xiv) Grant received for capital projects 18
(xv) Long term borrowings from banks 55,866 Sale of investments (33,318+120) 33,438
(xvi) Provision for Income-tax debited to P & L A/c 6,000 Interest income from investments 3,000
Cash and bank balance on 1.4.2018 6,000 Purchase of Property, Plant & Equipment (22,092)
Cash and bank balance on 31.3.2019 8,000 Expenditure on construction work (41,688)
You are required to prepare a cash flow statement as per AS-3 (Revised). (MTP Oct’19 12 Marks, RTP Net cash used in investing activities (27,168)
May 19)(Same concept lesser adjustments MTP 12 Marks Oct’22)
Cash flows from financing activities:
Grants for capital projects 18
Long term borrowings 55,866
Interest paid (13,042)
Dividend paid (10,202)
Net cash from financing activities 32,640
Net increase in cash 2,000
Add: Cash and bank balance as on 1.4.2018 6,000 1. Depreciation on Building ₹ 1,000.
Cash and bank balance as on 31.3.2019 8,000 2. Depreciation on Furniture & Fixtures for the year ₹ 2,000.
3. Depreciation on Cars for the year ₹ 5,000. One car was disposed during the year for ₹
3,400 whose written down value was ₹ 2,000.
Question 2
4. Purchase investments for ₹ 6,000.
The Balance Sheet of Harry Ltd. for the year ending 31st March, 2018 and 31st March, 2017 weresum-
5. Sold investments for ₹ 10,000, these investments cost ₹ 2,000.
marised as follows:
6. You are required to prepare Cash Flow Statement as per AS-3 (revised) using indirect
2018 (₹) 2017 (₹) method. (RTP Nov 18) (Same concept fewer adjustments MTP 15 Marks March ’23, RTP
Equity share capital 1,20,000 1,00,000 Nov’22, Old & New SM)
Reserves: Answer 2
Profit and Loss Account 9,000 8,000 Harry Ltd.
Cash Flow Statement for the year ended 31st March, 2018
Trade Payables 8,000 5,000
Income tax payable 3,000 2,000
₹ ₹
Declared Dividends 4,000 2,000
1,44,000 1,17,000
Net Profit before taxation 8,000
Property, Plant & Equipment (at W.D.V) :
Adjustments for:
Building 19,000 20,000
Depreciation (1,000 + 2,000 +5,000) 8,000
Furniture & Fixture 34,000 22,000
Profit on sale of Investment (8,000)
Cars 25,000 16,000
Profit on sale of car (1,400)
Long Term Investments 32,000 28,000
Operating profit before working capital changes 6,600
Current Assets:
Increase in Trade receivables (2,000)
Increase in inventories (6,000)
Trade Receivables 8,000 6,000
Increase in Trade payables 3,000
Cash & Bank 12,000 17,000
1,44,000 1,17,000
Income taxes paid (2,000)
The Profit and Loss account for the year ended 31st March, 2018 disclosed:
Net cash generated from operating activities (A) (400)
₹ Cash flows from investing activities
Profit before tax 8,000 Sale of car 3,400
Income Tax (3,000) Purchase of car (16,000)
Profit after tax 5,000 Sale of Investment 10,000
Declared Dividends (4,000) Purchase of Investment (6,000)
Retained Profit 1,000 Purchase of Furniture & fixtures (14,000)
Further Information is available:
Net cash used in investing activities (B) (22,600)
Issue of shares for cash 20,000
Dividends paid* (2,000) (iii) lncome tax paid during the year ₹ 15,75,000.
Net cash from financing activities(C) 18,000 (iv) 22,500, 10% preference shares of ₹ 100 each were redeemed on 02-04-2021 at a premium of
5%.
Net decrease in cash and cash equivalents (A + B +C) (5,000)
(v) Further the company issued 75,000 equity shares of ₹ 10 each at a premium of 20% on
Cash and cash equivalents at beginning of period 17,000 30.3.2022(Out of 75,000 equity shares, 25,000 equity shares were issued to a supplier of ma-
Cash and cash equivalents at end of period 12,000 chinery)
* Dividend declared for the year ended 31st March, 2017 amounting ₹ 2,000 must have (vi) Dividend for FY 2020-21 on preference shares were paid at the time of redemption.
been paid in the year 2017-18. Hence, it has been considered as cash outflow for prepara- (vii) Dividend on Equity shares paid on 31.01.2022 for the year 2020-2021 ₹ 7.50 lakhs and inter-
tion of cash flow statement of 2017-18. im dividend paid ₹ 2.50 lakhs for the year 2021-2022.
Working Notes: (viii) Land was purchased on 02.4.2021 for ₹ 3,00,000 for which the company issued 22,000
equity shares of ₹ 10 each at a premium of 20% to the land owner and balance in cash as
1. Calculation of Income taxes paid consideration.
₹ (ix) Current assets and current liabilities in the beginning and at the end of the years were as
detailedbelow:
Income tax expense for the year 3,000
Add: Income tax liability at the beginning of the year 2,000 As on 01.04.2021 As on 31.3.2022
5,000 ₹ ₹
Less: Income tax liability at the end of the year (3,000) Inventory 18,00,000 19,77,000
2,000 Trade receivables 3,87,000 3,79,650

2. Calculation of Fixed assets acquisitions Cash in hand 3,94,450 16,950
Furniture & Fixtures (₹) Car (₹)
Outstanding expenses 1,12,500 1,22,700
W.D.V. at 31.3.2018 34,000 25,000
(MTP 10 Marks April 23 & Nov ’21 & Sep ’23 , PYP 10 Marks Nov ’20, RTP May 20)(Similar to Jan’21 but dif-
Add back: Depreciation for the year 2,000 5,000
ferent figures)
Disposals — 2,000
36,000 32,000
Answer 3
Manan Ltd.
Less: W.D.V. at 31. 3. 2017 (22,000) (16,000)
Cash Flow Statement
Acquisitions during 2016-2018 14,000 16,000
for the year ended 31st March, 2022
Question 3 Rs. Rs.
The following figures have been extracted from the books of Manan Limited for the year ended Cash flow from Operating Activities
on31.3.2022. You are required to prepare the Cash Flow statement as per AS 3 using indirect method. Net profit before income tax and extraordinary items: 30,00,000
(i) Net profit before taking into account income tax and income from law suits but af- Adjustments for:
ter taking intoaccount the following items was ₹ 30 lakhs:
Depreciation on Property, plant and equipment 7,50,000
(a) Depreciation on Property, Plant & Equipment ₹ 7.50 lakhs.
Discount on issue of debentures 45,000
(b) Discount on issue of Debentures written off ₹ 45,000.
Interest on debentures paid 5,25,000
(c) Interest on Debentures paid ₹ 5,25,000.
Interest on investments received (90,000)
(d) Book value of investments ₹ 4.50 lakhs (Sale of Investments for ₹ 4,80,000). Profit on sale of investments 12,00,000
(e) Interest received on investments ₹ 90,000.
Operating profit before working capital changes 42,00,000
(ii) Compensation received ₹ 1,35,000 by the company in a suit filed.
Adjustments for:
Increase in inventory (1,77,000) Question 4
Decrease in trade receivable 7,350 The following are the extracts of Balance Sheet and Statement of Profit and Loss of Supriya Ltd.:
Increase in trade payables 450 Extract of Balance Sheet
Increase in outstanding expenses 10,200 (1,59,000)
Particulars Notes 2021(Rs. 2020(
’000) Rs.’000)
Income tax paid (15,75,000)
Cash flow from ordinary items 24,66,000
1 Shareholder’s funds
Cash flow from extraordinary items:
(a) Share capital 1 500 200
Compensation received in a suit filed 1,35,000
2 Non- current liabilities
Net cash flow from operating activities 26,01,000
(a) Long term loan from bank --- 250
Cash flow from Investing Activities;
Sale proceeds of investments 4,80,000
Interest received on investments 90,000
Assets
Purchase of land (3,00,000 less 2,64,000) 36,000
Net cash flow from investing activities 5,34,000
(a) Property, Plant and Equipment 230 128
Cash flow from Financing Activities
2 Current assets
Proceeds of issue of equity shares at 20% premium 6,00,000
(a) Trade receivables 2,000 4,783
Redemption of preference shares at 5% premium (23,62,500)
(b) Cash & cash equivalents (Cash balance) 212 35
Preference dividend paid (2,25,000)
Interest on debentures paid (5,25,000)
Extract of Statement of Profit and Loss
Dividend paid (7,50,000 + 2,50,000) (10,00,000)
Particulars Notes 2021 2020
Net cash used in financing activities (35,12,500)
(Rs.’000) (Rs.’000)
Net decrease in cash and cash equivalents during the year (3,77,500)
I Expenses:
Add: Cash and cash equivalents as on 31.3.2021 3,94,450
Employee benefits expense 69 25
Cash and cash equivalents as on 31.3.2022 16,950
Other expenses 2 115 110
II Tax expense:
Current tax (paid during year) 243 140
Notes to accounts
2021 (Rs.’000) 2020 (Rs.’000)

1 Share Capital
Equity Shares of Rs.10 each, fully paid up 500 200
2 Other expenses
Overheads 115 110
Prepare Cash Flow Statement of Supriya Ltd. for the year ended 31st March, 2021 in accordance with
AS-3 (Revised) using direct method. All transactions were done in cash only. There were no outstand-
ing/prepaid expenses as on 31st March, 2020 and on 31st March, 2021. Ignore deprecation. Dividend
amounting Rs. 80,000 was paid during the year ended 31st March, 2021. (RTP May ’21)
Answer 4 Question 5
Supriya Ltd. From the following information, prepare a Cash Flow Statement for the year ended 31 March, 2019.
Cash Flow Statement for the year ended 31st March, 2021(Using direct method)
Balance Sheets
(Rs. ’000)
Particulars Note 31.03.2019 31.03.2018
Cash receipts from customers 2,783 (₹) (₹)
Cash payments to suppliers (2,047) I EQUITY AND LIABILITES
Cash paid to employees (69) (1) Shareholder’s Funds
Other cash payments (for overheads) (115) (a) Share Capital 1 3,50,000 3,00,000
Cash generated from operations 552 (b) Reserves and Surplus 2 82,000 38,000
Income taxes paid (243) (2) Non-Current Liabilities
Net cash from operating activities 309 (3) Current Liabilities

Cash flows from investing activities (b) Other Current Liabilities 3 37,000 27,000
Payments for purchase of Property, Plant and Equipment (102) (c) Short term Provisions (provision for tax) 4 32,000 28,000
Net cash used in investing activities (102) Total 5,66,000 4,37,000
Cash flows from financing activities ASSETS
Proceeds from issuance of share capital 300 II (1) Non-current Assets
Bank loan repaid (250) (a) Tangible Assets 2,66,000 1,90,000
Dividend paid (80) (b) Intangible Assets (Goodwill) 47,000 60,000
Net cash used in financing activities (30) Non-Current Investments 35,000 10,000
Net increase in cash and cash equivalents 177 (2) Current Assets
Cash and cash equivalents at beginning of period 35 (a) Inventories 78,000 85,000
Cash and cash equivalents at end of period 212 (b) Trade Receivables 1,08,000 75,000
(c) Cash & Cash Equivalents 32,000 17,000
Total 5,66,000 4,37,000
Note 1: Share Capital
Particulars 31.03.2019 (₹) 31.03.2018 (₹)

8% Preference Share Capital 1,00,000 1,50,000
Total 3,50,000 3,00,000
Note 2: Reserves and Surplus Answer 5

Particulars 31.03.2019 (₹) 31.03.2018 (₹) (viii) Cash flow Statement for the year ending 31st March, 2019
General Reserve 30,000 20,000 Particulars ₹ ₹
1. Cash flow from Operating Activities
Profit and Loss A/c 27,000 18,000
A. Closing balance as per Profit and Loss Account 27,000
Capital Reserve 25,000
Less: Opening balance as per Profit and Loss Account (18,000)
Total 82,000 38,000
Note 3: Current Liabilities Add: Dividend declared during the year 37,000
Particulars 31.03.2019(₹) 31.03.2018 (₹) Add: Interim dividend paid during the year 10,000
Dividend declared 37,000 27,000 Add: Transfer to reserve 10,000
Note 4: Tangible Assets
Add: Provision for Tax 32,000
Particulars 31.03.2019 31.03.2018 B. Net profit before taxation, and extra-ordinary item 98,000
(₹) (₹) C. Add: Items to be added
Land & Building 75,000 1,00,000 Depreciation 18,000
Machinery 1,91,000 90,000 Loss on sale of Plant 3,000
Total 2,66,000 1,90,000 Goodwill written off 13,000 34,000
Additional Information: D. Less: Dividend Income (1,500)
(i) Rs.18,000 depreciation for the year has been written off on plant and machin- E. Operating profit before working capital changes [B + C 1,30,500
ery and no depreciationhas been charged on Land and Building.
- D]
(ii) A piece of land has been sold out for Rs.50,000 and the balance has been reval- F. Add: Decrease in Current Assets and Increase in
ued, profit on such saleand revaluation being transferred to capital reserve. There Current Liabilitie s
is no other entry in Capital Reserve Account.
Decrease in Inventories 7,000
(iii) A plant was sold for Rs.12,000 WDV being Rs.15,000 on the date of sale (after charging depre-
ciation).
(iv) Dividend received amounted to Rs.2,100 which included pre-acquisition dividend of Rs.600.
(v) An interim dividend of Rs.10,000 including Dividend Distribution Tax has been paid.
(vi) Non-current investments given in the balance sheet represents investment
in shares of othercompanies.
(vii) Amount of provision for tax existing on 31 3.2018 was paid during the year 2018
-19. (RTP Nov 19)
Increase in Trade Payables 21,000 28,000 Investments Account
G. Less: Increase in Trade Receivables (33,000) Particulars ₹ Particulars ₹

H Cash generated from operations (E+F-G) 1,25,500 To Balance b/d 10,000 By Bank A/c (Div. received) 600
I Less: Income taxes paid (28,000) To bank A/c (Purchase 25,600 By Balance c/d 35,000
J Net Cash from (used in) operating activities 97,500 35,600 35,600
II. Cash Flows from investing activities:
Purchase of Plant (1,34,000) Question 6
Sale of Land 50,000 A company provides you the following information:

Sale of plant 12,000 (i) Total sales for the year were Rs. 398 crores out of which cash sales amounted to Rs.
Purchase of investments (25,600) 262 crores.
Dividend Received 2,100 (ii) Receipts from credit customers during the year, aggregated Rs. 134 crores.
Purchases for the year amounted to Rs. 220 crores out of which credit purchase was 80%.
Net cash used in investing activities (95,500)
Balance in creditors as on
III. Cash Flows from Financing Activities:
Proceeds from issue of equity share capital 1,00,000 1.4.2020 ₹ 84 crores
Redemption of preference shares (50,000) 31.3.2021 ₹ 92 crores
Interim Dividend (inclusive of DDT) paid (10,000) (iii) Suppliers of other consumables and services were paid Rs. 19 crores in cash.
Final dividend (inclusive of DDT) paid (27,000) (iv) Employees of the enterprises were paid 20 crores in cash.
Net cash from financing activities 13,000 (v) Fully paid preference shares of the face value of Rs. 32 crores were redeemed. Equity
IV. Net increase in cash and cash equivalents (I+II+III) 15,000 shares of the face value of Rs. 20 crores were allotted as fully paid up at premium of 20%.
(vi) Debentures of Rs. 20 crores at a premium of 10% were redeemed. Debenture holders were
V. Cash and cash equivalents at beginning of period 17,000 issuedequity shares in lieu of their debentures.
VI. Cash and cash equivalents at end of period (IV+V) 32,000 (vii) Rs. 26 crores were paid by way of income tax.
(viii) A new machinery costing Rs. 25 crores was purchased in part exchange of an old machin-
Land and Building Account
ery. The book value of the old machinery was Rs. 13 crores. Through the negotiations, the
Particulars ₹ Particulars ₹ vendor agreed to take over the old machinery at a higher value of Rs. 15 crores. The bal-
ance was paid in cash to the vendor.
To Balance b/d 1,00,000 By Bank A/c (Sale) 50,000
(ix) Investment costing Rs. 18 cores were sold at a loss of Rs. 2 crores.
To Capital Reserve A/c (Profit on 25,000 By Balance c/d 75,000
sale/revaluation) (x) Dividends amounting Rs. 15 crores (including dividend distribution tax of Rs. 2.7 crores)
1,25,000 1,25,000 was also paid.
Plant and Machinery Account
(xi) Debenture interest amounting Rs. 2 crore was paid.
Particulars ₹ Particulars ₹ (xii) On 31st March 2016, Balance with Bank and Cash on hand was Rs. 2 crores.
To Balance b/d 90,000 By Depreciation A/c 18,000 On the basis of the above information, you are required to prepare a Cash Flow Statement for the year
To Bank A/c (Purchase) 1,34,000 By Bank A/c (sale) 12,000 ended 31st March, 2017 (Using direct method). (RTP May 18) (Same concepts fewer adjustments RTP Nov
21)
By Profit and Loss A/c (Loss 3,000
on sale) Answer 6
By Balance c/d 1,91,000 Cash flow statement (using direct method) for the year ended 31 st March, 2017
2,24,000 2,24,000
(Rs. in (Rs. in crores)
crores)
Cash flow from operating activities Question 7
Cash sales 262 From the following details relating to the accounts of Omega Ltd. prepare Cash Flow Statement forthe
Cash collected from credit customers 134 year ended 31st March, 2021:
Less: Cash paid to suppliers for goods & services and to em- 31.03.2021(₹) 31.03.2020 (₹)
ployees (Refer Working Note) (251)
Share Capital 14,00,000 11,20,000
Cash from operations 145
Less: Income tax paid (26)
Profit and Loss Account 1,40,000 84,000
Net cash generated from operating activities 119
Debentures 2,80,000 -
Provision for taxation 1,40,000 98,000
Net Payment for purchase of Machine (25 – 15) (10)
Trade payables 9,80,000 11,48,000
Plant and Machinery 9,80,000 7,00,000
Net cash used in investing activities 6
Land and Building 8,40,000 5,60,000
Investments 1,40,000 -
Redemption of Preference shares (32)
Trade receivables 7,00,000 9,80,000
Proceeds from issue of Equity shares 24
Inventories 5,60,000 2,80,000
Debenture interest paid (2)
Cash in hand and at Bank 2,80,000 2,80,000
Dividend Paid (15)
Depreciation @ 20% was charged on the opening value of Plant and Machinery.
(i) At the year end, one old machine costing 70,000 (WDV 28,000) was sold for ₹ 49,000. Purchase
Net increase in cash and cash equivalents 100 of machinery was also made at the year end.
(ii) ₹ 70,000 was paid towards Income tax during the year.
Add: Cash and cash equivalents as on 1.04.2016 2
(iii) Land & Building is not subject to any depreciation. Expenses on renovation of building amount
Cash and cash equivalents as on 31.3.2017 102
₹ 2,80,000 were incurred during the year. Prepare Cash Flow Statement. (RTP May ’22)
Working Note:Calculation of cash paid to suppliers of goods and services and to employees
(Rs. in crores)
Opening Balance in creditors Account 84
Add: Purchases (220x .8) 176
Total 260
Less: Closing balance in Creditors Account 92
Cash paid to suppliers of goods 168
Add: Cash purchases (220x .2) 44
Total cash paid for purchases to suppliers (a) 212
Add: Cash paid to suppliers of other consumables and services (b) 19
Add: Payment to employees (c) 20
Total cash paid to suppliers of goods & services and to employees [(a)+(b) + 251
(c)]
Answer 7
Omega Ltd. Working Notes: Provision for taxation account
Cash Flow Statement for the year ended 31st March, 2021 ₹ ₹
To Cash (Tax Paid) 70,000 By Balance b/d 98,000
Cash Flow from Operating Activities
To Balance c/d 1,40,000 By Profit and Loss A/c 1,12,000
Increase in balance of Profit and Loss Account 56,000
(Balancing figure)
2,10,000 2,10,000
Transferto General Reserve 2,10,000
Plant and Machinery account
Depreciation 1,40,000 ₹ ₹
Profit on sale of Plant and Machinery (21,000) To Balance b/d 7,00,000 By Depreciation 1,40,000
Operating Profit before Working Capital changes 4,97,000 To Profit and Loss A/c (profit 21,000
Increase in Inventories (2,80,000) on sale of machine)
Decrease in Trade receivables 2,80,000 To Cash (Balancing figure) 4,48,000 By Cash (sale of 49,000
Decrease in Trade payables (1,68,000) machine)
Cash generated from operations 3,29,000 By Balance c/d 9,80,000
Income tax paid (70,000) 11,69,000 11,69,000
Net Cash from operating activities 2,59,000

Question 8
Cash Flow from Investing Activities
Purchase of plant & machinery (4,48,000) Following is the Balance Sheet of Fox Ltd. You are required to prepare cash flow statement usingIndirect
Method.
Expenses on building (2,80,000)
Increase in investments (1,40,000) Particulars Note 31st March,2021 31st March,2020
No.
Sale of old machine 49,000 ( Rs.) ( Rs.)
Net Cash used in investing activities (8,19,000)
(I) Equity and Liabilities
Cash Flow from Financing activities
1. Shareholders’ Funds
Proceeds from issue of shares 2,80,000
(a) Share capital 1 5,60,000 3,00,000
Proceeds from issue of debentures 2,80,000
(b) Reserve and Surplus 2 35,000 25,000
Net cash from financing activities 5,60,000
2. Current Liabilities
Net increase in cash or cash equivalents NIL
(a) Trade payables 1,50,000 60,000
Cash and Cash equivalents at the beginning of the year 2,80,000
(b) Short-term provisions 8,000 5,000
Cash and Cash equivalents at the end of the year 2,80,000 (Provision for taxation)
Total 7,53,000 3,90,000
Fox Ltd.
(II) Assets
Cash Flow Statement for the year ended 31st March 2021
1. Non-current assets
(a) Property, Plant and 3,50,000 1,80,000 ₹ ₹
Equipment
2. Current assets 10,000
Net Profit (35,000 less 25,000)
(a) Inventories 1,20,000 50,000
Add: Dividend 10,000
(b) Trade receivables 1,00,000 25,000
Provision for tax 8,000
(c) Cash and cash equivalents 1,05,000 90,000
Net profit before taxation and extraordinary items 28,000
(d) Other current assets 78,000 45,000
Adjustment for:
Total 7,53,000 3,90,000
Notes to Accounts Depreciation 40,000
Particulars 31st March,2021 (₹) 31st March,2020 Increase in trade receivables (75,000)
(₹) Increase in inventories (70,000)
1. Share capital Increase in other current assets (33,000)
(a) Equity share capital 4,10,000 2,00,000 Increase in trade payables 90,000 (88,000)
(b) Preference share capital 1,50,000 1,00,000 Cash used in operating activities (20,000)
5,60,000 3,00,000 Less: Tax paid* (5,000)
2. Reserve and surplus Net cash used in operating activities (25,000)
Surplus in statement of profit and loss at the 25,000 Cash flows from investing activities
beginning of the year
Purchase of PPE
Add: Profit of the year 20,000
(2,10,000)
Less: Dividend (10,000)
Net cash used in investing activities (2,10,000)
Surplus in statement of profit and loss at the 35,000 25,000
end of the year
Issue of equity shares for cash 2,10,000
Issue of preference shares 50,000
1. Dividend paid during the year ₹ 10,000 Dividends paid (10,000)
2. Depreciation charges during the year ₹ 40,000. (RTP May 23) Net cash generated from financing activities 2,50,000
Net increase in cash and cash equivalents 15,000
Cash and cash equivalents at beginning of period 90,000
Answer 8
Cash and cash equivalents at end of period 1,05,000
*Provision for tax of last year considered to be paid in the current year.Working Note: Answer 9
PQR Ltd. Cash Flow Statement for the year ended 31st March, 2019
₹
(Using direct method)
Property, plant and equipment acquisitions
W.D.V. at 31.3.2021 3,50,000 Particulars ₹ ₹
Add back: Cash flows from Operating Activities
Depreciation for the year 40,000 Cash sales (₹ 3,75,000/25%) 15,00,000
3,90,000 Less: Cash payments for trade payables (6,10,000)
Less: W.D.V. at 31.12.2020 1,80,000 Wages Paid (5,55,000)
Acquisitions during 2020-2021 2,10,000 Office and selling expenses ₹ (35,000 + 15,000) (50,000) (12,15,000)
Cash generated from operations before taxes 2,85,000
Question 9 Income tax paid (55,000)
The following information was provided by PQR Ltd. for the year ended 31st March, 2019: Net cash generated from operating activities (A) 2,30,000
Cash flows from Investing activities
(1) Gross Profit Ratio was 25% for the year, which amounts to Rs. 3,75,000.
Sale of investments ₹ (8,20,000 + 20,000) 8,40,000
(2) Company sold goods for cash only.
Payments for purchase of Plant & machinery (3,50,000)
(3) Opening inventory was lesser than closing inventory by Rs. 25,000.
Net cash used in investing activities (B) 4,90,000
(4) Wages paid during the year Rs. 5,55,000.
(5) Office expenses paid during the year Rs. 35,000.
Bank loan repayment (including interest) (2,05,000)
(6) Selling expenses paid during the year Rs. 15,000.
Dividend paid (including dividend distribution tax) (40,000)
(7) Dividend paid during the year Rs. 40,000 (including dividend distribution tax).
Net cash used in financing activities (C) (2,45,000)
(8) Bank Loan repaid during the year Rs. 2,05,000 (included interest Rs. 5,000)
Net increase in cash (A+B+C) 4,75,000
(9) Trade Payables on 31st March, 2018 were Rs. 50,000 and on 31st March, 2019 were Rs. 35,000.
Cash and cash equivalents at beginning of the period 2,25,000
(10) Amount paid to Trade payables during the year Rs.6,10,000
Cash and cash equivalents at end of the period 7,00,000
(11) Income Tax paid during the year amounts to Rs. 55,000 (Provision for taxation
‘Cash Flow from Operating Activities’ by indirect method
as on 31stMarch, 2019 Rs. 30,000).
(12) Depreciation on furniture amounts to Rs. 40,000. ₹
(13) Depreciation on other tangible assets amounts to Rs. 20,000. Net Profit for the year before tax and extraordinary items 2,80,000
(14) Plant and Machinery purchased on 15th November, 2018 for Rs. 3,50,000. Add: Non-Cash and Non-Operating Expenses:
(15) On 31st March, 2019 Rs. 2,00,000, 7% Debentures were issued at face value in an Depreciation 60,000
exchangefor a plant. Interest Paid 5,000
(16) Cash and Cash equivalents on 31st March, 2018 Rs. 2,25,000. Less: Non-Cash and Non-Operating Incomes:
(A) Prepare cash flow statement for the year ended 31st March, 2019, using direct method. Profit on Sale of Investments (20,000)
(B) Calculate cash flow from operating activities, using indirect method. (PYP May ‘19, 10 Net Profit after Adjustment for Non-Cash Items 3,25,000
Marks)
Less: Decrease in trade payables 15,000
Increase in inventory 25,000 (40,000)
Cash generated from operations before taxes 2,85,000
Working Note: a. Operating Activities.

Calculation of net profit earned during the year b. Investing Activities.
Rs. Rs. c. Financing Activities.
Gross profit 3,75,000
Ans: (a)
Less: Office expenses, selling expenses 50,000
Depreciation 60,000 Question 14
Interest paid 5,000 (1,15,000)
As per AS 3 on Cash Flow Statements, cash received by a manufacturing company from sale of sharesof
2,60,000 ABC Company Ltd. should be classified as
Add: Profit on sale of investments 20,000
a. Operating activity.
Net profit before tax 2,80,000
b. Financing activity.
c. Investing activity.
Question 10
Ans: (c)
While preparing cash flow statement, conversion of debt to equity
a. Should be shown as a financing activity.

b. Should be shown as an investing activity. Theoretical Questions Answers
c. Should not be shown as it is a non-cash transaction. Question 15

Ans: (c)
What is the significance of cash flow statement? Explain in brief.
Which of the following would be considered a ‘cash-flow item from an “investing” activity’? Cash flow statement provides information about the changes in cash and cash equivalents of
an enterprise. It identifies cash generated from trading operations and is very useful tool of plan-
a. Cash outflow to the government for taxes. ning.
b. Cash outflow to purchase bonds issued by another company.
Question 16
c. Cash outflow to shareholders as dividends.
Ans: (b) Explain the difference between direct and indirect methods of reporting cash flows from oper-
atingactivities with reference to AS 3.
All of the following would be included in a company’s operating activities except: (a) As per Para 18 of AS 3 (Revised) on Cash Flow Statements, an enterprise should report cash flows
from operating activities using either:
a. Income tax payments
(b) The direct method, whereby major classes of gross cash receipts and gross cash payments
b. Collections from customers or Cash payments to suppliers are disclosed; or the indirect method, whereby net profit or loss is adjusted for the effects of
c. Dividend payments. transactions of a non-cash nature, any deferrals or accruals of past or future operating cash
receipts or payments, and items of income or expense associated with investing or financing
Ans: (c) cash flows.
Question 13 Practical Questions Answers
Hari Uttam, a stock broking firm, received Rs. 1,50,000 as premium for forward contracts entered
Question 17
for purchase of equity shares. How will you classify this amount in the cash flow statement of the
firm?
Classify the following activities as (a) Operating activities, (b) Investing activities (c) Financing
(a) activities (d) Cash equivalents with reference to AS 3 (Revised).
(b) Brokerage paid on purchase of investments Answer18

(c) Underwriting commission paid Cash Flow Statement of M/s Gagan Ltd. for the year ended March 31, 20X2
(d) Trading commission received
A Cash Flow from Operating Activities
(e) Proceeds from sale of investment
Net Profit as per Profit & Loss A/c xxxxx
(f) Purchase of goodwill
Add: Premium on Redemption of Debentures 1,650
(g) Redemption of preference shares
Add: Interest on 10% Debentures 11,000
(h) Rent received from property held as investment
Less: Interest on 10% Investments (35,000)
(i) Interest paid on long-term borrowings Marketable securities (having risk of change in
B Cash Flow from Investing Activities
value)
Interest on Investments [35,000-10,500] 24,500
(j) Refund of income tax received
C Cash Flow from Financing Activities
Answer 17
Interest on Debentures paid [11,000 - (1,175 - 275)] - outflow
Classification of activities with reference to AS 3 (10,100)
a. Brokerage paid on purchased of investments Investing Activities Redemption of Debentures [(1,10,000 - 77,000) at 5% premium] -
outflow (34,650)
b. Underwriting Commission paid Financing Activities
Note: Debtors written off against provision for doubtful debts does not require any
c. Trading Commission received Operating Activities
further adjustment in Cash Flow Statement.
d. Proceeds from sale of investment Investing Activities
e. Purchase of goodwill Investing Activities
f. Redemption of Preference shares Financing Activities Question 19
g. Rent received from property held asinvest- Investing Activities
From the following Balance sheet of Grow More Ltd., prepare Cash Flow Statement for the year ended
ment
31st March, 20X1 :
h. Interest paid on long term borrowings Financing Activities
Particulars Notes 31st March, 31st March,
i. Marketable securities Not a Cash equivalent
j. Refund of Income tax received Operating activities 20X1 20X0
Question 18 1 Shareholders’ funds
How will you disclose following items while preparing Cash Flow Statement of Gagan Ltd. as per AS- A Share capital 10,00,000 8,00,000
3 for the year ended 31st March, 20X2? B Reserves and Surplus 1 3,00,000 2,10,000
(i) 10% Debentures issued: 2 Non-current liabilities
As on 01-04-20X1 Rs. 1,10,000As on 31-03-20X2 Rs. 77,000Debentures were redeemed at 5% premium Long term borrowings 2 2,00,000 -
at the end of the year. Premiumwas charged to the Profit & Loss Account for the year.
(ii) Unpaid Interest on Debentures:As on 01-04-20X1 Rs.275
A Trade Payables 7,00,000 8,20,000
As on 31-03-20X2 Rs. 1,175 B Other current liabilities 3 - 1,00,000
(iii) Debtors of Rs.36,000 were written off against the Provision for Doubtful DebtsA/c C Short term provision 1,00,000 70,000
duringthe year. (provision for tax)
10% Bonds (Investments): As on 01-04-20X1 Rs. 3,50,000As on 31-03-20X2 Rs. 3,50,000
(iv) Accrued Interest on Investments:As on 31-03-20X2 Rs. 10,500 Total 23,00,000 20,00,000
Assets 20,000) was sold for Rs. 35,000. Purchase was also made at the
year end.
(ii) Rs. 50,000 was paid towards Income tax during the year.
A Property, plant and 13,00,000 9,00,000
Equipment (iii) Construction of the building got completed on 31.03.20X1 and hence no depreciation
4
may be
B Non-Current Investments 1,00,000 -
2 Current assets
Answer 19
charged on the same. Prepare Cash flow Statement.
A Inventories 4,00,000 2,00,000
B Trade receivables 5,00,000 7,00,000 Cash Flow Statement of Grow More Ltd for the year ended 31st March, 20X1 Cash
Flow fromOperating Activities
C Cash and Cash - 2,00,000
equivalents Rs.
Total 23,00,000 20,00,000 Increase in balance of Profit and Loss Account(1,00,000 40,000
Notes to accounts – 60,000)
No. Particulars 31st March, 20X1 31st March, 20X0 Provision for taxation (W.N.1) 80,000
1 Reserves and Sur- Transfer to General Reserve (2,00,000 – 1,50,000) 50,000
plus
Depreciation (W.N.2) 1,25,000
Revenue reserve 2,00,000 1,50,000
Profit and Loss ac- 1,00,000 60,000
Profit on sale of Plant and Machinery (15,000)
count
3,00,000
Total Operating Profit before Working Capital changes 2,80,000
2,10,000
Increase in Inventories (2,00,000)
Decrease in Trade receivables 2,00,000
2 Long term borrow- Decrease in Trade payables (1,20,000)

ings
Debentures (issued 2,00,000 --
at end ofyear) Income tax paid (50,000)
Net Cash generated from operating activities 1,10,000

3. Other current liabil-
ities Cash Flow from Investing Activities
Dividend payable - 1,00,000 Purchase of fixed assets (3,45,000)
Expenses on building (6,00,000 – 4,00,000) (2,00,000)
Increase in investments (1,00,000)
4 Property, plant
andequipment Sale of old machine 35,000
Net Cash used in investing activities (6,10,000)
Plant and machinery 7,00,000 5,00,000
Land and building 6,00,000 4,00,000 Cash Flow from Financing activities
Net carrying value 13,00,000 9,00,000 Proceeds from issue of shares(10,00,000 – 2,00,000
8,00,000)
Depreciation @ 25% was charged on the opening value of Plant and Machinery. Proceeds from issue of debentures 2,00,000 3,00,000
(i) At the year end, one old machine costing Rs. 50,000 (WDV Rs.
Dividend paid (1,00,000) 2 Non-current liabilities
Net cash generated from financing activities Long term borrowings 3 2,00,000 -
Net increase in cash or cash equivalents NIL
Cash and Cash equivalents at the beginning of theyear 2,00,000
B Other current liabilities 4 30,000 80,000
C Short term provision (provision fortax)
Cash and Cash equivalents at the end of the year Ni
95,000 60,000
Total 14,60,000 12,50,000
Working Notes:
Assets
1. Provision for taxation account
Rs. Rs. A Property, plant and Equipment 5 9,15,000 7,00,000
To Cash (Paid) 50,000 By Balance b/d 70,000 B Non-Current Investments 50,000 80,000
To Balance c/d 1,00,000 By Profit and LossA/c 80,000 2 Current assets
A Inventories 95,000 90,000
(Balancingfigure)
B Trade receivables 2,50,000 2,25,000
1,50,000 1,50,000
Plant and Machinery account C Cash and Cash equivalents 50,000 90,000
D Other Current assets 1,00,000 65,000
Rs. Rs.
Total 14,60,000 12,50,000
To Balance b/d 5,00,000 By Depreciation 1,25,000 Notes to accounts
To Profit and Loss A/c 15000
No. 31st March, 31st March,
(profit on sale of
20X1 20X0
machine)
1. Share capital
To Cash (Balancing figure) 3,45,000 By Cash (sale of 35,000 Equity share capital 6,00,000 5,00,000
machine) 10% Redeemable Preference share
By Balance c/d 7,00,000 capital -- 2,00,000
8,60,000 8,60,000
Total 6,00,000 7,00,000
Question 20
From the following Balance Sheets and information, prepare Cash Flow Statement of Ryan Ltd. by Capital redemption reserve 1,00,000 -
Indirect method for the year ended 31st March, 20X1:
Particulars Notes 31st March 31st March

20X1 20X0
Rs. Rs.
A Share capital 1 6,00,000 7,00,000
B Reserves and Surplus 2 4,20,000 3,00,000
Capital reserve 70,000 - Profit on sale of land (30,000)

General reserve 1,50,000 2,50,000
Profit and Loss account 1,00,000 50,000 Profit on sale of plant (W.N.3) (40,000)
Total 4,20,000 3,00,000

Profit on sale of investments (W.N.4) (20,000)
3 Long term borrowings
Interest on debentures (2,00,000 X 9%) 18,000
9% Debentures 2,00,000 --
Operating profit before working capital changes 3,38,000
Increase in inventory (5,000)
Dividend payable - 60,000 Increase in trade receivables (25,000)
Liabilities for expenses 30,000 20,000 Increase in Other current assets (W.N.9) Increase in (35,000)
Total 30,000 80,000 Trade payables
5,000
Increase in liabilities for expenses 10,000
5 Property, plant and equipment Cash generated from operations 2,88,000
Plant and machinery 7,65,000 5,00,000 Income taxes paid (W.N.8) (1,00,000)
Land and building 1,50,000 2,00,000 Net cash generated from operating activities 1,88,000
Net carrying value 9,15,000 7,00,000 Cash flow from investing activities
Additional Information: Proceeds from sale of land (W.N.2) 1,50,000
(i) A piece of land has been sold out for Rs.1,50,000 (Cost – Rs.1,20,000) and the balance Proceeds from sale of plant (W.N.3) 90,000
land was revalued. Capital Reserve consisted of profit on revaluation of land.
Proceeds from sale of investments (W.N.4) 70,000
On 1st April, 20X0 a plant was sold for Rs.90,000 (Original Cost – Rs.70,000 and
Purchase of plant (W.N.3) (3,50,000)
(ii) W.D.V. – Rs. 50,000) and Debentures worth Rs.1 lakh were issued at par as part consideration for
Purchase of investments (W.N.4) (25,000)
plant of Rs.4.5 lakhs acquired.
Pre-acquisition dividend received (W.N.4) 5,000
(iii) Part of the investments (Cost – Rs.50,000) was sold for Rs.70,000.
(iv) Pre-acquisition dividend received Rs.5,000 was adjusted against cost of investment.
(v) Interim dividend was declared and paid @ 15% during the current year.
Proceeds from issue of equity shares(6,00,000 1,00,000
(vi) Income-tax liability for the current year was estimated at Rs.1,35,000.
– 5,00,000)
Depreciation @ 15% has been charged on Plant and Machinery but nodepreciation has been charged
on Building. Proceeds from issue of debentures(2,00,000 – 1,00,000
1,00,000)
Answer20
Redemption of preference shares (2,00,000)
Cash Flow Statement of Ryan Limited For the year ended 31st March, 20X1
Dividends paid (1,50,000)
Rs. Rs. Interest paid on debentures (18,000)
Cash flow from operating activities Net Profit Net cash used in financing activities (1,68,000)
before taxation (W.N.1) 2,75,000 Net decrease in cash and cash equivalents (40,000)
Adjustment for
Cash and cash equivalents at the beginning of the year 90,000
Depreciation (W.N.3) 1,35,000
Cash and Cash equivalents at the end of the year 50,000
Working Notes:1. General Reserve Account

