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Q&A-1.1 Star Rating On the basis of Maximum marks from a chapter jjjjj On the basis of Questions included every year from a chapterjjjjj On the basis of Compulsory questions from a chapterjjjjj 1Accounting Standards & Guidance Notes This Chapter Includes : Accounting standards, Guidance Notes Marks of Short Notes, Distinguish Between, Descript ive & Practical Questions CA Final Gr. I SHORT NOTES 2004 - Nov [6] Write short notes on the following : (d) Advantages and disadvantages of setting of Accou nting Standards. (4 marks) Q&A-1.2O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Answer : Accounting Standards are prescribed by ICAI, which are to be followed in performing accounting transactions. Various accounting princip les, techniques and methods are described in these standards, which assist the user in preparation and presentation of financial statements, with a true and fair view. The various advantages of setting accounting standa rd are follows :- Advantages of setting Accounting Standard 1. Accounting standards reduces the possibilities of variation in the accounting treatment used while preparing financial statements . 2. Accounting standards call for certain disclosures which makes the financial statement more true & fair. 3. Accounting standard makes comparison of financial statements possible. Disadvantages of setting Accounting Standard 1. Accounting problems may have alternative solution s. Accounting Standards makes the choice between different alternative accounting treatments difficult. 2. Accounting standards leads to rigidity and is les s flexible. 3. Accounting standards are framed within the limits set by statutes. It cannot overrule the statutes. 2007 - May [6] Write short notes on the following : (d) Impairment of asset and its application to inven tory. (4 marks) (e) Treatment of borrowing costs. (4 marks) (f) Accounting for investment by a holding company i n subsidiaries. (4 marks) Answer : (d) AS-28 Impairment of assets, Provides the process that ensure that an asset is carried at no more that its recoverable amount, in an enterprise. If an asset is carried at more than its recoverable amount, then t he asset is called impaired asset, and thus, the enterprise have to recognise t he impairment loss. As-28 is applicable on all the business assets exce pt- (i) Inventories (ii) Assets arising from construction contracts (iii) Financial Assets (iv) Differed tax assets. As- 28 is not applicable on above all 4 types of as sets because other accounting standards are applicable on them. (e) AS-16 ‘Borrowing costs’‘ Borrowing cost includes the interest and other cos ts incurred by an enterprise, like interest and commit ment charges on bank borrowing’s, amortization of premium on debentures, amortization of discounts etc. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.3 Treatment:- (i) Borrowing costs that are directly attributable t o the acquisition, construction, or production of a qualifying asset should be capit alized. A qualifying asset is an asset which generally take s 12 months to get ready for its intended use or sale. (ii) other borrowing cost should be treated as an ex pense in the period, in which they are incurred. (f) AS-13 ‘Accounting for Investments’ classify the inv estment as long term and current investment .An investment made by a holding company in its subsidiary company, generally are long term Investment. Indian holding company shows its investments in their subsidiary company, just like any other investment and categorize it as trade investment. Investment cost includes brokerage, fees, duties etc. along with the acquisition cost. The acquisition cost is determined by taking fair m arket value of the securities issued, if investment is made by issue of securitie s, partly or wholly. But, in case if investment is made wholly or partly on account of any other assets the value of such assets are taken as cost o f investment. DISTINGUISH BETWEEN 2001 - Nov [6] (a) Explain the difference between direct and indi rect methods of reporting cash flows from operating activities with reference to Accounting Standard 3, revised. (8 marks) Answer : Direct Method of Reporting cash flows from Operating Activities. Information [Para 19]: Under the Direct Method, information about major classes of gross cash receipts and gross cash payments may be obtained either- (a) From the accounting records of the enterprise; or (b) By adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for a financial enterprise) Indirect Method of Reporting cash flows from Operating Activities . Information [Para 20]: Under the Indirect Method, the net cash flow from determined by adjusting Net Profit or Loss for the effects of - (a) Changes during the period in inven- tories and operating receivables and payables; (b) Non-cash items such as deprecia- tion, provisions, deferred taxes, and unrealised and losses; and Q&A-1.4O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 and other items in the statement of profit and loss for- CChanges during the period in i n v e n t o r i e s a n d o p e r a t i n g receivables and payables; C Other non-cash items; and C Other items for which the cash effects are investing or financing (c) All other items for which the cash effects are investing or financing cash flows. cash flows. Format : The Direct Method of reporting Cash Flows from Ope rating Activities is illustrated below - Particulars Amount Amount Cash Receipts from Customers for sale of goods / re ndering of services Cash Receipts from Royalties, fees, commission and other revenue Cash Payments to Suppliers for goods and services Cash Payment to and on behalf of Employees Cash receipts and payments relating to futures/forward/option/swap contracts when the cont racts are held for dealing or trading purposes. Cash Generated from Operations before taxes and extraordinary items Less : Cash Payments (Refunds) of income taxes unless they can be specifically identified with financing and investing activities Cash Flows before extraordinary items Add / Less : Cash Receipts (Payments) in relation to extraordinary items, e.g. earthquake disaster settl ement etc. NET CASH FROM OPERATING ACTIVITIES [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.5 Whereas the Formal under Indirect Method of reporti ng Cash Flows from Operating Activities is illustrated below:- Particulars Amount Amount Net Profit Before Taxes and Extra-ordinary Items Adjustments for :- Depreciation and similar non-cash items Foreign Exchange Losses, if any Interest/Dividend/Other Incomes relating to investi ng/ financing activities Interest Paid Taxes Paid (if PAT is considered initially instead of PBT) Operating Profit before Working Capital Changes Add/ (Less) : Decrease / (Increase) in Current Assets excluding C ash/ Cash Equivalents. Increase/(Decrease) in Current Liabilities excludin g Cash/ Cash Equivalents Cash Generated From Operations Less : Cash Payments (Refunds) of income taxes unless they can be specifically identified with financing and investing activities Cash Flows before extraordinary items Add/Less : Cash Receipts (Payments) in relation to extraordinary items, e.g. earthquake disaster settl ement etc. NET CASH FROM OPERATING ACTIVITIES 2005 - Nov [6] (c) Distinguish between "Timing differences" and " Permanent differences" referred to in AS-22 on accounting for Taxes, giving 2 examples of each. (4 marks) Answer : Please refer 2008 - Nov [7] (e) on page no. 96 Q&A-1.6O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 DESCRIPTIVE QUESTIONS 2001 - May [6] (b) Briefly indicate the items, which are included in t he expression "borrowing cost" as explained in AS-16. (6 marks) Answer : As - 16 (Para 4), Borrowing Cost. It may includes t he following items:- (i) Amortization of premium on debentures. (ii) Amortization of discounts, etc, related with th e borrowing. (iii) Amortization of ancillary costs, e.g. CA fees. (iv) Interest and commitment charges on bank borrowi ngs whether short term or long term. (v) Exchange differences arising from foreign curren cy borrowing up to the extent that they are regarded as an adjustment to cost of interest. 2002 - May [3] (a) What are the advantages of setting Accounting Standard? (4 marks) Answer : Please refer 2004 - Nov [6] (d) on page no. 11 2002 - Nov [4] (b) Write a note on recommendations given in the G uidance note on Accounting in respect of Minimum Alternate Tax (MAT ) issued by Institute of Chartered Accountants of India. (4 marks) Answer : According to the Guidance Note on Accounting for Ta xes on Income, (issued in August 1991), the tax charge for the period should be dete rmined on the basis of the ''tax effect accounting method'', although the ''taxes payable m ethod'' is also permitted for the time being. Thus, an entity following the ''tax effect a ccounting method'' should follow aforesaid Guidance Note in respect of accounting fo r MAT also. Taxes Payable Method: The current accounting practice generally followed in India regarding accounting for income taxes is the ''taxe s payable method''. According to this, the tax charged to the P&L A/c of a year is the amo unt of taxes payable for that year to the revenue authorities. MAT is the amount payable to the revenue authorities in the year in which the normal tax liability is less than MAT, therefore, as per the ''taxes payable method'', the amount of tax to be charged ( i.e. provision for taxation) to the P & L A/c should be the amount of MAT. The possibilit y of obtaining a credit in a year later does not reduce the tax liability of the current ye ar. Such possibility is dependent on conditions existing in a subsequent year and should not be recognised in the financial statements. In the year in which set off of MAT is availed against the normal tax liability, [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.7 the amount payable to the revenue authorities would be the amount of normal tax liability as reduced by the permissible set-off in respect of MAT. Thus the amount of tax to be charged in the P & L A/c of the year in which the set-off is availed would be the actual amount of tax payable. Note: 1. In the absence of any information regarding inter est on foreign currency loan taken for financing purchase of fixed assets, no pr ovision has been made for interest liability. 2. It has been assumed that restructuring costs are of revenue nature and thus are allowed for tax purposes. 2004 - May [4] (b) A company has given counter guarantees of ` 2.25 crores to various banks in respect of the guarantees given by the sai d banks in favour of Government authorities. Outstanding counter guarantees as at t he end of financial year 2003-2004 were ` 1.95 crores. How should this information be shown in the Financial Statements of the Company. (4 marks) Answer : The counter guarantee given by the company is, infa ct, an undertaking to perform what is, in any event, the obligation of the company its elf. This is purely a matter which is in the control of the company and a were possibility o f a default by the company in future cannot be said to involve the existence of a contin gent liability on Balance Sheet date. Thus no separate disclosure is required in case of counter guarantees as per guidance note on guarantees and counter guarantees. PRACTICAL QUESTIONS 1998 - Nov [2] E Ltd. manufactures and sells food products. The f ollowing draft financial statements were prepared by the chief accountant fo r the year ended 31.3.98 and placed before you for advice : Profit and Loss Statement for the year ended 31.3.9 8 (Figures in ` lakhs) Sales and other income 3,500 Cost of goods sold including operating expenses and depreciation 2,740 Operating profit 760 Profit on sale of property 200 Interest charges 300 Profit before tax 660 Tax provision 330 Profit after tax 330 Q&A-1.8O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Proposed dividend 300 Profit retained 30 Add opening balance of profit 360 Profit carried to Balance Sheet 390 Balance Sheet as on 31.3.98 (Figures in ` lakhs) Liabilities Assets Share capital 3,000 Fixed assets 5,000 General reserve 540 Less depreciation 1,000 4,000 Profit and loss account balance 390 Current Assets St ock 800 Secured loans 2,000 Debtors 1,000 Current Liabilities and Royalty receivable 100 Provisions Advance tax 200 Creditors 240 Cash balance 550 2,650 Provision for tax 330 Miscellaneous expenditure Proposed dividend 300 870to the extent not written of 150 6,800 6,800 You are provided with further information as follow s : (a) On 1.4.97 E Ltd. had sold some of its fixed asse ts for ` 100 lakhs [written down value ` 250 lakhs]. These assets were revalued earlier. As on 1.4.97 the revaluation reserve corresponding to these assets s tood at ` 200 lakhs. The profit on sale of property as shown in the profit and loss statement represented the transfer of this amount. Loss on sale of the asset was included in the cost of goods sold etc. (b) During the year E Ltd. undertook restructuring e xercise of its operations at a cost of ` 150 lakhs. This amount stood included in "miscella neous expenditure to the extent not written off". (c) Included in sales and other income is a sum of ` 100 lakhs representing royalty receivable for supply of know-how to a company in S outh-East Asia. As per agreement the amount is to be received in US Dollar s. However, exchange permission was denied to the company in South-East Asia for remitting the same. (d) E Ltd. purchased fixed assets costing ` 1,825 lakhs on 1.4.97 and the same was fully financed by foreign currency loan [i.e. US Do llars] repayable in five equal instalments annually. [Exchange rate at the time of purchase was 1 US Dollar = ` 36.50]. As on 31.3.98 the first instalment was pai d when 1 US Dollar fetched ` 41.50. The entire loss on exchange was included in cost of goods sold etc. E Ltd. normally provides depreciation on fixed assets at 2 0% on WDV basis. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.9 (e) Dividend at 10% on paid up equity capital is to be maintained as in prior years. You are required to redraft the financial statement s of E Ltd. for the year ended 31.3.98 in accordance with relevant provision s of accounting standards. Journal entries (wherever applicable) in respect of the information given are to be shown. Schedules, previous year's figures and cash flow statement are not required. (20 marks) Answer : (1) As per Para 14.4 and Para 32 of AS-10 on Account ing for Fixed Assets, on disposal of a previously revalued item of fixed ass et, the difference between net disposal proceeds and the net book value is normall y charged or credited to the profit and loss statement except that to the extent such a loss is related to an increase which was previously recorded as a credit to revaluation reserve and which has not been subsequently reversed or utilise d, it is charged directly to that account. The amount standing in revaluation reserve following the retirement or disposal of an asset which relates to that asset ma y be transferred to general reserve. Accordingly, the following journal entries are to b e passed : ( ` in lakhs) Profit on sale of Property Dr. 200 To Loss on Sale of Fixed Assets 150 To General Reserve 50 [Alternatively, these entries can be passed through Revaluation Reserve Account. That is, ‘Profit on Sale of Property’ can be credited first to Revaluation Reserve Account and then, this Reserve will be debi ted with loss on sale of fixed assets (included in ‘Cost of Goods Sold etc.’) and the balance will be transferred to General Reserve.] (2) As per Para 12 of AS-5 (Revised) on Net Profit o r Loss for the Period, Prior Period Items and Changes in Accounting Policies, when item s of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the perform ance of the enterprise for the period, the nature and amount of such items should be disclosed separately. Accordingly, the entire restructuring cost ` 150 lakh requires separate disclosure in the statement of profit and loss inst ead of deferring and showing it under miscellaneous expenditure. (3) According to Para 9.2 of AS-9 Revenue Recognitio n, where the ability to assess the ultimate collection with reasonable certainty i s lacking at the time of raising any claim, e.g. for escalation of price, export incenti ves, interest, etc., revenue recognition is postponed to the extent of uncertain ty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made. Q&A-1.10O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Thus, ‘Sales and other income’ should be reduced by ` 100 lakh with equivalent credit to Royalty Receivable Account. Alternatively, the students may apply Para 9.3 of A S-9, after making reasonable assumption as to the timing of the uncer tainty. According to Para 9.3 when the uncertainty relating to collectibility ari ses subsequent to the time of sale or the rendering of the service, it is more appropr iate to make a separate provision to reflect the uncertainty rather than to adjust th e amount of revenue originally recorded. (4) As per Para 10 of AS-11 (Revised) on Accounting for the Effects of Changes in Foreign Exchange Rates, exchange differences arisin g on repayment of liabilities incurred for the purpose of acquiring fixed assets, which are carried in terms of historical cost, should be adjusted in the carrying amount of the respective fixed assets. The carrying amount of such fixed assets sh ould, to the extent not already so adjusted or otherwise accounted for, also be adj usted to account for any increase or decrease in the liability of the enterp rise, as expressed in the reporting currency by applying the closing rate, for making p ayment towards the whole or a part of the cost of the assets or for repayment of the whole or a part of the money borrowed by the enterprise from any person, directl y or indirectly, in foreign currency specifically for the purpose of acquiring those assets. Thus the entire loss on exchange should be added to the carrying amount of fixed assets and not to the cost of goods sold. Further, depreciation on the revised unamortised de preciable amount should also be provided, in accordance with Para 25 of AS- 6 (Revised) on Depreciation Accounting. Calculation of Exchange Loss : Foreign currency loan = = 50 lakh US dollars Exchange loss = 50 lakhs US dollars × (41.50 ! 36.50) = ` 250 lakhs (including exchange loss on payment of first instal ment) Calculation of additional depreciation on account o f increase in the depreciable amount of fixed assets: 20% on ` 250 lakh = ` 50 lakh The following journal entries are required to be pa ssed : ( ` in lakhs) Fixed Assets Dr. 250 To Exchange Loss (or ‘Cost of Goods Sold etc.’ ) 250 Depreciation Dr. 50 To Provision for Depreciation 50 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.11 E. Ltd. Balance Sheet as at 31 st March, 1998 ( ` in lakhs) I. SOURCES OF FUNDS (1) Shareholders Funds(a) Capital 3,000 (b) Reserves and Surplus : General Reserve 590 Profit and Loss Account 340 9303,930 (2) Loan Funds : (a) Secured Loans 2,000 (b) Unsecured loans — 2,000 TOTAL 5,930 II APPLICATION OF FUNDS(1) Fixed Assets :(a) Gross block 5,000Exchange difference capitalised 250 5,250 (b) Less: Depreciation (1,000 + 50) 1,050 (c) Net block 4,200 (d) Capital work in progress — 4,200 (2) Investments — (3) Current Assets, Loan and Advances : (a) Inventories (b) Sundry debtors 800 (c) Cash balance 1,000 (d) Other current assets 550 (e) Loans and Advances (Advance tax) — 200 Less : Current Liabilities and Provisions : 2,550 (a) Liabilities (b) Provisions : 240 Provision for Taxation 280 Proposed Dividend 300 580 820 Net Current Assets (4) Miscellaneous expenditure 1,730 (to the extent not written off or adjusted) ______ TOTAL 5,930 Q&A-1.12O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Profit and Loss Account for the year ended 31 st March, 1998 (` in lakhs) Sales and other income (3,500 - 100) 3,400 Cost of goods sold including operating expenses and depreciation (2,390) (2,740 - 150 - 250 + 50) Restructuring cost (150) Interest charges : (300) Profit before Taxation 560 Provision for tax @ 50%) (280) Net Profit 280 Balance brought forward from previous year 360 Profit available for Appropriation 640 Proposed Dividend (300) Balance carried forward 340 Current year profit after tax is only ` 280 lakh as against the proposed dividend of ` 300 lakh. Hence, in order to ensure sufficient com pliance with section 205 of the Companies. Act, 1956, past profits are utilised to make up the shortfall (assuming that there are no arrears of depreciation). Note on Account : The royalty receivable in US dollars for supply of know-how to a company in South-East Asia amounting to ` 100 lakh has not been recognised as exchange permission has been denied to the company in South-east Asia for remitting the same. Notes : 1. In the absence of any information regarding inter est on foreign currency loan taken for financing purchase of fixed assets, no provisio n has been made for interest liability. 2. It has been assumed that restructuring costs are of revenue nature and thus are allowed for tax purposes. 1998 - Nov [3] The following are the changes in the account balan ces taken from the Balance Sheets of PQ Ltd. as at the beginning and e nd of the year : Changes in Rupees indebit or [credit] Equity share capital 30,000 shares of ` 10 each issued and fully paid 0 Capital reserve [49,200] 8% debentures [50,000] Debenture discount 1,000 Freehold property at cost/revaluation 43,000 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.13 Plant and machinery at cost 60,000 Depreciation on plant and machinery [14,400] Debtors 50,000 Stock and work-in-progress 38,500 Creditors [11,800] Net profit for the year [76,500] Dividend paid in respect of earlier year 30,000 Provision for doubtful debts [3,300] Trade investments at cost 47,000 Bank [64,300] 0 You are informed that : (a) Capital reserve as at the end of the year represented realised profits on sale of one freehold property together with surplus arising on the revaluation of balance of freehold properties. (b) During the year plant costing ` 18,000 against which depreciation provision of ` 13,500 was lying, was sold for ` 7,000. (c) During the middle of the year ` 50,000 debentures were issued for cash at a discount of ` 1,000. (d) The net profit for the year was after crediting the profit on sale of plant and charging debenture interest. You are required to prepare a statement which will explain, why bank borrowing has increased by ` 64,300 during the year end. Ignore taxation. (15 ma rks) Answer : PQ Ltd. Cash flow statement for the year ended... ` Cash flows from operating activities Net Profit 76,500 Adjustments for : Depreciation 27,900 Profit on sale of plant (2,500) Interest expense 2,000 Operating profit before working capital changes 1,03 ,900 Increase in debtors (less provision) (46,700) Increase in stock and work-in-progress (38,500) Increase in creditors 11,800 Net cash from operating activities 30,500 Cash flows from investing activities Purchase of plant and machinery (78,000) Proceeds from sale of plant 7,000 Q&A-1.14O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Proceeds from sale of freehold property 6,200 Increase in trade investments (47,000) Net cash used in investing activities (1,11,800) Cash flows from financing activities Proceeds from issuance of debentures at discount 49, 000 Debenture interest paid (2,000) Dividend paid in respect of earlier year (30,000) Net cash from financing activities 17,000 Excess of outflows over inflows64,300 Thus the shortfall of ` 64,300 was made up through borrowing from bank. Working Notes : (1) Plant and Machinery ` Amount of increase (at cost) 60,000 Add : Disposal (at cost) 18,000 Acquisition during the year 78,000 Disposal of plant : Proceeds from sale 7,000 Net book value (18,000 - 13,500) 4,500 Profit on sale 2,500 (2)Freehold property Capital Reserve 49,200 Less : Increase in freehold property (closing balance minus opening balance) 43,000 Proceeds from sale of freehold property 6,200 (a) Memorandum Accounts Plant and Machinery Account ` ` To Balance b/d — By Bank (Sale proceeds) 7,000 To Profit and Loss A/c 2,500 By Provision for Deprecia tion 13,500 (Profit on sale) By Balance c/d 60,000 To Bank (Balancing figure) 78,000 ______ 80,500 80,500 (b) Provisions for Depreciation (Plant and Machiner y) Account ` ` To Plant and Machinery A/c 13,500 By Balance b/d — To Balance c/d 14,400 By Profit and Loss A/c _____ (Balancing figure) 27,900 27,90027,900 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.15 (c) Freehold Property Account ` ` To Balance b/d — By Bank A/c 6,200 To Capital Reserve 49,200 (Balancing figure) _____ By Balance c/d 43,000 49,20049,200 In the absence of information about the opening bal ances, the entire amount of change has been considered under the closing balanc es for the purpose of calculation of missing figures. Notes : (1) Investment income and dividend pertaining to the current year have not been considered in the absence of any related informatio n. (2) Debenture interest has been calculated for six m onths @ 8% on ` 50,000. (3) The statement required in the question has been prepared in accordance with AS-3 (Revised) on Cash Flow Statements (Indirect Method) . 1999 - May [6] (a) A Limited Company closed its accounting year on 30-6-98 and the accounts for that period were considered and approv ed by the board of directors on 20th August, 1998. The company was engaged in layin g pipe line for an oil company, deep beneath the earth. While doing the boring work on 1-9-98 it had met a rocky surface for which it was estimated that there would be an extra cost to the tune of ` 80 lakhs. You are required to state with reasons, how the event would be dealt within the financial statements for the year ended 30-6-98. (3 marks) (b) X Co. Ltd., has obtained an Institutional Loan of ` 680 lakhs for modernisation and renovation of its plant & machinery. Plant & machin ery acquired under the modernisation scheme and installation completed on 31-3-98 amounted to ` 520 lakhs, 30 lakhs has been advanced to suppliers for additional assets and the balance loan of ` 130 lakhs has been utilised for working capital pu rpose. The total interest paid for the above loan amounted to ` 68 lakhs during 1997-98. You are required to state how the interest on the i nstitutional loan is to be accounted for in the year 1997-98. (4 marks) (c) Y Co. Ltd., used certain resources of X Co. Ltd. I n return X Co. Ltd. received ` 10 lakhs and ` 15 lakhs as interest and royalties respectively fr om Y Co. Ltd. during the year 1997-98. You are required to state whether and on what basis these revenues can be recognised by X Co. Ltd. (3 marks) (d) Ltd. purchased fixed assets costing ` 3,000 lakhs on 1-1-98 and the same was fully financed by foreign currency loan (U.S. Dollars) pa yable in three annual equal Q&A-1.16O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 instalments. Exchange rates were 1 Dollar = ` 40.00 and ` 42.50 as on 1-1-98 and 31-12-98 respectively. First instalment was paid on 31-12-98. The entire difference in foreign exchange has been charged to revenue for the year 1998. You are required to state, how these transactions w ould be accounted for. (3 marks) (e) Limited Company finds that the stock sheets as on 31-3-97 had included twice an item the cost of which was ` 20,000. You are asked to suggest, how the error would be de alt with in the accounts of the year ended 31-3-98. (3 marks) Answer : (a) According to Para 3.2 of AS 4 (Revised) on Continge ncies and Events Occurring after the Balance Sheet Date ‘events occurring afte r the balance sheet date’ are ‘significant events, both favourable and unfavourab le, that occur between the balance sheet date and the date on which financial statements are approved by the Board of Directors in the case of a company’. In this case the incidence, which was expected to p ush up cost became evident after the date of approval of the accounts. So that was not an ‘event occurring after the balance sheet date.’ However, t his may be mentioned in the Director’s Report. (b) The treatment for total interest amount of ` 68 lakhs can be given as follows : Purpose Nature Interest to be Interest to be charged t o capitalized Profit and loss account `in lakhs` in lakhs Modernisation Qualifying = 47.41 and renovation assets* of plant and machinery Advance to Qualifying = 2.74 Suppliers for assets* additional assets Working Not a qualifying Capital asset = 11.85 50.1511.85 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.17 (c) According to para 13 of AS 9 on Revenue Recognition , revenue arising from the use by others of enterprise resources yielding inte rest and royalties should only be recognised when no significant uncertainty as to me asurability or collectibility exists. These revenues are recognised on the follow ing basis : (1) Interest: on a time proportion basis taking into account the amount outstanding and the rate applicable. (2) Royalties: on an accrual basis in accordance with the terms of the relevant agreement. (d) According to para 13 of AS 11 (Revised 2003) ‘ The Effects of Changes in Foreign Exchange Rates’, exchange differences arising on th e settlement of monetary items or on reporting an enterprise’s monetary items at r ates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognized as income or expen ses in the period in which they arise. Thus exchange differences arising on re payment of liabilities incurred for the purpose of acquiring fixed assets are recog nized as income or expense. Calculation of Exchange Difference : Foreign currency loan = = 75 lakhs US Dollars Exchange difference = 75 lakhs US Dollars × (42.50 - 40.00) = ` 187.50 lakhs (including exchange loss on payment of first instal ment) Therefore, entire loss due to exchange differences amounting ` 187.50 lakhs should be charged to profit and loss account for th e year. (e) The error in the recording of closing stock of the year ended 31 st March, 1997 must have also resulted in overstatement of profits of p revious year, brought forward to the current year ended 31 st March, 1998. Vide para 4 of AS-5 (Revised) on Net Profit or Loss for the Period, Prior Period Items a nd Changes in Accounting Policies, the rectifications as required in the cur rent year are ‘Prior Period Items’. Accordingly, ` 20,000 should be deducted from opening stock in th e profit and loss account. And ` 20,000 should be charged as prior period adjustmen t in the profit and loss account for the year ended 31 st March 1998 in accordance with para 15 of AS-5 (Revised) which requires that the nature an d amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the current profit or loss can be p erceived. 