ACCOUNTING

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CA INTER PAPER 1
: Accounting

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 DISCLAIMER
This work of compilation done by CA Ravi Agarwal and Team is solely for fulfilling the motive of
benefitting the students. ALL THE QUESTIONS AND THEIR SOLUTIONS ARE TAKEN FROM MATERIAL
ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) AND WE DO NOT CLAIM
ANY COPYRIGHTS OR ANY SORT OF RIGHTS OVER THE CONTENT IN THIS MATERIAL. No liability
arising out of use of this material will be accepted by us.

NOTE FOR STUDENTS

All the questions and its solutions are taken from the latest material available on Institute Website
as in the month of DEC 2021 . Any further updates / amendments / changes in syllabus or
provisions or concepts are to be incorporated by the students timely as issued by ICAI. We will try
our level best to cover up such changes in the future version of this material, but it is advisable for
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Table of Contents

Chapter 1 introduction to Accounting Standard ................................................................... 4

Chapter 2 Framework for Preparation and Presentation of Financial Statement .............. 11
Chapter 3 Overview of Accounting Standards ..................................................................... 27
Chapter 4 Financial Statements of Companies .................................................................. 172
Chapter 5 Profit or Loss Pre and Post Incorporation ......................................................... 359
Chapter 6 Accounting for Bonus issue and Right Issue ..................................................... 414
Chapter 7 Redemption of Preference shares .................................................................... 455
Chapter 8 Redemption of Debentures............................................................................... 507
Chapter 9 Investment Accounts ........................................................................................ 545
Chapter 10 Insurance claims for loss of stock and loss of profit………………………………………………..611

Chapter 11 Hire Purchase & Installment Sale Transaction ................................................ 675

Chapter 12 Departmental Accounts .................................................................................. 719
Chapter 13 Accounting for Branches including foreign Branch......................................... 770
Chapter 14 Accounting from Incomplete Record .............................................................. 854
MTP-I JULY 2021………………………………………………………………………………………………………………………..942

MTP-II JULY 2021……………………………………………………………………………………………………………………….966

RTP-NOV 2021……………………………………………………………………………………………………………………..…..990

PAST PAPER JULY 21………………………………………………………………………………………………………………….1025

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MTP—I-NOV 2021…………………………………………………………………………………………………………………..1059

MTP-II-NOV 2021……………………………………………………………………………………………………………………1088
 Chapter 1 Introduction to Accounting Standard

QUESTION 1 (STUDY MATERIAL)

Accounting Standards for non-corporate entities in India are issued by

a) Central Govt.
b) State Govt.
c) Institute of Chartered Accountants of India.
Answer : (c)

QUESTION 2 (STUDY MATERIAL)

Accounting Standards

a) Harmonise accounting policies and eliminate the non-comparability of financial

statements.
b) It proves the reliability of financial statements

c) Both (a) and (b)

Answer : (c)

QUESTION 3 (STUDY MATERIAL)

It is essential to standardize the accounting principles and policies in order to ensure

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a) Transparency.
b) Consistency.
c) Both (a) and(b)
Answer: (c)
QUESTION 4 (STUDY MATERIAL)

Which committee is responsible for approval of accounting standards and their modification
for the purpose of applicability to companies?

a) NFRA.
b) Central Government Advisory Committee.
c) Advisory Committee for approval of Accounting Standards.
Answer: (a)

QUESTION 5 (STUDY MATERIAL)

Global Standards facilitate

a) Cross border flow of money.

b) Comparability of financial statements.
c) Both (a) and(b).
Answer: (c)

QUESTION 6. (STUDY MATERIAL)

Additional guidance given in Ind AS over and above what is given in IFRS are called
(a) Carve-outs.

(b) Carve-ins.

(c) Carve clarifications.

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Answer: (b)

QUESTION 7.(STUDY MATERIAL)

IASB stands for

(a) International Accounting Standards Bureau

(b) International Advisory Standards Board

(c) International Accounting Standard Board.

Answer: (c)

QUESTION 8(STUDY MATERIAL)

IFRS stands for

(a) International Financial Reporting System

(b) International Finance Reporting Standard

(c) International Financial Reporting Standard.

Answer: (c)

QUESTION 9.(STUDY MATERIAL)

Phase I of Ind AS was applicable to:

(a) All listed companies in India or outside India

(b) Companies with turnover INR 500 crores or more

(c) Companies with net worth INR 500 crores or more.

Answer: (c)

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QUESTION 10 (STUDY MATERIAL)

Explain the objective of “Accounting Standards” in brief. State the advantages of setting
Accounting Standards.
Answer

Accounting Standards are selected set of accounting policies or broad guidelines regarding the
principles and methods to be chosen out of several alternatives. These standards harmonize the
diverse accounting polices and practices at present in use in India. The main advantage of setting
accounting uniformity, comparability and quality improvement in the preparation and presentation
of financial statements.

QUESTION 11 (STUDY MATERIAL)

What is the significance of issue of Indian Accounting Standards?

Answer: 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.
Accordingly, while formulating IFRS-converged Indian Accounting Standards (Ind AS), efforts have
been made to keep these Standards, as far as possible, in line with the corresponding
IAS/IFRS and departures have been made where considered absolutely essential.

QUESTION 12 (STUDY MATERIAL)

Explain the significance of emergence of IFRS as Global Standards.

Answer: Global Standards facilitate cross border flow of money, global listing in different bourses
and comparability of financial statements. Global Standards improves the ability of investors to
compare investments on a global basis and thus lowers their risk of errors of judgment. It
facilitates accounting and reporting for companies with global operations and eliminates some

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costly requirements say reinstatement of financial statements.

QUESTION 13 (MTP MARCH 19, NOV 2020 RTP)

What are the issues, with which Accounting Standards deal?

ANSWER:

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 reader, and
(iv) Disclosure requirements which should be there to enable the public at large and the
stakeholders and the potential investors in particular, to get an insight into what these financial
statements are trying to reflect and thereby facilitating them to take prudent and informed
business decisions.

QUESTION 14 (MTP APRIL 19)

What are Accounting Standards? Explain the issues, with which the deal.

ANSWER:

Accounting Standards (ASs) are written policy documents issued by expert accounting body or by
government or other regulatory body covering the aspects of recognition, measurement,
presentation and disclosure of accounting transactions in the financial statements. Accounting
Standards reduce the accounting alternatives in the preparation of financial statements and ensure
standardization of alternative accounting treatments and comparability of financial statements of
different enterprises.

QUESTION 15 (PAST PAPER NOVEMBER 18)

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"Accounting Standards standardize diverse accounting policies with a view to eliminate the non-
comparability of financial statements and improve the reliability of financial statements. "Discuss
and explain the benefits of Accounting Standards.