Rs. Rs. Rs.
Net profit before taxation To Capital redemption 1,00,000 By Balance b/d 2,50,000
Retained profit 1,00,000 reserve
Less: Balance as on 31.3.20X0 (50,000) To Balance c/d 1,50,000
50,000
2,50,000 2,50,000
Dividend payable Account
Dividend 90,000
Rs. Rs.
2,75,000
To Bank (Balancing 1,50,000 By Balance b/d 60,000
Land and Building Account
figure)
Rs. Rs. To Balance c/d - By Profit and loss ac- 90,000
To Balance b/d 2,00,000 By Cash (Sale) 1,50,000 count
To Profit and Loss A/c (Profiton 30,000 By Balance c/d 1,50,000 1,50,000 1,50,000
sale)
To Capital reserve (Revaluation

profit) 70,000
3,00,000 3,00,000
Plant and Machinery Account
Rs. Rs.
To Balance b/d 5,00,000 By Cash (Sale) 90,000
To Profit and loss account 40,000 By Depreciation 1,35,000
To Debentures 1,00,000 By Balance c/d 7,65,000
To Bank 3,50,000
9,90,000 9,90,000
Investments Account
Rs. Rs.
To Balance b/d 80,000 By Cash (Sale) 70,000
To Profit and loss account 20,000 By Dividend
(Pre-acquisition) 5,000
To Bank (Balancing figure) 25,000 By Balance c/d 50,000
1,25,000 1,25,000
Capital Reserve Account
Rs. Rs.
To Balance c/d 70,000 By Profit on revaluation of 70,000
land
70,000 70,000
Provision for Taxation Account

B Inventory 2,16,000 3,00,000
Rs. Rs. C Other Current assets 8,94,000 8,50,000
To Bank (Balancing figure) 1,00,000 By Balance b/d 60,000 Total 38,00,000 41,20,000
Notes to accounts
To Balance c/d 95,000 By Profit and loss 1,35,000
account No. Particulars 31st March, 31st March,
1,95,000 1,95,000 20X0 20X1
Other Current Assets Account 1. Share capital
Rs. Rs. Equity share capital 12,00,000 16,00,000
To Balance b/d 65,000 10% Preference share capital 4,00,000 2,80,000
To Bank (Balancing figure) 35,000 By Balance c/d 1,00,000 Total 16,00,000 18,80,000
1,00,000 1,00,000 General reserve 6,00,000 7,60,000
Profit and Loss account 2,40,000 3,40,000
Question 21
Total 8,40,000 11,00,000
The Balance Sheet of New Light Ltd. as at 31st March, 20X1 and 20X0 (for the years ended) are asfol-
lows:
9% Debentures 4,00,000 2,80,000
Rs. Rs. Total 4,00,000 2,80,000
Notes 31st March 31st March 4. Other current liabilities
20X0 20X1
Dividend payable 1,20,000 -
Current Liabilities 4,80,000 5,20,000
Total 6,00,000 5,20,000
A Share capital 1 16,00,000 18,80,000
B Reserves and Surplus 2 8,40,000 11,00,000
Long term borrowings 3 4,00,000 2,80,000 Less: Depreciation (9,20,000) (11,60,000)
3 Current liabilities Net carrying value 22,80,000 26,40,000
A Other current liabilities 4 6,00,000 5,20,000 Additional information:The company sold one property, plant and equipment for Rs. 1,00,000, the cost of
which was Rs. 2,00,000 and the depreciation provided on it was Rs.80,000.
B Short term provision
3,60,000 3,40,000 (i) The company also decided to write off another item of property, plant and equipment
(provision for tax)
costing Rs. 56,000 on which depreciation amounting to Rs. 40,000 hasbeen provided.
Total 38,00,000 41,20,000
(ii) Depreciation on property, plant and equipment provided Rs. 3,60,000.
Assets
(iii) Company sold some investment at a profit of Rs.40,000.
(iv) Debentures and preference share capital redeemed at 5% premium. De-
A Property, plant andEquip- 22,80,000 26,40,000 bentures were redeemed at the year end.
ment 5
Company decided to value inventory at cost, whereas previously the practice was to value
B Non-Current Investments 4,00,000 3,20,000 inventory at cost less 10%. The inventory according to books on 31.3.20X0 was Rs. 2,16,000.
2 Current assets The inventory on 31.3.20X1 was correctly valued at Rs.3,00,000.
A Cash and Cash equivalents 10,000 10,000 Prepare Cash Flow Statement as per revised Accounting Standard 3 by indirect method.
Answer 21 C. Cash Flow from financing activities

New Light Ltd. Proceeds from issuance of share capital 4,00,000
Cash Flow Statement for the year ended 31st March, 20X1
A. Cash Flow from operating activities Rs. Rs. Redemption of preference share capital (1,26,000)
Profit after appropriation (Rs.1,20,000 + Rs.6,000)
Increase in profit and loss A/c after inventory adjustment

[Rs.3,40,000 – (Rs.2,40,000 + Rs.24,000)] 76,000 Redemption of debentures (Rs. 1,20,000 + Rs. 6,000) (1,26,000)
Transfer to general reserve 1,60,000

Dividend paid (1,20,000)
Provision for tax 3,40,000
(8,000)
Net profit before taxation and extraordinary item 5,76,000
Interest on debentures (36,000)
Adjustments for:
Net Cash generated from financing activities
Depreciation 3,60,000
Net increase/decrease in cash and cash equivalent Nil
Loss on sale of property, plant and equipment 20,000 during the year
Decrease in value of property, plantand equip- 16,000 Cash and cash equivalent at the beginning of theyear 10,000
ment
Profit on sale of investment (40,000) Cash and cash equivalent at the end of the year 10,000
Premium on redemption of preference share capital 6,000 Working Notes:
Revaluation of inventory will increase opening inventory by Rs. 24,000. 2,16,000/90 x 10 = Rs.24,000
Interest on debentures 36,000
Therefore, opening balance of other current assets would be as follows:Rs.11,10,000 + Rs.24,000 = Rs.11,34,000
Premium on redemption of debentures 6,000
Due to under valuation of inventory, the opening balance of profit and lossaccount be increased by
Operating profit before working capital changes 9,80,000 Rs.24,000.
The opening balance of profit and loss account after revaluation of inventorywill be Rs. 2,40,000 +
Increase in current liabilities
Rs.24,000 = Rs.2,64,000 Investment Account
(Rs.5,20,000 –Rs.4,80,000) 40,000
Increase in other current assets [Rs.11,50,000 Rs. Rs.
– (Rs. 11,10,000 + Rs.24,000)] (16,000) To Balance b/d 4,00,000 By Bank A/c 1,20,000
(balancing figure being
Cash generated from operations 10,04,000 6,44,000
investmentsold)
Income taxes paid (3,60,000)
Net Cash generated from operating activities To Profit and Loss A/c 40,000 By Balance c/d 3,20,000
(Profit on sale of in-
B. Cash Flow from investing activities
vestment)
Purchase of property, plant and equipment(W.N.3) (8,56,000)
4,40,000 4,40,000
Property, Plant and Equipment Account
Proceeds from sale of property, plantand 1,00,000 Rs. Rs. Rs.
equipment (W.N.3)
To Balance b/d 32,00,000 By Bank A/c (sale of 1,00,000
Proceeds from sale of investments (W.N.2) 1,20,000 (6,36,000) assets)
Net Cash used in investing activities To Bank A/c 8,56,000 By Accumulated
(balancing figure depreciation A/c 80,000 3 Long term borrowings

being assets By Profit and loss
purchased) A/c(loss 20,000 2,00,000 Short-term borrowings(Bank loan) 1,50,000 3,00,000
on sale of assets) Trade payables 8,80,000 8,20,000
By Accumulated
depreciation A/c 40,000 Other current liabilities 2 4,80,000 2,70,000
By Profit and loss A/c Total 91,60,000 1,09,80,000
(assets written 16,000 56,000 Assets
off)
By Balance c/d 38,00,000
A Property, plant andEquip- 21,20,000 32,80,000
40,56,000 40,56,000 ment 3
Accumulated Depreciation Account
2 Current assets
Rs. Rs. A Current InvestmentsIn- 11,80,000 15,00,000
To Property, plant 80,000 By Balance b/d 9,20,000 B ventory
20,10,000 19,20,000
and equipment C Trade receivables 4 22,40,000 26,40,000
A/c
D Cash and Cash equivalents 15,20,000 15,20,000
To Property, plant and 40,000 By Profit and loss A/c (de- 3,60,000
E Other Current assets (Prepaidex- 90,000 1,20,000
equipment preciation for the
penses)
A/c year)
Total 91,60,000 1,09,80,000
To Balance c/d 11,60,000
Notes to accounts
12,80,000 12,80,000
No. Particulars Rs.20X0 20X1
Question 22
9% Debentures (issued at - 9,00,000
ABC Ltd. gives you the Balance sheets as at 31st March 20X0 and 31st March 20X1. You are requiredto the endofyear)
prepare Cash Flow Statement by using indirect method as per AS 3 for the year ended 31st March20X1:
Particulars Notes Rs. Rs.

31st March 31st March
20X0 20X1
Share capital 50,00,000 50,00,000
Long term borrowings 1 - 9,00,000
Total - 9,00,000 Add: Decrease in Inventories(Rs. 90,000

20,10,000 – Rs.19,20,000)
15,80,000
2. Other current liabilities Less: Increase in Current Assets
Dividend payable 1,50,000 - Trade Receivables
Liabilities for expenses 3,30,000 2,70,000 (Rs. 30,60,000 – Rs.23,90,000) 6,70,000
Total 4,80,000 Prepaid Expenses (Rs. 1,20,000 – Rs.90,000) 30,000
2,70,000 Decrease in Current Liabilities:
Trade Payables (Rs. 8,80,000 – Rs. 8,20,000) 60,000
Expenses Outstanding
3 Property, plant and equip-
ment (Rs. 3,30,000 – Rs.2,70,000) 60,000 (8,20,000)
Plant and machinery 27,30,000 40,70,000 Net Cash generated from Operating Activities 7,60,000
Less: Depreciation (6,10,000) (7,90,000) Cash Flows from Investing Activities
Net carrying value 21,20,000
Investment in Current Investments (3,20,000)
32,80,000
Purchase of Plant & Machinery (Rs. (13,40,000)
40,70,000 – Rs. 27,30,000)
4 Trade receivables
Net Cash Used in Investing Activities (16,60,000)
Gross amount 23,90,000 28,30,000
Cash Flows from Financing Activities
Less: Provision for doubtful (1,50,000) (1,90,000)
debts Bank Loan Raised (Rs. 3,00,000 – Rs. 1,50,000) 1,50,000
22,40,000 26,40,000
Total Issue of Debentures 9,00,000
Additional Information: Payment of Dividend (1,50,000)

Net Cash Used in Financing Activities 9,00,000
(i) Net profit for the year ended 31st March, 20X1, after charging depreciation Rs. 1,80,000 is Rs.
10,40,000. Net Increase in Cash During the Year -
(ii) Trade receivables of Rs. 2,30,000 were determined to be worthless and werewritten off Add: Cash and Cash Equivalents as on 1.4.20X0 15,20,000
against the provisions for doubtful debts account during the year.
Cash and Cash Equivalents as on 31.3.20X1 15,20,000
Answer 22 Note:
Cash Flow Statement of ABC Ltd. for the year ended 31.3.20X1
Cash flows from Operating Activities Rs. Rs. 1. Bad debts amounting Rs. 2,30,000 were written off against provision for doubtful debts
account during the year. In the above solution, Bad debts have been added back in the
Net Profit 10,40,000
balances of provision for doubtful debts and trade receivables as on 31.3.20X1. Alterna-
Add: Adjustment For Depreciation (Rs.7,90,000 – 1,80,000 tively, the adjustment of writing off bad debts may be ignored and the solution can be
given on the basis offigures of trade receivables and provision for doubtful debts as
Rs.6,10,000)
appearing inthe balance sheet on 31.3.20X1.
Add: Adjustment for Provision for Doubtful Debts (Rs. 4,20,000 – 2,70,000
2. Current investments (i.e. Marketable securities) may not be readily convertible to a known
Rs.1,50,000)
amount of cash and be subject to an insignificant risk of changes in value as per the re-
Operating Profit Before Working Capital Changes 14,90,000 quirements of AS 3 and hence those have been considered as investing activities.
Question 23(Illustration) Shareholder’s funds
Intelligent Ltd., a non-financial company has the following entries in its Bank Account. It has sought (a) Share capital 1 5,00,000 5,00,000
your advice on the treatment of the same for preparing Cash Flow Statement. (b) Reserve & surplus 2 50,000 90,000
(i) Loans and Advances given to the following and interest earned on them: Non-current liabilities
(1) to suppliers (a) Long-term borrowings 3 5,00,000 7,50,000
(2) to employees
Current liabilities
(3) to its subsidiaries companies
(a) Other current liabilities 4 --- 5,000
(ii) Investment made in subsidiary Smart Ltd. and dividend received
(iii) Dividend paid for the year
Assets
(iv) TDS on interest income earned on investments made
Non-current assets
(v) TDS on interest earned on advance given to suppliers
(a) Intangible assets 5 2,05,000 1,80,000
(vi) Insurance claim received against loss of fixed asset by fireDiscuss in the
Notes to accounts
context of AS 3 Cash Flow Statement.
31.3.20X1 31.3.20X2
Answer23
Rs. Rs.
(i) Loans and advances given and interest earned
1 Share Capital
1) to s uppliers Operating Cash flow 50,000 Equity Shares of Rs.10 each 5,00,000 5,00,000
2) to employees Operating Cash flow 2 Reserve & surplus
3) to its s ubsidiary Investing Cash flow Profit & Loss A/c 50,000 90,000
ompanies
Investment made in subsidiary company and dividend received
10% Debentures 5,00,000 7,50,000
Investing Cash flow
4 Other current liabilities
(ii) Dividend paid for the year
Unpaid interest --- 5,000
Financing Cash Outflow
5 Intangible assets
(iii) TDS on interest income earned on investments made
Goodwill 2,05,000 1,80,000
Investing Cash Outflow You are required to show the related items in Cash Flow Statement.
(iv) TDS on interest earned on advance given to suppliers
Operating Cash Outflow
(v) Insurance claim received of amount loss of fixed asset by fire
Extraordinary item to be shown under a separate heading as ‘Cash inflow frominvesting activi-
ties’.
Following are extracts of the Balance Sheets of Ajay Ltd.:

Particulars Notes 31.3.20X1 31.3.20X2
Rs. Rs.
Answer 24 By Balance c/d 1,04,000

An Extract of Cash Flow Statement for the year ending 31.3.20X2 5,96,000 5,96,000
Rs. Answer 25
Cash flows from operating activities: Cash Flow Statement of …… for the year ended March 31, 20X1(Direct Method)
Closing balance as per Profit & Loss A/c 90,000
Particulars Rs. Rs.
Less: Opening balance as per Profit & Loss Alc (50,000)
Operating Activities:
Add: Goodwill amortisation 25,000
Cash received from sale of goods 1,40,000
Add: Interest on Debentures (Refer Note 1) 75,000
Cash received from Trade receivables 1,75,000
Net Cash from Operating Activities 1,40,000
Trade Commission received 50,000 3,65,000
Note 1: Interest has been computed on the closing balance of debentures as on 31.3.20X2 assumingthat
Less: Payment for Cash Purchases 1,20,000
all the additions/ deletions were made, if any, at the beginning of the year.
Payment to Trade payables 1,57,000
Cash flows from financing activities:
Office and Selling Expenses 75,000
Payment for Income Tax 30,000 (3,82,000)
Proceeds from debentures (Refer Working Note) 2,50,000
Net Cash Flow used in Operating Activities (17,000)
Interest paid on Debentures [less unpaid] (70,000)
Net Cash from Financing Activities 1,80,000 Question 26(Illustration)
Working Note:
The following summary cash account has been extracted from the company’s accounting re-
10% Debentures Account cords: Summary Cash Account
Particulars Rs. Particular Rs. Dividends 80
To Balance c/d 7,50,000 By Balance b/d 5,00,000 Repayments of bank loan 250
By Bank A/c (Bal. fig.) 2,50,000 Balance at 31.3.20X2 212
7,50,000 7,50,000
Prepare Cash Flow Statement of this company Hills Ltd. for the year ended 31stMarch, 20X2 in accor-
dance with AS-3 (Revised). The company does not have any cash equivalents.
Answer 26
From the following information, calculate cash flow from operating activities:Summary of Cash Ac-
count for the year ended March 31, 20X1 Hills Ltd. Cash Flow Statement for the year ended 31st March, 20X2(Using direct method)
Particulars Rs. Particulars Rs.

(Rs. ’000)
To Balance b/d 1,00,000 By Cash Purchases 1,20,000
To Cash sales 1,40,000 By Trade payables 1,57,000
Cash receipts from customers 2,783
To Trade receivables 1,75,000 By Office & Selling Expenses 75,000
Cash payments to suppliers (2,047)
To Trade Commission 50,000 By Income Tax 30,000
Cash paid to employees (69)
To Sale of Investment 30,000 By Investment 25,000
Other cash payments (for overheads) (115)
To Loan from Bank 1,00,000 By Repayment of Loan 75,000
Cash generated from operations 552
To Interest & Dividend 1,000 By Interest on loan 10,000
Income taxes paid (243)
Cash Flow Statement for the year ended 31st March, 20X1(Using direct method)
Net cash from operating activities 309
Cash flows from investing activities Particulars Rs. Rs.
Payments for purchase of fixed assets (230) Cash flows from Operating Activities
Proceeds from sale of fixed assets 128 Cash sales (Rs. 3,82,500/.30) 12,75,000
Net cash used in investing activities (102) Less: Cash payments for trade payables (4,60,000)
Cash flows from financing activities Wages Paid (4,92,500)
Proceeds from issuance of share capital 300 Office and selling expenses (75,000) (10,27,500)
Bank loan repaid (250) Cash generated from operations before taxes 2,47,500
Dividend paid (80) Income tax paid (65,000)
Net cash used in financing activities (30) Net cash generated from operating activities (A) 1,82,500
Net increase in cash and cash equivalents 177 Cash flows from investing activities
Cash and cash equivalents at beginning of period 35 Sale of investments (7,00,000 + 20,000) 7,20,000
Cash and cash equivalents at end of period 212 Payments for purchase of Plant & machinery (2,50,000)
Net cash used in investing activities (B) 4,70,000
Question 27(Illustration) Cash flows from financing activities
Prepare cash flow statement of M/s MNT Ltd. for the year ended 31st March, 20X1 with the help of the Bank loan repayment (including interest) (2,15,000)
following information: Dividend paid (30,000)
(1) Company sold goods for cash only. Net cash used in financing activities (C) (2,45,000)
(2) Gross Profit Ratio was 30% for the year, gross profit amounts to Rs. 3,82,500. Net increase in cash (A+B+C) 4,07,500
(3) Opening inventory was lesser than closing inventory by Rs. 35,000. Cash and cash equivalents at beginning of the period 2,00,000
(4) Wages paid during the year Rs. 4,92,500. Cash and cash equivalents at end of the period 6,07,500
(5) Office and selling expenses paid during the year Rs. 75,000.
(6) Dividend paid during the year Rs. 30,000. Question28(Illustration)
(7) Bank loan repaid during the year Rs. 2,15,000 (included interest Rs. 15,000). Ryan Ltd provides you the following information at the year-end, March 31, 20X1:
(8) Trade payables on 31st March, 20X0 exceed the balance on 31st March, 20X1 by
Rs. Rs.
Rs. 25,000.
Sales 6,98,000
(9) Amount paid to trade payables during the year Rs. 4,60,000.
Cost of Goods Sold (5,20,000)
(10) Tax paid during the year amounts to Rs. 65,000 (Provision for taxation as on
Operating Expenses 1,78,000
31.03.20X1Rs. 45,000).
(including Depreciation Expense of Rs. 37,000) (1,47,000)
(11) Investments of Rs. 7,00,000 sold during the year at a profit of Rs. 20,000.
Other Income / (Expenses): 31,000
(12) Depreciation on fixed assets amounts to Rs. 85,000.
(13) Plant and machinery purchased on 15th November, 20X0 for Rs. 2,50,000. Interest Expense paid (23,000)
(14) Cash and Cash Equivalents on 31st March, 20X0Rs. 2,00,000. Interest Income received 6,000
(15) Cash and Cash Equivalents on 31st March, 20X1Rs. 6,07,500 Gain on Sale of Investments 12,000
Loss on Sale of Plant (3,000)
Answer 27
(8,000)
M/s MNT Ltd.
23,000 Rs. Rs.
Income tax (7,000) Cash flows from operating activities

Net profit before taxation 23,000
16,000
Information available: Adjustments for:

31st March 31st March
Depreciation 37,000
20X1 20X0
Gain on sale of investments (12,000)
Rs. Rs.
Loss on sale of plant assets 3,000
Plant 7,15,000 5,05,000
Interest expense 23,000
Less: Accumulated Depreciation (1,03,000) (68,000)
6,12,000 4,37,000 Interest income (6,000)
Investments (Long term) 1,15,000 1,27,000 Operating profit before working capital changes 68,000
Inventory 1,44,000 1,10,000 Decrease in trade receivables 8,000
Trade receivables 47,000 55,000 Increase in inventory (34,000)
Cash 46,000 15,000 Decrease in prepaid expenses 4,000
Prepaid expenses 1,000 5,000 Increase in trade payables 7,000
Share Capital 4,65,000 3,15,000 Increase in outstanding liabilities 3,000
Reserves and surplus 1,40,000 1,32,000 Cash generated from operations 56,000
Bonds 2,95,000 2,45,000 Income taxes paid* (9,000)
Trade payables 50,000 43,000 Net cash generated from operating activities 47,000
Outstanding liabilities 12,000 9,000 Cash flows from investing activities
Income taxes payable 3,000 5,000 Purchase of plant (1,20,000)
Analysis of selected accounts and transactions during 20X0-X1 Sale of plant 5,000
1. Purchased investments for Rs. 78,000. Purchase of investments (78,000)
2. Sold investments for Rs. 1,02,000. These investments cost Rs. 90,000. Sale of investments 1,02,000
3. Purchased plant assets for Rs. 1,20,000. Interest received 6,000
4. Sold plant assets that cost Rs.10,000 with accumulated depreciation of Rs. 2,000for Net cash used in investing activities (85,000)
Rs.5,000. Cash flows from financing activities
5. Issued Rs. 1,00,000 of bonds at face value in an exchange for plant as- Proceeds from issuance of share capital 1,50,000
sets on31st March,20X1.
Repayment of bonds (50,000)
6. Repaid Rs. 50,000 of bonds at face value at maturity.
7. Issued 15,000 shares of Rs. 10 each. Dividends paid (8,000)
8. Paid cash dividends Rs. 8,000. Net cash from financing activities 69,000
Prepare Cash Flow Statement as per AS-3 (Revised), using indirect method. Net increase in cash and cash equivalents 31,000
Cash and cash equivalents at the beginning of theperiod 15,000
Answer 28
Cash and cash equivalents at the end of the period 46,000
Ryan Ltd. Cash Flow Statement for the year ending 31st March, 20X1
*Working Note: (b) Trade receivables 5 2,000 1,000

Rs. (c) Cash and Cash 17,000 14,000
Income taxes paid: (d) equivalents 8,000 6,000
Income tax expense for the year 7,000 4,000 8,500
Add: Income tax liability at the beginning of the year 5,000
Total 70,500 58,500
Notes to accounts
12,000
20X1 20X0
Less: Income tax liability at the end of the year (3,000)
Rs. Rs.
1 Share Capital
9,000
Equity Shares of Rs.10 each 60,000 50,000
2 Reserve & surplus
The balance sheets of Sun Ltd. as at 31st March 20X1 and 20X0 were as:
Profit and Loss Account 5,000 4,000
Particulars Notes Rs. Rs.

31 March
st
31st March
Dividend Payable - 1,000
20X0 20X1
14
1 Shareholders’ funds 4 Property, plant and equipment (at WDV)
(a) Share capital 1 60,000 50,000 Building 10,000 10,000

(b) Reserves and Surplus 2 5,000 4,000 Fixtures 17,000 11,000
2 Current liabilities Vehicles 12,500 8,000
(a) Trade Payables 4,000 2,500 Total 39,500 29,000
(b) Other current 3 - 1,000 5 Cash and cash equivalents
liabilities Cash and Bank 4,000 8,500
(c) Short term provision (provision 1,500 1,000

for tax) The profit and loss statement for the year ended 31st March, 20X1 disclosed:
Total 70,500 58,500 Particulars Rs.
Profit before tax 4,500
Assets
Tax expense: Current tax (1,500)
Profit for the year 3,000
(a) Property, plant andEquip- 39,500 29,000
ment 4 Declared dividend (2,000)
2 Current assets Retained Profit 1,000
Current Investments 2,000 Further information is available:
Fixtures Vehicles
(a) Inventory
Rs. Rs.
Depreciation for the year 1,000 2,500 Cash and cash equivalents at end of period (SeeNote)
Disposals: 4,000
Proceeds on disposal of vehicles — 1,700 Note to the Cash Flow Statement
Written down value — (1,000) Cash and Cash Equivalents

31.3.20X1 31.3.20X0
Profit on disposal 700
Bank and Cash 4,000 8,500
Cash and cash equivalents 4,000 8,500
Prepare a Cash Flow Statement for the year ended 31st March, 20X1.
Working Notes:
Answer 29 Rs.
Sun Ltd. Cash Flow Statement for the year ended 31st March, 20X1 1. Income taxes paid
Rs. Rs. Income tax expense for the year 1,500
Cash flows from operating activities Add: Income tax liability at the beginning of the year 1,000
Net Profit before taxation 4,500 2,500
Adjustments for: Less: Income tax liability at the end of the year (1,500)
Depreciation 3,500 1,000
Profit on sale of vehicles (1,700 – 1,000) (700) 2. Dividend paid
Operating profit before working capital changes 7,300 Declared dividend for the year 2,000
Increase in Trade receivables (2,000) Add: Amount payable at the beginning of the year 1,000
Increase in inventories (3,000) 3,000
Increase in Trade payables 1,500 Less: Amount payable at the end of the year -
Cash generated from operations 3,800 3,000
Income taxes paid (W.N.1) (1,000) 3. Property, plant and equipment acquisitions
Net cash generated from operating activities 2,800 Fixtures Vehicles
Cash flows from investing activities Rs. Rs.
Sale of vehicles 1,700 W.D.V. at 31.3.20X1 17,000 12,500
Purchase of current investments (1,000) Add back:
Purchase of vehicles (W.N.3) (8,000) Depreciation for the year 1,000 2,500
Disposals — 1,000
14Purchase of fixtures (W.N.3) (7,000)
18,000 16,000
Less: W.D.V. at 31.12.20X0 (11,000) (8,000)
Acquisitions during 20X0-20X1 7,000 8,000
Issue of shares for cash 10,000
Note: Current investments may not be readily convertible to a known amount of cash and may not be
Dividends paid (W.N.2) (3,000) subject to an insignificant risk of changes in value as per the requirements of AS 3 and hence those
have been considered as investing activities.
Net cash generated from financing activities 7,000
Cash and cash equivalents at beginning ofperiod(See
Note) 8,500 Ms. Jyoti of Star Oils Limited has collected the following information for the preparation of cash flow
statement for the year ended 31st March, 20X1:
(Rs. in lakhs) Interest income on investments (2,506)

Net Profit 25,000 Interest expenses 10,000
Dividend paid 8,535
Provision for Income tax 5,000
Income tax paid during the year 4,248 Changes in working capital (Excluding cash and bank balance) (56,081) (2,895)
Loss on sale of assets (net) 40

Book value of the assets sold 185
Income taxes paid (4,248)
Depreciation charged to the Statement of Profit and Loss 20,000
Net cash used in operating activities
Profit on sale of Investments 100
Carrying amount of Investment sold 27,765 Cash flows from investing activities
Interest income received on investments 2,506 Sale of assets (W.N.1) 145
Interest expenses of the year 10,000 Sale of investments (27,765 + 100) 27,865
Interest paid during the year 10,520 Receipt of grant for capital projects Interest income 12
Increase in Working Capital (excluding Cash & Bank Balance) 56,081 on investments
2,506
Purchase of Fixed assets 14,560 Purchase of fixed assets (14,560)
Investment in joint venture 3,850
Investment in joint venture (3,850)
Expenditure on construction work in progress 34,740
Expenditure on construction work-in progress (34,740)
Proceeds from calls in arrear 2
Receipt of grant for capital projects 12
Proceeds from long-term borrowings 25,980
Proceeds from calls in arrear 2
Proceeds from short-term borrowings 20,575
Opening cash and bank balance 5,003
Proceeds from long-term borrowings 25,980
Closing cash and bank balance 6,988
Proceed from short-term borrowings 20,575
Prepare the Cash Flow Statement for the year ended 31 March 20X1 in accordancewith AS 3. (Make nec-
essary assumptions)
Dividend (including dividend tax) paid (8,535) 27,502
Answer 30 Net increase in cash and cash equivalents 1,985
Star Oils Limited Cash flow Statement for the year ended 31st March, 20X1
Cash and cash equivalents at the beginning of theperiod 5,003
Cash and cash equivalents at the end of the period 6,988

(Rs. in
Working note:
lakhs)
Cash flows from operating activities 1. Book value of the assets sold 185
Net profit before taxation (25,000 + 5,000) 30,000 Less : Loss on sale of assets (40)
Adjustments for : Proceeds on sale 145
Depreciation 20,000
Loss on sale of assets (Net) 40
From the following Summary Cash Account of X Ltd. prepare Cash Flow Statementfor the year ended
Profit on sale of investments (100)
31st March, 20X1 in accordance with AS 3 (Revised) using the direct method. The company does not
have any cash equivalents. Answer 31

Summary Cash Account for the year ended 31 3.20X1
X Ltd.Cash Flow Statement for the year ended 31st March, 20X1 ( Using direct method)
Rs.’000 Rs.’000 Rs. ’000 Rs. ’000

Balance on 1.4.20X0 50 Payment to Suppliers 2,000 Cash flows from operating activities
Issue of Equity Shares 300 Purchase of Fixed Asset 200 Cash receipts from customers 2,800
Receipts from Customers 2,800 Overhead expense 200 Cash payments to suppliers (2,000)
Sale of Fixed Assets 100 Wages and Salaries 100 Cash paid to employees (100)
Taxation 250 Cash payments for overheads (200)
Dividend 50
Income tax paid (250)
Repayment of Bank Loan 300
Net cash generated from operating activities 250
Balance on 31.3.20X1 150
3,250 3,250
Payments for purchase of fixed assets (200)
Proceeds from sale of fixed assets 100
Net cash used in investing activities (100)
Proceeds from issuance of equity shares 300
Bank loan repaid (300)
Dividend paid (50)
Net increase in cash 100
Cash at the beginning of the year 50
Cash at the end of the year 150
Given below are the relevant extracts of the Balance Sheet and the Statement of Profitand Loss of ABC
Ltd. along with additional information:
Extract of Balance sheet
Particulars Notes 31.3.20X1 31.3.20X0

(a) Trade Payables 250 230
(b) Short term Provisions 1 200 180
(c) Other current liabilities 2 70 50
1 Short term Provisions:Provision for Tax

Assets 200 180
2 Other current liabilities:
1 Current assets
Outstanding wages 50 40
(a) Inventories 200 180 Outstanding expenses 20 10
(b) Trade Receivables 400 250 Total 70 50
(c) Other current assets 3 195 180 3 Other current assets:
Statement of Profit and Loss of ABC Ltd.for the year ended 31st March, 20X1 Advance tax
195 180
Particulars Notes Rs. in lakhs 4 Other income: Interest and dividend
I Revenue from operations 4,150
100
II Other income 4 100
5 Finance cost:Interest
III Total income (I + II) 4,250 60
Compute cash flow from operating activities using both direct and indirect method.
Expenses:
Answer 32
Purchases of Stock-in-Trade 2,400 Cash Flows from Operating Activities
Change in inventories of finished goods (20)

Rs. in lakhs Rs. in lakhs
Employee benefits expense 800
Using Direct MethodCash
Receipts:
Depreciation expense 100
IV Finance cost 5 60 Cash sales and collection from Trade receivables 4,000
Other expenses 200 Sales + Opening Trade receivables – Closing Trade 4,150 + 250 - 400
receivables (A)
Cash payments:
Total expenses 3,540
Cash purchases & payment to Trade payables
V Profit before tax (III – IV) 710
VI Tax expense: Current tax Purchases + Opening Trade payables –Closing 2,400 + 230 - 250 2,380
Trade payables
200
Wages and salaries paid 800 + 40 - 50 790
VII Profit for the year fromcontinuing operations 510
Cash expenses 200 + 10 – 20 190
Appropriations Taxes paid – Advance tax 195
Balance of Profit and Loss account brought forward 50 (B) 3,555
Transfer to general reserve 200 Cash flow from operating activities (A – B) 445
Dividend paid 330 Using Indirect Method

Notes to accounts: Profit before tax 710
Add: Non-cash items : Depreciation 100
20X1 20X0
Add: Interest : Financing cash inflow 60
Less: Interest and Dividend : Investment (100) Particulars Rs. in crores Rs. in
cashoutflow crores
Less: Tax paid (195) Cash flows from operating activities
Working capital adjustments Cash sales (60% of 135) 81
Trade receivables 250 - 400 (150) Cash receipts from Debtors 49
Inventories 180-200 (20) [45+ (135x40%) - 50]
Trade payables 250 - 230 20 Cash purchases (20% of 55) (11)
Outstanding wages 50- 40 10 Cash payments to suppliers (42)
Outstanding expenses 20-10 10 (130) [21+ (55x80%) – 23]
Cash flow from operating activities 445 Cash paid to employees (22)
Cash payments for overheads (Adm. and selling) (18)
Prepare Cash flow for Gamma Ltd., for the year ending 31.3.20X1 from the followingin- Income tax paid (8)
formation: Net cash generated from operating activities 29
(1) Sales for the year amounted to Rs. 135 crores out of which 60% was cash sales. Cash flows from investing activities
(2) Purchases for the year amounted to Rs. 55 crores out of which credit purchase was Sale of investments (12+ 2.40) 14.4
80%.
Payments for purchase of fixed assets (21 – 10) (11)
(3) Administrative and selling expenses amounted to Rs. 18 crores and salary paid
Net cash generated from investing activities 3.4
amountedto Rs. 22 crores.
(4) The Company redeemed debentures of Rs. 20 crores at a premium of 10%. Debenture
holders were issued equity shares of Rs. 15 crores towards redemption and the bal- Redemption of debentures (22-15) (7)
ance was paid in cash. Debenture interest paid during the year was Rs. 1.5 crores. Interest paid (1.5)
(5) Dividend paid during the year amounted to Rs. 11.7 crores. Dividend paid (11.7)
(6) Investment costing Rs. 12 crores were sold at a profit of Rs. 2.4 crores. Net cash used in financing activities (20.2)
(7) Rs. 8 crores was paid towards income tax during the year. Net increase in cash 12.2
(8) A new plant costing Rs. 21 crores was purchased in part exchange of an old plant. The Cash at beginning of the period 6.0
book value of the old plant was Rs. 12 crores but the vendor took over theold plant at
Cash at end of the period 18.2
a value of Rs. 10 crores only. The balance was paid in cash to the vendor.
(9) The following balances are also provided:
Rs. in crores Rs. in crores Question 34 (Illustration)

1.4.20X0 31.3.20X1
From the following information of Mr. Zen, prepare a Cash flow statement as per AS-3 for the yearend-
Debtors 45 50 ed 31.3.20X1:
Creditors 21 23
Bank 6 18.2
Answer 33
Gamma Ltd. Cash Flow Statement for the year ended 31st March, 20X1(Using direct
method)
Ledger balances of Mr. Zen as of 20X0 and 20X1 Drawings (W.N.3) (1,36,000)
Loan from Bank 80,000
As on 1.4.20X0 As on 1.4.20X1 Net cash used in financing activities (2,56,000)
Rs. Rs. Net decrease in cash (24,000)
Zen’s Capital A/c 10,00,000 12,24,000
Opening balance as on 1.4.20X0 80,000
Cash balance as on 31.3.20X1 56,000
Mrs. Zen’s loan 2,00,000 --
Working Notes:
Loan from Bank 3,20,000 4,00,000
1. Plant & Machinery A/c
Land 6,00,000 8,80,000
Rs. Rs.
Inventories 2,80,000 2,00,000 To Balance b/d 8,40,000 By Cash – Sales 40,000
Trade receivables 2,40,000 4,00,000 (6,40,000 + 2,00,000) By Provision forDepreciation 24,000
Cash 80,000 56,000 A/c
Additional information: By Profit & Loss A/c – 16,000
A machine costing Rs. 80,000 (accumulated depreciation there on Rs.24,000) was soldfor Rs. 40,000.
Loss on Sale (80,000 –
The provision for depreciation on 1.4.20X0 was Rs. 2,00,000 and 31.3.20X1 was Rs. 3,20,000. The net
profit for the year ended on 31.3.20X1 was Rs. 3,60,000. 64,000)
By Balance c/d
Answer 34
(4,40,000+3,20,000) 7,60,000
Cash Flow Statement of Mr. Zen as per AS 3for the year ended 31.3.20X1
8,40,000 8,40,000
Rs.
Provision for depreciation on Plant and Machinery A/c
(i) Cash flow from operating activities
Rs. Rs.
Net Profit (given) 3,60,000
To Plant and Machinery 24,000 By Balance b/d 2,00,000
Adjustments for A/c
Depreciation on Plant & Machinery (W.N.2) 1,44,000 To Balance c/d 3,20,000 By Profit & Loss A/c (Bal. 1,44,000
Loss on Sale of Machinery (W.N.1) 16,000 1,60,000 fig.)
Operating Profit before working capitalchanges 5,20,000 3,44,000 3,44,000