1999 - Nov [4] History Ltd. set up a factory on 1st Jan., 1980 at a cost of ` 100 crores financed 50% by debentures, 30% by preference capit al and 20% by equity capital. By 31st December, 1989 the debentures were repaid and preference capital redeemed. Q&A-1.18O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 The net asset value per rupee of equity investment made on 1st Jan., 1980 as on 31- 12-1989 was ` 8 of which 10% was in fixed assets and the balance 90% was in net working capital. On 1st January, 1990 the company made a rights issu e of equity shares at a premium of 50% in the ratio of 1:1; it also made a public issue of equity shares at a premium of 200% to the tune of 80% of equity capita l after the rights issue. The entire proceeds of rights and public issue were earmarked for capital expenditure. On 31st December, 1998 the net asset value of one r upee of equity capital based on the position as on 1-1-1990 was ` 41 of which only 1% was in fixed assets and the balance was in net working capital. You are informed that : (i) Capital expenditure was made only in 1980 and 19 90 (ii) Re. 1 of 1980 is equal to ` 3 of 1990 and ` 15 of 1999. History Ltd. asks you to: (a) Prepare Balance Sheets as on 1st Jan., 1980, 31s t Dec., 1989, 1st Jan., 1990, 31st Dec., 1998. (b) Work out the retained profit over the period 1st Jan., 1980, to 31st Dec., 1998 under the concept of physical capital maintena nce. (16 marks) Answer : History Ltd. Balance Sheet as on 1st January, 1980 ( ` ` ` ` in crores) I. SOURCES OF FUNDS 1. Shareholder's funds:Equity Share capital Preference share capital 2. Loan funds: Debentures 20 30 50 50 TOTAL 100 II. APPLICATION OF FUNDS 1. Fixed assets TOTAL 100 100 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.19 Balance Sheet as on 31st December, 1989 ( ` ` ` ` in crores) I. SOURCES OF FUNDS 1. Shareholder's funds:Equity Share capital Reserves and Surplus 2. Loan funds: 20 140 160 — TOTAL 160 II. APPLICATION OF FUNDS 1. Fixed assets 2. Net working capital 16 144 160 Balance Sheet as on 1st January, 1990 ( ` ` ` ` in crores) I. SOURCES OF FUNDS 1. Shareholder's funds:Equity share capital Share premium Other reserves and surplus 2. Loan funds 74 140 72 214 286 — TOTAL 286 II. APPLICATION OF FUNDS 1. Fixed assets 2. Net working capital 142 144 TOTAL 286 Balance Sheet as on 1st December, 1998 ( ` ` ` ` in crores) I. SOURCES OF FUNDS 1. Shareholder's funds:Equity share capital 72.00 Q&A-1.20O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Share premium 74.00 Other reserves and surplus 2,806.00 2,880.00 2,952.00 2. Loan funds — TOTAL 2,952.00 II. APPLICATION OF FUNDS 1. Fixed assets 2. Net working capital 29.52 2,922.48 TOTAL 2,952.00 (b) Retained Profit under Concept of Physical Capita l Maintenance (from 1st January, 1980 to 31st December, 1998) ( ` in crores) Equity on 31st December, 1998 2,952 (including premium) Less: Indexed value of equity share capital (including premium) 20 × 15 300 126 × 15/3 630 9302,022 Working Notes: 1. Issue of equity shares on 1st January, 1990: ( ` in crores) Paid-up value Share premium Total Rights issue 20 10 30 Public issue 32 64 96 (80% of 40) 52 74 126 2. Calculation of net assets As on 31st December, 1989: ( ` in crores) Net asset value of equity share capital ` 20 crore (20 × 8) 160 As on 31st December, 1998 : Net asset value of equity share capital ` 72 crore (72 × 41) 2,952 2000 - May [2] (b) (i) Advise P Co. Ltd. about the treatment of t he following in the Final Statement of Accounts for the year ended 31st March , 2000. A claim lodged with the Railways in March, 1997 for loss of goods of ` 2,00,000 had been passed for payment in March, 2000 for ` 1,50,000. No entry was passed in the books of the Company, when the claim was lodged . (3 marks) [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.21 (ii) The notes to accounts of X Ltd. for the year 1999-2 000 include the following: "Interest on bridge loan from banks and Financial I nstitutions and on Debentures specifically obtained for the Company's Fertiliser Project amounting to ` 1,80,80,000 has been capitalised during the year, which includes approximately ` 1,70,33,465 capitalised in respect of the utilisat ion of loan and debenture money for the said purpose". Is the treat ment correct? Briefly comment. (3 marks) Answer : (i) According to Para 9.2 of AS-9 on Revenue Recognitio n states that where the ability to assess the ultimate collection with reas onable certainty is lacking at the time of raising any claim, revenue recognition is p ostponed to the extent of uncertainty involved. Para 9.5 of AS-9 states that when recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognised. In this case it may be assumed that collectibility of claim was not certain in the earl ier periods.. This is supposed from the fact that only ` 1,50,000 were collected against a claim of ` 2,00,000. So this transaction can not be taken as a Prior Period Item . Accordingly as per revised AS-5, it will not be tre ated as extraordinary item. However, para 12 of AS-5 (Revised) states that when items of income and expense within profit or loss from ordinary activit ies are of such size, nature or incidence that their disclosure is relevant to expl ain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately. Accordingly the nature and am ount of this item should be disclosed separately as per para 12 of AS-5 (Revise d). (ii) The treatment done by the company is not in accorda nce with AS-16 ‘Borrowing Costs’. As per para 10 of AS-16, to the extent that funds are borrowed specifically for the purpose of obtaining a qualify ing asset, the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs incurred on that borrowi ng during the period. Hence, the capitalisation of borrowing costs should be res tricted to the actual amount of interest expenditure i.e. ` 1,70,33,465. Thus, there is an excess capitalisati on of ` 10,46,535. This has resulted in overstatement of p rofits by ` 10,46,535 and amount of fixed assets has also gone up by this amo unt. 2000 - Nov [4] (a) M Ltd. Group has three divisions A, B and C. D etails of their turnover, results and net assets are given below: ` (’000) Division A Sales to B 3,050 Q&A-1.22O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Other Sales (Home) 60 Export Sales 4,090 7,200 Division B Sales to C 30 Export Sales to Europe 200 230 Division C Export Sales to America 180 Head Divisions Office A B C ` (’000) (’000) (’000) (’000) Operating Profit or Loss before tax 160 20 (8) Re-allocated cost from Head Office 48 24 24 Interest costs 4 5 1 Fixed assets 50 200 40 120 Net current assets 48 120 40 90 Long-term liabilities 38 20 10 120 Prepare a Segmental Report for publication in M Ltd . Group. (8 marks) Answer : M Ltd. Segmental Report Divisions Inter segment eliminationsConsolidated Total ( ` 000) A B C Segment Revenue Sales Domestic Export 60 4,090 — 200 — 200 ——60 4,470 External sales 4,150 200 180 — 4,530 Inter Segment sales 3,050 30 — 3,080 — Total Revenue 7,200 230 180 3,080 4,530 Segment result (given) 160 20 (8) 172 Head office expenses 96 Operating profit 76 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.23 Interest expenses (10) Profit before tax Other Information : Fixed assets 200 40 120 360 Net current assets 120 40 90 250 Segment assets 320 80 210 610 Unallocated corporate assets 98 Segment liabilities 20 10 120 150 Unallocated corporate liabilities 38 Sales Revenue by Geographical Market Domestic Sales Export Sales 9by division A) Export to Europe Export to America Consolidated Total ( ` 000') External sales 60 4,090 200 180 4,530 2000 - Nov [6] (a) State with reference to accounting standard, h ow will you value the inventories in the following cases : (i) Raw material was purchased at ` 100 per kilo. Price of raw material is on the decline. The finished goods in which the raw materi al is incorporated is expected to be sold at below cost. 10,000 kg. of raw materia l is on stock at the year end. Replacement cost is ` 80 per kg. (ii) In a production process, normal waste is 5% of input. 5,000 MT of input were put in process resulting in a wastage of 300 MT. Cost p er MT of input is ` 1,000. The entire quantity of waste is on stock at the year en d. (iii) Per kg. of finished goods consisted of: Material cost ` 100 per kg. Direct labour cost ` 20 per kg. Direct variable Production overhead ` 10 per kg. Fixed production charges for the year on normal cap acity of one lakh kg. is ` 10 lakhs. 2,000 kg. of finished goods are on stock at the year end. (3 × 4 = 12 marks) Answer : (i) As per para 24 of AS 2 (Revised) on Valuation of In ventories, materials and other supplies held for use in the production of in ventories are not written down below cost if the finished product in which they wi ll be incorporated are expected to be sold at or above cost. However, when there ha s been a decline in the price Q&A-1.24O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 of materials and it is estimated that the cost of t he finished products will exceed net realisable value, the materials are written dow n to net realisable value. In such circumstances, the replacement cost of the mat erials may be the best available measure of their net realisable value. Hence, in the given case, the stock of 10,000 kgs o f raw material will be valued at ` 80 per kg. The finished goods, if on stock, should be valued at cost or net realisable value whichever is lower. (ii) As per para 13 of AS 2 (Revised), abnormal amounts of waste materials, labour or other production costs are excluded from cost of inventories and such costs are recognised as expenses in the period in which t hey are incurred. In this case, normal waste is 250 MT and abnormal w aste 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 abnor mal waste amounting to ` 50,000 (50 MT × ` 1,000) will be charged in the profit and loss stat ement. (iii) In accordance with paras 8 and 9 of AS-2 (Revised), the cost of conversion include a systematic allocation of fixed and variab le production overheads that are incurred in converting materials into finished goods. The allocation of fixed production overheads for the purpose of their inclu sion in the costs of conversion is based on the normal capacity of the production f acilities. Thus, cost per kg. of finished goods can be compute d as follows : ` Material cost 100 Direct labour cost 20 Direct variable production overhead 10 Fixed production overhead 10 140 Thus, the value of 2,000 kgs. of finished goods on stock at the year end will be ` 2,80,000 (2,000 kgs × ` 140). 2001 - May [1] Marks Limited manufactures a special type of Compu ter. The company has a software division for developing programs wit h respect to specialised areas such as Medical Imaging, Process Control and Information System. Following is the draft of Profit and Loss Account p repared by the Chief Accountant for the year ended 31st March, 2000: Figures in Lakhs ` ` Sales: Hardware division 1,200 Software division 800 2,000 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.25 Opening stock of finished goods 90 Raw materials consumed 400 Direct labour — Hardware division 250 — Software division 150 Variable production overheads — Hardware division 15 0 — Software division 50 Fixed Production Overheads (including interest and depreciation). — Hardware division 290 — Software division 100 Closing stock of finished goods (180) 1,300 Gross Profit 700 Administration Expenses 50 Selling and distribution expenses 150 200 Profit before tax 500 Tax at 40% 200 Profit after tax 300 Add: Balance of profit b/f 200 Profit carried forward 500 The following further informations are given : (a) 10 employees, who were working in a software division were made redundant on account of abandoning a particular software program and each of them were paid a compensation of ` 5 lakhs on the average. This cost is included in d irect labour. (b) The fixed production overheads of Hardware divis ion included interest of ` 50 lakhs and depreciation of ` 50 lakhs. Further this sum of ` 50 lakhs included an additional depreciation of ` 10 lakhs on a special machinery used in the manufacture of computer parts for better display pu rposes. (c) During the year, the Software division supplied a special program for a foreign firm on a consideration of ` 100 lakhs. It was found on June 1st, 2000 that the foreign firm has become bankrupt. The company had received an advance of ` 50 lakhs in the year ended 31st March, 2000 from the foreign firm. (d) The Software division was involved in a special program on hospital information system. The company so far incurred a sum of ` 20 lakhs as salaries and ` 10 lakhs as overheads, which were included in direct l abour and fixed production overheads, respectively. Management feels that a fu rther ` 50 lakhs will be required to complete the program, so that it can be effectively marketed. (e) Included in Fixed production overheads of Hardwa re division is a sum of ` 50 lakhs being the cost of prototype computers manufactured by the company. These are not to be sold, but to be kept back for demonstrati ng the medical imaging software program. Q&A-1.26O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (f) The company manufactured 550 computers during th e year. It has a policy of valuing finished stock of goods at a standard cost of ` 1.8 lakhs per computer. (i) Redraft the Profit and Loss Account for the year ended 31st March, 2000 with reference to relevant Accounting Standards iss ued by the institute. (15 marks) (ii) Compute the value of Closing Stock of finished goods. (5 marks) Answer : Marks Limited Profit and Loss Account For the year ended 31 st March, 2000 ( ` in lakhs) Sales - Hardware division 1,200 - Software division 800 2,000 Less : Expenditure Opening stock of finished goods 90 Raw material consumed 400 Direct labour -Hardware division 250 -Software division 80 Variable production overheads — Hardware division 15 0 — Software division 50 Fixed Production Overheads — Hardware division 140 — Software division 90 Closing stock of finished goods (180) Cost of prototype computer written off 10 Administration Expenses 50 Selling and distribution expenses 150 Provision for bad debts 50 Redundancy payment 50 Depreciation (including additional depreciation of ` 10 lakhs) 50 Interest 50 (1,480) Profit before tax 520 Provision for tax (40%) (208) Profit after tax312 Add : Balance of profit b/f 200 Surplus carried to balance sheet 512 Comments : (a) Compensation : The compensation on account of redundancy ` 50 lakhs should be disclosed separately as per para 12 of AS-5 (Rev ised) on Net Profit or Loss for the Period, Prior Period Items and Changes in Accou nting Policies. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.27 (b) Interest and Depreciation : Interest of ` 50 lakhs cannot be treated as production overheads. It will be disclosed separately in the p rofit and loss account as per the requirements of Part II of schedule VI to the Compa nies Act. Similarly depreciation is also to be disclosed separately. (c) Sales to foreign firm : This is an event occurring after the balance sheet date and accounts are only at draft stage. In accordance wit h para 13 of AS-4 (Revised) on Contingencies and Events Occurring after the Balanc e Sheet Date, adjustments to assets and liabilities are required. Hence the s um of ` 50 lakhs ( ` 100 lakhs - advance of ` 50 lakhs) should be provided for by way of provisi on for bad debts. (d) Special program on hospital information system : As per para 9 of AS-8 on Accounting for Research and Development, research a nd development costs of a project may be deferred to future periods, if the f ollowing criteria are satisfied: (i) The product or process is clearly defined and th e costs attributable to the product or process can be separately identified ; (ii) The technical feasibility of the product or pro cess has been demonstrated ; (iii) The management of the enterprise has indicated its intention to produce and market, or use, the product or process; (iv) There is a reasonable indication that current a nd future research and development costs to be incurred on the project tog ether with expected production, selling and administration costs are li kely to be more than covered by related future revenues/benefits; and (v) Adequate resources exist or are reasonable expec ted to be available, to complete the project and market the product or proc ess. From the information given, it may be inferred that the above conditions are more or less satisfied. Hence ` 30 lakhs i.e. ` 20 lakhs direct labour and ` 10 lakhs production overheads will have to be deferred. (e) Cost of prototype computers : An accounting policy is necessary regarding the writing off of the cost of these prototype computer s as per AS-1 on Disclosure of Accounting Policies. Hence assuming that expenditur e is to be written off over a period of five years, the amount to be treated as e xpense of the year is ` 10 lakhs. ( Note : Students may assume any appropriate number of year s for the purpose of writing off) 2001 - May [5] Ms. Jyothi of Star Oils Limited has collected the f ollowing information for the preparation of cash flow statement for the year 2000 : (` in Lakhs) Net Profit 25,000 Dividend (including dividend tax) paid 8,535 Provision for Income-tax 5,000 Q&A-1.28O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Income-tax paid during the year 4,248 Loss on sale of assets (net) 40 Book value of the assets sold 185 Depreciation charged to Profit & Loss Account 20,000 Amortisation of Capital grant 6 Profit on sale of Investments 100 Carrying amount of Investment sold 27,765 Interest income on investments 2,506 Interest expenses 10,000 Interest paid during the year 10,520 Increase in Working Capital (excluding Cash & Bank balance) 56,075 Purchase of fixed assets 14,560 Investment in joint venture 3,850 Expenditure on construction work in progress 34,740 Proceeds from calls in arrear 2 Receipt of grant for capital projects 12 Proceeds from long-term borrowings 25,980 Proceeds from short-term borrowings 20,575 Opening cash and Bank balance 5,003 Closing cash and Bank balance 6,988 Required : Prepare the Cash Flow Statement for the year 2000 in accordance with AS- 3, Cash Flow Statements issued by the Institute of Chartered Accountants of India. (Make necessary assumptions). (16 marks) Answer : Star Oils Limited Cash Flow Statement for the year ended 31 st December, 2000 ( ` in lakhs) Cash flows from operating activities Net profit before taxation (25,000 + 5,000) 30,000 Adjustments for : Depreciation 20,000 Loss on sale of assets (Net) 40 Amortisation of capital grant (6) Profit on sale of investments (100) Interest income on investments (2,506) Interest expenses 10,000 Operating profit before working capital changes 57,4 28 Changes in working capital (excluding cash and bank balance) (56,075) [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.29 Cash generated from operations 1,353 Income taxes paid (4,248) Net cash used in operating activities (2,895) Cash flow from investing activities Sale of assets 145 Sale of investments (27,765 + 100) 27,865 Interest income on investments 2,506 Purchase of fixed assets (14,560) Investment in joint venture (3,850) Expenditure on construction work-in-progress (34,740 ) Net cash used in investing activities (22,634) Cash flows from financing activities Proceeds from calls in arrear 2 Receipts of grant for capital projects 12 Proceeds from long-term borrowings 25,980 Proceeds from short-term borrowing 20,575 Interest paid (10,520) Dividend (including dividend tax) paid (8,535) 27,514 Net increase in cash and cash equivalents 1,985 Cash and cash equivalents at the beginning of the p eriod 5,003 Cash and cash equivalents at the end of the period 6 ,988 Working Notes : Book value of the assets sold185 Less : Loss on sale of assets 40 Proceeds on sale 145 Assumption : Interest income on investments ` 2,506 has been received during the year. 2001 - Nov [2] (a) R Limited (the Lessee) acquired a machinery on lease from S Limited (the Lessor) on January 1, 2000. The lease term cov ers the entire economic life of the machinery i.e. 3 years. The fair value of the machi nery on January 1, 2000 is ` 3,50,000. The lease agreement requires the lessee to pay an amount of ` 1,50,000 per year beginning December 31, 2000. The lessee ha s guaranteed a residual value of ` 11,400 on December 31, 2002 to the lessor. The les sor however estimates that the machinery will have a salvage value of only ` 10,000 on December 31, 2002. The implicit rate of interest is 15% p.a. Compute the v alue of machinery to be recognised by the lessee and also the finance charges every year on the basis of AS 19. P.V. Factor of 15% in three years is 2.283. (8 marks) Q&A-1.30O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (b) X Limited sold to Y Limited goods having a sales va lue of ` 25 lakhs during the financial year ended 31.03.2001. Mr. A, the Managin g Director and Chief Executive of X Limited owns nearly 100 percent of the capital of Y Limited. The sales were made to Y Limited at the normal selling price of X Limited. The Chief Accountant of X Limited does not consider that these sales should be treated any differently from any other sale made by the company despite being made to a controlled company, because the sales wer e made at normal and, that too, at arms' length prices. Discuss the above issue from the new point of AS 18 . (8 marks) Answer : (a) Taking the fair value of the machinery, the value o f machinery to be recognised by R Limited i.e. the lessee would be ` 3,50,000 The lease payments would be apportioned by the less ee between the finance charge and the reduction of the outstanding liability as f ollows : Year Finance Charge ( `) Payment ( `) Reduction in Outstanding Liability ( `) Outstanding Liability ( `) Year 1 (January 1) (December 31) Year 2 (December 31) Year 3 (December 31) — 52,500 37,875 21,056 — 1,50,000 1,50,000 1,50,000 — 97,500 1,12,125 1,28,944 3,50,000 2,52,500 1,40,375 11,431*] The difference between this figure and guaranteed r esidual value of ` 11,400 is due to approximation in computing the interest rate implicit in the lease. Alternatively, the students may, first, calculate t he present value of the minimum lease payments, as shown below : Present value of minimum lease payments : Annual lease rental × P.V. Factor + Present value o f Guaranteed residual value = 1,50,000 × 2.283 + 11,400 × = 3,42,450 + 7,495.69 = ` 3,49,945.69 As the calculated amount ` 3,49,946 is lower than the fair value of the lease d asset ` 3,50,000 the amount of machinery recognised as an asset and the amount of outstanding liability arising from the lease cou ld be recorded at ` 3,49,946 by the lessee. In this case, the calculations will be made as given below : [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.31 Year Finance Charge ( `) Payment (`) Reduction in Outstanding Liability (`) Outstanding Liability ( `) Year 1 (January 1) (December 31) Year 2 (December 31) Year 3 (December 31) — 52,500 37,875 21,046 — 1,50,000 1,50,000 1,50,000 — 97,508 1,12,134 1,28,954 3,49,946 2,52,438 1,40,304 11,350* (b) Para 3 of AS 18 on Related Party Disclosures descri bes related party relationship as follows: (a) Enterprises that directly, or indirectly through one or more intermediaries, control or are controlled by, or are under common c ontrol with, the reporting enterprise (this includes holding companies, subsid iaries and fallow subsidiaries); (b) Associates and joint ventures of the reporting e nterprise and the investing party or venturer in respect of which the reporting enterprise is an associate or a joint venture; (c) Individuals owning, directly or indirectly, an i nterest in the voting power of the reporting enterprise that gives them control or sig nificant influence over the enterprise, and relatives of any such individual; (d) Key management personnel and relatives of such p ersonnel; and (e) Enterprises over which any person described in ( c) or (d) is able to exercise significant influence. This includes enterprises owned by directors or maj or shareholders of the reporting enterprise and enterprises that have a member of ke y management in common with the reporting enterprise. The sale of goods worth ` 25 lakhs falls under AS 18 and hence the following information should be disclosed by X Limited as per para 23 of AS 18. (1) The name of the transacting related party ; (2) A description of the relationship between the pa rties; (3) A description of the nature of transactions; (4) Volume of the transactions either as an amount o r as an appropriate proportion; (5) Any other elements of the related party transact ions necessary for an understanding of the financial statements; (6) The amounts or appropriate proportions of outsta nding items pertaining to related parties at the balance sheet and provision for doubtful debts due from such parties at that date; and (7) Amounts written off or written back in the perio d in respect of debts due from or to related parties. Q&A-1.32O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 2001 - Nov [6] (b) From the following Summary Cash Account of X L td. Prepare Cash Flow Statement for the year ended 31st March, 2001 in accordance with AS-3 (Revised) using the direct method. The Company does not have any cash equivalents. Summary Cash Account for the year ended 31.3.2001 ` '000 ` '000 Balance on 1.4.2000 50 Payment to Suppliers 2,000 Issue of Equity Shares 300 Purchase of Fixed Assets 20 0 Receipts from Customers 2,800 Overhead expense 200 Sale of Fixed Assets 100 Wages and Salaries 100 Taxation 250 Dividend 50 Repayment of Bank Loan 300 Balance of 31.3.2001 150 3,250 3,250 (8 marks) Answer : X Ltd. Cash Flow Statement for the year ended 31 st March, 2001 (Using the direct method) ` ‘000` ‘000 Cash flows from operating activities Cash receipts from customers 2,800 Cash payments to suppliers (2,000) Cash paid to employees (100) Cash payment for overheads (200) Cash generated from operations 500 Income tax paid (250) Net cash from operating activities 250 Cash flows from investing activities Payment for purchase of fixed assets (200) Proceeds from sale of fixed assets 100 Net cash used in investing activities (100) Cash flows from financing activities Proceeds from issuance of equity shares 300 Bank loan repaid (300) Dividend paid (50) [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.33 Net cash used in financing activities (50) Net increase in cash 100 Cash at beginning of period _50 Cash at end of period150 2002 - May [3] (b) Answer the following questions by quoting the relev ant Accounting Standard: (i) During the year 2001-02, a medium size manufactu ring company wrote down its inventories to net realisable value by ` 5,00,000. Is a separate disclosure necessary? (4 marks) (ii) A limited company has been including interest i n the valuation of closing stock. In 2001-02, the management of the company decided t o follow AS-2 and accordingly interest has been excluded from the val uation of closing stock. This has resulted in a decrease in profits by ` 3,00,000. Is a disclosure necessary? If so, draft the same. (4 marks) (iii) A company signed an agreement with the Employe es Union on 1.9.2001 for revision of wages with retrospective effect from 30 .9.2000. This would cost the company an additional liability of ` 5,00,000 per annum. Is a disclosure necessary for the amount paid in 2001-02? (4 marks) Answer : (i) Although the case under consideration does not rela te to extraordinary item, but the nature and amount of such item may be relevant to users of financial statements in understanding the financial position and performance of an enterprise and in making projections about financia l position and performance. Para 12 of AS-5 (Revised in 1997) on Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies sta tes that : “When items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence th at their disclosure is relevant to explain the performance of the enterprise for the p eriod, the nature and amount of such items should be disclosed separately.” Circumstances which may give to separate disclosure of items of income and expense in accordance with para 12 of AS 5 incl ude the write-down of inventories to net realisable value as well as the reversal of such writ-downs. (ii) As per AS 5 (Revised), change in accounting policy can be made for many reasons, one of these is for compliance with an acc ounting standard. In the instant case, the company has changed its accountin g policy in order to conform with the AS-2 (Revised) on Valuation of Inventories . Therefore, a disclosure is necessary in the following lines by way of notes to the annual accounts for the year 2001-2002. Q&A-1.34O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 “To be in conformity with the Accounting Standard o n Valuation of Inventories issued by ICAI, interest has been exclu ded from the valuation of closing stock unlike preceding years. Had the same principle been followed in previous years, profit for the year and its corresp onding effect on the year end net assets would have been higher by ` 3,00,000.” (iii) It is given that revision of wages took place on 1 st September, 2001 with retrospective effect from 30.9.2000. Therefore wage s payable for the half year from 1.10.2000 to 31.3.2001 cannot be taken as an e rror or omission in the preparation of financial statements and hence this expenditure cannot be taken as a prior period item. Additional wages liability of ` 7,50,000 (for 1 years @ ` 5,00,000 per annum) should be included in current year’s wages. It may be mentioned that additional wages is an exp ense arising from the ordinary activities of the company. Although abnorm al in amount, such an expense does not qualify as an extraordinary item. However, as per Para 12 of AS 5 (Revised), when items of income and expense wi thin profit or loss from ordinary activities are of such size, nature or inc idence that their disclosure is relevant to explain the performance of the enterpri se of the period, the nature and amount of such items should be disclosed separa tely. 2002 - Nov [1] On 30th September, 1999 Beta Enterprises Ltd. was incorporated with an Authorised Capital of ` 50 lakhs. Its first accounts were closed on 31st M arch, 2000 by which time it had become a listed company with a n issued subscribed and paid up Capital of ` 40 lakhs in 4,00,000 Equity Shares of ` 10 each. The company started off with two lines of business namely 'Engineering Division' and 'Chemicals Division', with equal asset base wit h effect from 1st April, 2000. The 'Ceramics Division' was added by the company on 1st April, 2001. The following data is gathered from the books of account of Beta Enter prises Ltd.: Trial Balance as on 31st March, 2002 (Rupees in 000's) Dr. Cr. Engineering Division sales — 6,000 Cost of Engineering Division sales 2,600 — Chemicals Division sales — 8,000 Cost of sales of Chemicals Division 4,300 — Ceramics Division sales — 1,500 Cost of sales of Ceramics Division 900 — Administration costs 2,000 — [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.35 Distribution costs 1,500 — Dividend-Interim 1,200 — Fixed Assets at cost 9,000 — Depreciation on Fixed Assets — 1,500 Stock on 31st March, 2002 400 — Trade Debtors 440 — Cash at Bank 160 — Trade Creditors — 500 Equity Share Capital in shares of ` 10 each — 4,000 Retained Profits — 1,000 22,500 22,500 Additional Information : (a) Administration costs should be split between the Divisions in the ratio of 5 : 3 : 2. (b) Distribution costs should be spread over the Di visions in the ratio of 3 : 1 : 1. (c) Directors have proposed a Final Dividend of ` 8 lakhs. (d) Some of the users of Ceramics Division are unhap py with the product and have lodged claims against the company for damages of ` 7.5 lakhs. The claim is hotly contested by the company on legal advice. (e) Fixed Assets worth ` 30 lakhs were added in the Ceramics Division on 1. 4.2001. (f) Fixed Assets are written off over a period of 10 years on straight line basis in the books. However for Income tax purposes depreciation at 20% on written down value of the assets is allowed by Tax Authorities. (g) Income tax rate may be assumed at 35%. (h) During the year Engineering Division has sold to Alpha Ltd. goods having a sales value of ` 25 lakhs. Mr. Gamma, the Managing Director of Beta Enterprises Ltd. owns 100% of the issued Equity Shares of Alpha Ltd. The sales made to Alpha Ltd. were at normal selling price of Beta Enterprises Lt d. You are required to prepare Profit and Loss Account for the year ended 31st March, 2002 and the Balance Sheet as at the date. Y our answer should include notes and disclosures as per Accounting Standards. (20 mar ks) Answer : Beta Enterprises Ltd. Profit and Loss Account for the year ending 31 st March, 2002 ` ‘000 Sales 15,500 Cost of Sales (7,800) 7,700 Distribution costs (1,500) Administration costs (2,000) Profit before tax 4,200 Q&A-1.36O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Taxation 1,239 Deferred tax (35% of ` 660) 231 (1,470) Profit after tax 2,730 Dividends ( ` 1,200 + ` 800) (2,000) Profit for the year 730 Retained profit brought forward ( ` 1,000 - ` 210) __790 Retained Profit carried forward 1,520 Beta Enterprises Ltd. Balance Sheet as at 31st March, 2002 Liabilities Amount Assets Amount ` ‘000 ` ‘000 ` ‘000 Share Capital : Fixed Assets: Issued and subscribed Gross block 9,000 4,00,000 shares of ` 10 each, Less: Depreciation 1,500 7,500 fully paid up 4,000 Reserve and Surplus : Current Assets Loans and Advances : Retained profit 1,520 (a) Current Assets : Deferred Tax Liability 441 Stock 400 Current liabilities and provision : Debtors 440 Cash-at-Bank 160 1,000 (a) Current liabilities : (b) Loans and Advances NIL Creditors 500 (b) Provisions : Provision for tax 1,239 Proposed dividend 800 8,5008,500 Notes to Accounts: 1. Segmental Disclosures (Business Segments) (Figures in ` ` ` ` 000's) Engineering Chemical Ceramics Total Division Division Division Sales 6,000 8,0001,50015,500 Cost of Sales 2,600 4,300 900 7,800 Administration Cost (5 : 3 : 2) 1,000 600 400 2,000 Distribution Cost (3 : 1 : 1) 900 300 300 1,500 Profit / Loss 1,500 2,800(100) 4,200 6,000 8,0001,50015,500 Original cost of Assets (Equal 3,000 3,000 3,000 9,000 Capital Base) [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.37 Depreciation @ 10% p.a. For the year ended 31.3.2001 300 300 NIL 600 For the year ended 31.3.2002 300 300 300 900 Note : Ceramics division is a reportable segment as per a ssets criteria. 2. Tax Computation (` in 000's) Profit before tax for the year ended 31.3.2002 4,200 Add: Depreciation provided in the books (300 + 300 + 300 ) 900 5,100 Less: Depreciation as per Income Tax Act (480 + 480 + 60 0) 1,560 Taxable Income 3,540 Tax at 35%1,239 3. Deferred Tax liability (as per AS 22 on Accounting for Taxes on Income) ` ‘000 Opening Timing Difference on 1.4.2001 WDV of fixed assets as per books 5,400 WDV of fixed assets as per Income Tax Act 4,800 Difference 600 Deferred Tax Liability @ 35% on 600210 This has been adjusted against opening balance of r etained profits. Current year (ended 31 st March, 2002) ` ‘000 Depreciation as per Books 900 Depreciation as per Income Tax Act (480 + 480 + 600 ) 1,560 Difference 660 Deferred Tax Liability @ 35% on 660 (to be carried forward) 231 4. Contingent Liabilities not provided : Company is contesting claim for damages for ` 7,50,000 and as such the same is not acknowledged as debts. 5. Related Party Disclosure : Para 3 of AS 18 lists out related party relationsh ip. It includes, individuals owning, directly or indirectl y, an interest in voting power of reporting enterprise which gives them control or si gnificant influence over the enterprises and relatives of any such individual. I n the instant case, Mr. Gamma as a managing director controls operating and financia l actions of Beta Enterprise Ltd. He is also owning 100% share Capital of Alpha Ltd. thereby exercising control over it. Hence, Alpha Ltd. Is a related party as per par a 3 of AS 18. Disclosure to be made : Name of the related party and nature of relationship Alpha Ltd. Common directo r Nature of the transaction Sale of goods at normal co mmercial terms Name of the transaction Sales to Alpha Ltd. worth `25 lakhs. Q&A-1.38O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 2002 - Nov [2] (b) A company obtained term loan during the year e nded 31st March, 2002 in an extent of ` 650 lakhs for modernisation and development of its factory. Buildings worth ` 120 lakhs were completed and Plant and Machinery w orth ` 350 lakhs were installed by 31st March, 2002. A sum of ` 70 lakhs has been advanced for Assets the installation of which is expected in the follow ing year. ` 110 lakhs has been utilised for Working Capital requirements. Interest paid on the loan of ` 650 lakhs during the year 2001-2002 amounted to ` 58.50 lakhs. How should the interest amount be tre ated in the Accounts of the Company? (6 marks) Answer : The treatment for total interest amount of ` 58.50 Lakhs can be given as follows. Purpose Nature Interest to be capitalized ` in lakhsInterest to be charged to Profit and loss account ` in lakhs Building Plant and machinery Advance to suppliers for additional assets Working capital Qualifying asset Qualifying asset Qualifying asset Not a qualifying asset 58.5 12010.8650 × = 58.5 35031.5650× = 58.5 706.3650× = 58.5 1109.9650× = 48.6 9.9 2002 - Nov [6] In the context of relevant Accounting Standards, g ive your comments on any four of the following matters for the financial year end ing on 31.3.2002. (a) Assets and liabilities and income and expenditur e items in respect of foreign branches are translated into Indian rupees at the p revailing rate of exchange at the end of the year. The resultant exchange differences in the case of profit, is carried to other Liabilities Account and the Loss, if any, is charged to revenue. (b) Leave encashment benefit is accounted for as per "Pay-as-you-go" method. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.39 (c) Increase in pension liability on account of wage revision in 1999-2000 is being provided for in 5 instalments commencing from that year. The remaining liability of ` 300 lakhs as re-determined in actuarial valuation will be provided for in the next 2 years. (d) A Pharma Company spent ` 33 lakhs during the accounting year ended 31st March, 2002 on a research project to develop a drug to treat "AIDS". Experts are of the view that it may take four years to establis h whether the drug will be effective or not and even if found effective it may take two to three more years to produce the medicine, which can be marketed. The company wa nts to treat the expenditure as deferred revenue expenditure. (e) While preparing its final accounts for the year ended 31st March, 2002 Rainbow Limited created a provision for Bad and Doubtful de bts are 2% on trade debtors. A few weeks later the company found that payments f rom some of the major debtors were not forthcoming. Consequently the comp any decided to increase the provision by 10% on the debtors as on 31st March, 2 002 as the accounts were still open awaiting approval of the Board of Directors. I s this to be considered as an extra-ordinary item or prior period item? (4×4 = 16 marks) Answer : (a) The financial statements of an integral foreign ope ration (for example, dependent foreign branches) should be translated using the pr inciples and procedures described in paragraphs 8 to 16 of AS 11 (Revised 2 003). The individual items in the financial statements of a foreign operation are translated as if all its transactions had been entered into by the reporting enterprise itself. Individual items in the financial statements of the foreign operation are translated at the actual rate on the date of transa ction. For practical reasons, a rate that approximates the actual rate at the date of tr ansaction is often used, for example, an average rate for a week or a month may be used for all transactions in each foreign currency during the period. The for eign currency monetary items (for example cash, receivables, payables) should be reported using the closing rate at each balance sheet date. Non-monetary items (for example, fixed assets, inventories, investments in equity shares) which ar e carried in terms of historical cost denominated in a foreign currency should be re ported using the exchange date at the date of transaction. Thus the cost and depreciation of the tangible fixed assets is translated using the exchange rate at the date of purchase of the asset if asset is carried at cost. If the fixed asset is carried at fair value, translation should be done using the rate existed on the date of the v aluation. The cost of inventories is translated at the exchange rates that existed wh en the cost of inventory was incurred and realizable value is translated applyin g exchange rate when realizable value is determined which is generally closing rate . Q&A-1.40O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Exchange difference arising on the translation of t he financial statements of integral foreign operation should be charged to pro fit and loss account. Exchange difference arising on the translation of the financ ial statement of foreign operation may have tax effect which should be dealt as per AS -22 ‘Accounting for Taxes on Income’. Thus, the treatment by the management of translatin g all assets and liabilities; income and expenditure items in respect of foreign branches at the prevailing rate at the year end and also the treatment of resultant exchange difference is not in consonance with AS-11 (Revised 2003). Note : for the purpose of translation of assets, liabilit ies, income and expenditure items of foreign operations, AS-11 (Revised 2003) c lassifies the foreign operation into two types- Integral foreign operation, Non-int egral foreign operation. Integral foreign operation is a foreign operation, the activ ities of which are an integral part of those of the reporting enterprise. Non-integral foreign operation is a foreign operation that is not an integral foreign operation . The above answer has been given on the basis that the foreign branches referr ed in the question are integral foreign operations. (b) As per para 12 of AS-15 on ‘Accounting for Retireme nt Benefits in the Financial Statements of Employers’, the cost of retirement be nefits to an employer results from receiving services from the employees who are entitled to receive such benefits. Consequently, the cost of retirement bene fits is accounted for in the period during which these services are rendered. Ac counting for retirement benefit cost only when employees retire or receive benefits payments (i.e. as per pay as you go method) does not achieve the objective of al location of those costs to the periods in which the services were rendered. Hence, the treatment of leave encashment benefit by the management is not in cons onance with AS-15. Note : AS 15 was revised in March, 2005. AS-15 (revised 2 005) covers the leave encashment benefits under the category of short-ter m employee benefits. Accumulating short-term compensated absence (i.e. e arned leaves) are those that are carried forward and can be used for future peri ods if the current period’s entitlement is not used in full [para 13 of AS-15 ( Revised)]. Earned leaves which are encashable on retirement or resignation are ve sting (which entitle employees to receive cash payment for unused entitlements on leaving the enterprise) accumulating compensated absences. ‘An enterprise s hould measure the expected cost of accumulating compensated absences as the ad ditional amount that the enterprise expects to pay as a result of the unused entitlement that has accumulated at the balance sheet dates [Para 14 of AS-15 (Revised)]. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.41 (c) Revision of wages and consequential increase in pen sion liability of employer is not a prior period item as it has not arisen out of errors or omissions of previous year. It is also not an extraordinary item as defin ed in AS-5 on Net profit or loss for the period, Prior Period Items and Changes in Accou nting policies. It is an expense arising out of the ordinary activity of the enterpr ise. Therefore, it should have been charged during the year 1999-2000, and disclosed se parately. The treatment of deferring to two years, ` 30 crores remaining pension liability as redetermined by actuarial valuation is also not in consonance with AS-15 relating to Accounting for Retirement Benefits in t he Financial Statements of Employers. As per para 29 of AS-15, any alternation s in the retirement benefit costs arising from changes in the actuarial method used or assumptions adopted should be charged or credited to the statement of p rofit and loss as they arise in accordance with AS-5 “Prior Period and Extraordinar y Items and Changes in Accounting Policies”. Additionally, a change in the actuarial method used should be treated as a change in an accounting policy and disclosed in accordance with AS-5. Note : AS-15 was revised in March, 2005. As per para 92 o f AS 15 (Revised 2005) ‘Employee Benefits’, actuarial gains and losses sho uld be recognized immediately in the statement of profit and loss as income or ex pense. (d) As per para 41 of AS-26 ‘Intangible Assets’, no int angible asset arising from research (or from the research phase of an internal project) should be recognized. Expenditure on research (or on the research phase o f an internal project) should be recognized as an expense when it is incurred. Th us the company cannot treat the expenditure as deferred revenue expenditure. Th e entire amount of ` 33 Lakhs spent on research project should be charged as an e xpense in the year ended 31 st March, 2002. (e) The preparation of financial statements involve mak ing estimates which are based on the circumstances existing at the time when the financial statements are prepared. It may be necessary to revised an estimat e in a subsequent period if there is a change in the circumstances on which the estimate was based. Revision of an estimate does not bring the resulting amount within the definition either of prior period items or of an extraordinary item [par a 21, AS-5 (Revised)]. In the given case, Rainbow Limited created a provis ion for bad and doubtful debts at 2% on trade debtors while preparing its fi nal accounts for the year ended 31 st March, 2002. Subsequently, the company decided to increase the provision by 10%. As per AS 5 (Revised), this change in estimate is neither a prior period item nor an extraordinary item. Q&A-1.42O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 However, as per para 27 of AS-5 (Revised), a change in accounting estimate which has a material effect in the current period s hould be disclosed and quantified. Any change in an accounting estimate wh ich is expected to have a material effect in later periods should also be dis closed. 2003 - May [1] (a) From the Books of Bharati Ltd., following inf ormations are available as on 1.4.2001 and 1.4.2002 : ` (1) Equity Shares of ` 10 each 1,00,000 (2) Partly paid Equity Shares of ` 10 each ` 5 paid 1,00,000 (3) Options outstanding at an exercise price of ` 60 for one equity share ` 10 each. Average Fair value of equity share during both years ` 75 10,000 (4) 10% convertible preference shares of ` 100 each. Conversion ratio 2 equity shares for each preferenc e share 80,000 (5) 12% convertible debentures of ` 100 Conversion ratio 4 equity shares for each debenture 10,000 (6) 10% dividend tax is payable for the years ending 31.3.2003 and 31.3.2002. (7) On 1.10.2002 the partly paid shares were fully p aid up. (8) On 1.1.2003 the company issued 1 bonus share for 8 shares held on that date. Net profit attributable to the equity shareholders for the years ending 31.3.2003 and 31.3.2002 were ` 10,00,000. Calculate: (i) Earnings per share for years ending 31.3.2003 an d 31.3.2002. (ii) Diluted earnings per share for years ending 31. 3.2003 and 31.3.2002. (iii) Adjusted earnings per share and diluted EPS fo r the year ending 31.3.2002, assuming the same information for previous year, al so assume that partly paid shares are eligible for proportionate dividend only . (14 marks) Answer : (i) Earnings per share Year ended Year ended31.3.2003 31.3.2002 ` ` Net profit attributable to equity shareholders 10,00 ,000 10,00,000 Weight average number of equity shares 2,00,000 1,50,000 [(W.N. 1)- without considering bonus issue for the year ended 31.3.2002] Earning per share 5 6.667 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.43 (ii) Diluted earnings per share : Options are most dilutive as their earnings per incremental share is nil. Hence, for the purpose of computation of diluted earnings per share, options will be considered first. 12% co nvertible debentures being second most dilutive will be considered next and th ereafter convertible preference shares will be considered (as per W.N. 2) . Year ended 31.3.03 year ended 31.3.02 Net profit attri- No. of equity Net Profit No. of equi ty Net Profit butable to equity shares attributable shares(with- attr ibutable Shareholders Per share out considering per share ` `bonus issue)` As reported (for years 10,00,000 2,00,000 5 1,50,000 6.667 ended 31.3.2003 and 31.3.2002) Options __2,000 10,00,0002,02,000 4.95 1,52,0006.579 Dilutive Dilutive 12% Convertible Debentures 84,000 40,000 40,000 10,84,0002,42,000 4.48 1,92,0005.646 Dilutive Dilutive 10% Convertible Preference Shares 8,80,000 1,60,0001,60,000 19,64,0004,02,000 4.886 3,52,0005.58 Anti-Dilutive Dilutive Since diluted earnings per share is increased when taking the convertible preference shares into account ( ` 4.48 to ` 4.886), the convertible preference shares are anti-dilutive and are ignored in the calculatio n of diluted earnings per share for the year ended 31.3.2003. Therefore, diluted earnings p er share for the year ended 31 st March, 2003 are ` 4.48 For the year ended 31st March, 2002, Options, 12% Convertible debentures a nd Convertible preference shares will be considered di lutive and diluted earnings per share will be taken as ` 5.58 Year ended 31.3.2003 year ended 31.3.2003 Diluted earnings per share 4.48 5.58 Q&A-1.44O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (iii) Adjusted earnings per share and diluted earnin gs per share for the year ending 31.3.2002. Net profit attributable to equity shareholders ` 10,00,000 Weight average number of equity shares [(W.N. 1)- considering bonus issue] 1,75,000 Adjusted earnings per share ` 5.714 Calculation of adjusted diluted earnings per share Net profit No .of equity Net profit attributable to shares (after attributable equity considering per share shareholders bonus issue) ` ` ` As reported 10,00,000 1,75,000 5,714 Options ________ 2,000 10,00,000 1,77,000 5.65 Dilutive 12% Convertible Debentures 84,000 40,000 10,84,000 2,17,000 4.995 Dilutive 10% Convertible- Preference Shares 8,80,000 1,60,000 19,64,0003,77,0005.21 Anti-Dilutive Since diluted earnings per share are increased when taking the convertible preference shares into account (from ` 4.995 to ` 5.21), the convertible preference shares are anti-dilutive and are ignored in the cal culation of diluted earnings per share. Therefore, adjusted diluted earnings per share for the year ended 31.3.2002 are ` 4.995 Adjusted diluted earnings per share ` 4.995 Working Notes : (1) Weighted average number of equity shares 31.3.2003 31.3.2002 No.of shares No.of shares (a) Fully paid equity shares 1,00,000 1,00,000 (b) Partly paid equity shares [Note-1] 50,000 Partly paid equity shares [Note-2] 25,000 Fully paid equity shares [Note-3] 50,000 (Partly paid shares converted into fully paid up on 1.10.2002) [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.45 (c) Bonus Shares [Note 5] 25,000 _______ Weighted average number of equity shares 2,00,000 1,50,000 (without considering bonus issue for the year ended 31.3.2002) Bonus shares 25,000 Weighted average number of equity shares 1,75,000 (after considering bonus issue for the year ended 31.3.2002). Note-1 : Since partly paid equity shares are entitled to p articipate in dividend to the extent of amount paid, 1,00,000 equity shares o f ` 10 each, ` 5 paid up will be considered as 50,000 equity shares for the year end ed 31 st March, 2002 Note-2 : On 1 st October, 2002 the partly paid shares were converte d into fully paid up. Thus, the weighted average equity shares (for s ix months ended 30th September, 2002) will be calculated as : 50,000 × = 25,000 shares Note-3 : Weighted average shares (for six months ended 31st March, 2003) will be calculated as : 1,00,000 × = 50,000 shares Note-4 : Total number of fully paid shares on 1st January, 2003 Fully paid shares on 1st April, 2002 1,00,000 Partly paid shares being made fully paid up on 1 st October, 2002 1,00,000 2,00,000 Note-5 : Calculation of bonus share : The company issued 1 bonus share for 8 shares held on 1st January, 2003. Thus, 2,00,000/8 = 25,000 bonus shares will be issu ed. Bonus is an issue without consideration, thus it wi ll be treated as if it had occurred prior to the beginning of 1 st April, 2001, the earliest period reported. Q&A-1.46O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (2) Increase in earnings attributable to equity shar eholders on conversion of potential equity shares Increase in Increase in Earnings perearnings number of incremental equity shares share (1) (2) (3) = (1) ÷ (2) ` ` ` Options Increase in earnings Nil No. of incremental shares issued for no. consideration 2,000 Nil [10,000 × (75 - 60) / 75] Convertible Preference Shares Increase in net profit attributable to 8,80,000 equity shareholders as adjusted by attributable dividend tax [( ` 10 × 80,000) + 10% ( ` 10 × 80,000)] No. of incremental shares (2 × 80,000) 1,60,000 5.50 12% Convertible Debentures increase in net profit 84,000 [( ` 10,00,000 × 0.12 ) × (1 - 0.30 )]* No. of incremental shares (10,000 × 4) 40,000 2.10 * Tax rate has been taken at 30% in the absence of any information in the question. 2003 - May [2] (b) A Ltd. acquired 25% of shares in B Ltd. as on 31.3.2002 for ` 3 lakhs. The Balance Sheet of B Ltd. as on 31.3.2002 is give n below :` Share Capital 5,00,000 Reserves and Surplus 5,00,000 10,00,000 Fixed Assets5,00,000 Investments 2,00,000 Current Assets 3,00,000 10,00,000 During the year ended 31.3.2003 the following are the additional information available : (i) A Ltd. received dividend from B Ltd., for this y ear ended 31.3.2002 at 40% from the Reserves. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.47 (ii) B Ltd., made a profit after tax of ` 7 lakhs for the year ended 31.3.2003. (iii) B Ltd., declared a dividend @ 50% for the year ended 31.3.2003 on 30.4.2003. A Ltd. is preparing Consolidated Financial Stateme nts in accordance with AS-21 for its various subsidiaries. Calculate: (i) Goodwill if any on acquisition of B Ltd.'s share s. (ii) How A Ltd., will reflect the value of investmen t Ltd., in the Consolidated Financial Statements? (iii) How the dividend received from B Ltd. will be shown in the Consolidated Financial Statements? (6 marks) Answer : In terms of AS-23 B Ltd. will be considered as on a ssociate company of A Ltd. as shares acquired represent to more than 20%. (i) Calculation of Goodwill ` in lakhs Cost of investment 3.00 Less: Share in the value of Equity of B Ltd. as at the date of investment [25% of ` 10 lakh ( ` 5 lakh + ` 5 lakh)] 2.50 Goodwill 0.50 (ii) A Ltd. Consolidated Profit and Loss Account for the year e nded 31st March, 2003 ` in lakhs By Share of profits in B Ltd. 1.75 By Dividend received from B Ltd. 0.50 Transfer to investment account 0.50 Nil (iii) A Ltd. Consolidated Balance Sheet as on 31.3.2003 ` in lakhs Goodwill 0.50 Investment in B Ltd. Investment 3.00 Less: Goodwill 0.50 Less: Dividend received 0.50 2.00 Share of profit for year 2002-2003 1.75 3.75 1. Dividend received from B Ltd. amounting to ` 0.50 lakh will be reduced from investment value in the books of A Ltd. However goo dwill will not change. Q&A-1.48O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 2. B Ltd. made a profit of ` 7 lakhs for the year ended 31st March, 2003. A Ltd .'s share in the profit of ` 7 lakhs in ` 1.75 lakhs. Investment in B Ltd. will be increased by ` 1.75 lakh and consolidated profit and loss account of A Ltd. will be credited with ` 1.75 lakh in the consolidated financial statement of A Ltd. 3. Dividend declared on 30th April, 2003 will not be recognised in the consolidated financial statements of A Ltd. 2003 - May [5] (a) XYZ Ltd., has undertaken a project for expansi on of capacity as per the following details : Plan Actual ` ` April, 2002 2,00,000 2,00,000 May, 2002 2,00,000 3,00,000 June, 2002 10,00,000 — July, 2002 1,00,000 — August, 2002 2,00,000 1,00,000 September, 2002 5,00,000 7,00,000 The company pays to its bankers at the rate of 12% p.a., interest being debited on a monthly basis. During the half year company had ` 10 lakhs overdraft upto 31 st July, surplus cash in August and again overdraft of over ` 10 lakhs from 1.9.2002. The company had a strike during June and hence could no t continue the work during June. Work was again commenced on 1st July and all the w orks were completed on 30th September. Assume that expenditure were incurred on 1st day of each month. Calculate : (i) Interest to be capitalised. (ii) Give reasons wherever necessary. Assume: (a) Overdraft will be less, if there is no capital e xpenditure. (b) The Board of Directors based on facts and circum stances of the case has decided that any capital expenditure taking more th an 3 months as substantial period of time. (8 marks) Answer : XYZ Ltd. Month Actual Interest Cumulative Expenditure Capitalised Amount ` ` ` April, 2002 2,00,000 2,000 2,02,000 May, 2002 3,00,000 5,020 5,07,020 June, 2002 — 5,070 5,12,090 Note 2 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.49 July, 2002 — 5,120 5,17,210 August, 2002 1,00,000 — 6,17,210 Note 3 September, 2002 7,00,000 10,00013,27,210Note 4 13,00,000 27,21013,27,210 Note : (1) There would not have been overdraft, if there is no capital expenditure. Hence, it is a case of specific borrowing as per AS - 16 on B orrowing Costs. (2) The company had a strike in June and hence could not continue the work during June. As per para 14(c) of AS-16, the activities t hat are necessary to prepare the asset for its intended use or sale are in progress. The strike is not during extended period. Thus, during strike period, interest need t o be capitalised. (3) During August the company did not incur any inte rest as there was surplus cash in August. Therefore, no amount should be capitalis ed during August as per para 14(b) of AS- 16. (4) During September, it has been taken that actual overdraft is ` 10 lakh only. Hence, only ` 10,000 interest has been capitalised even though a ctual expenditure exceeds `10 lakh. Alternatively, interest may be charged on total amo unt of (` 6,17,210 + ` 7,00,000 = 13,17,210) for the month of September, 2002 as it is given in the question that overdraft was over ` 10 lakh from 1.9.2002 and not exactly ` 10 lakh. In that case, interest amount ` 13,172 will be capitalised for the month of Septe mber. 2003 - May [6] Briefly explain as per relevant Accounting Standar d/Guidance Notes : (a) TVSM company has taken a Transit Insurance Polic y. Suddenly in the year 2002- 2003 the percentage of accident has gone upto 7% an d the company wants to recognise insurance claim as revenue in 2002-2003 i n accordance with relevant Accounting Standards. Do you agree? (4 marks) (b) SCL Ltd., sells agriculture products to dealers. One of the condition of sale is that interest is payable at the rate of 2% p.m., for del ayed payments. Percentage of interest recovery is only 10% on such overdue outst andings due to various reasons. During the year 2002-2003 the company want s to recognise the entire interest receivable. Do you agree? (4 marks) (c) HSL Ltd. is manufacturing goods for local sale a nd exports. As on 31st March, 2003, it has the following finished stocks in the f actory warehouse: (i) Goods meant for local sale ` 100 lakhs (cost ` 75 lakhs). (ii) Goods meant for exports ` 50 lakhs (cost ` 20 lakhs). Q&A-1.50O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Excise duty is payable at the rate of 16%. The comp any’s Managing Director says that excise duty is payable only on clearance of goods and hence is not a cost. Please advise HSL using guidance note, if any issued on this, including valuation of stock. (4 marks) (e) ABC Ltd. was making provision for non-moving sto cks based on no issues for the last 12 months upto 31.3.2002. The company wants to provide during the year ending 31.3.2003 based on technical evaluation: Total value of stock ` 100 lakhs Provision required based on 12 months issue ` 3.5 lakhs Provision required based on technical evaluation ` 2.5 lakhs Does this amount to change in Accounting Policy? Ca n the company change the method of provision? (4 marks) (f) XYZ is an export oriented unit and was enjoying tax holiday upto 31.3.2002. No provision for deferred tax liability was made in ac counts for the year ended 31.3.2002. While finalising the accounts for the ye ar ended 31.3.2003, the Accountant says that the entire deferred tax liabil ity upto 31.3.2002 and current years deferred tax liability should be routed throu gh Profit and Loss Account as the relevant Accounting Standard has already become man datory from 1.4.2001. Do you agree? (4 marks) Answer : (a) AS 9 on Revenue Recognition defines revenue as ‘gro ss inflow of cash, receivables or other consideration arising in the c ourse of the ordinary activities of the enterprise from the sale of goods, from the ren dering of services and from the use by others of enterprise resources yielding inte rest, royalties and dividends’. To recognise revenue AS-9 requires that revenue ari ses from ordinary activities and that it is measurable and there shou ld be no uncertainty. As per para 9.2 of the Standard, where the ability to assess th e ultimate collection with reasonable certainty is lacking at the time of rais ing any claim, revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is re asonably certain that the ultimate collection will be made. In the given case, TVSM company wants to suddenly r ecognise Insurance claim because it has increased over the previous ye ar. But, there are uncertainties involved in the settlement of the claim. Also the c laim does not seem to be in the course of ordinary activity of the company. Hence, TVSM company is not advised to recognise the Insurance claim as revenue. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.51 (b) As per para 9.2 of AS-9 on Revenue Recognition, whe re the ability to assess the ultimate collection with reasonable certainty is la cking at the time of raising any claim, e.g. for escalation of price, export incenti ves, interest etc, revenue recognition is postponed to the extent of uncertain ty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognised at the time of sa le or rendering of service even though payments are made by instalments. Thus, SCL Ltd. cannot recognise the interest amount unless the company actually receives it. 10% rate of recovery on overd ue outstandings is also an estimate and is not certain. Hence, the company is advised to recognise interest receivable only on receipt basis. (c) Guidance Note on Accounting Treatment for Excise Du ty says that excise duty is a duty on manufacture or production of excisable go ods in India. Central Excise Rules, 1944 provide that “excise dut y shall be collected at the time of removal of goods from factory premises or from a pproved place of storage.” Therefore, the levy of excise duty is and remains u pon the manufacture or production alone. Only the collection part of it is shifted to the stage of removal. Further, paragraph 23(i) of the Guidance Note makes it clear that excise duty should be considered as a manufacturing expense and like other manufacturing expense and like other manufacturing expenses be co nsidered as an element of cost for inventory valuation. Therefore, in the given case of HSL Ltd., the Manag ing Director’s contention that “excise duty is payable only on clearance of g oods and hence is not a cost is incorrect. Excise duty on the goods meant for local sales should be provided for at the rate of 16% on the selling price, that is, ` 100 lakhs for valuation of stock. Excise duty on goods meant for exports, should be p rovided for, since the liability for excise duty arises when the manufactu re of the goods is completed. However, if it is assumed that all the conditions s pecified in Rule 19 of the Central Excise Rules 2002 regarding export of excisable goo ds without payment of duty are fulfilled by HSL Ltd., excise duty may not be p rovided for. (e) The decision of making provision for non-moving sto cks 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 stocks should be made. The method of estimating the amount of provision may be changed in case a more prudent estimate can be made. Q&A-1.52O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 In the given case, considering the total value of s tock, the change in the amount of required provision of non-moving stock fr om ` 3.5 lakhs to ` 2.5 lakhs is also not material. The disclosure can be made fo r such change in the following lines by way of notes to the accounts in the annual accounts of ABC Ltd. for the year 2002-03. “The company has provided for non-moving stocks on the basis of technical evaluation unlike preceding years. Had the same met hod been followed as in the previous year, the profit for the year and the corr esponding effect on the year end net assets would have been higher by ` 1 lakh.” (f) Paragraph 33 of AS-22 on “Accounting For Taxes on I ncome” relates to the transitional provisions. It says, “ On the first oc casion that the taxes on income are accounted for in accordance with this statement, th e enterprise should recognise, in the financial statements, the deferred tax balan ce that has accumulated prior to the adoption of this statement as deferred tax asse t / liability with a corresponding credit / charge to the revenue reserves, subject to the consideration of prudence in case of deferred tax assets. Further Paragraph 34 lays down, “For the purpose of determining accumulated deferred tax in the period in which this statement is applied for the first time, the opening balances of assets and liabilities for acco unting purposes and for tax purposes are compared and the differences, if any, are determined. The tax effects of these differences, if any, should be recognised as deferred tax assets or liabilities, if these differences are timing differ ences”. Therefore, in the case of XYZ, even though AS-22 ha s come into effect from 1.4.2001, the transitional provisions permit adjust ment of deferred tax liability/asset upto the previous year to be adjusted from opening reserve. In other words, the deferred taxes not provided for alone can be adjust ed against opening reserves. Provision for deferred tax asset/liability for the current year should be routed through profit and loss account like normal provisi on. 2003 - Nov [1] (b) PQR Ltd.'s accounting year ends on 31st March. The company made a loss of ` 2,00,000 for the year ending 31.3.2001. For the ye ars ending 31.3.2002 and 31.3.2003, it made profits of ` 1,00,000 and ` 1,20,000 respectively. It is assumed that the loss of a year can be carried forward for eight years and tax rate is 40%. By the end of 31.3.2001, the company feels that there will be sufficient taxable income in the future years against which carry forward loss can be set o ff. There is no difference between taxable income and accounting income except that th e carry forward loss is allowed in the years ending 2002 and 2003 for tax purposes. Pr epare a statement of Profit and Loss for the years ending 2001, 2002 and 2003. (4 ma rks) [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.53 Answer : Statement of Profit and loss31.3.2001 31.3.2002 31.3.2003 ` ` ` Profit (Loss) (2,00,000) 1,00,000 1,20,000 Less : Current tax (8,000) Deferred tax : Tax effect of timing differences originating during the year 80,000 Tax effect of timing differences reversed/ adjusted during the Year (40,000)(40,000) Profit (loss) after tax effect (1,20,000) 60,000 72,000 2003 - Nov [4] (b) State, how you will deal with the following mat ters in the accounts of U Ltd. for the year ended 31st March, 2003 with ref erence to Accounting standards : (i) The company finds that the stock sheets of 31.3. 2002 did not include two pages containing details of inventory worth ` 14.5 lakhs. (4 marks) (ii) The company had spent ` 45 lakhs for publicity and research expenses on on e of its new consumer product, which was marketed in the accounting year 2002- 2003, but proved to be a failure. (4 marks) Answer : (i) Paragraph 4 of Accounting Standard 5 on Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies, de fines Prior Period items as “ income or expenses which arise in the current per iod as a result of errors or omissions in the preparation of the financial state ments of one or more prior periods”. Rectification of error in stock valuation is a prio r period item vide Para 4 of AS-5. `14.5 lakhs must be added to the opening stock of 1. 4.2002. It is also necessary to show ` 14.5 lakhs as a prior period adjustment in the Pro fit and loss Account below the line. Separate disclosure of this item as a prior period item is required as per para 15 of AS-5. (ii) In the given case, the company spent ` 45 lakhs for publicity and research of a new product which was marketed but proved to be a f ailure. It is clear that in future there will be no related further revenue/ben efit because of the failure of the product. Thus according to para’s 41 to 43 of AS-26 ‘Intangible Assets’, the company should charge the total amount of ` 45 lakhs as an expense in the profit and loss account. Q&A-1.54O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 2003 - Nov [5] (b) On 1st December, 2002, Vishwakarma Construction Co. Ltd. undertook a contract to construct a building for ` 85 lakhs. On 31st March, 2003 the company found that it had already spent ` 64,99,000 on the construction. Prudent estimate of additional cost for completion was ` 32,01,000. What is the additional provision for foreseeable loss, which must be made in the final accounts for the year ended 31st March, 2003 as per provisions of Account ing Standard 7 on "Accounting for Construction Contracts"? (5 marks) (c) While preparing its final accounts for the year end ed 31st March, 2003 a company made a provision for bad debts @ 5% of its total de btors. In the last week of February, 2003 a debtor for ` 2 lakhs had suffered heavy loss due to an earthquake; the loss was not covered by any insuran ce policy. In April, 2003 the debtor became a bankrupt. Can the company provide f or the full loss arising out of insolvency of the debtor in the final accounts for the year ended 31st March, 2003? (5 marks) Answer : (b) ` Cost incurred till 31 st March, 2003 64,99,000 Prudent estimate of additional cost for completion 3 2,01,000 Total cost of construction97,00,000 Less : Contract price 85,00,000 Total foreseeable loss12,00,000 According to para 35 of AS 7 (Revised 2002), the amount of ` 12,00,000 is required to be recognized as an expense. Contract work in progress = = 67% Proportion of total contract value recognized as tu rnover as per para 7.02 of AS 7 (Revised) on Construction Contracts. = 67% of ` 85,00,000 = ` 56,95,000. Thus, Loss to be recognised = ` 64,99,000 ! ` 56,95,000 = ` 8,04,000 Since, total foreseeable loss = ` 12,00,000 Therefore, Additional provision to be made = ` 12,00,000 ! ` 8,04,000 = ` 3,96,000 (c) As per para’s 8.2 and 13 of Accounting Standard 4 o n Contingencies and Events Occurring after the Balance Sheet Date, Assets and Liabilities should be adjusted for events occurring after the balance sheet date t hat provide additional evidence to assist estimation of amounts relating to conditi ons existing at the balance sheet date. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.55 So full provision for bad debt amounting to ` 2 lakhs should be made to cover the loss arising due to the insolvency in the Final Accounts for the year ended 31 st March, 2003. It is because earthquake took place be fore the balance sheet date. Had the earthquake taken place after 31st March, 2003, then mere disclosure required as per para 15, would have been sufficient . Thus loss to be recognised = ` 64,99,000 ! ` 56,95,000 = ` 8,04,000 Since total foreseeable loss = ` 12,00,000 ˆ Additional provision to be made = 12,00,000 ! 8,04,000 = ` 3,96,000 2004 - May [5] (a) At the end of the financial year ending on 31s t December, 2003, a company finds that there are twenty law suits outst anding which have not been settled till the date of approval of accounts by the Board of Directors. The possible outcome as estimated by the Board is as follows : Probability Loss ( `) In respect of five cases (Win) 100% — Next ten cases (Win) 60% — Lose (Low damages) 30% 1,20,000 Lose (High damages) 10% 2,00,000 Remaining five cases (Win) 50% — Lose (Low damages) 30% 1,00,000 Lose (High damages) 20% 2,10,000 Outcome of each case is to be taken as a separate e ntity. Ascertain the amount of contingent loss and the accounting treatment in res pect thereof. (4 marks) (b) Z Ltd. presents the following information for the y ear ending 31/3/2002 and 31/3/2003 from which you are required to calculate the Deferred Tax Asset/Liability and state how the same should be dealt with as per relevant accounting standard. 31/3/2002 31/3/2003 ` (lakhs) ` (lakhs) Depreciation 4010.10 4023.54 Unabsorbed carry forward business loss and depreciation allowance 2016.60 4110.00 Disallowance under Section 43/B of Income Tax Act, 1961 518.35 611.45 Deferred Revenue Expenses 4.88 — Provision for Doubtful Debts 282.51 294.35 Z Ltd. had incurred a loss of ` 504 lakhs for the year ending 31/3/2003 before providing for Current Tax of ` 26.00 lakhs. (6 marks) Q&A-1.56O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Answer : (a) Para 10 of AS 4 (Revised) on ‘Contingencies and Eve nts Occurring after the Balance Sheet Date’ States that the amount of a con tingent loss should be provided for by a charge in the statement of profit and loss if : (i) It is probable that future events will confirm t hat, after taking into account any related probable recovery, an asset has been impair ed or a liability has been incurred as at the balance sheet date and (ii) A reasonable estimate of the amount of the resu lting loss can be made. In the given case, the probability of winning is 10 0% in respect of first five cases and hence, question of providing for continge nt loss does not arise. The condition (i) of Para 10 of AS-4, as stated abo ve, is not met in the other cases since the probability of winning the suits is 60% for next ten cases and 50% for the remaining five cases. Therefore, the pr oper treatment is to disclose the contingent loss in respect of these ca ses as per para 11 of AS- 4. The maximum loss for each of the next ten cases is ` 2,00,000 whereas the expected loss is ` 56,000 ( ` 1,20,000 × 0.3 + ` 200,000 × 0.1). The maximum loss for each of the remaining five cases i s ` 2,10,000 whereas the expected loss is ` 72,000 ( ` 1,00,000 × 0.3 + ` 2,10,000 × 0.2). To disclose contingent liability on the basis of maximum loss w ill be highly unrealistic. Therefore, the better approach will be to disclose the overall expected loss of ` 9,20,000 ( ` 56,000 × 10 + ` 72,000× 5) as contingent liability. (b) ` in lakhs` in lakhs 31.3.2002 31.3.2003 Carried Forward Business Loss and Depreciation Allowance 2,016.60 4,110.00 Add : Disallowance under Section 43B of Income Tax Act, 1961 518.35 611.45 Provision for Doubtful Debts 282.51 294.35 2,817.46 5,015.80 Less : Depreciation 4,010.10 4,023.54 (-) 1,192.64 992.26 Less : Deferred Revenue Expenditure 4.88 — Timing Differences (-)1,197.52 992.26 Where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws, deferred tax assets should be recog nized only to the extent that there is virtual certainty supported by convincing evidence that future taxable [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.57 income will be available against which such deferre d tax assets can be realized. The existence of unabsorbed depreciation or carry f orward of losses is strong evidence that future taxable income may not be avai lable. Deferred Tax Asset on ` 992.26 lakh should not be recognized as an asset as per para 17 of AS-22 on ‘Accounting for Taxes on Income’. Deferred Tax Liab ility on ` 1,197.52 lakh should be disclosed under a separate heading in the balanc e sheet of Z Ltd., separately from current assets and current liabilities. 2004 - Nov [4] (a) X Co. Ltd. supplied the following information. You are required to compute the basic earning per share : (Accounting year 1.1.2002-31.12.2002) Net Profit : Year 2002 : ` 20,00,000 : Year 2003 : ` 30,00,000 No. of shares outstanding prior to Right issue : 10,00,000 shares. Right Issue : One new share for each four outstanding i.e., 2,50,000 shares. Right Issue price - ` 20 Last date of exercise rights - 31.3.2003. Fair rate of one Equity share immediately prior to exercise right on 31.3.03 : ` 25 (8 marks) (b) A Ltd. Leased a machinery to B. Ltd. on the followi ng terms : (` in Lakhs) Fair value of the machinery 20.00 Lease term 5 years Lease Rental per annum 5.00 Guaranteed Residual value 1.00 Expected Residual value 2.00 Internal Rate of Return 15% Depreciation is provided on Straight line method @1 0% per annum. Ascertain unearned financial Income and necessary entries may be passed in the books of the Lessee in the First year. (8 marks) (c) The following particulars are stated in the Balance Sheet of M/s Exe Ltd. as on 31.03.2003: (` in Lakhs) Deferred Tax Liability (Cr.) 20.00 Deferred Tax Assets (Dr.) 10.00 Q&A-1.58O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 The following transactions were reported during the year 2003-04 : (i) Tax Rate 50% (ii) Depreciation – As per Book 50.00 Depreciation – for Tax purposes 30.00 There were no addition to Fixed Assets during the y ear. (iii) Items disallowed in 2002-03 and allowed for Ta x purposes in 2003-04 10.00 (iv) Interest to Financial Institutions to accounted in the Books on accrual basis, but actual payment was made on 30.9.2004 20.00 (v) Donations to Private Trusts made in 2003-04 10.00 (vi) Share issue expenses allowed under 35(D) of the I.T. Act, 1961 for the year 2003-04 (1/10th of ` 50.00 lakhs incurred in 1999-2000) 5.00 (vii) Repairs to Plant and Machinery ` 100.00 lakhs was spread over the period 2003-04 and 2004-05 equally in the books. However t he entire expenditure was allowed for Income-tax purposes. Indicate clearly the impact of above items in terms of Deferred Tax liability/Deferred Tax Assets and the balances of Deferred Tax Liabili ty/Deferred Tax Asset as on 31.03.2004. (4 marks) Answer : (a) Computation of Basic Earnings per share (as per paragraphs 10 and 26 of AS- 20 on Earnings per Share) Year Year 2002 2003 ` ` EPS for the year 2002 as originally reported = = ( ` 20,00,000 / 10,00,000 shares) 2.00 EPS for the year 2002 restated for rights issue = [` 20,00,000/ (10,00,000 shares × 1.04*)] 1.92 (appro x) EPS for the year 2003 including effects of rights i ssue = = 2.51 (approx.) *Refer Working Note 2 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.59 Working Notes : (1) Computation of theoretical ex-rights fair value per share = = = = = ` 24 (2) Computation of adjustment factor = = = 1.04 (approx.) (b) Computation of Unearned Finance IncomeAs per AS-19 on leases, unearned finance income is the difference between (a) the gross investment in the lease and (b) the present v alue of minimum lease payments under a finance lease from the standpoint of the lessor; and any unguaranteed residual value accruing to the lessor, at the interest rate implicit in the lease. Where : (a) Gross investment in the lease is the aggregate of (i) minimum lease payments from the standpoint of the lessor, and (ii ) any unguaranteed residual value accruing to the lessor. Gross investment = Minimum lease payments + Unguar anteed residual value = (Total lease rent + Guaranteed residual value) + U nguaranteed residual value = [( ` 5,00,000 × 5 years) + ` 1,00,000] + ` 1,00,000 = ` 27,00,000 Q&A-1.60O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (b) Table showing present value of (i) Minimum Lease payments (MLP) and (ii) Unguaranteed Residual Value (URV). Yearly MLP inclusive Internal rate Present Value MLP of URV of return (Discount ` factor 15%)` 1 5,00,000 .8696 4,34,800 2 5,00,000 .7561 3,78,050 3 5,00,000 .6575 3,28,750 4 5,00,000 .5718 2,85,900 5 5,00,000 .4972 2,48,600 1,00,000 .4972 49,720 (guaranteed residual value) 17,25,820 (i) 1,00,000 .4972 49,720 (ii) (unguaranteed residual value) (i) + (ii) 17,75,540(b) Unearned Finance Income = (a) ! (b) = ` 27,00,000 - ` 17,75,540 = ` 9,24,460 Journal Entries in the Books of B Ltd. ` ` At the inception of lease : Machinery Account Dr. To A Ltd,s. account (Being lease of machinery recorded at present value of MLP) 17,25,820 17,25,820* At the end of the first year of lease : Finance charges account (Refer Working Note) Dr. To A Ltd.’s Account (Being the finance charges for fist year due) 2,58,873 2,58,873 A Ltd.’s Account Dr. To Bank Account (Being the lease rent paid to the lessor which incl udes outstanding liability of ` 2,41,127 and finance charge of ` 2,58,873) 5,00,000 5,00,000 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.61 Depreciation Account Dr. To Machinery Account (Being the depreciation provided @ 10% p.a. on stra ight line method) 1,72,582 1,72,582 Profit and Loss Account Dr. To Depreciation Account To Finance Charges Account (Being the depreciation and finance charges transfe rred to Profit and Loss Account) 4,31,455 1,72,582 2,58,873 Note : According to AS-19, the lessee should recognise the lease as an asset and a liability at an amount equal to the fair value of t he leased asset at the inception of lease. However, if the fair value exceeds the present valu e of minimum lease payments from the views of lessee, the amount recorded should be the present value of these minimum lease payments. So, in this case, as the fair value of ` 20,00,000 is more than the P.V. amounting ` 17,25,820, the machinery has been recorded at ` 17,25,820 in the books of B Ltd. (Lessee) at the inception of lease. As p er As, at the inception of the lease, the asset & liability for the future lease payments are recognised in the balance sheet at the same amount. Working Note : Table showing apportionment of lease payments by B Ltd. between the finance charges and the reduction of outstanding liability. Year Outstanding liability (openingbalance) ` Leaserent ` Financecharge ` Reduction inoutstanding liability ` Outstanding liability (closing balance) ` 12345 17,25,820 14,84,693 12,07,397 8,88,507 5,21,783 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 2,58,873 2,22,704 1,81,110 1,33,176 78,267 2,41,727 2,77,396 3,18,890 3,66,724 5,21,783 14,84,693 12,07,397 8,88,507 5,21,783 1,00,050 8,74,230 17,25,830 * The difference between this figure and guaranteed residual value (` 1,00,000) is due to approximation in computing the interest rate imp licit in the lease. Q&A-1.62O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (c) Impact the various items in terms of deferred t ax liability/deferred tax asset. Transactions Analysis Nature of differenceEffect Amount Difference in depreciation Disallowances, as per IT Act, of earlier years Interest to financial institutions Donation to private trusts share issue expenses Repairs to plant and machinery Generally, written down value method of depre- ciation is adopted under IT Act which leads to higher depreciation in earlier years of useful life of the asset in compari- son to later years. Tax payable for the earlier year was higher on this account. It is allowed as deduction under section 43 B of the IT Act, if the payment is made before the due date of filing the return of income (i.e. 31 st October, 2004). N o t a n a l l o w a b l e expenditure under IT Act. Due to disallowance of full expenditure under IT Act, tax payable in the earlier years was higher. Due to allowance of full expenditure under IT Act, tax payable of the current year will be less. Responding timing difference Responding timing difference No timing difference Permanent difference Responding timing difference Originating timing differenceReversal of DTL Reversal of DTA Not applicable Not applicable Reversal of DTA Increase in DTL ` 20 lakh × 50% = ` 10 lakh ` 10 lakh × 50% = ` 5 lakh Not applicable Not applicable ` 5 lakh × 50% = ` 2.5 lakh ` 50 lakh × 50% = ` 2.5 lakh [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.63 Deferred Tax Liability Account Dr. Cr. ` in lakhs` in lakhs 31.3.2004 To profit and Loss By Balance b/d 20.00 Account 10.00 1.4.2003 By Profit and Loss 25.00 (Depreciation) Account To Balance c/d 35.00 (Repairs to plant) — 45.001.4.2004 45.00 By Balance b/d 35.00 Deferred Tax Assets Account Dr. Cr. ` in lakhs` in lakhs 1.4.2003 To Balance 10.00 b/d 31.3.2004 By Profit and Loss Account : Items disallowed in 2002-03 and allowed as per I.T. Act in 2003-04 5.00 Share issue expenses 2.50 By Balance c/d 2.50 10.0010.00 1.4.2004 To Balance c/d 2.50 2005 - May [4] (a) Prepare a segmental report for publication in Diversifiers Ltd. from the following details of the company's three divisi ons and the head office : ` ('000) Forging Shop Division Sales to Bright Bar Division 4,575 Other Domestic Sales 90 Export Sales 6,135 10,800 Bright Bar Division Sales to Fitting Division 45 Export Sales to Rwanda 300 345 Fitting Division Export Sales to Maldives 270 Q&A-1.64O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Particulars Head Forging Bright Fitting Office Shop Bar DivisionDivision Division ` ('000) ` ('000) ` ('000) ` ('000) Pre-tax Operating result 240 30 (12) Head office cost reallocated 72 36 36 Interest costs 6 8 2 Fixed assets 75 300 60 180 Net current assets 72 180 60 135 Long-term liabilities 57 30 15 180 (8 marks) (b) An equipment is leased for 3 years and its useful l ife is 5 years. Both the cost and the fair market value of the equipment are ` 3,00,000. The amount will be paid in 3 instalments and at the termination of lease lesso r will get back the equipment. The unguaranteed residual value at the end of 3 yea rs is ` 40,000. The (internal rate of return) IRR of the investment is 10%. The p resent value of annuity factor of Re.1 due at the end of 3rd year at 10% IRR is 2.486 8. The present value of Re.1 due at the end of 3rd year at 10% rate of interest is 0.7513. (i) State with reason whether the lease constitutes finance lease. (ii) Calculate unearned finance income. (4 marks) (c) Intelligent Corp. (I-Corp.) is dealing in seasonal products. The quarterly sales pattern of the product is given below : Quarter.-I II III IV Ending 31st March 30th June 30th September 31st Decem ber For the First quarter ending 31st March, 2005 I-Cor p. gives you the following information: ` crore Sales 50 Salary and other expenses 30 Advertisement expenses (routine) 02 Administrative and selling expenses 08 While preparing interim financial report for the fi rst quarter 'I-Corp.' wants to defer ` 21 crore expenditure to third quarter on the argum ent that third quarter is having more sales, therefore third quarter should b e debited by higher expenditure, considering the seasonal nature of business. The ex penditure are uniform throughout all quarters. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.65 Calculate the result of first quarter as per AS-25 and comment on the company's view. (4 marks) (d) Top & Top Limited has set up its business in a desi gnated backward area which entitles the company to receive from the Government of India a subsidy of 20% of the cost of investment. Having fulfilled all the co nditions under the scheme, the company on its investment of ` 50 crore in capital assets, received ` 10 crore from the Government in January, 2005 (accounting period being 2004-05). The company wants to treat this receipt as an item of r evenue and thereby reduce the losses on profit and loss account for the year ende d 31st March, 2005. Keeping in view the relevant Accounting Standard, d iscuss whether this action is justified or not. (4 marks) Answer : (a) Diversifiers Ltd. Segment Report Divisions Divisions Inter segment eliminations Consolidated Total ( ` 000) Forging Bright BarFitting Inter segment eliminations Consolidate Total ( ` 000') Segment Revenue Sales Domestic Export 90 6,135 — 300 — 270 ——90 6,705 External sales 6,225 300 270 — 6,795 Inter Segment sales 4,575 45 — 4,620 — Total Revenue 10,800 345 270 4,620 6,795 Segment result (given) 240 30 (12) 258 Head office expenses (144) Operating profit 144 Interest expenses (16) Profit before tax 98 Other Information : Fixed assets 300 60 180 540 Net current assets 180 60 135 375 Segment assets 480 120 315 915 Unallocated corporate assets 147 Q&A-1.66O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Segment liabilities 30 15 180 225 Unallocated corporate liabilities 57 Sales Revenue by Geographical Market Particulars Domestic SalesExport Sales 9by division A) Export to Europe Export to America Consolidated Total ( ` 000') External sales 90 6,135 300 270 6,795 (b) (i) The lease constitutes finance lease : Para 20 of AS 10 as accounting for fixed assets sta tes that interest on borrowed funds attributable to the construction or acquisiti on of fixed assets for the period upto the completion of construction or acquisition of fixed assets should be included in the gross block value of the assets to which they relate. (ii) Unearned finance income ` The cost of equipment is 3,00,000 Less : Depreciation = 60,000 = = ` 60 Net Cost 2,40,000 Unearned Income for equipment ` Depreciation 60,000 Residual value 40,000 1,00,000 Internal rate of return on investment will be 10% of 3,00,000 30,000 Add: 3,00,000 + 30,000 3,30,000 Present value of Re. 1 at 70% IRR at the end of 3 rd year 2.4868 × 3,00,000 7,46,040 Less: The present value of ` 1 due at the end of 3 rd year at 10% rate interest 0.7513 ×3,00,000 2,25,190 5,20,850 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.67 Total unearned finance income will be 5,20,850 - 3,30,000 = 1,90,850 (c)The result of first quarter calculated as : Statement on Interim financial reporting(Ending on 31 st March, 2005) ( ` in crore) Sales 50 Less: Salary and other expenses 30 Advertisement expenses 02 Administrative and selling expenses 08 40 Net Margin 10 (d) This problem is related to Accounting Standard 12, AS 12 concerned with “Accounting for Government Grants”. It deals with a ccounting for Government grants in financial statements reflecting the effec ts of changing prices or in supplementary information of similar nature, other Government assistance and Government participation in ownership of the enterp rise. It is mandatory in nature cases. Top and Top limited has set up its business in desi gnated backward area which entitles the company to receive from the Gove rnment of India a subsidy of 20% of the cost of investment. Having fulfilled all the conditions under the scheme, the company on its investment of ` 50 crore in capital assets, received ` 10 crore from the Government in January, 2005 (accounting pe riod being 2004-05). The company wants to treat this receipt as an item of r evenue and thereby reduce the losses on profit and loss account for the year ende d 31 st March ,2005. The action taken by company is justified as per rul es of Accounting Standard - 12. 2005 - Nov [4] (a) Venus Ltd. has an asset, which is carried in t he Balance Sheet on 31-3-2005 at ` 500 lakhs. As at that date the value in use is ` 400 lakhs and the net selling price ` 375 lakhs. From the above data : (i) Calculate impairment loss. (ii) Prepare journal entries for adjustment of impai rment loss. (iii) Show, how impairment loss will be shown in the Balance Sheet. (6 marks) (b) Himalaya Ltd. in the past three years spent ` 75,00,000 to develop a Drug to treat Cancer, which was charged to Profit and Loss Accoun t since they did not meet AS-8 criteria for capitalisation. In the current ye ar approval of the concerned Govt. Authority has been received. The Company wishes to capitalise ` 75,00,000 and disclose it as a prior period item. Is it correct? Give reason for your views. (5 marks) Q&A-1.68O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (c) Bottom Ltd. entered into a sale deed for its immova ble property before the end of the year. But registration was done with registrar subsequent to Balance Sheet date. But before finalisation, is it possible to re cognise the sale and the gain at the Balance Sheet date? Give your view with reasons. (5 marks) Answer : (a) (i) Impairment loss calculated as follows : ` In (Lakhs) Carrying amount before impairment loss 500 Less : Recoverable amount 400 Impairment loss 100 Carrying amount after impairment loss 400 An impairment loss should be recognised for a cash generating unit if, and only if its recoverable amount is less than its carrying amount. The impairment loss should be allocated to reduce the carrying amount o f the assets of the unit in the following order: (a) First, to goodwill allocated to the cash generat ing unit (if any), and (b) Then, to the other assets of the unit on a pro-r ata basis based on the carrying amount of each asset in the unit (ii) An impairment loss should be recognised as an e xpense in the statement of profit and loss immediately, unless the asset is ca rried at revalued amount in accordance with another Account Standard (AS - 10) in which cash any impairment loss of a revalued asset should be treat ed as a revaluation decrease under the Accounting standard . The following journal entry will be passed : (i) Impairment loss A/c Dr. 100 To Profit and loss (Adjustment) A/c 100 (ii) Revaluation A/c Dr. 400 To Assets A/c 400 (iii) Balance Sheet Liabilities Amount Assets Amount Assets 400 400 (b) Himalaya Ltd. In the past three years spent ` 75,00,000 to develop a Drug to treat cancer, which was charged to Profit and Loss A/c. T he company wishes to capitalise ` 75,00,000 and disclose it as a prior period item. It is correct. The reason in respect are given as follows : (i) Accounting standard of accounting for R and D is sued by the ICAI deals with the issues which suggests expensing of R and D expenses and deferral only on fulfilment of certain conditions. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.69 (ii) This is a part of commercial production. (iii) Research is original and planned investigation undertake with the prospect of gaining new scientific or technical knowledge an d understanding search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or a new process or technique or in bringing about a significant improvement to an existing product or process. (iv) Prudential policy as per AS-8 are also covered by the Himalaya Ltd : (a) As on 31 st March, 1994, expected revenue ` 75 lakhs which was more than the current and estimated future R and D cost of ` 65 lakhs. Product has been defined and R and D costs have bee n clearly linked to the product and the board of directors has indic ated their willingness to use the research. As per para 9 of AS-8, the R a nd 2D costs of ` 50 lakhs may be deferred. (b) As on 31 st March, 1995 the accumulated R and D costs includin g current costs of ` 5 lakhs were ` 55 lakhs. The expected future R and D costs incurred of the project were ` 8 lakhs. Thus, the aggregate of R and D cost incurred and future R and D cost to be incurred to complete the project works out to be ` 63 lakhs whereas expected future revenue was ` 60 lakhs. So it was necessary to write off ` 3 lakhs ( ` 63 lakhs - ` 3 lakhs) Can be deferred. (c) Revenue Recognition : Bottom Ltd., entered into a sale deed for immovabl e property before the end of the year (Generally afte r 31 st Dec.). But registration was done with register subsequent to Balance Sheet date . But before finalisation, it is not possible to recognise the sale and the gain at the balance sheet date. The reasons in such problems are as follows : (i) It not covers the revenue recognition criteria a s specified in para 3 of AS - 9 like : Realised capital gains arising and of disposal of n on-current assets (immovable property) and unrealised capital gains, i.e. appreciation in the value of fixed assets. (ii) As per paras 10-11 of AS-9 revenue from sale of goods is recognised when the seller transfers the goods to the buyer for a c onsideration. Sale is performed if : (a) The seller of goods has transferred the property in the goods to the buyer for a price or all significant risks and rewards of ownership have been transferred to the buyer. Q&A-1.70O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (b) The seller retains no effective control of the g oods transferred to a degree usually associated with the ownership. (c) There is no significant uncertainty as regards t he consideration to be derived from the sale of goods. (iii) Revenue is the gross inflow of cash receivable or other consideration arising in the course of ordinary activities of the reporti ng entity from sale of goods, rendering services and from the use of entity’s res ources by other yielding interest, dividend and royalties. 2005 - Nov [5] (a) In view of the provisions of Accounting Standa rd 25 on Interim Financial Reporting, on what basis will you calcula te, for an interim period, the provision in respect of defined benefit schemes like pension, gratuity etc. for the employees? (5 marks) Answer : Interim Financial Reporting (AS-25) : An interim period will be calculated on the following basis for gratuity provision in respect o f defined benefit schemes like pension, etc. For the employees; (i) Balance Sheet as of the end of the current inter im period and a comparative balance sheet as of the end of the immediately prec eding financial year. (ii) Statements of profit and loss for the current i nterim period and commutatively for the current financial year to date, with comparativ e statements of profit and loss for the comparable interim periods (current and yea r to date) of the immediately preceding financial year. (iii) Cash flows statement commutatively for the cur rent financial year to date, with a comparative statement for the comparable year to date period of the immediately preceding financial year. (iv) For an enterprise where business is highly seas onal, financial information for the twelve months ending on the interim reporting date the comparative information for the prior twelve month period may be useful. Accordingly, enterprises whose business is highly s easonal are encouraged to consider reporting such information in addition to the information called for in the preceding paragraph. (v) The objective of such statement is to prescribe the minimum content of an interim financial report and to prescribe the princ iples for recognition and measurement in a complete or condensed financial st atements for an interim period. Timely and reliable financial reporting imp roves the ability of investors, creditors and others to understand an enterprise’s capacity to generate earnings and cash flows, etc. financial condition and liquid ity. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.71 2005 - Nov [6] (b) In May, 2004 Speed Ltd. took a bank loan to be used specifically for the construction of a new factory building. The con struction was completed in January, 2005 and the building was put to its use immediatel y thereafter. Interest on the actual amount used for construction of the building till i ts completion was ` 18 lakh, whereas the total interest payable to the bank on the loan for the period till 31st March, 2005 amounted to 25 lakh. Can ` 25 lakh be treated as part of the cost of factory building and thus be capitalised on the plea that the loan was specifica lly taken for the construction of factory building? (4 marks) Answer : In May, 2004 Speed Ltd. takes a bank loan for the c onstruction of a new factory building. The construction was completed in January , 2005 and the building is using by the company from the date of construction. Interest on the actual amount used for construction of the building till its completion wa s ` 18 lakh, whereas the total interest payable to the bank on the loan for the period till 31 st March, 2005 amounted to 25 lakh. ` 25 lakh can be treated as part of the cost of Fact ory building and thus be capitalised on the plea that the loan was specially taken by the company for the construction of factory building as per AS-7. Accou nting for construction contracts under the paragraph (3). It states that the cost included in the amount at which construction contract work is stated should comprise those costs that relate directly to a specific contract and those that are attributable to the con tract activity in general and can be allocated to specific contracts. Profit in the case of fixed price contract normally should not be recognised unless the work on a contract has progressed to a reasonab le extent. 2006 - May [4] (a) Global Ltd. has initiated a lease for three ye ars in respect of an equipment costing ` 1,50,000 with expected useful life of 4 years. The asset would revert to Global Limited under the lease agreement. The other information available in respect of lease agreement is : (i) The unguaranteed residual value of the equipment after the expiry of the lease term is estimated at ` 20,000. (ii) The implicit rate of interest is 10%. (iii) The annual payments have been determined in su ch a way that the present value of the lease payment plus the residual value is equal to the cost of asset. Ascertain in the hands of Global Ltd. (i) The annual lease payment. (ii) The unearned finance income. (iii) The segregation of finance income, and also Q&A-1.72O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (iv) Show how necessary items will appear in its pro fit and loss account and balance sheet for the various years. (8 marks) Answer : Assumption : Annual lease payments are considered to be made at the end of each accounting year. (i) Calculation of annual lease Payment ` Cost of the equipment 1,50,000 Unguaranteed residual value 20,000 PV of residual value for 3 years @ 10% (` 20,000 × 0.751) 15,020 Fair value to be recovered from lease payment (` 1,50,000 ! ` 15,020) 1,34,980 PV factor for 3 years @ 10% 2,487 Annual lease payment (` 1,34,980/PV Factor for 3 years @ 10% i.e. 2.487) 54,275 (ii) Unearned Financial Income Total lease payments [ ` 54,275 × 3] Add : Residual value Gross Investments Less : Present value of Investments ( ` 1,34,980 + ` 15,020) Unearned financial income 1,62,825 20,000 1,82,825 1,50,000 32,825 (iii) Segregation of Finance Income Year Lease Rentals Finance Charges @ 10% on outstanding amount of the year Repayment Outstanding Amount 0 I II III ` — 54.275 54.275 74,275Note ` — 15,000 11,073 6,752 ` — 39,275 43,202 67,523 ` 1,50,000 1,10,725 67,523 — 1,82,825 32,825 1,50,000 Note : ` 74,275 includes unguaranteed residual value of equ ipment amounting `20,000. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.73 (iv) Profit and Loss Account (Relevant Extracts) Year Credit side ` I II III By Finance Income By Finance Income By Finance Income 15,000 11,073 6,752 Balance Sheet (Relevant Extracts) Assets side ` `` I year : Lease receivable Less : Amount received 1,50,000 39,275 1,10,725 II year : Lease receivable Less : Received 1,10,725 43,202 67,523 III year : Lease amount receivable Less : amount received Residual value 47,523 20,00067,523 67,523 Nil Notes to Balance Sheet ` Year I Minimum lease payments ( ` 54,275 + ` 54,275) Residual value Unearned finance income ( ` 11,073 + ` 6,752) Lease receivable Classification: Not later than 1 year Later than 1 year but not more than 5 years Total 1,08,550 20,000 1,28,550 17,825 1,10,725 43,202 67,523 1,10,725 Year II Minimum lease payments Residual value (estimated) Unearned finance income Lease receivables (not later than 1 year) 54,275 20,000 74,275 6,752 67,523 Q&A-1.74O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Year III Lease receivables (including residual value) Amount received 67,523 67,523 Nil 2006 - May [6] (a) Narmada Ltd. sold goods for ` 90 lakhs to Ganga Ltd. during financial year ended 31-3-2006. The Managing Direct or of Narmada Ltd. own 100% of Ganga Ltd. The sales were made to Ganga Ltd. at nor mal selling prices followed by Narmada Ltd. The Chief Accountant of Narmada Ltd. c ontends that these sales need not require a different treatment from the other sa les made by the company and hence no disclosure is necessary as per accounting standa rd. Is the Chief Accountant correct? (4 marks) (b) Milton Ltd. is a full tax free enterprise for the f irst 10 years of its existence and is in the second year of its operations. Depreciation tim ing difference resulting in a deferred tax liability in years 1 and 2 is ` 200 lakhs and 400 lakhs respectively. From the 3 rd year onwards, it is expected that the timing diffe rence would reverse each year by ` 10 lakhs. Assuming tax rate @ 35%, find out the de ferred tax liability at the end of the second year and any cha rge to the profit and loss account. (4 marks) (c) Victory Ltd. purchased goods on credit from Lucky L td. for ` 250 crores for export. The export order was cancelled. Victory Limited dec ided to sell the same goods in the local market with a price discount. Lucky Limit ed was requested to offer a price discount of 15%. The Chief Accountant of Lucky Ltd. wants to adjust the sales figure to the extent of the discount requested by V ictory Ltd. Discuss whether this treatment is justified. (4 marks) (d) Accounts of Poornima Ltd. show a net profit of `7,20,000 for the third quarter of 2005 after incorporating the following : (i) Bad debts of ` 40,000 incurred during the year. 50% of the bad de bts have been deferred to the next quarter. (ii) Extra ordinary loss of ` 35,000 incurred during the quarter has been fully recognised in this quarter. (iii) Additional depreciation of ` 45,000 resulting from the change in the method of charge of depreciation. Ascertain the correct quarterly income. (4 marks) Answer : (a) No, the Chief Accountant is not correct. As per AS- 18 “ Related Party Disclosure”, the name of related party relationship, the nature of transaction has to be disclosed irrespective of the fact that the sale were made at normal selling price or arms- length price. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.75 In this case, Narmada Ltd. Sold goods for ` 90 lakhs to Ganga Ltd. During the year ended 31.3.2006 as the transaction falls under related party transaction, the disclosure is necessary as per AS-18, in spite of t he fact that the sales were made at normal selling price. (b) As per AS-22 “Accounting for Taxes on Income” read with ASI-5 i ssued by the Institute of Chartered Accountant of India :- • The deferred tax in respect of timing difference w hich originate during the tax holiday period, but reverse during the tax holiday period, should not be recognised to the extent the gross total income of the enterprises is subject to such deductions. • The deferred tax in respect of timing difference w hich originate during the tax holiday period, and reverse after the tax holiday p eriod, should be recognised in the years which the timing differences originate , subject to consideration of prudence. • Timing differences which originate first should be recognised as reversing first. • In this case, the Milton Ltd. is full tax free en terprise for the first 10 years of its existence and therefore, as per the above inter pretation the depreciation deferred tax liability arose in year 1 of ` 200 lakhs will be reversed first from year 3 onwards to the extend of ` 80 lakhs, the balance ` 120 lakhs is not reversed during tax holiday period and ` 400 lakhs which resulted in year 2 is also not reversed during the tax holiday period. Th erefore, deferred tax liability on account of... difference of ` 182 lakhs should be recognised at the end of the 2 nd year and charged to profit and loss account. (c) As per the AS 9 “Revenue Recognition”, trade discou nt and volume rebates received are not encompassed within the definition determining the revenue. However the price discount of 15% in the instant ca se, is not the discount given during the ordinary course of the trade therefore i t can not be treated in the nature of discount eligible for deduction from sales price , the better alternate is to treat the amount as bad debt, therefore the chief accountant of lucky Ltd. is not correct to this extent. (d) In this case, the quarterly income has not been cor rectly states as per AS - 25 “Interim financial Reporting”. The quarterly income should be adjusted and restated as follows : Bad debt of ` 40,000 has been incurred during the current quarte r. Out of this, the company has deferred 50% i.e. ` 20,000 to next quarter. This is not correct. ` 20,000 therefore should be deducted from ` 7,20,000. Q&A-1.76O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 The treatment of extraordinary loss of ` 35,000 being recognised in the same quarter and recognised the additional depreciation of ` 45,000 in the same quarter is correct and in tune with AS - 25, so no adjustme nt required for the two items. The company should report the quarterly income as ` 7,20,000 - 20,000 = ` 7,00,000. 2006 - Nov [3] (a) A company had imported raw materials worth US Dollars 6,00,000 on 5th January, 2005, when the exchange rate was ` 43 per US Dollar. The company had recorded the transaction in the books at the a bove mentioned rate. The payment for the import transaction was made on 5th April, 2 005 when the exchange rate was ` 47 per US Dollar. However on 31st March, 2005 the rate of exchange was ` 48 per US Dollar. The company passed an entry on 31st Marc h, 2005 adjusting the cost of raw materials consumed for the difference between ` 47 and ` 43 per US Dollar. In the background of the relevant accounting standa rd, is the company's accounting treatment correct? Discuss. (4 marks) (b) A private limited company manufacturing fancy terry towels had valued its closing stock of inventories of finished goods at the reali sable value, inclusive of profit and the export cash incentives. Firm contracts had been received and goods were packed for export, but the ownership in these goods had not been transferred to the foreign buyers. Comment on the valuation of the stocks by the compa ny. (4 marks) (c) A company with a turnover of ` 250 crores and an annual advertising budget of ` 2 crore had taken up the marketing of a new product. It was estimated that the company would have a turnover of ` 25 crores from the new product. The company had debited to its Profit and Loss account the tota l expenditure of ` 2 crore incurred on extensive special initial advertisement campaign for the new product. Is the procedure adopted by the company correct? (4 marks) (d) A company deals in petroleum products. The sale pri ce of petrol is fixed by the government. After the Balance Sheet date, but befor e the finalisation of the company's accounts, the government unexpectedly inc reased the price retrospectively. Can the company account for additi onal revenue at the close of the year? Discuss. (4 marks) Answer : (a) As per AS-11 (Revised 2003), 'The effects of change s in Foreign Exchange Rates', monetary items denominated in a foreign currency sh ould be reported using the closing rate at each balance sheet date. The effect of exchange difference should be taken into profit and loss account. Sundry credi tors is a monetary item, hence should be valued at the closing rate i.e. ` 48 at 31 st March, 2005 irrespective of the payment for the same subsequently at lower rate in the next financial year. The [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.77 difference of ` 5 (48 - 43) per US dollar should be shown as an ex change loss in the profit and loss account for the year ended 31 st March, 2005 and is not to be adjusted against the cost of raw-materials. In the subsequent year, the company would record an exchange gain of Re. 1 per US dolla r, i.e., the difference between ` 48 and ` 47 per Us dollar. Hence, the accounting treatment adopted by the company is incorrect. (b) Accounting Standard -2 “Valuation of Inventories” s tates that inventories should be valued at lower of historical cost and net realisab le value. AS- 9 on “Revenue Recognition” states, “at certain stages in specifi c industries, such as when agricultural crops have been harvested or mineral o res have been extracted, performance may be substantially complete prior to the execution of the transaction generating revenue. In such cases, when sale is ass ured under forward contract or a government guarantee or when market exists and there is a negligible risk of failure to sell, the goods invoiced are often value d at Net - realisable value.” Terry Towels do not fall in the category of agricul ture crops or mineral ores. Accordingly, talking into account the fact stated, the closing stock of finished goods. (Fancy terry towel) should have been valued at lower of cost and net- realisable value and not at net realisable value. F urther, export incentives are recorded only in the year the export sale takes pla ce. Therefore, the policy adopted by the company for valuing its closing stock of inv entories of finished goods is not correct. (c) According to AS 26 ‘Intangible Assets’ “expenditure or an intangible item should be recognised as an expense when it is incurred unl ess it forms part of the cost of an intangible asset”. In the given case, advertisement expenditure of ` 2 crores had been taken up for the marketing of a new product which may provi de future economic benefits to an enterprise by having a turnover of ` 25 crores. Here, no intangible asset or other asset is acquired or created that can be recognised . Therefore, the accounting treatment by the company of debiting the entire adv ertising expenditure of ` 2 crores to the Profit and Loss account of the year i s correct. (d) According to para 8 of AS 4 (Revised 1995), the une xpected increase in sale price of petrol by the government after the balance sheet date cannot be regarded as an event occurring after the Balance Sheet date, which requires an adjustment at the Balance Sheet date, since it does not represent a c ondition present at the balance sheet date. The revenue should be recognized only i n the subsequent year with proper disclosures. The retrospective increase in t he petrol price should not be considered as a prior period item, as per AS 5, bec ause there was no error in the preparation of previous period’s financial statemen ts. Q&A-1.78O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 2006 - Nov [5] (a) Mohur Ltd. has equity capital of ` 40,00,000 consisting of fully paid equity shares of ` 10 each. The net profit for the year 2004-05 was ` 60,00,000. It has also issued 36,000, 10% convertible debentures of ` 50 each. Each debenture is convertible into five equity shares. The tax rate a pplicable is 30%. Compute the diluted earnings. (8 marks) Answer : Interest on Debentures @ 10% for the year 36,000 × 50 × = ` 1,80,000 Tax on interest @ 30% = ` 54,000 Diluted Earnings (Adjusted net profit) = (60,00,000 + 1,80,000 ! 54,000) = ` 61,26,000 2007 - May [5] (a) During the course of the last three years, a c ompany owning and operating Helicopters lost four Helicopters. The co mpany Accountant felt that after the crash, the maintenance provision created in respect of the respective helicopters was no longer required, and proposed to write back to t he Profit and Loss account as a prior period item. Is the Company’s proposed accounting treatment corr ect ? Discuss. (4 marks) (b) Mr. ‘X’ as a contractor has just entered into a con tract with a local municipal body for building a flyover. As per the contract terms, ‘X’ will receive an additional ` 2 crore if the construction of the flyover were to be finished within a period of two years of the commencement of the contract. Mr. X wa nts to recognize this revenue since in the past he has been able to meet similar targets very easily. Is X correct in his proposal ? Discuss. (4 marks) (c) A Company is in the process of setting up a product ion line for manufacturing a new product. Based on trial runs conducted by the c ompany. It was noticed that the production lines output was not of the desired qual ity. However company has taken a decision to manufacture and sell the sub-standard product over the next one year due to the huge investment involved. In the background of the relevant accounting standa rd, advise the company on the cut-off date for capitalisation of the proje ct cost. (4 marks) (d) A Company has an inter-segment transfer pricing pol icy of charging at cost less 10%. The market prices are generally 25% above cost . Is the policy adopted by the company correct? (4 marks) Answer : (a) The term ‘prior period items’, as defined in AS-5 ( revised) “Net Profit or Loss for the Period, Prior Period Items and Changes In Accountin g Policies”, refer only to income or expenses which arise in the current perio d as a result of errors or [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.79 omissions in the preparation of the financial state ments of one or more prior periods. As per paragraph 8 of AS-5, extraordinary items should be disclosed in the statement of profit and loss as a part of net profi t or loss for the period. The nature and the amount of each extraordinary item should be separately disclosed in the statement of profit and loss in a manner that its i mpact on current profit or loss can be perceived. The balance amount of maintenance pro vision written back to profit and loss account, no longer required due to crash o f the helicopters, is not a prior period item because there was no error in the prepa ration of previous periods ‘financial statements’. (b) According to para 14 of AS-7 (Revised) on ‘Construc tion Contracts’, incentive payments are additional amounts payable to the cont ractor if specified performance standards are met or exceeded. Incentiv e payment are included in contract revenue when : (I) the contract is suffici ently advanced and it is probable that the specified performance standards will be me t or exceeded ; and (ii) the amount of the incentive payment can be measured rel iably. In the given problem, the contract has not even begun and hence Mr. X the contractor should not recognize any revenue of this contract. (c) According to AS 10 ‘Accounting for Fixed Assets’, e xpenditure incurred on start up and commissioning of the project, including the exp enditure incurred on test runs and experimental production, is usually capitalized as an indirect element of the construction cost. However, the expenditure incurre d after the plant has begun commercial production i.e., production intended for sale or captive consumption, is not capitalized and is treated as revenue expend iture even though the contract may stipulate that the plant will not be finally ta ken over until after the satisfactory completion of the guarantee period. In the case giv en in question, the company did not stop production even though the output was not of the desired quality, and continued the sub-standard production because of th e huge investment involved in the project. Capitalization should cease at the end of the trial run, since the cut- off date would be the date when the trial run was c ompleted. (d) According to AS-17 ‘Segment Reporting’ the inter -s egment transfers should be measured on the basis that the enterprise actually used to price these transfers. The basis of pricing inter-segment transfers and an y change therein should be disclosed in the financial statements. The enterpri se can have its own policy for pricing inter-segment transfers and hence, inter-se gment transfers may be based on cost, below cost or market price. However, which ever policy is followed, the same should be disclosed and applied consistently. In the given case inter- segment transfer pricing policy adopted by the comp any is correct but it should be followed consistently. Q&A-1.80O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 2007 - Nov [5] (a) Arrange and redraft the following Cash Flow St atement in proper order keeping in mind the requirements of AS-3 : ` (in lacs) ` (in lacs) Net Profit 60,000 Add: Sale of Investments 70,000 Depreciation on Assets 11,000 Issue of Preference Shares 9,000 Loan raised 4,500 Decrease in Stock 12,000 1,66,500 Less: Purchase of Fixed Assets 65,000 Decrease in Creditors 6,000 Increase in Debtors 8,000 Exchange gain 8,000 Profit on sale of investments 12,000 Redemption of Debenture 5,700 Dividend paid 1,400 Interest paid 945 1,07,045 59,455 Add: opening cash and cash equivalent 12,341 Closing cash and cash equivalent 71,796 (6 marks) (b) P Ltd. has 60% voting right in Q Ltd. Q Ltd. has 2 0% voting right in R Ltd. Also, P Ltd. directly enjoys voting right of 14% in R Ltd. R Ltd. is a listed company and regularly supplies goods to P. Ltd. The management of R Ltd. has not disclosed its relationship with P Ltd. How would you assess the situation from the viewpoi nt of AS-18 on Related Party Disclosures ? (4 marks) (c) Lessee Ltd. took a machine on lease from Lessor Ltd ., the fair value being ` 7,00,000. The economic life of the machine as well as the lease term is 3 years. At the end of each year Lessee Ltd. pays ` 3,00,000. Guaranteed Residual Value (GRV) is ` 22,000 on expiry of the lease. Implicit Rate of Re turn (IRR) is 15% p.a. and present value factors at 15% are 0.869, 0.756 a nd 0.657 at the end of first, second and third years respectively. Calculate the value of machine to be considered by Lessee Ltd. and the interest (Finance charges) in each year. (6 marks) [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.81 Answer : (a) Cash Flow Statement Particulars ( ` ` ` ` in Lakhs) Cash flows from operating activities Net profit Less: Exchange again Less: Profit on sale of investments 60,000 (8,000) (12,000) Add: Depreciation on assets 40,000 11,000 Change in current assets and current liabilities 51, 000 Less : Increase in debtors Add : Decrease in stock Less : Decrease in creditors (8,000) 12,000 (6,000) (2,000) Net cash from operating activities 49,000 Cash flow from investing activities Sale of investments Purchase of fixed assets 70,000 (65,000) Net cash from investing activities 5,000 Cash flows from financing activities Issue of preference shares Loan raised Redemption of Debentures Interest paid Dividend paid 9,000 4,500 (5,700) (945) (1,400) Net cash from financing activities 5,455 Net increase in cash & cash equivalents 59,455 Add: Opening cash and cash equivalents 12,341 Closing cash and cash equivalents 71,796 Q&A-1.82O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (b) According to AS-18 'Related Party Disclosures' defi nes 'Related Party as one that has at any time during the reporting period, the ab ility to control the other party or exercise significant influence over the other party in making financial and/or operating decisions. Control is defined as ownership directly or indirectly of m ore than one-half of the voting power of an enterprise; and Significant influence is defined as participation in the financial and/o r operating policy decisions of an enterprise but not control o f those policies. Fact of this case: P Ltd. has direct economic interest in R Ltd. to t he extent of 14%, and through Q Ltd. in which it is the majority shareholders. It has further control of 12% in R Ltd. (60% of Q Ltd's 20%) Therefore, these two makes total control of 26% (i. e. 14% + 12%). Finding:- In this case, control of P Ltd. in R Ltd. / M.P s/ c directly and through Q Ltd. does not go beyond 26%. But according to AS-18 , significant influence may be exercised as an investing party (i.e. P Ltd.) ho lds, directly or indirectly through intermediaries 20% or more of the voting power of t he R Ltd. Since R Ltd. is a listed company and regularly. (c) 1. Computation of value of machine:- Machine is valued at Fair Value or Present Value of Minimum Lease Payment (MLP) whiche ver is less. (i) Present value of Minimum Lease Payment (MLP) Year MLP PV at 15%PV Amount 1. 2. 3. 3,00,000 3,00,000 3,22,000 (considering residual value) ` 0.869 0.756 0.657 ` 2,60,700 2,26,800 2,11,554 PV of MLP 6,99,054 (ii) Fair value of the machine is ` 7,00,000. Value of the machine will be taken as ` 6,99,054. 2. Computation of Interest (i.e. finance an charges) Year Liability Interest at 15%Principal Lease rental `` `` 1stLess: Principal 6,99,054 1,95,11,04,858 1,95,142 (Rental- interest) 3,00,000 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.83 5,03,912 75,587 2,24,413 (Rental- interest) 3,00,000 2 ndLess: Principal 2,24,413 2,58,075 3,00,000 2,79,499 41,925 (Rental- interest) 3 rdLess: Principal 2,58,075 Residual value 21,424 Note:- Difference between guaranteed residual value ` 22,000 and the Residual Value as calculated above i.e. 21,424 is arises due to ap proximation in computing the interest rate implicit in the lease. 2008 - May [4] (a) X Ltd. began construction of a new building on 1 st January, 2007. It obtained ` 1 lakh special loan to finance the construction of the building on 1st January, 2007 at an interest rate of 10%. The company’s othe r outstanding two non-specific loans were : Amount Rate of Interest ` 5,00,000 11% ` 9,00,000 13% The expenditure that were made on the building proj ect were as follows: ` January 2007 2,00,000 April 2007 2,50,000 July 2007 4,50,000 December 2007 1,20,000 Building was completed by 31st December, 2007. Foll owing the principles prescribed in AS-16 ‘ borrowing cost’ calculate the amount of interest to be capitalised and pass one Journal Entry for capitalising the cos t and borrowing cost in respect of the building. (10 marks) Answer : (a) (i) Computation of average accumulated expenses ` 2,00,000 ×12/12 ` 2,50,000 × 9/12 ` 4,50,000 × 6/12 ` 1,20,000 × 1/12 ` 2,00,000 1,87,500 2,25,000 10,000 6,22,500 Q&A-1.84O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (ii) Calculation of average interest rate other than for specific borrowings Account of loan (in `) 5,00,000 9,00,000 14,00,000 Rate of interest 11% 13% Amount of interest (in `) 55.000 1,17,000 1,72,000 Weighted average rate of interest 12.285% (approx) (iii) Interest on average accumulated expenses ` Specific borrowings (` 1,00,000 ×10% ) 10,000 Non-specific borrowings 64,189 Amount of interest to be capitalized 74,189 (iv) Total expenses to be capitalized for building ` Cost of building ` (2,00,000 + 2,50,000 + 4, 50,000 + 1,20,000) 10,20,000 Add: Amount of interest to be capitalised 74,189 10,94,189 Journal Entry Date Particulars Dr. ( ` ` ` `) Cr. (` ` ` `) 31.12.2007 Building account Dr. To Bank account (Being amount of cost of building and borrow i ng cost thereon capitalized) 10,94,189 10,94,189 2008 - May [5] (c) Mini Ltd. took a factory premises on lease on 1.4.07 for ` 2,00,000 per month. The lease is operating lease. During Mar ch, 2008, Mini Ltd. relocates its operation to a new factory building. The lease on t he old factory premises continues to be live upto 31.12.2010. The lease cannot be cancel led and cannot be sub-let to another user. The auditor insists that lease rent o f balance 33 months upto 31.12.2010 should be provided in the accounts for the year end ing 31.3.2008. Mini Ltd. seeks your advice. (5 marks) [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.85 (d) A Cosmetic articles producing company provides the following information: Cold Cream Vanishing Cream January, 2006- September, 2006 per month 2,00,000 2,00,000 October, 2006- December, 2006 per month 1,00,000 3,00,000 January, 2007- March, 2007 per month 0 4,00,000 The company has enforced a gradual change in produc t-line on the basis of an overall plan. The Board of Directors of the Company has passed a resolution in March, 2006 to this effect. The company follows cal endar year as its accounting year. Should this be treated as a discontinuing ope ration ? Give reasons in support of your answer. (5 marks) Answer : (c) As per AS 29 Provisions, Contingent Liabilities and Contingent Assets and ASI 30 ‘Applicability of AS 29 to Onerous Contracts, when an enterprise has a contract that is onerous, the present obligation under the c ontract should be recognized and measured as a provision. In the given case, the ope rating lease contract has become onerous (For a contract to qualify as an one rous contract, the unavoidable costs of meeting the obligation under the contract should exceed the economic benefits expected to be received under it.) as the economic benefit of lease contract for next 33 months up to 31.12.2010 will b e nil. However, the lessee, Mini Ltd., has to pay lease rent of ` 66,00,000 (i.e. 2,00,000 p.m. for next 33 months) Hence, provision on account of ` 66,00,000 is to be provided in the accounts for the year ending 31.03.08 Therefore auditor is r ight. (d) In response to the market forces, business enterpri ses often abandon products or even product lines and reduce the size of their wo rkforce. These actions are not in themselves discontinuing operations unless they satisfy the definition criteria. In the instant case the company has been gradually reducing operation in the product - line of cold creams, simultaneously incre asing operation in the product line of Vanishing Creams The Company was not dispo sing of any of its components. Phasing out a product line as undertake n by the company does not meet definition criteria in Para-3 of AS-24, namely , disposing of substantially in its entirety a component of the enterprise. Therefore t his changeover is not a discontinuing operation. Q&A-1.86O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 CA Final Gr. I (New Course) SHORT NOTES 2008 - Nov [7] Write short notes on the following: (b) Reversal of an Impairment Loss. (4 marks) (d) What are the types of Employees benefit and what is the objective of Introduction of this Standard i.e. AS-15? (4 marks) (e) What are Timing differences and Permanent differ ences ? (4 marks) Answer : (b) As per AS 28 on “Impairment of Assets”, an enterpri se should assess at each Balance Sheet date whether there is any indication that an impairment loss recognised for an asset in prior accounting periods may no longer exist or may have decreased. If any such indication exists, the enterprise should estimate the recoverable amount of that asset. In assessing that whether there is any indication t hat an impairment loss recognised for an asset in prior accounting periods may no longer exist or may have decreased, an enterprise should consider, as a minimum, the following indications. External Sources: 1. Assets Market Value has increased significantly d uring the period. 2. Significant changes with a favourable effect on t he enterprise have taken place during the period, or will take place in the near f uture, in the technological market, economic or legal environment in which the enterpri se operates or in the market to which the asset is dedicated. 3. Market interest rates or other market rates of re turn on investments have decreased during the period, and those decreases ar e likely to affect the discount rate used in calculating the assets value in use an d increase the asset's recoverable amount materially. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.87 Internal Sources : 1. Significant changes with a favourable effect on t he enterprise have taken place during the period or are expected to take place in the near future to the extent to which, or manner in which the asset is used or is e xpected to be used. 2. Evidence is available from internal reporting tha t indicates that the economic performance of the asset is or will be. better than expected. (d) As per AS-15 (revised), the following are the vario us types of employees benefits:- (i) Short term Employees Benefits:- These are those benefits, which falls due wholly wi thin 12 months after the end of period, in which such service is rendered by the employees. These benefits are like - wages and salaries, profit shar ing bonus, ESI contributions and various non monetary benefits like medical, sub sidies, rent free house etc. (ii) Long term Employees’ Benefits:- It includes long term service leave etc. Such benef its are not payable wholly within 12 month, after the end of period, in which such service is rendered by the employees. (iii) Post- Employment Benefits:- It includes, (a) retirement benefits, like gratuity and pension e tc. (b) other benefits, like, post- employment medical, post employment life insurance cover and so on. (iv) Termination Benefits:- These are those benefits given to employees for ter minating them from there service. It normally includes- (a) Voluntary Retirement Compensation (b) Retirement Compensation, etc. Termination Benefits are differed, and shown in the Balance Sheet, as miscellaneous expenditure of the Employer Company. The various objective of As-15 on Employees benefit s are:- (i) To recognize such benefits as an expense, when e nterprise consume the economic benefit, arising from service provided by employees. (ii) To recognize such benefits as a liability, at t he time of providing services in exchange of employee’s benefits payable in futur e. (e) (a) Timing difference is the difference between the accounting income and taxable income that originated in the same period a nd are capable of reversal in one or more subsequent periods. Examples of timi ng differences are as follows:- Q&A-1.88O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (i) Expenditure of nature mentioned is 43 B, like ta xes, duty, cess, fees etc. if are accrued in the P/L A/c on accrual basis; but are allowed only on actual payment for tax purpose. (ii) Provision made in P/L A/c, but the relevant lia bility is allowed in the year in which it actualize. (b) Permanent difference is the difference between t he accounting income and taxable income that originated in the same period; but are not capable of reversal. Examples of permanent differences are as follows:- (i) Personal expenditure (ii) Contribution to National Laboratory. (iii) Donations, etc. 2009 - Nov [6] Write short notes on the following : (b) Treatment of refund of Government grants. (4 mark s) Answer : AS-12’ Accounting for Government Grants. A Government Grant that is refundable is treated as an extra ordinary items in the follow ing ways. (i) Amount refundable as government grant related to any specific fixed asset, is to be recorded in books, by increasing the book value of such asset or by reducing the capital reserve of deferred income balance, wit h same amount. (ii) Refundable amount, which is related with revenu e, is applied first against any unamortized deferred credit remaining in respect of such grant. If there is no unamortized deferred credit, then th e amount is directly charged to from P/L A/c. (iii) If there is any amount refundable, in respect of promoters’ contribution, then the same is to be reduced from capital reserve. 2013 - May [7] Answer the following: (d) Write short notes on “Disclosure of carrying amo unts of financial assets and financial liabilities in balance sheet”. (4 marks) Answer: “Disclosure of carrying amounts of financial assets and financial liabilities in Balance Sheet”. According to AS 32 ‘Financial instruments: Disclosu res’, the carrying amounts of financial assets and financial liabilities should b e disclosed either on the face of the balance sheet or in the notes as follows: Financial Assets (a) financial assets at fair value through profit or loss, showing separately (I) those designated as such upon initial recognition and (ii ) those classified as held for trading. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.89 (b) held-to-maturity investments; (c) loans and receivables; (d) available-for-sale financial assets; Financial Liabilities (a) financial liabilities at fair value through prof it or loss, showing separately (i) those designated as such upon initial recognition and (ii ) those classified as held for trading, and (b) financial liabilities measured at amortised cost . DESCRIPTIVE QUESTIONS 2009 - Nov [6] (c) Give four examples of activities that do not n ecessarily satisfy criterion (a) of paragraph 3 of AS—24, but that mig ht do so in combination with other circumstances. (4 marks) Answer : Para 3 of AS 24 “Discontinuing Operations” explains the criteria for determination of discontinuing operation. According to Paragraph 9 o f As 24, examples of activities that do not necessarily satisfy criterion (a) of paragra ph 3, but that might do so in combination with other circumstances, include: (i) Closing of a facility to achieve productivity im provement or any other cost saving. (ii) Gradual/Evolutionary phasing out any product li ne or service or class. (iii) Discontinuing several products, within an ongo ing line of business. (iv) Changing of location of production or marketing activities for a particular business line. PRACTICAL QUESTIONS 2008 - Nov [1] {C} (a) On 30.6.2007, Asmitha Ltd. incurred ` 2,00,000. Net Loss from disposal of a business segment. Also, on 30.7.2007, the company paid ` 60,000 for Property taxes Assessed for the calendar year 2007. How the above transactions should be included in determination of Net Income o f Asmitha Ltd. for the six months interim period ended on 30.9.2007. (b) M/s XYZ Ltd. has three segments namely X, Y, Z. The total Assets of the Company are ` 10.00 crs segment X has ` 2.00 crs., segment Y has ` 3.00 crs. and segment Z has ` 5.00 crs. deferred tax Assets included in the Asse ts of each segments are X- ` 0.50 crs., Y- ` 0.40 crs. and Z- ` 0.30 crs. The accountant contends that all the three segments are reportable segments. Comment. Q&A-1.90O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (c) M/s Dinesh & Company signed an agreement with worke rs for increase in wages with retrospective effect. The out-flow on Account of arrears was for 2005- 06— ` 10.00 lakhs, for 2006-07— ` 12.00 lakhs and for 2007-08 ` 12.00 lakhs. This amount is payable in September, 2008. The accountan t wants to charge ` 22.00 lakhs as prior period charges in Financial statemen t for 2008-09. Discuss. (d) M/s Prima Co. Ltd. sold goods worth ` 50,000 to M/s Y and Company. M/s Y and Co. asked for discount of ` 8,000 which was agreed by M/s Prima Co. Ltd. the s ale was effected and Goods were despatched. After recei ving, Goods worth ` 7,000 was found defective, which they returned immediatel y. They made the payment of ` 35,000. to M/s Prima Co. Ltd. Accountant booked the sales for ` 35,000. Please discuss. (5 marks each) Answer : (a) As per para 10 of AS 25 “Interim Financial Reportin g”, if an enterprise prepares and presents a complete set of financial statements in its interim financial report, the form and content of those statements should con form to the requirements as applicable to annual complete set of financial stat ements. As on 30.9.2007. Asmitha Ltd., would report the entire ` 2,00,000 loss on the disposal of its business segment since the loss was incurred during interim period. A cost charged as an expense in an annual period should be allocated to Interim periods on accrual basis. Since ` 60,000 Property Tax payment relates to entire cale ndar year 2007, ` 30,000 would be reported as an expense for six mon ths ended on 30.09.07 while remaining ` 30,000 would be reported as prepaid expenses. (b) As per AS 17 “Segment Reporting”, segment assets do not include income tax assets. Therefore, the revised total assets are 8.8 crores (10 crores - (0.5+0. 