ANSWER:

Accounting Standards standardize diverse accounting policies with a view to eliminate the
non-comparability of financial statements and improve the reliability of financial statements.
Accounting Standards 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 transparency, in the interests of users of financial
statements.

The following are the benefits of 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 of preparation of financial statements.
(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 required bylaw.
(iii) Comparability of financial statements: The application of accounting standards
would facilitate comparison of financial statements of different companies situated
in India and facilitate 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 institutions, traditions and legal systems from
one country to another give rise to differences in Accounting Standards adopted in
different countries.

QUESTION 16 (STUDY MATERIAL)

Briefly explain the process of issuance of Indian Accounting Standards.

ANSWER

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
disclosure 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

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analysis of IFRSs requirements and extensive discussion with various stakeholders.
The ICAI has worked towards convergence of global accounting standards by considering the
application 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.
Ind AS are issued by the Central Government of India under the supervision and control of ASB of
ICAI 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.
QUESTION 17 (STUDY MATERIAL)
What do you mean by Carve outs/ins in Ind AS? Explain.

ANSWER

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.
These differences are due to differences in economic conditions prevailing in India. These differences
which are in deviation to the accounting principles and practices stated in IFRS, are commonly known
as ‘Carve-outs’. Additional guidance given in Ind AS over and above what is given in IFRS, is termed as
‘Carve in’.

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Chapter 2 Framework for Preparation and
Presentation of Financial Statement
QUESTION 1 (STUDY MATERIAL)

The 'going concern' concept assumes that

(a) The business can continue in operational existence for the foreseeable future.
(b) The business cannot continue in operational existence for the foreseeable future.
(c) The business is continuing to be profitable.
Answer: (a)

QUESTION 2 (STUDY MATERIAL)

Two principal qualitative characteristics of financial statements are

(a) Understandability and materiality

(b) Relevance and reliability
(c) Relevance and materiality
Answer: (b)

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QUESTION 3 (STUDY MATERIAL)

All of the following are the components of financial statements except:

(a) Balance Sheet

(b) Profit and loss account
(c) Human Responsibility report
Answer: (c) Human Responsibility report.
QUESTION 4 (STUDY MATERIAL)

An accounting policy can be changed if the change is required

(a) By statute or accounting standard

(b) For more appropriate presentation of financial statements
(c) Both (a) and (b)
Answer: (c)

QUESTION 5 (STUDY MATERIAL)

Value of equity may change due to

(a) Contribution from or Distribution to equity participants

(b) Income earned/expenses incurred
(c) Both (a) and(b)
Answer: (c)

QUESTION 6 (STUDY MATERIAL)

Anitemthatmeetsthedefinitionofanelementoffinancialstatementsshould be recognised in the

financial statements if:

(a) It is probable that any future economic benefit associated with the item will flow to the
enterprise
(b) Item has a cost or value that can be measured with reliability
(c) Both (a) and (b)
Answer: (c)

QUESTION 7 (STUDY MATERIAL)

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A machine was acquired in exchange of an old machine and Rs.20,000 paid in
cash.ThecarryingamountofoldmachinewasRs.2,00,000whereasitsfairvalue was Rs.1,50,000 on
the date of exchange. The historical cost of the new machine will be taken as

(a) Rs.2,00,000
(b) Rs.1,70,000
(c) Rs.2,20,000
Answer: (b)
QUESTION 8. (STUDY MATERIAL)

Which of the assumption is not considered as fundamental accounting assumption?

(a) Going Concern

(b) Accrual

(c) Reliability.

Answer: (c)

QUESTION 9. (STUDY MATERIAL)

Liabilities are recorded at the undiscounted amount of cash expected to be paid on settlement of
liability in the normal course of business under:

(a) Present value.

(b) Realizable value.

(c) Current cost.

Answer: (b)

QUESTION 10 (STUDY MATERIAL)

What are the qualitative characteristics of financial statements which improve the usefulness of
the information furnished therein? (PAST EXAM NOV 2020)

Answer: The qualitative characteristics are attributes that improve the usefulness of information
provided in financial statements. Understandability; Relevance; Reliability; Comparability are the

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qualitative characteristics of financial statements

QUESTION 11 (STUDY MATERIAL)

One of the characteristics of financial statements is neutrality –Do you agree with this statement?

Answer:
Yes, one of the characteristics of financial statements is neutrality. To be reliable, the information
contained 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 analysis could shift from one
area of business to another thereby arriving at a totally different conclusion on the business results

QUESTION 12 (STUDY MATERIAL)

Balance sheet of a trader on 31st March, 20X1 is given below:

Additional information:
(a) 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.
(b) The trader’s purchases and sales in 20X1-X2 amounted to ₹ 4 lakh and ₹ 4.5 lakh respectively.
(c) The cost and net realisable value of stock on 31.03.X2 were ₹ 32,000 and
₹ 40,000 respectively.
(d) Expenses (including interest on 10% Loan of ₹ 3,500 for the year) amounted to₹ 14,900.

(e) Deferred cost is amortised equally over 4 years.

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(f) Trade receivables on 31.03.X2 is ₹ 25,000, of which ₹ 2,000 is doubtful. Collection of another ₹
4,000 depends on successful re-installation of certain product supplied to the customer.

(g) Closing trade payable is ₹ 12,000, which is likely to be settled at 5% discount.

(h) Cash balance on 31.03.X2 is ₹ 37,100.

(i) There is an early repayment penalty for the loan ₹ 2,500.

You are required to prepare Profit and Loss Accounts and Balance Sheets of the traderin both cases
(i) assuming going concern (ii) not assuming going concern.
ANSWER
Profit and Loss Account for the year ended 31st March, 20X2

Balance Sheet as at 31st March, 20X2

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QUESTION 13 (STUDY MATERIAL)

Carrying amount of a machine is ₹ 40,000 (Historical cost less depreciation). The machine is
expected to generate ₹ 10,000 net cash inflow. The net realisable value(or net selling price) of the
machine on current date is ₹ 35,000. The enterprise’s required earning rate is 10% per year.
The enterprise can either use the machine to earn ₹ 10,000 for 5 years. This is
equivalent of receiving present value of ₹ 10,000 for 5 years at discounting rate 10%
on current date.

The value realised by use of the asset is called value in use. The value in use is the value of asset by
present value convention.

Value in use = ₹ 10,000 (0.909 + 0.826 + 0.751 + 0.683 + 0.621) = ₹ 37,900

Net selling price = ₹ 35,000

The present value of the asset is ₹ 37,900, which is called its recoverable value. It is
obviously not appropriate to carry any asset at a value higher than its recoverable
value. Thus the asset is currently overstated by ₹ 2,100 (₹ 40,000 – ₹ 37,900).