To find out Mr. Zen’s drawings:
Decrease in inventories 80,000
Rs.
Increase in trade receivables (1,60,000)
Opening Capital 10,00,000
Increase in trade payables 32,000 (48,000)
Add: Net Profit 3,60,000
Net cash generated from operating activities 4,72,000
13,60,000
(ii) Cash flow from investing activities
Less: Closing Capital (12,24,000)
Sale of Machinery (W.N.1) 40,000
Drawings 1,36,000
Purchase of Land (8,80,000 – 6,00,000) (2,80,000)
Net cash used in investing activities (2,40,000) Note: Students may note that in case there is an increase in the amount of debentures/loans
during the year and the interest is required to be computed, then in such a case, students may
(iii) Cash flow from financing activities choose either to compute interest on the closing balance of the debentures or may compute
Repayment of Mrs. Zen’s Loan (2,00,000) interest on opening balance for full year (in case of no repayment) and proportionate interest
on additions. Suitable note for assumption may be given in the solution for this.
Chapter 12
Buy back of securities
Chapter 12
Coverage 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023 Buy back of securities
Study
Q.17 TO Q.32
Mat. Question 1
Past Q.12
Q.6 NO Q.7 Q.13 NO NO Q.3 Q.15 Q.6 Q.1 NO What are the conditions to be fulfilled by a Joint Stock Company to buy-back itsequity shares as
Exams Q.14
per Companies Act, 2013? Explain in brief. (Old & New SM) (PYP 5 Marks May ’23)
Q.3 Q.2 Q.5 Q.2
MTP Q.3 Q.3 Q.2 NO Q.2 NO Q.6 Q.7
Q.4 Q.5 Q.8 Q.8 Answer 1
RTP Q.4 Q.10 Q.6 Q.9 Q.2 Q.8 Q.6 Q.13 Q.4 Q.9 Q.11 NO
Section 68 to 70 of the Companies Act, 2013 lays down the provisions for a company to buy-back its own
equity shares. The Companies Act, 2013 under Section 68 (1) permits companies to buy-back theirown
shares and other specified securities out of:
(i) Its free reserves; or

(ii) The securities premium account; or
(iii) The proceeds of the issue of any shares or other specified securities.
Note: No buy-back of any kind of shares or other specified securities shall be made out of the proceeds
of an earlier issue of the same kind of shares or same kind of other specified securities. For example, if
equity shares are to be bought-back, then, preference shares may be used for the purpose. The other
important provisions relating to the buy-back are:
(1) Section 68 (2) further states that no company shall purchase its own shares or other spec-
ified securities unless—
(a) the buy-back is authorised by its articles;
(b) a special resolution has been passed in general meeting of the company authorising the
buy- back; However, the above provisions do not apply where the buy-back is ten percent
or less ofthe paid-up equity capital + free reserves and is authorized by a board resolution
passed at a duly convened meeting of the directors. Hence, in case the buy-back is up to
10% of paid up equity + free reserves, the same may be done with the authorization of the
Board Resolution without the necessity of its being authorized by the articles of association
of the company and by a special resolution of its members passed at a general meeting
of the company.
(c) the buy-back must be equal or less than twenty-five per cent of the total paid-up capital
and free reserves of the company: (Resource Test)
(d) Further, the buy-back of shares in any financial year must not exceed25% of its total paid-
up capital and free reserves: (Share Outstanding Test)
(e) the ratio of the debt owed by the company (both secured and unsecured) after such buy-
back is not more than twice the total of its paid-up capital and its free reserves: (Debt-Eq-
uity Ratio Test) Note: Central Government may prescribe a higher ratio of the debt than
that specified under this clause for a class or classes of companies. Debt here should in-
clude both long-term debt as well as short term debt.
(f) all the shares or other specified securities for buy-back are fully paid-up;
(g) the buy-back of the shares or other specified securities listed on any recognised stock ex-
change is in accordance with the regulations madeby the Securities and Exchange Board
of India in this behalf; cellation of securities, the date of extinguishing and physically destroying of securities and
such other particulars as may be prescribed.
(h) the buy-back in respect of shares or other specified securities other than those specified in
clause (f) is in accordance with the guidelines as may be prescribed. Provided that no offer (9) A company shall, after the completion of the buy-back under this section, file with the Reg-
of the buy-back under this sub section shall be made within a period of one year reckoned istrar and the Securities and Exchange Board of India, a return containing such particulars
from the date of closure of a previous offer of buy-back if any. This means that there cannot relating to the buy-back within thirty days of such completion, as may be prescribed, pro-
be more than one buy- back in one year. vided that no return shall be filed withthe Securities and Exchange Board of India by a com-
pany whose shares are not listed on any recognised stock exchange.
(2) The notice of meeting at which special resolution is supposed to be passed must be ac-
companied byan explanatory statement stating- (10) If a company makes default in complying with the provisions of this section or any regula-
tions made bySEBI in this regard, the company may be punishable with a fine which shall not
(a) a full and complete disclosure of all material facts;
be less than Rs One Lakhbut which may extend to three lakh rupees and every officer of the
(b) the necessity of the buy-back; company who is in default shall be punishable with imprisonment for upto 3 years or with a
fine of not less than one lakh rupees but whichmay extend to three lakh rupees or with both.
(c) the class of security intended to be purchased under the buy-back;
(d) the amount to be invested under the buy-back;
(11) Section 69 (1) states that where a company purchases its own shares out of the free re-
serves or securities premium account, a sum equal to the nominal value of shares so pur-
(e) the time limit for completion of the buy-back. chased shall betransferred to the Capital Redemption Reserve Account and details of such
(3) Every buy-back shall be completed within twelve months from the date of passing the account shall be disclosed in the Balance Sheet.
special resolution, or the resolution passed by the board of directors. (12) The shares or other specified securities which are proposed to be bought- back must be
(4) The buy-back may be— fully paid-up.
(a) from the existing (13) The Capital Redemption Reserve Account may be applied by the company in paying up
unissued shares of the company to be issued to members of the company as fully paid
(b) security holders on a proportionate basis; or bonus shares.
(c) from the open market; or (14) Premium (excess of buy-back price over the par value) paid on buy-back should be ad-
(d) by purchasing the securities issued to employees of the company pursuant to a justed against free reserves and/or securities premium account. Revaluation reserve rep-
scheme of stock option or sweat equity. resents unrealized profit and hence it cannot be used for buy-back of securities.
(5) Where a company has passed a special resolution under clause (b) of Sub- section (2) to (1) No company shall directly or indirectly purchase its own shares or other specified
buy-back its own shares or other securities under this section, it shall, before making such securities—
buy-back, file with the Registrar and the Securities and Exchange Board of India a declara- (a) through any subsidiary company including its own subsidiary companies; or
tion of solvency in the form as may be prescribed and verified by an affidavit to the effect
that the Board of Directors has made a full inquiry into the affairs of the company as a result (b) through any investment company or group of investment companies; or
of which they have formed an opinion that it is capable of meeting its liabilities and will not (c) if a default is subsisting, in repayment of deposit or interest payable thereon, re-
be rendered insolvent within a period of one year of the date of declaration adopted by the demptionof debentures or preference shares or payment of dividend to any share-
Board of Directors. It must be signed by at least two directorsof the company, one of whom holder or repayment of any term loan or interest payable thereon to any financial
shall be the managing director, if any: institutions or bank. Provided that the buy–back is not prohibited if the default is
Note: No declaration of solvency shall be filed with the Securities and Exchange Board of In- remedied and a period of three years has elapsed since the cessation of the de-
dia by a company whose shares are not listed on any recognised stock exchange. fault.
(6) Where a company buys-back its own securities, it shall extinguish and physically destroy (2) In accordance with schedule III, no company shall directly or indirectly purchase its
the securities so bought-back within seven days of the last date of completion of buy-back. own shares or other specified securities in case such company has not complied
with provisions of Sections 92 (filling of annual return), 123 (payment of dividend
(7) Where a company completes a buy-back of its shares or other specified securities under within 30 days of declaration),
this section, itshall not make further issue of same kind of shares (including allotment of fur-
ther shares under clause 127 (failure to distribute dividend) and 129 (preparation of financial state-
ment of the company).
(a) of Sub-section (1) of Section (62) or other specified securities within a period of six months
except by way of bonus issue or in the discharge of subsisting obligations such as conversion
of warrants, stock option scheme, sweat equity or conversion of preference shares or de-
bentures into equity shares.
(8) Where a company buy-back its securities under this section, it shall maintain a register of the
securities so bought, the consideration paid for the securities bought-back, the date of can-
Question 2 Premium payable on Redemption of Preference Shares A/c Dr. 2,000
The following was the summarized balance sheet of Bhoomi Ltd. as on 31st March, 2020:
To Preference Shareholders A/c 22,000
Equity & liability Rs (in lakhs) Assets Rs (in lakhs) (Being amount payable on redemption of Preference
Authorised Capital: Property, plant and shares, at a Premium of 10%)
equipment 1,12,000 3 Securities Premium A/c Dr. 2,000
Equity shares of Rs 10 each 80,000 Investments 24,000 To Premium payable on Redemption of
Preference Shares A/c 2,000
Issued Capital Cash at Bank 13,200
Equity Shares of Rs10 each Fully Trade Receivables 66,000 (Being Securities Premium utilised to provide Premium on
Paid up Redemption of Preference Shares)
64,000
4 Equity Share Capital A/c Dr. 16,000
10% Redeemable Preference Shares
of 10 each, Fully Paid Up 20,000 Premium payable on Buyback A/c Dr. 16,000
Reserves & Surplus: To Equity Share buy back A/c 32,000
Capital Redemption Reserve 8,000 (Being the amount due on buy-back)
Securities Premium 6,400 5 Securities Premium A/c (6,400 – 2,000) Dr. 4,400
General Reserve 48,000 General Reserve A/c (balancing figure) Dr. 11,600
Profit & Loss Account 2,400 To Premium payable on Buyback A/c 16,000
9% Debentures 40,000 (Being premium on buyback provided first out of Securities

Premium and the balance out of General Reserves.)
Trade Payables 26,400
2,15,200 2,15,200 6 Bank A/c Dr. 16,000
On 1st April,2020 the Company redeemed all its Preference Shares at a Premium of 10% and bought back To Bank Loan A/c 16,000
25% of its Equity Shares at Rs20 per Share. In order to make Cash available, the Company sold all the (Being Loan taken from Bank to finance Buyback)
Investments for Rs25,000 Lakhs and raised a Bank Loan amounting to Rs16,000 lakh on the Security of the
7 Preference Shareholders A/c Dr. 22,000
Company’s Plant. Give the necessary Journal Entries considering that the buy back is authorised by the
articles of company and necessary resolution is passed by the company for this. The amount of Securities Equity Shares buy back A/c Dr. 32,000
premium may be utilized to the maximum extent allowed by law. (MTP 8 Marks Oct ’20, Oct’21 & Oct ‘23, MTP To Bank A/c 54,000
12 Marks Oct’19)(Same concept different figures RTP May’20)
(Being payment made to Preference Shareholders and Equity
Answer 2 Shareholders)
Journal entries In the books of Bhoomi Ltd. 8 General Reserve Account Dr. 36,000
To Capital Redemption Reserve Account 36,000
Dr. Cr. (Being amount transferred to Capital Redemption Reserve
Account to the extent of face value of preference shares re-
Rs in lakhs deemed and equity Shares bought back) (20,000 + 16,000)
1 Bank A/c Dr. 25,000
To Investments A/c 24,000
To Profit and Loss A/c 1,000
(Being Investments sold and, profit being credited to Profit
and Loss Account)
2 10% Redeemable Preference Share Capital A/c Dr. 20,000
Question 3 Premium Payable on buyback account Dr 480
SMM Ltd. has the following capital structure as on 31st March, 2017: Rs. in crore
To Equity Share buyback account 720
Particulars Situation Situation (Being cancellation of shares bought back)
(i) Equity share capital (shares of Rs. 10 each) 1,200 1,200 Securities Premium account 400
(ii) Reserves: General 1,080 1,080 General Reserve / Profit & Loss A/c Dr. 80
Reserves To Premium Payable on buyback account 480
400 400
Securities Premium (Being Premium Payable on buyback account charged to
Profit & Loss 200 200
securities premium and general reserve/Profit & Loss A/c
(C).General Reserve / Profit & Loss A/c Dr 240
Infrastructure Development Reserve (Statutory Reserve) 320 320
To Capital redemption reserve account
(iii) Loan Funds 3,200 6,000
(Being transfer of free reserves to capital redemption reserve to 240
the extent of nominal value of share capital bought back out of
redeemed through free reserves)
The company has offered buy back price of Rs. 30 per equity share.You are required to calculate
maximum permissible number of equity shares that can be bought back in both situations and
also required to pass necessary Journal Entries. (MTP 10 Marks, Apr 19 & Mar 18, MTP 12 Marks Aug
18, Mar 19) (Same concept different figures PYP 15 Marks July’21) Working Notes:
1. Shares Outstanding Test

Answer 3
Particulars (Shares in crores
Statement determining the maximum number of shares to be bought back
Number of shares outstanding 120
Number of shares (in crores)
25% of the shares outstanding 30
Particulars When loan fund is crores Resources Test
Rs.3,200crores Rs. 6,000 crores
Particulars (Rs. in crores)
Shares Outstanding Test (W.N.1) 30 30 Paid up capital 1,200
Resources Test (W.N.2) 24 24 Free reserves (Rs. in crores) (1,080 + 400 +200) 1,680
Debt Equity Ratio Test (W.N.3) 32 Nil Shareholders’ funds (Rs. in crores) 2,880
Maximum number of shares that can be bought 24 Nil 25% of Shareholders fund (Rs. in crores) Rs. 720 crores
back [least of the above]
Buy back price per share Rs. 30
Journal Entries for the Buy Back
Number of shares that can be bought back 24 crores shares
(applicable only when loan fund is Rs. 3,200 crores)
Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds Post Buy Back
Rs. in crores Particulars When loan fund is
Debit Credit
(a) Equity Share buyback account Dr. 720 Rs. 3,200 Rs. 6,000
crores
To Bank Account 720 crores
(Being payment for buy back of 24 crores equity shares of 10 (a) Loan funds (Rs.) 3,200 6,000
each @ Rs. 30 per share) (b) Minimum equity to be maintained after buy back in the 1,600 3,000
ratio of 2:1 (Rs. ) (a/2)
(b) Equity share capital account Dr. 240
(c) Present equity shareholders fund (Rs.) 2,880 2,880
(d) Future equity shareholders fund (Rs.) (see W.N.4) 2,560 (2,880- N.A. 86,50,000
320) Property, Plant & Equipment 46,50,000
(e) Maximum permitted buy back of Equity (Rs.) [(d) – (b)] 960 Nil Current Assets 40,00,000
(f) Maximum number of shares that can be bought back @ Rs. 32 crore shares Nil 86,50,000
30 per share The Company wants to buy back 25,000 equity shares of Rs. 10 each, on 1st April, 2016 at Rs. 20 per
As per the provisions of the Companies Act, 2013, company Qualifies
Does not Qual- share. Buy back of shares is duly authorized by its Articles and necessary resolution has been passed
ify by the Company towards this. The buy -back of shares by the Company is also within the provisions
Amount transferred to CRR and maximum equity to be bought back will be calculated by simultaneous ofthe Companies Act, 2013. The payment for buy back of shares will be made by the Company out of
equation method sufficientbank balance available shown as part of Current Assets. You are required to prepare the
necessary journal entries towards buy back of shares and prepare the Balance Sheet after buy back
Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy-back of equity is ‘y’ ofshares. (MTP 15 Marks Oct 18)(Same amount different figures RTP May’18, May’22, Old & New SM)
Then
Answer 4
Equation 1 : (Present Equity- Transfer to CRR)- Minimum Equity to be maintained = MaximumPermit-
ted Buy Back As per the information given in the Question, buy -back of 25,000 shares @ Rs. 20,
as desired by the company, is within the provisions of the Companies Act, 2013.
= (2,880 – x) – 1,600 = y
Journal Entries for buy-back of shares
= 1280 – x =y (1)
Debit Credit
Equation 2: Maximum Permitted Buy Back X Nominal Value Per Share/Offer Price Per Share
(a) Equity Share buyback account Dr. 5,00,000
or 3x =y (2)
(Being buy back of 25,000 equity shares of Rs. 10 each @Rs. 20 per
share)
by solving the above two equations we get x= Rs. 320 y = Rs. 960
(b) Equity share capital account Dr. 2,50,000
Securities premium account 2,50,000
Question 4 To Equity shares buy-back account 5,00,000

(Being cancellation of shares bought back)
Following is the summarized Balance Sheet of Complicated Ltd. as on 31st March, 2016:
(c )Revenue reserve account 2,50,000
Liabilities Amount (Rs.)
To Capital redemption reserve account 2,50,000
Equity shares of Rs. 10 each, fully paid up 12,50,000
(Being transfer of free reserves to capital redemption reserve to the
Bonus shares of Rs. 10 each, fully paid up 1,00,000 extent of nominal value of capital bought backthrough free re-
Share option outstanding Account 4,00,000 serves)
Revenue Reserve 15,00,000
Balance Sheet of Complicated Ltd.as on 1st April, 2016
Securities Premium 2,50,000
Particulars Note Amount
No
Rs.
EQUITY AND LIABILITIES
Unpaid dividends 1,00,000
12% Debentures (Secured) 18,75,000 1 Shareholders’ funds
Advance from related parties (Unsecured) 10,00,000 (a) Share capital 1 11,00,000
Current maturities of long term borrowings 16,50,000 (a) Reserves and Surplus 2 22,25,000
Application money received for allotment due for refund 2,00,000
(a) Long-term borrowings 3 28,75,000 Reserve & Surplus:

3 Current liabilities Security premium Rs 70,000
(a) Other current liabilities 4 19,50,000 General reserve Rs 63,000
Profit and Loss Rs 1,40,000 2,73,000
Total 81,50,000
Non-current liability:
ASSETS 9% debentures (secured) 3,00,000

Term loan 40,000
( a) Property, Plant & Equipment 46,50,000 Creditors 65,000
2 Current assets (40,00,000-5,00,000) 35,00,000 Provision for taxation 15,000

Property plant and equipment 6,00,000
Total 81,50,000 Non-current investment 1,50,000
Notes to Accounts
Current assets:
Stock Rs 2,00,000
Debtors Rs 2,60,000
Profit and Loss A/c 1,25,000
Bank Rs 83,000 5,43,000
Revenue reserves 15,00,000
The shareholders adopted the resolution on 31st March, 2020 to:
Less: Transfer to CRR (2,50,000) 12,50,000
(i) Buy back 25% of the paid up capital @ Rs 15 each.
(ii) Issue 10% debentures of Rs 60,000 at a premium of 10% to finance the buyback of shares.
Less: Utilization for share buy-back (2,50,000) -
(iii) Maintain a balance of Rs 20,000 in General Reserve.
Share Option Outstanding Account 4,00,000
(iv) Sell investments worth Rs 1,00,000 for Rs 80,000.
(v) Buy back expenses were Rs 2,000.
Capital Redemption Reserve 2,50,000 22,25,000
You are required to pass necessary journal entries to record the above
3. Long-term borrowings
transactions and prepareLedger account of Bank. (MTP 8 Marks Nov ’21 &
Secured April ‘23)
Unsecured loans 10,00,000 28,75,000
Answer 5
4. In the books of SM Limited Journal Entries
Other Current Liabilities
Current maturities of long term borrowings 16,50,000 Particulars Dr. Cr.
Unpaid dividend 1,00,000 Rs Rs
Application money received for allotment due for refund 2,00,000 19,50,000 1. Equity share capital A/c (15,000 x Rs10) Dr. 1,50,000
Premium on buyback A/c (15,000 x Rs5) Dr. 75,000
Question 5 ity shares buy back or Equity Shareholders A/c (15,000 x Rs15) 2,25,000
SM Limited gives the following information as on 31st March, 2023: (Being the amount due to equity shareholders on buy back)
2. Equity shares buy back/Equity shareholders A/c Dr. 2,25,000
Rs
To Bank A/c 2,25,000
Share capital
(60,000 Equity Shares of Rs 10 Each) 6,00,000
(Being the payment made on account of buy back of 15,000 Question 6

Equity Shares as per the Companies Act)
Alpha Ltd. furnishes the following information as at 31st March, 2021:
3. Bank A/c Dr. 66,000
To 10 % Debentures A/c 60,000 Rs In lakhs Rs In lakhs
To Securities Premium A/c 6,000 Shareholders’ Funds
(Being 14 % debentures issued to finance buy back) Equity share capital (fully paid up shares of Rs 10 each) 2,400
4. Buyback Expenses A/c Dr. 2,000 Reserves and Surplus
To Bank A/c 2,000 Securities Premium 350
(Buyback expenses paid) General Reserve 530
5. Bank A/c Dr. 80,000 Capital Redemption Reserve 400
Profit and Loss A/c (Loss on sale of investment) Dr. 20,000 Profit & Loss Account 340 1,620
To Investment A/c 1,00,000 Non-current Liabilities
(Being investment sold at loss) 12% Debentures 1,500
6. General reserve Dr. 43,000 Current Liabilities
Profit and Loss A/c Dr. 1,07,000 Trade PayabIes 1,490
To Capital redemption reserve A/c 1,50,000 Other Current Liabilities 390 1,880
(Being amount equal to nominal value of buy back shares Non-current Assets
from free reserves transferred to capital redemption reserve Property, plant and equipment 4,052
accountas per the law)
Current Assets
7. Securities Premium Dr. 75,000
Current Investments 148
Profit and Loss A/c Dr 2,000
Inventories 1,200
To Premium on buyback 75,000
Trade Receivables 520
To Buyback Expenses A/c 2,000
Cash and Bank 1,480 3,348
(Being premium on buyback and buyback expenses charged
to securities premium and profit and loss account)
On 1st April, 2021, the company announced buy-back of 25% of its equity shares @ Rs 15 per share.
Bank Account
For this purpose, it sold all its investment for Rs 150 lakhs.On 10th April, 2021 the company achieved the
Particulars Amount Particulars Amount target of buy-back.
(Rs) (Rs)
On 30th April, 2021, the company issued one fully paid up equity share of Rs 10 each by way of bonus for
To Balance b/d To 83,000 By Equity Shareholders A/c 2,25,000 every four equity shares held by the equity shareholders by capitalization of Capital Redemption Reserve.
Investment A/c 80,000 By Expenses on buy back of shares 2,000 Premium (excess of buy-back price over the par value) paid on buy-back should be adjusted against secu-
rities premium account. You are required to pass necessary journal entries and preparethe Balance Sheet
of Alpha Ltd. after bonus issue. (MTP 12 Marks Mar’22, PYP 10 Marks May ’18) (Same concept different
To 10% Debentures and 66,000 By Balance c/d 2,000
figures RTP May’21, RTP May’19, PYP 5 Marks Nov’22)
Securities premium
Total 2,29,000 Total 2,29,000
Note: It may be noted that as per the provisions of the Companies Act, no buy-back of any kind of
shares or other specified securities shall be made out of the proceeds of an earlier issue of the same
kind of shares or same kind of other specified securities. Issue of debentures has been excluded for
the purpose of “specified securities” and the entire amount of Rs 1,50,000 has been credited to CRR
while solving the Question.
Answer 6 Profit and Loss Account) aggregating Rs 600 lakhs may also be considered for the purpose of transfer
to CRR.Balance Sheet (After buy back and issue of bonus shares)
In the books of Alpha Limited Journal Entries
Particulars Note Amount (Rs in Lakhs)
No
Date Particulars Dr. Cr.
2021 (Rs in lakhs)
(1) Shareholder’s Funds 1 2,250
April 1 Bank A/c Dr. 150
To Investment A/c 148 (a) Share Capital
To Profit on sale of investment 2 (b) Reserves and Surplus 2 872
(Being investment sold on profit) (2) Non-Current Liabilities

April 10 Equity share capital A/c Dr. 600 (a) Long-term borrowings - 12% Debentures 1,500
Securities premium A/c Dr. 300 (3) Current Liabilities

To Equity shares buy back A/c 900 (a) Trade payables 1,490
(Being the amount due to equity shareholders on buy back) (b) Other current liabilities 390
Total 6,502
Equity shares buy back A/c Dr. 900
II. Assets
To Bank A/c 900
(Being the payment made on account of buy back of Rs 60
Lakh Equity Shares) (a) Property, plant and equipment 4,052
April 10 General reserve A/c Dr. 530 (2) Current assets
Profit and Loss A/c Dr. 70 (a) Current investments

(b) Inventory 1,200
To Capital redemption reserve (CRR) A/c 600 (c) Trade receivables 520
(Being amount equal to nominal value of buy back (d) Cash and cash equivalents (W.N. 2) 730
shares from free reserves transferred to capital redemp-
tion reserve account as per the law) Total 6,502
April 30 Capital redemption reserve A/c Dr. 450

To Bonus shares A/c (W.N.1) 450
(Being the utilization of capital redemption reserve to issue
bonus shares)
Bonus shares A/c Dr. 450
To Equity share capital A/c 450
(Being issue of one bonus equity share for every four
equity shares held)
Profit on sale of Invest- Dr. 2
ment 2
To Profit and Loss A/c
(Profit on sale transfer to Profit and Loss A/c)
Note: For transferring amount equal to nominal value of buy back shares from free reserves to capital
redemption reserve account, the amount of Rs 340 lakhs from P & L A/c and the balance from general
reserve may also be utilized. The combination of different set of amounts (from General Reserve and
Notes to Accounts
Rs In lakhs
1. Share Capital
Property, plant & equipment 58,50,000
Equity share capital (225 lakh fully paid up shares of Rs 2,250
10 each) Current Assets 34,50,000
Super Limited wants to buy back 35,000 equity shares of ₹ 10 each fully paid up on 1st April, 2022 at
₹ 30 per share.
General Reserve 530 Buy Back of shares is fully authorised by its articles and necessary resolutions have been passed by
the company towards this. The payment for buy back of shares will be made by the company out of
Less: Transfer to CRR (530) - sufficient bank balance available as part of the Current Assets. Comment with calculations, whether
Capital Redemption Reserve 400 the Buy Back of shares by the company is within the provisions of the Companies Act, 2013. (MTP 10
Marks Oct’22, PYP 10 Marks May ’19)
Add: Transfer due to buy-back of shares from P/L 70
Add: Transfer due to buy-back of shares from Gen. res. 530 Answer 7
Less: Utilisation for issue of bonus shares (450) 550 Determination of maximum no. of shares that can be bought back as per the Companies Act, 2013
Securities premium 350 1. Shares Outstanding Test

Less: Adjustment for premium paid on buy back (300) 50
Particulars (Shares)
Profit & Loss A/c 340
Number of shares outstanding 1,70,000
Add: Profit on sale of investment 2
25% of the shares outstanding 42,500
Less: Transfer to CRR (70) 272 872
Resources Test: Maximum permitted limit 25% of Equity paid up capital + Free Reserves
1. Working Notes:Amount of equity share capital = 2,400 - 600 (buyback) + 450 (Bonus
shares) = 2,250
2. Cash at bank after issue of bonus shares Particulars
Rs in lakhs Paid up capital (₹) 17,00,000
Cash balance as on 1st April, 2021 1480 Free reserves (₹) (23,50,000 + 2,50,000 + 2,00,000) 28,00,000
Add: Sale of investments 150 Shareholders’ funds (₹) 45,00,000
1630 25% of Shareholders fund (₹) 11,25,000
Less: Payment for buy back of shares (900) Buy back price per share ₹ 30
730 Number of shares that can be bought back (shares) 37,500

Actual Number of shares proposed for buy back 35,000
Question 7
Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Shareholder’s Funds post Buy Back
Super Ltd. gives the following information as on 31st March, 2022.
Particulars ₹
Liabilities In ₹ (a) Loan funds (₹) (38,00,000+8,50,000) 46,50,000

Equity Shares of ₹ 10 each fully paid up 17,00,000 (b) Minimum equity to be maintained after buy back in the ratio of 2:1
Revenue Reserve 23,50,000 (₹) (a/2) 23,25,000
Securities Premium 2,50,000 (c) Present equity/shareholders fund (₹) 45,00,000
Profit & Loss Account 2,00,000 (d) Future equity/shareholders fund (₹) (see W.N.) (45,00,000 – 39,56,250
Infrastructure Development Reserve 1,50,000 5,43,750)
(e) Maximum permitted buy back of Equity (₹) [(d) – (b)] 16,31,250
Question 8
(f) Maximum number of shares that can be bought back @ 54,375 shares Pratham Ltd. (a non-listed company) has the following Capital structure as on 31st March, 2022:
₹ 30 per share
Particulars ₹ ₹
(g) Actual Buy Back Proposed 35,000 Shares
Summary statement determining the maximum number of shares to be bought back Equity Share Capital (shares of ₹ 10 each fullypaid 30,00,000
Particulars Number of Reserves & Surplus

shares General Reserve 32,50,000
Shares Outstanding Test 42,500 Security Premium Account 6,00,000
Resources Test 37,500 Profit & Loss Account 4,30,000
Debt Equity Ratio Test 54,375 Revaluation Reserve 6,20,000 49,00,000
Maximum number of shares that can be bought back [least of the 37,500 Loan Funds 42,00,000
above] You are required to compute by Debt Equity Ratio Test, the maximum number of shares that can be
Company qualifies all tests for buy-back of shares and it can buy back maximum 37,500 shares on 1st bought back in the light of above information, when the offer price for buy back is ₹ 30 per share..
April, 2022. (MTP 15 Marks March ’23, Old & New SM, RTP Nov 20)(MTP 10 Marks Sep ’23)
However, company wants to buy-back only 35,000 equity shares @ ₹ 30. Therefore, buy-back of 35,000 Answer 8
shares, as desired by the company is within the provisions of the Companies Act, 2013.
Debt Equity Ratio Test
Working Note:
Amount transferred to CRR and maximum equity to be bought back will be calculated by simultaneous Particulars ₹
equation method. (a) Loan funds 42,00,000
Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy-back of equity is ‘y’. (b) Minimum equity to be maintained after buy back in the
Then ratio of 2:1 (₹ in crores) 21,00,000
(c) Present equity shareholders fund (₹ in crores) 72,80,000
(d) Future equity shareholder fund (₹ in crores) (See 59,85,000
Note 2) (72,80,000-12,95,000)
(e) Maximum permitted buy back of Equity (₹ in crores) [(d) – 38,85,000 (by
(b)] (See Note 2) simultaneous
equation)
(f) Maximum number of shares that can be bought back @ ₹ 1,29,500 (by simultaneous
30 per share (shares in crores) (See Note 2)
equation)
Working Note: Answer 9

1. Shareholders’ funds Journal Entries in the books of Umesh Ltd.
Particulars ₹ Rs. Rs.
Paid up capital 30,00,000 1. Bank A/c Dr. 10,00,000
Free reserves (32,50,000 +6,00,000+4,30,000) 42,80,000 11% Preference share application & allotment A/c
10,00,000
72,80,000
As per section 68 of the Companies Act, 2013, amount transferred to CRR and maximum equity to be (Being receipt of application money on preference
bought back will be calculated by simultaneous equation method. shares)
Suppose amount equivalent to nominal value of bought back shares transferred to CRR account is ‘x’ 2. 11% Preference share application & allotment A/c
and maximum permitted buy-back of equity is ‘y’. Dr. 10,00,000
To 11% Preference share capital A/c 10,00,000
Equation 1 :(Present equity – Nominal value of buy-back transfer to CRR) – Minimum equity to be main-
tained = Maximum permissible buy-back of equity (Being allotment of 1 lakh preference shares)
3. General reserve A/c Dr. 30,00,000
To Capital redemption reserve A/c 30,00,000
(Being creation of capital redemption reserve for buy
back of shares)
4. Equity share capital A/c Dr. 40,00,000
Premium payable on buyback A/c Dr. 48,00,000
To Equity shareholders/Equity shares buy back
A/c 88,00,000
(Amount payable to equity shareholder on buy back)
5. Equity shareholders/ Equity shares buy back A/c Dr. 88,00,000
To Bank A/c 88,00,000
Question 9
(Being payment made for buy back of shares)
Umesh Ltd. resolves to buy back 4 lakhs of its fully paid equity shares of Rs. 10 each at Rs. 22 per share.
6. Securities Premium A/c Dr. 16,00,000
This buyback is in compliance with the provisions of the Companies Act and does not exceed 25% of
Company’s paid up capital in the financial year. For the purpose, it issues 1 lakh 11 % preference shares General reserve A/c 32,00,000
of Rs. 10 each at par, the entire amount being payable with applications. The company uses Rs. 16 lakhs To Premium payable on buyback A/c 48,00,000
of its balance in Securities Premium Account apart from its adequate balance in General Reserve to
fulfill the legal requirements regarding buy-back. Give necessary journal entries to record the above (Being premium on buyback charged from securities
transactions. (RTP Nov 19, Nov’22) premium and general reserve)
Working Notes:
1. Calculation of amount used from General Reserve Account
Rs.Rs.
Amount paid for buy back of shares (4,00,000 shares x Rs. 22) 88,00,000
Less: Proceeds from issue of Preference Shares (10,00,000)
(1,00,000 shares x Rs.10)
Less: Utilization of Securities Premium Account (16,00,000)
Balance used from General Reserve Account 62,00,000 Machinery 31,00,000

* Used under Section 68 for buy back 32,00,000 furniture 20,00,000 76,00,000
Used under Section 69 for transfer to CRR (W.N 2) 30,00,000 Non-current Investments 30,00,000
62,00,000 Current assets
Amount to be transferred to Capital Redemption Reserve account Inventory 12,00,000
Rs.
cash and bank balance 15,00,000 34,00,000
Nominal value of shares bought back (4,00,000 shares 40,00,000
x Rs.10) 1,40,00,000
Less: Nominal value of Preference Shares issued for such On 1st April, 2017, the company passed a resolution to buy back 20% of its equity capital @ Rs. 60
buy back (1,00,000 shares x Rs.10) per share. For this purpose, it sold all of its investment for Rs. 25,00,000.
(10,00,000)
The company achieved its target of buy-back. You are required to:
Amount transferred to Capital Redemption Reserve 30,00,000
Account (a) Give necessary journal entries and
(b) Give the Balance Sheet of the company after buy back of shares. (RTP Nov 18, Old & New
Question 10 SM)
The following summarized Balance Sheet Pee Limited (a non-listed company) furnishes as at 31st Answer 10
March, 2017:
Journal Entries in the books of Pee Limited
Equity & Liabilities Rs. Rs.
Particulars Dr. Cr.
Share capital:
(i) Bank Account Dr. 25,00,000
Authorised capital
Profit and Loss Account Dr. 5,00,000
2,50,000 Equity shares of Rs. 10 each fully paid up 25,00,000
To Investment Account 30,00,000
5,000, 10% Preference shares of Rs. 100 each 5,00,000 30,00,000
(Being the investments sold at loss for the purpose
Issued and subscribed capital:
of buy back)
2,40,000 Equity shares of Rs. 10 each fully paid up 24,00,000
(ii) Equity Share capital account Dr. 4,80,000
3,000, 10% Preference shares of Rs. 100 each 3,00,000 27,00,000
Premium payable on buy back Account Dr. 24,00,000
(Issued two months back for the purpose of buy back)
To Equity shares buy back Account 28,80,000
Reserves and surplus:
(Being the amount due on buy back)
(iii) Securities Premium Account Dr. 24,00,000
Revenue reserve 25,00,000
To Premium payable on buy back 24,00,000
Account
Profit and loss account 35,00,000 97,00,000
(Being the premium payable on buy back
Current liabilities adjusted against
Trade payables 13,00,000 securities premium account)
Other current Liabilities 3,00,000 16,00,000 (iv) Revenue Reserve Account Dr. 1,80,000
1,40,00,000 To Capital Redemption Reserve Account 1,80,000
Assets (Being the amount equal to nominal value of eq-
uity shares bought back out of free reserves
Tangible assets
transferred to capital
Building 25,00,000
redemption reserve account (4,80,000-3,00,000) Profit and loss A/c 35,00,000

(v) Equity shares buy-back Account Dr. 28,80,000 Less: Loss on investment 5,00,000 30,00,000 68,00,000
(Being the payment made on buy back) Question 11
Balance Sheet of Pee Limited as on 1st April, 2017(After buy back of shares)
Pay Limited provides you with the following information as at 31st March, 2022:
Particulars Note No (Rs.)
I. Equity and Liabilities (Rs. in Lakhs)
(1) Shareholder’s Funds Share Capital:
(a) Share Capital 1 22,20,000 Authorised 300
(b) Reserves and Surplus 2 68,00,000 Issued:
(2) Current Liabilities 16,00,000 11% Redeemable preference shares of Rs. 100 each fully 125
Total 1,06,20,000 paid
II. Assets Equity shares of Rs. 10 each fully paid 175 300
(1) Non-current assets Reserves and surplus:
(a) Fixed assets 76,00,000 Capital reserve 35
(2) Current assets 30,20,000 Securities premium 105
Total 1,06,20,000 Revenue reserves 460
Notes to Accounts
Profit and loss account 50 650
1 Share Capital (Rs.) Current liabilities and provisions 50
Authorised capital: 30,00,000 Fixed assets: cost 100
Issued and subscribed capital: Less: Accumulated depreciation (90) 10
1,92,000 Equity shares of Rs. 10 each fully paid up 1,92,0000 Non-current investments at cost (Market valueRs. 400 200
3,000 10% Preference shares of Rs. 100 each fully paid up 3,00,000 22,20,000 Lakhs)
Reconciliation of share capital Current assets 790
Opening no. of shares 2,40,000
Buy back of shares during the year 48,000 1,92,000
Answer 11
Pa
(i) The company redeemed preference shares at a premium of 4% on 1st April, 2022.
During the year the company has buy back of 48,000 (ii) It also bought back 2.5 lakhs equity shares of Rs. 10 each at Rs. 40 per share. The payments
shares for the above were made out of the bank balances, which appeared as a part of currentas-
sets.
You are asked to:
Capital redemption reserve 1,80,000 (1) Pass journal entries to record the above.
Securities Premium 27,00,000 (2) Prepare balance sheet as at 01.04.2022. (RTP May ’23)
Less: Premium payable on buy back of shares 24,00,000 3,00,000
Less: Transfer to Capital redemption reserve 1,80,000 23,20,000
(3) (iii) Balance Sheet of Pay Ltd as at 1.4.2022

