ACCOUNTING STANDARD – REVISION QUESTIONS

AS 26 – INTANGIBLE ASSETS
Objective:
The objective of AS 26 is to prescribe the accounting treatment for intangible assets that are not
dealt with specifically in another Accounting Standard. AS 26 requires an enterprise to recognise an
intangible asset if, and only if, certain criteria are met. AS 26 also specifies how to measure the
carrying amount of intangible assets and requires certain disclosures about intangible assets.
ALL entities should apply this Standard for accounting intangible assets.
SCOPE
The following intangibles are NOT covered by this Standard:
(a) Intangible assets that are covered by another Accounting Standard;
Example:
Goodwill arising on amalgamation - dealt with by AS-14;
Goodwill arising on consolidation- dealt with by AS-21;
(b) Intangible assets held for sale in the ordinary course of business- When dealt with by AS-2;
etc.
(c) Financial asset; (Dealt with by Ind AS)
(d) Mineral rights and expenditure on the exploration for, or development and extraction of,
minerals, oil, natural gas and similar non-regenerative resources; (Dealt with by Industry
standards)
(e) Intangible assets arising in insurance enterprises from contracts with policyholders; and
(f) Expenditure on employee termination benefits i.e., the amount payable by the company on
retrenchment of employee or when employee accepts voluntary retirement benefits; (Dealt
with by general principles of accounting) ; (Dealt with by AS-15)
However, AS 26 applies to other intangible assets used (such as computer software), and other
expenditure (such as start-up costs), in extractive industries or by insurance enterprises.
AS 26 also applies to:
i. Expenditure on advertising, training, start -up cost
ii. Research and development activities
iii. Right under licensing agreements for items such as motion picture films, video recordings,
plays, manuscripts, patents and copyrights. These items are excluded from the scope of AS 19.
iv. The underlying intangible asset in finance lease after its initial recognition.
3. Definitions
An intangible asset is an asset which satisfies the following criteria:
It should be an identifiable non-monetary asset, without physical substance; held for
producing/supply of goods services, rental, or administrative purpose
Question
An airline company incurs huge training expenses for its pilots before starting their service; In return
pilot has to enter into a 3 years bond i.e, they cannot leave the company before 3 years. the pilot
leaves the company during the 3-year period, a proportionate amount of training cost will have to be
reimbursed by them. The bond is supported by a bank guarantee. In the past the airline has been
successful in its claims against the pilot when they have left during the 3-year guaranteed period. Can
the training expenses be capitalized as an intangible asset or should it be charged to P&L?

Answer
As per AS-26, an intangible asset can be recognised only when it satisfies the intangible asset
definition and also the asset recognition criteria, i.e., Probable future economic benefits inflow
should be controlled by the entity and costs should be measured reliably.

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In the given case based on the information available, the entity has legally controlled and protected
the future economic benefits and it also meets the other points of 'intangible asset definition. So, the
entity can recognise the training expense as an intangible asset and it should amortise the same over
the guaranteed period.

However, normal training expenditure should NOT be capitalised.

Question
During 20X1-X2, an enterprise incurred costs to develop and produce a routine low risk computer
software product, as follows:
Particular Amount
Completion of detailed program and design (Phase 1) 50,000
Coding and Testing (Phase 2) 40,000
Other coding costs (Phase 3 & 4) 63,000
Testing costs (Phase 3 & 4) 18,000
Product masters for training materials (Phase 5) 19,500
Packing the products (1,500 units) (Phase 6) 16,500
After completion of phase 2, it was established that the product is technically feasible for the market.
You are required to state how the above referred cost to be recognized in the books of accounts.
Answer
As per AS 26, costs incurred in creating a computer software product should be charged to research
and development expense when incurred until technological feasibility/asset recognition criteria has
been established for the product. Technological feasibility/asset recognition criteria have been
established upon completion of detailed program design, coding and testing.
In this case, Rs 90,000 would be 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).
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.
Packing cost Rs 16,500 should be recognized as expenses and charged to P & L A/c.

Question
PQR Ltd. has acquired a Brand from another company for Rs 100 lakhs. PQR Ltd. contends that since
the said brand is a very popular and famous brand, no amortization needs to be provided. Comment
on this in line with the Accounting Standards (RTP MAY 2022)
Answer
AS 26 ‘Intangible Assets” provides that an intangible asset should be measured initially at cost. After
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
systematic basis over the best estimate of its useful life for computing amortization. There is a
rebuttable presumption that the useful life of an intangible asset will not exceed 10 years from the
date when the asset is available for use. It must be ensured that the value of brand is amortized in
accordance with AS 26, as brand is considered to be intangible asset.
The contention of PQR Ltd. that Brand is very popular and famous, hence no amortization needs to
be provided is not correct as there is no persuasive evidence that the useful life of the intangible
asset will exceed 10 years
Question
ABC Ltd, developed a Know-How by incurring expenditure of Rs 20 Lakhs. The Know-How was used
by the Company from 01.04.20x1. The useful life of the asset is 10 years from the year of

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commencement of its use. The Company has not amortised the asset till 31.03.20x8. Pass Journal
Entry to give effect to the value of Know-How as per AS - 26 for the year ended 31.03.20x8.
Answer
Journal Entry

Question
A company acquired a patent at a cost of Rs 160 lakhs for a period of 5 years and the product life
cycle is also 5 years. The company capitalized the cost and started amortising the asset at Rs 16 lakhs
per year based on the economic benefits derived from the product manufactured under the patent.
After 2 years it was found that the product life cycle may continue for another 5 years from then (the
patent is renewable and the company can get it renewed after 5 years). The net cash flows from the
product during these 5 years were expected to be Rs 50 lakhs, Rs 30 lakhs, Rs 60 lakhs, Rs 70 lakhs
and Rs 40 lakhs. Find out the amortization cost of the patent for each of the years.
Answer
Company amortized Rs 16,00,000 per annum for the first two years. Hence, Amortization for the first
two years (Rs 16,00,000 X 2) = Rs 32,00,000.
Remaining carrying cost after two years = Rs 1, 28, 00,000 (1,60,00,000 – 32,00,000)
Since after two years it was found that the product life cycle may continue for another 5 years, hence
the remaining carrying cost Rs128 lakhs will be amortized during next 5 years in the ratio of net cash
arising from the sale of the products of Fast Limited.
The amortization cost of the patents may be computed as follows:

Question
Desire Ltd. acquired a patent at a cost of Rs 1,00,00,000 for a period of 5 years and the product life-
cycle is also 5 years. The company capitalized the cost and started amortizing the asset on SLM. 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 expected to be Rs 45,00,000, Rs
42,00,000, Rs 40,00,000, Rs 38,00,000 and Rs 35,00,000. Patent is renewable and company changed
amortization method from 3rd year (i.e. from SLM to ratio of expected new cash flows).
You are required to compute the amortization cost of the patent for each of the years (1st year to 7th
year)
Answer
Company amortized Rs 20,00,000 per annum ( 100,00,000/5 ) for the first two years. Hence,
Amortization for the first two years (Rs 20,00,000 X 2) = Rs 40,00,000.

