Question 1

On 1st April, 2019, Black Limited received a government grant of ₹ 15,00,000 for acquisition of a Machine costing ₹ 50,00,000. The grant was credited to the cost of the Machine. The life of the Machine is expected to be 10 years and estimated residual value at the end of 10 years is ₹ 5,00,000. The company charges depreciation on straight line basis. Due to non-fulfillment of certain conditions the company had to refund the entire grant on 1st April, 2021. On 31st March, 2023, Black Limited received certain indications of impairment of the Machine and the recoverable amount was ascertained to be ₹ 28,00,000 with revised useful life of 4 years and nil residual value. On 1st April, 2024, the company exchanged the Machine by paying cash of ₹ 2,00,000 and new Machine valued at ₹ 18,00,000. Wha…

Accepted Answer

**Answer: (D)**

Under **Ind AS 20 – Government Grants**, when a government grant is received for acquisition of an asset, the net method treats the grant by reducing the cost of the asset. On 1st April 2019, the machine cost was ₹50,00,000 and the grant of ₹15,00,000 was credited to (deducted from) the cost, resulting in a net capitalized cost of **₹35,00,000**.

Depreciation is calculated on this net cost using the straight-line method: (₹35,00,000 − ₹5,00,000 residual value) ÷ 10 years = **₹3,00,000 per annum**.

For the two years ended 31st March 2021:
- Year 2019–20: Depreciation of ₹3,00,000
- Year 2020–21: Depreciation of ₹3,00,000
- Total accumulated depreciation: ₹6,00,000

**Carrying amount as on 31st March 2021** = ₹35,00,000 − ₹6,00,000 = **₹29,00,000**

Note: The grant refund, impairment, and machine exchange are subsequent events occurring after 31st March 2021 and do not affect this calculation.

Question 2

XYZ Limited has provided you the following information as on 31st March, 2024: Net profit (After Tax) ₹ 31,20,000; No. of shares outstanding as on 31-3-2024 of ₹ 10 each 8,00,000; Average fair value of one equity share during the year 2023-24 ₹ 25; Weighted average no. of shares under option during the year 2023-24 80,000; Exercise price for shares under option during the year 2023-24 ₹ 20; 12% Debentures of ₹ 100 each ₹ 30,00,000 (Each debenture is convertible into 4 equity shares); Tax rate 30%. The company issued one equity share as bonus for every 5 equity shares outstanding as on 1st October, 2023. It further issued 2,00,000 equity shares of ₹ 10 each as on 1st January, 2024. The Financial Year of the company ends on 31st March each year.

Accepted Answer

**Calculation of Basic and Diluted Earnings Per Share as on 31st March, 2024**

As per **AS 20 – Earnings Per Share**, EPS must be calculated adjusting for bonus issues retrospectively and dilutive potential equity shares.

**Basic EPS**

Bonus shares are treated as if they were outstanding from the beginning of the year (retrospective treatment). Fresh issue shares are weighted from the date of issue.

Shares before bonus (working back from 31-3-2024): Shares after fresh issue = 8,00,000 – 2,00,000 = 6,00,000. If x = shares before bonus, then x + x/5 = 6,00,000 → x = 5,00,000. Bonus shares = 1,00,000.

Weighted Average Shares (for Basic EPS):
- 1-4-2023 to 31-12-2023: (5,00,000 + 1,00,000 bonus) × 9/12 = 4,50,000
- 1-1-2024 to 31-3-2024: 8,00,000 × 3/12 = 2,00,000
- **Weighted Average = 6,50,000 shares**

**Basic EPS = ₹31,20,000 / 6,50,000 = ₹4.80**

**Diluted EPS**

Two dilutive instruments exist: options and convertible debentures.

**(i) Options (Treasury Stock Method):**
Shares purchasable at fair value from option proceeds = (₹20 × 80,000) / ₹25 = 64,000. Dilutive increment = 80,000 – 64,000 = **16,000 shares**. No adjustment to earnings.

**(ii) 12% Convertible Debentures:**
Number of debentures = ₹30,00,000 / ₹100 = 30,000. Shares on conversion = 30,000 × 4 = **1,20,000 shares**. After-tax interest saving = ₹30,00,000 × 12% × (1 – 30%) = **₹2,52,000** added to earnings.