(i) Journal entries in the books of Pay Ltd. Rs. in lakhs
Particulars Note No Rs. In lakhs
Particulars Debit Credit I. Equity and Liabilities
1st 11% Preference share capital A/c Dr. 125 (1) Shareholder’s Funds
April, Premium payable on Redemption of Prefer- Dr. 5 (a) Share Capital 1 150
2022 ence Shares
(b) Reserves and Surplus 2 570
To Preference shareholders A/c (Being 130
(2) Current Liabilities 50
preference share capital
Total 770
account transferred to shareholders
II. Assets
account)
Preference shareholders A/c Dr. 130 (a) Property, plant and Equipment 3 10
To Bank A/c 130 (b) Non-current investments -Investment at cost Mar- 200
ket value
(Being payment made to shareholders)
Rs. 400 crores)
Shares buy back A/c Dr. 100
(2) Current assets 4 560
To Bank A/c 100
Total 770
(Being 2.5 lakhs equity shares bought back @
Notes to Accounts
Rs. 40 per share)
Equity share capital A/c (2.5 lakh х Rs. 10) Dr. 25 1. Share Capital Rs. In lakhs
Premium payable on buy- back A/c (2.5 lakh xRs. Dr. 75 Authorised, Issued and Subscribed:
30) Equity shares of Rs. 10 each 150
To Shares buy back A/c 100 2. Reserves and Surplus
(Being cancellation of shares bought back) Capital reserve 35
Revenue reserve A/c Dr. 150 Capital redemption reserve 150
To Capital Redemption Reserve 150 Securities premium 105
A/c (125 + 25) Less: Utilisation for buy back and redemption
(Being creation of capital redemption reserve to the of shares (80) 25
extent of the face value of preference shares re-
deemed and equity shares bought back) Revenue Reserve 460
Less: transfer to Capital redemption reserve (150) 310
Securities Premium Dr. 80 Profit and Loss Account balance 50 570
To Premium payable on Redemption of Pref. 5 3. Property, plant and equipment
Shares
Cost 100
To Premium payable on buy- back A/c 75
Less: Provision for depreciation (90) 10
(Being premium on preference shares redeemed*
4. Current assets
and equity shares bought back charged to securi-
ties premium account) Current assets as on 31.3.2022 790
(ii) *Securities premium utilized for premium on preference shares redeemed assuming that the Less: Bank payment for redemption and buy back (230) 560
company is not governed under section 133 of the Companies Act. Alternatively, it may not be
utilized assuming otherwise.
Question 12 To Premium payable on buy-back 25,00,000
The Directors of Umang Ltd. passed a resolution to buyback 5,00,000 of its fully paid equity shares of (Being premium payable on buy-back charged
from Securities premium)
Rs. 10 each at Rs. 15 per share. This buyback is in compliance with the provisions of the Companies
Act, 2013. 6. General Reserve A/c Dr. 30,00,000
For this purpose, the company To Capital Redemption Reserve A/c 30,00,000
(i) Sold its investments of Rs. 30,00,000 for Rs . 25,00,000. (Being creation of capital redemption reserve to the
(ii) Issued 20,000, 12% preference shares of Rs. 100 each at par, the entire amount being pay- extent of the equity shares bought back after deducting
able withapplication. fresh pref.
(iii) Used Rs. 15,00,000 of its Securities Premium Account apart from its adequate balance in shares issued)
GeneralReserve to fulfill the legal requirements regarding buy-back.
(iv) The company has necessary cash balance for the payment to shareholders. Question 13
You are required to pass necessary Journal Entries (including narration) regarding buy- back of
shares in the books of Umang Ltd. (PYP 5 Marks Jan 21) X Ltd. furnishes the following summarized Balance Sheet as at 31-03-2018.
Answer 12
Liabilities (in Rs.) (in Rs.)
Journal Entries in the books of Umang Ltd.
Share Capital
Equity Share Capital of Rs. 20 each fully paid up 50,00,000
Dr. Cr.
10,000, 10% Preference Shares of Rs. 100 each fully paid up 10,00,000
Rs. Rs.
60,00,000
1. Bank A/c Dr. 25,00,000
Reserves & Surplus
Profit and Loss A/c Dr. 5,00,000
To Investment A/c 30,00,000
Security Premium 12,00,000
(Being investment sold for the purpose of buy-back
Revenue Reserve 5,00,000
of Equity Shares)
Profit and Loss 20,00,000
2. Bank A/c Dr. 20,00,000
Dividend Equalization Fund 5,50,000 43,50,000
To 12% Pref. Share capital A/c 20,00,000
Non-Current Liabilities
(Being 12% Pref. Shares issued for ` 20,00,000) Pa
12% Debenture 12,50,000
3. Equity share capital A/c Dr. 50,00,000 Current Liabilities and Provisions 5,50,000
Premium payable on buy-back Dr. 25,00,000 Total 1,21,50,000
To Equity shares buy-back 75,00,000 Assets
A/c Equity shareholders A/c
Fixed Assets
(Being the amount due on buy-back of equity shares)
Tangible Assets 1,00,75,000
4. Equity shares buy-back A/c/ Equity shareholders A/c Dr. 75,00,000
Current Assets
To Bank A/c 75,00,000
Investment 3,00,000
(Being payment made for buy-back of equity shares)
Inventory 2,00,000
5. Securities Premium A/c General Dr. 15,00,000
Cash and Bank 15,75,000 20,75,000
Reserve A/c Dr. 10,00,000
Total 1,21,50,000
The shareholders adopted the resolution on the date of the above mentioned Balance Sheet to:
(1) Buyback 25% of the paid up capital and i was decided to offer a price of 20% over market price.
The prevailing market value of the company’s share is Rs. 30 per share. Profit and Loss A/c Dr. 4,40,000
(2) To finance the buy back of share company : To Capital redemption reserve A/c* 10,00,000
(a) Issue 3000, 14 % debenture of 100 each at a premium of 20% (Being amount equal to nominal value of buy back
(b) Issue 2500, 10 % preference share of Rs. 100 each shares from free reserves transferred to capital re-
demption reserve account as per the law)
(3) Sell investment worth Rs. 1,00,000 for Rs. 1,50,000.
[12,50,000 less 2,50,000]
(4) Maintain a balance of Rs. 2,00,000 in Revenue Reserve.
7. Capital redemption reserve A/c Dr. 7,50,000
(5) Later the company issue three fully paid up equity share of Rs. 20 each
by way of bonus shareforevery 15 equity share held by the equity share- To Bonus shares A/c (W.N.1) 7,50,000
holder. (Being the utilization of capital redemption reserve to issue
You are required to pass the necessary journal entries to record the above transactions and 37,500 bonus shares)
prepare Balance Sheet after buy back. (PYP 15 Marks, Nov’19, RTP Nov’21) 8. Bonus shares A/c Dr. 7,50,000
Answer 13 To Equity share capital A/c 7,50,000
In the books of X Limited Journal Entries

(Being issue of 3 bonus equity share for every 15equity
shares held)
Particulars Dr. Cr.
Rs. Rs. *Alternatively, entry for combination of different amounts (from Revenue reserve, Securities premium and
profit and Loss account.) may be passed for transferring the required amount to CRR.
1. Bank A/c Dr. 3,60,000
Note: It may be noted that as per the provisions of the Companies Act, no buy-back of any kind of shares
To 14 % Debenture A/c 3,00,000 or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of
To Securities Premium A/c 60,000 shares or same kind of other specified securities. Issue of debentures has been excluded for the purpose
of “specified securities” and the entire amount of Rs. 10,00,000 (after deducting only pref.share capital) has
(Being 14 % debentures issued to finance buy back)
been credited to CRR while solving the question.
2. Bank A/c Dr. 2,50,000 Balance Sheet (After buy back and issue of bonus shares)
To 10% preference share capital A/c 2,50,000
Particulars Note Amount
(Being 10% preference share issued to finance buy back)
No
Rs.
3. Bank A/c Dr. 1,50,000
To Investment A/c 1,00,000
To Profit on sale of investment (Being investment sold 50,000
on profit)
4. Equity share capital A/c (62,500 x Rs.20) Dr. 12,50,000
Securities premium A/c(62,500 x Rs.16) Dr. 10,00,000
To Equity shares buy back A/c (62,500 x Rs.36) 22,50,000
(Being the amount due to equity shareholders on buy back)
5. Equity shares buy back A/c Dr. 22,50,000

To Bank A/c 22,50,000
(Being the payment made on account of buy back of
62,500 Equity Shares as per the Companies Act)
6. Revenue reserve Dr. 3,00,000
Securities premium Dr. 2,60,000
(2) Non-Current Liabilities 10,00,000

(a) Long-term borrowings 3 15,50,000 Less: Utilisation for issue of bonus shares (7,50,000)
(3) Current Liabilities 2,50,000
(a) Trade payables - Profit & Loss A/c 20,00,000
(b) current liabilities & Provisions 5,50,000 3 Add: Profit on sale of investment 50,000
Total 1,05,60,000 Less: Transfer to CRR (4,40,000) 16,10,000
II. Assets Dividend equalization reserve (5,50,000) 5,50,000 27,10,000
(1) Non-current assets Long-term borrowings - 12% Debentures 12,50,000
(a) Property, Plant and Equipment 1,00,75,000 - 14% Debentures 3,00,000 15,50,000
(2) Current assets

(a) Investments 2,00,000 Working Notes:1. Amount of bonus shares = [(2,50,000 -25%)3/15] x 20 = 37,500 x 20=7,50,000
(b) Inventory 2,00,000 2. Cash at bank after issue of bonus shares

(c) Cash and cash equivalents (W.N. 2) 85,000
Rs.
Total 1,05,60,000
Cash balance as on 30.3.2018 15,75,000
Notes to Accounts Add: Issue of debenture 3,60,000
Rs. Add: issue of preference shares 2,50,000
1. Share Capital Add: Sale of investments 1,50,000
Equity share capital (Fully paid up shares of Rs. 20 each) 23,35,000
(2,50,000-62,500+37,500 shares) 45,00,000 Less: Payment for buy back of shares (22,50,000)
10% preference shares @ Rs. 100 each (10,00,000 + 2,50,000) 85,000

12,50,000
Question 14
Capital Reserve 1,00,000 57,50,000 Mohan Ltd. furnishes the following summarised Balance Sheet on 31st March 2021. (Rs. in Lakhs)
Amount
Equity and Liabilities:
Add: Premium on debenture 60,000
Shareholders’ fund
Less: Adjustment for premium paid on buy back
Share Capital
(10,00,000)
Equity Shares of Rs. 10 each fully paid up 780
Less: Transfer to CRR (2,60,000) Nil
6% Redeemable Preference shares of Rs. 50 each fully Paid up 240
Capital Redemption Reserve Reserves and Surplus
Transfer due to buy-back of shares from P&L Capital Reserves 58

General Reserve 625
Securities Premium 52
Profit & Loss 148
Revaluation Reserve 34
Infrastructure Development Reserve 16
Non-current liabilities 1. Shares Outstanding Test
7% Debentures 268 Particulars (Shares in lakh)

Unsecured Loans 36 Number of shares outstanding 78
Current Liabilities 395 25% of the shares outstanding 19.5
2652
Assets: Resources Test
Non-current Assets
Particulars
Plant and Equipment less depreciation 725 Paid up capital (Rs. in lakh) 780
Investment at cost 720 Free reserves (Rs. in lakh) (625+52+148-24-240*) 561
Current Assets 1207 Shareholders’ funds (Rs. in lakh) 1341
2652 25% of Shareholders fund (Rs. in lakh) 335.25
(1) Other Information:The company redeemed preference shares at a premium of Buy-back price per share 30
10% on 1st April,2021. Number of shares that can be bought back 11.175
(2) It also offered to buy back the maximum permissible number of equity shares *Amount transferred to CRR is excluded from free reserves. Premium on re-
of Rs. 10 each at Rs. 30 per share on 2nd April 2021. demption also reduced.
(3) The payment for the above was made out of available bank balance, which ap-
peared as a part of the current assets.
Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy-Back
(4) The company had investment in own debentures costing Rs . 60 lakhs (face
value Rs . 75 lakhs). These debentures were cancelled on 2nd April 2021. Particulars Rs. In lakh
On 4th April 2021 company issued one fully paid-up equity share of Rs. 10 each by way of bonus for (a) Loan funds ( Rs.) 304
every five equity shares held by the shareholders. (b) Minimum equity to be maintained after buy- back 152
in the ratio of 2:1 ( Rs.) (a/2)
(a) You are required to:
(c) Present equity shareholders fund ( Rs.) 1341
(b) Calculate maximum possible number of equity shares that can be bought back as per the
Companies Act, 2013 and (d) Future equity shareholders fund ( Rs.) (see W.N.4) 1043.75 (1341-297.25)
Record the Journal Entries for the above-mentioned information. (PYP 10 Marks Dec’21) (e) Maximum permitted buy-back of Equity ( Rs.) [(d) 891.75
– (b)]
Answer 14
(f) Maximum number of shares that can be 29.725
(i)Statement determining the maximum number of shares to be bought back bought back @ Rs. 30 per share
Number of shares (in lakhs)
As per the provisions of the Companies Act, 2013, Qualifies
company
Particulars When loan fund is Rs. 304 lakhs‘
Alternatively, when current liabilities are considered as part of loan funds, in that case Debt Equity Ratio
Shares Outstanding Test (W.N.1) 19.5 Test will be done as follows:
Resources Test (W.N.2) 11.175
Particulars Rs. in lakh
Debt Equity Ratio Test (W.N.3) 29.725
(a) Loan funds ( Rs.) 699
Maximum number of shares that can be bought back 11.175
(b) Minimum equity to be maintained after buy- 349.5
[least of the above]
back in the ratio of 2:1 ( Rs.) (a/2)
Thus, the company can buy 11,17,500 Equity shares at Rs. 30 each.
(c) Present equity shareholders fund ( Rs.) 1341
Working Notes: (d) Future equity shareholders fund ( Rs.) (see W.N.4) 1093.125 (1341-247.875)
(e) Maximum permitted buy-back of Equity ( Rs.) [(d) – 743.625

(b)] (ii) Journal Entries for Buy Back (Rs. in lakhs)
(f) Maximum number of shares that can be bought 24.7875

Date Particulars Debit Credit
back @ Rs. 30 per share
2021
As per the provisions of the Companies Act, Qualifies
1st April 6% Redeemable preference share capital A/c Dr. 240
2013, company
Premium on redemption of preference shares A/c Dr. 24
Amount transferred to CRR and maximum equity to be bought back will be calculated bysimul-
To Preference shareholders A/c 264
taneous equation method
(Being preference share capital transferred to
Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy- back of equity is ‘y’ Then
shareholders account)
Equation 1: (Present Equity- Transfer to CRR) - Minimum Equity to be maintained = Maximum Permitted
Buy-Back Preference shareholders A/c Dr. 264
= (1341 – x) – 152 = y To Bank A/c 264
= 1189 – x =y (1) (Being payment made to shareholders)
Equation 2: Maximum Permitted Buy-Back x Nominal Value Per Share/Offer Price Per Share y/30 x 10 = x General Reserve or P&L A/c* Dr. 24
or 3x = y (2) To Premium on redemption of preference 24
by solving the above two equations we get x = Rs. 297.25 and y = Rs. 891.75 shares A/c
(Being premium on redemption of preference
Alternatively, when current liabilities are considered as part of loan funds, in that case
shares adjusted through securities premium)
Equation 1: (Present Equity- Transfer to CRR)- Minimum Equity to be maintained = Maximum Permitted
2nd April Equity shares buy-back A/c Dr. 335.25
Buy-Back
To Bank A/c 335.25
= (1341 – x) – 349.5 = y
(Being 11.175 lakhs equity shares of Rs. 10 each
= 991.5 – x =y (1)
bought back @ Rs. 30 per share)
Equation 2: Maximum Permitted Buy-Back X Nominal Value Per Share/Offer Price Per Share y/30 x 10 = x
Equity share capital A/c Dr. 111.75
or 3x = y (2)
Securities Premium A/c Dr. 52
by solving the above two equations we get x = 247.875 and y = 743.625
General Reserve or P&L A/c Dr. 171.50
To Equity Shares buy-back A/c 335.25
General reserve A/c Dr. 351.75
To Capital redemption reserve A/c 351.75
(Being creation of capital redemption reserve ac-
count to the extent of the face value of preference
shares redeemed and equity shares bought back
as per the law ie. 240+
111.75 lakhs)
2nd April 7% Debentures A/c Dr. 75
To Investment (own debentures) A/c 60
To Profit on cancellation of own debentures A/c 15
(Being cancellation of own debentures costing Rs.
60 lakhs, face value being Rs. 75 lakhs and the bal-
ance being profit on cancellation of debentures)
4th April Capital Redemption Reserve Dr. 133.65 Answer 15

To Bonus Shares A/c 133.65 Statement determining the maximum number of shares to be bought back Number of shares
(Being issue of one bonus equity share for every five Particulars When loan fund is
equity shares held)
₹ 2,520 crores ₹ 1,680 crores ₹ 2,100 crores
Bonus shares A/c Dr. 133.65
Shares Outstanding Test (W.N.1) 11.55 11.55 11.55
To Equity share capital A/c 133.65
Resources Test (W.N.2) 8.75 8.75 8.75
(Being bonus shares issued)
Debt Equity Ratio Test (W.N.3) Nil 5.25 Nil
Working Note: Bonus Share to be issued =66.825 (78 - 11.175) lakh shares divided by 5 = 13.365 lakh
Maximum number of shares that
shares.
can be bought back [least of the Nil 5.25 Nil
Note: *Securities premium has not been utilized for the purpose of premium payable on redemption of above]
preference shares assuming that the company referred in the question is governed by Section 133 of
Journal Entries for the Buy-Back (applicable only when loan fund is ₹ 1,680 crores)
the Companies Act, 2013 and complies with the Accounting Standards prescribed for them. Alternative
entry considering otherwise is also possible by utilizing securities premium amount. ₹ in crores
Question 15 Particulars Debit Credit

(a) Equity share buy-back account Dr. 157.5
Quick Ltd. has the following capital structure as on 31st March,2021:
To Bank account 157.5
₹ in Crores (b) Equity share capital account (5.25 x ₹ 10) Dr. 52.5
(1) Share Capital: 462 Securities premium account (5.25 x ₹ 20) Dr. 105
(Equity Shares of ₹ 10 each, fully paid)
(2) Reserves and Surplus: To Equity share buy-back account 157.5
General Reserve 336 (c) General reserve account Dr. 52.5
Securities Premium Account 126 To Capital redemption reserve account 52.5
Profit and Loss Account 126 Working Notes:Shares Outstanding Test
Statutory Reserve 180 Particulars (Shares in crores)

Capital Redemption Reserve 87 Number of shares outstanding 46.2
Plant Revaluation Reserve 33 888 25% of the shares outstanding 11.55
(3) Loan Funds: Resources Test
Secured 2,200 Particulars

Unsecured 320 2,520 Paid up capital (₹ in crores) 462
On the recommendations of the Board of Directors, on 16th September, 2021, the shareholders of the Free reserves (₹ in crores) (336+126+126) 588
company have approved a proposal to buy-back of equity shares. The prevailing market value of the Shareholders’ funds (₹ in crores) 1,050
company’s share is ₹ 20 per share and in order to induce the existing shareholders to offer their shares
for buy-back, it was decided to offer a price of 50% over market value. The company had sufficient bal- 25% of Shareholders fund (₹ in crores) ₹ 262.5 crores
ance in its bank account for the buy-back of shares. Buy-back price per share ₹ 30
You are required to compute the maximum number of shares that can be bought back in the light of the Number of shares that can be bought back (shares in crores) 8.75 crores shares
above information and also under a situation where the loan funds of the company were either ₹ 1,680
Crores or ₹ 2,100 Crores.
Assuming that the entire buy-back is completed by 31st December,2021, Pass the necessary ac-
counting entries (narrations not required) in the books of the company in each situation (PYP 10
Marks May’22)
Particulars When loan fund is

₹ 2,520 crores ₹ 2,100
crores
₹ 1,680 crores
(a) Loan funds (₹ in crores) 2,520 1,680 2,100
(b) Minimum equity to be maintained after
buy- back in the ratio of 2:1 (₹ in 1,260 840 1,050
crores)
(c) Present equity shareholders fund 1,050 1,050 1,050
(₹ in crores)
(d) Futureequity shareholder fund (₹ in N.A. 997.5 N.A.
crores) (See Note 2) (1,050-52.5)
(e) Maximum permitted buy-back of Nil 157.5 (by Nil

Equity (₹ in crores) [(d) – (b)] (See simultane-
ous
Note 2)
equation)
(f) Maximum number of shares that can Nil 5.25 (by si- Nil
be bought back @ ₹ 30 per multaneous
3. Statutory reserves, capital redemption reserve and plant revaluation reserves are not free re-
serves.
equation)
share (shares in crores)
4. For calculation of debt -equity ratio both secured and unsecured loans have been considered.
(See Note 2)
Note:
1. Under Situations 1 & 3 the company does not qualify for buy-back of shares as per the provi- Question 16
sions of the Companies Act, 2013.
2. As per section 68 of the Companies Act, 2013, the ratio of debt owed by the company should The following information from Balance Sheet of Z Ltd. as on 31st March ,2023:
not be more than twice the capital and its free reserve after such buy-back.
Amount transferred to CRR and maximum equity to be bought back will be calculated by simul- ₹ Lakhs
taneous equation method.
Share Capital:
Suppose amount equivalent to nominal value of bought back shares transferred to CRR ac- Equity shares of ₹ 10 each Fully Paid Up 16,000
count is ‘x’
10% Redeemable Pref. Shares of ₹ 10 each Fully Paid Up 5,000
and maximum permitted buy-back of equity is ‘y’.
Reserves & Surplus
Then
Capital Redemption Reserve 2,000
Equation 1: (Present equity – Nominal value of buy-back transfer to CRR) – Minimum equity to be
maintained= Maximum permissible buy-back of equity (1,050 –x)-840 = y Securities Premium 1,600
General Reserve 12,000
Profit & Loss Account 600
Secured Loans:
9% Debentures 10,000
Trade payables 4,600
Sundry Provisions 2,000 6 Preference Shareholders A/c Equity buy- 5,500

back A/c
Fixed Assets 28,000 3,200
To Bank A/c 8,700
Investments 4,700
Cash at Bank 4,600 (Being payment made to preference shareholders and equity
shareholders)
Other Current Assets 16,500
7 General Reserve Account 6,600
To Capital Redemption Reserve Account (Being amount 6,600
On 1st April, 2023 the Company redeemed all its Preference Shares at a Premium of 10% and bought
transferred to capital redemption
back 10% of its Equity Shares at ₹ 20 per Share. In order to make cash available, the Company sold all
the Investments for ₹ 5,000 lakhs. reserve account towards face value of preference shares re-
deemed and equity shares bought back)
You are required to pass journal entries for the above and prepare the Company’s Balance sheet
immediately after buyback of equity shares and redemption of preference shares.(Nov ’23) Balance Sheet of C Ltd. (after Redemption and Buyback)
(₹ Lakhs)
Answer 16
(i) Journal Entries in the books of Z Ltd. (₹ in lakhs)
Particulars NoteNo Amount
Particulars
EQUITY AND LIABILITIES ₹
1 Bank A/c Dr. 5,000
4,700 (I) Shareholders’ Funds:
To Investments A/cTo Profit and
Loss A/c 300 (a) Share Capital 1 14,400
(Being investment sold on profit for the purpose of buy- (b) Reserves and Surplus 2 14,400
back) (2) Non-Current Liabilities:

(a) Long Term Borrowings 3 10,000
2 10% Redeemable Preference Share Capital A/c Premium on Dr. 5,000
(3) Current Liabilities:
Redemption of Preference Shares A/c
Dr. 500 (a) Trade payables 4,600
To Preference Shareholders A/c 5,500
(Being redemption of preference share capital at premium of (b) Short Term Provisions 2,000
10%)
Total 45,400
3 Profit and Loss A/c Dr. 500
(II) ASSETS
To Premium on Redemption of Preference Shares A/c 500
(1) Non-Current Assets
(Being premium on redemption of preference shares adjusted
PPE 28,000
through securities premium)
Current Assets:
4 Equity Share Capital A/c Premium Dr. 1,600
on buyback (a) Cash and Cash equivalents (W N) 900
Dr. 1,600
To Equity buy-back A/c (b) Other Current Assets 16,500
3,200
(Being Equity Share bought back, Share Capital cancelled, and 45,400
Premium on Buyback accounted for)
5 Securities Premium A/c (1,600) Dr. 1,600

To Premium on Buyback A/c
(Being premium on buyback provided out of securities 1,600
premium)
Notes to Accounts (c) 15% of the total paid-up capital and free reserves of the company.
₹ in Lakhs
Ans: (a)
1. Share Capital
1,440 lakh Equity Shares of ₹ 10 each Fully
Paid up (160 lakh Equity Shares bought back) Question 18
14,400
The companies are permitted to buy-back their own shares out of
General Reserve 12,000 (a) Free reserves and Securities premium
Less: Transfer to CRR (6,600) 5,400 (b) Proceeds of the issue of any shares.
Capital Redemption Reserve 2,000 (c) Both (a) and (b)
Add: Transfer due to buy-back of shares from Gen. 6,600
res. 8,600
Ans: (c)
Securities premium 1,600
Less: Adjustment for premium paid on buy back (1,600) Question 19
Profit & Loss A/c 600 When a company purchases its own shares out of free reserves; a sum equal to nominal value of shares
so purchased shall be transferred to
(d) Revenue redemption reserve.
Less: Adjustment for premium paid on redemp- (500)
tion of preference shares 400 14,400 (e) Capital redemption reserve.
3. Long-term borrowings (f) Buy-back reserve
Secured Ans: (b)

9 % Debentures 10,000
Working Note: Question 20
Bank Account State which of the following statements is true?
Amount Amount (d) Buy-back is for more than twenty-five per cent of the total paid-up capi-
taland free reserves of the company.
(₹ Lakhs) (₹ Lakhs)
(e) Partly paid shares cannot be bought back by a company.
To balance b/d 4,600 By Preference Shareholders 5,500
(f) Buy-back of equity shares in any financial year shall exceed twenty-five
To Investment A/c 5,000 A/c By Equity buy back A/c 3,200
percent of its total paid-up equity capital in that financial year.
(sale Proceeds)
By Balance c/d (Balancing figure)
Ans: (b)
900
Question 21
9,600 9,600
Premium (excess of buy-back price over the par value) paid on buy-back should be adjusted against
Question 17
(a) Free reserves.
As per section 68(1) of the Companies Act, buy-back of own shares by thecompany, shall (b) Securities premium.
not exceed
(c) Both (a) and (b).
(a) 25% of the total paid-up capital and free reserves of the company.
(b) 20% of the total paid-up capital and free reserves of the company.
Ans: (c) meeting of the company.

(c) the buy-back must be equal or less than twenty-five per cent of the total paid-up
Question 22 capital and free reserves of the company: (Resource Test)
(d) Further, the buy-back of shares in any financial year must not exceed25% of its total
Advantages of Buy-back of shares include to
paid-up capital and free reserves: (Share Outstanding Test)
(g) Encourage others to make hostile bid to take over the company. (e) the ratio of the debt owed by the company (both secured and unsecured) after
(h) Decrease promoters holding as the shares which are bought back are can- such buy-back is not more than twice the total of its paid-up capital and its free re-
celled. serves: (Debt-Equity Ratio Test)
(i) Discourage others to make hostile bid to take over the company as thebuy- Note: Central Government may prescribe a higher ratio of the debt than that speci-
back will increase the promoters holding. fied under this clause for a class or classes of companies. Debt here should include
both long-term debt as well as short term debt.
Ans: (c)
(f) all the shares or other specified securities for buy-back are fully paid-up;
(g) the buy-back of the shares or other specified securities listed on any recognised
stock exchange is in accordance with the regulations madeby the Securities and
Question 23
Exchange Board of India in this behalf;
What are the conditions to be fulfilled by a Joint Stock Company to buy-back its eq- (h) the buy-back in respect of shares or other specified securities other than those speci-
uity shares as perCompanies Act, 2013? Explain in brief. fied in clause
(f) is in accordance with the guidelines as may be prescribed.
Answer 23
Provided that no offer of the buy-back under this sub section shall be made within a pe-
Section 68 to 70 of the Companies Act, 2013 lays down the provisions for a company to buy-
riod of one year reckoned from the date of closure of a previous offer of buy-back if any.
back its own equity shares.
This means that there cannot be more than one buy- back in one year.
The Companies Act, 2013 under Section 68 (1) permits companies to buy-back theirown
(2) The notice of meeting at which special resolution is supposed to be passed must be accom-
shares and other specified securities out of:
panied by an explanatory statement stating-
(i) its free reserves; or
(a) A full and complete disclosure of all material facts;
(ii) the securities premium account; or
(b) the necessity of the buy-back;
(iii) the proceeds of the issue of any shares or other specified securities.
(c) the class of security intended to be purchased under the buy-back;
Note: No buy-back of any kind of shares or other specified securities shall be made
(d) the amount to be invested under the buy-back;
out of the proceeds of an earlier issue of the same kind of shares or same kind of other
specified securities. For example, if equity shares are to be bought-back, then, prefer- (e) the time limit for completion of the buy-back.
ence shares may be used for the purpose. (3) Every buy-back shall be completed within twelve months from the date of passing the special
The other important provisions relating to the buy-back are: resolution, or the resolution passed by the board of directors.
(1) Section 68 (2) further states that no company shall purchase its own shares or other (4) The buy-back may be—
specified securities unless— (a) from the existing security holders on a proportionate basis; or
(a) the buy-back is authorised by its articles; (b) from the open market; or
(b) a special resolution has been passed in general meeting of the company authorising (c) by purchasing the securities issued to employees of the company pursuant to a
the buy-back; scheme of stock option or sweat equity.
However, the above provisions do not apply where the buy-back is ten percent or (5) Where a company has passed a special resolution under clause (b) of Sub- section (2) to
less of the paid- up equity capital + free reserves and is authorized by a board reso- buy-back its own shares or other securities under this section, it shall, before making such
lution passed at a duly convened meeting of the directors. Hence, in case the buy- buy-back, file with the Registrar and the Securities and Exchange Board of India a declaration
back is up to 10% of paid up equity of solvency in the form as may be prescribed and verified by an affidavit to the effect that the
+ free reserves, the same may be done with the authorization of the Board Res- Board of Directors has made a full inquiry into the affairs of the company as a result of which
olution without the necessity of its being authorized by the articles of association they have formed an opinion that it is capable of meeting its liabilities and will not be ren-
of the company and by a special resolution of its members passed at a general dered insolvent within a period of one year of the date of declaration adopted by the Board of
Directors. It must be signed by at least two directorsof the company, one of whom shall be (c) if a default is subsisting, in repayment of deposit or interest payable thereon, re-
the managing director, if any: demption of debentures or preference shares or payment of dividend to any share-
holder or repayment of any term loan or interest payable thereon to any financial insti-
Note: No declaration of solvency shall be filed with the Securities and Exchange Board
tutions or bank. Provided that the buy– back is not prohibited if the default is remedied
of India by a company whose shares are not listed on any recognised stock exchange.
and a period of three years has elapsed since the cessation of the default.
(6) Where a company buys-back its own securities, it shall extinguish and physically de-
(2) In accordance with schedule III, no company shall directly or indirectly purchase its
stroy the securities so bought-back within seven days of the last date of completion of
own shares or other specified securities in case such company has not complied
buy-back.
with provisions of Sections 92 (filling of annual return), 123 (payment of dividend
(7) Where a company completes a buy-back of its shares or other specified securities un- within 30 days of declaration), 127 (failure to distribute dividend) and 129 (prepara-
der this section, it shall not make further issue of same kind of shares (including allotment tion of financial statement of the company).
of further shares under clause
(a) of Sub-section (1) of Section (62) or other specified securities within a period of six months Question 24
except by way of bonus issue or in the discharge of subsisting obligations such as con-
version of warrants, stock option scheme, sweat equity or conversion of preference shares SMM Ltd. has the following capital structure as on 31st March, 20X1: ₹ in crore
or debentures into equity shares.
(8) Where a company buy-back its securities under this section, it shall maintaina register
of the securities so bought, the consideration paid for the securities bought-back, the Particulars Situation Situation
date of cancellation of securities, the date of extinguishing and physically destroying of
I II
securities and such other particulars as may be prescribed.
(i) Equity share capital (shares of ₹10 each) 1,200 1,200
(9) A company shall, after the completion of the buy-back under this section, file with the Regis-
trar and the Securities and Exchange Board of India, a return containing such particulars (ii) Reserves:
relating to the buy-back within thirty days of such completion, as may be prescribed, General Reserves 1,080 1,080
provided that no return shall be filed with the Securities and Exchange Board of India by
Securities Premium 400 400
a company whose shares arenot listed on any recognised stock exchange.
Profit & Loss 200 200
(10) If a company makes default in complying with the provisions of this section or any reg-
ulations made by SEBI in this regard, the company may be punishable with a fine which Infrastructure Development Reserve (StatutoryReserve) 320 320
shall not be less than Rs One Lakh but whichmay extend to three lakh rupees and every
officer of the company who is in defaultshall be punishable with imprisonment for upto Loan Funds 3,200 6,000
(iii)
3 years or with a fineof not less than one lakh rupees but which may extend to three
lakh rupeesor with both.
(11) Section 69 (1) states that where a company purchases its own shares out ofthe free re- The company has offered buy-back price of ₹ 30 per equity share. You are required to calculate max-
serves or securities premium account, a sum equal to the nominal value of shares so pur- imum permissible number of equity shares that can be bought back in both situations and also re-
chased shall be transferred to the Capital Redemption Reserve Account and details of such quired to pass necessary Journal Entries.
account shall be disclosed in the BalanceSheet.
Answer 24
(12) The shares or other specified securities which are proposed to be bought- back must be
Statement determining the maximum number of shares to be bought back Number of shares (in
fully paid-up.
crores)
(13) The Capital Redemption Reserve Account may be applied by the company in paying up
unissued shares of the company to be issued to members of the company as fully paid Particulars When loan fund is
bonus shares.
₹ 3,200 crores ₹ 6,000 crores
(14) Premium (excess of buy-back price over the par value) paid on buy-backshould be ad-
Shares Outstanding Test (W.N.1) 30 30
justed against free reserves and/or securities premium account. Revaluation reserve rep-
resents unrealized profit and hence it cannot be used for buy-back of securities. Resources Test (W.N.2) 24 24
(1) No company shall directly or indirectly purchase its own shares or other specified Debt Equity Ratio Test (W.N.3) 32 Nil
securities— Maximum number of shares that can be- 24 Nil
(a) through any subsidiary company including its own subsidiary companies; or bought back [least of the above]
Journal Entries for the Buy-Back (applicable only when loan fund is ₹3,200 crores)
(b) through any investment company or group of investment companies; or
Particulars Debit Credit Particulars When loan fund is

(a) Equity shares buy-back account Dr. 720 ₹3,200 crores ₹6,000 crores
To Bank account 720 (a) Loan funds (₹) 3,200 6,000
(Being payment for buy-back of 24 crores equity (b) Minimum equity to bemaintained after 1,600 3,000
shares of ₹10 each @ ₹30 per share) buy-back in the ratio of 2:1 (₹) (a/2)
(b) Equity share capital account Dr. 240 (c) Present equity shareholdersfund (₹) 2,880 2,880
Premium Payable on buy-back account Dr. 480 (d) Future equity shareholdersfund (₹) 2,560 (2,880- N.A.
To Equity share buy-back account 720
(see W.N.4) 320)
(e) Maximum permitted buy-backof 960 Nil
Securities Premium account General Re- Dr. 400 Equity (₹) [(d) – (b)]
serve / Profit & Loss A/c
Dr. 80 (f) Maximum number of sharesthat can 32 crore shares
To Premium Payable on buy-back account (Being 480 be bought back @
Premium Payable on buy-back account charged to se- Nil
curities premium and general reserve/Profit & Loss A/c) ₹30 per share
As per the provisions of the Companies
Act, 2013, company Qualifies Does not Qualify
(c) General Reserve / Profit & Loss A/c Dr. 240 Amount transferred to CRR and maximum equity to be bought back willbe calculated bysimultaneous
equation method
To Capital redemption reserve account 240
Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy-back of equity is ‘y’
(Being transfer of free reserves to capital redemption
Then
reserve to the extent of nominal value of share capital Equation 1: (Present Equity- Transfer to CRR)- Minimum Equity to bemaintained =Maximum Permit-
bought back out of redeemed through free reserves) ted Buy-Back
= (2,880 – x) – 1,600 = y
Working Notes:
= 1280 – x =y (1)
Shares Outstanding Test
Equation 2: Maximum Permitted Buy-Back X Nominal Value PerShare/Offer Price Per Share
y/30 x 10 = x or
Particulars (Shares in crores) 3x = y (2)
by solving the above two equations we get
25% of the shares outstanding 30
x= ₹ 320y = ₹960
Resources Test
Particulars Question 25
Paid up capital (₹in crores) 1,200
KG Limited furnishes the following Balance Sheet as at 31st March, 20X1:
Free reserves (₹in crores) (1,080 + 400 +200) 1,680
Shareholders’ funds (₹in crores) 2,880 Particulars Notes ₹
25% of Shareholders fund (₹in crores) ₹720 crores Equity and Liabilities
Buy-back price per share ₹30 1 Shareholders’ funds
Number of shares that can be bought back 24 crores shares A Share capital 1 1,200
Debt Equity Ratio Test: Loans cannot be in excess of twice B Reserves and Surplus 2 810
the EquityFunds post Buy-Back
the target of buy-back. On 30th April, 20X1 the company issued one fully paid up equity share of ₹ 10 by
way of bonus for every four equity shares held by the equity shareholders.
Long term borrowings 3 750
(1) You are required to:
(2) Pass necessary journal entries for the above transactions.
A Trade Payables 745
Prepare Balance Sheet of KG Limited after bonus issue of the shares.
B Other Current Liabilities 195
Total 3,700 Answer 25
Assets In the books of KG Limited
1 Non-current assets Journal Entries
A Property, plant and equipment 4 2,026
Date Particulars Dr. Cr.
B Non-current Investments 74
20X1 (₹ in lakhs)
2 Current assets
April 1 Bank A/c Dr. 75
A Inventories 600 74
To Investment A/c
B Trade receivables 260
To Profit on sale of investment 1
C Cash and Cash equivalents 740
(Being investment sold on profit)
Total 3,700
April 5 Equity share capital A/c Dr. 300
Securities premium A/c Dr. 150
Notes to accounts
To Equity shares buy-back A/c 450
No. Particulars ₹ (Being the amount due to equity shareholders onbuy-
back)
1 Share Capital Equity shares buy-back A/c Dr. 450
Authorized, issued and subscribed capital To Bank A/c 450
Equity share capital (fully paid up shares of ₹ 10 each) 1,200 (Being the payment made on account of buy-back of30 Lakh
2 Reserves and Surplus Equity Shares)
Securities premium 175 April 5 General reserve A/c Dr. 265
General reserve 265 Profit and Loss A/c Dr. 35
Capital redemption reserve 200 To Capital redemption reserve A/c 300
Profit & loss A/c 170