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Remaining carrying cost after two years = Rs 60,00,000 (1,00,00,000 – 40,00,000)

Question
A company acquired for its internal use a software on 28.01.2012 from the USA for US $ 1,00,000.
The exchange rate on that date was Rs 52 per USD. The seller allowed trade discount @ 5 %. The
other expenditure were:
(i) Import Duty : 20%
(ii) Purchase Tax : 10%
(iii) Entry Tax : 5 % (Recoverable later from tax department)
(iv) Installation expenses : Rs 25,000
(v) Profession fees for Clearance from Customs : Rs 20,000
Compute the cost of Software to be capitalized.
Answer

Note: Since entry tax has been mentioned as a recoverable / refundable tax, it is not included as part
of the cost of the asset.
Question
Surgical Ltd, is developing a new production process of surgical equipment. During the financial year
ended 31st March 2020 the total expenditure incurred on the process was Rs 67 lakhs. The
production process met the criteria for recognition as an intangible asset on 1st January 2020.
Expenditure incurred till this date was Rs 35 lakhs.
Further expenditure incurred on the process for the financial year ending 31st March 2021 Rs 105
lakhs. As on 31st March 2021, the recoverable amount of technique embodied in the process is
estimated to be Rs 89 lakhs. This includes estimates of future cash outflows and inflows.
Under the provisions of AS 26, you are required to ascertain:
(i) The expenditure to be charged to Profit and Loss Account for the year ended 31st March 2020;
(ii) Carrying amount of the intangible asset as on 31st March 2020;

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(iii) Expenditure to be charged to Profit and Loss Account for the year ended 31st March 2021;
(iv) Carrying amount of the intangible asset as on 31st March 2021 (DEC 2021 5 MARKS)
Answer
As per AS 26 ‘Intangible Assets’
(i) Expenditure to be charged to Profit and Loss account for the year ended 31.03.2020
Rs 35 lakhs is recognized as an expense because the recognition criteria were not met until 1st
January 2020. This expenditure will not form part of the cost of the production process recognized as
an intangible asset in the balance sheet.
(ii) Carrying value of intangible asset as on 31.03.2020
At the end of financial year, on 31st March 2020, the production process will be recognized (i.e.
carrying amount) as an intangible asset at a cost of Rs 32 (67-35) lacs (expenditure incurred since the
date the recognition criteria were met, i.e., from 1st January 2020).
(iii) Expenditure to be charged to Profit and Loss account for the year
ended 31.03.2021 (Rs in lacs)
Carrying Amount as on 31.03.2020 32
Expenditure during 2020 – 2021 105
Book Value 137
Recoverable Amount (89)
Impairment loss 48

(iv) Carrying value of intangible asset as on 31.03.2021

Question
Ltd. is showing an intangible asset at Rs 72 lakhs as on 31-3-2022. This asset was acquired for Rs 120
lakhs as on 01-04-2016 and the same was used from that date. The company has been following 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 Assets” and also give the necessary rectification journal entry in the books (MTP APRIL
2022-5 Marks)
Answer
As per AS 26 'Intangible Assets', the depreciable amount of an intangible asset should be allocated
on 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 Company has been following the policy of amortization of the intangible asset
over a period of 15 years 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 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). 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 amortizing Rs 12 lakhs per year.

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The necessary journal entry (for rectification) will be

Revenue Reserves Dr. Rs 24 Lakhs
To Intangible Assets Rs 24 Lakhs
(Adjustment to reserves due to restatement of the carrying amount of intangible asset)

Question
Naresh Ltd. had the following transactions during the financial year 2019-2020:
(i) Naresh Ltd. acquired running business of Sunil Ltd. for Rs 10,80,000 on 15th May, 2019. The fair
value of Sunil Ltd.'s net assets was Rs 5,16,000. Naresh Ltd. is of the view that due to popularity of
Sunil Ltd.’s product in the market, its goodwill exists.
(ii) Naresh Ltd. had taken a franchise on July 2019 to operate a restaurant from Sankalp Ltd. for Rs
1,80,000 and at an annual fee of 10% of net revenues (after deducting expenditure). The franchise
expires after 6 years. Net revenues were Rs 60,000 during the financial year 2019-2020.
(iii) On 20th August, 2019, Naresh Ltd, incurred costs of Rs 2,40,000 to register the patent for its
product. Naresh Ltd. expects the patent’s economic life to be 8 years.
Naresh Ltd. follows an accounting policy to amortize all intangibles on straight line basis over the
maximum period permitted by accounting standards taking a full year amortization in the year of
acquisition. Goodwill on acquisition of business to be amortized over 5 years (SLM) as per AS 14.
Prepare a schedule showing the intangible assets section in Naresh Ltd. Balance Sheet at 31st March,
2020. (RTP MAY 2021)
Answer

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AS 13 – Accounting for Investments

THIS STANDARD DOES NOT DEAL WITH

1. The basis for recognition of interest, dividends and rentals earned on investments which are
covered by AS 9
2. Operating or finance leases
3. Investments on retirement benefit plans and life insurance enterprises
4. Mutual funds, venture capital funds and/ or the related asset management companies,
banks and public financial institutions formed under a Central or State Government Act or so
declared under the Companies Act, 2013
Definition
Investments are assets held by an enterprise for earning income by way of dividends, interest, and
rentals, for capital appreciation, or for other benefits to the investing enterprise.
INVESTMENT PROPERTIES -
✓ An investment property is an investment in land or buildings that are not intended to be
occupied substantially for use by, or in the operations of, the investing enterprise.
✓ An investment property is accounted for in accordance with cost model as prescribed in AS
10 (Revised), ‘Property, Plant and Equipment’.
Basic Classification : Investments are generally classified into :-
✓ A current investment- It is an investment that is by its nature readily realisable and is
intended to be held for not more than one year from the date on which such investment is made.
The intention to hold for not more than one year is to be judged at the time of purchase of
investment.
✓ A long term investment – It is an investment other than a current investment
INVESTMENT RE-CLASSIFICATION- From: Long Term Investments To: From: Current Investments To:
Re-classification of Investments Current Investments Long Term Investments
Transfers are made at (a) Cost, or Cost, or
(b) Carrying Amount, Fair Value,
whichever is less, at the date of whichever is less, at the date of
transfer. transfer.