QUESTION 14 (STUDY MATERIAL)

A trader commenced business on 01/01/20X1 with ₹ 12,000 represented by 6,000units of a certain
product at ₹ 2 per unit. During the year 20X1 he sold these units at₹ 3 per unit and had withdrawn
₹ 6,000. Thus: Opening Equity = ₹ 12,000 represented by 6,000 units at ₹ 2 per unit.
Closing Equity = ₹ 12,000 (₹ 18,000 – ₹ 6,000) represented entirely by cash.
Retained Profit = ₹ 12,000 – ₹ 12,000 = Nil
The trader can start year 20X2 by purchasing 6,000 units at ₹ 2 per unit once again for selling them
at ₹ 3 per unit. The whole process can repeat endlessly if there is no change in purchase price of
the product.

Financial capital maintenance at current purchasing power: Under this convention, opening and
closing equity at historical costs are restated at closing prices using average price indices. (For
example, suppose opening equity at historical cost is ₹ 3,00,000 and opening price index is 100. The
opening equity at closing prices is ₹ 3,60,000 if closing price index is 120). A positive retained profit

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by this method means the business has enough funds to replace its assets at average closing price.
This may not serve the purpose because prices of all assets do not change at average rate in real
situations. For example, price of a machine can increase by 30%while the average increase is 20%.

QUESTION 15 (STUDY MATERIAL)

In the previous illustration (Illustration 3), suppose that the average price indices at
the beginning and at the end of year are 100 and 120 respectively.
Opening Equity = ₹ 12,000 represented by 6,000 units at ₹ 2 per unit.
Opening equity at closing price = (₹ 12,000 / 100) x 120 = ₹ 14,400 (6,000 x ₹ 2.40)
Closing Equity at closing price
= ₹ 12,000 (₹ 18,000 – ₹ 6,000) represented entirely by cash.
Retained Profit = ₹ 12,000 – ₹ 14,400 = (–) ₹ 2,400
The negative retained profit indicates that the trader has failed to maintain his
capital. The available fund of ₹ 12,000 is not sufficient to buy 6,000 units again at

increased price ₹ 2.40 per unit. In fact, he should have restricted his drawings to
₹ 3,600 (₹ 6,000 – ₹ 2,400).
Had the trader withdrawn ₹ 3,600 instead of ₹ 6,000, he would have left with ₹ 14,400,
the fund required to buy 6,000 units at ₹ 2.40 per unit.

QUESTION 16 (STUDY MATERIAL)

A trader commenced business on 01/01/20X1 with ₹ 12,000 represented by 6,000units of a certain
product at₹ 2 per unit. During the year 20X1 he sold these units at₹ 3 per unit and had withdrawn
₹ 6,000. Let us assume that the price of the product at the end of year is ₹ 2.50 per unit. In other
words, the specific price index applicable to the product is 125.

Current cost of opening stock = (₹ 12,000 / 100) x 125 = 6,000 x ₹ 2.50 = ₹ 15,000
Current cost of closing cash = ₹ 12,000 (₹ 18,000 – ₹ 6,000)
Opening equity at closing current costs = ₹ 15,000
Closing equity at closing current costs = ₹ 12,000
Retained Profit = ₹ 12,000 – ₹ 15,000 = (-) ₹ 3,000

The negative retained profit indicates that the trader has failed to maintain his capital. The
available fund of₹ 12,000 is not sufficient to buy 6,000 units again at increased price of ₹ 2.50 per
unit. The drawings should have been restricted to ₹ 3,000(₹ 6,000 – ₹ 3,000). Had the trader
withdrawn ₹ 3,000 instead of ₹ 6,000, he would have left with ₹15,000, the fund required to buy
6,000 units at ₹ 2.50 per unit. You are required to compute the Capital maintenance under all three
bases ie. (i)Historical costs, (ii) Current purchasing power and (iii) Physical capital maintenance.

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Solution
Financial Capital Maintenance at historical costs

Closing capital (At historical cost) 12,000

Less: Capital to be maintained
Opening capital (At historical cost) 12,000
Introduction (At historical cost) Nil (12,000)
Retained profit Nil
Financial Capital Maintenance at current purchasing power

Closing capital (At closing price) 12,000

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

Physical Capital Maintenance

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

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

Practical Questions

Question 17(STUDY MATERIAL, RTP NOV 2018, NOV 2019) (RTP JULY 2021)

Mohan started a business on 1st April 20X1 with ₹ 12,00,000 represented by 60,000 units of ₹ 20
each. 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 the year 20X1-X2 if Financial Capital is maintained at historical cost.

ANSWER 17

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Question 18(STUDY MATERIAL)

Opening Balance Sheet of Mr. A is showing the aggregate value of assets, liabilities and equity ₹ 8
lakh, ₹ 3 lakh and ₹ 5 lakh respectively. During accounting period,
Mr. A has the following transactions:
(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
(4) Mr. A withdrew ₹ 9,000 for his personal use.
You are required to show the effect of above transactions on Balance Sheet in the
form of Assets - Liabilities = Equity after each transaction.

ANSWER 18
Effects of each transaction on Balance sheet of the trader are shown below:

Question 19(STUDY MATERIAL)

Balance Sheet of Anurag Trading Co. on 31st March, 20X1 is given below:

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Additional Information:

(i) Remaining life of Property, Plant and Equipment is 5 years with even use. The net realizable
value of Property, Plant and Equipment as on 31st March, 20X2was ₹ 64,000.
(ii) Firm’s sales and purchases for the year 20X1-X2 amounted to ₹ 5 lacs and ₹ 4.50 lacs
respectively.
(iii) The cost and net realizable value of the stock were ₹ 34,000 and ₹ 38,000 respectively.

(iv) General Expenses for the year 20X1-X2 were ₹16,500.

(v) Deferred Expenditure is normally amortized equally over 4 years starting from F.Y. 20X0-X1 i.e.
₹5,000 per year.
(vi) Out of trade receivables worth ₹10,000, collection of ₹4,000 depends on successful re-design of
certain product already supplied to the customer.
(vii) Closing trade payable is ₹10,000, which is likely to be settled at 95%.
(viii) 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
Concern.

ANSWER 19

Profit and Loss Account of Anurag Trading Co. for the year ended
31st March, 20X2
(Assuming business is not a going concern)

QUESTION 20 ( RTP, PAST PAPER MAY 18)

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Briefly explain the elements of financial statements.

ANSWER:

Elements of Financial Statements

 Asset Resource controlled by the enterprise as a result of past
events from which future economic benefits are expected
to flow to the enterprise
Liability Present obligation of the enterprise arising from past
events, the settlement of which is expected to result in an
outflow of a resource embodying economic benefits.
Equity Residual interest in the assets of an enterprise after
deducting all its liabilities
Income/gain Increase in economic benefits during the accounting
period in the form of inflows or enhancement of assets or
decreases in liabilities that result in increase in equity
other than those relating to contributions from equity
participants
Expense/loss Decrease in economic benefits during the accounting
period in the form of outflows or depletions of assets or
incurrence of liabilities that result in decrease in equity
other than those relating to distributions to equity
participants

QUESTION 21 ( RTP, MAY 19) (RTP NOV 2020) (RTP JULY 2021)

(A) With regard to financial statements name any four:-

(1) Users

(2) Qualitative Characteristics

(3) Elements

(B) What are the fundamental accounting assumptions?