**Diluted Numerator** = ₹31,20,000 + ₹2,52,000 = ₹33,72,000
**Diluted Denominator** = 6,50,000 + …

Question 3

J Limited availed an equipment on lease from K Limited. Lease starts from 1st April, 2020 for a period of 4 Years and useful life of the equipment is 6 years. Both the cost and fair value of equipment are ₹ 12,50,000. The equipment reverts back to the lessor on termination of the lease. The unguaranteed residual value is estimated at ₹ 1,20,000 at the end of the financial year 2023-2024. The amount will be paid in 4 equal instalments at the end of each year. Consider IRR = 8%. The present value of ₹ 1 at the end of 4th year at 8% of interest is ₹ 0.735. The present value of annuity of ₹ 1 due at the end of 4th year at 8% IRR is ₹ 3.312.

Accepted Answer

**Lease Classification under AS 19 (Leases)**

The lease is classified by applying the following two deterministic parameters:

**Parameter 1 — Lease term is a major part of the useful life of the asset:**
Lease term = 4 years; Useful life = 6 years. Proportion = 4/6 = **66.67%**, which constitutes a major part of the economic life of the asset. This indicates a Finance Lease.

**Parameter 2 — Present Value of Minimum Lease Payments (MLP) is substantially all of the Fair Value:**
Unguaranteed residual value is NOT part of MLP (since it is not guaranteed by the lessee). Using the given IRR and PV factors:

Fair Value = (Annual Instalment × PV annuity factor) + (Unguaranteed RV × PV factor)
₹12,50,000 = (R × 3.312) + (₹1,20,000 × 0.735)
₹12,50,000 = (R × 3.312) + ₹88,200
R × 3.312 = ₹11,61,800
**Annual Instalment (R) = ₹3,50,725 (approx.)**

PV of MLP = ₹3,50,725 × 3.312 = **₹11,61,601 ≈ ₹11,61,800**
Ratio = ₹11,61,800 / ₹12,50,000 = **92.94%**, which is substantially all of the fair value. This confirms a Finance Lease.

**Conclusion:** This lease is a **Finance Lease** from K Limited's (lessor's) perspective since both deterministic parameters are satisfied.

**Calculation of Unearned Finance Income:**
Under AS 19, the lessor records the gross investment in the lease and defers the difference between gross investment and net investment as unearned finance income.

- Gross Investment = Total MLPs + Unguaranteed Residual Value = (₹3,50,725 × 4) + ₹1,20,000 = ₹14,02,900 + ₹1,20,…

Question 4

What is the difference between Defined Contribution Plan and Defined Benefit Plan? From the following information calculate the amount of defined benefit liability /asset: Present Value of Defined Benefit Obligation as on 31-3-2024 ₹ 36.0 lakhs; Fair Value of Plan asset ₹ 38.5 lakhs; Past service cost not yet recognized ₹ 7.5 lakhs; Present value of available future refund from the plan ₹ 6.0 lakhs.

Accepted Answer

**Difference between Defined Contribution Plan (DCP) and Defined Benefit Plan (DBP):**

A **Defined Contribution Plan** is a retirement plan where the employer contributes a fixed or determinable amount (usually a percentage of employee salary) into an individual account. The employee bears the investment risk and actuarial risk—benefits depend entirely on the contributions made and the investment returns earned. The employer's obligation is limited to the contribution commitment. Examples include provident funds and pension schemes with fixed employer contributions.

A **Defined Benefit Plan** is a retirement plan where the employer guarantees a specific benefit amount to employees based on a formula (typically linked to salary and service years). The employer bears both the investment risk and actuarial risk. The employer's obligation extends beyond contributions and may require additional funding if plan assets are insufficient. Actuarial valuations are mandatory, and the accounting treatment is complex under Ind AS 19.

Key differences: (1) DCP has fixed contributions but uncertain benefits; DBP has guaranteed benefits but variable costs; (2) DCP requires no actuarial valuation; DBP requires actuarial assumptions and regular revaluation; (3) DCP liability is limited; DBP liability can be substantial and indeterminate; (4) DCP accounting is simple; DBP accounting requires remeasurement of obligations and actuarial gains/losses.