Question
ABC Ltd. wants to re-classify its investments in accordance with AS 13 (Revised). Decide and state on
the amount of transfer, based on the following information:
(a) A portion of current investments purchased for Rs 20 lakhs, to be reclassified as long term
investment, as the company has decided to retain them. The market value as on the date of Balance
Sheet was Rs 25 lakhs.
(b) Another portion of current investments purchased for Rs 15 lakhs, to be reclassified as long term
investments. The market value of these investments as on the date of balance sheet was Rs 6.5
lakhs.
(c) Certain long term investments no longer considered for holding purposes, to be reclassified as
current investments. The original cost of these was Rs 18 lakhs but had been written down to Rs 12
lakhs to recognise other than temporary decline as per AS 13 (Revised). Fair value is Rs 13 lacs.
Solution
As per AS 13 (Revised), where investments are reclassified from current to long-term, transfers are
made at the lower of cost and fair value at the date of transfer.

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(1) In the first case, the market value of the investment is Rs 25 lakhs, which is higher than its cost i.e.
Rs 20 lakhs. Therefore, the transfer to long term investments should be carried at cost i.e. Rs 20
lakhs.
(2) In the second case, the market value of the investment is Rs 6.5 lakhs, which is lower than its cost
i.e. Rs 15 lakhs. Therefore, the transfer to long term investments should be carried in the books at
the market value i.e. Rs 6.5 lakhs. The loss of Rs 8.5 lakhs should be charged to profit and loss
account.
As per AS 13 (Revised), where long-term investments are re-classified as current investments,
transfers are made at the lower of cost and carrying amount at the date of transfer.
(3) In the third case, the book value of the investment is 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
investment should be carried at Rs 12 lakhs.
DETERMINATION OF COST
✓ Acquired Investments - Cost of an acquired / purchased Investment = Purchase Price +
Acquisition Charges, e.g. Brokerage, Fees, Stamp Duties, etc
✓ If an investment is acquired, or partly acquired, by the issue of shares or other securities, the
acquisition cost is the fair value of the securities issued or asset given up.
✓ The fair value may not necessarily be equal to the nominal or par value of the securities
issued.

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VALUATION OF CURRENT INVESTMENTS-

✓ Current Investments are valued at Cost or Market Value whichever is lower.
✓ Cost or Market value should be determined either on individual investment basis or category
of investment basis. Example – Equity , Preference shares etc. Valuation of current investments on
overall (i.e global) basis is not appropriate.
CARRYING OF INVESTMENT

VALUATION OF LONG TERM INVESTMENTS-

1. Carrying Amount: Long-Term Investments are usually carried at Cost.
2. Basis: Long-Term Investments are of individual importance to an enterprise. So, the Carrying
Amount is determined on an individual basis.
3. Decline in Value:
Permanent Fall - When there is a permanent decline in the value of a long-term investment, the
Carrying Amount is reduced in order to recognise the decline. The reduction in value shall be
determined and made for each investment individually.
Temporary Fall - In the value of long-term investments need not be provided for.
4. Reversal of reduction: When there is a rise in the value or that the reasons for reduction no
longer exist, the reduction in Carrying Amount should be reversed. The reduction or reversal of such
reduction in the Carrying Amount should be charged or credited to the Profit and Loss Statement.

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QUESTION
Prepare Investment account from the following
Interest at 10% and Interest dates : 30th June and 31st December
Brokerage at 2% for all transactions

Date of No of Towards
Quote Price Brokerage Cost Interest Calculation
Purchase debentures Debentures

98 ex 500deb x fv 100 x 10%

01-04-2022 500 interest 49,000 980 49,980 1,250 x 3/12
101 ex
01-06-2022 1000 interest 1,01,000 2,020 1,03,020 4,167
102 cum
01-09-2011 800 interest 80,267 1,632 81,899 1,333 800deb x 102 = 81600
(800deb
x 100 x
(81600 - 10% x
1333) 2/12)

No of Towards
Date of Quote Price Brokerage Cost Interest Calculation
debentures Debentures
Sale
103 ex
01-02-2023 600 interest 61,800 1,236 60,564 500 61,064
(61800-
net sale 1236)

Solution

Investment in 12% Debentures A/c in RIL

Dr (Interest dates: 30th June & 31st December) Cr
Face Face
Date Particulars Value Cost Interest Date Particulars Value Cost Interest
01-04- To Balance 30-06-
2022 b/d 50,000 49,980 1,250 2022 By Bank a/c Nil Nil 7,500
01-06- 31-12-
2022 To Bank a/c 1,00,000 1,03,020 4,167 2022 By Bank a/c Nil Nil 11,500
01-09- 01-02- By Bank
2022 To Bank a/c 80,000 81,899 1,333 2023 a/c(Sale) 60,000 60,564 500
31-03- 01-02- By P&L
2023 To P&L a/c - - 17,000 2023 a/c(loss) - 714 -
(Interest for
the CY)
31-03- By Balance
2023 c/d 1,70,000 1,73,621 4,250
230000 234899 23750 230000 234899 23750

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VARIABLE INCOME BEARING SCRIPS - Shares

Question
Date Particulars
01-04-2022 Opening balance of 2000 shares(FV 10 each) had cost of Rs.2,40,000
01-05-2022 Purchased 500 shares at Rs.15 each
01-09-2022 RIL issed bonus in 1:5
01-11-2022 RIL issues right shares in 1:3 at Rs.18 each. Exercised 60% and balance right sold for
Rs.2/share
01-12-2022 Declared and Paid dividend at 20% for the year 2021-2022
01-02-2023 Declared and paid Interim dividend @ 10%
28-02-2023 Sold 8000 shares at 20 each

Solution
Investment in Equity shares of RIL
Dr Cr
No of No of
Date Particulars Cost Dividend Date Particulars Cost Dividend
shares shares
01-04- 01-12- By Bank
2022 To Balance b/d 20,000 2,40,000 - 2022 (Dividend) - 10,000 40,000
01-05- 01-02- By Bank (Int
2022 To Bank 5,000 75,000 - 2023 Div) - - 36,000
01-09- 28-02- By bank
2022 To Bonus shares 5,000 Nil - 2023 (Sale) 8,000 1,60,000 -
01-11- To Bank - Right
2022 shares 6,000 1,08,000 -
28-02- To P&L a/c
2023 (Profit) - 68,222 -
31-03- 31-03- By Balance
2023 To P&L a/c - - 76,000 2023 c/d 28,000 3,21,222 Nil
(Dividend for
the CY)
36,000 4,91,222 76,000 36,000 4,91,222 76,000

Working notes
1. Rights Issue
10000 shares
Exercised Sold
60% 40%
On 1/11/2022 30,000 shares x 1/3 = 10,000 shares 6000 shares 4000 shares
Rs.18 Rs.2
1,08,000 8,000
In Investment acc To P&l a/c

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2. We will receive dividend for 25,000 shares (20,000 shares + 5,000 purchased shares)
20,000 shares 5,000 shares
20,000 x 10 x 20% 5000 x 10 x 20%
Rs.40,000 Rs.10,000
Post- acquisition dividend Pre- acquisition dividend
Dividend Income - P&L Adj.with cost

3. Interim Divided = 36,000 shares x 10 x 10% = Rs.36,000

Question
M/s Innovative Garments Manufacturing Company Limited invested in the shares of another
company on 1st 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 :
Shares – Rs 2,25,000
Gold – Rs 6,00,000
Silver- Rs 3,50,000
How above investments will be shown in the books of accounts of M/s Innovative Garments
Manufacturing Company Limited for the year ending 31st March, 2017 as per the provisions of
Accounting Standard 13 "Accounting for Investments"?