Answer:

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(A) (1) Users of financial statements

Investors, Employees, Lenders, Supplies/Creditors, Customers, Government & Public

(2) Qualitative Characteristics of Financial Statements

Understandability, Relevance, Comparability, Reliability & Faithful Representation

(3) Elements of Financial Statements:

Asset, Liability, Equity, Income/Gain and Expense/Loss

(B) Fundamental Accounting Assumptions:

Accrual, Going Concern and Consistency

QUESTION 22 (MTP OCTOBER 19) (MTP OCTOBER 20) (RTP MAY 2020)
ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom-made machine
amounting to Rs. 4,00,000. As on 31st March, 2018 before delivery of the machine, ABC Ltd.
had to change its method of production. The new method will not require the machine
ordered and so it shall be scrapped after delivery. The expected scrap value is ‘NIL’.

Show the treatment of machine in the books of ABC Ltd.

ANSWER:
A liability is recognized when outflow of economic resources in settlement of a present obligation
can be anticipated and the value of outflow can be reliably measured. In the given case, ABC Ltd.
should recognize a liability of Rs. 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 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 of
purchase price of the machine should be recognized as an expense. Hence ABC Ltd. should charge
the amount of Rs. 4,00,000 (being loss due to change in production method) to Profit and loss
statement and record the corresponding liability (amount payable to XYZ Ltd.) for the same
amount in the books for the year ended 31 st March,2018.

QUESTION 23 (RTP NOV 2018) 22

Explain in brief, the alternative measurement bases, for determining the value at which an
element can be recognized in the Balance Sheet or Statement of Profit and Loss.
Answer:
The Framework for Recognition and Presentation of Financial statements recognizes four alternative
measurement bases for the purpose of determining the value at which an element can be recognized
in the balance sheet or statement of profit and loss.
These bases are: (i)Historical Cost; (ii)Current cost (iii) Realizable (Settlement) Value and (iv) Present
Value.

A brief explanation of each measurement basis is as follows:

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 acquisition.
Liabilities are generally recorded at the amount of proceeds received in exchange for the obligation.

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
acquired currently. 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 under
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 24 (PAST PAPER MAY 19)

Write short note on Timing difference and Permanent Difference as per AS 22.

ANSWER

Matching of taxes against revenue for a period poses special problems arising from the fact that in
number of cases, taxable income may be different from the accounting income. The divergence
between taxable income may be different from the accounting income arises due to two main

23
reasons: Firstly, there are differences between items of revenue and expenses as appearing in the
statement of profit and loss and the items which are considered as revenue, expenses or deductions
for tax purposes, known 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 amount which is recognised for the computation of taxable income,
known as Timing Difference.
Permanent differences are the differences between taxable income and accounting income which
arise 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.
Timing differences are those differences between taxable income and accounting income which arise
in one accounting period and are capable of reversal in one or more subsequent periods. For e.g.,
Depreciation, Bonus, etc.

QUESTION 25 (PAST PAPER MAY 19)

State the circumstances when Garner V/s Murray rule is not applicable.

ANSWER

Garner vs Murray rule is non-applicable in the following cases:

1. When the solvent partner has a debit balance in the capital account.
Only solvent partners will bear the loss of capital deficiency of insolvent partner in their capital ratio.
If incidentally a solvent partner has a debit balance in his capital account, he will escape the liability
to bear the loss due to insolvency of another partner.

2. When the firm has only two partners.

3. When there is an agreement between the partners to share the deficiency in capital account of
insolvent partner.

4. When all the partners of the firm are insolvent.

QUESTION 26 (PAST PAPER NOV 18)

"Accounting Standards standardize diverse accounting policies with a view to eliminate the non-
comparability of financial statements and improve the reliability of financial statements. "Discuss
and explain the benefits of Accounting Standards.

ANSWER

24
Accounting Standards standardize diverse accounting policies with a view to eliminate the non-
comparability of financial statements and improve the reliability of financial statements. Accounting
Standards 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 transparency, in the interests of users of financial statements.

The following are the benefits of 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 of
preparation of financial statements.

(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 required by law.

(iii) Comparability of financial statements: The application of accounting standards would facilitate
comparison of financial statements of different companies situated in India and facilitate
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 institutions, traditions
and legal systems from one country to another give rise to differences in Accounting Standards
adopted in different countries

QUESTION 26 (PAST PAPER NOV 18)

Give an analytical statement of distinction between an ordinary partnership firm and a limited
liability partnership.

ANSWER
Distinction between an ordinary partnership firm and an LLP

Key Elements Partnerships LLPs

1 Applicable Law Indian Partnership The Limited Liability Partnerships Act, 2008
Act 1932
2 Registration Optional Compulsory with ROC
3 Creation Created by an Created by Law
Agreement
4 Body Corporate No Yes
5 Separate Legal No Yes
Entity

25
6 Perpetual Partnerships do It has perpetual succession and individual partners
Succession not have may come and go
perpetual
succession
7 Number of Minimum 2 and Minimum 2 but no maximum limit
Partners Maximum 20
(subject to 10 for
banks)
8 Ownership of Firm cannot own The LLP as an independent entity can own assets
Assets any assets. The
partners own the
assets of the firm
9 Liability of Unlimited: Limited to the extent of their contribution towards
Partners/ Partners are LLP except in case of intentional fraud or wrongful
Members severally and act of omission or commission by a partner.
jointly liable for
actions of other
partners and the
firm and their
liability extends to
personal assets
10 Principal Agent Partners are the Partners are agents of the firm only and not of other
Relationship agents of the firm partners
and of each other

26
Chapter 3 Overview of Accounting Standards

UNIT-I

MCQ

1. Non-corporate entities which are not Level I entities whose turnover (excluding other income)
exceeds rupees ___________ but does not exceed rupees fifty crore in the immediately preceding
accounting year are classified as Level II entities.

(a) Five crores.

(b) Two crores.

(c) One crore.

ANSWER 1-C

2. The following Accounting Standard is not applicable to Non-corporate Entities falling in Level II
in its entirety

(a) AS 10.

(b) AS17.

(c) AS 2.

ANSWER 2-B

27
3. All commercial, industrial and business reporting entities, whose turnover (excluding other
income) exceeds rupees fifty crore in the immediately preceding accounting year,
are classified as

(a) Level II entities.

(b) Level I entities.

(c) Level III entities.