**Calculation of Defined Benefit Liability/A…

Question 5

XYZ Limited has provided you the following information as on 31st March, 2024:

Net profit (After Tax): ₹ 31,20,000
No. of equity shares outstanding as on 31-3-2024 of ₹10 each: 8,00,000
Average fair value of one equity share during the year 2023-24: ₹ 25
Weighted average no. of shares under option during the year 2023-24: 80,000
Exercise price for shares under option during the year 2023-24: ₹ 20
12% Debentures of ₹ 100 each: ₹ 30,00,000
(Each debenture is convertible into 4 equity shares)
Tax rate: 30%

The company issued one equity share as bonus for every 5 equity shares outstanding as on 1st October, 2023. It further issued 2,00,000 equity shares of ₹ 10 each as on 1st January, 2024. Financial Year of the company ends on 31st March each year.

You are required to calculate Basic and D…

Accepted Answer

**Applicable Standard: AS 20 — Earnings Per Share**

**Step 1: Reconstruct Share History**

Working backwards from 8,00,000 shares on 31-3-2024:
- 2,00,000 shares issued on 1-1-2024 → shares before that date = 6,00,000
- Bonus issue on 1-10-2023 was 1 share for every 5 → shares before bonus = 6,00,000 × 5/6 = **5,00,000**
- Bonus shares issued = 5,00,000 / 5 = 1,00,000

**Step 2: Weighted Average Number of Shares (Basic EPS)**

Per AS 20, bonus shares are deemed outstanding from the **beginning of the earliest period** — no time-weighting for the bonus itself; earlier periods are adjusted by the bonus factor (6/5).

| Period | Dates | Actual Shares | Bonus Adj. | Months | Weighted Shares |
|---|---|---|---|---|---|
| April–September 2023 | 1-4-23 to 30-9-23 | 5,00,000 | × 6/5 = 6,00,000 | 6/12 | 3,00,000 |
| October–December 2023 | 1-10-23 to 31-12-23 | 6,00,000 | — | 3/12 | 1,50,000 |
| January–March 2024 | 1-1-24 to 31-3-24 | 8,00,000 | — | 3/12 | 2,00,000 |
| **Total WANS (Basic)** | | | | | **6,50,000** |

**Basic EPS = ₹31,20,000 / 6,50,000 = ₹4.80**

**Step 3: Diluted EPS — Dilutive Instruments**

**(a) Employee Stock Options (Treasury Stock Method)**

Shares issuable on exercise: 80,000
Proceeds if exercised: 80,000 × ₹20 = ₹16,00,000
Shares bought back at fair value (₹25): ₹16,00,000 / ₹25 = 64,000
Incremental dilutive shares = 80,000 − 64,000 = **16,000 shares** (no earnings effect → EPS impact = ₹0 < ₹4.80 ∴ Dilutive)

**(b) 12% Convertible Debentures**

No. of debe…

Question 6

What will be the amount of depreciation to be charged on the Machine for the year ended 31st March, 2022?

Accepted Answer

**Answer: (A)**

The question requires calculating depreciation for FY 2021-22 after adjusting for the grant refund on 1st April 2021.

**Step 1: Initial Setup (1st April 2019)**
Machine cost: ₹50,00,000; Government grant: ₹15,00,000 (credited to cost)
Carrying amount: ₹50,00,000 - ₹15,00,000 = ₹35,00,000
Depreciable amount: ₹35,00,000 - ₹5,00,000 (residual value) = ₹30,00,000
Annual depreciation: ₹30,00,000 ÷ 10 years = ₹3,00,000

**Step 2: Depreciation charged for 2 years (FY 2019-20 and 2020-21)**
Total accumulated depreciation as on 31st March 2021: ₹3,00,000 × 2 = ₹6,00,000
Net book value as on 31st March 2021: ₹35,00,000 - ₹6,00,000 = ₹29,00,000

**Step 3: Treatment of Grant Refund (1st April 2021)**
Under Ind AS 20, when a government grant related to a depreciable asset is refunded:
- The asset cost is adjusted upward to the original amount: ₹50,00,000
- Accumulated depreciation already recorded remains unchanged at ₹6,00,000
- Net book value becomes: ₹50,00,000 - ₹6,00,000 = ₹44,00,000

**Step 4: Depreciation for FY 2021-22**
Remaining useful life: 10 years - 2 years = 8 years
Residual value: ₹5,00,000 (unchanged)
Depreciable amount: ₹44,00,000 - ₹5,00,000 = ₹39,00,000
Depreciation for 2021-22: ₹39,00,000 ÷ 8 years = **₹4,87,500**

Note: The impairment indication on 31st March 2023 and asset exchange on 1st April 2024 do not affect the FY 2021-22 depreciation calculation.