Solution
As per AS 13 (Revised) ‘Accounting for Investments’, for investment in shares - if the investment is
purchased 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, i.e., in case of
shares, at lower of cost (Rs 2,50,000) and market value (Rs 2,25,000) as on 31 March 20X4, i.e., Rs
2,25,000.
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
company. However, provision for diminution should be made to recognise a decline, if other than
temporary, in the value of the investments.
Gold and silver are generally purchased with an intention to hold it for long term period (more than
one year) until and unless given otherwise. Hence, the investment in Gold and Silver (purchased on
1st March, 20X1) should continue to be shown at cost (since there is no ‘other than temporary’
diminution) as on 31st March, 20X4, i.e., Rs 4,00,000 and Rs 2,00,000 respectively, though their
market values have been increased.
Question
On 1st April, 20X1, Rajat has 50,000 equity shares of P Ltd. at a book value of Rs 15 per share
(nominal 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.
(2) On 1st August, 20X1, P Ltd. issued one equity bonus share for every six shares held by the
shareholders.
(3) On 31st October, 20X1, 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 their
rights in full or in part.

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Rajat sold 1/3rd of entitlement to Umang for a consideration of Rs 2 per share and subscribed the
rest on 5th November, 20X1.
You are required to prepare Investment A/c in the books of Rajat for the year ending 31st March,
20X2
Solution
In the books of Rajat

Working Notes:
(1) Bonus shares = 10,000 shares 50,000 + 10,0006
(2) Right shares = (50,000 + 10,000 + 10,000)/ 7 x 3 = 30,000 shares
(3) Sale of rights = 30,000 shares××1/3 x 2 = 20,000 to be credited to statement of profit and loss
(4) Rights subscribed = = 30,000 x 2/3 ×15 = 300,000

Question
On 1.4.20X1, Sundar had 25,000 equity shares of ‘X’ Ltd. at a book value of Rs 15 per share (Nominal
value Rs 10). On 20.6.20X1, he purchased another 5,000 shares of the company at Rs16 per share.
The directors of ‘X’ Ltd. announced a bonus and rights issue. No dividend was payable on these
issues. The terms of the issue are as follows:
Bonus basis 1:6 (Date 16.8.20X1).
Rights basis 3:7 (Date 31.8.20X1) Price Rs 15 per share.
Due date for payment 30.9.20X1.
Shareholders were entitled to transfer their rights in full or in part. Accordingly, Sundar sold 33.33%
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 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 prepare in the books of Sundar.
(1) Investment Account
(2) Profit & Loss Account.
For your exercise, assume that the books are closed on 31.12.20X1and shares are valued at average
cost.

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Solution
Books of Sundar
Investment Account (Equity Shares in X Ltd.)

Profit and Loss Account (An extract)

Working Notes:
(1) Bonus Shares = (25,000+5,000)/ 6 = 5,000 shares
(2) Right Shares = (25,000+5,000+5,000)/ 7×3 = 15,000 shares
(3) Right shares renounced = 15,000×1/3 = 5,000 shares
Sale of right shares = 5,000 x 2 = Rs 10,000
Right shares subscribed = 15,000 – 5,000 = 10,000 shares
Amount paid for subscription of right shares = 10,000 x 15 = Rs 1,50,000
(4) Dividend received = 25,000 (shares as on 1st April 20X1) × 10 × 20% = Rs 50,000
Dividend on shares purchased on 20.6.20X1 = 5,000×10×20% = Rs 10,000 is adjusted to Investment
A/c
(5) Profit on sale of 25,000 shares
= Sales proceeds – Average cost
Sales proceeds = Rs 3,75,000
Average cost = (3,75,000+80,000+1,50,000-10,000)/ 45,000 ×25,000 = 3,30,556

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 ACCOUNTING STANDARD – REVISION QUESTIONS

Profit = Rs 3,75,000– Rs 3,30,556= Rs 44,444.

(6) Cost of shares on 31.12.20X1
(3,75,000+80,000+1,50,000-10,000)/ 45,000×20,000 = 2,64,444
Question
On 1st January 20X1, Singh had 20,000 equity shares in X Ltd. Nominal value of the shares was Rs10
each but their book value was Rs 16 per share. On 1st June 20X1, Singh purchased 5,000 more equity
shares in the company at a premium of Rs 4 per share.
On 30th June, 20X1, the directors of X Ltd. announced a bonus and rights issue. Bonus was declared
at the rate of one equity share for every five shares held and these shares were received on 2nd
August, 20X1.
The terms of the rights issue were:
(a) Rights shares to be issued to the existing holders on 10th August, 20X1.
(b) Rights issue would entitle the holders to subscribe to additional equity shares in the Company at
the rate of one share per every three held at Rs 15 per share-the whole sum being payable by 30th
September, 20X1.
(c) Existing shareholders were entitled to transfer their rights to outsiders, either wholly or in part.
(d) Singh exercised his option under the issue for 50% of his entitlements and the balance of rights
he sold to Ananth for a consideration of Rs 1.50 per share.
(e) Dividends for the year ended 31st March, 20X1, at the rate of 15% were declared by the Company
and received by Singh on 20th October, 20X1.
(f) On 1st November, 20X1, Singh sold 20,000 equity shares at a premium of Rs 3 per share.
The market price of share on 31-12-20X1 was Rs 14. Show the Investment Account as it would
appear in Singh’s books on 31-12-20X1 and the value of shares held on that date.
Solution
Investment Account-Equity Shares in X Ltd.

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 ACCOUNTING STANDARD – REVISION QUESTIONS

Working Notes:
1. Right shares
No. of right shares issued = (20,000 + 5,000 + 5,000)/ 3 = 10,000 shares
No. of right shares subscribed = 10,000 x 50% = 5,000 shares
Amount of right shares issued = 5,000 x 15 = Rs 75,000
No. of right shares sold = 10,000 – 5,000 = 5,000 shares
Sale of right shares = 5,000 x 1.5 = Rs 7,500 to be credited to statement of profit and loss
2. Cost of shares sold — Amount paid for 35,000 shares Rs
(Rs3,20,000 + Rs 70,000 + Rs 75,000) 4,65,000
Less: Dividend on shares purchased on June 1 (7,500)
(since the dividend pertains to the year ended
31st March, 20x1, i.e., the pre- acquisition
period)
Cost of 35,000 shares 4,57,500
Cost of 20,000 shares (Average cost basis) 2,61,429
Sale proceeds 2,60,000
Loss on sale 1,429

3. Value of investment at the end of the year

Assuming investment as current investment, closing balance will be valued based on lower of cost or
net realisable value.
Here, Net realisable value is Rs14 per share i.e. 15,000 shares x Rs 14 = Rs 2,10,000 and
cost = { 4,57,500×15,000 / 35,000 } 1,96,071. Therefore, value of investment at the end of the year
will be Rs 1,96,071.