ANSWER 3-B

Theory Questions

1. What are the issues, with which Accounting Standards deal?

ANSWER 1
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 reader, and (iv) Disclosure requirements.

2. List the criteria to be applied for rating a non-corporate entity as Level-I entity and Level II
entity for the purpose of compliance of Accounting Standards in India. (JAN 2021)

ANSWER 2

Criteria for classification of non-corporate entities as decided by the Institute of Chartered

Accountants of India

Level I Entities

Non-corporate entities which fall in any one or more of the following categories, at the end of the
relevant accounting period, are classified as Level I entities:

(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.

(ii) Banks (including co-operative banks), financial institutions or entities carrying on insurance
business.

28
(iii) All commercial, industrial and business reporting entities, whose turnover (excluding other
income) exceeds rupees fifty crore in the immediately preceding accounting year.

(iv) All commercial, industrial and business reporting entities having borrowings (including public
deposits) in excess of rupees ten crore at any time during the immediately preceding accounting
year.

(v) Holding and subsidiary entities of any one of the above.

Level II Entities (SMEs)

Non-corporate entities which are not Level I entities but fall in any one or more of the following
categories are classified as Level II entities:

(i) All commercial, industrial and business reporting entities, whose turnover (excluding other
income) exceeds rupees one crore but does not exceed rupees fifty crore in the immediately
preceding accounting year.

(ii) All commercial, industrial and business reporting entities having borrowings (including public
deposits) in excess of rupees one crore but not in excess of rupees ten crore at any time during the
immediately preceding accounting year.

(iii) Holding and subsidiary entities of any one of the above.

Practical Questions

Question 1
XYZ Ltd., with a turnover of ₹ 35 lakhs and borrowings of ₹ 10 lakhs 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 (AS) Rules, 2006.
If XYZ is a partnership firm, is there any other exemption additionally available?

ANSWER 1
The question deals with the issue of Applicability of Accounting Standards for corporate & non-
corporate entities. The companies can be classified under two categories via SMCs and Non SMCs
under the Companies (AS) Rules, 2006.
As per the Companies (AS) Rules, 2006, criteria for above classification as SMCs, are:
“Small and Medium Sized Company” (SMC) means, a company-

29
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;

which is not a bank, financial institution or an insurance company;

whose turnover (excluding other income) does not exceed rupees fifty crore in the immediately
preceding accounting year;

which does not have borrowings (including public deposits) in excess of rupees ten crore at any
time during the immediately preceding accounting year; and
 which is not a holding or subsidiary company of a company which is not a small and medium-sized
company.

Since, XYZ Ltd.’s turnover of ₹ 35 lakhs does not exceed ₹ 50 crores and borrowings of ₹ 10 lakhs are
less than ₹ 10 crores, it is a small and medium sized company (SMC).

The following relaxations and exemptions are available to XYZ Ltd as per the criteria laid down for
SMCs/Non SMCs:

1. AS 3 “Cash Flow Statements” is not mandatory.

2. AS 17 “Segment Reporting” is not mandatory.

3. SMCs are exempt from some paragraphs of AS 19 “Leases”.

4. SMCs are exempt from disclosures of diluted EPS (both including and excluding extraordinary
items).

5. SMCs are allowed to measure the ‘value in use’ on the basis of reasonable estimate thereof
instead of computing the value in use by present value technique under AS 28 “Impairment of
Assets”.

6. SMCs are exempt from certain disclosure requirements of AS 29 (Revised) “Provisions, Contingent
Liabilities and Contingent Assets”.

7. SMCs are exempt from certain requirements of AS 15 “Employee Benefits”.

8. Accounting Standards 21, 23, 27 are not applicable to SMCs.

However, if XYZ is a partnership firm and not a corporate, then its classification will be done on the
basis of the classification of non-corporate entities as prescribed by the ICAI. Accordingly, to ICAI,
non-corporate entities can be classified under 3 levels viz Level I, Level II (SMEs) and Level III (SMEs).

30
Since, turnover of XYZ, a partnership firm is less than ₹ 1 crore & borrowings of ₹ 10 lakhs is less than
₹ 1 crore, therefore, it will be classified as Level III SME. In this case, AS 3, AS 17, AS 18, AS 21
(Revised), AS 23, AS 24, AS 27 will not be applicable to XYZ a partnership firm. Relaxations from
certain requirements in respect of AS 15, AS 19, AS 20, AS 25, AS 28 and AS 29 (Revised) are also
available to XYZ a partnership firm.
Question 2
A company was classified as Non-SMC in 20X1-20X2. In 20X2-20X3, it has been classified as SMC.
The management desires to avail the exemption or relaxations available for SMCs in 20X2-20X3.
However, the accountant of the company does not agree with the same. Comment.

As per Rule 5 of the Companies (Accounting Standards) Rules, 2006, an existing company, which
was previously not an SMC and subsequently becomes an SMC, should not be qualified for
exemption or relaxation in respect of accounting standards available to an SMC until the company
remains an SMC for two consecutive accounting periods. Therefore, the management of the
company cannot avail the exemptions available with the SMCs for the year ended 31st March,
20X3.

UNIT-II

(STUDY MATERIAL)

QUESTION 1 (STUDY MATERIAL)

M/s Omega & Co. (a partnership firm), had a turnover of Rs. 1.25 crores (excluding other
income) and borrowings of Rs. 0.95 crores in the previous year. It wants to avail the exemptions
available in application of Accounting Standards to non-corporate entities for the year ended
31.3.2016. Advise the management of M/s Omega & Co in respect of the exemptions of
provisions of ASs, as per the directive issued by the ICAI.

Answer

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 3 levels viz Level I, Level II (SMEs) and Level III(SMEs).

31
An entity whose turnover (excluding other income) exceeds rupees fifty crore in the immediately
preceding accounting year, will fall under the category of Level I entities. Non-corporate entities
which are not Level I entities but fall in any one or more of the following categories are classified
as Level II entities:

(i) All commercial, industrial and business reporting entities, whose turnover
(excluding other income) exceeds rupees one crore but does not exceed rupees fifty crore in
the immediately preceding accounting year.
(ii) All commercial, industrial and business reporting entities having borrowings (including
public deposits) in excess of rupees one crore but not in excess of rupees ten crore at any
time during the immediately preceding accounting year.
(iii) Holding and subsidiary entities of any one of the above.

As the turnover of M/s Omega &Co. is more than Rs. 1crore, it falls under 1st
criteriaofLevelIInon-corporateentitiesasdefinedabove.EvenifitsborrowingsofRs.0.95 crores is less
than Rs. 1 crores, it will be classified as Level II Entity. In this case, AS 3, AS 17, AS 21 (Revised), AS
23, AS 27 will not be applicable to M/s Omega &Co. Relaxations from certain requirements in
respect of AS 15, AS 19, AS 20, AS 25,AS28 and AS29(Revised) are also available to M/s Omega &
Co.