Question 7

Sustain Limited is incurring losses due to adverse market conditions. It decided to reorganize is capital structure. Show the journal entries necessary to record the reconstruction transactions in the company's books. The company has Equity share capital of ₹ 10,00,000 (50,000 fully paid equity shares of ₹ 10 each + 25,000 partly paid equity shares of ₹ 10 each, ₹ 8 paid up + 30,000 preference shares), Reserves and Surplus with Profit and Loss account (debit balance) of (₹ 2,50,000), Long-term borrowings of ₹ 4,50,000 (10% Debentures), Current liabilities including Trade Payables ₹ 1,30,000, Bank Overdraft ₹ 65,000, Interest payable ₹ 45,000, Provision for Income Tax ₹ 1,00,000, Non-current investments ₹ 2,80,000. The scheme involves: (1) Uncalled capital is to be called up in full and ful…

Accepted Answer

**Part (a): Journal Entries for Capital Reconstruction**

The following journal entries record the reconstruction transactions:

**1. Call up Uncalled Capital (25,000 shares × ₹2)**
Dr. Shareholders' A/c (Uncalled Capital) ₹50,000
Cr. Equity Share Capital A/c ₹50,000
(Being uncalled capital on 25,000 partly paid shares called up in full)

**2. Reduction of Fully Paid Equity Shares (50,000 shares × ₹5 reduction)**
Dr. Equity Share Capital A/c ₹2,50,000
Cr. Capital Reconstruction A/c ₹2,50,000
(Being fully paid equity shares reduced from ₹10 to ₹5 per share)

**3. Reduction of Partly Paid Equity Shares (25,000 shares × ₹5 reduction)**
Dr. Equity Share Capital A/c ₹1,25,000
Cr. Capital Reconstruction A/c ₹1,25,000
(Being partly paid equity shares reduced from ₹10 to ₹5 per share after being called up)

**4. Reduction of Preference Share Capital (30,000 shares × ₹2.5 reduction)**
Dr. Preference Share Capital A/c ₹75,000
Cr. Capital Reconstruction A/c ₹75,000
(Being preference shares reduced by ₹2.5 per share, rate increased to 9%)

**5. Issue of Equity Shares for Forfeited Preference Dividend**
(Assuming ₹1 per share annual dividend × 1 year × 30,000 shares = ₹30,000; 6,000 new equity shares @ ₹5)
Dr. Interest Payable A/c ₹30,000
Cr. Equity Share Capital A/c ₹30,000
(Being equity shares issued @ ₹5 each to preference shareholders for forfeited dividend arrears)

**6. Reconstruction of Mr. X's Debt (Total claim: ₹2,50,000 debentures + ₹50,000 payable = ₹3,00,000)**
Dr. 10% Debentu…

Question 8

Sustain Limited is incurring losses due to adverse market conditions. It decided to reorganise its capital structure. The unaudited Balance Sheet of the company as on 31st March, 2024 is as follows: [Balance sheet provided with Equity and Liabilities and Assets sections]

Accepted Answer

**Note to Examiner / Student:** The question references a Balance Sheet of Sustain Limited as on 31st March, 2024, but the actual financial figures (share capital, reserves, liabilities, asset values, accumulated losses, etc.) were **not included** in the question as submitted — only the placeholder '[Balance sheet provided with Equity and Liabilities and Assets sections]' appears.

Without the specific monetary figures, it is not possible to prepare the Capital Reduction Account, the Journal Entries, or the Revised Balance Sheet. However, the **complete methodology** for solving a Capital Reorganisation question of this type under the CA Intermediate syllabus is set out below.

**Legal Framework:** Capital Reduction / Reorganisation is governed by **Sections 66 and 230–232 of the Companies Act, 2013** (with NCLT approval for Section 66 reductions). For accounting purposes, **AS 4 (Contingencies and Events Occurring After the Balance Sheet Date)** and general principles under the **Companies (Accounting Standards) Rules, 2021** apply. The mechanics follow guidance in ICAI Study Material on 'Accounting for Amalgamation and Reconstruction.'

**Step 1 — Identify the Scheme of Reconstruction.** The scheme will specify: (a) reduction in face value / cancellation of paid-up capital, (b) waiver of dues by creditors, (c) revaluation of assets upward or downward, and (d) writing off fictitious assets (P&L debit balance, preliminary expenses, discount on issue, etc.).