(Being amount equal to nominal value of buy-backshares from
Total 810 free reserves transferred to capital redemption reserve account
3 Long term borrowings as per the law)
12% Debentures 750 April 30 Capital redemption reserve A/c Dr. 225
4 Property, plant and equipment To Bonus shares A/c (W.N.1) 225
Land and Building 1,800 (Being the utilization of capital redemption reserve toissue
bonus shares)
Plant and machinery 226
Bonus shares A/c Dr. 225
Net carrying value 2,026
To Equity share capital A/c 225
(Being issue of one bonus equity share for every four equity
On 1st April, 20X1, the company announced the buy-back of 25% of its equity shares @ ₹ 15 per share.
shares held)
For this purpose, it sold all of its investments for ₹ 75 lakhs.On 5th April, 20X1, the company achieved
Balance Sheet (After buy-back and issue of bonus shares) Profit & Loss A/c 170
Particulars Notes ₹ Less: Transfer to CRR (35) 136
Equity and Liabilities Total 436
1 Shareholders’ funds 3 Long term borrowings
A Share capital 1 1,125 12% Debentures 750
B Reserves and Surplus 2 436 4 Property, Plant and Equipment
2 Non-current liabilities Land and Building 1,800
Long term borrowings 3 750 Plant and machinery 226
3 Current liabilities Net carrying value 2,026
A Trade Payables 745
B Other Current Liabilities 195 Working Notes:Amount of bonus shares = 25% of (1,200 – 300) lakhs = ₹225 lakhs
Total 3,251 Cash at bank after issue of bonus shares
Assets
Partic- ₹ in lakhs
1 Non-current assets ulars
A Property, plant and equipment 2,026 Cash balance as on 1st April, 20X1 740
2 Current assets Add: Sale of investments 75
A Inventories 4 600 815
B Trade receivables 260 Less: Payment for buy-back of (450)
shares
365
Total 3,251
Notes to accounts Note: In the given solution, it is possible to adjust transfer to capital redemption reserve account or cap-
italization of bonus shares from any other free reserves or securities premium (to the extent available)
No. Particulars ₹ also.
1 Share Capital
Question 26
Authorized, issued and subscribed capital:
Equity share capital (fully paid up shares of ₹10 each) 1,125 Following is the Balance Sheet of Competent Limited as at 31st March, 20X1:
Particulars Notes ₹
General Reserve 265
Less: Transfer to CR (265) -
Capital Redemption Reserve 200
A Share capital 1 12,50,000
Add: Transfer due to buy-back of shares from P/L 35
B Reserves and Surplus 2 18,75,000
Add; Transfer due to buy-back of shares from General 2 Non-current liabilities
Reserve 265 Long term borrowings 3 28,75,000
Less: Utilisation for issue of bonus shares (225) 275

Securities premium 175
Less: Adjustment for premium paid on buy-back (150) 25
3 Current liabilities Answer 26

A Other Current Liabilities 16,50,000 Determination of Buy-back of maximum no. of shares as per the Companies Act, 2013
Total 76,50,000 1. Shares Outstanding Test
Assets Particulars (Shares)
1 Non-current assets Number of shares outstanding 1,25,000
A Property, plant and Equipment 46,50,000 25% of the shares outstanding 31,250
4 Resources Test: Maximum permitted limit 25% of Equity paid up capital +FreeReserves
Particulars
2 Current assets
Paid up capital (₹) 12,50,000
A Other Current Assets 30,00,000
Free reserves (₹) (15,00,000 + 2,50,000 + 1,25,000) 18,75,000
Total 76,50,000
Shareholders’ funds (₹) 31,25,000
Notes to accounts
No. Particulars ₹ 25% of Shareholders fund (₹) 7,81,250

1 Share Capital
Buy-back price per share ₹20
Equity share capital (fully paid up shares of ₹10 each) Number of shares that can be bought back (shares)Actual 39,062
12,50,000 Number of shares for buy-back 25,000

Securities premium 2,50,000 Debt Equity Ratio Test: Loans cannot be in excess of twice the EquityFunds postBuy-Back
Profit and loss account 1,25.000
Particulars ₹
(a) Loan funds (₹) (18,75,000+10,00,000+16,50,000) 45,25,000
Total 18,75,000
(b) Minimum equity to be maintained after buy-backin the
3 Long term borrowings ratio of 2:1 (₹) (a/2) 22,62,500
14% Debentures 18,75,000 (c) Present equity/shareholders fund (₹) 31,25,000
Unsecured Loans 10,00,000 (d) Future equity/shareholders fund (₹) (see W.N.)(31,25,000 28,37,500
Total 28,75,000
– 2,87,500)
(e) Maximum permitted buy-back of Equity (₹) 5,75,000
Land and Building 19,30,000
[(d) – (b)]
Plant and machinery 18,00,000
(f) Maximum number of shares that can be boughtback @ 28,750 shares
Furniture and fitting 9,20,000
₹20 per share
Net carrying value 46,50,000
(g) Actual Buy-Back Proposed 25,000 Shares
The company wants to buy-back 25,000 equity shares of ₹ 10 each, on 1st April,20X1 at ₹ 20 pershare.
Buy-back of shares is duly authorized by its articles and necessary resolution has been passed by As per Section 68 (2) (d) of the Companies Act 2013, the ratio of debt owed by the company should not
the company towards this. The payment for buy-back of shares will be made by the company out of be more than twice the capital and its free reserves after such buy-back. Further under Section 69 (1), on
sufficient bank balance available shown as part of Current Assets. buy-back of shares out of free reserves a sum equal to the nominal value of the share bought back shall be
transferred to Capital Redemption Reserve (CRR). As per section 69 (2) utilization of CRR is restricted to fully
Comment with your calculations, whether buy-back of shares by company is within the provisions
paying up unissued shares of the Company which are to be issued as fully paid- up bonus shares only.
of the Companies Act, 2013. If yes, pass necessary journal entries towards buy-back of shares and
It means CRR is not available for distribution as dividend. Hence, CRR is not a free reserve. Therefore, for
prepare the Balance Sheet after buy-back of shares.
calculation of future equity i.e. share capital and free reserves, amount transferred to CRR on buy-back
has to be excluded from the present equity.

Summary statement determining the maximum number of shares to be bought back
Particulars Number of shares A Other Current Liabilities 16,50,000
Shares Outstanding Test 31,250 Total 71,50,000
Resources Test 39,062 Assets
Debt Equity Ratio Test 28,750 1 Non-current assets
Maximum number of shares that can be boughtback [least 28,750 A Property, plant and equipment 4 46,50,000
of the above]
2 Current assets
Company qualifies all tests for buy-back of shares and came to the conclusion that it can buy max-
imum 28,750 shares on 1st April, 20X1. However, company wants to buy-back only 25,000 equity A Other Current Assets (30,00,000 – 5,00,000) 25,00,000
shares @ ₹ 20. Therefore, buy-back of 25,000 shares, as desired by the company is within the pro- Total 71,50,000
visions of the Companies Act, 2013.
Notes to accounts
Journal Entries for buy-back of shares
No. Particulars ₹
1 Share Capital
Particulars Debit (₹) Credit (₹)
(a) Equity shares buy-back account Dr. 5,00,000
Equity share capital (fully paid up shares of 10,00,000
To Bank account 5,00,000
₹10 each)
(Being buy-back of 25,000 equity shares of ₹ 2 Reserves and Surplus
10 each @ ₹20 per share) Profit and Loss A/c 1,25,000
(b) Equity share capital account Dr. 2,50,000
Revenue reserves 15,00,000
Securities premium account Dr. 2,50,000
Less: Transfer to CRR (2,50,000) 12,50,000
To Equity shares buy-back account 5,00,000
Less: Utilization for share buy-back (2,50,000) -
(c) Revenue reserve account Dr. 2,50,000
Capital Redemption Reserves 2,50,000
To Capital redemption reserve account 2,50,000
Total 16,25,000
(Being transfer of free reserves to capital redemp-
tion reserve to the extent of nominal value of capital 3 Long term borrowings
bought back through free reserves) 14% Debentures 18,75,000
Unsecured Loans 10,00,000
Balance Sheet of M/s. Competent Ltd.as at 31st March, 20X1
Total 28,75,000
Particulars Notes ₹ 4 Property, plant and equipment
Equity and Liabilities Land and Building 19,30,000
1 Shareholders’ funds Plant and machinery 18,00,000
A Share capital 1 10,00,000 Furniture and fitting 9,20,000
B Reserves and Surplus 2 16,25,000 Net carrying value 46,50,000
2 Non-current liabilities Working Note
Amount transferred to CRR and maximum equity to be bought back will becalculated by simultaneous
equation method. Notes to accounts

Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy- back of equity is ‘y’.
No. Particulars ₹ in (‘000)
Then
1 Share Capital
Authorized, Issued and Subscribed Capital:
3,00,000 Equity shares of ₹ 10 each fully paid up 3,000
20,000 9% Preference Shares of 100 each 2,000
Total 5,000
Capital reserve 10
Revenue reserve 4,000
M Ltd. furnishes the following Balance Sheet as at 31st March, 20X1: Securities premium 500
Particulars Notes ₹ (in 000) Profit and Loss account 1,800
Equity and Liabilities Total 6,310
1 Shareholders’ funds 3 Long term borrowings
A Share capital 1 5,000 10% Debentures 400
B Reserves and Surplus 2 6,310 4 Property, Plant and Equipment (PPE)
2 Non-current liabilities PPE: Cost 3,000
Long term borrowings 3 400 Less: Provision for depreciation (250)
3 Current liabilities Net carrying value 2,750
A Trade Payables 40 The company passed a resolution to buy-back 20% of its equity capital @ ₹ 15 per share. For this purpose,
it sold its investments of ₹30 lakhs for ₹ 25 lakhs. You are required to pass necessary Journal entries.
Total 11,750
Assets Answer 27
Journal Entries in the books of M Ltd. ₹ in ‘000
A Property, plant and Equipment 4 2,750 Particulars Dr. Cr.
B Non-Current Investments (at cost) 5,000 1. Bank A/c Dr. 2,500
2 Current assets Profit and Loss A/c Dr. 500
A Inventories 1,000 To Investment A/c 3,000
B Trade receivables 2,000 (Being investment sold for the purpose of buy-backof
Equity Shares)
C Cash and Cash equivalents 1,000
2. Equity share capital A/c Dr. 600
Total 11,750
Premium payable on buy-back Dr. 300
To Equity shares buy-back A/c 900
(Being the amount due on buy-back of equity shares)
3. Equity shares buy-back A/c Dr. 900

To Bank A/c 900
(Being payment made for buy-back of equity shares) 1 Share Capital

4. Securities Premium A/c Dr. 300 Authorized, issued and subscribed share capital:
To Premium payable on buy-back 300 12% Redeemable preference shares of ₹ 100 each, fully paid 75
up
(Being premium payable on buy-back charged from
Securities premium) Equity shares of ₹ 10 each, fully paid up 25
5. Revenue reserve A/c Dr. 600 Total 100
To Capital Redemption Reserve A/c 600 2 Reserves and Surplus
(Being creation of capital redemption reserve to the Capital reserve 15
extent of the equity shares bought back)
Question 28(Illustration) Revenue reserves 260
Anu Ltd. (a non-listed company) furnishes you with the following balance sheet as at 31st March, Total 300
20X1: 3 Property, Plant and Equipment
(in crores ₹) PPE Cost 100
Less: Provision for depreciation (100)
Particulars Notes ₹ Net carrying value NIL
Equity and Liabilities 4 Non-Current Investments
1 Shareholders’ funds Non-current investments at cost (Market value ₹ 400 Cr.) 100
Share capital Reserves 1 100 The company redeemed preference shares on 1st April, 20X1. It also bought back 50 lakhs equity
and Surplus Current shares of ₹ 10 each at ₹ 50 per share. The payments for the above were made out of the huge bank bal-
A liabilities 2 300
B ances, which appeared as a part of current assets. You are asked to:
2
Trade Payables Pass journal entries to record the above.
40
A (ii) Prepare balance sheet as at 1.4.20X1.
440
Answer28
Total Journal entries in the books of Anu Ltd. ₹ in crores
Assets
1 Non-current assets Particulars Dr. Cr.
A Property, plant and equipment 3 - 1st 12% Preference share capital A/c Dr. 75
B Non-Current Investments 4 100 April, To Preference shareholders A/c 75
20X1
2 Current assets (Being preference share capital accounttrans-
ferred to shareholders account)
A Trade receivables 140
Preference shareholders A/c Dr. 75
B Cash and Cash equivalents 200
To Bank A/c 75
Total 440
(Being payment made to shareholders)
Notes to accounts
Shares buy-back A/c Dr. 25
To Bank A/c 25
No. Particulars ₹
(Being 50 lakhs equity shares bought back @ ₹50per
share)
Equity share capital A/c (50 lakhs х ₹10) Dr. 5 Notes to accounts
Securities premium A/c (50 lakhs х ₹40) Dr. 20 No. Particulars ₹

To Shares buy-back A/c 25 1 Share Capital
(Being cancellation of shares bought back) Authorized, issued and subscribed share capital
Revenue Reserve A/c Dr. 80 200 lakhs Equity shares of ₹10 each fully paid
To Capital Redemption Reserve A/c (75+5) 80 20
(Being creation of capital redemption reserve to the ex- Total 20

tent of the face value of preference shares redeemed 2 Reserves and Surplus
and equity shares bought back)
Capital reserve 15
Balance Sheet of Anu Ltd as at 1.4.20X1 (in crores ₹) Capital redemption reserve 80
Particulars Notes ₹ Securities premium 25

Less: Utilization for buy-back of shares (20) 5
Revenue Reserve 260
Less: transfer to Capital redemption reserve (80) 180
Total 280
A Share capital 1 20
3 Property, plant and Equipment
B Reserves and Surplus 2 280
PPE: cost 100
Less: Provision for depreciation (100)
A Trade Payables 40
Net carrying value -
Total 340
4 Non-Current Investments
Assets
Non-current investments at cost 100
(Market value ₹400 Crores)
A Property, plant and equipment 3 -
5 Cash and Cash Equivalents
B Non-Current Investments 4 100
Cash and Cash Equivalents as on 31.3.20X1 200
2 Current assets
Less: Bank payment for redemption and buy-back (100)
A Trade receivables 140
Total 100
B Cash and Cash equivalents 5 100
Total 340
Dee Limited (a non-listed company) furnishes the following Balance Sheet as at 31st March, 20X1:
(in thousand ₹)
A Share capital 1 2,700
B Reserves and Surplus 2 9,700
A Trade Payables 1,400 Answer 29

Total 13,800 Journal Entries in the books of Dee Limited (in thousand ₹)
Assets Particulars Dr. Cr.

1 Non-current assets (i) Bank Account Dr. 2,200
A Property, plant and Equipment 9,300 Profit and Loss Account Dr. 800
B Non-Current Investments 3,000 To Investment Account 3,000
2 Current assets (Being the investments sold at loss for the purpose of
A Inventories 500
B Trade receivables 200 buy-back)
C Cash and Cash equivalents 800 (ii) Equity Share buy-back Account Dr. 2,500
Total 13,800 To Bank Account 2,500

Notes to accounts (Being the payment made on buy-back)
No. Particulars ₹ (iii) Equity Share Capital Account Dr. 500
1 Share Capital Premium Payable on Buy-Back Account To Equity Dr. 2,000

Shares Buy-Back Account 2,500
(Being the buy-back amount allocated to equity share
2,50,000 Equity shares of ₹ 10 each fully paid up 2,500
capital)
2,000, 10% Preference shares of ₹ 100 each 200
(iv) Securities premium Account Dr. 2,000
(Issued two months back for the purpose of buy-back)
To Premium payable on buy-back Account 2,000
Total 2,700 (Being the premium payable on buy-back adjustedagainst secu-

rities premium account)
(v) Revenue reserve Account Dr. 300
Capital reserve 1,000 300
To Capital Redemption Reserve Account
Revenue reserve 3,000
(Being the amount equal to nominal value of equity shares
Securities premium 2,200 bought back out of free reserves transferred to capital redemp-
Profit and loss account 3,500 tion reserve account)
Total 9,700
The company passed a resolution to buy-back 20% of its equity capital @ ₹ 50 per share. For this Balance Sheet of Dee Limited as at 1st April, 20X1(Afterbuy-back of shares)(in thousand ₹)
purpose,
it sold all of its investment for ₹ 22,00,000.
You are required to pass necessary journal entries and prepare the Balance Sheet.
A Share capital 1 2,200
B Reserves and Surplus 2 6,900
A Trade Payables 1,400
Total 10,500
Assets
1 Non-current assets Question 30(Illustration)
A Property, plant and Equipment 9,300 Perrotte Ltd. (a non-listed company) has the following Capital Structure as on 31.03.20X1:
2 Current assets
A Inventories 500
Particulars (₹ in crores)
B Trade receivables 200
(1) Equity Share Capital (Shares of ₹ 10 each fully paid) - 330
(2) Reserves and Surplus
Total 10,500
General Reserve 240 -
Notes to accounts
Securities Premium Account 90 -
No. Particulars ₹ Profit & Loss Account 90 -
1 Share Capital Infrastructure Development Reserve 180 600
Authorized, issued and subscribed capital: (3) Loan Funds 1,800
2,50,000 Equity shares of ₹10 each fully paid up 2,000 The Shareholders of Perrotte Ltd., on the recommendation of their Board of Directors, have approved
on 12.09.20X1 a proposal to buy-back the maximum permissible number of Equity shares considering
2,000, 10% Preference shares of ₹ 100 each 200
the large surplus funds available at the disposal of the company. The prevailing market value of the
(Issued two months back for the purpose of buy- company’s shares is ₹ 25 per share and in order to induce the existing shareholders to offer their shares
for buy-back, it was decided to offer a price of 20% over market.
back)
Total 2,200 You are also informed that the Infrastructure Development Reserve is created to satisfy Income-tax
Act requirements. You are required to compute the maximum number of shares that can be bought
Pa back in the light of the above information and also under a situation where the loan funds of the com-
pany were either ₹ 1,200 crores or ₹ 1,500 crores.
Assuming that the entire buy-back is completed by 09.12.20X1, show the accounting entries in the
Capital reserve 1,000 company’s books in each situation.
Capital redemption reserve 300
Answer 30
Securities Premium 2,200
Statement determining the maximum number of shares to be bought back Number of shares
Less: Premium payable on buy-back of shares (2,000) 200
Revenue reserve 3,000 Particulars When loan fund is
Less: Transfer to Capital redemption reserve (300) 2,700 ₹ 1,800 crores ₹ 1,500 crores
Profit and loss A/c 3,500 ₹ 1,200 crores
Less: Loss on investment (800) 2,700 Shares Outstanding Test 8.25 8.25 8.25
(W.N.1)
Total 6,900
Resources Test (W.N.2) 6.25 6.25 6.25
Debt Equity Ratio Test Nil 3.75 Nil
(W.N.3)
Maximum number of shares that
can be bought back [least of the Nil 3.75 Nil
above]
Journal Entries for the Buy-Back (applicable only when loan fund is ₹ 1,200 crores)
₹ in crores

Particulars Debit Credit
(a) Equity share buy-back account Dr. 112.5 Particulars When loan fund is
To Bank account 112.5
₹ 1,800 ₹ 1,200 ₹ 1,500
(Being buy-back of 3.75 crores equity shares of ₹10each @ crores crores crores
₹30 per share)
(a) Loan funds (₹in crores) 1,800 1,200 1,500
(b) Equity share capital account Dr. 37.5
(b) Minimum equity to be
Securities premium account Dr. 75
maintained after buy-back in the 900 600 750
To Equity share buy-back account 112.5
ratio of 2:1 (₹in crores)
(c) Present equity shareholders fund(₹ 750 750 750
(c) General reserve account Dr. 37.5
in crores)
To Capital redemption reserve account 37.5
(d) Future equity shareholder fund(₹in N.A. 712.5 N.A.
(Being transfer of free reserves to capital redemption
crores) (See Note 2) (750-37.5)
reserve to the extent of nominal valueof share capital
bought back out of redeemed through free reserves) (e) Maximum permitted buy-back of Nil 112.5 (by Nil
Working Notes: Equity (₹ in crores) [(d) – (b)] (See simultaneous

Note 2) equation)
1. Shares Outstanding Test
(f) Maximum number of shares that can 3.75 (by
be bought back @ simultaneous
Particulars (Shares in crores)
equation)
₹ 30 per share (shares in crores) (See Nil Nil
Note 2)
25% of the shares outstanding 8.25
Resources Test
Note:
Particulars Under Situations 1 & 3 the company does not qualify for buy-back of shares as per the provisions of the
Paid up capital (₹in crores) 330 Companies Act, 2013.
Free reserves (₹in crores) 420 As per section 68 of the Companies Act, 2013, the ratio of debt owed by the company should not be
more than twice the capital and its free reserveafter such buy-back. In the question, it is stated that
Shareholders’ funds (₹in crores) 750
the company has surplus funds to dispose of therefore, it is presumed that buy- back is outof free re-
25% of Shareholders fund (₹in crores) ₹187.5 crores serves or securities premium and hence a sum equal to the nominal value of the share bought back
Buy-back price per share ₹30 shall be transferred to Capital Redemption Reserve (CRR). Utilization of CRR is restricted to issuance
of fully paid-up bonus shares only. It means CRR is not available for distribution as dividend. Hence,
Number of shares that can be bought back (shares in 6.25 crores shares CRR is not a free reserve. Therefore, for calculation of future equity i.e. share capital and free reserves,
crores) amount transferred to CRR on buy-back has to be excluded from present equity.
Amount transferred to CRR and maximum equity to be bought back will be calculated by simultaneous
equation method.
Suppose amount equivalent to nominal value of bought back shares transferred to CRR account is ‘x’ and
maximum permitted buy-back of equity is ‘y’.
Then
Equation 1 : (Present equity – Nominal value of buy-back transfer to CRR)
– Minimum equity to be maintained= Maximum permissible buy-back ofequity
(750 –x)-600 = y (1)
Since 150 – x = y Notes to accounts
Maximumbuy−back No. Particulars ₹

1 Share Capital
Equity shares of ₹ 10 each fully paid 100
9% Redeemable preference shares of ₹ 100 each fullypaid 20
Total 120
Capital reserves 8
Revenue reserves 50
Question 31(Illustration) Total 118

Extra Ltd. (a non-listed company) furnishes you with the following Balance Sheet as at 31st March,
20X1: 10% Debentures 4
(in lakhs ₹) The company redeemed the preference shares at a premium of 10% on 1st April, 20X1.
Particulars Notes ₹ (i) It also bought back 3 lakhs equity shares of ₹ 10 each at ₹ 30 per share. The
Equity and Liabilities 1. payment for the above was made out of huge bank balances.
1 Shareholders’ funds (ii) Included in its investment were “investments in own debentures” costing ₹ 2
A Share capital 1 120 2. lakhs (face value ₹ 2.20 lakhs). These debentures were cancelled on 1st April, 20X1.
B Reserves and Surplus 2 118 (iii) The company had 1,00,000 equity stock options outstanding on the above- mentioned
2 Non-current liabilities date, to the employees at ₹ 20 when the market price was ₹30 (This was included under
current liabilities) On 1.04.20X1 employees exercised their options for 50,000 shares.
Long term borrowings 3 4
(iv) Pass the journal entries to record the above.
3 Current liabilities (v) Prepare Balance Sheet as at 01.04.20X1.
A Trade Payables 70
Total 312
Assets
A Property, plant and Equipment 50
B Non-current Investments 120
2 Current assets
A Cash and Cash equivalents 142
Total 312
Answer 31 10% Debentures A/c Dr. 2.20

(₹ in lakhs) To Investment (own debentures) A/c 2.00
To Profit on cancellation of own debenturesA/c 0.20
Date Particulars Debit Credit
20X1 (Being cancellation of own debentures costing
9% Redeemable preference share capital A/c Dr. 20.00 ₹2 lakhs, face value being ₹2.20 lakhs and the
balance being profit on cancellation ofdeben-
tures)
Bank A/c Dr. 10.00
1st April Premium on redemption of preference shares A/c Dr. 2.00
Employees stock option outstanding (Current
To Preference shareholders A/c 22.00
liabilities) A/c Dr. 5.00
(Being preference share capital transferred to
shareholders account) To Equity share capital A/c 5.00
To Securities premium A/c 10.00
Preference shareholders A/c Dr. 22.00
(Being the allotment to employees, of 50,000 shares
To Bank A/c 22.00
of ₹ 10 each at a premium of 20 per share in exercise
(Being payment made to shareholders) of stock options by
Equity shares buy-back A/c Dr. 90.00 employees)
To Bank A/c 90.00 Securities premium A/c Dr. 2.00
(Being 3 lakhs equity shares of ₹ 10 eachbought To Premium on redemption of preferenceshares 2.00
back @ ₹ 30 per share)
A/c
Equity share capital A/c Dr. 30.00
(Being premium on redemption of preference
Securities premium A/c Dr. 60.00
shares adjusted through securities premium)
To Equity Shares buy-back A/c 90.00
Balance Sheet of Extra Ltd. as at 01.04.20X1 (in lakhs ₹)
Revenue reserve A/c Dr. 50.00
To Capital redemption reserve A/c 50.00
(Being creation of capital redemption reserve ac-
count to the extent of the face value of preference A Share capital 1 75.00
shares redeemed and equity B Reserves and Surplus 2 66.20
shares bought back as per the law) 2 Non-current liabilities
Long term borrowings 3 1.80
A Other Current Liabilities 4 65.00
Total 208
Assets
A Property, plant and Equipment 50.00
B Non-current Investments 5 118.00
2 Current assets
A Cash and Cash equivalents 6 40.00

Total 1.80
Total 208
Notes to accounts 4. Other Current liabilities
Opening balance 70.00
No. Particulars ₹
Less: Adjustment for ESOP outstanding (5.00)
1 Share Capital
Total 65.00
Equity shares of ₹10 each fully paid 100
5. Non-current investments
Less: Cancellation of bought back shares (30)
Add: Shares issued against ESOP 5
Less: Investment in own debentures (2.00)
Total 75
Total 118.00
6. Cash and Cash Equivalents
Capital Reserve
Less: Payment to preference shareholders (22.00)
Add: Profit on cancellation of debentures 0.20 8.20
Less: Payment to equity shareholders (90.00)
Revenue reserves
Add: Share price received against ESOP 10.00
Total 40.00
Less: Creation of Capital Redemption Reserve (50.00) -
Securities Premium Question 32(Illustration)
Pratham Ltd. (a non-listed company) has the following Capital structure as on 31st March, 20X1:
Less: Adjustment for cancellation of equity (60.00)
Particulars ₹ ₹
shares
Equity Share Capital (shares of ₹ 10 each fully paid 30,00,000
Less: Adjustment for premium on redemptionof (2.00)
Reserves & Surplus
preference shares
Add: Shares issued against ESOP at premium 10.00 8.00
Security Premium Account 6,00,000
Capital Redemption Reserve 50.00
Total 66.20
Revaluation Reserve 6,20,000 49,00,000
Loan Funds 42,00,000
10% Debentures 4.00
Less: Cancellation of own debentures (2.20)
You are required to compute by Debt Equity Ratio Test, the maximum number of shares that can
bebought back in the light of above information, when the offer price for buy-back is ₹ 30 per share.
Answer 32 (f) Maximum number of shares that can be 1,29,500 (by simultaneous
Debt Equity Ratio Test bought back @ ₹ 30 per share (shares in
equation)
crores) (See Note 2)
Particulars ₹
Working Note:
(a) Loan funds 42,00,000
Shareholders’ funds
(b) Minimum equity to be maintained after-
buy- back in the ratio of 2:1 (₹in crores) 21,00,000 Particulars ₹
(c) Present equity shareholders fund 72,80,000 Paid up capital 30,00,000
(₹in crores) Free reserves (32,50,000 +6,00,000+4,30,000) 42,80,000
(d) Future equity shareholder fund (₹ in 59,85,000 72,80,000
crores) (See Note 2) (72,80,000-12,95,000) As per section 68 of the Companies Act, 2013, amount transferred to CRR and maximum equity to be
bought back will be calculated by simultaneous equation method.
(e) Maximum permitted buy-back of Equity(₹in 38,85,000 (by simultaneous
Suppose amount equivalent to nominal value of bought back shares transferred to CRR account is ‘x’ and
crores) [(d) – (b)] (See Note 2) equation)
maximum permitted buy-back of equity is ‘y’.
Equation 1 : (Present equity – Nominal value of buy-back transfer to CRR) – Minimum equity to be main-
tained = Maximum permissible buy-back of equity.
Chapter 13
Chapter 13
Amalgamation of Companies
Amalgamation of Companies
Attempts MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV MAY NOV Question 1 (Illustration)
Cover-
2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023
age The following are the Balance Sheets of P Ltd. and Q Ltd. as at 31st March, 20X1:
Study
Q.32 TO Q.57 Particulars Notes ₹ P Ltd ₹ Q Ltd
Mat.
Q.23
1 Equity and Liabilities
Past Q.24 Shareholders’ funds
Q.17 Q.28 Q.1 NO NO Q.24 Q.26 Q.22 Q.25 Q.30 Q.12 NO
Exams
Q.29 A Share capital 1 8,00,000 4,00,000
Q.10 Q.14 Q.12 B Reserves and Surplus 3,00,000 2,00,000
Q.9 Q.11 Q.26 Q.12 Q.10 Q.15 Q.13 Q.11
MTP NO Q.10 Q.8 Q.10
Q.10 Q.27 Q.13 Q.11 Q.24
Q.28 Q.27 Q.30
Q.17 Q.16 A Long-term borrowings 2 2,00,000 1,50,000
RTP Q.19 Q.11 Q.9 Q.13 Q.18 Q.19 Q.20 Q.21 Q.1 NO
Q.30 Q.29 3 Current liabilities
Total 15,50,000 9,00,000
Assets
A Property, Plant and Equipment 7,00,000 2,50,000
B Non-current investments 80,000 80,000
2 Current assets
A Inventories 2,40,000 3,20,000
B Trade receivables 4,20,000 2,10,000
C Cash and Cash equivalents 1,10,000 40,000
Total 15,50,000 9,00,000
Notes to accounts
P Ltd. Q Ltd.
1 Share Capital
Equity shares of ₹ 10 each 6,00,000 3,00,000
10% Preference Shares of ₹ 100 each 2,00,000 1,00,000
8,00,000 4,00,000
12% Debentures 2,00,000 1,50,000
2,00,000 1,50,000
Details of Trade receivables and trade payables are as under:

(Declaration of equity dividend @ 10%)
P Ltd. (₹) Q Ltd. (₹) Equity Dividend Dr. 60,000
Trade receivables To Bank Account 60,000
Debtors 3,60,000 1,90,000 (Payment of equity dividend)
Bills Receivable 60,000 20,000 Business Purchase Account Dr. 4,90,000
4,20,000 2,10,000 To Liquidator of Q Ltd. 4,90,000
Trade payables (Consideration payable for the business taken overfrom Q Ltd.)
Sundry Creditors 2,20,000 1,25,000
Bills Payable 30,000 25,000 Property, Plant and Equipment (115% of ₹ 2,50,000) Dr. 2,87,500
2,50,000 1,50,000 Inventory (95% of ₹ 3,20,000) Dr. 3,04,000
Property, plant and equipment of both the companies are to be revalued at 15% above book Debtors Dr. 1,90,000
value. Both the companies are to pay 10% Equity dividend, but Preference dividend Bills Receivable Dr. 20,000
having beenalready paid. After the above transactions are given effect to, P Ltd. will Investment Dr. 80,000
absorb Q Ltd. on the following terms:
Cash at Bank Dr. 10,000
(i) 8 Equity Shares of ₹ 10 each will be issued by P Ltd. at par against 6 shares ofQ Ltd. (₹ 40,000 –₹ 30,000 dividend paid)
(ii) 10% Preference Shareholders of Q Ltd. will be paid at 10% discount by issue To Provision for Bad Debts (5% of ₹ 1,90,000) 9,500
of10%Preference Shares of ₹ 100 each at par in P Ltd. To Sundry Creditors 1,25,000
(iii) 12% Debenture holders of Q Ltd. are to be paid at 8% premium by 12%Deben-
tures in PLtd. issued at a discount of 10%. To 12% Debentures in Q Ltd. 1,62,000
(iv) ₹ 30,000 is to be paid by P Ltd. to Q Ltd. for Liquidation expenses. To Bills Payable 25,000
SundryCreditors of Q Ltd. include ₹ 10,000 due to P Ltd.
To Business Purchase Account 4,90,000
(v) Inventory in Trade and Debtors are taken over at 5% lesser than their book-
To Capital Reserve (Balancing figure) 80,000
value by PLtd.
(Incorporation of various assets and liabilities taken over from Q
Prepare:
Ltd. at agreed values and difference ofnet assets and purchase
consideration being credited to capital reserve)
(a) Journal entries in the books of P Ltd.
(b) Statement of consideration payable by P Ltd. (Old & New SM) (Same
conceptdifferent figures RTP May ’23, PYP 10 Marks May ’19) Liquidator of Q Ltd. Dr. 4,90,000
To Equity Share Capital 4,00,000
Answer 1
To 10% Preference Share Capital 90,000
(a) Journal Entries in the Books of P Ltd.
(Discharge of consideration for Q Ltd.’s business)
₹ Dr. Cr. 12% Debentures in Q Ltd. (₹ 1,50,000 × 108%) Dr. 1,62,000
₹ Discount on Issue of Debentures Dr. 18,000
Property, Plant and Equipment Dr. 1,05,000 To 12% Debentures 1,80,000
To Revaluation Reserve 1,05,000 (Allotment of 12% Debentures to debenture holdersof Q Ltd. at

a discount of 10%)
(Revaluation of PPE at 15% above book value)
Sundry Creditors of Q Ltd. Dr. 10,000
Reserve and Surplus Dr. 60,000
To Sundry Debtors of P Ltd. 10,000
To Equity Dividend 60,000
(Cancellation of mutual owing)
Notes to accounts
Goodwill Dr. 30,000
To Bank 30,000 1 Share Capital Rs. in (‘000)
(Being liquidation expenses reimbursed to Q Ltd.) Equity share capital
Capital Reserve Dr. 30,000 1,50,000 Equity Shares of Rs. 10 each 15,00
To Goodwill 30,000 7,500 14% Preference Shares of Rs. 100 each 7,50
(Being goodwill set off) 22,50
General reserve 9,00
Secured
15% Debentures 7,00
Question 2 Illustration 4 Property, plant and Equipment

Land and Building 32,50
Following is the balance sheet of A Ltd. as on 31st March, 20X1
5 Non-current investments
Particulars Notes Rs. (000)
Investments at cost 6,00
B Ltd agreed to take over the assets and liabilities on the following terms andconditions:
(a) Discharge 15% debentures at a premium of 10% by issuing 15% deben-
A Share capital 1 22,50 turesof XLtd.
B
Reserves and Surplus 2 9,00 (b) PPE at 10% above the book value and investments at par value.
2 Non-current liabilities (c) Current assets at a discount of 10% and Current liabilities at book value.
(d) Preference shareholders are discharged at a premium of 10% by issuing 15%prefer-
A Long-term borrowings 3 7,00
ence shares of Rs.100 each.
A
(e) Issue 3 equity shares of Rs . 10 each for every 2 equity shares in B Ltd. and paythe
Trade Payables 5,00 balance in cash. Calculate Purchase consideration. (New SM)
Total 43,50
Answer 2
A Assets
B Calculation of Purchase Consideration (Net Asset value Method)
Property, Plant and Equipment 4 32,50 PARTICULARS (Rs. in ‘000’s)
Non-current investments 5 6,00
a
b
c
2 Current assets
Inventories 2,00
Trade receivables 2,00
Cash and Cash equivalents 1,00
Total 43,50
Notes of accounts
Value of assets taken over:Property,
Plant and EquipmentNon-Current 35,75
Yes Ltd. No Ltd.
Investments Current Assets 6,00
1 Share Capital
4,50
Total Assets (A) Less: Lia- Equity share capital
46,25
bilities taken over: Authorized share capital 25 5
Issued and subscribed:
15% Debentures Current Lia- 7,70 Equity shares of ₹10 each fully paid 12 5
bilities Total Liabilities (B) 5,00
12,70 12 5
Purchase consideration (A -B) Mode
33,55 2 Long term borrowings
of Purchase Consideration In the form of
Unsecured loan from Yes Ltd. -- 10
15% Preference sharesIn the form of Equity
-- 10
shares 8,25
22,50
In the form of Cash (Balance) Gross value 70 30
2,80
Total Depreciation (50) (24)
33,55
20 6
Question 3 4 Non-current investments
30 lakhs equity shares of ₹10 each 3 --
The following are the Balance Sheets of Yes Ltd. and No Ltd. as at 31st March, 20X1:
Long term loan to No Ltd. 10 --
Particulars Notes ₹ Yes ₹ No
Ltd(in Ltd(in 13 --
crores) crores)
On that day Yes Ltd. absorbed No Ltd. The members of No Ltd. are to get oneequity share of Yes Ltd. is-
1 Equity and LiabilitiesShareholders’ sued at a premium of ₹ 2 per share for every five equity shares held by them in No Ltd. The necessary
approvals are obtained.You are asked to pass journal entries in the books of the two companies to
funds
giveeffect to the aboveif the amalgamation is in the nature of merger.(Old & New SM)
A Share capital 1 12 5
B Reserves and Surplus 88 10 Answer 3
2 Non-current liabilities Journal Entries in the books of No Ltd.
(Rupees in crores)
Long term borrowings 2 -- 10
Dr. Cr.
3 Current liabilities 33 15
Realization Account Dr. 64.00
To Property, plant and equipmentAccount
Total 133 40
30.00
Assets
To Current Assets Account 34.00
(Being the assets taken over by Yes Ltd. trans-
A Property, Plant and Equipment 3 20 6 ferred to
B Non-current investments 4 13 -- Provision for depreciation Account Dr. 24.00
2 Current assets 100 34
Current Liabilities Account Dr. 15.00
Total 133 40
Unsecured Loan from Yes Ltd. Account Dr. 10.00 Business Purchase Account Dr. 1.20
To Realization Account 49.00 To Liquidator of No Ltd. Account 1.20

Being the amount of purchase consideration
(Being the transfer of liabilities and provision agreed under
to
approved scheme of amalgamation- W.N. 1
Realization Account)
Yes Ltd. Property, plant and equipment Dr. 6.00
To Realization Account Current Assets Dr. 34.00
Dr. 1.2
To Current Liabilities 15.00
(Being the amount of consideration due from Yes
Ltd. credited To Unsecured Loan (from Yes Ltd.) 10.00
to Realization Account) 1.2 To Business Purchase Account 1.20
Equity Shareholders Account 13.80 To Reserve & Surplus A/c 10.00
Shareholders Account 13.80 To Profit & loss A/c* 3.80

Bing the assets and liability taken over and Dr. 1.20
To Realization Account the surplus transferred profit and loss ac-
count
(Being the loss on Realization transferred to equity Liquidator of No Ltd. Dr. 120
share -
To Equity Share Capital Account 100
Equity Share Capital Account Dr. 5.00 To Securities Premium Account 0.2
Reserves and Surplus Account Dr. 10.00 (Being the allotment to shareholders of No
To Equity Shareholders Account 15.00 Ltd. 10 lakhs equity shares of ₹10 each at a premi-
um of ₹2 per share)
(Being the amount of share capital, reserves and surplus
Unsecured Loan (from Yes Ltd.) Dr. 10.00
credited to equity shareholdersaccount)
To Loan to No. Ltd. 10.00
(Being the cancellation of unsecured loan given
Equity shares of Yes Ltd. 1.20 to No Ltd.)
To Yes Ltd. 1.20
(Being the receipt of 10 lakhs equity shares of

*As amalgamation in the nature of merger so balancing figure will be transferred to Profit &Loss ac-
₹10 each at ₹12 per share for allotment to shareholders countWorking Note:
Purchase Consideration Rs. In crores

Equity shareholders Account 1.20
To Equity shares of Yes Ltd. 1.20 50lakhs 1.20

X Rs. 12 i.e. , 10 lakhs equity Shares at Rs. 12 per share
Being the distribution of equity shares received from Yes
5
Ltd. to shareholders
Number of equity shares of ₹10 each to be issued [
Journal Entries in the books of Yes Ltd.(Rupees in crores) 1.20 crores 12
]= 10 lakhs Loan from X Ltd. -- 15,000

4 Non-current investments
Question 4
Loan to Y Ltd. 15,000 --
The following are the Balance Sheets of X Ltd. and Y Ltd :] 15,000 --
A new company XY Ltd. is formed to acquire the sundry assets and trade payablesof X Ltd. and Y Ltd.
Particulars Notes ₹ X Ltd. ₹ Y Ltd.
and for this purpose, the sundry assets of X Ltd. are revalued at ₹ 1,00,000. The debt due to X Ltd. is also
Equity and Liabilities to be discharged in shares of XY Ltd.Show the Ledger Accounts to close the books of X Ltd. (Old & New
1 SM)
Shareholders’ funds
Answer 4
A Share capital 1 1,00,000 50,000
Books of X Ltd.
B Reserves and Surplus 2 10,000 (10,000)
Realization Account
Rs. Rs.
A Long term borrowings 3 -- 15,000 To Sundry Assets 1,20,000 By Trade payables 25,000
By XY Ltd. (Purchase consideration) 75,000
By Shareholders (Loss on realization) 20,000
1,20,000 1,20,000
A Trade Payables 25,000 5,000
Total 135,000 60,000 XY Ltd.