QUESTION 2 (STUDY MATERIAL)

Suppose a trader has purchased 500 units of certain article @ Rs. 10 per unit. He sold 400 articles
@ Rs. 15 per unit. If the net realisable value per unit of the unsold article is Rs. 15, the trader
should value his stock at Rs. 10 per unit and thus ignoring the profit Rs.500 that he may earn in
next accounting period by selling 100 units of unsold articles. If the net realisable value per unit
of the unsold article is Rs.8, the trader should value his stock at Rs. 8 per unit and thus
recognising possible loss Rs.200
thathemayincurinnextaccountingperiodbyselling100unitsofunsoldarticles.

Answer

Profit of the trader if net realisable value of unsold article is Rs. 15

= Sale – Cost of goods sold = (400 x Rs. 15) – (500 x Rs. 10 – 100 x Rs. 10) = Rs. 2,000 Profit
of the trader if net realisable value of unsold article is Rs. 8

32
= Sale – Cost of goods sold = (400 x Rs. 15) – (500 x Rs. 10 – 100 x Rs. 8) = Rs. 1,800

QUESTION 3 (STUDY MATERIAL)

Exercise of prudence does not permit creation of hidden reserve by understating profits and
assets or by overstating liabilities and losses. Suppose a company is facing a damage suit. No
provision for damages should be recognised by a charge against profit, unless the probability
of losing the suit is more than the probability of not losing it.
Answer

Substance over form: Transactions and other events should be accounted for and presented in
accordance with their substance and financial reality and not merely by their legal form.
Materiality: Financial statements should disclose all ‘material items, i.e. the items the
knowledge of which might influence the decisions of the user of the financial statement.
Materiality is not always a matter of relative size. For example a small amount lost by fraudulent
practices of certain employees can indicate a serious flaw in the enterprise’s internal control
system requiring immediate attention to avoid greater losses in future. In certain cases
quantitative limits of materiality is specified. A few of such cases are given below:
(a) A company should disclose by way of notes additional information regarding any item
of income or expenditure which exceeds 1% of the revenue from operations or
Rs.1,00,000 whichever is higher (Refer general Instructions for preparation of
Statement of Profit and Loss in Schedule III to the Companies Act,2013).

(b) A company should disclose in Notes to Accounts, shares in the company held by each
shareholder holding more than 5 per cent shares specifying the number of shares
held. (Refer general Instructions for Balance Sheet in Schedule III to the Companies
Act,2013).

QUESTION 4 (STUDY MATERIAL)

In the books of M/s Prashant Ltd., closing inventory as on 31.03.2015 amounts to

Rs. 1,63,000 (on the basis of FIFO method).

The company decides to change from FIFO method to weighted average method for
ascertaining the cost of inventory from the year 2014-15. On the basis of weighted average
method, closing inventory as on 31.03.2015 amounts to Rs.1,47,000.
Realisablevalueoftheinventoryason31.03.2015amountstoRs.1,95,000.

33
Discuss disclosure requirement of change in accounting policy as per AS-1.

Answer

As per AS 1 “Disclosure of Accounting Policies”, any change in an accounting policy which has
a material effect should be disclosed in the financial statements. The amount by which any
item in the financial statements is affected by such change should also be disclosed to the
extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact
should be indicated. Thus Prashant Ltd. should disclose the change in valuation method of
inventory and its effect on financial statements. The company may disclose the change in
accounting policy in the following manner:
 ‘The company values its inventory at lower of cost and net realisable value. Since net
realisable value 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. 2014-15, the company has
changed to weighted average method, which better reflects the consumption pattern of
inventory, for ascertaining inventory costs from the earlier practice of using FIFO for the
purpose. The change in policy has reduced current profit and value of inventory by Rs.16,000.

QUESTION 5 (STUDY MATERIAL)

ABC Ltd. was making provision for non-moving inventories based on issues for the last 12
months up to31.3.2016.

The company wants to provide during the year ending 31.3.2017 based on technical
evaluation:

Total value of inventory Rs. 100 lakhs

Provision required based on 12 months issue Rs. 3.5 lakhs
Provision required based on technical evaluation Rs. 2.5 lakhs
Does this amount to change in Accounting Policy? Can the company change the method of
provision?

Answer

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 provision for non-moving inventories should be made. 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 provision of non-moving inventory from Rs.3.5 lakhs to Rs.2.5 lakhs is also not

34
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 ABC Ltd. for the year2016-17:
“The company has provided for non-moving inventories on the basis of technical evaluation
unlike preceding years. Had the same method been followed as in the previous year, the
profit for the year and the corresponding effect on the year end net assets would have been
lower by Rs. 1lakh.”
QUESTION 6 (STUDY MATERIAL)

Jagannath Ltd. had made a rights issue of shares in 2017. In the offer document to its
members, it had projected a surplus of Rs.40 crores during the accounting year to end on
31st March, 2017. The draft 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 managing director, decided on the
following:

(i) Value year-end inventory at works cost (Rs. 50 crores) instead of the hitherto method
of valuation of inventory at prime cost (Rs. 30crores).
(ii) Provide depreciation for the year on straight line basis on account of substantial
additions in gross block during the year, instead of on the reducing balance method,
which was hitherto adopted. As a consequence, the charge for depreciation at Rs. 27
crores is lower than the amount of Rs. 45 crores which would have been provided had
the old method been followed, by Rs. 18 cores.

(iii) Not to provide for “after sales expenses” during the warranty period. Till the last
year, provision at 2% of sales used to be made under the concept of
“matching of costs against revenue” and actual expenses used to be charged against the
provision. The board now decided to account for expenses as and when actually
incurred. Sales during the year total to Rs. 600 crores.

(iv) Provide for permanent fall in the value of investments - which fall had taken
placeoverthepastfiveyears-theprovisionbeingRs.10crores.
As chief accountant of the company, you are asked by the managing director to
draftthenotesonaccountsforinclusionintheannualreportfor2016-2017.

Answer

35
As per AS 1, any change in the accounting policies which has a material effect in the current
period or which is reasonably expected to have a material effect in later periods should be
disclosed. In the case of a change in accounting policies which has a material effect in the
current period, the amount by which any item in the financial statements is affected by such
change should also be disclosed to the extent ascertainable. Where such amount is not
ascertainable, wholly or in part, the fact should be indicated. Accordingly, the notes on
accounts should properly disclose the change and its effect.
 Notes on Accounts:
(i) During the year inventory has been valued at factory cost, against the practice of
valuing it at prime cost as was the practice till last year. This has been done to take
cognizance of 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 is increased by Rs. 20crores.
(ii) In view of the heavy capital intensive method of production introduced during the
year, the company has decided to change the method of providing depreciation from
reducing balance method to straight line method. As a result of this change,
depreciation has been provided at Rs. 27 crores which is lower than the charge which
would have been made had the old method and the old rates been applied, by Rs. 18
crores. To that extent, the profit for the year is increased.
(iii) So far, the company has been providing 2% of sales for meeting “after sales expenses
during the warranty period. With the improved method of production, the probability of
defects occurring in the products has reduced considerably. Hence, the company has
decided not to make provision for such expenses but to account for the same as and
when expenses are incurred. Due to this change, the profit for the year is increased by
Rs.12 crores than would have been the case if the old policy were to continue.
(iv) The company has decided to provide Rs. 10 crores for the permanent fall in the value of
investments which has taken place over the period of past five years. The provision so
made has reduced the profit disclosed in the accounts by Rs. 10crores.