4+0.3). segment X holds total assets of 1.5 crores (2 crores - 0.5 crores); Segment Y holds 2.6 crores (3 crores - 0.4 crores); and Seg ment Z holds 4.7 crores (5 crores - 0.3 crores). Thus, all segments are rep ortable segments. As all the three segments hold more than 10% of the total assets. (c) As per AS 5(Revised) *Net Profit or Loss for the Pe riod, Prior Period Items and Changes in Accounting Policies”, the term prior per iod item refers only to income or expenses which arise in the current period as a result of errors or omission in the preparation of the financial statements of one or m ore prior periods. The term does not include other adjustments, necessitated by circ umstances, which though related to prior periods are determined in the curr ent period. The full amount of wage arrears paid to workers will be treated as an expense of current year and it will be charged to profit and loss account as curre nt expenses and not as prior period expenses. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.91 It may be mentioned that additional wages is an exp ense arising from the ordinary activities of the company. Although abnorm al in amount, such an expense does not qualify as an extraordinary item. However, as per Para 12 of AS 5 (Revised), when items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence th at their disclosure is relevant to explain the performance of the enterprise for the p eriod, the nature and amount of such items should be disclosed separately. (d) AS per Para 4.1 of AS 9 “Revenue Recognition”, reve nue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. In the given case, M/s Prima Co. Ltd. should record the sales at gross value of ` 50,000. Discount of ` 8,000 in price and goods returned worth ` 7,000 are to be adjusted by suitable provisions. M/s Prime Co. L td. might have sent the credit note of ` 15,000 to M/s Y & Co. to account for these adjustm ents. The contention of the accountant to book the sales for ` 35,000 is not correct. 2009 - May [1] {C} Answer any four out of the following : (a) From the following details of an asset (i) Find out impairment loss (ii) Treatment of impairment loss (iii) Current year depreciation Particulars of asset : Cost of asset ` 56 lakhs Life period useful 10 years Salvage value Nil Current carrying value ` 27.30 lakhs Life remaining useful 3 years Recoverable amount ` 12 lakhs Upward revaluation done in last year ` 14 lakhs (4 marks) (b) Rainbow Limited borrowed an amount of ` 150 crores on 1.4. 2008 for construction of boiler plant @ 11% p.a. The plant is expected to be completed in 4 years. Since the weighted average cost of capital is 13% p.a., t he accountant of Rainbow Ltd. capitalised ` 19.50 crores for the accounting period ending on 3 1.3.2009. Due to surplus fund out of ` 150 crores, an income of ` 3.50 crores was earned and credited to profit and loss account. Comment on the above treatment of accountant with reference to relevant accounting standard. (4 m arks) Q&A-1.92O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (c) Suraj Limited wishes to obtain a machine costing ` 30 lakhs by way of lease. The effective life of the machine is 14 years, but the company requires it only for the first 5 years. It enters into an agreement with Ash ok Ltd. for a lease rental for ` 3 lakhs p.a. payable in arrears and that implicit rat e of interest is 15%. The chief accountant of Suraj Limited is not sure about the t reatment of these lease rentals and seeks your advise. (4 marks) (d) Omega Limited is working on different projects thos e are likely to be completed within 3 years period. It recognises revenue from t hese contracts on percentage of completion method for financial statement during 2006, 2007 and 2008 for ` 11,00,000, ` 16,00,000 and ` 21,00,000 respectively. However, for Income-tax purpose, it has adopted the completed contract meth od under which it has recognised revenue of ` 7,00,000, ` 18,00,000 and ` 23,00,000 for the years 2006, 2007 and 2008 respectively. Income-tax rate is 35%. Compute the amount of deferred tax asset/liability for the years 2006, 20 07 and 2008. (4 marks) (e) While preparing its final accounts for the year en ded 31st March, 2009, a company made a provision for bad debts @ 5% of its total de btors. In the last week of February 2009, a debtor for 2 lakhs had suffered he avy loss due to a earthquake. The loss was not covered by any insurance policy. I n April,2009, the debtor became bankrupt. Can the company provide for full l oss arising out of insolvency of debtor in the final accounts for year ended 31 st March, 2009? (4 marks) Answer : (a) As per AS 28 “Impairment of Assets”, an impairment loss on a revalued asset is recognised as an expense in the statement of profit and loss. However, an impairment loss on a revalued asset is recognised d irectly against any revaluation surplus for the asset to the extent that the impair ment loss does not exceed the amount held in the revaluation surplus for the same asset. Impairment Loss and its treatment ( ` in lakhs) Current carrying amount (including revaluation amou nt of `14 lakhs) 27.30 Less: Current recoverable amount 12.00 Impairment Loss 15.30 Impairment loss charged to revaluation reserve 14.00 Impairment loss charged to profit and loss account 1 .30 As per para 61 of AS 28, “after the recognition of an impairment loss, the depreciation (amortization) charge for the asset sh ould be adjusted in future periods to allocate the asset's revised carrying am ount, less its residual value (if any), on a systematic basis over its remaining useful life.” [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.93 In the given case, the carrying amount of the asset will be reduced to ` 12 lacs after impairment. This amount is required to be dep reciated over remaining useful life of 3 years (including current year). therefore , the depreciation for the current year will be ` 4 lacs. (b) As per AS 16 Borrowing costs' states, “to the exten t that funds are borrowed specifically for the purpose of obtaining a qualify ing asset, the amount of borrowing costs eligible for capitalisation on that asset sho uld be determined as the actual borrowing costs incurred on that borrowing during t he period less any income on the temporary investment of those borrowings.” The capitalisation rate should be the weighted average of the borrowing costs applica ble to the borrowings of the enterprise that are outstanding during the period., other than borrowings made specifically for the purpose of obtaining a qualify ing asset. Hence, in the above case, treatment of accountant of Rainbow Ltd. is in correct. The amount of borrowing costs capitalized for the financial year 2008-2009 should be calculated as follows: Actual interest for 2008-2009 (11% of ` 150 crores) ` 16.50 crores Less : Income on temporary investment from specific borrow ings` 3.50 crores Borrowing costs to be capitalized during year 2008- 2009` 13,00 crores (c) As per AS 19 Leases', a lease will be classified as finance lease if at the inception of the lease, the present value of minimum lease pa yment amounts to at least substantially all of the fair value of leased asset . In the given case, the implicit rate of Interest is given at 15%. The present value of m inimum lease payments at 15% using PV- Annuity Factor can be computed as follows : Annuity Factor (Year 1 to year5) 3.36 (approx) Present value of minimum lease payments (for ` 3 lakhs each year) ` 10.08 lakhs (approx.) Thus, present value of minimum lease payments is ` 10.08 lakhs and the fair value of the machine is ` 30 lakhs. In a finance lease, lease term should be for the major part of the economic life of the asset even. If title is not transferred. However, in the given case, the effective useful life of the machine is 14 years while the lease is only for five years. Therefore, lease agreement is an operating lease. Lease payments under an operating lease should be recogni zed as an expense in the statement of profit and loss on a straight line bas is over the lease term unless another systematic basis is more representative of the time pattern of the user's benefit. Q&A-1.94O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Note : For the computation of present value of minimum le ase payments, the discounting rate is the interest rate implicit in t he lease, which is calculated by using this formula. D F rn. .( )= +1 1 (d) Omega Limited Calculation of deferred Tax Asset/Liability Year Accounting Taxable Timing Difference Deferred Tax Income Income (balance) Liability (balance) 2006 11,00,000 7,00,000 4,00,000 1,40,000 2007 16,00,000 18,00,00 2,00,000 70,000 2008 21,00,000 23,00,000NIL NIL 48,00,000 48,00,000 (e) According to para 8.2 and 13 of Accounting Standard 4 ` Contingencies and Events occurring after the Balance Sheet Date', ass ets and liabilities should be adjusted for events occurring after the date of bal ance sheet, that provide additional evidence to assist estimation of amounts relating to conditions existing at the Balance Sheet Date. Therefore, in the given case, full provision for bad debt amounting ` 2 lakhs should be made to cover the loss arising d ue to insolvency in the final accounts for the year ended 31st March, 2 009 as earthquake took place before the balance sheet date. 2009 - Nov [1] (a) The following data apply to ‘X’ Ltd. defined be nefit pension plan for the year ended 31.03.09, calculate the actual retur n on Plan assets: — Benefits Paid 2,00,000 — Employer contribution 2,80,000 — Fair market value of plan assets on 31.03.09 11,40, 000 — Fair market value of plan asset as on 31.03.08 8,00 ,000 (b) U.S.A. Ltd. purchased raw material @ ` 400 per kg. company does not sell raw material but uses in production of finished goods. The finished goods in which raw material is used are expected to be sold at below c ost. At the end of the accounting year company is having 10000 kg. of raw material in stock. As the company never sells the raw material, it does not know the sellin g price of raw material and hence can not calculate the realisable value of the raw m aterial for valuation of inventories at the end of the year. However replacement cost of raw material is ` 300 per kg. How will you value the inventory of raw material ? [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.95 (c) Moon Ltd. entered into agreement with Sun Ltd. for sale of goods of ` 8 lakhs at a profit of 20% on cost. The sale transaction took pl ace on 1st February, 2009. On the same day Sun Ltd. entered into another agreemen t with Moon Ltd. to resell the same goods at ` 10.80 lakhs on 1st August, 2009. State the treatme nt of this transaction in the financial statements of Moon Ltd . as on 31.03.09. The pre- determined re-selling price covers the holding cost of Sun Ltd. Give the Journal Entries as on 31.03.09 in the books of Moon Ltd. (d) XY Ltd. was making provisions for non-moving stock s based on no issues for the last 12 months upto 31.03.08. Based on technical ev aluation the company wants to make provisions during the year 31.03.09. Total value of stock - ` 150 lakhs. Provisions required based on 12 months issue ` 4.0 lakhs. Provisions required based on technical evaluation ` 3.20 lakhs. Does this amount to change in accounting policy ? C an the company change the method of provision ? (5 × 4 = 20 marks) Answer : (a) ` in lacs Fair value of plan assets on 31.03.088.00 8.00 Add: Employer contribution 2.80 2.80 Less: Benefits paid 2.00 (A) 8.80 Fair market value of plan assets at (B) 11.40 Actual return on plan assets (B-A) 2.60 (b) As per AS 2 (Revised) “Valuation of inventories”, m aterials and other supplies held for use in the production of inventories are not wr itten down below cost if the finished products in which they will be incorporate d are expected to be sold at or above cost. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished produ cts will exceed net realizable value, the materials are written down to net realizable va lue. In such a situation the replacement cost of the material may be the best av ailable measure of their net realizable value. There, in the case, USA Ltd. will value the stock o f raw material at ` 30,00,000 (10,000 kg. @ ` 300 per kg.) (c) In the given case, Moon Ltd. concurrently agreed to repurchase the same good from Sun Ltd. on 1 st Feb., 2009. Also the re-selling price is pre-deter mined and covers purchasing and holding costs of Sun Ltd. Hen ce, the transaction between Moon Ltd. and Sun Ltd. on 1 st Feb., 2009 should be accounted for as financing rather than sale. The resulting cash flow of ` 9.60 lakhs received by Moon Ltd., cannot be considered as revenue as per AS 9 “Revenu e Recognition”. Q&A-1.96O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Journal Entries in the books of Moon Ltd. Date Particulars ` ` ` ` in lakhs 10.02.09 Bank Account Dr. To Advance from Sun Ltd. (Being advance received from Sun Ltd. amounting ( ` 8 lakhs + 20% of ` 8 lakhs = 9.60 lakhs) under sale and re-purchase agreement) 9.60 9.60 31.03.09 Financing Charges Account Dr. To Sun Ltd. (Financing charges for 2 months at ` 1.20 lakhs. (10.80 - 9.60) i.e. 1.2 lakhs x 2/6) 0.40 0.40 31.03.09 Profit and Loss Account Dr. To Financing Charges Account (Being amount of finance charges transferred to P& L Account) 0.40 0.40 The balance of Sun Ltd. account will be disclosed a s an advance under the head liabilities in the balance sheet of Moon Ltd. as on 31 st March, 2009. (d) The decision of making provision for non-moving sto cks on the basis of technical evaluation does not amount to change in accounting policy as per AS 5 “Net Profit or loss for the Period, Prior items and Changes in Accounting Policies.” The method of estimating the amount of provision may be changed, in case, a more prudent estimate can be made by adopting the change d method. In the given case, considering the total value of s tock, the change in the amount of required provision of non-moving stock fr om ` 4.0 lakhs is also not material. The disclosure can be made for such chang e by way of notes to the accounts in the financial statements of XY Ltd. for the year ending on 31.03.09, in the following manner. “The company has provided for non-moving stock on t he basis of technical evaluation unlike preceding years. Had the same met hod been followed as in the previous years, the profit for the year and the cor responding effect on the year end, net assets would have been higher by ` 0.80 lakhs”. Pass journal entries in the books of H Ltd .to reco rd the above arrangement of 31.03.09 and prepare the Balance Sheet of Ltd. a fter absorption of S Ltd. Workings should form part of your answer. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.97 2009 - Nov [6] (d) From the following information compute diluted earnings per share. Net profit for the year 2008 ` 12,00,000 Weighted average number of equity shares outstandin g during the year 2008 5,00,000 shares Average fair value of one equity share during the year 2008 ` 20 Weighted average number of shares under option during the year 2008 1,00,000 shares Exercise price per share under option during the ye ar 2008` 15 (4 marks) Answer : Journal Entries in the books of H Ltd. computation of diluted earnings per share Earnings Shares ` ` ` ` Earning per share ` ` ` ` Net profit for the year 2008 12,00,000 Weighted average number of equity shares outstanding during the year 2008 Basic earnings per share (1,20,00,000/5,00,000) Weighted average number of shares under option Number of shares that would have been issued at fair value (1,00,000 × 15.00)/20.00) Diluted earnings per share (12,00,000/5,25,000) 12,00,000 5,00,000 1,00,000 (75,000) 5,25,000 2.40 2.29 The earnings have not been increased as the total n umber of shares has been increased only by the number of shares (25,000) dee med for the purpose of compu- tation to have been issued for no consideration as per (para 37 (b) of AS20) 2010 - May [1] (b) Sun Ltd. has entered into a sale contract of ` 5 crores with X Ltd. during 2009-10 financial year. The profit on this t ransaction is ` 1 crore. The delivery of goods to take place during the first month of 2010- 11 financial year. In case of failure of Sun Ltd. to deliver within the schedule a compen sation of ` 1.5 crore is to be paid to X Ltd. Sun Ltd. planned to manufacture the goods du ring the last month of the 2009-10 financial year. As on Balance Sheet date (31.3.2010 ), the goods were not manufactured and it was unlikely that Sun Ltd. will be in a posi tion to meet the contractual obligation. Q&A-1.98O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (i) Should Sun Ltd. provide for contingency as per A S-29 ? (ii) Should provision is measured as the excess of c ompensation to be paid over the profit ? (5 marks) (c) Rainbow Limited borrowed an amount of ` 150 crores on 1.4.2009 for construction of boiler plant @ 11% p.a. The plant is expected to be completed in 4 years. The weighted average cost of capital is 13% p.a. The ac countant of Rainbow Ltd., capitalised interest of ` 19.50 crores for the accounting period ending on 31.3.2010. Due to surplus fund out of ` 150 crores, an income of ` 3.50 crores was earned and credited to profit and loss account. Com ment on the above treatment of accountant with reference to relevant accounting standard. (5 marks) (d) Y Ltd. is a full tax free enterprise for the first ten years of its existence and is in the second year of its operation. Depreciation timing d ifference resulting in a tax liability in year 1 and 2 is ` 200 lakhs and ` 400 lakhs respectively. From the third year it is expected that the timing difference woul d reverse each year by ` 10 lakhs. Assuming tax rate of 40%, find out the defer red tax liability at the end of the second year and any charge to the Profit and Loss a ccount. (5 marks) Answer : (b) (i) AS 29 " Provisions, Contingent Liabilities and Contingent Assets" provides that when an enterprise has a present obligation, as a r esult of past events, that probably requires an outflow of resources and a rel iable estimate can be made of the amount of obligation a provision should be r ecognised. Sun Ltd. has the obligation to deliver the goods within the schedule d time as per the contract. It is possible that Sun Ltd. will fail to deliver the goods within the schedule and it is also possible to estimate the amount of compensa tion. Therefore, Sun Ltd. should provide for the contingency amounting ` 1.5 crores as per AS 29. (ii) Provisions should not be measured as the exces s of compensation to be paid over the profit. The goods were not manufactured be fore 31 st March,2010 and no profit had accrued for the financial year 2009-2 010. Therefore, provision should be made for the full amount of compensation amounting ` 1.50 crores. (c) Para 10 of the AS 16 'Borrowing Cost' states, "To t he extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on t hat asset should be determined as the actual borrowing costs incurred on that borrowi ng during the period less any income on the temporary investment of those borrowi ng". The capitalisation rate should be the weighted average of the borrowing cos ts applicable to the borrowings of the enterprise that are outstanding d uring the period, other than borrowings made specifically for the purpose of obt aining a qualifying asset. In the given case, the amount of ` 150 crores was specifically borrowed for construct ion [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.99 of boiler plant. Therefore, treatment of accountant of Rainbow Ltd. is not correct and the amount of borrowing costs to be capitalised for the financial year 2009-10 should be calculated as follows : ` (in crores) Interest paid for 2009-10 (11% on ` 150 crores) 16.50 Less: Income on temporary investment from specific borrowings 3.50 Borrowing costs to be capitalised during 2009-10 13. 00 (d)As per Accounting Standard Interpretation (ASI) 5 " Accounting for Taxes on Income in the situations of Tax Holiday under secti ons 10A and 10B of the Income- Tax Act,1961 Accounting standard (AS) 22 Accounting for Taxes on Income", deferred tax in respect of timing differences which originate during the tax holiday period and reverse during the tax holiday period, s hould not be recognised to the extent deduction from the total income of an enterp rise is allowed during the tax holiday period as per the provisions of sections 10 A and 10B of the Income-Tax Act. Deferred tax in respect of timing differences which originate during the tax holiday period but reverse after the tax holiday pe riod should be recognised in the year in which the timing differences originate. How ever, recognition of deferred tax assets should be subject to the consideration of pr udence as laid down in As 22. For this purpose, the timing differences which orig inate first should be considered to reverse first. Out of ` 200 lakhs depreciation timing difference, amount o f ` 80 lakhs ( ` 10 lakhs × 8 years) will reverse in the tax holiday pe riod and therefore, should not be recognised. However, for ` 120 lakhs ( ` 200 lakhs - ` 80 lakhs), deferred tax liability will be recognised for ` 48 lakhs (40% of ` 120 lakhs) in first year. In the second year, the entire amount of timing difference of ` 400 lakhs will reverse only after tax holiday period and hence, will be recogni sed in full. Deferred tax liability amounting ` 160 lakhs (40% of ` 400 lakhs) will be created by charging it to profi t and loss account and the total balance of deferred tax liability account at the end of second year will be ` 208 lakhs (48 lakhs + 160 lakhs). 2010 - May [2] (b) Comforts Ltd. granted ` 10,00,000 loan to its employees on January 1, 2009 at a concessional interest rate of 4% per a nnum. Loan is to be repaid in five equal annual instalments alongwith interest. Market rate of interest for such loan is 10% per annum. Following the principles of recognition and measurement as laid down in AS-30—‘Financial instruments : Recognition and meas urement’, record the entries for the year ended 31 st December, 2009 for the loan transaction, and also calculate the value of loan initially to be recognised and amorti sed cost for all the subsequent years. The present value of ` 1 receivable at the end of each year based on disc ount factor of 10% can be taken as : Q&A-1.100O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Year end 1 0.9090 2 0.8263 3 0.7512 4 0.6829 5 0.6208 (12 marks) Answer : Journal Entries in the books of Comfort Ltd. (i) for the year ended 31st December,2009 (regarding loan to employees) Dr. Amount (` ` ` ` ) Cr. Amount (` ` ` ` ) Staff loan A/c Dr. To Bank A/c (Being the disbursement of loans to staff) 10,00,000 10,00,000 Staff cost A/c (10,00,000 ! 8,54,763) Dr. [Refer part (ii)] To Staff loan A/c (Being the write off of excess of loan balance over present value thereof, in order to reflect the loan at its present value of ` 8,54,763) 1,45,237 1,45,237 Staff loan A/c Dr. To Interest on staff loan A/c (Being the charge of interest @ market rate of 10% to the loan) 85,476 85,476 Bank A/c Dr. To Staff loan A/c (Being the repayment of first instalment with inter est for the year) 2,40,000 2,40,000 Interest on staff loan A/c Dr. To Profit and loss A/c (Being transfer of balance in staff loan interest a ccount to profit and loss account) 85,476 85,476 Profit and loss A/c Dr. To Staff cost A/c (Being transfer of balance in staff cost account to profit and loss Account) 1,45,237 1,45,237 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.101 (ii) Calculation of initial recognition amount of lo an to employees Cash Inflow Total P.V. factor Present value Year end Principal Interest @4% ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` 2009 2010 2011 2012 2013 2,00,000 2,00,000 2,00,000 2,00,000 2,00,000 40,000 32,000 24,000 16,000 8,000 2,40,000 2,32,000 2,24,000 2,16,000 2,08,000 0.9090 0.8263 0.7512 0.6829 0.62082,18,160 1,91,702 1,68,269 1,47,506 1,29,126 Present value or Fair value 8,54,763 (iii) Calculation of amortised cost of loan to emplo yees Year Amortised Cost (Openingbalance) [1] Interest to be recognised@ 10%[2] Repayment including(interest) [3] Amortised Cost (Closing balance) [4]=[1]+[2] ! !! ! [3] ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` 2009 2010 2011 2012 2013 8,54,763 7,00,239 5,38,263 3,68,089 1,88,89885,476 70,024 53,826 36,809 (Bal.fig.) 19,102 2,40,000 2,32,000 2,24,000 2,16,000 2,08,000 7,00,239 5,38,263 3,68,089 1,88,898 Nil 2010 - Nov [1] {C} (a) Night Ltd. sells beer to customers; some of the customers consume the beer in the bars run by Night Limited. While leaving the bars, the consumers leave the empty bottles in the bars and t he company takes possession of these empty bottles. The company has laid down a de tailed internal record procedure for accounting for these empty bottles which are so ld by the company by calling for tenders. Keeping this in view : (i) Decide whether the stock of empty bottles is an asset of the company ; Q&A-1.102O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (ii) If so, whether the stock of empty bottles exist ing as on the date of Balance Sheet is to be considered as inventories of the company a nd valued as per AS-2 or to be treated as scrap and shown at realizable value w ith corresponding credit to ‘Other Income’ ? (5 marks) (b) AS-4 prescribes that adjustments to assets and liab ilities are required for events occurring after the Balance Sheet date that provide additional information materially affecting the determination of the amoun t relating to conditions existing at the Balance Sheet date-generally called adjustin g events. “Proposed Dividend” is shown and adjusted in the Balance Sheet even if it is not an adjusting event as per AS-4 because it is proposed by the Board of Dir ectors of the company after the Balance Sheet date. Keeping this in view, is it not violation of AS-4 t o show proposed dividends as current liabilities and provisions ? Comment. (5 mar ks) Answer : (a) (i) Tangible objects or intangible rights having pro bable future benefits, owned by an enterprise are called assets. In this case Night Ltd. sells these empty bottles by calling tenders. It means further benefits are a ccrued on its sale. Therefore, empty bottles are assets for the company. (ii) According to AS 2 “Valuation of Inventories”, i nventories are assets held for sale in the ordinary course of business. Stock of e mpty bottles existing on the Balance Sheet date is the inventory and Night Ltd. has detailed controlled recording and accounting procedure which duly signi fy its materiality. Therefore stock of empty bottles cannot be consider ed as scrap and should be valued as inventory in accordance with AS 2. (b) • According to AS 4 "Contingencies and Events occurr ing after the Balance Sheet Date”, adjustments to assets and liabilities are required for events occurring after the balance sheet date that provide additional information materially affecting the determination of the amoun ts relating to conditions existing at the balance sheet date. On the basis of such provisions, proposed dividend is not an adjusting event. • However this standard again states that dividends stated to be in respect of the period covered by the financial statements, which a re proposed or declared by the enterprise after the balance sheet date but bef ore approval of the financial statements, should be adjusted in the financial sta tements. • Schedule VI of the Companies Act 1956 also prescri bes that proposed dividend should be shown under the heading ‘Current Liabilities and Provisions’ in the balance sheet. Hence, showing pr oposed dividends as ‘current liability and provision’ by adjusting it i n the Balance Sheet is not in violation of AS 4. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.103 2010 - Nov [7] Answer the following : (e) S. Square Private Limited has taken machinery on lease from S.K. Ltd. The information is as under : Lease term = 4 years Fair value at inception of lease = ` 20,00,000 Lease rent = ` 6,25,000 p.a. at the end of year Guaranteed residual value = ` 1,25,000 Expected residual value = ` 3,75,000 Implicit interest rate = ` 15% Discounted rates for 1 st year, 2nd year, 3rd year and 4th year are 0.8696, 0.7561, 0.6575 and 0.5718 respectively. Calculate the value of the lease liability as per A S-19. (4 marks) Answer : • As per AS 19 “Leases”, the lessee should recognise the lease as an asset and a liability at an amount equal to the fair value of t he leased asset at the inception of the finance lease. • Whereas, if the fair value of the leased asset exc eeds the present value of the minimum lease payments from the standpoint of the l essee, the amount recorded as an asset and a liability should be the present v alue of the minimum lease payments from the standpoint of the lessee. • In computing the present value of the minimum leas e payments the discount rate is the interest rate implicit in the lease. Present value of minimum lease payments will be calculated as follows: Year Minimum Lease Payment Internal rate of return (Discount rate @ 5%)Present value 1234 6,25,000 6,25,000 6,25,000 7,50,000 0.8696 0.7561 0.6575 0.57185,43,500 4,72,563 4,10,937 4,28,850 Net Total 26,25,000 18,55,850 Note : 1. Present value of minimum lease payments 18,55,850 is less than fair value at the inception of lease i.e. 20,00,000, therefore, the l ease liability should be recognized at 18,55,850 according to AS 19. 2. Minimum Lease Payment of 4th year includes guaran teed residual value amounting 1,25,000. Q&A-1.104O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 2011 - May [1] {C} (a) The fair value of plan assets of Anupam Ltd. w as ` 2,00,000 in respect of employee benefit pension plan as on 1st April, 2009. On 30th September, 2009 the plan paid out benefits of ` 25,000 and received inward contributions of ` 55,000. On 31st March, 2010 the fair value of plan assets was ` 3,00,000. On 1st April, 2009 the company made the following estimate s, based on its market studies and prevailing prices. % Interest and dividend income (after tax) payable by fund 10.25 Realised gains on plan assets (after tax) 3.00 Fund administrative costs (3.00) Expected rate of return 10.25 Calculate the expected and actual returns on plan assets as on 31st March, 2010, as per AS-15. (5 marks) (c) HSL Ltd., is manufacturing goods for local sale and exports. As on 31st March, 2010, it has the following finished stock in the fa ctory warehouse: (i) Goods meant for local sales ` 100 lakhs (cost ` 75 lakhs) (ii) Goods meant for exports ` 50 lakhs (cost ` 20 lakhs) Excise duty is payable at the rate of 12%. The comp any's Managing Director says that excise duty is payable only on clearance of go ods and hence not a cost. Please advice HSL using guidance note, if any issue d on this, including valuation of stock. (5 marks) (d) Rama Ltd. has provided the following information: Depreciation as per accounting records = ` 2,00,000 Depreciation as per income-tax records = ` 5,00,000 Unamortised preliminary expenses as per tax record = ` 30,000 There is adequate evidence of future profit suffici ency. How much deferred Tax asset/liability should be recognized as transit ion adjustment ? Tax rate 50%. (5 marks) Answer : (a) Calculation of Expected Returns on Plan Assets a s on 31 st March, 2010, as per AS 15. Particulars Amounts ( ` ` ` ` ) Return on opening value of plan assets of ` 2,00,000@ 10.25% (held for the year) Add: Return on net gain of ` 30,000 (i.e. ` 55,000 - ` 25,000) during the year i.e. held for six months @5% (equivalent t o 10.25% annually, compounded every six months) Expected return on plan assets as on 31 st March, 2010 20,500 1,50022,000 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.105 Calculation of Actual Returns on Plan Assets as on 31st March, 2010, as per AS 15. Particulars Amounts ` ` ` ` Amounts ` ` ` ` Fair value of Plan Assets as on 31 st March, 2010 Less: Fair value of Plan Assets as on 1st April, 2009 Add: Contribution received as on 30th September, 2009 Add: Benefits paid as on 30 th September, 2009 Actual returns on Plan Assets as on 31st March, 2010 2,00,000 55,000 3,00,000 (2,55,000) 45,000 25,000 70,000 (c) As per Central Excise Rules, 2002, excise duty is l evied upon the manufacture or production of goods. However, it is collected only at the time of removal of goods from factory premises of factory warehouse. Guidance Note on ‘Accounting Treatment for Excise D uty’ says that excise duty is a duty on manufacture or production of exci sable goods in India. As explained in the Guidance Note, the liability fo r excise duty arises at the point of time at which the manufacture is completed . The excise duty paid or provided on finished goods should, therefore, be in cluded in inventory valuation. Further, the Guidance Note states that excise duty should be considered as a manufacturing expense and like other manufacturin g expenses are considered as an element of cost for the purpose of inventory valuation, excise duty should also be considered as an element of cost while valu ing the inventory. In the given case of HSL Ltd., the Managing Directo r’s contention that “excise duty is payable only of clearance of goods and henc e is not a cost” is incorrect. Excise duty on the goods meant for local sales shou ld be provided for at the rate of 12% on the selling price, that is on ` 100 lakhs for valuation of stock. Excise duty on goods meant for exports, should also be provided for, since the liability for excise duty arises when the manufactu re of the goods is completed. However, if it is assumed that all the conditions s pecified in Rule 19 of the Central Excise Rules, 2002 regarding export of excisable go ods without payment of duty are fulfilled by HSL Ltd. excise duty may not be pr ovided for. Q&A-1.106O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (d) Table showing calculation of Deferred tax asset/ liability. Particulars Amount Timing differencesDeferred tax Amount @50% ` ` ` ` ` ` ` ` Excess depreciation as per tax records (5,00,000 - 2,00,000) Unamortised preliminary expenses as per tax records Net deferred tax liability 3,00,000 30,000 Timing Timing Deferred tax liability Deferred tax asset 1,50,000 (15,000) 1,35,000 2011 - May [7] Answer the following : (a) Anil Pharma Ltd. ordered 16,000 kg of certain mater ial at ` 160 per unit. The purchase price includes excise duty ` 10 per kg in respect of which full CENVAT credit is admissible. Freight incurred amounted to ` 1,40,160. Normal transit loss is 2%. The company actually received 15,500 kg and consumed 13,600 kg of material. Compute cost of inventory under AS-2 and amount of abnormal loss. (b) Jain Construction Co. Ltd. undertook a contract on 1st January, 2010 to construct a building for ` 80 lakhs. The company found on 31st March, 2010 th at it had already spent ` 58,50,000 on the construction. Prudent estimate of additional cost for completion was ` 31, 50,000. What amount should be charged to revenue and what a mount of contract value to be recognized as turnover in the final acc ounts for the year ended 31st March, 2010 as per provisions of AS-7 (revised)? (c) Kumar Ltd. is an engineering industry. The company received an actuarial valuation for the first time for its pension scheme which revealed a surplus of ` 6 lakhs. It wants to spread the same over the next 2 years by reducing the annual contribution to ` 2 lakhs instead of ` 5 lakhs. The average remaining life of the employee is estimated to be 6 years. You are requir ed to advise the company. (d) An enterprise reports quarterly, estimates an annua l income of ` 10 lakhs. Assume tax rates on 1st ` 5,00,000 at 30% and on the balance income at 40%. The estimated quarterly income are ` 75,000, ` 2,50,000, ` 3,75,000 and ` 3,00,000. Calculate the tax expense to be recognized in each quarter. (4 × 4 = 16 marks) [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.107 Answer : (a) Calculation of total cost of material Particulars ` ` ` ` Purchase price (16,000 kg. x ` 160) Less: CENVAT credit (16,000 kg. x ` 10) Add: Freight Total material cost 25,60,000 (1,60,000) 24,00,000 1,40,160 25,40,160 Number of units after normal loss =16,000 kg. x(100 - 2)% =15,680 kg Revised cost per kg. = ` 162 Closing inventory = Material actually received - Ma terial consumed = 15,500 kg.