Asset
₹ ₹
Non-current assets
To Realization Account 75,000 By Shares in XY Ltd. 75,000
1
Property, Plant and 1,20,000 60,000
A Equipment
Question 5
B Non-current investments 4 15,000 --
Super Express Ltd. and Fast Express Ltd. were in competing business. They decided to form a new com-
pany named Super Fast Express Ltd. The balance sheets of both the companies were as under:
135,000 60,000
Particulars Notes Super Ex- FastExpress
Notes to accounts pressLtd. Ltd.
₹ ₹
1 Share Capital X Ltd. Y Ltd.
1 Equity and Liabilities Shareholders’
Equity share capital 1,00,000 50,000
1,00,000 50,000 funds
2 Reserves and Surplus A Share capital 1 20,00,000 10,00,000
Profit and loss A/c 10,000 -- B Reserves and Surplus 2 1,00,000 1,00,000
Profit and loss A/c (debit balance) -- (10,000) 2 Non-current liabilities
10,000 (10,000) A Long term provisions 3 1,00,000
3 Long term borrowings 2 Current liabilities --
The assets and liabilities of both the companies were taken over by the new company at their book
A Trade Payables 60,000 40,000
values. The companies were allotted equity shares of ₹ 100 each in lieu of purchase consideration
Total 22,60,000 13,00,000 amounting to ₹ 30,000 (20,000 for Super- Fast Express Ltd and 10,000 for Fast Express Ltd.).Prepare
Assets opening balance sheet of Super Fast Express Ltd. considering pooling method. (Old & NewSM)
1 Non-current assets Answer 5

A Property Plant and Equipment 4 14,00,000 11,00,000
Balance Sheet of Super Fast Express Ltd
B Intangible assets 5 -- 1,00,000
2 Current assets Particulars Notes ₹
Inventories 3,00,000 40,000 Equity and Liabilities
Trade receivables 2,40,000 40,000 1 Shareholders’ funds
Cash and Cash equivalents 6 3,20,000 20,000 a Share capital 1 30,00,000
Notes to accounts
Super Express Fast Express 2 Non-current liabilities
Ltd. ₹ Ltd.₹ a Long-term provisions 3 1,00,000
1 Share Capital 3 Current liabilities
Equity shares of ₹100 each 20,00,000 10,00,000 a Trade Payables 1,00,000
2 Reserves and Surplus Total 35,60,000
Insurance reserve 1,00,000 -- Assets
Employee profit sharing reserve -- 60,000 1 Non-current assets
Reserve account -- 1,00,000 a Property, Plant and Equipment 4 25,00,000
Surplus -- 1,00,000 b Intangible assets 5 1,00,000
1,00,000 2,60,000 2 Current assets
3 Long term provisions Inventories 3,40,000
Provident fund 1,00,000 -- Trade receivables 2,80,000
Total 1,00,000 -- Cash and cash equivalents 6 3,40,000
4 Property, Plant and Equipment Total 35,60,000
Land and Building 10,00,000 6,00,000 Notes to Accounts
Plant and machinery 4,00,000 5,00,000 ₹
14,00,000 11,00,000 1 Share Capital
5 Intangible assets Equity share capital
Goodwill -- 1,00,000 Issued, subscribed and paid up
30,000 Equity shares of ₹100 each 30,00,000
-- 1,00,000
Total 30,00,000
6. Cash and Cash Equivalents
Cash at Bank 2,20,000 10,000
Reserve account 1,00,000
Cash in hand 1,00,000 10,000
Surplus 1,00,000
3,20,000 20,000
Insurance reserve 1,00,000
Employees profit sharing account 60,000 Assets

Total 3,60,000 1 Non-current assets
3 Long-term provisions A Property, Plant and 4 22,304 6,750
Provident fund 1,00,000 Equipment
Total 1,00,000 2 Current assets
4 Property, Plant and Equipment A Inventories 7,862 4,041
Buildings 16,00,000 B Trade receivables 2,120 1,100
Machinery 9,00,000 C Cash and Cash equivalents 1,114 609
Total 25,00,000 Total 33,400 12,500
Notes to accounts
5 Intangible assets
Goodwill 1,00,000 Rs. P Rs. V
Total 1,00,000 Ltd Ltd
6 Cash and cash equivalents (Rs. in- (Rs. in-

Lakhs) Lakhs)
Balances with banks 2,30,000
1 Share Capital 15,000 6,000
Cash on hand 1,10,000
Total 3,40,000 2 Reserves and Surplus
Securities premium 3,000 --
Question 6 Foreign project reserve -- 310
General reserve 9,500 3,200
The following were the Balance Sheets of P Ltd. and V Ltd. as at 31st March, 20X1:
Profit and loss account 2,870 825
Particulars Notes Rs. P Rs. V
15,370 4,335
Ltd(Rs.in Ltd(Rs.in
Lakhs) Lakhs) 3 Long term borrowings
Equity and Liabilities 12% debentures -- 1,000
1 Shareholders’ funds -- 1,000

4 Property, Plant and
A Share capital 1 15,000 6,000
Equipment
B Reserves and Surplus 2 15,370 4,335
Land and Building 6,000 --
Plant and machinery 14,000 5,000
Long term borrowings 3 -- 1,000
Furniture and fixtures 2,304 1,750
22,304 6,750
A Trade Payables 1,200 463
All the bills receivable held by V Ltd. were P Ltd.’s acceptances.On 1st April 20X1, P Ltd. took over V Ltd in an
B Short term provisions 1,830 702 amalgamation in the nature of merger. It was agreed that in discharge of consideration for the business P
Total 33,400 12,500 Ltd. would allot three fully paid equity shares of Rs . 10 each at par for every two shares held in V Ltd. It
was also agreed that 12% debenturesin V Ltd. would be converted into 13% debentures in P Ltd. of the same
amount and denomination.
Details of trade receivables and trade payables as under:
P Ltd. V Ltd.
(Rs. in lakhs) (Rs . in lakhs)
Trade payables To Liability for 12% Debentures 1,000
To Creditors 463
Bills Payable 120 - To Provisions 702
Trade Creditors 1,080 463
To Business Purchase 9,000
1,200 463
(Being assets & liabilities taken over from V Ltd.)
Trade receivables
Liquidator of V Ltd. A/c Dr. 9,000
Trade debtors 2,120 1,020
To Equity Share Capital A/c 9,000
Bills Receivable — 80
(Purchase consideration discharged in theform of equity shares)
2,120 1,100
Goodwill A/c Dr. 1
Expenses of amalgamation amounting to Rs. 1 lakh were borne by P Ltd.
To Bank A/c 1
You are required to: (i) pass journal entries in the books of P Ltd. and (ii) prepare P Ltd.’s (Liquidation expenses paid by P Ltd debited to Goodwill A/c)
Balance Sheet immediately after the merger. (New SM)

Profit and loss A/c Dr. 1
To Goodwill A/c 1
Answer 6 (being the Goodwill charged to Profit and loss

Books of P Ltd. account)
Journal Entries Liability for 12% Debentures A/c Dr. 1,000
Dr. Cr.
To 13% Debentures A/c 1,000
(Rs. in Lacs) (Rs. in Lacs)
(12% debentures discharged by issue of13% debentures)
Business Purchase A/c Dr. 9,000
Bills Payable A/c Dr. 80
To Liquidator of V Ltd 9,000
To Bills Receivable A/c 80
(Being business of V Ltd. taken over for Con-
sideration settled as per agreement) (Cancellation of mutual owing on account of bills)
Balance Sheet of P Ltd. as at 1st April, 20X1 (after merger)
Plant and Machinery Dr. 5,000
Furniture & Fittings Dr. 1750 A Long-term borrowings 3 1,000
Inventory Dr. 4,041 3 Current liabilities
Debtors Dr. 1,020 A Trade Payables (1,543 + 40) 1,583
Cash at Bank Dr. 609 B Short-term provisions 2,532
Bills Receivable Dr. 80 Total 45,819
Assets
To Foreign Project Reserve 310
A Property, Plant and Equipment 4 29,054
To General Reserve (3,200 - 3,000) 200
2 Current assets
To Profit and Loss A/c (825 ) 825
A Inventories 11,903
Working Note:
B Trade receivables 3,140
Computation of purchase consideration
C Cash and cash equivalents 1,722
Total 45,819 The purchase consideration was discharged in the form of three equityshares of Ltd. for every two equity
shares held in V Ltd.
Notes to accounts
3 Purchase consideration = Rs.6,000 lacs × 2 = Rs.9,000 lacs.
Rs.
1. Share Capital Question 7
Sun and Neptune had been carrying on business independently. They agreed to amalgamate and
Authorized, issued, subscribed and paid up form a new company Jupiter Ltd. with an authorised share capital of Rs . 4,00,000 divided into 80,000
24 crores equity shares of Rs.10 each 24,000 equity shares of Rs. 5 each. On 31st March, 20X3 the respective information of Sun and Neptune were as
follows:
(Of the above shares, 9 crores shares have been issued for
consideration other than cash) Sun ( Rs.) Neptune ( Rs.)
Total 24,000 Share capital 3,65,000 3,52,500

2. Reserves and Surplus Current liabilities 5,97,000 1,80,250
Securities Premium 3,000
Current assets 3,27,000 1,67,750
Foreign Project Reserve 310
(a) Revalued figures of non-current and Current assets were as follows:
Total 16,704
Sun ( Rs.) Neptune ( Rs.)
Secured
13% Debentures 1,000 The debtors and creditors include Rs. 43,350 owed by Sun to Neptune.
4. Property, Plant and Equipment The purchase consideration is satisfied by issue of the following sharesand debentures.
Land & Buildings 6,000
(i) 60,000 equity shares of Jupiter Ltd. to Sun and Neptune in the proportion to the profit-
Plant & Machinery 19,000 ability of their respective business based on the average net profit during the lastthree
years which were as follows:
Total 29,054 Sun ( Rs.) Neptune ( Rs.)
20X1 Profit 4,49,576 2,73,900
20X2 (Loss)/Profit (2,500) 3,42,100

20X3 Profit 3,77,924 3,59,000
15% debenture in Jupiter Ltd. at par to provide an income equivalent to 8% return business as on capital
employed in their respective business as on 31st March, 20X3 after revaluation of assets.
(1) Compute the amount of debentures and shares to be issued to Sun and Neptune.
(2) A Balance sheet of Jupiter Ltd. showing the position immediately after amalgamation.
(New SM) I. Equity and Liabilities

Answer 7 (1) Shareholders’ Funds
1) Computation of Amount of Debentures and Shares to be issued: Sun Neptune (a) Share Capital 1 3,00,000
(i) Average Net Profit (b) Reserves and Surplus 2 64,000
Rs. (4,49,576-2,500+3,77,924)/3 = 2,75,000 (2) Non-Current Liabilities

(a) Long-term borrowings 3 4,16,000
Rs. (2,73,900+,3,42,100+3,59,000)/3 = 3,25,000
Equity Shares Issued (3) Current Liabilities
Ratio of distribution Sun: (a) Other current liabilities 7,33,900
Neptune 275 325 Total 15,13,900

(a) Number Sun: 27,500 II. Assets
Neptune: 32,500 (1) Non-current assets
60,000 (a) PPE 11,00,000
(b) Amount (2) Current assets
27,500 shares of Rs . 5 each = 1,37,500
(a) Other current assets 4,13,900
32,500 shares of Rs . 5 each = 1,62,500
Total 15,13,900
Notes to Accounts
(iii) Capital Employed (after revaluation of assets) Rs. Rs. Rs.
Property, plant and equipment 7,10,000 3,90,000 1 Share Capital
Current Assets 2,99,500 1,57,750 Authorized
10,09,500 5,47,750 80,000 Equity Shares of Rs.5 each 4,00,000
Less: Current Liabilities (5,97,000) (1,80,250) Issued and Subscribed
4,12,500 3,67,500 60,000 Equity Shares of Rs.5 each 3,00,000
(iv) Debentures Issued (all the above shares are allotted as fully paid-up pursuant to a
contract without payment being received in cash)
8% Return on capital employed 33,000 29,400
15% Debentures to be issued to provide equivalent income:
Capital Reserve 64,000
Secured Loans
Working Notes:
Rs. Sun Neptune Total
(2) Balance Sheet of Jupiter Ltd. Rs. Rs.

As at 31st March 20X3 (after amalgamation) (1) Purchase Consideration
Particulars Note No Rs. Equity Shares Issued 1,37,500 1,62,500 3,00,000
15% Debentures Issued 2,20,000 1,96,000 4,16,000 Rs. Rs.

3,57,500 3,58,500 7,16,000 Sundry assets
75 112
(2) Capital Reserve 18,00,000 × × =
100 100 15,12,000
(a) Net Assets taken over
75 112
18,00,000 × × = 4,14,000 19,26,000
Property, plant & equipment 7,10,000 3,90,000 11,00,000
100 100
Current Assets 2,99,500 1,14,400* 4,13,900
Less: Liabilities:
10,09,500 5,04,400 15,13,900
Less: Current Liabilities (5,53,650**) (1,80,250) (7,33,900)
4,55,850 3,24,150 7,80,000 Bank overdraft 50,000
(b) Purchase Consideration 3,57,500 3,58,500 7,16,000 Unrecorded liability 25,000 (4,15,000)
(c) Capital Reserve [(a) - (b)] 98,350 Purchase consideration 15,11,000
(d) Goodwill [(b) - (a)] 34,350

Question 9
(e) Capital Reserve 64,000
[Final Figure(c) -(d)] P Ltd. and Q Ltd. decided to amalgamate as on 01.04.2016 Their summarized Balance Sheets as
on31.03.2016 were as follows:
*1,57,750–43,350= 1,14,400
(Rs.in ‘000)
** 5,97,000–43,350= 5,53,650
Particulars P Ltd. Q Ltd.
Question 8 Source of Funds:
Equity share capital (Rs.10 each) 300 280
The following is the summarized Balance Sheet of ‘A’ Ltd. as on 31.3.2019:
9% preference share Capital ( Rs.100 each) 60 40
Liabilities Rs. Assets Rs.
Investment allowance Reserve 70 60
14,000 Equity shares of Rs. 100 each, fully 14,00,000 Sundry as- 18,00,000
paid-up sets Profit and Loss Account 8 12
General reserve 10,000 10 % Debentures 100 60
10% Debentures 2,00,000 Trade Payables 50 30
Trade payables 1,40,000 Tax provision 14 8
Bank overdraft 50,000 Total 602 490

Application of Funds:
18,00,000 18,00,000 Building 120 100
B Ltd. agreed to take over the business of ‘A’ Ltd. Calculate purchase consideration under Net Assets
Investments 80 50
method on the basis: Market value of 75% of the sundry assets is estimated to be 12% more than the
book value and that of the remaining 25% at 8% less than the book value. The liabilities are taken Trade receivables 90 70
over at book values. There is an unrecorded liability of Rs. 25,000. (MTP 5 Marks Oct 19)
Inventories 72 80
Answer 8
Cash and Bank 80 50
Calculation of Purchase Consideration under Net Assets Method Total 602 490
From the following information, you are required to prepare the Balance Sheet as on 01.04.2016 of a new Note to accounts
company, R Ltd., which was formed to take over the business of both the companies and took overall
the assets and liabilities:50 % Debenture are to be converted into Equity Shares of the New Rs. in’000
Company. 1. Share Capital
(i) Investments are non - current in nature. Equity share capital
(ii) Fixed Assets of P Ltd. were valued at 10% above cost and that of Q Ltd. at 5% above cost. 55,598 Equity shares of Rs.10 each, fully paid up (W.N.2) 5,55,980
(iii) 10 % of trade receivables were doubtful for both the companies. Inventories to be car- Preference share capital
ried at cost.
9% Preference share capital (Share of Rs.100 each) (W.N.2) 1,00,000
(iv) Preference shareholders were discharged by issuing equal number of 9% 6,55,980
preference shares at par.
Equity shareholders of both the transferor companies are to be discharged by issuing Equity
sharesof Rs.10 each of the new company at a premium of Rs. 5 per share.
Securities premium (W.N.2) 2,77,990
Give your Answer on the basis that amalgamation is in the nature of purchase. (MTP 15 Marks Investment allowance reserve 1,30,000
Oct’18, RTP May 19)
(Rs.70,000+ Rs.60,000)
Answer 9 Amalgamation adjustment reserve (1,30,000)
M/s R Ltd. Balance Sheet as at 1.4.2016 2,77,990
Particulars Notes Rs. in’000 Secured
Equity and Liabilities 10% Debentures (50% of Rs.1,60,000) 80,000
1 Shareholders’ funds 4. Trade Payables (Rs.50,000+ Rs.30,000) 80,000
a Share capital 1 6,55,980 5. Short term provisions
b Reserves and Surplus 2 2,77,990 Provision for tax (Rs.14,000+ Rs.8,000) 22,000
2 Non-current liabilities 6. Tangible assets
a Long-term borrowings 3 80,000 Building (Rs.1,32,000+Rs.1,05,000) 2,37,000
3 Current liabilities Plant and machinery (Rs.1,76,000+Rs.1,47,000) 3,23,000
a Trade Payables 4 80,000 5,60,000
b Short term provision 5 22,000 7. Non – current Investments (Rs.80,000+ Rs.50,000) 1,30,000
Total 11,15,970 8. Inventory
Assets Stock (Rs. 72,000+ Rs. 80,000) 1,52,000
1 Non-current assets 9. Trade receivables
a Fixed assets Trade receivables (90% of (Rs.90,000+ Rs.70,000) 1,44,000
Tangible assets 6 5,60,000 10. Cash and cash equivalents
b Non-current investments 7 1,30,000 Cash and Bank (Rs. 80,000+ Rs. 50,000 – Rs. 30) 1,29,970
2 Current assets
a Inventory 8 1,52,000 Working Notes:
b Trade receivables 9 1,44,000 1. Calculation of value of equity shares issued to transferor companies
c Cash and cash equivalents 10 1,29,970
P Ltd. (Rs.) Q Ltd. (Rs.)
Total 11,15,970
Assets taken over:
Building 1,32,000 1,05,000 Robert Diamond

Ltd.(Rs. in
Plant and machinery 1,76,000 1,47,000 Ltd. (Rs. in
lakhs)
lakhs)
Investments 80,000 50,000
Equity Share Capital (Fully paid shares of Rs. 10 each) 22,500 9,000
Inventories 72,000 80,000
Securities Premium 4,500 -
Trade receivables 81,000 63,000
Foreign Project Reserve - 465
Cash & Bank 80,000 50,000
General Reserve 14,250 4,800
6,21,000 4,95,000
Less: Liabilities: Profit and Loss Account 4,305 1,162.5
10% Debentures 1,00,000 60,000 12% Debentures - 1,500
Trade payables 50,000 30,000 Trade payables 1,800 694.5
Tax Provision 14,000 1,64,000 8,000 98,000 Provisions 2,745 1,053
4,57,000 3,97,000 Land and Buildings 9,000 -
Less: Preference Share Capital 60,000 40,000 Plant and Machinery 21,000 7,500
3,97,000 3,57,000 Furniture, Fixtures and Fittings 3,456 2,550

Number of shares issued to equity shareholders, debenture holders and preferenceshareholders Inventory 11,793 6,061.5
P Ltd. Q Ltd. Total Trade receivables 3,180 1,650
Equity shares issued @ Rs.15 Cash at Bank 1,671 913.5

per All the bills receivable held by Diamond Ltd. were Robert Ltd.’s acceptances.
On 1st April 2020, Robert Ltd. took over Diamond Ltd. in an amalgamation in the nature of merger. It
share (including Rs.5 premi-
was agreed that in discharge of consideration for the business, Robert Ltd. would allot three fully paid
um)
equity shares of Rs. 10 each at par for every two shares held in Diamond Ltd. It was also agreed that 12%
Rs.3,97,000/15 26,466 debentures in Diamond Ltd. would be converted into 13% debentures in Robert Ltd. of the same amount
shares and denomination.
Rs.3,57,000/15 23,800 shares 50,266 shares Details of trade receivables and trade payables are as under:
Equity share capital @ Rs.10 Rs.2,64,660 Rs.2,38,000 Rs.5,02,660
Particulars Robert Ltd. Diamond Ltd.
Securities premium @ Rs.5 Rs.1,32,330 Rs.1,19,000 Rs.2,51,330
(Rs. in lakhs)
Rs.3,96,990 Rs.3,57,000 Rs.7,53,990
Trade Payables:
50% of Debentures are converted into equity shares @ Rs. 15 per share
Creditors 1,620 694.5
1,00,000/2 = 50,000/15 3,332 shares
Bills Payable 180 -
60,000/2 = 30,000/15 2,000 shares 5,332 shares
1,800 694.5
Equity share capital @ Rs.10 Rs.33,320 Rs.20,000 Rs.53,320 Trade receivables:
Security premium@ Rs.5 Rs.16,660 Rs.10,000 Rs.26,660 Debtors 3,180 1,530
Rs.49,980 Rs.30,000 Rs. 79,980
Bills Receivables - 120
9% Preference share capi- Rs.60,000 Rs.40,000 Rs.1,00,000 3,180 1,650
tal issued Expenses of amalgamation amounting to Rs. 1.5 lakhs were borne by Robert Ltd. You are required to:
(i) Pass journal entries in the books of Robert Ltd. and

Question 10
Prepare Robert Ltd.’s Balance Sheet immediately after the merger. (MTP 16 Marks Apr’22, MTP 20 Marks
March 21 & May ‘20)( Same concept different figures MTP 20 Marks Apr’19, MTP 15 Marks Aug18, Old &
Robert Ltd. and Diamond Ltd. give the following information as at 31.03.2020:
New SM)
Answer 10 Equity and Liabilities

Books of Robert Ltd. Journal Entries 1 Shareholders’ funds
(Rs. in Lacs) (Rs. in Lacs) A Share capital 1 36,000
Business Purchase A/c Dr. 13,500 B Reserves and Surplus 2 24,981
To Liquidator of Diamond Ltd. 13,500 2 Non-current liabilities
(Being business of Diamond Ltd. taken over for

consideration settled as per agreement) A Long-term borrowings 3 1,500
Plant and Machinery Dr. 7,500 3 Current liabilities
Furniture & Fittings Dr. 2,550 A Trade Payables (1,800+694.5-120) 2,374.5
Inventory Dr. 6,061.5 B Short-term provisions (2,745+1,053) 3,798
Debtors Dr. 1,530 Total 68,653.5
Cash at Bank Dr. 913.5 Assets
Bills Receivable Dr. 120 1 Non-current assets
To Foreign Project Reserve 465 A Property, Plant & Equipment 4 43,506
To General Reserve Rs. (4,800 - 4,500) 300 2 Current assets
To Profit and Loss A/c 1,162.5 A Inventories (11,793+6,061.5) 17,854.5
To Liability for 12% Debentures 1,500 B Trade receivables (3,180+1,650-120) 4,710
To Creditors 694.5 C Cash and cash equivalents (1,671+913.5-1.5) 2,583
To Provisions 1,053 Total 68,653.5
To Business Purchase A/c 13,500

(Being assets & liabilities taken over from Diamond Ltd.)
Liquidator of Diamond Ltd. A/c Dr. 13,500
To Equity Share Capital A/c 13,500
(Purchase consideration discharged in the form of equi-
ty shares)
Profit & Loss A/c Dr. 1.5
To Bank A/c 1.5
(Liquidation expenses paid and charged to P& L A/c)
Liability for 12% Debentures A/c Dr. 1,500
To 13% Debentures A/c 1500
(12% debentures discharged by issue of 13% debentures)
Bills Payable A/c Dr. 120
To Bills Receivable A/c 120
(Cancellation of mutual owing on account of bills)
Balance Sheet of Robert Ltd. as at 1st April, 2020 (after merger)
Particulars Notes Rs. (in lakhs)
Notes to Accounts Equity Shares of Rs. 10 each 28,00,000 8,40,000

Rs. 8% Preference Shares of Rs. 100 each 2,80,000 –
1. Share Capital 10% Preference Shares of Rs. 100 each – 2,80,000
Equity share capital General Reserve 1,96,000 1,96,000
Authorized, issued, subscribed and paid-up: 36 crores equity shares Retirement Gratuity fund 1,40,000 56,000
of Rs. 10 each (out of these shares, 13.5 crores shares have been is- Trade payables 3,64,000 2,24,000
sued for consideration other than cash) 36,000
(a) Beta Ltd. is absorbed by Alex Ltd. on the following terms:10% Preference Share-
holders are to be paid at 10% premium by issue of 8% Preference Shares of
General Reserve 14,550 Alex Ltd.
Securities Premium 4,500 (b) Goodwill of Beta Ltd. is valued at Rs. 1,40,000, Buildings are valued at Rs.
Foreign Project Reserve 465 4,20,000 and theMachinery at Rs. 4,48,000.
Profit and Loss Account Rs. (4,305 +1,162.5-1.5) 5,466 (c) Inventory to be taken over at 10% less value and Provision for Doubtful
Debts to be created @7.5%.
Total 24,981
(i) Equity Shareholders of Beta Ltd. will be issued Equity Shares of Alex Ltd. @ 5%
3. Long-term borrowings premium. You arerequired to:
Secured (ii) Prepare necessary Ledger Accounts to close the books of Beta Ltd.
13% Debentures 1,500
(iii) Show the acquisition entries in the books of Alex Ltd.
4. PPE
Also draft the Balance Sheet after absorption as at 31st March, 2020. (MTP 16 Marks Oct 20,Mar 22 &
Land & Buildings 9,000 Oct ‘23, RTP Nov 18) (Same concept different figures Old & New SM)
Plant & Machinery 28,500
Answer 11
In the Books of Beta Ltd. Realization Account
Total 43,506
Working Note: Rs. Rs.
Computation of purchase consideration To Sundry Assets 15,96,000 By Retirement Gratuity Fund 56,000
Purchase consideration was discharged in the form of three equity shares of Robert Ltd. for every two To Preference Shareholders By Trade payables 2,24,000
equity shares held in Diamond Ltd. 28,000
(Premium on (Purchase Con-
Purchase consideration = Rs. 9,000 lacs × 3/2 = Rs. 13,500 lacs Redemption) sideration)
To Equity Shareholders By Alex Ltd. 14,84,000
Question 11
(Profit on Realisation) 1,40,000
Two companies named Alex Ltd. and Beta Ltd. provide you the following summary of ledgerbalances 17,64,000 17,64,000
as on 31st March, 2020: Equity Shareholders Account
Alex Ltd. (Rs.) Beta Ltd. (Rs.) Rs. Rs.

Goodwill 1,40,000 70,000 To Equity Shares of Alex Ltd. 11,76,000 By Share Capital 8,40,000
Building 8,40,000 2,80,000 By General Reserve 1,96,000
By Realisation Account
Machinery 14,00,000 4,20,000
(Profit on Realisation)
Inventory 7,00,000 4,90,000
1,40,000
Trade receivables 5,60,000 2,80,000
11,76,000 11,76,000
Cash at Bank 1,40,000 56,000 Preference Shareholders Account
Rs. Rs. Equity and Liabilities

To 8% Preference 3,08,000 By Preference Share Capital 2,80,000 1 Shareholders’ funds
A Share capital 1 45,08,000
Shares of AlexLtd. By Realisation Account (Premium on 28,000
B Reserves and Surplus 2 2,52,000
Redemption of Preference Shares)
3,08,000 3,08,000
A Long-term provisions 1,96,000
Alex Ltd. Account
A Trade Payables 5,88,000
Rs. Rs.
B Short term provision 21,000
To Realisation 14,84,000 By 8% Preference Shares 3,08,000
Account Total 55,65,000
By Equity Shares 11,76,000
Assets
14,84,000 14,84,000
In the Books of Alex Ltd. Journal Entries
A Property, Plant and Equipment (PPE) 3 31,08,000
Dr. Cr.
B Intangible assets 2,80,000
Rs. Rs.
2 Current assets
Business Purchase A/c Dr. 14,84,000
A Inventories 11,41,000
To Liquidators of Beta Ltd. Account 14,84,000
B Trade receivables 8,40,000
(Being business of Beta Ltd. taken over)
C Cash and cash equivalents 1,96,000
Goodwill Account Dr. 1,40,000
Total 55,65,000
Building Account Dr. 4,20,000
Machinery Account Dr. 4,48,000
Inventory Account Dr. 4,41,000
Trade receivables Account Dr. 2,80,000
Bank Account Dr. 56,000
To Retirement Gratuity Fund Account 56,000
To Trade payables Account 2,24,000
To Provision for Doubtful Debts Account 21,000
To Business Purchase A/c 14,84,000
(Being Assets and Liabilities taken over as per agreed
valuation).
Liquidators of Beta Ltd. A/c Dr. 14,84,000
To 8% Preference Share Capital A/c 3,08,000
To Equity Share Capital A/c 11,20,000
To Securities Premium A/c 56,000
(Being Purchase Consideration satisfied as above).
Balance Sheet of Alex Ltd. (after absorption) as at 31st March, 2020
Notes to accounts:
Total 14,84,000
Rs.
1 Share Capital
Question 12
3,92,000 Equity Shares of Rs. 10 each fully paid (Out of above 1,12,000 39,20,000
Equity Shares were issued in consideration other than for cash) Sun and Neptune (both companies) had been carrying on business independently. They agreed to
amalgamate and form a new company Jupiter Ltd. with an authorised share capital of Rs. 4,00,000 di-
Preference share capital vided into 80,000 equity shares of Rs. 5 each. On 31st March, 2021 Sun and Neptune provide the following
information:
5,880 8% Preference Shares of Rs. 100 each (Out of above 3,080 Prefer- 5,88,000
ence Shares were issued in consideration other than for cash) Sun (Rs.) Neptune (Rs.)
Total 45,08,000 Property, Plant & Equipment 6,35,000 3,65,000
2 Reserves and Surplus Current Assets 3,27,000 1,67,750
Securities Premium 56,000 9,62,000 5,32,750
General Reserve 1,96,000 Less: Current Liabilities (5,97,000) (1,80,250)
Total 2,52,000 Representing Capital 3,65,000 3,52,500
3 PPE Additional Information:
Buildings 12,60,000 (a) Revalued figures of Property, Plant & Equipment and Current assets were as follows:
Machinery 18,48,000
Sun (Rs.) Neptune (Rs.)
Total 31,08,000
Property, Plant & Equipment 7,10,000 3,90,000
Working Notes:
Purchase Consideration: Rs.
Goodwill 1,40,000 The debtors and creditors include Rs. 43,350 owed by Sun to Neptune.
Building 4,20,000 The purchase consideration is satisfied by issue of the following shares and debentures.
Machinery 4,48,000 (i) 60,000 equity shares of Jupiter Ltd. to Sun and Neptune in the proportion to the profitabil-
Inventory 4,41,000 ityof their respective business based on the average net profit during the last three years
which were as follows:
Sun (Rs.) Neptune (Rs.)
Cash at Bank 56,000
2019 Profit 4,49,576 2,73,900
Less: Liabilities:
2020 (Loss)/Profit (2,500) 3,42,100
Retirement Gratuity (56,000)
2021 Profit 3,77,924 3,59,000
Trade payables (2,24,000)
Net Assets/ Purchase Consideration 14,84,000
To be satisfied as under:
Preference Shareholders of Beta Ltd. 2,80,000 (ii) 15% debentures in Jupiter Ltd. at par to provide an income equivalent to 8% return business
as on capital employed in their respective business as on 31 st March, 2021 after revaluation
Add: 10% Premium 28,000 of assets.
Satisfied by issue of 3,080 no. of 8% Preference Shares of Alex Ltd. 3,08,000
You are required to :
Equity Shareholders of Beta Ltd. to be satisfied by issue of 1,12,000Equity
Shares of Alex Ltd. at 5% Premium 11,76,000 (1) Compute the amount of debentures and shares to be issued to Sun and Neptune.
(2) A Balance sheet of Jupiter Ltd. showing the position immediately after amalgamation.
(MTP 16 Marks Oct ’21 & April ’23, Old & New SM)(PYP 20 Marks May ’23) Particulars Note No Rs.
Answer 12 I. Equity and Liabilities
(1) Computation of Amount of Debentures and Shares to be issued: (1) Shareholders’ Funds
(i) Average Net Profit (a) Share Capital 1 3,00,000
Rs. (4,49,576-2,500+3,77,924)/3 = 2,75,000 (b) Reserves and Surplus 2 64,000

(2) Non-Current Liabilities
Rs. (2,73,900+,3,42,100+3,59,000)/3
= 3,25,000
Equity Shares Issued (a) Long-term borrowings 3 4,16,000
a. Ratio of distribution (3) Current Liabilities

(a) Other current liabilities 7,33,900
Sun : Neptune
Total 15,13,900
275 : 325
II. Assets
Number (1) Non-current assets

(a) Property, Plant & Equipment 11,00,000
Sun : 27,500
(2) Current assets
Neptune : 32,500
(a) Other current assets 4,13,900
60,000
Total 15,13,900
Amount
Notes to Accounts
Sun Neptune
Rs.
Rs. Rs.
1 Share Capital
27,500 shares of Rs. 5 each 1,37,500
32,500 shares of Rs. 5 each 1,62,500 Authorized
(iii) Capital Employed (after revaluation ofassets) Rs. Rs. 80,000 Equity Shares of Rs. 5 each 4,00,000
Issued and Subscribed

Property, Plant & Equipment 7,10,000 3,90,000
(all the above shares are allotted as fully paid-up pursuant to a
10,09,500 5,47,750 contract without payment being received in cash)
Less: Current Liabilities -5,97,000 -1,80,250 2 Reserve and Surplus
4,12,500 3,67,500 Capital Reserve 64,000
(iv) Debentures Issued 3 Long-term borrowings
8% Return on capital employed 33,000 29,400 Secured Loans
15% Debentures to be issued to provide equiva- 15% Debentures 4,16,000
lent income:
Working Notes:
Sun: 33,000 × 100/15 2,20,000
Rs. Sun Neptune Total
Neptune: 29,400 × 100/15 1,96,000
Rs. Rs.
Balance Sheet of Jupiter Ltd. As at 31st March 2021 (after amalgamation) (1) Purchase Consideration
Equity Shares Issued 1,37,500 1,62,500 3,00,000
15% Debentures Issued 2,20,000 1,96,000 4,16,000 reserve.
3,57,500 3,58,500 7,16,000 (2) B Ltd. is to take over trade payables at book value.
(2) Capital Reserve (3) The purchase consideration is to be paid in cash to the extent of Rs. 6,00,000 and the bal-
ance in fully paid equity shares of Rs. 100 each at Rs. 125 per share.
(a) Net Assets taken over
The average profit is Rs. 1,24,400. The liquidation expenses amounted to Rs. 16,000. B Ltd.
Property, Plant & Equipment 7,10,000 3,90,000 11,00,000
sold prior to 31st March, 2021 goods costing Rs. 1,20,000 to A Ltd. for Rs. 1,60,000. Rs. 1,00,000
Current Assets 2,99,500 1,14,400* 4,13,900 worth of goodsare still in Inventory of A Ltd. on 31st March, 2021. Trade payables of A Ltd. in-
clude Rs. 40,000 still due to B Ltd. Show the Realisation A/c, Bank A/c, B Ltd. A/c and Equity
10,09,500 5,04,400 15,13,900
shareholders A/c to close the books of A Ltd. and prepare the Balance Sheet of B Ltd. as at
Less: Current Liabilities (5,53,650**) (1,80,250) (7,33,900) 1st April, 2021 after the takeover from the available information. (MTP 16 Marks Nov ’21 &
4,55,850 3,24,150 7,80,000 March ’23, RTP Nov’19)
(b) Purchase Consideration 3,57,500 3,58,500 7,16,000

Answer 13
(c) Capital Reserve [(a) - (b)] 98,350
Books of A Limited Realization Account
(d) Goodwill [(b) - (a)] 34,350
(e) Capital Reserve [Fi- 64,000
Rs. Rs.
nal Figure(c) -(d)]
To Building 3,40,000 By Trade payables 3,20,000
*1,57,750–43,350= 1,14,400
To Machinery 6,40,000 By B Ltd. 12,10,000
** 5,97,000–43,350= 5,53,650
To Inventory 2,20,000 By Equity Shareholders (Loss) 76,000
To Trade receivables 2,60,000
Question 13 To Patent 1,30,000

To Bank (Exp.) 16,000
A Ltd. gives the following information on 31st March, 2022:
16,06,000 16,06,000
Rs. Bank Account
8,000 Equity shares of Rs. 100 each 8,00,000
To Balance b/d 1,36,000 By Realization (Exp 16,000
To B Ltd. By 10% Debentures 4,00,000
Loans 1,60,000
By Loans 1,60,000
By Equity shareholders 1,60,000
7,36,000 7,36,000
Building 3,40,000
B Ltd. Account
Machinery 6,40,000
Bank 6,00,000
Inventory 2,20,000 To Realisation A/c 12,10,000 By
Trade receivables 2,60,000 Equity share in B Ltd.
Bank 1,36,000 (4,880 shares at Rs. 6,10,000
125
Patent 1,30,000 By
each
Profit & Loss account (Dr. balance) 34,000
12,10,000 12,10,000
B Ltd. agreed to absorb A Ltd. on the following terms and conditions:
Equity Share Holders Account
(1) B Ltd. would take over all assets, except bank balance and Patent at their book values
less 10%. Goodwill is to be valued at 4 year’s purchase of super profits, assuming that To 76,000 8,00,000
the normal rate of return be 8% on the combined amount of share capital and general Realization Account By Equity share capital
To 34,000 Profit and loss account …..