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 ACCOUNTING STANDARD – REVISION QUESTIONS

AS 4 -CONTINGENCIES AND EVENTS OCCURRING AFTER THE BALANCE SHEET DATE

Question
The financial statements of Alpha Ltd. for the year 2019-2020 were approved by the Board of
Directors on 15th July, 2020. The following information was provided:
(i) A suit against the company’s advertisement was filed by a party on 20th April, 2020 claiming
damages of Rs 25 lakhs.
(ii) The terms and conditions for acquisition of business of another company had been decided by
March, 2020. But the financial resources were arranged in April, 2020 and amount invested was 50
lakhs.
(iii) Theft of cash of 5 lakhs by the cashier on 31st March, 2020, was detected on 16th July, 2020.
(iv) The company started a negotiation with a party to sell an immovable property for 40 lakhs in
March, 2020. The book value of the property is 30 lakh on 31st March, 2020. However, the deed was
registered on 15th April, 2020.
(v) A major fire had damaged the assets in a factory on 5th April, 2020. However, the assets were
fully insured.
With reference to AS 4, state whether the above mentioned events will be treated as contingencies,
adjusting events or non-adjusting events occurring after the balance sheet date
(MTP MARCH 2022 : 5MARKS)
Solution
(i) Non-adjusting event: Suit filed against the company is a contingent liability but it was not existing
as on date of balance sheet date as the suit was filed on 20th April after the balance sheet date. As
per AS 4, 'Contingencies' is restricted to conditions or situations at the balance sheet date, the
financial effect of which is to be determined by future events which may or may not occur. Hence, it
will have no effect on financial statement and will be a non-adjusting event.
(ii) Adjusting event: In the given case, terms and conditions for acquisition of business were finalised
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 April, 2020. Hence, necessary
adjustment to assets and liabilities for acquisition of business is necessary in the financial statements
for the year ended 31st March 2020.
(iii) Non-adjusting event: Only those events which occur between the balance sheet date and the
date on which the financial statements are approved, may indicate the need for adjustments to
assets and liabilities as at the balance sheet date or may require disclosure.
In the given case, as the theft of cash was detected on 16th July, 2020 ie after approval of financial
statements, no adjustment is required.
(iv) Non-adjusting event: Adjustments 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. In the given case, sale of immovable property was under proposal stage
(negotiations only started) on the balance sheet date, and was not finalized. 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 Report of approving Authority.
(v) Non-adjusting event: Adjustments 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 condition of fire occurrence was not existing on the balance sheet date. Only
the disclosure regarding fire and loss, being completely insured may be given in the report of
approving authority.

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 ACCOUNTING STANDARD – REVISION QUESTIONS

Question
Tee Ltd. closes its books of accounts every year on 31st March. The financial statements for the year
ended 31st March 2020 are to be approved by the approving authority on 30th June 2020. During
the first quarter of 2020-2021, the following events / transactions has taken place.
The accountant of the company seeks your guidance for the following:
(i) Tee Ltd. has an inventory of 50 stitching machines costing at Rs 5,500 per machine as on 31st
March 2020. The company is expecting a heavy decline in the demand in next year. The inventories
are valued at cost or net realizable value, whichever is lower. During the month of April 2020, due to
fall in demand, the prices have gone down drastically. The company has sold 5 machines during April,
2020 at a price of Rs 4,000 per machine.
(ii) A fire has broken out in the company's godown on 15th April 2020. The company has estimated a
loss of Rs 25 lakhs of which 75% is recoverable from the Insurance company.
(iii) A suit against the company's advertisement was filed by a party on 10th April, 2020 10 days after
the year end claiming damages of Rs 20 lakhs.
You are required to state with reasons, how the above transactions will be dealt with in the financial
statements for the year ended 31 March 2020 (RTP MAY 2022)
SOLUTION
Events occurring after the balance sheet date are those significant events, both favourable and
unfavourable, that occur between the balance sheet date and the date on which the financial
statements are approved by the Board of Directors in the case of a company, and, by the
corresponding approving authority in the case of any other entity. Assets and 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 or that indicate
that the fundamental accounting assumption 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 accounting treatment in the financial statements for the year ended
at 31 March 2020:
(i) Since on 31 March 2020, Tee Ltd. was expecting a heavy decline in the demand of the 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, inventory should be written down to
Rs 4,000 per machine. Total value of inventory in the books will be 50 machines x Rs 4,000 = Rs
2,00,000.
(ii) A fire took place after the balance sheet date i.e. during 2020-2021 financial year. Hence, the
financial statements for the year 2019-2020 should not be adjusted for loss occurred due to fire.
However, in this circumstance, the going concern assumption will be evaluated. In case the going
concern assumption is considered to be appropriate even after the occurrence of fire, no disclosure
of the same is required in the financial statements.
(iii) The contingency is restricted to conditions existing at the balance sheet date. However, in the
given case, suit was filed against the company’s advertisement by a party on 10th April for amount of
Rs 20 lakhs. Therefore, it does not fit into the definition of a contingency and hence is a non-
adjusting event.

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 ACCOUNTING STANDARD – REVISION QUESTIONS

Question
XYZ Ltd. operates its business into various segments. Its financial year ended on 31st March, 2020
and the financial statements were approved by their approving authority on 15th June, 2020. The
following material events took place:
a. A major property was sold (it was included in the balance sheet at Rs 25,00,000) for which
contracts had been exchanged on 15th March, 2020. The sale was completed on 15th May, 2020 at a
price of Rs 26,50,000.
b. On 2nd April, 2020, a fire completely destroyed a manufacturing plant of the entity. It was
expected that the loss of Rs 10 million would be fully covered by the insurance company.
c. A claim for damage amounting to Rs 8 million for breach of patent had been received by the entity
prior to the year-end. It is the director's opinion, backed by legal advice that the claim will ultimately
prove to be baseless. But it is still estimated that it would involve a considerable expenditure on legal
fees.
You are required to state with reasons, how each of the above items should be dealt with in the
financial statements of XYZ Ltd. for the year ended 31st March, 2020 (RTP NOV 2021)
SOLUTION
(a) The sale of property should be treated as an adjusting event since contracts had been exchanged
prior to the year-end. The effect of the sale should be reflected in the financial statements ended
on 31.3.2020 and the profit on sale of property Rs 1,50,000 would be considered.
(b) The event is a non-adjusting event since it occurred after the year-end and does not relate to the
conditions existing at the year-end. However, it is necessary to consider the validity of the going
concern assumption having regard to the extent of insurance cover. Also, since it is said that the
loss would be fully recovered by the insurance company, the fact should be disclosed by way of a
note to the financial statements.
(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 means of a contingent
liability with full details of the facts. Provision should be made for legal fee expected to be
incurred to the extent that they are not expected to be recovered.