- 13,600 kg = 1,900 kg Value of closing stock = 1,900 kg x ` 162 = ` 3,07,800 Abnormal loss in kg. = 15,680 kg. - 15,500 kg = 180 kg. Abnormal loss in value = 180 kg x ` 162 = ` 29,160 (b) Particulars ` ` ` ` Cost incurred till 31st March, 2010 Prudent estimate of additional cost for completion Total cost of construction Less: Contract price Total foreseeable loss 58,50,000 31,50,000 90,00,000 (80,00,000) 10,00,000 As per para 35 of AS 7 (Revised) Construction Contr acts when it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately. Accordingly, the loss of ` 10,00,000 is required to be recognized as an expen se in the year 2009-10. Also as per para 21 of the said standard when the o utcome of a construction contract can be estimated reliably, contract revenu e and contract costs associated with the construction contract should be recognised as r evenue and expenses respectively by reference to the stage of completion of the cont ract activity at the reporting date. Accordingly, Q&A-1.108O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Contract work in progress = = 65%×58, 50, 000 100 90, 00, 000 Proportion of total contract value to be recognized as turnover = 65% of ` 80,00,000 = ` 52,00,000 (c) According to para 92 of AS 15 (Revised) “Employee B enefits”, actuarial gains and losses should be recognized immediately in the stat ement of profit and loss as income or expense. Therefore, surplus of ` 6 lakhs in the pension scheme on its actuarial valuation is required to be credited to t he profit and loss statement of the current year. Hence, Kumar Ltd. cannot spread the a ctuarial gain of ` 6 lakhs over the next 2 years by reducing the annual contributio ns to ` 2 lakhs instead of ` 5 lakhs. It has to contribute 5 lakhs annually for its pension schemes. (d) As per para 29 of AS 25 ‘Interim Financial Reportin g’, income tax expense is recognised in each interim period based on the best estimate of the weighted average annual income tax rate expected for the ful l financial year. Estimated Annual Income Tax expense: 30% on ` 5,00,000 40% on remaining ` 5,00,000 ` 10,00,000 ` 1,50,000 ` 2,00,000 ` 3,50,000 Weighted average annual income tax rate = = 35%3 50 000 10 00 000 , , , , Tax expense to be recognised in each of the quarter ly reports Quarter I - ` 75,000 x 35% Quarter II - ` 2,50,000 x 35% Quarter III - ` 3,75,000 x 35% Quarter IV - ` 3,00,000 x 35% ` 10,00,000 ` 26,250 ` 87,500 ` 1,31,250 ` 1,05,000 ` 3,50,000 2011 - Nov [1] {C} (a) Primus Hospitals Ltd. had acquired 40 units of Doppler scan machines from Holiver USA at a cost of US $ 1,65,10 0 per unit in the beginning of Financial Year 2008-09. The prevailing rate of exch ange was ` 50 to the US $. The acquisition was partly funded out of a government g rant of ` 5 crore. The grant relating to such machines was given with a rider that in the event of a change in management, the entity is bound to return the grant. In April 2 011, 51% control in the company was taken over by an overseas investor. The expected pr oductive period of such an asset is normally reckoned at 5 years. The depreciation r ate adopted was 20% p.a. S.L.M. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.109 basis. The company had incurred expenditure of US $ 4,000 towards Bank charges and ` 7,500 per unit as sea freight. You are also inform ed that neither Capital Reserve nor deferred Income account has been maintained by the company. You are required to suggest the accounting treatment as a result of the return of the grant, in the light of the relevant AS. (5 marks) Answer : Calculation of Revised Book value as on 1 st April, 2010 Particulars ( ` ` ` ` ) Acquisition of 40 Doppler Scan machines [US $ 1,65, 100 × ` 50 × 40 machines] Add: Bank charges paid ($ 4,000 × ` 50) Add: Sea Freight on the above machine ( ` 7,500 per unit × 40 machines) Total landed cost as on 1 st April, 2008 Less: Government grant Value of 40 Doppler Scan machines Less: Depreciation @ 20% for 3 years on SLM basis (i.e. ` 28,07,00,000 × 20% × 3 years) WDV at the beginning of the year 2011-12 Add: Refund of Government grant Revised Book value on 1 st April, 2011 33,02,00,000 2,00,000 3,00,000 33,07,00,000 (5,00,00,000) 28,07,00,000 (16,84,20,000) 11,22,80,000 5,00,00,000 16,22,80,000 Note: As per para 16 of AS 6 'Depreciation Accounting'. where the historical cost of a depreciable asset has undergone a change due to inc rease or decrease in long term liability on account of exchange fluctuations, pric e adjustments, changes in duties or similar factors, the depreciation on the revised un amortized depreciable amount should be provided prospectively over the residual useful life of the asset. In this case, on 1 st April, 2011, the remaining useful life is only two years i.e. 2011-12 & 2012-13. Hence the WDV of ` 16,22,80,000 is to be written off under SLM @ 50% each year i.e. ` 8,11,40,000 per year. The Government grant of ` 5 crores that becomes refundable should be account ed for as an extraordinary item as per AS 12 'Governme nt Grants', with related disclosure of the increased depreciation of ` 2.5 crores (i.e. ` 8,11,40,000 - ` 5,61,40,000) consequent to the return of such grant. 2011 - Nov [7] Answer this question: (b) G Ltd. acquired a machine on 1 st April, 2005 for ` 7 crore that had an estimated useful life of 7 years. The machine is depreciated on straight line basis and does not carry any residual value. On 1 st April, 2009, the carrying value of the machine Q&A-1.110O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 was reassessed at ` 5.10 crore and the surplus arising out of the reva luation being credited to revaluation reserve. For the YE March 2 011 conditions indicating an impairment of the machine existed and the amount re coverable ascertained to be only ` 79 lakhs. You are required to calculate the loss o n impairment of the machine and show how this loss is to be treated in the books of G Ltd. G Ltd. had followed the policy of writing down the revaluation surplus by the increased charge of depreciation resulting from the revaluation. (4 m arks) Answer : (` ` ` ` in crores) Carrying amount of the machine as on 1 st April 2005 Depreciation for 4 years i.e. 2005-06 to 2008-09 [ × 4 years]7.00 (4.00) Carrying amount as on 31.03.2009 Add: Upward Revaluation (credited to Revaluation Reserv e account) Carrying amount of the machine as on 1 st April 2009 (revalued) Less: Depreciation for 2 years i.e. 2009-10 & 2010-11[ × 2 years] 3.00 2.10 5.10 (3.40) Carrying amount as on 31.03.2011 Less: Recoverable amount Impairment loss Less: Balance in revaluation reserve as on 31.03.2011: Balance in revaluation reserve as on 31.03.2009 2.10 Less: Enhanced depreciation met from revaluation reserve 2009-10 & 2010-11 = [(1.70 - 1.00) × 2 years] (1.40) Impairment loss set off against revaluation reserve balance as per para 58 of AS 28 "Impairment of Assets" 1.70 (0.79) 0.91 (0.70) Impairment Loss to be debited to profit and loss ac count 0.21 2012 - May [1] {C} (a) Sun Co-operative Society Ltd. has borrowed a s um of US$ 12.50 million at the commencement of the financial year 2 011-12 for its solar energy project at LIBOR (London Interbank offered rate of 1%) + 4% . The interest is payable at the end of the respective financial year. The loan was avai led at the then rate of ` 45 to the US dollar while the rate as on 31 st March 2012 is ` 48 to the US dollar. Had Sun Co- operative Society Ltd. borrowed the Rupee equivalen t in India, the interest would have been 11%. You are required to compute ‘Borrowing Co st’ also showing the amount of exchange difference as per prevailing Accounting St andards. (5 marks) [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.111 (b) Acute Ltd. is the owner of a CGU (Cash Generating U nit) block of assets whose current carrying cost is ` 999 lakhs. The company, after a detailed study by its technical team, has assessed the present recoverabl e amount of this CGU block of assets is ` 555 lakhs. The value of the block of assets as per the Income tax Records is ` 777 lakhs. The Board of Directors of the company h ave issued a signed statement confirming that the impairment in the value of the CGU is only a temporary phenomenon which is reversible in subsequ ent periods and also assuring virtual certainty of taxable incomes in th e foreseeable future. You are required to show Deferred Tax workings as per Accou nting Standards in force, given the tax rate of 30% plus 10% surcharge thereo n. The depreciation rate for tax purposes is 15% and that per books is 13.91%. (5 marks) (c) PRZ & Sons Ltd. are Heavy Engineering contractors s pecializing in construction of dams. From the records of the company, the follo wing data is available pertaining to year ended 31 st March, 2012. Using this data and applying the relevant Accounting Standard you are required to: (i) Compute the amount of profit/loss for year ended 31 st March, 2012. (ii) Arrive at the contract work in progress as at t he end of financial year 2011-12. (iiii) Determine the amount of revenue to be recogni zed out of the total contract value. (iv) Work out the amount due from/to customers as at year end. (v) List down relevant disclosures with figures as p er relevant Accounting Standard. (` ` ` ` Crore) Total Contact Price 2,400 Work Certified 1,250 Work pending certification 250 Estimated further cost to completion 1,750 Stage wise payments received 1,100 Progress payments in pipe line 300 (5 marks) (d) On 30-6-2011, X Limited incurred ` 3,00,000 net loss from disposal of a business segment. Also on 31-7-2011, the company paid ` 80,000 for Property taxes assessed for the calendar year 2011. How should the above transactions be included in determination of net income of X Limite d for the six months interim period ended on 30-9-2011? (5 marks) Answer : (a) Computation of Borrowing Cost as per AS 16" Borrowi ng Costs” and Amount of Exchange Difference as per AS 11. “The Effects of C hanges in Foreign Exchange Rates”: Q&A-1.112O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (a) Interest for the period 2011-12 = US$ 12.5 million × 5% × ` 48 per US$ = ` 30 million (b) Increase in the liability towards the principal amount = US$ 12.5 million × ` (48 - 45) = ` 37.5 million (c) Interest that would have resulted if the loan was taken in Indian currency = US$ 12.5 million × ` 45 × 11% = ` 61.875 million (d) Difference between interest on local currency borrowing and foreign currency borrowing = ` 61.875 million - ` 30 million = ` 31.875 million. • Therefore, out of ` 37.5 million increase in the liability towards pri ncipal amount, only ` 31.875 million will be considered as the borrowing cost. • Thus, total borrowing cost would be ` 61.875 million being the aggregate of interest of ` 30 million on foreign currency borrowings plus the exchange difference to the extent of difference between inte rest on local currency borrowing and interest on foreign currency borrowin g of ` 31.875 million. • Therefore, ` 61.875 million would be considered as the borrowin g cost to be accounted for as per AS 16 and the remaining ` 5.625 million (37.5 - 31.875) would be considered as the exchange difference to b e accounted for as per AS 11. (b) Assumption: (i) It is assumed that current carrying cost of the CGU block of asset as per Accounting and Tax Records are after charging depre ciation of the current year. (ii) The assumption has been taken on the basis that impairment loss is calculated on carrying value after charging depreci ation of the year. (iii) In the absence of specific instructions. defer red tax workings of current year have been shown as below: Statement showing Deferred Tax workings for the cur rent year Particulars`i `i `i `i in lakhs Depreciation as per Accounting books for the curren t year X .1391 161.41 Depreciation as per Income Tax Records for the curr ent year X .15 137.12 Timing difference Tax effect of the above timing difference at 33%* (deferred tax asset) (A) Impairment Loss recognised in the profit and loss account (999 - 555) Impairment Loss allowed for tax purposes 24.29 8.02 444 Nill [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.113 Timing difference Tax effect of the above timing difference at 33% (d eferred tax asset) (B) Total deferred tax asset (A + B) 444 146.52 154.54 Note: • Deferred tax asset should be recognised and carrie d forward only to the extent that there is a reasonable certainty that sufficien t future taxable income will be available against which such deferred text asset ca n be realised. • The Board of Directors of Acute Ltd. have issued s igned statement confirming virtual certainty of taxable incomes in the foresee able future. • Therefore, the company can recognize deferred tax asset during the current year. • The deferred tax asset calculated on account of di fference of depreciation as per accounting and tax records is actually a revers al of deferred tax liability created in the previous years. * Tax rate : 30% x 110% = 33%. (c) (i) Calculation of profit/loss for the year ended 31st March, 2012(` (` (` (` in crores) Total estimated cost of construction (1,250 + 250 + 1,750) Less: Total contract price Total foreseeable loss to be recognized as expense 3,250 (2,400) 850 According to AS 7 (Revised 2002) “Construction Cont racts” when it is probable that total contract costs will exceed total contract rev enue, the expected loss should be recognized as an expense immediately. *Tax rate = 30% × 110% = 33%. (ii) Contract work-in-progress i.e. cost incurred to date ( ` ` ` ` in crores) Work certified Work not certified 1,250 250 1,500 (iii) Proportion of total contract value recognised as revenue Percentage of completion of contract to total estim ated cost of construction = (1,500/3,250) × 100 = 46.15% Revenue to be recognized till date = 46.15% of ` 2,400 crores = ` 1,107.60 crores. Q&A-1.114O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (iv) Amount due from / to customers = Contract costs + Recognised profits - Recognised losses - (Progress payments received + P rogress payments to be received) = ` [1,500 + Nil - 850 - (1,100 + 300)] crores = ` [1,500 - 850 -1,400] crores Amount due to customers (shown as liability) = ` 750 crores. (v) The relevant disclosures under AS 7 (Revised) are g iven below: ( ` ` ` ` in crores) Contract revenue till 31 st March, 2012 Contract expenses till 31st March, 2012 Recognized losses for the year 31st March, 2012 Progress billings ` (1,100 + 300) Retentions (billed but not received from contractee ) Gross amount due to customers 1,107.60 1,500.00 (850) 1,400 300 750 (d) • As per AS 25 “Interim Financial Reporting” states that revenues and gains should be recognised in interim reports on the same basis as used in annual reports. • As at September 30,2011, X Ltd. would report the entire ` 3,00,000 loss on the disposal of its business segment since the loss was incurred during the interim period. • A cost charged as an expense in an annual period s hould be allocated among the interim periods, which are clearly benefited fr om the expense. through the use of accruals and/or deferrals. • Since ` 80,000 property tax payment relates to the entire 2011 calender year, only ` 40,000 of the payment would be reported as an expe nse at September 30, 2011, while out of the remaining ` 40,000 ` 20,000 for Jan. 2011 to March, 2011 would be shown as payment of the outsta nding amount of previous year and another ` 20,000 related to quarter October, 2011 to December, 2011 would be reported as a prepaid expe nse. 2012 - May [5] (a) As point of staff welfare measures, Y Co. Ltd h as contracted to lend to its employees sums of money at 5 percent per ann um rate of interest. The amounts lent are to be repaid alongwith the interest in fiv e equal annual instalments. The market rate of interest is 10 percent per annum. Y lent ` 16,00,000 to its employees on 1 st January, 2011. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.115 Following the principles of recognition and measure ment as laid down in AS 30, you are required to record the entries for the year ended 31st December, 2011 for the transaction and also calculate the value of the loa n initially to be recognised and the amortised cost for all the subsequent years. For purposes of calculation, the following discount factors at interest rate of 10 percent may be adopted. At the end of year 1 .909 2 .827 3 .751 4 .683 5 .620 (8 marks) Answer : (a) (i) Computation of initial recognition amount of loan to employees Year end Cash Inflow Total P.V. factor @10%Present value Principal ` ` ` ` Interest @ 5% ` ` ` ` ` ` ` ` ` ` ` ` 2011 2012 2013 2014 2015 3,20,000 3,20,000 3,20,000 3,20,000 3,20,000 80,000 64,000 48,000 32,000 16,0004,00,000 3,84,000 3,68,000 3,52,000 3,36,000 0.909 0.827 0.751 0.683 .06203,63,600 3,17,568 2,76,368 2,40,416 2,08,320 Present value or Fair value 14,06,272 (ii) Computation of amortised cost of loan to employees Year Amortised cost (Opening balance) [1] ` ` ` ` Interest to be recognised @10%[2] ` ` ` ` Repayment (including interest) [3] ` ` ` ` Amortised Cost (Closing balance) [4]=[1]+[2]-[3] ` ` ` ` 2011 2012 2013 2014 2015 14,06,272 11,46,899 8,77,589 5,97,348 3,05,083 1,40,627 1,14,690 87,759 59,735 30,917* 4,00,000 3,84,000 3,68,000 3,52,000 3,36,000 11,46,899 8,77,589 5,97,348 3,05,083 Nil * ` 3,05,083 ×10% = ` 30,508. The difference of ` 409 ( ` 30,917 - ` 30,508) is due to approximation in computation. Q&A-1.116O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (iii) Journal Entries in the books of Y Ltd. For the year ended 31st December, 2011 (regarding loan to employees) Particulars Dr. Amount ( ` ` ` `) Cr. Amount (` ` ` `) Staff loan A/c Dr. To Bank A/c (Being the disbursement of loans to staff) 16,00,000 16,00,000 Staff cost A/c ` (16,00,000 - 14,06,272) Dr. [Refer part (ii)] To Staff loan A/c (Being the write-off of excess of loan balance over present value thereof in order to refiect the loan at its present value of ` 14,06,272) 1,93,728 1,93,728 Staff loan A/c Dr. To Interest on staff loan A/c (Being the charge of interest @ market rate of 10% on the loan) 1,40,627 1,40,627 Bank A/c Dr. To Staff loan A/c (Being the repayment of first instalment with interest for the year) 4,00,000 4,00,000 Interest on staff loan A/c Dr. To Profit and Loss A/c (Being transfer of balance of staff loan interest account to Profit and Loss account) 1,40,627 1,40,627 Profit and Loss A/c Dr. To Staff Cost A/c (Being transfer of balance of staff cost account to profit and loss account) 1,93,728 1,93,728 2012 - May [7] Answer any four of the following: (a) Bellhop LLC submits the following information perta ining to year 2011. Using the data, you are required to find the ending cash and Bank balances given an opening figure thereof was ` 1.55 million. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.117 (` millions) Additional shares issued 6.50 CAPEX (Capital expenditure) 9.90 Proceeds from Assets sold 1.60 Dividends declared 0.50 Gains from disposal of Assets (1.20) Net Income 3.30 Increase in Accounts Receivable 1.50 Redemption of 4.5% debentures 2.50 Depreciation & Amortization 0.75 (4 marks) (b) From the information furnished you are required to compute the Basic and Diluted EPS (earnings per share) for accounting year 01-04- 2011 to 31-03-2012 and adjusted EPS for the year 01-04-2010 to 31-03-2011. Net profit for year ended 31-03-2011 ` 75,50,000 Net profit for year ended 31-03-2012 ` 1,00,25,000 No. of Equity shares as on 01-04-2011 50,00,250 Bonus issue on 01-01-2012 1 share for every 2 held No. of 12% Convertible Debentures of ` 100 1,00,000 each issued on 01-01-2012 Conversion Ratio of Debentures 10 shares per debent ure Tax Rate 30 percent (4 marks) (c) X Limited was making provisions upto 31-3-2011 for non-moving stocks based on no issues for the last 12 months. Based on a techni cal evaluation the company wants to make provisions during the year 31-3-2012 in the following manner : Total value of stock ` 3 crores. Provision required based on 12 months ` 8 lakhs Provision required based on technical evaluation ` 7.50 lakhs. Does this amount to change in accounting policy ? Can the company change the method of provision ? (4 marks) (d) X Limited began construction of a new plant on 1 st April 2011 and obtained a special Loan of ` 8 lakhs to finance the construction of the plant. The rate of interest on loan was 10 percent per annum. The expenditure that was made on the project of pla nt construction was as follows: ` 1-4-2011 - 10,00,000 1-8-2011 - 24,00,000 1-1-2012 - 4,00,000 Q&A-1.118O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 The Company’s other outstanding non specific loan w as ` 46,00,000 at an interest of 12 percent per annum. The construction of the plant was completed on 31-3 -2012 . You are required to calculate the amount of interest to be capitalized as per the provision of AS-16 of the borrowing cost (including cost) (4 marks) (e) X Limited on 1-1-2012 had made an investment of ` 600 lakhs in the equity shares of Y limited of which 50% is made in the long term category and the rest as temporary investment. The realisable value of all s uch investment on 31-3-2012 become ` 200 lakhs as X limited lost a case of copy right. How will you recognize the reduction in financial statements for the year ended on 31-3-2012. (4 marks) Answer : (a) Bellhop LLC Cash Flow Statement for the year ended 31 st March, 2011 ` ` ` ` in millions ` ` ` ` in millions Cash flows from operating activities Net income Add: Depreciation & amortization Loss from disposal of assets Less: Increase in accounts receivables Net cash generated from operating activities Cash flows from investing activities Capital expenditure Proceeds from sale of fixed assets Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of additional shares Dividend declared Redemption of 4.5% debentures Net cash generated from financing activities Net decrease in cash Cash at beginning of the period Cash at end of the period (Balancing figure) 3.30 0.75 1.20 (1.50) (9.90) 1.60 6.50 (0.50) (2.50) 3.75 (8.30) 3.50 (1.05)1.55 0.50 Note: Since, in this question it is not specifying to us e Cash Flow Statement for finding the closing cash balance, therefore, one ca n prepare cash and bank account for calculation of closing cash and bank ba lance. [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.119 (b) No. of Bonus shares issued as on 1.1.2012 On existing shares (50,00,250 × ½) 25,00,125 shares On convertible debentures as per SEBI Guidelines on Bonus Issue (1,00,000 debentures × 10 shares × ½) 5,00,000 share s Basic Earnings per share for the year 2011-12 = = ` 1.25 Adjusted earnings per share for the year 2010-11 = = ` 0.94 For Diluted EPS Interest expense for the current year = ` 12,00,000 Tax relating to interest expense (30%) = ` 3,60,000 Adjusted net profit for the current year = ` 1,00,25,000 + (12,00,000 - 3,60,000) × 3/12 = ` 1,02,35,000 No. of equity shares resulting from conversion of d ebentures = 1,00,000 × 10 shares = 10,00,000 No. of equity shares used to compute diluted earnin gs per share = 50,00,250 +25,00,125 + 5,00,000 + (10,00,000 × 3/ 12) = 50,00,250 +25,00,125 + 5,00,000 + 2,50,000 = 82,50,375 shares Diluted earnings per share =1,02,35,000/82,50,375 = ` 1.24 Note: According to AS 20, bonus shares issued to existin g shareholders and to convertible debenture holders (on conversion of deb entures into shares) are an issue without consideration. Hence, it is treated a s if it had occurred prior to the beginning of the year 2010-11, the earliest period reported. (c) • Basis of provisioning whether on no issues or on t echnical evaluation is the basis of making estimates and cannot be considered as Accounting Policy. • According to AS 5, due to uncertainties inherent i n business activities, many financial statement items cannot be measured with p recision but can only be estimated. • The estimation process involves judgments based on the latest information available. Q&A-1.120O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 • An estimate may have to be revised if changes occu r regarding the circumstances on which the estimate was based, or a s a result of new information, more experience or subsequent developm ents. • The basis of change in provisioning is a guideline and the better way of estimating the provision for non-moving stock on ac count of change. Therefore, it is not a change in accounting policy. Accounting policy is the valuation of inventory on cost or on net realizable value or on lower of cost or net realizable value. Any interchange of this valua tion base would have constituted change in accounting policy. • After word, the company should be able to demonstr ate satisfactorily that having regard to circumstances provision made on th e basis of technical evaluation provides more satisfactory results than provision based on 12 months issue. If that is the case, then the company can change the method of provision. (d) (i) Calculation of average accumulated expenses ` ` ` ` ` 10,00,000 × 12/12 = ` 24,00,000 × 8/12 = ` 4,00,000 × 3/12 =10,00,000 16,00,000 1,00,000 27,00,000 (ii) Non-specific Borrowings Non-specific Borrowings = Average accumulated capita l expenses-Specific borrowings = ` 27,00,000 - ` 8,00,000 = ` 19,00,000 (iii) Interest on average accumulated expenses ` ` ` ` Specific borrowings( ` 8,00,000 × 10%) Non-specific borrowings ( ` 19,00,000 × 12%) Amount of interest to be capitalized 80,000 2,28,000 3,08,000 (iv) Total expenses to be capitalized for Plant ` ` ` ` Cost of plant (10,00,000 + 24,00,000 + 4,00,000) Add: Amount of interest to be capitalised Total cost of plant 38,00,000 3,08,000 41,08,000 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.121 (e) • X limited invested ` 600 lakhs in the equity shares of Y Ltd. Out of wh ich, the company intends to hold 50% shares for long term i. e. ` 300 lakhs and remaining as temporary (current) investment i.e. ` 300 lakhs. Irrespective of the fact that investment has been held by X Limited only for 3 months (from 1.1.2012 to 31.3.2012). • AS 13 lays emphasis on intention of the investor t o classify the investment as current or long term even though the long term inve stment may be readily marketable. • In the given problem, the realizable value of all such investments on 31.3.2012 became ` 200 lakhs i.e. ` 100 lakhs in respect of current investment and ` 100 lakhs in respect of long term investment. • According to AS 13, ‘Accounting for Investment’, t he carrying amount for current investments is the lower of cost and fair v alue. In respect of current investments for which an active market exists, mark et value generally provides the best evidence of fair value. • On the afforsaid basis, the carrying value of inve stment held as temporary investment should be shown at realizable value i.e. at ` 100 lakhs. The reduction of ` 200 lakhs in the carrying value of current investm ent will be included in the profit and loss account. • Standard further states that long-term investments are usually carried at cost. However, when there is a decline, other than tempor ary, in the value of long term investment, the carrying amount is reduced to recognise the decline. • In this case, Y Limited lost a case of copyright w hich drastically reduced the realisable value of its shares to one third which i s quiet a substantial figure. Losing the case of copyright may affect the busines s and the performance of the company in long run. Accordingly, it will be ap propriate to reduce the carrying amount of long term investment by ` 200 lakhs and shown the investments at `100 lakhs, considering the downfall in the value of shares as decline other than temporary. The reduction of ` 200 lakhs in the carrying value of long term investment will be included in t he profit and loss account. Alternative approach for treatment of long term inv estment If we assumes that the decline in the value of long term investment is temporary and Y Limited will overcome this downfall in short period by filing a case against this decision of government ,with strong arguments. In this case, long term investment will be shown at cost. Q&A-1.122O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 2012 - Nov [1] {C} (a) Prakash Limited leased a machine to Badal Limi ted on the following terms: (` ` ` ` in lakhs) (i) Fair value of the machine 48.00 (ii) Lease term 5 years (iii) Lease rental per annum 8.00 (iv) Guaranteed residual value 1.60 (v) Expected residual value 3.00 (vi) Internal rate of return 15% Discounted rates for 1 st year to 5th year are 0.8696, 0.7561, 0.6575, 0.5718 and 0.4972 respectively. Ascertain Unearned Financial Income. (5 marks) (b) Goodwill Limited is a full tax free enterprise for the 1 st 12 years of its existence and is in third year of operations. Depreciation ti ming difference resulting in a deferred tax liability in 1 st, 2nd and 3rd year is ` 200 lakhs, ` 300 lakhs and ` 400 lakhs respectively. From the 4th year onwards, it is expected that the timing difference would reverse each year by ` 10 lakhs. Assuming tax rate @ 35%, find out the deferred tax liability at the end of 3 rd year and any charge to the Profit and Loss Account. (5 marks) (c) In a manufacturing process of Vijoy Limited, one by -product BP emerges besides two main products MP1 and MP2 apart from sc rap. Details of cost of production process is here under : Item Unit Amount (`) Output (Unit) Closing stock as on 31-03-2012 Raw-Material 15,000 1,60,000 MP1 - 6,250 800 Wages – 82,000 MP2 - 5,000 200Fixed Overhead – 58,000 BP - 1,600 – Variable Overhead – 40,000 – – Average market price of MP1 and MP2 is ` 80 per unit and ` 50 per unit respectively, by-product is sold @ ` 25 per unit. There is a profit of ` 5,000 on sale of by-product after incurring separate processing charges of ` 4,000 and packing charges of ` 6,000. ` 6,000 was realised from sale of scrap. Calculate the value of Closing Stock of MP1 and MP2 as on 31-03-2012. (5 marks) [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.123 (d) Antarbarti Limited reported a Profit Before Tax (PB T) of ` 4 lakhs for the third quarter ending 30-09-2011. On enquiry you observe t he following. Give the treatment required under AS-25. (i) Dividend income of ` 4 lakhs received during the quarter has been recog nized to the extent of ` 1 lakh only. (ii) 80% of sales promotion expenses ` 15 lakhs incurred in the third quarter has been deferred to the fourth quarter as the sales in the last quarter is high. (iii) In the third quarter, the company changed depr eciation method from WDV to SLM, which resulted in excess depreciation of ` 12 lakhs. The entire amount has been debited in the third quarter, though the s hare of the third quarter is only ` 3 lakhs. (iv) ` 2 lakhs extra-ordinary gain received in third quar ter was allocated equally to the third and fourth quarter. (v) Cumulative loss resulting from change in method of inventory valuation was recognized in the third quarter of ` 3 lakhs. Out of this loss ` 1 lakh relates to previous quarters. (vi) Sale of investment in the first quarter resulte d in a gain of ` 20 lakhs. The company had apportioned this equally to the fou r quarters. Prepare the adjusted profit before tax for the thir d quarter. (5 marks) Answer: (a) According to AS 19 on Leases, unearned finance income is the difference between (a) the gross investment in the lease and (b) the present value of minimum lease payments under a finance lease from t he standpoint of the lessor; and any unguaranteed residual value accruing to the lessor, at the interest rate implicit in the lease. Where: (a) Gross investment in the lease is the aggregate of (i) minimum lease payments from the stand point of the lessor and (ii ) any unguaranteed residual value accruing to the lessor. Gross investment = Minimum lease payments + Unguaranteed residual value = [Total lease rent + Guaranteed residual value (GR V)] + Unguaranteed residual value (URV) = [( ` 8,00,000 × 5 years) + ` 1,60,000] + ` 1,40,000 = ` 43,00,000 (a) Q&A-1.124O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (b) Table showing present value of (i) Minimum lease payments (MLP) and (ii) Unguaranteed residual value (URV). Year MLP inclusive of URV ` ` ` ` Internal rate of return (Discount factor @ 15%) Present Value ` ` ` ` 1 8,00,000 0.8696 6,95,680 2 8,00,000 0.7561 6,04,880 3 8,00,000 0.6575 5,26,000 4 8,00,000 0.5718 4,57,440 5 8,00,000 0.4972 3,97,760 1,60,000 (GRV) 0.4972 79,552 41,60,000 27,61,312 (i) 1,40,000 (URV) 0.4972 69,608 (ii) 43,00,000(i) + (ii) 28,30,920 (b) Unearned Finance Income (a) - (b) = ` 43,00,000 - ` 28,30,920 = ` 14,69,080. (b) CAccording to an explanation to AS 22, "Accounting f or Taxes on Income", in the case of tax free enterprises, no deferred tax l iability is recognized, in respect of timing differences that originate and re verse in the tax holiday period. Deferred tax liability or asset is created in respect of timing differences that originate in a tax holiday period but are expe cted to reverse after the tax holiday period. For this purpose, adjustments are d one in accordance with the FIFO method. CAccordingly, depreciation timing difference of ` 90 lakhs ( ` 10 lakhs x 9 years) will reverse in the tax holiday period i.e. from 4th year to 12th year. Therefore, no deferred liability on ` 90 lakhs out of ` 200 lakhs, will be created. In the 1st year, deferred tax liability of ` 38.5 lakhs will be created @ 35% on ` 110 lakhs ( ` 200 lakhs - ` 90 lakhs) only. CHowever, the entire depreciation timing difference of 2nd and 3rd year i.e. ` 300 lakhs and ` 400 lakhs will reverse only after the tax holiday period. So, deferred tax liability will be created in the 2 nd year for ` 105 lakhs ( ` 300 x 35%) and in the 3rd year for ` 140 lakhs ( ` 400 x 35%). CTherefore, total deferred tax liability in the Bala nce Sheet at the end of 3rd year will be ` (38.5 + 105 + 140) lakhs = ` 283.5 lakhs and charge to Profit and Loss account in the 3 rd year will be ` 140 lakhs ( ` 400 x 35%). [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.125 (c) As per para 10 of AS 2 'Valuation of Inventories', most by-products as well as scrap or waste materials, by their nature, are immaterial . They are often measured at net realizable value and this value is deducted from th e cost of the main product. 