QUESTION 7 (STUDY MATERIAL)

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 Special Court. XYZ has accepted Inter-Corporate Deposits (ICDs) and, it
is making its best efforts to settle the dues. There were claims at varied rates of interest,

36
from lenders, from the due date of ICDs to the date of repayment. The company has
provided interest, as per the terms of the contract till the due date and a note for non-
provision of interest on the due date to date of repayment was affected in the financial
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 considers that these claims are in the nature of "claims against the
company not acknowledged as debt”, and the same has been disclosed by way of a note in
the accounts instead of making a provision in the profit and loss accounts. State whether
the treatment done by the Company is correct or not.
Answer

AS 1 ‘Disclosure of Accounting Policies’ recognizes 'prudence' as one of the major

considerations governing the selection and application of accounting policies. In view of the
uncertainty attached to future events, profits are not anticipated but recognized only when
realized though not necessarily in cash. Provision is made for all known liabilities and losses
even though the amount cannot be determined with certainty and represents only a best
estimate in the light of available information.
Also as per AS 1, ‘accrual’ is one of the fundamental accounting assumptions. Irrespective of
the terms of the contract, so long as the principal amount of a loan is not repaid, the lender
cannot be replaced in a disadvantageous position for non-payment of interest in respect of
overdue amount. From the 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 amount estimated or on reasonable basis based
on facts and circumstances of each case. However, in respect of the overdue interest
amounts, which are settled, the liability should be accrued to the extent 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.

QUESTION 8 (STUDY MATERIAL)

The company deals in three products, A, B and C, which are neither similar nor
interchangeable. At the time of closing of its account for the year 2016-17, the Historical
Cost and Net Realisable Value of the items of closing stock are determined as follows:

Items Historical Cost (Rs. in lakhs) Net Realizable Value (Rs. In lakhs)
A 40 28
B 32 32
C 16 24

37
What will be the value of closing stock?

Answer
As per AS 2 (Revised) on ‘Valuation of Inventories’, inventories should be valued at the lower
of cost and net realisable value. Inventories should be written down to net realisable value
on an item-by-item basis in the given case.

Items Historical Cost Net Realisable Valuation of

(Rs. in lakhs) Value (Rs. in closing stock (Rs.
lakhs) in lakhs)
A 40 28 28
 B 32 32 32
C 16 24 16
88 84 76
Hence, closing stock will be valued at Rs. 76 lakhs.

QUESTION 9 (STUDY MATERIAL)

X Co. Limited purchased goods at the cost of Rs. 40 lakhs in October, 2016. Till March,
2017, 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 closing stock to be disclosed as at31.3.2017.

Answer
As per AS 2 (Revised) “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 value is 11,00,000 90%
= Rs.9,90,000. So, the stock should be valued at Rs.9,90,000.

QUESTION 10 (STUDY MATERIAL)

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 is on stock at the year end. State with reference to Accounting Standard, how will
you value the inventories in this case?

Answer

38
As per AS 2 (Revised), abnormal amounts of wasted materials, labour and other production
costs are excluded from cost of inventories and such costs are recognized 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 = Rs.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 = Rs. 1,052.6315 Total value
of inventory = 4,700 MT x Rs. 1,052.6315 = Rs. 49,47,368.
QUESTION 11 (STUDY MATERIAL)

You are required to value the inventory per kg of finished goods consisting of:

Rs. 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

Rs. 20 lakhs. 4,000 kgs of finished goods are in stock at the year end.

Answer
In accordance with AS 2 (Revised), the cost of conversion include a systematic allocation of
fixed and variable overheads that are incurred in converting materials into finished goods.
The allocation of fixed overheads for the purpose of their inclusion in the cost of conversion
is based on normal capacity of the production facilities.
Cost per kg. of finished goods:

Rs.
Material Cost 200
Direct Labour 40
Direct Variable Production Overhead 20
Fixed Production Overhead
10 70

39
270
Hence the value of 4,000 kgs. of finished goods = 4,000 kgs x Rs. 270 = Rs. 10,80,000

QUESTION 12 (STUDY MATERIAL)

On 31st March 2017, a business firm finds that cost of a partly finished unit on that date is Rs.
530. The unit can be finished in 2017-18 by an additional expenditure of Rs.

310. The finished unit can be sold for Rs. 750 subject to payment of 4% brokerage on selling
 price. The firm seeks your advice regarding the amount at which the unfinished unit should
be valued as at 31st March, 2017 for preparation of final accounts. Assume that the partly
finished unit cannot be sold in semi finished form and its NRV is zero without processing it
further
Answer
Valuation of unfinished unit

Rs.
Net selling price 750
Less: Estimated cost of completion (310)
440

Less: Brokerage (4% of 750) (30)

Net Realisable Value 410
Cost of inventory 530
Value of inventory (Lower of cost and net realizable value) 410

QUESTION 13 (STUDY MATERIAL)

Classify the following activities as (a) Operating Activities, (b) Investing Activities,

(a) Financing Activities (d) Cash Equivalents.

(a) Purchase of Machinery.
(b) Proceeds from issuance of equity share capital
(c) Cash Sales.
(d) Proceeds from long-term borrowings.

40
(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.
(k) Proceeds from sale of investment
(l) Purchase of goodwill.
 (m) Cash paid to suppliers.
(n) Interim Dividend paid on equity shares.
(o) Wages and salaries paid.
(p) Proceed from sale of patents.
(q) Interest received on debentures held as investment.
(r) Interest paid on Long-term borrowings.
(s) Office and Administration Expenses paid
(t) Manufacturing Overheads paid.
(u) Dividend received on shares held as investments.
(v) Rent Received on property held as investment.

(w) Selling and distribution expense paid.

(x) Income tax paid
(y) Dividend paid on Preference shares.
(z) Underwritings Commission paid.

(aa) Rent paid.

(bb) Brokerage paid on purchase of investments.
(cc) Bank Overdraft
(dd) Cash Credit

(ee) Short-term Deposits (ff)

Marketable Securities

(gg) Refund of Income Tax received.

