Worked Solution
✓ Verified(a) Cash Flow Statement Disclosures under AS-3 (Revised)
(i) & (ii) 10% Debentures — Redemption with Premium:
Opening balance ₹1,10,000; Closing balance ₹77,000. Debentures redeemed at face value = ₹33,000. Premium at 5% = ₹1,650. Total cash outflow = ₹34,650. This is shown under Financing Activities as outflow: Repayment of Debentures ₹34,650. The premium of ₹1,650 charged to P&L is a non-operating charge; it must be added back to Net Profit in Operating Activities (indirect method) since it is not an operating cash expense.
(iii) Unpaid Interest on Debentures:
Accrued interest increased from ₹275 to ₹1,175 (increase of ₹900). Under indirect method, this increase in current liability is added back in Operating Activities as a working capital adjustment. If interest paid is disclosed separately, cash paid = Interest charged to P&L − Increase in accrued interest. It is disclosed under Financing Activities (or Operating, per entity policy) as interest actually paid in cash.
(iv) Debtors Written Off against Provision:
This is a non-cash transaction — both Debtors and Provision for Doubtful Debts reduce by ₹36,000. There is no impact on the Cash Flow Statement. No disclosure required.
(v) 10% Bonds (Investments) — Unchanged Balance:
Balance ₹3,50,000 on both dates. No purchase or sale during the year. No cash flow impact from the principal. No entry in Cash Flow Statement for principal. Interest income on bonds = 10% × ₹3,50,000 = ₹35,000. Accrued interest (closing) = ₹10,500 (opening assumed nil). Cash received from interest = ₹35,000 − ₹10,500 = ₹24,500, shown under Investing Activities (interest received).
(vi) Accrued Interest on Investments ₹10,500:
This has not been received in cash. In Operating Activities (indirect method): Increase in accrued interest receivable = ₹10,500 → deducted from Net Profit as it increased profit without cash receipt. Alternatively, if shown as investing cash inflow, only ₹24,500 (cash actually received) is disclosed.
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(b) Accounting for Government Grant — AS-12
D Ltd. received a subsidy (government grant) of ₹16,00,000 (80% of ₹20,00,000) in November 2020 (i.e., during FY 2020-21), after 3 years of use. Under AS-12 (Accounting for Government Grants), grants related to depreciable fixed assets may be treated as deduction from the gross value of the asset (Method 1) or as Deferred Income (Method 2).
The company appears to have used Method 1. The Fixed Assets Account reveals a negative balance of ₹8,00,000 (NBV ₹8,00,000 − Grant ₹16,00,000). This negative balance arises because the grant exceeds the net book value of the asset at the time of sanction.
Treatment for 2020-21:
- Revised cost of machine after deducting grant = ₹20,00,000 − ₹16,00,000 = ₹4,00,000
- Revised annual depreciation = ₹4,00,000 ÷ 5 = ₹80,000 per year
- Depreciation that should have been charged for 3 years = ₹80,000 × 3 = ₹2,40,000
- Actual accumulated depreciation charged = ₹12,00,000
- Excess depreciation charged = ₹9,60,000 — this should be written back to Profit & Loss Account as income in 2020-21
- After write-back, revised NBV = ₹4,00,000 − ₹2,40,000 = ₹1,60,000
- For remaining 2 years (2020-21 and 2021-22): Depreciation = ₹80,000 per year
The machine should be shown at ₹1,60,000 in the Balance Sheet as at 31-03-2021 after this adjustment. The excess depreciation of ₹9,60,000 is credited to P&L. Alternatively, the negative balance of ₹8,00,000 is transferred to P&L Account, with asset shown at NIL, and no further depreciation charged.
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(c) Closing Inventory Valuation — AS-2
Under AS-2 (Valuation of Inventories), inventory is valued at the lower of cost or net realisable value (NRV).
Fixed overhead is absorbed at the normal capacity rate per AS-2: ₹75,000 ÷ 15,000 kg = ₹5 per kg. Only absorbed overheads are included in cost; unabsorbed overhead (₹24,000) is treated as a period cost.
Cost of Closing Finished Goods (1,200 kg):
Cost per kg of production = ₹22.50 (see working notes). NRV = ₹20 per kg. Since NRV < Cost, finished goods are valued at NRV = 1,200 × ₹20 = ₹24,000.
Cost of Closing Raw Materials (900 kg):
Since finished goods are expected to be sold below cost, AS-2 requires raw materials to be written down to replacement cost = ₹9.50 per kg. Cost = ₹10 per kg. Since NRV (replacement cost) < Cost, raw materials are valued at 900 × ₹9.50 = ₹8,550.
Total Closing Inventory = ₹24,000 + ₹8,550 = ₹32,550
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(d) Change in Accounting Policy — AS-5
1. Does this constitute a change in Accounting Policy?
Under AS-5 (Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies), an accounting policy is the specific principles and methods applied to prepare financial statements. The underlying policy — to provide for non-moving inventories — remains unchanged. What has changed is only the method of estimation (time-based criterion → technical evaluation). This constitutes a change in accounting estimate, not a change in accounting policy. AS-5 clarifies that when it is difficult to distinguish between a change in policy and a change in estimate, it is treated as a change in estimate.
2. Can the company make this change?
Yes. A change in accounting estimate is permissible under AS-5 when new information or improved evaluation methods lead to a more appropriate estimate. Technical evaluation is a more specific, asset-condition-based method and is likely to provide a more accurate estimate of obsolescence.
Effect: The provision reduces from ₹3.5 lakhs to ₹2.5 lakhs — a reduction of ₹1 lakh, which is credited to P&L for the year ending 31-03-2022. This is recognized prospectively (not retrospectively).
Disclosure: Per AS-5, the nature and amount of the change (₹1 lakh) must be disclosed in the financial statements if material, so users can understand the impact on current-year profit.
Write it like this
1The skeleton
- Label each sub-part (a)(i), (b), (c) etc. with its AS number in line 1 — examiners are checking boxes mentally; if they don't see 'AS-3', 'AS-12', 'AS-2', 'AS-5' upfront, your answer reads like general knowledge, not accountancy.
- For Cash Flow (a): state the activity head first, then the treatment — write 'Financing Activities — Repayment of Debentures ₹34,650' before explaining why, because the examiner's marking key is keyed to activity classification, not your reasoning chain.
- For the grant question (b): write both Method 1 and Method 2 in one line each, then commit to one — this signals you know the full AS-12 framework; examiners award presentation marks for showing you know alternatives exist even if the question implies one method.
- For inventory (c): show the fixed overhead absorption calculation explicitly — write '₹75,000 ÷ 15,000 kg = ₹5 per kg (normal capacity rate)' as its own line; half the marks in AS-2 numericals are in the overhead treatment, not the final NRV comparison.
- For AS-5 (d): use the two-step answer format — first classify (policy vs. estimate), then state effect + disclosure — the question always has two halves worth separate marks; students who merge them into one paragraph get partial credit even with correct content.
- End each sub-part with a one-line 'Therefore' conclusion — 'Therefore, closing inventory is valued at ₹32,550' or 'Therefore, no entry in Cash Flow Statement is required' — these closing lines are what examiners tick as the final mark-scorer.
2Examiner-rewarded phrases
3Common trap
Heads up — on part (d) almost everyone writes 'this is a change in accounting policy' and then tries to apply retrospective treatment; that's the exact wrong classification and you lose both sub-marks. The moment the underlying policy (provide for non-moving stock) stays the same and only the measurement method changes, it's an estimate change — say that explicitly in your first sentence or the rest of your answer doesn't matter.