Question
A case is going on between ABC Ltd. and Tax department on claiming the exemption for certain
items, for the year 2019-2020. The court has issued the order on 15th April and rejected the claim of
the company. Accordingly, company is liable to pay the additional tax. The financial statements were
approved on 31st May, 2020. Shall company account for such tax in the year 2019-2020 or shall it
account for in the year 2020-2021? (RTP MAY 2021)
SOLUTION-
To decide whether, the event is adjusting or not adjusting two conditions need to be satisfied,
(a) There has to be evidence
(b) The event must have been related to period ending on reporting date.
Here both the conditions are satisfied. Court order is a conclusive evidence which has been received
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
2019-2020
Question
The accounting year of Dee Limited ended on 31st March, 2018 but the accounts were approved
on 30th April, 2018. On 15th April, 2018 a fire occurred in the factory and office premises. The loss
by fire is of such a magnitude that it was not possible to expect the enterprise Dee Limited to start
operation again.

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 ACCOUNTING STANDARD – REVISION QUESTIONS

State with reasons, whether the loss due to fire is an adjusting or non- adjusting event and how the
fact of loss is to be disclosed by the company in the context of the provisions of AS-4 (Revised).
Solution
As per AS 4 (Revised) “Contingencies and Events occurring after the Balance Sheet Date”, an event
occurring after the balance sheet date should be an adjusting event even if it does not reflect any
condition existing on the balance sheet date, if the event is such as to indicate that the fundamental
accounting assumption of going concern is no longer appropriate.
The fire occurred in the factory and office premises of an enterprise after 31 March, 2018 but before
approval of financial statement of 30.4.18. The loss by fire is of such a magnitude that it is not
reasonable to expect the Dee Ltd. to start operations again, i.e., the going concern assumption is not
valid.
Since 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 adequate disclosures by the company by way of note in its financial statements
in the following manner:
“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 liquidation basis”
Question
Neel Limited has its corporate office in Mumbai and sells its products to stockists all over India. On
31st March, 2013, the company wants to recognize receipt of cheques bearing date 31st March,
2013 or before, as "Cheques in Hand" by reducing "Trade Receivables". The "Cheques in Hand" is
shown in the Balance Sheet as an item of cash and cash equivalents. All cheques are presented to
the bank in the month of April 2013 and are also realized in the same month in normal course after
deposit in the bank. State with reasons, whether each of the following is an adjusting event and how
this fact is to be disclosed by the company, with reference to the relevant accounting standard.
(i) Cheques collected by the marketing personnel of the company from the stockists on or before
31st March, 2013.
(ii) Cheques sent by the stockists through courier on or before 31st March, 2013.
Answer
(i)Cheques collected by the marketing personnel of the company is an adjusting event as the
marketing personnel’s are employees of the company and therefore, are representatives of the
company. Handing over of cheques by the stockist to the marketing employees discharges the
liability of the stockist.
Therefore, cheques collected by the marketing personnel of the company on or before 31st March,
2013 require adjustment from the stockists’ accounts i.e. from ‘Trade Receivables A/c’ even though
these cheques (dated on or before 31st March, 2013) are presented in the bank in the month of
April, 2013 in the normal course.
Hence, collection of cheques by the marketing personnel is an adjusting event as per AS 4
‘Contingencies and Events Occurring after the Balance Sheet Date’. Such ‘cheques in hand’ will be
shown in the Balance Sheet as ‘Cash and Cash equivalents’ with a disclosure in the Notes to accounts
about the accounting policy followed by the company for such cheques.
(ii) Even if the cheques bear the date 31st March or before and are sent by the stockists through
courier on or before 31st March, 2013, it is presumed that the cheques will be received after 31st
March. Collection of cheques after 31st March, 2013 does not represent any condition existing on
the balance sheet date i.e. 31st March. Thus, the collection of cheques after balance sheet date is
not an adjusting event. Cheques that are received after the balance sheet date should be accounted
for in the period in which they are received even though the same may be dated 31st March or

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 ACCOUNTING STANDARD – REVISION QUESTIONS

before as per AS 4. Moreover, the collection of cheques after balance sheet date does not represent
any material change affecting financial position of the enterprise, so no disclosure in the Director’s
Report is necessary.

DISCLOSURE-
Disclosure of events occurring after the balance sheet date requires the following information should
be provided:
✓ The nature of the event;
✓ An estimate of the financial effect, or a statement that such an estimate cannot be made.

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 ACCOUNTING STANDARD – REVISION QUESTIONS

AS 19 – LEASES
Question
A Lease Agreement of 10 years allows the Lessee to cancel the agreement after 5 years by payment
of an additional amount equivalent to 2 years’ Lease Rental. Is it a Non-Cancellable Lease of ten
years?
Solution
Principle: If the cancellation of lease by the Lessee is allowed only after payment of additional
amount such that the continuation of lease at the inception of the lease proved to be certain, the
Lease is considered as a Non-Cancellable Lease. The additional amount to be paid (i.e. Cancellation
Penalty) should be evaluated in the context of continuity of the lease agreement.

Analysis: If the penalty is nominal, then at the inception of the lease it is doubtful whether the lease
will be continued beyond 5 years. In that case, it should be treated as non-cancellable for a period of
5 years.

Conclusion: In the given case, the penalty is not nominal. The savings in next five years'Lease Rent
may be substantially equal to two years Lease Rental paid as Cancellation Penalty. The condition
stated in AS-19 should be interpreted in the proper perspective. Thus, the above lease will be
considered as non-cancellable for 10 years

Question

1. Classify the following into either Operating or Finance Lease:

Description Solution
(i) Lessee has option to purchase the asset at lower than Fair Value, at the Finance Lease
end of lease term.
(ii) Economic Life of the Asset is 7 years, Lease Term in 6 years, but asset is Finance Lease
not acquired at the end of the leased term.
(iii) Economic Life of the Asset is 6 years, Lease Term is 2 years, but the Asset Finance Lease
is of special nature and has been procured only for use of the Lessee.
(iv) Present Value (PV) of Minimum Lease Payment (MLP) = “X”. Fair Value of Operating Lease
the Asset is “Y”

Question
A machine was given on 3 years operating lease by a dealer of the machine for equal annual lease
rentals to yield 30% profit margin on cost Rs 1,50,000. Economic life of the machine is 5 years and
output from the machine are estimated as 40,000 units, 50,000 units, 60,000 units, 80,000 units and
70,000 units consecutively for 5 years. Straight line depreciation in proportion of output is
considered appropriate.
Compute the following:
(i) Annual Lease Rent
(ii) Lease Rent income to be recognized in each operating year and
(iii) Depreciation for 3 years of lease (DEC 2021: 5 MARKS)