Realization Account By General reserve 80,000 Less: Unrealized profit (15,000) (15,000)
To 6,10,000 Total 1,07,000
Equity shares in B Ltd
3 Trade payables
To Bank 1,60,000
8,80,000 8,80,000
Less: Inter-company transaction cancelled
upon amalgamation (40,000) 2,80,000
B Ltd Balance Sheet as on 1st April, 2021 (An extract)1
Particulars Notes Rs. Buildings 3,06,000
Equity and Liabilities Machinery 5,76,000
1 Shareholders’ funds Total 8,82,000
a Share capital 1 4,88,000 5 Intangible assets
Pa Goodwill 2,16,000
6 Inventories
Less: Cancellation of profit upon amalgamation (15,000) 1,83,000
a Trade Payables 3 2,80,000
7 Trade receivables
b Bank overdraft 6,00,000
Total 14,75,000
Less: Intercompany transaction cancelled (40,000) 1,94,000
Assets
upon amalgamation
1 Non-current assets Working Notes:
Property, Plant and Equipment 4 8,82,000
1. Valuation of Goodwill Rs.
Intangible assets 5 2,16,000
Average profit 1,24,400
2 Current assets
a Inventories 6 1,83,000 Less: 8% of Rs. 8,80,000 (70,400)
b Trade receivables 7 1,94,000 Super profit 54,000
14,75,000 Value of Goodwill = 54,000 x 4 2,16,000
1
In the absence of the particulars of assets and liabilities (other than those of A Ltd.), the complete Bal- 2. Net Assets for purchase consideration
ance Sheet of B Ltd. after takeover cannot be prepared.Notes to Accounts Goodwill as valued in W.N.1 2,16,000
Rs. Building 3,06,000
1 Share Capital Machinery 5,76,000
Equity share capital Inventory 1,98,000
4,880 Equity shares of Rs. 100 each (Shares have been is- 4,88,000 Trade receivables 2,34,000
sued for consideration other than cash) Total Assets 15,30,000
Total 4,88,000 Less: Trade payables (3,20,000)
2 Reserves and Surplus (an extract) Net Assets 12,10,000
Securities Premium 1,22,000 Out of this Rs. 6,00,000 is to be paid in cash and remaining i.e., (12,10,000 – 6,00,000)Rs. 6,10,000 in shares of
Rs. 125. Thus, the number of shares to be allotted 6,10,000/125 = 4,880 shares.
3. Unrealized Profit on Inventory Rs. Black Ltd. White Ltd.

The Inventory of A Ltd. includes goods worth Rs. 1,00,000 which was sold by B Ltd. (₹) (₹)
on profit. Unrealized profit on this Inventory will be
Land and Buildings 5,20,000 10,40,000
40,000 / 1,60,000 X 10,000 25,000 Inventory 1,80,000 1,25,000
As B Ltd. purchased assets of A Ltd. at a price 10% less than the book value, 10%
need to be adjusted from the Inventory i.e., 10% of Rs. 1,00,000. (10,000) The purchase consideration is to be discharged as under:
Amount of unrealized profit 15,000
(a) Issue 1,80,000 equity shares of ₹ 25 each fully paid up in proportion of their profitability in
the preceding two financial years.
Question 14
Black Limited and White Limited have been carrying their business independently from 01/04/2022. (b) Preference shareholders of two companies are issued equivalent number of 12% preference
Because of synergy in business, they amalgamated on and from 1 st April, 2022 and formed a new shares of Grey Limited at a price of ₹ 120 per share (face value ₹ 100).
company Grey Limited to take over the business of Black Limited and White Limited. The information (c) 15% Debenture holders of Black Limited and White Limited are discharged by Grey Limited
of Black Limited and White Limited as on 31st March, 2022 are as follows: issuing such number of its 18% Debentures of ₹ 100 each so as to maintain the same amount
of interest.
Black Ltd. White Ltd.
You are required to prepare the Balance Sheet of Grey Limited after amalgamation. The
(₹) (₹) amalgamation took place in the nature of purchase. (MTP 15 Marks Sep’22)
Share Capital:
Equity share of ₹ 10 each 15,00,000 14,50,000
10% Preference shares of ₹ 100 each 2,00,000 1,40,000
Revaluation Reserve 1,00,000 2,00,000
Profit & Loss Account:
Opening balance (Credit balance) 1,50,000 1,20,000
Profit for the Year 2,00,000 1,30,000
15% Debentures of ₹ 100 each (Secured) 4,00,000 5,00,000
Land and Buildings 3,20,000 7,40,000
Investments 1,00,000 60,000
Inventory 2,20,000 1,50,000
Cash at Bank 1,60,000 1,30,000
(i) The authorized capital of the new company will be ₹ 54,00,000 divided into 2,00,000
equity shares of ₹ 25 each, and 4,000 preference shares of ₹ 100 each.
(ii) Trade payables of Black Limited includes ₹ 15,000 due to White Limited
and trade receivables of White Limited shows ₹ 15,000 receivable from
Black Limited.
(iii) Land & Buildings and inventory of Black Limited and White Limited are to be revalued
as under:
Answer 14 2. Reserves and surplus

Balance Sheet of Grey Ltd. as at 1st April, 2022 Securities Premium (3,400 x ₹ 20) 68,000
Capital Reserve
Particulars Note No. (₹) 1,17,000 1,85,000
(a) Share Capital
1 48,40,000 Land and Building Plant 15,60,000
and Machinery
(b) Reserves and Surplus 2 1,85,000 32,00,000 47,60,000
(2) Non-Current Liabilities Working Notes:
Black Ltd. (₹)
Grey Ltd.
1. Computation of Purchase consideration
Total 61,90,000
(a) Preference shares:
II. Assets
Shares at ₹ 120 each 2,40,000 1,68,000
(b) Equity shares:
Preceding 2 years profitability
(b) Non-current investments 1,60,000
Year 1 1,50,000 1,20,000
(2) Current assets
Year 2 2,00,000 1,30,000
(a) Inventory 3,05,000
3,50,000 2,50,000
(b) Trade receivables 6,75,000
Shares (in ratio 35: 25)
(c) Cash and bank balances 2,90,000
1,05,000 shares at ₹ 25 26,25,000
Total 61,90,000
75,000 shares at ₹ 25 18,75,000
Notes to Accounts:
Amount of purchase consideration (a + b) 28,65,000 20,43,000
(₹) (₹)
2. Net Assets Taken Over
1. Share Capital
Assets taken over:
Authorized:
50,00,000 Land and Building 5,20,000 10,40,000
4,00,000 Plant and Machinery 18,00,000 14,00,000
4,000 preference share of ₹ 100 each
Investments 1,00,000 60,000
Issued, subscribed, and paid up share capital:
Inventory 1,80,000 1, 25,000
1,80,000 Equity shares of ₹ 25 each 45,00,000 Trade receivables 4,25,000 2,50,000
3,400 Preference shares of ₹ 100 each 3,40,000 Cash and bank 1,60,000 1,30,000
(all the above shares are allotted as fully paid-up pursuant 48,40,000 31,85,000 30,05,000
to contracts without payment being received in cash) Less: Liabilities taken over:
Debentures 3,33,333 4,16,667
6,28,333 5,36,667
Net assets taken over 25,56,667 24,68,333 Investments 96,000 3,00,000

Purchase consideration 28,65,000 20,43,000 Stock in Trade 6,30,000 4,20,000
Goodwill 3,08,333 Sundry Debtors 4,90,000 3,20,000
Capital reserve 4,25,333 Bills Receivables 60,000 70,000
Net amount of capital reserve ₹ 1,17,000 Cash at Bank 1,72,000 61,000
3. Black White Limited A Limited take over B Limited on the above date, both companies agreeing on a scheme of Amalgama-
Limited tion on the following terms:
Existing Debentures ₹ 4,00,000 x ₹ 5,00,000 x 15% (a) A Limited will issue 80,000 Equity Shares of ₹ 10 each at par to the Equity Shareholders of B
Limited.
15% (b) A Limited will issue 10% Preference Shares of ₹ 100 each to discharge the Preference Share-
= ₹ 60,000 = ₹ 75,000 holders of B Limited at 15% premium in such a way that the existing dividend quantum of
the preference shareholders of B Limited will not get affected. Accordingly, ₹ 5,00,000
Debentures to be issued in Grey Limited @ ₹ 60,000 x ₹ 75,000x100/18 pref. shares are discharged at ₹ 5,75,000 (5,00,000X 115%) by issue of 4,000 preference
100/18 shares of ₹ 100 each at premium of ₹
18% to maintain the same amount of interest = ₹ 3,33,333 = ₹ 4,16,667 43.75 each.
(c) The Debentures of B Limited will be converted into equivalent number of Debentures of A
Question 15 Limited.
(d) All the Bills Receivable of A Limited were accepted by B Limited.
A Limited and B Limited are carrying on business of same nature. On 31 st March, 2021 the information
given by both these companies is as follows: (e) A contingent liability of B Limited amounting to ₹ 72,000 to be treated as actual liability
in trade
A Ltd.(₹) B Ltd. (₹)
payables.
Share Capital
(f) Expenses of Amalgamation amounted to ₹ 12,000 were borne by A Limited.
- Equity Shares 10 each (Fully Paid) 12,00,000 7,20,000
You are required to pass opening Journal Entries in the books of A Limited and prepare
- 10% Preference Shares of ₹ 100 each 6,00,000 - the openingBalance Sheet of A Limited as on 1st April, 2021 after amalgamation, assum-
- 8% Preference Shares of ₹ 100 each - 5,00,000 ing that the amalgamation is in the nature of Merger.(MTP 20 Marks Oct’22)

Answer 15
Investment Allowance Reserve - 60,000
Journal Entries in the books of A Ltd.
Security Premium 2,40,000 -
Export Profit Reserve 1,80,000 1,20,000 Particulars Debit Credit
Profit & Loss Account 2,16,000 1,92,000 ₹ ₹
9% Debentures (₹ 10 each) 3,00,000 2,00,000 Business purchase A/c (W.N.1) Dr. 13,75,000
Secured Loan - 3,60,000 To Liquidator of B Ltd. 13,75,000
Sundry Creditors 3,12,000 2,04,000 (Being business of B Ltd. taken over)
Bills Payable 75,000 1,00,000 Land & Building A/c Dr. 8,40,000
Other Current Liabilities 50,000 75,000 Plant and machinery A/c Dr. 5,60,000
Land and Building 10,80,000 8,40,000 Office equipment A/c Dr. 2,10,000
Plant and Machinery 6,00,000 5,60,000 Investments A/c Dr. 3,00,000
Office Equipment 3,45,000 2,10,000 Inventory A/c Dr. 4,20,000
Debtors A/c Dr. 3,20,000

Opening Balance Sheet of A Ltd. (afterabsorption) as at 1st April, 2021
Bills receivables A/c Dr. 70,000
Bank A/c Dr. 61,000 Particulars Notes ₹
To General reserve A/c (W.N.2) 95,000
(2,50,000-1,55,000)
To Export profit reserve A/c 1,20,000
ab2 Share capital Re- 1 30,00,000
To Investment allowance reserve A/c 60,000 serves and Surplus
a3 2 14,94,000
To Profit and loss A/c 1,20,000 Non-current liabilities
ab
To Liability for 9% Debentures A/c (₹ 100 each) 2,00,000 Long-term borrowings
Current liabilities 3 8,60,000
To Secured Loan 3,60,000
To Trade creditors A/c 2,76,000 Trade Payables
1 Other current liabilities 4 7,03,000
To Bills payables A/c 1,00,000
ab2 Total 5 1,25,000
To Other current liabilities A/c 75,000
abc Assets 61,82,000
To Business purchase A/c 13,75,000
Non-current assets
(Being assets and liabilities taken over) PPE
Liquidator of B Ltd. Dr. 13,75,000 Investments
6 36,35,000
To Equity share capital A/c 8,00,000 Current assets
7 3,96,000
To 10% Preference share capital A/c 4,00,000 Inventories
To Securities premium A/c 1,75,000 Trade receivables
8 10,50,000
(Being purchase consideration discharged) Cash and cash equiva-
lents Total 9 8,80,000
General Reserve* A/c Dr. 12,000
10 2,21,000
To Cash at bank 12,000
61,82,000
(Being expenses of amalgamation paid)
Notes to accounts
Liability for 9% Debentures in B Ltd. A/c Dr. 2,00,000
To 9% Debentures A/c 2,00,000 ₹
(Being debentures in B ltd. discharged by issuing own 9% 1 Share Capital

debentures) Equity share capital
Bills payables A/c Dr. 60,000 2,00,000 Equity shares of ₹ 10 each
To Bill receivables A/c 60,000 (Out of above, 80,000 shares were issued for consider- 20,00,000
(Cancellation of mutual owing on account of bills of ex- ation other than cash)
change) Preference share capital
*Alternatively, profit & loss A/c may be debited in place of general reserve A/c.
10,000 10% Preference shares of ₹ 100 each
(Out of above, 4,000 shares were issued for consideration 10,00,000
other than cash)
Total 30,00,000
2 Reserves and Surplus Add: Adjustment under scheme of amalgamation 2,10,000 5,55,000
General Reserve Total 36,35,000
Opening balance 3,00,000 7 Investments
Add: Adjustment under scheme of amalgamation 95,000 Opening balance 96,000
Less: Amalgamation expense paid (12,000) 3,83,000 Add: Adjustment under scheme of amalgamation 3,00,000 3,96,000
Securities premium (2,40,000+1,75,000) 4,15,000 8 Inventories
Export profit reserve Opening balance 6,30,000
Opening balance 1,80,000 Add: Adjustment under scheme of amalgamation 4,20,000 10,50,000
Add: Adjustment under scheme of amalgamation 1,20,000 3,00,000 9 Trade receivables
Investment allowance reserve 60,000 Debtors: Opening balance 4,90,000
Profit and loss account Add: Adjustment under scheme of amalgamation 3,20,000 8,10,000
Opening balance 2,16,000 Bills Payables: Opening balance 60,000
Add: Adjustment under scheme of amalgamation 1,20,000 3,36,000 Add: Adjustment under scheme of amalgamation 70,000
Total 14,94,000 Less: Cancellation of mutualown- (60,000) 70,000
ing upon amalgamation
3 Long-term borrowings Total 8,80,000
Secured 10 Cash and cash equivalents
9% Debentures 3,00,000 Opening balance 1,72,000
Add: Adjustment under scheme of amalgamation 2,00,000 Add: Adjustment under scheme of amalgamation 61,000
Secured loan 3,60,000 8,60,000 Less: Amalgamation expense paid (12,000)
4 Trade payables 2,21,000
Creditors: Opening balance 3,12,000 Working Notes:Calculation of purchase consideration
Add: Adjustment under scheme of amalgamation 2,76,000 5,88,000

₹
Bills Payables: Opening balance 75,000
Equity shareholders of B Ltd. (80,000 x ₹ 10) 8,00,000
Add: Adjustment under scheme of amalgamation 1,00,000
Preference shareholders of B Ltd. (5,00,000 x 115%) 5,75,000
Less: Cancellation of mutual owning (60,000) 1,15,000
Purchase consideration would be 13,75,000
upon amalgamation
Amount to be adjusted from general reserve
7,03,000
The difference between the amount recorded as share capital issued and the amount of share capital of
transferor company should be adjusted in General Reserve.
Opening balance 50,000
Thus, General reserve will be adjusted as follows:
Add: Adjustment under scheme of amalgamation 75,000 1,25,000
6 PPE ₹
Land & Building- Opening balance 10,80,000 Purchase consideration 13,75,000
Add: Adjustment under scheme of amalgamation 8,40,000 19,20,000 Less: Share capital issued (₹ 7,20,000 + ₹ 5,00,000) (12,20,000)
Plant and machinery- Opening balance 6,00,000 Amount to be adjusted from general reserve 1,55,000
Add: Adjustment under scheme of amalgamation 5,60,000 11,60,000 Calculation of balances of Profit & Loss and Sundry Creditors of B Limited to be taken over by A
Limited
Office equipment- Opening balance 3,45,000

Expenses of Rs. 5,000 to be met from bank balance of Mohan Ltd. This is to be adjusted from the
P&L Creditors
bank balance of Mohan Ltd. before acquisition by Ravi Ltd.
(₹) (₹)
Balance as per Balance Sheet of B Limited 1,92,000 2,04,000 (a) You are required to prepare:
Less / Add: Contingent Trade Payable treated as Actual Liability (72,000) 72,000 (b) Realization account and Equity Shareholders’ account in the books of Mohan Ltd.
Bank Account and Balance Sheet with notes to accounts in the books of Ravi Ltd. (RTP May 21)
Taken by A Limited 1,20,000 2,76,000
Answer 16
Question 16 (i) In the books of Mohan Ltd.
Mohan Ltd. gives you the following information as on 31st March, 2020: (ii) Realisation Account
Rs. Rs.
Rs.
To Goodwill 10,000 By 10% Debentures 2,00,000
Share capital:
To Property, plant and 3,40,000 By Interest accrued on 20,000
Equity shares of Rs. 10 each 3,00,000
equipment debentures
6,000, 9% cumulative preference shares of Rs. 10 each 60,000
To Inventory 80,000 By Trade payables 1,50,000
Profit and Loss Account (Dr. balance) 1,70,000
To Trade receivables 1,10,000 By Ravi Ltd. (Purchase 1,65,400
10% Debentures of Rs. 100 each 2,00,000 consideration) (W.N. 1)
Interest payable on Debentures 20,000 To Bank By Equity shareholders A/c (loss
Trade Payables 1,50,000 15,000 on realization) (Bal. fig.) 25,000
(20,000 - 5,000)
Property, Plant and Equipment 3,40,000 To Preference share
Goodwill 10,000 holders A/c (W.N.2)

Trade Receivables 1,10,000 5,60,400 5,60,400
Equity shareholders’ Account
Bank Balance 20,000
A new company Ravi Ltd. is formed with authorised share capital of Rs. 4,00,000 divided into 40,000 Eq- Rs. Rs.
uity Shares of Rs. 10 each. The new company will acquire the assets and liabilities of Mohan Ltd. on the
To Profit & loss A/c 1,70,000 By Equity Share capital 3,00,000
following terms:
To Expenses* 5,000
(a) Mohan Ltd.’s debentures are paid by similar debentures in new company and for outstand-
To Equity shares in Ravi Ltd. 1,00,000
ing accrued interest on debentures, equity shares of equal amount are issued at par.
To Realization A/c 25,000
The trade payables are paid by issue of 12,000 equity shares at par in full and final settlement of 3,00,000 3,00,000
their claims.
*Alternatively, expenses may be routed through Realization account. In the books of Ravi Ltd.
Preference shareholders are to get equal number of equity shares issued at par. Dividend on
(iii) Bank Account
(a) preference shares is in arrears for three years. Preference shareholders to forgo dividend fortwo
years. For balance dividend, equity shares of equal amount are issued at par. Rs. Rs.
(i) Equity shareholders are issued one share at par for every three shares held To Business Purchase 15,000 By Balance c/d (Bal. fig.) 1,09,600
in Mohan Ltd. To Equity shares application 94,600
(ii) Current Assets are to be taken at book value (except inventory, which is to be re- & allotment A/c (W.N. 3)
duced by 10%).Goodwill is to be eliminated. The Property, plant and equipment is taken 1,09,600 1,09,600
over at Rs. 3,08,400.
Balance Sheet as at 31st March, 2020
(iii) Remaining equity shares of the new company are issued to public at par fully
paid up.
Working Notes:
Particulars Note No. Rs.
Calculation of Purchase consideration
(1) Shareholder’s Funds Rs.
Payment to preference shareholders
6,000 equity shares @ Rs. 10 60,000
(2) Non-Current Liabilities For arrears of dividend: (6,000 x Rs. 10) x 9% 5,400
Long-term borrowings 2 2,00,000 Payment to equity shareholders
Total 6,00,000 (30,000 shares x 1/3) @ Rs. 10 1,00,000
II. Assets Total purchase consideration 1,65,400
(1) Non-current assets Preference shareholders’ Account in books of Mohan Ltd.
(a) Property, plant and equipment 3,08,400 Rs. Rs.

(2) Current assets To Equity Shares in Ravi By Preference Share
(a) Inventories 72,000 Ltd. 65,400 capital 60,000
(b) Trade receivables 1,10,000 By Realization A/c (Bal.

(c) Cash and cash equivalents 1,09,600 fig.) 5,400
Total 6,00,000 65,400 65,400

Calculation of number of Equity shares issued to public
Notes to Accounts Authorized equity shares 40,000
Rs. Less: Equity shares issued for
1. Share Capital Interest accrued on debentures 2,000
Authorised share capital Trade payables of Mohan Ltd. 12,000
40,000 equity shares of Rs. 10 each Preference shareholders of Mohan Ltd. 6,000
4,00,000 Arrears of preference dividend 540
Issued and Subscribed Equity shareholders of Mohan Ltd. 10,000 (30,540)
40,000 shares of Rs. 10 each fully paid up 4,00,000 Number of equity shares issued to public at par for cash 9,460
(out of the above, 30,540 (W.N.3) shares have been allotted as fully
paid-up pursuant to contract without payment being received in Question 17
cash)
X Ltd. and Y Ltd. give the following information of assets, equity and liabilities as on 31st March, 2018:
2. Long Term Borrowings
10% Debentures 2,00,000 X Ltd. (Rs.) Y Ltd. (Rs.)
Equity Shares of Rs. 10 each 30,00,000 9,00,000
9% Preference Shares of Rs. 100 each 3,00,000 -
10% Preference Shares of Rs. 100 each - 3,00,000
Retirement Gratuity Fund (long term) 1,50,000 60,000
Trade Payables 3,90,000 2,40,000 Answer 17

Assets In the Books of Y Ltd.Realization Account
Goodwill 1,50,000 75,000
Rs. Rs.
Land & Buildings 9,00,000 3,00,000
To Sundry Assets: By Retirement 60,000
Plant & Machinery 15,00,000 4,50,000
Gratuity Fund
Inventories 7,50,000 5,25,000
Goodwill 75,000
Land & Building 3,00,000 By Trade payables 2,40,000
Cash and Bank 1,50,000 60,000
Plant & Machinery 4,50,000 By X Ltd. (Purchase 15,90,000
X Ltd. absorbs Y Ltd. on the following terms:
Inventory 5,25,000 Consideration)
(i) 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Pref-
erence Shares of X Ltd. Trade receivables 3,00,000
(ii) Goodwill of Y Ltd. on absorption is to be computed based on two times of aver- Bank 60,000 17,10,000
age profits of precedingthree financial years (2016-17 : Rs. 90,000; 2015-16 : Rs. To Preference 30,000
78,000 and 2014-15: Rs. 72,000). The profits of 2014 -15 included credit of an Shareholders
insurance claim of
(Premium on
Rs. 25,000 (fire occurred in 2013-14 and loss by fire Rs. 30,000 was booked in Redemption)
Profit and Loss Account of that year). In the year 2015 -16, there was an embez-
To Equity Shareholders
zlement of cash by an employee amounting to Rs. 10,000.
(Profit on
(iii) Land & Buildings are valued at Rs. 5,00,000 and the Plant & Machinery at Rs. 4,00,000. 1,50,000 _
Realisation)
(iv) Inventories are to be taken over at 10% less value and Provision for Doubtful
18,90,000 18,90,000
Debts is to be created @ 2.5%.
In the Books of X Ltd.
(v) There was an unrecorded current asset in the books of Y Ltd. whose fair value
amounted to Rs. 15,000and such asset was also taken over by X Ltd. Journal Entries
(vi) The trade payables of Y Ltd. included Rs. 20,000 payable to X Ltd.
Dr. Cr.
(vii) Equity Shareholders of Y Ltd. will be issued Equity Shares @ 5% premium. You are re-
quired to: Rs. Rs.
(i) Prepare Realizations A/c in the books of Y Ltd. Business Purchase A/c Dr. 15,90,000
15,90,000
(ii) Show journal entries in the books of X Ltd.
To Liquidators of Y Ltd. Account
(iii) Prepare the Balance Sheet of X Ltd. after absorption as at 31st March,2018. (RTP Nov
20, PYP 20 Marks May 18) (Being business of Y Ltd. taken over)
Goodwill Account Dr. 1,50,000
Land & Building Account Dr. 5,00,000
Plant & Machinery Account Dr. 4,00,000
Inventory Account Dr. 4,72,500
Trade receivables Account Dr. 3,00,000
Bank Account Dr. 60,000
Unrecorded assets Account Dr. 15,000
To Retirement Gratuity Fund Account 60,000
To Trade payables Account 2,40,000
Notes to accounts
To Provision for Doubtful Debts Account 7,500
To Business Purchase A/c 15,90,000 Rs.
(Being Assets and Liabilities taken over as per agreed 1 Share Capital
valuation).
Liquidators of Y Ltd. A/c Dr. 15,90,000
4,20,000 Equity Shares of Rs. 10 each fully paid (Out of above 42,00,000
To 9% Preference Share Capital A/c 3,30,000
1,20,000 Equity Shares were issued at 5% premium in consideration other
To Equity Share Capital A/c 12,00,000 than for cash)
To Securities Premium A/c 60,000 Preference share capital
6,300 9% Preference Shares of Rs. 100 each (Out of above 3,300 6,30,000
(Being Purchase Consideration satisfied as above)
Preference Shares were issued in consideration other than for cash)
Balance Sheet of X Ltd. (after absorption) as at31st March, 2018 Total 48,30,000
Particulars Notes Rs. 2 Reserves and Surplus
Equity and Liabilities Securities Premium 60,000
1 Shareholders’ funds General Reserve 2,10,000
A Share capital 1 48,30,000 Total 2,70,000
B Reserves and Surplus 2 2,70,000 3 Long-term provisions
2 Non-current liabilities Retirement Gratuity fund 2,10,000
A Long-term provisions 3 2,10,000 4 Trade payables (3,90,000 + 2,40,000 - 20,000*) 6,10,000
3 Current liabilities * Mutual Owings eliminated.
A Trade Payables 4 6,10,000 5 Short term Provisions
B Short term provision 5 7,500 Provision for Doubtful Debts 7,500
Total 59,27,500
Assets 6 Property, Plant and Equipment
1 Non-current assets Land & Buildings 14,00,000
Property, Plant and Equipment 6 33,00,000 Plant & Machinery 19,00,000
Intangible assets 7 3,00,000 Total 33,00,000
2 Current assets 7 Intangible assets
A Inventories 8 12,22,500 Goodwill (1,50,000 +1,50,000) 3,00,000
B Trade receivables 9 8,80,000 8 Inventories (7,50,000 + 4,72,500) 12,22,500
C Other current Assets 10 15,000 9 Trade receivables (6,00,000 + 3,00,000 - 20,000) 8,80,000
D Cash and cash equivalents 11 2,10,000 10 Other current Assets 15,000
Total 59,27,500 11 Cash and cash equivalents (1,50,000 +60,000) 2,10,000
Working Notes:Computation of goodwill Rs. Question 18
Profit of 2016-17 90,000 P Ltd. and Q Ltd. agreed to amalgamate and form a new company called PQ Ltd. The summarized
balance sheets of both the companies on the date of amalgamation stood as below:
Profit of 2015-16 adjusted (Rs. 78,000 + 10,000) 88,000
Profit of 2014-15 adjusted (Rs. 72,000 – 25,000) 47,000 Liabilities P Ltd. Q Ltd. Assets P Ltd. Q Ltd.
2,25,000 Rs. Rs. Rs.
Rs.
Average profit 75,000
Goodwill to be valued at 2 times of average profits = Rs. 75,000 x 2 = Rs. 1,50,000 Equity Shares 8,20,000 3,20,000 Land & Building 4,50,000 3,40,000
(Rs. 100 each)
Purchase Consideration: Rs.
9% Pref. Shares 3,80,000 2,80,000 Furniture & 1,00,000 50,000
Goodwill 1,50,000
Fittings
(Rs. 100 each)
8% Debentures 2,00,000 1,00,000 Plant & 6,20,000 4,50,000
Inventory 4,72,500
Machin-
Trade receivables 3,00,000 ery
Unrecorded assets 15,000 General Reserve 1,50,000 50,000 Trade receivables 3,25,000 1,50,000
Cash at Bank 60,000 Profit & Loss A/c 3,52,000 2,05,000 Inventory 2,33,000 1,05,000
18,97,500 Unsecured Loan - 1,75,000 Cash at bank 2,08,000 1,75,000
Less: Liabilities: Trade payables 88,000 1,60,000 Cash in hand 54,000 20,000
Retirement Gratuity 60,000 12,90,000
19,90,000 12,90,000 19,90,000
Trade payables 2,40,000 (i) PQ Ltd. took over the assets and liabilities of both the companies at book value after creating provi-
Provision for doubtful debts 7,500 (3,07,500) sion @ 5% on inventory and trade receivables respectively and depreciating Furniture & Fittings by
@ 10%,Plant and Machinery by @ 10%. The trade receivables of P Ltd. include Rs. 25,000 due from Q
Net Assets/ Purchase Consideration 15,90,000
Ltd. PQ Ltd. will issue:5 Preference shares of Rs. 20 each @ Rs. 18 paid up at a premium of Rs. 4
To be satisfied as under: per share for each pref. shareheld in both the companies.
10% Preference Shareholders of Y Ltd. 3,00,000 (ii) 6 Equity shares of Rs. 20 each @ Rs. 18 paid up a premium of Rs. 4 per share for each equity
Add: 10% Premium 30,000 shareheld in both the companies.
9% Preference Shares of X Ltd. 3,30,000 (iii) 6% Debentures to discharge the 8% debentures of both the companies.
Equity Shareholders of Y Ltd. to be satisfied by issue of 1,20,000 equity 20,000 new equity shares of Rs. 20 each for cash @ Rs.18 paid up at a premium of Rs.4 per share. PQ
Shares of X Ltd. at 5% Premium Ltd. will pay cash to equity shareholders of both the companies in order to adjust their rights as per
the intrinsic value of the shares of both the companies.
12,60,000
You are required to prepare ledger accounts in the books of P Ltd. and Q Ltd. to close their books. (RTP
Total 15,90,000
May 20)
Answer 18
In the Books of P Ltd. Realization Account
Rs. Rs.
To Land & Building 4,50,000 By 8% Debentures 2,00,000
To Plant & Machinery 6,20,000 By Trade Payables 88,000
To Furniture & Fitting 1,00,000 By PQ Ltd. 16,02,100
To Trade receivables 3,25,000 (Purchase consideration) To Cash in hand 20,000 Loss

To Inventory/Stock 2,33,000 By Equity Shareholders A/c 1,37,900 To Pref. shareholders 28,000
To Cash at Bank 2,08,000 (loss) 13,18,000 13,18,000
Equity Shareholders Account
To Cash in Hand 54,000
To Preference shareholders 38,000 Rs. Rs.
(excess payment) To Equity shares in PQ Ltd. 4,22,400 By Share Capital 3,20,000
20,28,000 20,28,000 To Realization 90,750 By Profit & Loss A/c 2,05,000
Equity Shareholders Account
To Cash 61,850 By General Reserve 50,000
Rs. Rs. 5,75,000 5,75,000
To Realization A/c (loss) 1,37,900 By Share capital 8,20,000 9% Preference Shareholders Account
To Equity Shares in PQ Ltd. 10,82,400 By Profit & Loss A/c 3,52,000 Rs. Rs.
To Cash 1,01,700 By General Reserve 1,50,000 To Preference Shares in PQ 3,08,000 By Share capital 2,80,000
13,22,000 13,22,000 Ltd
9% Preference Shareholders Account By Realization A/c 28,000
To Preference Shares in 4,18,000 By Pref. Share 3,80,000 3,08,000 3,08,000

Q Ltd. Account
PQ Ltd. capitalBy 38,000
Realization A/c Rs. Rs.
4,18,000 4,18,000
PQ Ltd. Account To Realization 7,92,250 By Equity shares in PQ Ltd.
A/c
To Realization A/c 16,02,100 By Shares in PQ Ltd.
For Equity 4,22,400
For Equity 10,82,400 15,00,400
Preference 3,08,000 7,30,400
For Pref. 4,18,000
By Cash 61,850
By Cash
7,92,250 7,92,250
1,01,700
8% Debentures holders Account
16,02,100 16,02,100
8% Debentures holders Account Rs. Rs.
Rs. Rs. To 6% Deben- 1,00,000 By 8% Debentures 1,00,000

tures
To 6% Debentures 2,00,000 By 8% Debentures 2,00,000
Books of Q Ltd.
Realization Account
Rs. Rs.
To Land & Building 3,40,000 By 8% Debentures 1,00,000
To Plant & Machinery 4,50,000 By Trade payables 1,60,000
To Furniture & Fittings 50,000 By Unsecured loan 1,75,000
To Trade receivables 1,50,000 By PQ Ltd. (Purchase
To Inventory 1,05,000 consideration) 7,92,250
To Cash at bank 1,75,000 By Equity Shareholders A/c 90,750
Working Notes: per intrinsic value of both companies.

Purchase consideration
Question 19
P Ltd. Q
Ltd. P Ltd. and Q Ltd. agreed to amalgamate their business. The scheme envisaged a share capital, equal to
Rs.
the combined capital of P Ltd. and Q Ltd. for the purpose of acquiring the assets, liabilities and under-
Rs.
takings of the two companies in exchange for share in PQ Ltd. The Summarized Balance Sheets ofP Ltd.
Payable to preference shareholders: and Q Ltd. as on 31st March, 2017 (the date of amalgamation) are given below:
Preference shares at Rs. 22 per share 4,18,000 3,08,000 Summarized balance sheets as at 31-03-2017
Equity Shares at Rs. 22 per share 10,82,400 4,22,400
Liabilities P Ltd. Rs. Q Ltd. Rs. Assets P Ltd. Rs. Q Ltd. Rs.
Cash [See W.N. (ii )] 1,01,700 61,850
Equity & Assets:
16,02,100 7,92,250
liabilities:
Value of Net Assets
Shareholders Fund Non-current Assets:
P Ltd. Q
Ltd. a. Share Capital 6,00,000 8,40,000 Property, Plant &
Rs.
Rs.
Equipment
Land & Building 4,50,000 3,40,000
b. Reserves 10,20,000 6,00,000 (excluding 7,20,000 10,80,000
Plant & Machinery less 10% Depreciation 5,58,000 4,05,000
Goodwill)
Furniture & Fittings less 10% 90,000 45,000
Current Liabilities Current Assets
Depreciation
Bank Overdraft - 5,40,000 a. Inventories 3,60,000 6,60,000
Trade receivables less 5% 3,08,750 1,42,500
Trade payables 2,40,000 5,40,000 b. Trade receivables 4,80,000 7,80,000
Inventory less 5% 2,21,350 99,750
c. Cash at Bank 3,00,000 -
Cash at Bank 2,08,000 1,75,000
18,60,000 25,20,000 18,60,000 25,20,000
Cash in hand 54,000 20,000
(i) The consideration was to be based on the net assets of the companies as shown in the above Bal-
18,90,100 12,27,250 ance Sheets, but subject to an additional payment to P Ltd. for its goodwill to be calculated as its
Less: Debentures 2,00,000 1,00,000 weighted average of net profits for the three years ended 31st March, 2017. The weights for this pur-
pose for the years 2014-15, 2015-16 and 2016-17 were agreed as 1, 2 and 3 respectively. The profit had
Trade payables 88,000 1,60,000 been: 2014-15 Rs. 3,00,000; 2015-16 Rs. 5,25,000 and 2016-17 Rs. 6,30,000. The shares of PQ Ltd. were to
Secured Loans – (2,88,000) 1,75,000 (4,35,000) be issued to P Ltd. and Q Ltd. at a premium and in proportion to the agreed net assets value
of these companies. In order to raise working capital, PQ Ltd proceeded to issue 72,000 shares of
16,02,100 7,92,250
Rs. 10 each at the same rate of premium as issued for discharging purchase consideration to P Ltd.
Payable in shares 15,00,400 7,30,400 and Q Ltd.You are required to :
Payable in cash* 1,01,700 (61,850) (ii) Calculate the number of shares issued to P Ltd. and Q Ltd; and
(iii) Prepare required journal entries in the books of PQ Ltd.; and
P Q
Prepare the Balance Sheet of PQ Ltd. as per Schedule III after recording the necessary journal entries. (RTP
Plant & Machinery 6,20,000 4,50,000 May 18, Nov 21)
Less: Depreciation 10% 62,000 45,000
5,58,000 4,05,000
Furniture & Fixtures 1,00,000 50,000
Less: Depreciation 10% 10,000 5,000
90,000 45,000
*This cash is paid to equity shareholders of both the companies for adjustment of their rights as
Answer 19 Inventory account Dr. 6,60,000

(i) Calculation of number of shares issued to P Ltd. and Q Ltd.: Trade receivables account Dr. 7,80,000
To bank overdraft account 5,40,000
Amount of Share Capital as per balance sheet Rs.
To Trade payables account 5,40,000
P Ltd. 6,00,000
To Business purchase account 14,40,000
Q Ltd. 8,40,000
(Being assets and liabilities of Q Ltd. taken over)
14,40,000
Liquidator of P Ltd. Account Dr. 21,60,000
Share of P Ltd. = Rs. 14,40,000 x [21,60,000/ (21,60,000 + 14,40,000)]
To Equity share capital account (86,400 x Rs. 10) 8,64,000
= Rs. 8,64,000 or 86,400 shares
To Securities premium (86,400 x Rs. 15) 12,96,000
Securities premium = Rs. 21,60,000 – Rs. 8,64,000 = Rs. 12,96,000Premium per share = Rs. 12,96,000 / Rs.
86,400 = Rs. 15 (Being the allotment of shares as per agreement for
Issued 86,400 shares @ Rs. 10 each at a premium of Rs.15 per share Share of Q Ltd. = Rs. 14,40,000 x discharge of purchase consideration)
[14,40,000/ (21,60,000 + 14,40,000)] Liquidator of Q Ltd. account Dr. 14,40,000
= Rs. 5,76,000 or 57,600 shares To Equity share capital account (57,600 x Rs. 10) 5,76,000
Securities premium = Rs. 14,40,000 – Rs. 5,76,000 = Rs. 8,64,000Premium per share = Rs. 8,64,000 / Rs. To Securities premium (57,600 x Rs. 15) 8,64,000
57,600 = Rs. 15
(Being the allotment of shares as per agreement
Issued 57,600 shares @ Rs. 10 each at a premium of Rs. 15 per share
for discharge
(ii) Journal Entries in the books of PQ Ltd. of purchase consideration)
Dr. Cr. Bank A/c 18,00,000

Particulars Amount Amount To Equity share capital account 7,20,000
(Rs.) (Rs.) To Securities premium(Equity share capital 10,80,000
Business purchase account Dr. 36,00,000 issued to raise working capital)
To Liquidator of P Ltd. account 21,60,000

Balance Sheet of PQ Ltd. on 31st March, 2017 after amalgamation
To Liquidator of Q Ltd. account 14,40,000
(Being the amount of purchase consideration Particulars Notes Rs.
payable Equity and Liabilities
to liquidator of P Ltd. and Q Ltd. for assets taken 1 Shareholders’ funds
over) a Share capital 1 21,60,000
Goodwill Dr. 5,40,000
Property, Plant & Equipment account Dr. 7,20,000
a Trade payables (2,40,000 + 5,40,000) 7,80,000
Inventory account Dr. 3,60,000
Total 61,80,000
Trade receivables account Dr. 4,80,000
Assets
Cash at bank Dr. 3,00,000
To Trade payables account 2,40,000
a Fixed assets
To Business purchase account 21,60,000
2 Tangible assets (7,20,000 + 10,80,000) 18,00,000
(Being assets and liabilities of P Ltd. taken over)
Intangible assets (goodwill) 4 5,40,000
Property, Plant & Equipment account Dr. 10,80,000
Current assets Trade receivable 4,80,000 7,80,000

a Inventories (3,60,000 + 6,60,000) 10,20,000 Cash at bank 3,00,000
b Trade receivables (4,80,000 +7,80,000) 12,60,000 Less: Liabilities
c Cash and cash equivalents 3 15,60,000 Bank overdraft 5,40,000
Total 61,80,000 Trade payables 2,40,000 5,40,000
Notes to accounts Net assets or Purchase consideration 21,60,000 14,40,000
New authorized capital
Rs.
= Rs. 14,40,000 + Rs. 12,00 000 = Rs. 26,40,000
1 Share Capital
Cash and Cash equivalents Rs.
Issued, subscribed and paid up share capital
2,16,000 Equity shares of Rs. 10 each 21,60,000
P Ltd. Balance 3,00,000
(Out of the above 1,44,000 shares issued for non-cash consideration
Cash received from Fresh issue (72,000 X Rs.25)18,00,000
21,00,000
under scheme of amalgamation)
Less: Bank Overdraft 5,40,000
15,60,000*
(@ Rs. 15 for 2,16,000 shares)
3 Cash and cash equivalents *The balance of cash and equivalents has been shown after setting off overdraft amount.