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Solution
(a) Operating Activities: c, e, f, g, j, m, o, s, t, w, x, aa & gg.
(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 14 (STUDY MATERIAL)

X Ltd. purchased debentures of Rs. 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,2017?

Answer
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 Rs. 10 lacs,
made in debentures is for short-term period then it is an item of ‘cash equivalents’.
However, if investment of Rs. 10 lacs made in debentures is for long-term period then as per
AS 3, it should be shown as cash flow from investing activities.

QUESTION 15 (STUDY MATERIAL)

Classify the following activities as per AS 3 Cash Flow Statement:

(i) Interest paid by financial enterprise

(ii) Tax deducted at source on interest received from subsidiary company

(iii) Deposit with Bank for a term of two years

(iv) Insurance claim received towards loss of machinery by fire
(v) Bad debts written off
Answer
(i) Interest paid by financial enterprise Cash flows
from operating activities
(ii)

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TDS on interest received from subsidiary company Cash flows
from investing activities
(iii) Deposit with bank for a term of two years Cash flows
from investing activities
(iv) Insurance claim received against loss of fixed asset by fire
Extraordinary item to be shown as a separate heading under ‘Cash flow from
investing activities’
(v) Bad debts written off
 It is a non-cash item which is adjusted from net profit/loss under indirect method, to
arrive at net cash flow from operating activity.

QUESTION 16 (STUDY MATERIAL)

Following is the cash flow abstract of Alpha Ltd. for the year ended 31st March, 2017:

Cash Flow (Abstract)

Inflows Rs. Outflows Rs.

Opening balance: Payment for
Cash 10,000 Account 90,000
Payables
Bank 70,000 Salaries and wages 25,000

Share capital – shares issued 5,00,000 Payment of overheads 15,000

Collection on account Fixed assets acquired 4,00,000
of Trade Receivables 3,50,000 Debentures redeemed 50,000
Sale of fixed assets 70,000 Bank loan repaid 2,50,000
Taxation 55,000
Dividends (including 1,00,000
dividend distribution
tax)
Closing balance:
Cash 5,000
bank 10,000

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10,00,000 10,00,000

Prepare Cash Flow Statement for the year ended 31st March, 2017 in accordance with
Accounting standard3.

Answer
Cash Flow Statement for the year ended 31.3.2017

Rs. Rs.
 Cash flow from operating activities
Cash received on account of trade receivables 3,50,000
Cash paid on account of trade payables (90,000)
Cash paid to employees (salaries and wages) (25,000)
Other cash payments (overheads) (15,000)
Cash generated from operations 2,20,000
Income tax paid (55,000)
Net cash generated from operating activities 1,65,000
Cash flow from investing activities
Payment for purchase of fixed assets (4,00,000)
Proceeds from sale of fixed assets 70,000
Net cash used in investment activities (3,30,000)
Cash flow from financing activities

Proceeds from issue of share capital 5,00,000

Bank loan repaid (2,50,000)
Debentures redeemed (50,000)
Dividends paid (1,00,000) 1,00,000
Net cash used in financing activities
Net decrease in cash and cash equivalents (65,000)
Cash and cash equivalents at the beginning of the year 80,000
Cash and cash equivalents at the end of the year 15,000

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QUESTION 17 (STUDY MATERIAL)

Prepare Cash Flow from Investing Activities of M/s. Creative Furnishings Limited for the year
ended 31-3-2017.

Particulars Rs.
Plant acquired by the issue of 8%Debentures 1,56,000
Claim received for loss of plant in fire 49,600
Unsecured loans given to subsidiaries 4,85,000
 Interest on loan received from subsidiary companies 82,500
Pre-acquisition dividend received on investment made 62,400
Debenture interest paid 1,16,000
Term loan repaid 4,25,000
Interest received on investment 68,000
(TDS of Rs. 8,200 was deducted on the above interest)
Book value of plant sold (loss incurred Rs. 9,600) 84,000
Answer
Cash Flow Statement from Investing Activities of

M/s Creative Furnishings Limited for the year ended 31-03-2017

Cash generated from investing activities Rs. Rs.

Interest on loan received 82,500
Pre-acquisition dividend received on investment 62,400
made Unsecured loans given to subsidiaries (4,85,000)

Interest received on investments (gross value) 76,200

TDS deducted on interest (8,200)
Sale of plant 74,400
Cash used in investing activities (before extra ordinary item) (1,97,700)
Extraordinary claim received for loss of plant 49,600
Net cash used in investing activities (after extra ordinary (1,48,100)
item)

Note:

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1. Debenture interest paid and Term Loan repaid are financing activities and therefore not
considered for preparing cash flow from investing activities.

2. Plant acquired by issue of 8% debentures does not amount to cash outflow, hence also
not considered in the above cash flow statement.
 QUESTION 18 (STUDY MATERIAL)

Entity A, a supermarket chain, is renovating one of its major stores. The store will have more
available space for in 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
resulting from the store renovations, which will attract new customers. State whether the
remodelling cost will be capitalised or not.

Answer
The expenditure in remodeling the store will create future economic benefits (in the form of
15% of increase in sales) and the cost of remodeling can be measured reliably, therefore, it
should be capitalized.

QUESTION 19 (STUDY MATERIAL)

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?

Answer

De-recognition of the carrying amount occurs regardless of whether the cost of the previous
part/inspection was identified in the transaction in which the item was acquired or
constructed.

QUESTION 20 (STUDY MATERIAL)

What will be your answer in the above question, if it is not practicable for an enterprise to
determine the carrying amount of the replaced part/inspection?

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Answer

It may use the cost of the replacement or the estimated cost of a future similar inspection as an
indication of what the cost of the replaced part/existing inspection component was when the
item was acquired or constructed.
QUESTION 21 (STUDY MATERIAL) (MTP MAY 18)

Entity A 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 (temporary) site. The following incremental costs will be incurred:

1. Setup costs of Rs.5,00,000 to install machinery in the new location. 2. Rent

of Rs.15,00,000

3. Removal costs of Rs.3,00,000 to transport the machinery from the old location to
the temporary location.

Can these costs be capitalised into the cost of the new building?

Answer

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 to 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 relocating or reorganising
operations of the company and do not meet the requirement of AS 10 (Revised) and therefore,
cannot be capitalised.

QUESTION 22 (STUDY MATERIAL)

Entity A, which operates a major chain of supermarkets, has acquired a new store location. The new
location requires significant renovation expenditure. Management expects that
therenovationswilllastfor3monthsduringwhichthesupermarket will be closed.

Management has prepared the budget for this period including expenditure related to

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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?

Answer

Management should capitalise the costs of construction and remodelling the supermarket,
because they are necessary to bring the store to the condition necessary for it to be capable of
operating in the manner intended by management. The supermarket cannot be opened without
incurring the remodelling expenditure, and thus the expenditure should be considered part of
the asset.