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 ACCOUNTING STANDARD – REVISION QUESTIONS

SOLUTION-
(i) Annual lease rent
Total lease rent
= 130% of Rs 1,50,000 X Output during lease period
Total output
= 130% of Rs 1,50,000 x (40,000 +50,000+ 60,000)
(40,000 + 50,000 +60,000 + 80,000 + 70,000)
= 1,95,000 x 1,50,000 units
3,00,000 units
= Rs 97,500
Annual lease rent = Rs 97,500 / 3 = Rs 32,500
(ii) Lease rent Income to be recognized in each operating year
Total lease rent should be recognised as income in proportion of output during lease period, i.e. in
the proportion of 40 : 50 : 60.
Hence income recognised in years 1, 2 and 3 will be as:
Year 1 Rs 26,000,
Year 2 Rs 32,500 and
Year 3 Rs 39,000.
(iii) Depreciation for three years of lease
Since depreciation in proportion of output is considered appropriate, the depreciable amount Rs
1,50,000 should be allocated over useful life 5 years in proportion of output, i.e. in proportion of 40 :
50 : 60 : 80 : 70
Depreciation for year 1 is Rs 20,000, year 2 = 25,000 and year 3 = 30,000.

Question
B&P Ltd. availed a lease from N&L Ltd. The conditions of the lease terms are as under:
i. Lease period is 3 years, in the beginning of the year 2009, for equipment costing Rs.10,00,000 and
has an expected useful life of 5 years.
ii. The Fair market value is also Rs.10,00,000
iii. The property reverts back to the lessor on termination of the lease.
iv. The unguaranteed residual value is estimated at Rs.1,00,000 at the end of the year 2011.
v. 3 equal annual payments are made at the end of each year.
vi. Consider IRR = 10%.
The present value off Rs.1 due at the end of 3rd year at 10% rate of interest is Rs.0.7513. The present
value of annuity of Rs.1 due at the end of 3rd year at 10% IRR is Rs.2.4868.
State whether the lease constitute finance lease and also calculate unearned finance income.
SOLUTION
Computation of annual lease payment: Particulars Rs.
Cost of equipment 10,00,000
Unguaranteed residual value 1,00,000
Present value of unguaranteed residual value
(Rs. 1,00,000 x 0.7513) 75,130
Present value of lease payments
(Rs. 10,00,000 -Rs. 75,130) 9,24,870

Present value of annuity for three years is 2.4868

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 ACCOUNTING STANDARD – REVISION QUESTIONS

Annual lease payment [9,24,870/2.4868] 3,71,911.70

Classification of lease:
Parameter 1:
The present value of lease payment i.e., Rs. 9,24,870 which equals 92.48% of the fair market value
i.e., Rs. 10,00,000.
The present value of minimum lease payments substantially covers the fair value of the leased asset
Parameter 2:
The lease term (i.e. 3 years) covers the major part of the life of asset (i.e. 5 years).
Therefore, it constitutes a finance lease.
Computation of Unearned Finance Income
Particulars Rs.
Total lease payments (Rs. 3,71,911.70 x 3) 11,15,735
Add: Unguaranteed residual value 1,00,000
Gross investment in the lease 12,15,735
Less: Present value of lease payments and residual value i.e.
Net Investment (Rs. 75,130 + Rs. 9,24,870) (10,00,000)
Unearned finance income 2,15,735

Question
Lessee Ltd. took a machine on lease from Lessor Ltd., the fair value being Rs.7,00,000.
The economic life of machine as well as the lease term is 3 years. At the end of each year Lessee Ltd.
pays Rs.3,00,000. The Lessee has guaranteed a residual value of Rs.22,000 on expiry of the lease to
the Lessor. However, Lessor Ltd., estimates that the residual value of the machinery will be only
Rs.15,000. The implicit rate of return is 15% p.a. and present value factors at 15% are 0.869, 0.756
and 0.657 at the end of first, second and third years respectively.
Calculate the value of machinery to be considered by Lessee Ltd. and the finance charges in each
year.
Solution
As per para 11 of 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 inception of lease. However, if the fair value of the leased asset exceeds the
present value of minimum lease payment from the standpoint of the lessee, the amount recorded as
an asset and liability should be the present value of minimum lease payments from the standpoint of
the lessee.
Computation of Value of machinery:
Present value of minimum lease payment = Rs.6,99,054
Fair value of leased asset = Rs.7,00,000
Therefore, the recognition will be at the lower of the two i.e. 6,99,054
Working Note -Present value of minimum lease payments:
Annual lease rental × PVIF+ Present value of guaranteed residual value
= Rs.3,00,000 × (0.869 + 0.756 + 0.657) + Rs.22,000 × 0.657
= Rs.6,84,600 + Rs.14,454 = 6,99,054

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 ACCOUNTING STANDARD – REVISION QUESTIONS

Computation of finance charges:

Year Finance Payment Reduction in Outstanding
charge outstanding liability
liability
1st Year beginning – – – 6,99,054
End of 1st year 1,04,858 3,00,000 1,95,142 5,03,912
End of 2nd year 75,587 3,00,000 2,24,413 2,79,499
End of 3rd year 41,925 3,00,000 2,58,075 21,424

Question
Bhrigu Ltd wishes to obtain a Machine Tool costing (Fair Value) Rs 20 Lacs by way of lease. The life of
the machine tool is 12 years but the Company requires it only for the first five years. It enters into an
agreement with Maharaj Ltd for a lease rental of Rs 2 Lacs p.a.
Bhrigu Ltd is not sure about the treatment of these lease rentals, and hence requests your
assistance. Assume Implicit Rate of Interest at 15%. PV Factors are: 0.87, 0.76, 0.66, 0.57 and 0.50.
Solution
(a) Lease term = 5 years
(b)Useful Life = 12 years
Percentage = 5/12 * 100 = 42%
(d) Fair Value of Asset = 20,00,000
(e) Present value of MLP = 672,000 [200,000 X 3.36]
Percentage = 672,000 / 20,00,000 x 100 = 34%
Therefore it is an operating Lease
In the Books of Lessee-
Lessee has to be recognise Lease Rental paid on Straight Line Basis or any other systematic basis
Journal Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Entries in
book of
Lessee-
Particulars
Lease Rental 200,000 200,000 200,000 200,000 200,000
A/c Dr
To Bank A/c 200,000 200,000 200,000 200,000 200,000
(Being Lease
Rental paid)
P&l A/c Dr 200,000 200,000 200,000 200,000 200,000
To Lease 200,000 200,000 200,000 200,000 200,000
Rental A/c
(Being Lease
Rental
Transferred)

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 ACCOUNTING STANDARD – REVISION QUESTIONS