Question 20
4 Intangible Assets
The following are the Balance Sheets of Aakash Limited and Ganga Limited as at March 31, 2021:
Goodwill 5,40,000
Working Notes: Particulars Note Aakash Limited Ganga Limited
Calculation of goodwill of P Ltd. No.
(Rs.) (Rs.)
Particulars Amount Rs. Weig Weighted I. Equity and Liabilities:

amount Rs. (1) Shareholder’s Funds:
ht
2014-15 3,00,000 1 3,00,000 (a) Share Capital 1 80,00,000 20,00,000
2015-16 5,25,000 2 10,50,000 (b) Reserves and Surplus 2 (3,24,00,000) 56,00,000
2016-17 6,30,000 3 18,90,000 (2) Non-Current Liabilities:
Total (a+b+c) 14,55,000 6 32,40,000 (a) Secured Loans 3 3,20,00,000 1,60,00,000
weighted Average = [Total weighted amount/ (b) Unsecured Loans 4 1,72,00,000 -
Total of weight][ Rs. 32,40,000/6]Goodwill 5,40,000 (3) Current Liabilities:

Calculation of Net assets (a) Trade Payables 56,00,000 36,00,000
P Ltd. Rs. Q Ltd. Rs. (b) Other Current Liabilities 5 2,04,00,000 56,00,000
Assets Total 5,08,00,000 3,28,00,000
Goodwill 5,40,000 II. Assets:
Property, Plant & Equipment 7,20,000 10,80,000 (1) Non-Current Assets:
Inventory 3,60,000 6,60,000 Property, Plant & Equipment
68,00,000 1,36,00,000
(2) Current Assets: (iv) Preference Shareholders in Aakash Limited are issued Equity Shares in Aakash-
Ganga Ltd. worth Rs. 4,00,000 in lieu of their present holdings.
(a) Inventories 3,68,00,000 -
(v) Secured Loan agree to continue the balance amount of their loans to AakashGanga Lim-
(b) Other Current Assets 72,00,000 1,92,00,000 ited after adjusting realizable value of pledged asset in case of Aakash Limited and after
Total 5,08,00,000 3,28,00,000 waiving 50% of interest due in the case of Ganga Limited.
Notes to Accounts: (vi) Unsecured Loans are taken over by AakashGanga Limited at 25% of loan
amounts.
Aakash Limit- Ganga Limited
ed(Rs.) (vii) Employees are issued fully paid Equity Shares in AakashGanga Limited in full
(Rs.) settlement of their dues.
1. Share Capital Statutory Liabilities are taken over by AakashGanga Limited at full value and Trade Pay-
Authorized, Issued, Subscribed & Paid up : ables are taken over at 80% of the book value.
6,00,000 Equity Shares of Rs.10 each 60,00,000 -
You are required to prepare the opening Balance Sheet of AakashGanga Limited as at 1.4.2021.
20,000 Preference Shares of Rs. 100 each 20,00,000 - (RTPMay 22)
2,00,000 Equity Shares of Rs. 10 each - 20,00,000
Answer 20
80,00,000 20,00,000
2. Reserves and Surplus Balance sheet of Aakash Ganga Ltd. as at 1st April, 2021
General Reserve 8,00,000 56,00,000 Particulars Note No. (Rs.)
Surplus (3,32,00,000) - I. Equity and Liabilities
(3,24,00,000) 56,00,000 (1) Shareholders’ Funds
3. Secured Loans (a) Share Capital 1 1,40,00,000
(Secured Loans of Aakash Limited are secured 3,20,00,000 1,60,00,000 (2) Non-Current Liabilities
against pledge of Inventories) (a) Long term borrowings 2 2,12,60,000
4. Unsecured Loans 1,72,00,000 -
5. Other Current Liabilities
(b) Other current liabilities 4 1,64,00,000
Statutory Liabilities 1,44,00,000 20,00,000
Total 5,90,20,000
Liability to Employees 60,00,000 36,00,000
II. Assets
2,04,00,000 56,00,000
Both the companies go into liquidation and a new company ‘AakashGanga Limited’ is formed to take (a) Property, Plant & Equipment 5 2,04,00,000
over their business. The following information is given:All Current Assets of two companies, except
pledged inventory are taken over by Aakash Ganga Limited. The realizable value of all the Current (b) Intangible assets 6 1,54,20,000
Assets (including pledged inventory) is 80% of book value in case of Aakash Limited and 70% for Gan- (2) Current assets
ga Limited.
(a) Cash and cash equivalents 40,00,000
(i) Property, Plant and Equipment of both the companies are taken over at book value by
AakashGanga Limited. (b) Other current assets 7 1,92,00,000
(ii) Secured Loans include Rs. 32,00,000 accured interest in case of Ganga Lim- Total 5,90,20,000
ited. Notes to Accounts
(iii) 4,00,000 Equity Shares of Rs. 10 each are allotted by AakashGanga Limited at (Rs.)
par against cash payment of entire face value to the shareholders of Aakash
Limited and Ganga Limited in the ratio of shares held by them in Aakash Lim- 1. Share Capital
ited and Ganga Limited. Issued, subscribed & Paid up:
14,00,000 equity shares of Rs. 10 each, fully paid up (W.N.4) 1,40,00,000 Interest waived - 16,00,000 1,44,00,000
(of the above 10,00,000 shares have been issued for consideration Value of Inventory (80% of 2,94,40,000 25,60,000
other than cash)
Rs. 3,68,00,000)
2. Long Term borrowings
Unsecured Loans (25% of
Secured Loans 43,00,000 -
Rs.1,72,00,000)
Aakash Limited 25,60,000
3,17,40,000 2,28,80,000
Ganga Limited 1,44,00,000 1,69,60,000
Assets taken over by AakashGanga Ltd. (Rs.)
Unsecured Loans 43,00,000 2,12,60,000
Aakash Limited Ganga Limited
3. Trade Payables (W.N.1)
Rs. Rs.
Property, Plant & Equipment 68,00,000 1,36,00,000
Ganga Limited 28,80,000 73,60,000
Current Assets
(80% and 70% respectively of book value) 57,60,000 1,34,40,000
Statutory Liabilities
Aakash Limited 1,44,00,000 1,25,60,000 2,70,40,000
Ganga Limited 20,00,000 1,64,00,000

Goodwill / Capital Reserve on amalgamation (Rs.)
5. Property, Plant & Equipment
Aakash Limited 68,00,000 Liabilities taken over (W.N. 1) 3,17,40,000 2,28,80,000
Ganga Limited 1,36,00,000 2,04,00,000 Equity shares to be issued to Preference Sharehold-

ers 4,00,000 -
A 3,21,40,000 2,28,80,000
Goodwill (W.N.3) 1,54,20,000
Less: Total assets taken over (W.N. 2) B (1,25,60,000) (2,70,40,000)
7. Other Current Assets
A-B 1,95,80,000 (41,60,000)
Goodwill Capital Reserve
Ganga Limited 1,34,40,000 1,92,00,000
Net Goodwill (1,95,80,000- 41,60,000) 1,54,20,000
Working Notes:
Equity shares issued by AakashGanga Ltd.
Value of total liabilities taken over by AakashGanga Ltd. (Rs.)
Aakash Limited Ganga Limited

(i) For Cash 40,00,000
Current liabilities
For consideration other than cash
Statutory liabilities 1,44,00,000 20,00,000
(ii) In Discharge of Liabilities to Employees 96,00,000
Liability to employees 60,00,000 36,00,000
(iii) To Preference shareholders 4,00,000 1,00,00,000
Trade payables @ 80% 44,80,000 2,48,80,000 28,80,000 84,80,000
1,40,00,000
Secured loans
No. of shares @ Rs. 10 14,00,000
Given in Balance Sheet 3,20,00,000 1,60,00,000 Journal Entries in the Books of Z Ltd.
Rs. Rs.
(i) Equity Share Capital (Rs. 10 each) A/c Dr. 50,00,000
To Equity Share Capital (Rs. 5 each) A/c 25,00,000
To Reconstruction A/c 25,00,000
(Being conversion of 5,00,000 equity shares of

Rs. 10 each fully paid into same number of fully
By R e c o n s t r u c - 15,000
paid equity shares of Rs. 5 each as per tion A/c (recon-
scheme of reconstruction.) struction ex-
penses
(ii) 9% Preference Share Capital (Rs. 100 each) A/c Dr. 20,00,000
To 10% Preference Share Capital (Rs. 50 10,00,000 paid)
each) A/c 2,60,000 Provision for tax A/c (tax 75,000
To Reconstruction A/c 10,00,000 By paid)
(Being conversion of 9% preference share of By Balance c/d 55,000
Rs. 100 each into same number of 10% prefer- 2,60,000
ence share of Rs. 50 each and claims of prefer-
ence dividends settled as per scheme of recon- Reconstruction Account
struction.)
Rs. Rs.
(iii) 10% Secured Debentures A/c Dr. 9,60,000
To Bank (penalty) 15,000 By Equity Share
Trade payables A/c Dr. 1,00,000
To Bank (reconstruction expenses) 15,000 Capital A/c 25,00,000
Interest on Debentures payable A/c Dr. 96,000
To Goodwill 11,00,000 By 9% Pref. Share
Bank A/c Dr. 1,00,000
To Patent 5,00,000 Capital A/c 10,00,000
To Patent A/c 5,00,000
To P & L A/c 14,60,000 By Mr. Y (Settlement) 5,78,000
To Profit and Loss A/c 14,60,000
To P&M 6,50,000 By Mr. Z (Settlement) 3,82,000
To Plant and Machinery A/c 6,50,000
To Furniture and Fixtures 1,00,000 By Trade Payables A/c 1,70,000
To Furniture & Fixture A/c 1,00,000
To Trade investment 50,000 By Director’s loan 60,000
To Trade Investment A/c 50,000
To Inventory 2,50,000 By Bank 1,00,000
To Inventory A/c 2,50,000
To Trade Receivables 1,00,000 By Provision for tax 25,000
To Trade Receivables A/c 1,00,000
To Capital Reserve (bal. fig.) 7,75,000 By Land and Building 2,00,000
To Capital Reserve (bal. fig.) 7,75,000
50,15,000 50,15,000
(Being writing off of losses and reduction in the
value of assets as per scheme of reconstruc- Question 21
tion, balance of reconstruction A/c transfer to
Capital Reserve.) The balance sheets of Truth Limited and Myth Limited as at 31.03.2021 is given below. Myth Limited is to
Bank Account be amalgamated with Truth Limited from 1.04.2021. The amalgamation is to be carried out in the nature
of purchase
Rs. Rs.
To Reconstruction 1,00,000 By Balance b/d 1,00,000 Particulars Note Truth Ltd. ( Myth Ltd. (
(Y) (overdraft) No. Rs.) Rs.)
To Reconstruction(Z) 60,000 By Reconstruction 15,000 (1) Equity and Liabilities
A/c 1. Shareholders’ Funds
To Recon- 1,00,000 (capital (a) Share Capital 1 10,00,000 4,00,000
struction A/c commitment
(refund of (b) Reserves and Surplus 2 11,35,000 4,13,000
penalty paid)
earlier fees by 2. Non -Current Liabilities 3 - 1,50,000
directors) 3. Current Liabilities 4 1,40,000 1,82,000
Total 22,75,000 11,45,000
(2) Assets
1. Non -Current Assets Answer 21
(a) Property, Plant & 15,75,000 6,80,000 Balance Sheet of Truth Ltd. (after amalgamated with Myth Ltd.) as at 1.4.2021
Equipment
Particulars Note No. ( Rs.)
(b) Investments 1,87,500 1,00,000
2. Current Assets 5 5,12,500 3,65,000 I. Equity and liabilities
Total 22,75,000 11,45,000 (1) Shareholder’s funds
(a) Share capital 1 13,13,750
Note Particulars Truth Limited ( Rs.) Myth Limited ( Rs.) (b) Reserves and surplus 2 20,76,250
No.
(2) Non-current liabilities
1 Share Capital 10,00,000 4,00,000
12% Debentures 3 1,75,000
Equity shares of Rs. 10 each
(3) Current liabilities
2 Reserves & Surplus
(a) Trade payables 4 2,32,000
(b) Other current liabilities 5 90,000
Profit & Loss A/c 4,45,000 1,58,000
Total 38,87,000
Export Profit Reserve 1,85,000 25,000
II. Assets
3 Non- Current Liabilities 11,35,000 4,13,000
14% Debentures --- 1,50,000
(a) Property, plant and equipment 6 22,55,000
(b) Intangible assets (Goodwill) [WN 1] 4,67,000
Trade Payables 90,000 1,42,000
(c) Non-current investments 7 2,87,500
Other Current Liabilities 50,000 40,000
(2) Current assets
5 Current Assets 1,40,000 1,82,000
(a) Inventories (2,15,000 + 85,000) 3,00,000
Inventory 2,15,000 85,000
(b) Trade receivables (2,02,500 + 1,75,000) 3,77,500
(c) Cash & cash equivalents (95,000 + 1,05,000) 2,00,000
Cash and Cash equivalents 95,000 1,05,000
Total 38,87,000
5,12,500 3,65,000
Notes to Accounts
Truth Limited would issue 12% debentures to discharge the claim of the debenture holders of Myth
Limited so as to maintain their present annual interest income. Non-trade investment, which consti- ( Rs.) ( Rs.)
tute 80% of their respective total investments yielded income of 20% to Truth Limited and 15% to Myth
Limited. This income is to be deducted from profits while computing average profit for the purpose of 1. Share Capital
calculating goodwill. Profit before tax of both the companies during the last 3 years were as follows: 1,31,375 Equity Shares of Rs. 10 each [1,00,000 + 13,13,750
Truth Limited ( Rs.) Myth Limited ( Rs.) 31,375]
2018-2019 8,20,000 2,55,000 (of the above shares, 31,375 shares were issued to the vendors
2019-2020 7,45,000 2,15,000 otherwise than for cash)
2020-2021 6,04,000 2,14,000 2. Reserves and surplus
Goodwill is to be calculated on the basis of simple average of three years profit by using Capitaliza- General Reserve 5,05,000
tion method taking 18% as normal rate of return. Ignore taxation. Purchase consideration is to be Profit and Loss A/c 4,45,000
discharged by Truth Limited on the basis of intrinsic value per share. Prepare Balance Sheet of Truth
Limited after the amalgamation. (RTP Nov’22) Securities Premium [31,375 x 30] 9,41,250
Export profit reserve 1,85,000
Average Profit before Tax

Add: Balance of Myth Ltd. 25,000 2,10,000
Amalgamation Adjustment Reserve (25,000) 20,76,250 Truth Ltd. Myth Ltd.
3. Long Term Borrowings 2018-2019 8,20,000 2,55,000
12% Debentures issued to Myth Ltd. 1,75,000 2019-2020 7,45,000 2,15,000
4. Trade payables 2020- 2021 6,04,000 2,14,000
Trade payables 90,000 Total profit of 3 years (a) 21,69,000 6,84,000
Add: Taken over 1,42,000 2,32,000 Simple Average [(a)/3] 7,23,000 2,28,000
Less: Non-trading income* (30,000) (12,000)
5 Other Current Liabilities
(iii) Goodwill 6,93,000 2,16,000
Truth Ltd. 50,000
Capitalised value of [(6,93,000 / 38,50,000 [(2,16,000 / 12,00,000
Myth Ltd. 40,000 90,000 average profit
18) x 100] 18) x 100]
6. Property, Plant & Equipment
Less: Capital Employed [From (19,85,000) (7,33,000)
Truth Ltd. 15,75,000
(i) above]
Myth Ltd. 6,80,000 22,55,000
Goodwill 18,65,000 4,67,000
7. Investment 2,87,500
* For Truth Ltd. = 1,87,500 x 80% x 20% = 30,000; and
Truth Ltd. 1,87,500
Myth Ltd. = 1,00,000 x 80% x 15% = 12,000
Myth Ltd. 1,00,000
(1) Intrinsic Value per Share
Working Notes:Valuation of Goodwill Truth Ltd. Myth Ltd.

Capital Employed Rs. Rs.
Truth Ltd. Myth Ltd. Goodwill [W.N. 1] 18,65,000 4,67,000
Rs. Rs. Rs. Rs. Other Assets 22,75,000 41,40,000 11,45,000 16,12,000
Assets as per Balance Sheet 22,75,000 11,45,000 Less: Liabilities
Less: Non-trade Investment (1,50,000) (80,000) 12% Debentures - 1,75,000**
21,25,000 10,65,000 Trade payables 90,000 1,42,000
Less: Liabilities:
Provision for Tax 50,000 (1,40,000) 40,000 (3,57,000)
14% Debentures - 1,50,000
Net Assets 40,00,000 12,55,000
Trade payables 90,000 1,42,000
Intrinsic value per share [Net 40,00,000 / 12,55,000 /
Other current liabilities 50,000 (1,40,000) 40,000 (3,32,000) Assets / No. of Shares]
1,00,000 40,000
Capital Employed 19,85,000 7,33,000
= Rs. 40 = Rs. 31.375
Purchase Consideration & manner of its discharge

Black Limited takes over White Limited on 1st July, 2020.
Intrinsic Value of Myth Ltd. [a] Rs. 31.375 per share No Balance Sheet of White Limited is available as on that date. It is, however estimated that White Lim-
ited earned profit of Rs. 2,40,000 after charging proportionate depreciation @ 10% p.a. on Property
No. of shares [b] 40,000 shares Plant and Equipment, during April-June, 2020.
Purchase Consideration c= [a x b] Rs. 12,55,000 Estimated profit of Black Limited during these 3 months was Rs. 4,80,000 after charging proportionate
Intrinsic Value of Truth Ltd. [d] Rs. 40 per share deprecation @ 10% p.a. on Property Plant and Equipment
No. of shares to be issued [c / d] 31,375 shares Both the companies have declared and paid 10% dividend within this 3 months’ period.
Goodwill of White Limited is valued at Rs. 2,40,000 and Property Plant and Equipment are valued at
Question 22 Rs. 1,20,000 above the depreciated book value on the date of takeover.
Purchase consideration is to be satisfied by Black Limited by issuing shares at par. Ignore income tax.
The summarized Balance Sheets of Black Limited and White Limited as on 31st March, 2020 is as fol- You are required to:
lows:
(i) Compute No. of shares to be issued by Black Limited to White Limited against purchase
Particulars Notes Black Limited ( Rs. White Limited ( Rs. consideration.
In 000) In 000) (ii) Calculate the balance of Net Current Assets of Black Limited and White Limited as on 1st
July, 2020.
Shareholders’ Funds (iii) Give balance of Profit or Loss of Black Limited as on 1st July, 2020
(a) Share Capital 1 6,000 3,600 (iv) Give balance of Property Plant and Equipment as on 1st July, 2020 after takeover.
(PYP 10 Marks July 21)
(b) Reserves and Surplus 2 1,080 660
Current Liabilities Answer 22
Trade payables 600 360 (i) No. of shares issued by Black Ltd. to White Ltd. against purchase consideration
Total 7,680 4,620
White Ltd. Rs. Rs.
Assets
Goodwill 2,40,000
Non-current assets
Property, plant and equipment 24,00,000
Property, Plant and Equip- 3,600 2,400
Less: Depreciation [24,00,000 10 % 3/12] (60,000)
ment
23,40,000
Current assets
(a) Inventories Add: Appreciation 1,20,000 24,60,000
960 720
(b) Trade receivables Inventory 7,20,000
1,680 1,080
(c) Cash and Cash Trade receivables 10,80,000
1,440 420
Equivalents Cash and Bank balances 4,20,000
Total 7,680 4,620 Add: Profit after depreciation 2,40,000
Add: Depreciation (non-cash) 60,000 3,00,000
NoteNo. Particulars Black Limited ( Rs. in White Limited ( Rs. in
000) 000) Less: Dividend [36,00,000 10%] (3,60,000) 3,60,000
1. Share Capital Equity Shares of Rs. 100 each 6,000 3,600 48,60,000
Less: Trade payables (3,60,000)
Reserves and Surplus Purchase Consideration 45,00,000
2. General Reserve 360 180 Number of shares to be issued by Black Ltd. @ Rs. 100 each 45,000 shares
Profit and Loss Account 720 480
Calculation of Net Current Assets as on 01.07.2020
Total 1,080 660
Black Ltd. White Ltd. Galaxy Ltd. Glory Ltd.

Rs. Rs. Rs. Rs. Rs.
Current assets: (I) Equity & Liabilities
Inventory 9,60,000 7,20,000 (1) Shareholders’ fund
Trade receivables 16,80,000 10,80,000 Share Capital .

Cash and Bank 14,40,000 4,20,000 Equity shares of Rs. 10 each 8,40,000 4,55,000
Less: Dividend (6,00,000) (3,60,000) Reserves & Surplus
Add: Profit after depreciation 4,80,000 2,40,000 General Reserve 4,48,000 40,000
Add: Depreciation being non cash Profit & Loss A/c 1,12,000 72,000
90,000 14,10,000 60,000 3,60,000
(1) Non-current Liabilities Se-
40,50,000 21,60,000 curedLoan
Less: Trade payables (6,00,000) (3,60,000)
34,50,000 18,00,000 6% Debentures - 3,30,000
Profit and Loss Account balance of Black Ltd. as on 1.07.2020 (1) Current Liabilities
Rs.
Total 18,20,000 10,80,000
P & L A/c balance as on 31.03.2020 7,20,000
Less: Dividend paid (6,00,000) (II) Assets
1,20,000 (1) Non-current assets Property,
Add: Estimated profit for 3 months after charging 4,80,000 Plant & Equipment
depreciation
Freehold property, at cost 5,88,000 3,36,000
6,00,000
Property, plant and equipment as on 01.07.2020 Plant & Machinery, at cost less 1,40,000 84,000
depreciation
Property, plant and equipment of Black Ltd. as on 31.03.2020 36,00,000
Motor vehicles, at cost less 56,000 -
Less: Depreciation for 3 months [36,00,000 x 10% x 3/12] (90,000)
depreciation
Property, plant and equipment of White Ltd. Taken over as on 24,00,000 35,10,000
(2) Current Assets
31.03.2020
Inventories
Less: Proportionate depreciation for 3 months on fixed assets (60,000)
3,36,000 4,38,000
23,40,000 Trade Receivables 4,62,000 1,18,000
Add: Appreciation above the estimated book value 1,20,000 24,60,000 Cash at Bank 2,38,000 1,04,000
Total Property, plant and equipment as on 1.7.2020 59,70,000 18,20,000 10,80,000
Total
Question 23
(i) Assets and Liabilities are to be taken at book value, with the following exceptions:The Deben-
Galaxy Ltd. and Glory Ltd., are two companies engaged in the same business of chemicals. To mit-
tures of Glory Ltd. are to be discharged, by the issue of 8% Debentures of Glorious Ltd. at
igatecompetition, a new company Glorious Ltd, is to be formed to which the assets and liabilities of
a premium of 10%.
the existing companies, with certain exception, are to be transferred. The summarized Balance Sheet (ii) Plant and Machinery of Galaxy Ltd. are to be valued at Rs . 2,52,000.
of Galaxy Ltd. and Glory Ltd. as at 31st March, 2020 are as follows:
(iii) Goodwill is to be valued at : Galaxy Ltd. Rs. 4,48,000 Glory Ltd. Rs. 1,68,000
Liquidator of Glory Ltd. is appointed for collection from trade debtors and pay- (a) Share capital 1 26,80,000
ment to trade creditors.He retained the cash balance and collected Rs. 1,10,000 (b) Reserves and surplus 2 30,000
from debtors and paid Rs. 1,80,000 to trade creditors. Liquidator is entitled to re-
ceive 5% commission for collection and 2.5% for payments. The balance cash 2 Non-current liabilities
will be taken over by new company. (a) Long-term borrowings 3 3,00,000
(1) You are required to : 3 Current liabilities
(2) Compute the number of shares to be issued to the shareholders of Galaxy Ltd. and Glory (a) Trade payables 4,20,000
Ltd, assumingthe nominal value of each share in Glorious Ltd. is Rs . 10.
Total 34,30,000
Prepare Balance Sheet of Glorious Ltd., as on 1st April, 2020 and also prepare notes to the accounts as ASSETS
per Schedule III of the Companies Act, 2013. (PYP 20 Marks , Jan 21)
Answer 23 (a) i
(i) Calculation of Purchase consideration (or basis for issue of shares of Glorious Ltd. Property, plant and equipment 4 13,16,000
ii Intangible assets 5 6,16,000

Galaxy Ltd. Glory Ltd.
Purchase Consideration: Rs. Rs. 2 Current assets
Goodwill 4,48,000 1,68,000 (a) Inventories 6 7,74,000
Freehold property 5,88,000 3,36,000 (b) Trade receivables 4,62,000

Plant and Machinery 2,52,000 84,000 (c) Cash and cash equivalents 7 2,62,000
Motor vehicles 56,000 - Total 34,30,000
Inventory 3,36,000 4,38,000 Notes to accounts:
Trade receivables 4,62,000 -
Secured 8% 3,000 Debentures of Rs.100 each
Cash at Bank 2,38,000 24,000
4. Property Plant and Equipment
23,80,000 10,50,000
Freehold property
Less: Liabilities: Galaxy Ltd. 5,88,000
6% Debentures (3,00,000 x 110%) - (3,30,000) Glory Ltd. 3,36,000 9,24,000
Trade payables (4,20,000) Plant and Machinery

Galaxy Ltd. 2,52,000
Net Assets taken over 19,60,000 7,20,000 Glory Ltd. 84,000 3,36,000
To be satisfied by issue of shares of Glorious. Ltd. 1,96,000 72,000 Motor vehicles - Galaxy Ltd. 56,000
@ Rs. 10 each 13,16,000
Balance Sheet of Glorious Ltd. as at 1st April, 2020 5 Intangible assets
Particulars Note No Amount Goodwill

Rs.
Glory Ltd. 1,68,000 6,16,000
EQUITY AND LIABILITIES 6 Inventories
1 Shareholders’ funds Galaxy Ltd. 3,36,000

Glory Ltd. 4,38,000 7,74,000
14% Preference Shares of Rs. 100 each 450 300

1,650 1,425
Glory Ltd.(As per working note) 24,000 2,62,000
Revaluation Reserve 225 150
Question 24 General Reserve 255 225

Investment Allowance Reserve 75 75
Dark Ltd. and Fair Ltd. were amalgamated on and from 1st April, 2021. A new company Bright Ltd. was
formed to take over the business of the existing companies. The balance Sheets of Dark Ltd. and Fair Profit and Loss Account 75 45
Ltd. as at 31st March, 2021 are given below: 630 495
(Rs. In Lakhs) Additional Information:
(i) Bright Limited will issue 5 equity shares for each equity share of Dark Limited and 4
Particulars Note No. Dark Fair Ltd. equity sharesfor each equity share of Fair Limited. The shares are to be issued @ Rs. 35
Ltd. each having a face value of
1 Equity and Liabilities Rs. 10 per share.
(1) Shareholders’ Funds
(ii) Preference shareholders of the two companies are issued equivalent number of 16%
Share Capital 1 1,650 1,425 preferenceshares of Bright Limited at a price of Rs. 160 per share (face value Rs. 100).
(iii) 10% Debenture holders of Dark Limited and Fair Limited are discharged by Bright Lim-
Reserves and Surplus 2 630 495 ited, issuingsuch number of its 16% Debentures of Rs. 100 each so as to maintain the in-
terest.
(2) Non-Current Liabilities Long TermBorrow-
ings: 90 45 (iv) Investment allowance reserve is to be maintained for 4 more years.
10% Debentures of 100 Rs. each (v) Liquidation expenses are for Dark Limited Rs. 6,00,000 and for Fair Limited Rs. 3,00,000. It
is decided that these expenses would be borne by Bright Limited.
(3) Current Liabilities Trade Payables 630 285 (vi) All the assets and liabilities of Dark Limited and Fair Limited are taken over at book value.
Total 3,000 2,250 (vii) Authorized equity share capital of Bright Limited is Rs. 15,00,00,000 divided into equity
share of Rs. 10 each. After issuing required number of shares to the liquidators of Dark
II Assets
Limited and Fair Limited, Bright Limited issued balance shares to public. The issue was
(1) Non Current Assets 1,350 975 fully subscribed.
(a) Property, Plant and Equipment You are required to prepare Balance Sheet of Bright Limited as at 1st April, 2021 after amalgamation has
been carried out on the basis of Amalgamation in the nature of purchase (PYP 15 Marks Dec’21) (Same
concept different figures PYP 15 Marks Nov’20)(MTP 15 Marks Sep ’23)
(b) Non Current Investments 225 75
(2) Current Assets Answer 24
(a) Inventories 525 375 Balance Sheet of Bright Ltd. as at 1st April, 2021
(b) Trade Receivables 450 525
(c) Cash and Cash Equivalents 450 300 Particulars Note No. (Rs. in
lakhs)
Total 3,000 2,250
Notes to Accounts
Dark Ltd. Fair Ltd.
(Rs.in (Rs.in (a) Share Capital 1 2,250
Lakh) Lakh) (b) Reserves and Surplus 2 4,200
1 Share Capital (2) Non-Current Liabilities
Equity Shares of Rs. 100 each 1, 200 1,125
Long-term borrowings 3 84.375

(3) Current Liabilities CA CS CMA Mentoring Program Reviews
Trade payables 4 915
Total 7449.375
II. Assets
(a) i. Property, plant and equipment 5 2,325
ii. Intangible assets 6 633.375
(b) Non-current investments 7 300
(2) Current assets
(a) Inventories 8 900
(b) Trade receivables 9 975
(c) Cash and cash equivalents 10 2316
Total 7449.375
Notes to Accounts
1. Share Capital
Authorized Share Capital
1,50,00,000 Equity shares of Rs.10 each 1500
7,50,000 16% Preference Share of 100 each 750
Issued: 1,50,00,000 Equity shares of Rs. 10 each 1500
(Out of which 1,05,00,000 Shares were Issued for
consideration other than cash)
7,50,000 16% Preference Shares of 100 each

(Issued for consideration other than cash) 750 2,250
2. Reserves and surplus
Securities Premium Account
(1,50,00,000 shares ×Rs. 25) 3750
(7,50,000 shares × Rs. 60) 450 4,200
Investment Allowance Reserve 150
Amalgamation Adjustment Reserve (150) 4,200
16% Debentures (56,25,000+28,12,500)
(W.N. 3) 84.375
4. Trade payables
Dark Ltd. 630
Fair Ltd. 285 915
i.e. 4,50,000 shares × Rs. 160 each

5. Property, plant & equipment
720
Land and Building 1350
Plant and Machinery 975 2,325
6. Intangible assets 480
(b) Equity shareholders:
Goodwill [W.N. 2] 624.375
(12,00,00,000X 5)
Add: liquidation exp. (6+3) 9.00 633.375 2,100
100
7. Non-current Investments
Investments (225+75) 300
i.e. 60,00,000 shares x Rs. 35 each
8. Inventories 11,25,00,000X4
(100)
Dark Ltd. 525
Fair Ltd. 375 900
Amount of Purchase Consideration Net
9 Trade receivables
2,820 1,575
Dark Ltd. 450
Fair Ltd. 525 975 Assets Taken Over 2,055
10 Cash & cash equivalents
(2) Assets taken over:
Dark Ltd. 450 1,350 975
Property Plant & Equity
Fair Ltd. 300
Non-Current Investments 225 75
Liquidation Expenses (6+3) (9)
Inventory 525 375
Shares issued for cash (45 lakh shares x Rs.35) 1575
2316 Trade receiv- 450 525
ables
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ONE STOP SOLUTION FOR ALL ICAI RESOURCES

ADVANCED MAY 2024 & NOV 2024

Paper 1-Advanced Accounting

Sl No. Chapter Name Page No,

2. Framework for Preparation and Presentation of 06-31

3. Applicability of Accounting Standards 32-39

4.1 AS 1- Disclosure of Accounting Policies 40-50

4.2 AS 3 - Cash Flow Statements 51-79

4.3 AS 17- Segment Reporting 80-98

4.4 AS 18 - Related Party Disclosures 99-119

4.5 AS 20 - EPS 120-143

4.6 AS 24 - Discontinuing Operations 144-155

4.7 AS 25 Interim Financial Reporting 156-173

5.1 AS 2 - Valuation of Inventory 174-197

5.2 AS 10 - Property, Plant & Equipment 198-231

5.3 AS 13 - Accounting for Investments 232-318

5.4 AS 16 - Borrowing Costs 319-344

5.5 AS 19 - Leases 345-356

5.6 AS 26 - Intangible Assets 357-374

5.7 AS 28 - Impairment of Assets 375-397

6.1 Employee Benefits 398-414

6.2 AS 29 - Provisions, Contingent Liabilities & 415-434

CAmentoringprogram.org +91 7890770777 https://t.me/caraviagarwaloriginal all subjects free Question

Paper 1-Advanced Accounting Paper 1-Advanced Accounting

7.3 AS 11 - The Effects of Changes in Foreign 463-488 StudyMat. Q.3 to Q.11

9.1 AS 12 - Accounting for Government Grants 551-576

9.2 AS 14 - Accounting for Amalgamation 577-588

10.1 AS 21 - Consolidated Financial Statements 589-711

10.2 AS 23 - Accounting for Investments in Associates in 712-721

10.3 AS 27- Financial Reporting of Interests in Joint 722-738

11.1 Preparation of Financial Statements 739-826

11.2 Cash Flow Statement 827-891

12 Buy back of security 892-971

13 Amalgamation of Companies 972-1078

14 Accounting for Reconstruction of Companies 1079-1181

15 Accounting for Branches including Foreign 1182 -1300

Paper 1-Advanced Accounting Paper 1-Advanced Accounting

The main advantages of setting accounting standards are as follows:

c. Accounting Standards prevent manipulation of data by the management.

Paper 1-Advanced Accounting Paper 1-Advanced Accounting

a. Cross border flow of money. b. Comparability of financial statements Question 10

a. Accounting Standards makes the financial statements of different companies comparable

b. Accounting Standards prevent any misleading accounting treatment.

Briefly explain the process of issuance of Indian Accounting Standards.

Paper 1-Advanced Accounting Paper 1-Advanced Accounting

MTP Q.4 Q.19 A brief explanation of each measurement basis is as follows:

Paper 1-Advanced Accounting Paper 1-Advanced Accounting

(ii) Shareholders’ Fund / Reserve & Surplus

(3) Rent Outstanding 7.70 - 2.40 = 5.30 Question 6

(vii) Money received against share warrant.

(viii) Cash equivalents. (MTP 4 Marks, Mar’22, 5 Marks, April’19)

Paper 1-Advanced Accounting Paper 1-Advanced Accounting

(14) Payments to creditors by cheque 60,000 Cash in hand 2,000

Paper 1-Advanced Accounting Paper 1-Advanced Accounting

By Balance c/d (given) 18,000 To sales (balancing 500 - By Creditors 60,000

Particulars Cash Bank Cash Bank 1,20,000 Equity shares 96,00,000

₹ ₹ ₹ ₹ Capital reserves (excluding revaluation reserve) 45,000

To balance b/d 7,500 2,500 By Purchases 1,000 - Securities premium 50,000

To debtors - 76,000 By Expenses 9,000 15% Debentures 65,00,000