1. Calculation of net realizable value of by-product , BP ` ` ` ` Selling price of by-product BP (1,600 units x ` 25 per unit) 40,000 Less: Separate processing charges of (4,000) by-product BP Packing charges (6000 ) Net realizable value of by-product BP 30,000 2. Calculation of cost of conversion for allocation between joint products MP1 and MP2 ` ` ` ` ` ` ` ` Raw material 1,60,000 Wages 82,000 Fixed overhead 58,000 Variable overhead 40,000 3,40,000 Less: NRV of by-product BP (See calculation1) (30,000) Sale value of scrap (6,000 ) (36,000) Joint cost to be allocated between MP1 and MP2 3,04, 000 3. Determination of "basis for allocation" and allocation of joint cost to MP1 and MP2 MP1 MP2 Output in units (a) 6,250 units 5,000 units Sales price per unit (b) ` 80 ` 50 Sales value (a x b) ` 5,00,000 ` 2,50,000 Ratio of allocation 2 1 Joint cost of ` 3,04,000 allocated in the ratio of 2:1 (c) ` 2,02,667 ` 1,01,333 Cost per unit [c/a] ` 32.43 ` 20.27 Q&A-1.126O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 4. Determination of value of closing stock of MP1 an d MP2 MP1 MP2 Closing stock in units 800 units 200 units Cost per unit ` 32.43 ` 20.27 Value of closing stock ` 25,944 ` 4,054 (d) As per para 36 of AS 25 "Interim Financial Reportin g", seasonal or occasional revenue and cost within a financial year should not be deferred as of interim date until it is appropriate to defer at the end of the enterprise's financial year. Therefore dividend income, extra-ordinary gain, and gain on s ale of investment received during 3 rd quarter should be recognised in the 3rd quarter only. Similarly, sales promotion expenses incurred in the 3rd quarter should also be charged in the 3rd quarter only. Further, as per the standard, if there is change in the accounting policy within the current financial year, then such a change should b e applied retrospectively by restating the financial statements of prior interim periods of the current financial year. The change in the method of depreciation or i nventory valuation is a change in the accounting policy. Therefore, the prior inte rim periods' financial statements should be restated by applying the change in the me thod of valuation retrospectively. Accordingly, the adjusted profit before tax for the 3 rd quarter will be as follows: Statement showing Adjusted Profit Before Tax for th e third quarter (` ` ` ` in lakhs) Profit before tax (as reported) 4 Add: Dividend income ` (4 - 1) lakhs 3 Excess depreciation charged in the 3 rd quarter, due to change in the method, should be applied retrospectively ` (12 - 3) lakhs 9 Extra ordinary gain ` (2 - 1) lakhs 1 Cumulative loss due to change in the method of inve ntory valuation should be applied retrospectively ` (3 - 2) lakhs 1 18 Less: Sales promotion expenses (80% of ` 15 lakhs) (12) Gain on sale of investment (occasional gain should not be deferred) (5) Adjusted Profit before tax for the third quarter 1 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.127 2012 - Nov [7] Answer the following : (b) P Ltd. has 60% voting right in Q Ltd. Q Ltd. has 20% voting right in R Ltd. Also, P Ltd. directly enjoys voting right of 14% in R Ltd. R Ltd. is a listed company and regularly supplies goods to P Ltd. The management o f R Ltd. has not disclosed its relationship with P Ltd. How would you assess the situation from the view po int of AS-18 on related party disclosures ? (4 marks) (c) An oil company has been contaminating land for s everal years. It does not clean up because there is no legislation requiring cleani ng up. At 31 st March 2012, it is virtually certain that a law requiring a clean up o f land already contaminated will be enacted shortly after the year end. Is provisioning presently necessary ? (4 marks) (d) Vijaya Ltd. had to pay delayed cotton clearing c harges over and above the negotiated price for taking delayed delivery of cot ton from the supplier’s godown. Upto 2010-11, the company has regularly included su ch charges in the valuation of closing stock. This charge, being in the nature of interest, the company has decided to exclude it from closing stock valuation. This would result in decrease of profit by ` 8.60 lakhs. What is the treatment in the Final Statement of acc ounts for the year ended 31.03.2012 ? Also draft a suitable note for disclos ure. (4 marks) Answer: (b) CP Ltd. has direct economic interest in R Ltd. to th e extent of 14%, and through Q Ltd. (in which it is the majority shareholders) i t has further control of 12% in R Ltd. (60% of Q Ltd.'s 20%). These two taken toget her (14% + 12%) make the total control of 26%. CAS 18 'Related Party Disclosures', defines related party as one that has at any time during the reporting period, the ability to co ntrol the other party or exercise significant influence over the other party in making financial and / or operating decisions. CSince, P Ltd. has total control of 26% (directly an d indirectly by Q Ltd.) in R Ltd. which is less than half of the voting power of R Ltd., P Ltd. is said to have significant influence over R Ltd. Also it is given in the question that R Ltd. is a listed company and regularly supplies goods to P Ltd. CHence related party disclosure, as per AS 18, is re quired by R Ltd. in its financial statements, in respect of goods supplied to P Ltd. (c) CAccording to AS 29 'Provisions, Contingent Liabilit ies and Contingent Assets', a past event will lead to present obligation when t he enterprise has no realistic alternative to settle the obligation created by the past event. Q&A-1.128O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 CHowever, when environmental damage is caused there may be no obligation to remedy the consequences. CThe causing of the damage will become an obligating event when a new law requires the existing damage to be rectified. Where details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is virtually certain to be enacted. CIn the given situation it is virtually certain that law will be enacted requiring clean-up of a land already contaminated. CTherefore, an oil company has to provide for such c lean up cost in the year in which the law is virtually certain to be enacted. (d) CAS 5 (Revised) "Net Profit or Loss for the Period, Prior Period items and Changes in Accounting Policies" states that a chang e in an accounting policy should be made only if (a) it is required by statute, or (b) for compliance with an accounting standard, or (c) if it is considered that the change would result in a more appropriate presentation of the financial statements of an ente rprise. CThe change in the method of stock valuation is justified in view of the fact that the change is in line with the recommendations of A S 2 (Revised) 'Valuation of Inventories' and would result in more appropriat e preparation of the financial statements. CAccordingly, cost formula used for inventory valuat ion will exclude the delayed cotton clearing charges being in the nature of inte rest. Due to change in the cost formula, the value of inventory and resulting profit will decrease by ` 8.60 lakhs. Disclosure : • As per AS 2, the accounting policy adopted for val uation of inventories including the cost formula used should be disclosed in the financial statements by way of a note. Also, appropriate disclosure of the change and the amount by which any item in the financial statements is affected by such cha nge, is necessary as per AS 1, AS 2 and AS 5. • Therefore, the under mentioned note should be give n in the annual accounts. • “In compliance with the Accounting Standards issue d by the ICAI, delayed cotton clearing charges which are in the nature of interest have been excluded from the valuation of closing stock unlike precedin g years. Had the company continued the accounting practice followed earlier, the value of closing stock as well as profit before tax for the year would hav e been higher by ` 8.60 lakhs.” [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.129 2013 - May [1] {C} (a) J Ltd. purchased a machinery from K Ltd. on 31 -08-2012. Quoted price was ` 275 lakhs. The vendor offers 2% trade discount. Sa les tax on quoted price is 6%. J Ltd. spent ` 60,000 for transportation and ` 45,000 for architect’s fees. They borrowed money from HDFC Bank of ` 250 lakhs for acquisition of asset @ 15% p.a. They also spent ` 15,000 for material, ` 10,000 for labour and ` 4,000 as overheads during trial run of the machine. The machine was re ady for use on 15-01-2013 but it was put to use on 15-3-2013. Find out the original cost of the machine. Also suggest the accounting treatment for between the date, the mach ine was ready for use and the date at which it was actually put to use. (5 marks) (b) A Ltd. had acquired 80% shares in the B Ltd. for ` 15 lakhs. The net assets of B Ltd. on the day are ` 22 lakhs. During the year A Ltd. sold the investme nt for ` 30 lakhs and net assets of B Ltd. on the date of dispo sal was ` 35 lakhs. Calculate the profit or loss on disposal of this investment to be recognized in Consolidated Financial Statement. (5 marks) (c) On 1 st January, 2011 Santa Ltd. sold equipment for ` 6,14,460. The carrying amount of the equipment on that date was ` 1,00,000. The sale was a part of the package under which Banta Ltd. leased the asset to Santa Ltd. for Ten Year term. The economic life of the asset is estimated at 10 y ears. The minimum lease rents payable by the leaser has been fixed at ` 1,00,000 payable annually beginning 31 st December, 2011. The incremental borrowing interest rate of Santa Ltd. is estimated at 10% p.a. Calculate the net effect on the profit and loss account. (5 marks) (d) X Ltd. purchased a fixed asset four years ago for ` 150 lakhs and depreciates it at 10% p.a. on straight line method. At the end of the fourth year it has revalued the asset at ` 75 lakhs and has written off the loss on revaluati on to the profit and loss account. However on the date of revaluation, the ma rket price is ` 67.50 lakhs and expected disposal costs are ` 3 lakhs. What will be the treatment in respect of impairment loss on the basis that fair value for re valuation purpose is determined by market value and the value in use is estimated a t ` 60 lakhs? (5 marks) Answer: (a) (i) Original cost of the machinery:– Particulars Amount ( ` ` ` `) Quoted price Less: Trade discount @ 2% Add: Sales Tax @ 6% on quoted price* Transportation charges Architect’s Fees Trial run expenses 2,75,00,000 (5,50,000) 2,69,50,000 16,50,000 60,000 45,000 29,000 Q&A-1.130O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Note: *In general, sales tax is calculated on amount arr ived at after deduction of trade discount. But, sales tax has been computed on the basis of the requirement of the question i.e. sales tax is calculated on quo ted price. (Material ` 15,000 + Labour ` 10,000 + Overheads ` 4,000) Finance cost (15% on ` 250 lakhs for the 4.5 months i.e. for the period 01.9.12 to 15.1.13) Total amount to be capitalised for machine 14,06,250 3,01,40,250 (ii) Cost incurred during the period between the dat e the machinery was ready for use and the actual date the machine was p ut to use:– Finance cost amounting ` 6,25,000 i.e. 15% of ` 250 lakhs for 2 months i.e. for the period 15.01.2013 to 15.03.2013 shall be ch arged to statement of profit and loss as per AS 16 “Borrowing Costs”. (b) Computation of Profit/Loss on disposal of invest ment in subsidiary:– Particulars Amount ( ` ` ` `) Proceeds from the sale of Investment Less: A Ltd.’s share in net assets of B Ltd. (W.N.1) 30,00,000 (28,00,000) Add: Capital Reserve at the time of acquisition of shar es in B Ltd. (W.N.2) 2,00,000 2,60,000 Profit on sale of investment 4,60,000 Working Notes: 1. A Ltd.’s share in net assets of B Ltd.:– Particulars ` Net Assets of B Ltd. on the date of disposal Less: Minority Interest (20% of ` 35 lakhs) 35,00,000 (7,00,000) A Ltd.’s share in the net assets of B Ltd. 28,00,000 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.131 2. Capital Reserve (At the time of acquisition of sh ares in B Ltd.) Particulars ` A Ltd.’s share in the net assets of B Ltd. on the d ate of acquisition (80% of ` 22 lakhs) Less: Cost of investment 17,60,000 (15,00,000) Capital Reserve at time of acquisition of shares in B Ltd. 2,60,000 (c) Net effect on the Statement of Profit and Loss o f Santa Ltd.. In the year of sale in the books of Lessee. • For the computation of net effect on the statement of profit and loss on sale of equipment, it has to be judged whether lease is an operating lease or finance lease. • The lease term is for 10 years which covers the en tire economic life of the equipment. At the inception of the lease, the prese nt value of the MLP (i.e. minimum lease payments) is ` 6,14,400 [ ` 1,00,000 × 6.144 (Annuity factor of ` 1 @ 10% for 10 years)] and amounts to at least sub stantially all of the fair value (sale price i.e. ` 6,14,460) of the leased equipment. Hence the lease is a finance lease. • According to AS 19 “Leases”, if a sale and leaseba ck transaction results in a finance lease, profit of ` 5,14,460 (Sale value ` 6,14,460 less carrying amount ` 1,00,000) will not be recognized as income in the year of sale in the books of lessee i.e. Santa Ltd. • It should be deferred and amortised over the lease term in proportion to the depreciation of the leased asset. • Thus, assuming that depreciation is charged on str aight line basis, Santa Ltd. will recognize depreciation of ` 61,446 per annum for 10 years ( ` 6,14,460/10) and amortise profit of ` 5,14,460 over the lease term of 10 years, i.e. ` 51,446 p.a. The net effect is a debit of ( ` 61,446 ! ` 51,446) ` 10,000 p.a. to the Statement of profit and loss, for 10 years as cover ed under the lease term. Note: There is no sale and lease back transaction, the S tatement of profit and loss for each year (covered in the lease term) woul d have been charged by ( ` 1,00,000/10) ` 10,000, towards depreciation. Therefore, the sale and lease back transaction will have no impact on profit or l oss account to be reported by the lessee (vendor in the sales transaction) ove r the lease period. Q&A-1.132O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (d) Treatment of Impairment Loss • According to AS 28 “Impairment of Assets”, if the recoverable amount (higher of net selling price and its value in use) of an as set is less than its carrying amount, the carrying amount of the asset should be reduced to its recoverable amount. • In the given case, net selling price is ` 64.50 lakhs ( ` 67.50 lakhs !` 3 lakhs) and value in use is ` 60 lakhs. • Thus, recoverable amount will be ` 64.50 lakhs. Impairment loss will be calculated as ` 10.50 lakhs [ ` 75 lakhs (Carrying Amount after revaluation - Refer Working Note) less ` 64.50 lakhs (Recoverable Amount)]. • Therefore, impairment loss of 10.50 lakhs should b e recognised as an expense in the Statement of Profit and Loss immedia tely since there was downward revaluation of asset which was already cha rged to Statement of Profit and Loss. Working Note: Calculation of carrying amount of the fixed asset a t the end of the fourth year on revaluation Particulars ( ` ` ` ` in lakhs) Purchase price of a fixed asset Less: Depreciation for four years [(150 lakhs/10 years) × 4 years] Carrying value at the end of fourth year Less: Downward revaluation charged to profit and loss ac count Revalued carrying amount 150.00 (60.00) 90.00 (15.00) 75.00 2013 - May [5] (b) On 1st April, 2011, the fair value of plan assets were ` 2,50,000 in respect of a pension plan of Q Ltd. On 30 th September, the plan paid out benefits of ` 47,500 and received further contribution of ` 1,22,500. On 31 st March, 2012, the fair value of plan asset was ` 3,75,000 and the present value of the benefit obligation was ` 3,69,800. Actuarial losses on the obligation for 2 011-12 were ` 1,500. On 1 st April, 2011, the company had made the following es timates: Particulars % (i) Interest and dividend income after tax payable b y the fund 9.25 (ii) Realised and un-realised gain on plan asset (af ter tax) 2.00 (iii) Fund expenses. (1.00) Expected rate of return10.25 Find out the expected and unexpected return on plan assets. (6 marks) [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.133 Answer: Computation of Expected and Unexpected Returns on P lan Assets Particulars Amount ( ` ` ` `) Return on ` 2,50,000 held for 12 months at 10.25% Return on ` 75,000 (1,22,500 - 47,500) held for six months at 5% (equivalent to 10.25% annually, compounded every si x months) Expected return on plan assets for 2011-12 Fair value of plan assets as on 31 st March, 2012 Less: Fair value of plan assets as on 1st April, 2011 2,50,000 Contributions received 1,22,500 Add: Benefits paid Actual return on plan assets 25,625 3,750 29,375 3,75,000 (3,72,500) 2,500 47,500 50,000 Unexpected Return on Plan Asset = Actual return ! Expected return = 50,000 ! 29,375 = ` 20,625. 2013 - May [7] Answer the following: (b) From the following information relating to W Ltd., calculate diluted earnings per share as per AS-20. (i) Net profit for the current year ` 5,00,00,000 (ii) Number of equity shares outstanding 1,00,00,000 (iii) 11% convertible debentures of ` 100 each (Nos.) 1,25,000 (iv) Interest expenses for current year ` 13,75,000 (v) Tax saving relating to interest expense 30% (vi) Each debenture is convertible into eight equity shares. (4 marks) (c) W Ltd. purchased machinery for ` 80 lakhs from X Ltd. during 2010-11 and installed the same immediately. Price includes exci se duty of ` 8 lakhs. During the year 2010-11, the company produced exciseable goods on which excise duty of ` 7.20 lakhs was charged. Give necessary entries explaining the treatment of Cenvat Credit. (4 marks) (e) Vishnu Company has at its financial year ended 31 st March, 2013, fifteen law suits outstanding none of which has been settled by the t ime the accounts are approved by the directors. The directors have estimated that the possible outcomes as below: Result Probability Amount of loss For first ten cases: Win 0.6 Loss-low damages 0.3 90,000 Q&A-1.134O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 Loss-high damages 0.1 1,60,000 For remaining five cases: Win 0.5 Loss-low damages 0.3 60,000 Loss-high damages 0.2 95,000 The directors believe that the outcome of each case is independent of the outcome of all the others. Estimate the amount of contingent loss and state th e accounting treatment of such contingent loss. (4 marks) Answer: (b) Adjusted net profit for the current year Particulars Amount. ( ` ` ` `) Net profit for the current year (assumed to be afte r tax) Add: Interest expense for the current year Less: Tax relating to interest expenses (30% of ` 13,75,000) Adjusted net profit for the current year 5,00,00,000 13,75,000 (4,12,500) 5,09,62,500 Weighted Average Number of Equity Shares Number of equity shares resulting from conversion o f debentures: 1,25,000 debentures × 8 = 10,00,000 shares Number of equity shares for computation of diluted EPS: 1,00,00,000 + 10,00,000 = 1,10,00,000 shares Calculation of diluted earnings per share Diluted earnings per share = = (5,09,62,500/1,10,00,000 = ` 4.63 (approx.) (c) Journal Entries Particulars ` in lakhs (a) Machinery A/c Dr. Cenvat credit receivable on capital goods A/c Dr. To Bank A/c or Creditors A/c (Being capitalization of machinery) 72 8 80 (b) Excise duty A/c Dr. To Cenvat credit receivable on capital goods A/c To Bank A/c (Being excise duty set off to the extent of 50% of excise duty paid in the first year of acquisition of capit al asset)7.2 4.0 3.2 [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.135 (e) In the given question: • The probability of winning first 10 cases is 60% a nd for remaining five cases is 50%. • In other words, probability of losing 10 cases and 5 cases is 40% and 50% respectively. • According to AS 29 “Provisions, Contingent Liabili ties and Contingent Assets”, where it is not probable that a present obligation exists, an enterprise discloses a contingent liability. • Since in the given case, chances of winning the ca se is more and losing the case is less, no provision will be recognized. In f act, it is a contingent loss/liability. • The amount of contingent loss may be calculated as under: • Expected contingent loss in first ten cases = [` 90,000 × 0.3 + ` 1,60,000 × 0.1] × 10 cases = [ ` 27,000 + ` 16,000] × 10 cases = ` 43,000 × 10 cases = ` 4,30,000 • Expected contingent loss in remaining five cases = [` 60,000 × 0.3 + ` 95,000 × 0.2] × 5 cases = [ ` 18,000 + ` 19,000] × 5 cases = ` 37,000 × 5 cases = ` 1,85,000 • Total contingent liability = ` 4,30,000 + ` 1,85,000 = ` 6,15,000 • As enterprise should not recognise a contingent li ability. For each class of contingent loss/liability at the balance sheet date , an enterprise should disclose, by way of a note, a brief description of the nature of the contingent liability. 2013 - Nov {C} [1] (a) P Ltd. has three business segments which are FMCG, Batteries and Sports Equipment. The Battery segment has been consistently underperforming and P Ltd. after several discussions with Labour un ions have finally decided on closure of this segment. Under the agreement with the Labou r Union the employees of the Battery Segment will earn no further benefit as the arrangement is a curtailment without settlement wherein the employees of the discontinue d segment will continue to receive benefits for services rendered when the segment was functioning. As a result of the curtailment, the company's obligations that were ar rived on the basis of actuarial valuations before the curtailment have come down. T he following information is also furnished: (i) The value of gross obligations before the curtai lment calculated on actuarial basis was ` 4,000 lakhs. (ii) The value of Unamortized past service costs is ` 100 lakhs. Q&A-1.136O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (iii) The Curtailment will bring down gross obligati ons by ` 500 lakhs and P Ltd. anticipates a proportional decline in the value of unamortized past service costs also. (iv) The Fair Value of plan assets on date is estima ted at ` 3,250 lakhs. You are required to calculate the gain from curtail ment and also show the liability lo be recognized in the Balance Sheet of P Ltd. aft er the curtailment. (5 marks) (b) To comply with listing requirements and other stat utory obligations Quaker Ltd. prepares interim financial reports at the end of ea ch quarter. The company has brought forward losses of ` 700 lakhs under Income Tax Law, of which 90% is eligible for set off as per the recent verdict of t he Court, that has attained finality. No Deferred Tax Asset has been recognized on such l osses in view of the uncertainty over its eligibility for set off. The c ompany has reported quarterly earnings of ` 700 lakhs and ` 300 lakhs respectively for the first two quarters of Financial year 2013-14 and anticipates a net earnin g of ` 800 lakhs in the coming half year ended March 2014 of which ` 100 lakhs will be the loss in the quarter ended Dec. 2013. The tax rate for the company is 30 % with a 10% surcharge. You are required to calculate the amount of Tax Expense to be reported for each quarter of financial year 2013-14. (5 marks) (c) B Ltd. entered into an agreement on 1st March, 2013 to buy computer spares from S Ltd. at prevailing market price for ` 1200 lakhs on which S Ltd. made a profit of 20% and received full advance payment. The transact ion was concluded on 15th March, 2013. On the same day S Ltd. agrees to buy o n 15 th Sept., 2013 the same goods from B Ltd. at 20% over cost. The 20% mark up compensates B Ltd. for its inventory holding costs till sale date. You are req uired to show how both the buyer & seller account for the above transaction in the y ear 2012-13 explaining in brief the justification for your treatment and also draft the Notes on Account on disclosure if any required in the annual accounts o f year ended 31 st March, 2013. (5 marks) (d) Vintage Ltd. has been in the business of sale of Vi ntage Wines for the last 12 years and is an extremely cash rich company. In FY 2011-1 2 the Board of the company decided to venture into new areas of business and i dentified the activity of acquiring Vintage Properties such as old Bungalows, Heritage buildings and the like at prime locations and after carrying out reno vation and refurbishment of the same to let out these properties on lease to willin g parties. The new business was commenced as a separate division of the company in FY 2012-13 during which the company managed to identify 19 such properties of w hich 17 were acquired and 9 given on lease. Being the initial year of operati ons and also since some of the lease arrangements were entered into at the fag end of the year the income from [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.137 leasing was only a paltry amount. After the acquisi tion of the properties as aforesaid very attractive offers for sale of 14 of the properties were received. Vintage Ltd. after negotiation accepted 12 of the o ffers and sold these 12 properties making large profits in the bargain. The accountant of Vintage Ltd. has accounted the acquisition and disposals of properti es as 'Purchases' and 'Sales' in the Profit & Loss account of the Property Divisi on and treated the lease incomes as part of the other income of the company. The con tention of the accountant of Vintage Ltd. was that since a majority of the prope rties were disposed off within a short span of time, the properties are to be consid ered as stock in trade only. Further since the lease income was insignificant it does not become the main source of income and hence considered as part of ot her income. You are required to examine the correctness of the contentions of th e accountant of Vintage Ltd. considering the relevant Accounting Standards and p rovisions of Revised Schedule IV of Companies Act, 1956. (5 marks) 2013 - Nov [7] (b) WIN Ltd. has entered into a three year lease a rrangement with Tanya sports club in respect of Fitness Equipments costing ` 16,99,999.50. The annual lease payments to be made at the end of each year a re structured in such a way that the sum of the Present Values of the lease payments and that of the residual value together equal the cost of the equipments leased ou t. The unguaranteed residual value of the equipment at the expiry of the lease is esti mated to be ` 1,33,500. The assets would revert to the lessor at the end of the lease. Given that the implicit rate of interest is 10% you are required to compute the amount of th e annual lease and the unearned finance income. Discounting Factor at 10% for years 1, 2 and 3 are 0.909, 0.826 and 0.751 respectively (4 marks) (c) Qu Ltd. is in the business of manufacture of Passe nger cars and commercial vehicles. The company is working on a strategic pla n to shift from the Passenger car segment over the coming 5 years. However no spe cific plans have been drawn up for sale of neither the division nor its assets. As part of its plan it will reduce the production of passenger cars by 20% annually. It al so plans to commence another new factory for the manufacture of commercial vehic les and transfer surplus employees in a phased manner. (i) You are required to comment if mere gradual phas ing out in itself can be considered as a 'Discontinuing Operation' within th e meaning of AS 24. (ii) If the company passes a resolution to sell some of the assets in the passenger car division and also to transfer few other assets of the passenger car division to the new factory, does this trigger the applicati on of AS 24 ? (iii) Would your answer to the above be different if the company resolves to sell the assets of the Passenger Car Division in a phase d but time bound manner? (4 marks) Q&A-1.138O OO OSolved Scanner Solved Scanner Solved Scanner Solved Scanner CA Final Gr. I Paper - 1 (d) Grant Medicare Ltd. acquired 5 units of Brain Scan Equipment for US$ 5,00,000 in April 2010 incurring ` 20,00,000 on sea freight and US$ 12,000 per unit t owards transit Insurance, bank charges etc. The purchase w as partly funded out of the company's internal accruals and from Government Gra nt of ` 94 Lakhs. The prevailing exchange rate to the US$ was ` 50. The company estimated the useful life of the equipment at 4 years with an estimated salvage value of 13% (approx). The grant was considered as Deferred Income up to 2 012-13 and in April 2013 the company had to return the entire grant received due to non fulfillment of certain conditions. You are required to show the deprecatio n and the grant that is to be recognized in the Profit & Loss accounts for the pe riod commencing 2010-11 onwards and also draw up the entry that is passed i n April 2013 for the return of the Grant. The Company follows the written down value m ethod for depreciating its assets. (4 marks) (e) Blow Glass Limited manufactures Glass Bottles of va rious sizes and shapes at its 3 manufacturing facilities in UP, Haryana and MP. T he company follows the WDV method of depreciation for all assets at these unit s and at its corporate office. In 2013 May it acquired a new unit making plastic cont ainers in Gujarat. The method of depreciation followed in the newly acquired unit was the SLM method for all its assets, till the unit was acquired by Blow Glass Lt d. The Chief Accountant of Blow Glass is of the view that since the company has ado pted the WDV method at all its existing assets it is mandatory to follow the WDV m ethod in respect of the new unit also, especially since the same class of assets exi st at the existing units and new unit. You are requested to comment on the stand of the Chief Accountant. (4 marks) Similarly Asked Questions No. Category Question Marks Frequency 1 Distinguish Between / Short Notes. What are Timing differences and Permanent differences ? 2008 - Nov [7] (e), 2005 - Nov [6] (c) 4, 4 2 Times 2 Practical Practical Question of 09- May [1] (b) 10 - May [1] (b) 4, 5 2 Times [Chapter # ## # 1] Accounting Standards & Guidance NotesO OO OQ&A-1.139 Table Showing Marks of Compulsory Questions Year 09 M09 N 10 M 10 N 11 M 11 N 12 M 12 N 13 M 13 N Practical 16 10 15 5 20 20 20 20 Total 16 10 15 5 20 20 20 20




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