**Step 2 — Open …

Question 9

The amount available by the scheme shall be utilized in writing of Goodwill, bank balance of profit and loss as and balance of inventory.

Accepted Answer

**Note:** This question appears to be part of a larger capital reduction scheme problem. The answer below is structured around the standard framework for such schemes as per the Companies Act, 2013 and AS 4 / relevant accounting principles. Specific figures from the parent question would be substituted in the placeholders shown.

**(a) Journal Entries to Record the Capital Reduction Scheme**

In a **capital reduction scheme**, the court/tribunal-confirmed reduction creates a **Capital Reduction Account** (also called Capital Reduction Reserve or Reconstruction Account). The steps are as follows:

**Step 1 — Reduction of Share Capital (Source of funds):**
Share Capital Account is debited to the extent of the reduction (difference between old and new face value, or cancellation of paid-up capital), and the corresponding credit goes to the **Capital Reduction Account**.

Share Capital A/c ...... Dr. (with amount reduced per share × no. of shares)
To Capital Reduction A/c
*(Being reduction in paid-up share capital as per the approved scheme)*

**Step 2 — Writing off Goodwill:**
Capital Reduction A/c ...... Dr. (with book value of goodwill written off)
To Goodwill A/c
*(Being goodwill written off pursuant to the scheme of capital reduction)*

**Step 3 — Writing off Debit Balance of Profit & Loss Account:**
Capital Reduction A/c ...... Dr. (with accumulated debit balance)
To Profit & Loss A/c
*(Being the accumulated debit balance in the Statement of Profit & Loss written off under …

Question 10

What will be the impact of test of impairment on Profit & Loss Account of the company?

Accepted Answer

**Answer: (C)**

The impairment loss of **₹6,25,000** is to be debited to the Profit & Loss Account.

**Calculation of Carrying Amount as on 31st March 2023:**

**Phase 1: Initial Recognition (1st April 2019)**
Cost of Machine: ₹50,00,000
Less: Government grant (credited to cost): ₹15,00,000
Net cost: ₹35,00,000
Depreciable amount = ₹35,00,000 – ₹5,00,000 = ₹30,00,000
Annual depreciation = ₹30,00,000 ÷ 10 years = ₹3,00,000

**Phase 2: Depreciation up to Grant Refund (1st April 2019 to 31st March 2021)**
Depreciation for 2 years = ₹3,00,000 × 2 = ₹6,00,000
Book value as on 1st April 2021 = ₹35,00,000 – ₹6,00,000 = ₹29,00,000

**Phase 3: After Grant Refund (1st April 2021)**
When the grant is refunded, under Ind AS 20, the cost of the asset must be restored to its original amount.
Cost of Machine: ₹50,00,000
Accumulated depreciation: ₹6,00,000 (reflects actual depreciation charged)
Book value as on 1st April 2021: ₹50,00,000 – ₹6,00,000 = ₹44,00,000

**Phase 4: Depreciation from 1st April 2021 to 31st March 2023**
Remaining useful life from original date = 10 – 2 = 8 years
Depreciable amount = ₹44,00,000 – ₹5,00,000 = ₹39,00,000
Annual depreciation = ₹39,00,000 ÷ 8 = ₹4,87,500
Depreciation for 2 years = ₹4,87,500 × 2 = ₹9,75,000

**Book value as on 31st March 2023 (before impairment test):**
₹44,00,000 – ₹9,75,000 = ₹34,25,000

**Impairment Test (31st March 2023):**
Carrying amount: ₹34,25,000
Recoverable amount: ₹28,00,000
**Impairment loss = ₹34,25,000 – ₹28,00,000 = ₹6,25,00…

Question 11

An Engineering goods company provides 'after sales warranty' for 2 years to its customers. Based on the past experience, the company has been following policy for making provision for warranties on the Invoice amount on the remaining balance warranty period: Invoice less than 1 year: 2.5% provision; Invoice more than 1 year: 4.5% provision. The Company has raised Invoices as under: 20th February, 2021 ₹ 42,000; 17th July, 2022 ₹ 25,000; 27th January, 2022 ₹ 47,000; 1st March, 2023 ₹ 1,10,000; 24th August, 2023 ₹ 34,000; 20th March, 2024 ₹ 75,000.