Question
A Ltd has initiated a lease for 3 yrs for an equipment costing 1.5 lacs with expected useful life of 4
years. The asset would revert to Global Ltd under the lease agreement. Other information available
in respect of lease agreement is –
• The Unguaranteed Residual Value of the equipment after the expiry of the lease term is estimated
at Rs 20,000.
• The implicit rate of interest is 10%.
• The annual payments have been determined in such a way that the Present Value of the Lease
Payment plus the Residual Value is equal to the Cost of the asset,
Ascertain in the hands of Global Ltd - (a) Annual Lease Payment, (b) Unearned Finance Income, (c)
Segregation of Finance Income.
Solution
Journal Entries In the books of Global ltd (Lessor) For Finance Lease
Particulars Yr 1 Yr 2 Yr 3
Lease Receivable A /c Dr 150,000 - -
To Equipment A/c 150,000 - -
(Being Equipment Given on Finance Lease Accounted)

Lease Receivable A /c Dr 15,000 11,071 6,811

To Interest / Finance Income 15,000 11,071 6,811
(Being Interest Income Accounted)

Bank A/c Dr 54,294 54,294 74,294

To Lease Receivable A /c 54,294 54,294 74,294
(Being Lease Rental Receipt Accounted)
Interest/Finance Income A/c Dr 15,000 11,071 6,811
To P&L A/c 15,000 11,071 6,811
(Being Interest Income transferred to P&L A/c)

Question
Chandika Silk Mills leased its looms to Kali Looms Ltd for a period of five years from 1st April 2013,
for a lumpsum lease of Rs 10,50,000 payable in full in advance. The Lessor agreed to incur the
expenditure for Repairs and Maintenance of the looms which were as under: Financial Year 2013-
2014 Rs 4,700, Financial Year 2014-2015 Rs 5,200.
WDV of the Looms on 01.04.2013 was Rs 4,60,000 and depreciation at 33 1/3 % was to be charged.
Pass Journal Entries in the books of the Lessor for Operating Lease. Show relevant entries for the
year
2013-2014, if the Lessor closes its account on 31st March every year.

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SOLUTION
Journal Entries in the books for Chandika Silks(Lessor) for Operating Lease
Particulars Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Bank A/c Dr 10,50,000 - - - -
To Lease Rental Advance A/c 10,50,000 - - - -
(Being Lease Advance

SALE AND LEASEBACK TRANSACTION

• A Sale and Leaseback Transaction involves the Sale of an Asset by the Vendor, and the leasing
of the same asset back to the Vendor.
• The Vendor / Seller is thus the Lessee, and the Buyer of the Asset is the Lessor.
• The Lease Payments and the Sale Price are usually interdependent, as they are negotiated as
a package
WHERE SALE AND LEASEBACK RESULTS IN FINANCE LEASE
The excess or deficiency of sales proceeds over the carrying amount should be deferred and
amortised over the lease term in proportion to the depreciation of the leased asset
WHERE SALE AND LEASEBACK RESULTS IN OPERATING LEASE
• If Sale price = Fair Value then Profit or loss should be recognised immediately.
• Sale Price < Fair Value then Profit should be recognised immediately. The loss should also be
recognised immediately except that, if the loss is compensated by future lease payments at below

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market price, it should be deferred and amortised in proportion to the lease payments over the
period for which the asset is expected to be used.
• Sale Price > Fair Value then The excess over fair value should be deferred and amortised
over the period for which the asset is expected to be used.

Question
A Ltd. sold machinery having WDV of Rs 40 lakhs to B Ltd. for Rs 50 lakhs and the same machinery
was leased back by B Ltd. to A Ltd. The lease back is operating lease.
Comment if –
(a) Sale price of Rs 50 lakhs is equal to fair value.
(b) Sale price of Rs 50 Lakhs & Fair value is Rs 60 lakhs.
(c) Fair value is Rs 45 lakhs and sale price is Rs 38 lakhs.
(d) Fair value is Rs 40 lakhs and sale price is Rs 50 lakhs.
(e) Fair value is Rs 46 lakhs and sale price is Rs 50 lakhs
(f) Fair value is Rs 35 lakhs and sale price is Rs 39 lakhs (JAN 2021: 5 MARKS)
Solution
Following will be the treatment in the given cases:
(a) When sales price of Rs 50 lakhs is equal to fair value, A Ltd. should immediately recognise the
profit of Rs 10 lakhs (i.e. 50 – 40) in its books.
(b) When fair value is Rs 60 lakhs then also profit of Rs 10 lakhs should be immediately recognised by
A Ltd.
(c) When fair value of leased machinery is Rs 45 lakhs & sales price is Rs 38 lakhs, then loss of Rs 2
lakhs (40 – 38) to be immediately recognised by A Ltd. in its books provided loss is not compensated
by future lease payment.
(d) When fair value is Rs 40 lakhs & sales price is Rs 50 lakhs then, profit of Rs 10 lakhs is to be
deferred and amortised over the lease period.
(e) When fair value is Rs 46 lakhs & sales price is Rs 50 lakhs, profit of Rs 6 lakhs (46 - 40) to be
immediately recognised in its books and balance profit of Rs 4 lakhs (50-46) is to be
amortised/deferred over lease period.
(f) When fair value is Rs 35 lakhs & sales price is Rs 39 lakhs, then the loss of Rs 5 lakhs (40-35) to be
immediately recognised by A Ltd. in its books and profit of Rs 4 lakhs (39-35) should be
amortised/deferred over lease period.

Question
Classify the following into either operating or finance lease:
i. Lessee has option to purchase the asset at lower than fair value, at the end of lease term;
ii. Economic life of the asset is 7 years, lease term is 6 years, but asset is not acquired at the end of
the lease term;
iii. Economic life of the asset is 6 years, lease term is 2 years, but the asset is of special nature and
has been procured only for use of the lessee;
iv. Present value (PV) of Minimum lease payment (MLP) = “X”. Fair value of the asset is “Y”.
Solution
i. If it becomes certain at the inception of lease itself that the option will be exercised by the lessee,
it is a Finance Lease.
ii. 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.
iii. Since the asset is procured only for the use of lessee, it is a finance lease.
iv. The lease is a finance lease if X = Y, or where X substantially equals Y.

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Question
What are the disclosures requirements for operating leases by the lessee as per AS-19?
Solution
As per AS 19, lessees are required to make following disclosures for operating leases:
a. the total of future minimum lease payments under non-cancellable operating leases for each of
the following periods:
i. not later than one year;
ii. later than one year and not later than five years;
iii. later than five years;
b. the total of future minimum sublease payments expected to be received under non-cancellable
subleases at the balance sheet date;
c. lease payments recognized in the statement of profit and loss for the period, with separate
amounts for minimum lease payments and contingent rents;
d. sub-lease payments received (or receivable) recognized in the statement of profit and loss for the
period;
e. a general description of the lessee's significant leasing arrangements including, but not limited to,
the following:
i. the basis on which contingent rent payments are determined;
ii. the existence and terms of renewal or purchase options and escalation clauses; and
iii. restrictions imposed by lease arrangements, such as those concerning dividends, additional debt,
and further leasing.

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