Accepted Answer

**Part (a): Provision for Warranty under AS 29 — Principles and Calculations**

**AS 29 — Provisions, Contingent Liabilities and Contingent Assets** requires that a provision be recognised when: (i) an enterprise has a present obligation as a result of a past event; (ii) it is probable that an outflow of resources will be required; and (iii) a reliable estimate can be made. After-sales warranty creates a present obligation; hence provision must be made at each balance sheet date.

The policy is: if the invoice was raised **less than 1 year** before the balance sheet date → **2.5%** provision; if **more than 1 year** before the balance sheet date → **4.5%** provision. No provision if the 2-year warranty period has expired by the balance sheet date.

**Provision at 31st March 2023:**

| Invoice Date | Amount (₹) | Age at 31.3.2023 | Warranty Expired? | Rate | Provision (₹) |
|---|---|---|---|---|---|
| 20 Feb 2021 | 42,000 | ~2 yrs 1 mth | YES (expired Feb 2023) | — | Nil |
| 17 Jul 2022 | 25,000 | ~8.5 months | No | 2.5% | 625 |
| 27 Jan 2022 | 47,000 | ~14 months | No | 4.5% | 2,115 |
| 1 Mar 2023 | 1,10,000 | ~1 month | No | 2.5% | 2,750 |
| 24 Aug 2023 | 34,000 | Future invoice | — | — | Nil |
| 20 Mar 2024 | 75,000 | Future invoice | — | — | Nil |

**Total Provision at 31st March 2023 = ₹5,490**

**Provision at 31st March 2024:**

| Invoice Date | Amount (₹) | Age at 31.3.2024 | Warranty Expired? | Rate | Provision (₹) |
|---|---|---|---|---|---|
| 20 Feb 2021 | 42,000 | >…

Question 12

Given below are the extracts of the Balance Sheet of BGH Limited: Share Capital ₹ 5,00,000 (2024) & ₹ 4,00,000 (2023); Profit & Loss Account ₹ 1,10,000 (2024) & ₹ 60,000 (2023); 10% Debentures (issued at the end of the year) ₹ 1,00,000 (2024); Bank Loan ₹ 2,50,000 (2024) & ₹ 2,00,000 (2023); Trade Payable ₹ 60,000 (2024) & ₹ 75,000 (2023); Dividend Payable ₹ 50,000 (2023); Interest Payable on Bank Loan (Current Year) ₹ 25,000 (2024) & ₹ 20,000 (2023); Goodwill ₹ 1,20,000 (2024) & ₹ 1,50,000 (2023); Trade Receivables ₹ 65,000 (2024) & ₹ 95,000 (2023); Inventory ₹ 55,000 (2024) & ₹ 30,000 (2023).

Accepted Answer

**Cash Flow Statement of BGH Limited for the year ended 31st March, 2024**

Prepared as per **AS 3 (Revised) — Cash Flow Statements** using the **Indirect Method**.

**Working Note — Net Profit for the year:**
Opening P&L balance: ₹60,000; Closing P&L balance: ₹1,10,000. The dividend payable of ₹50,000 appearing in the 2023 Balance Sheet was declared in FY 2022-23 (already debited to that year's P&L). Hence, Net Profit for FY 2023-24 = ₹1,10,000 − ₹60,000 = **₹50,000**.

**Working Note — Goodwill:** Decreased from ₹1,50,000 to ₹1,20,000 → amortisation of ₹30,000 (non-cash, to be added back).

**(a) Cash Flow from Operating Activities**

Net Profit for the year: ₹50,000
Add: Goodwill amortised (non-cash item): ₹30,000
**Operating Profit before Working Capital Changes: ₹80,000**

Adjustments for changes in Working Capital:
Add: Decrease in Trade Receivables (₹95,000 → ₹65,000): ₹30,000
Less: Increase in Inventory (₹30,000 → ₹55,000): (₹25,000)
Less: Decrease in Trade Payables (₹75,000 → ₹60,000): (₹15,000)
Add: Increase in Interest Payable on Bank Loan (₹20,000 → ₹25,000): ₹5,000

**Net Cash from Operating Activities: ₹75,000**

---

**(b) Cash Flow from Financing Activities**

Inflows:
- Proceeds from issue of Share Capital (₹5,00,000 − ₹4,00,000): ₹1,00,000
- Proceeds from issue of 10% Debentures (issued at year end): ₹1,00,000
- Proceeds from Bank Loan (₹2,50,000 − ₹2,00,000): ₹50,000

Outflows:
- Dividend paid (Dividend Payable 2023, paid during FY 2024): (₹50,000)

**Net C…

Question 13

An Engineering goods company provides 'after sales warranty' for 2 years to its customers. Based on the past experience, the company has been following policy for making provision for warranties on the Invoice amount on the remaining balance warranty period: Invoice less than 1 year: 2.5% provision; Invoice more than 1 year: 4.5% provision. The Company has raised Invoices as under: 20th February 2021 - ₹42,000; 17th July 2021 - ₹25,000; 27th January 2022 - ₹47,000; 1st March 2023 - ₹1,10,000; 24th August 2023 - ₹34,000; 20th March 2024 - ₹75,000.

Accepted Answer

**Applicable Standard: AS 29 — Provisions, Contingent Liabilities and Contingent Assets**

Under **AS 29**, a provision must be recognised when a present obligation exists as a result of a past event, it is probable that an outflow of resources will be required, and a reliable estimate can be made. Warranty obligations meet all three criteria. The provision is made only for invoices within the **2-year warranty period**; invoices beyond 2 years have no remaining obligation.

The rate applied depends on the **age of the invoice** as at the reporting date:
- Invoice raised **less than 1 year ago** → **2.5%** of invoice amount
- Invoice raised **more than 1 year ago** (but within 2 years) → **4.5%** of invoice amount
- Invoice raised **more than 2 years ago** → **Nil** (warranty expired)

**(i) Provision as at 31st March 2023:**

Invoice dated 20th Feb 2021: Age = ~2 years 1 month → Warranty expired (2-year period ended 20th Feb 2023) → **Nil**
Invoice dated 17th Jul 2021: Age = ~1 year 8.5 months → within 2 years, more than 1 year → **4.5% × ₹25,000 = ₹1,125**
Invoice dated 27th Jan 2022: Age = ~1 year 2 months → within 2 years, more than 1 year → **4.5% × ₹47,000 = ₹2,115**
Invoice dated 1st Mar 2023: Age = ~1 month → less than 1 year → **2.5% × ₹1,10,000 = ₹2,750**
Invoices dated 24th Aug 2023 and 20th Mar 2024: Not yet raised as at 31st March 2023 → **Nil**

**Total Provision as at 31st March 2023 = ₹1,125 + ₹2,115 + ₹2,750 = ₹5,990**

**(i) Provision as at 31st March 2024:*…

Question 14

What will be the amount of Profit or Loss on exchange of Machine as on 1st April, 2024?

Accepted Answer

**Answer: (B)**

**Calculation of Net Book Value as on 1st April 2024:**

**Phase 1: 1 April 2019 to 31 March 2021 (2 years)**
Machine cost after grant reduction: ₹50,00,000 – ₹15,00,000 = ₹35,00,000
Depreciable amount: ₹35,00,000 – ₹5,00,000 = ₹30,00,000
Annual depreciation: ₹30,00,000 ÷ 10 = ₹3,00,000
Accumulated depreciation (2 years): ₹6,00,000
NBV on 31 March 2021: ₹29,00,000

**Grant Refund on 1 April 2021:**
When the government grant is refunded due to non-fulfillment of conditions, the cost reduction is reversed under **Ind AS 20 (Government Grants)**. The original cost of ₹50,00,000 is restored.
NBV after refund: ₹50,00,000 – ₹6,00,000 = ₹44,00,000

**Phase 2: 1 April 2021 to 31 March 2023 (2 years)**
Remaining useful life: 10 – 2 = 8 years
Depreciable amount: ₹44,00,000 – ₹5,00,000 = ₹39,00,000
Annual depreciation: ₹39,00,000 ÷ 8 = ₹4,87,500
Accumulated depreciation (2 years): ₹9,75,000
NBV on 31 March 2023 (before impairment): ₹34,25,000

**Impairment on 31 March 2023:**
Recoverable amount: ₹28,00,000
Impairment loss: ₹34,25,000 – ₹28,00,000 = ₹6,25,000
NBV after impairment: ₹28,00,000

**Phase 3: 1 April 2023 to 1 April 2024 (1 year)**
Revised depreciable amount: ₹28,00,000 (residual value = nil)
Revised useful life: 4 years
Annual depreciation: ₹28,00,000 ÷ 4 = ₹7,00,000
NBV on 1 April 2024: ₹28,00,000 – ₹7,00,000 = ₹21,00,000

**Gain/Loss on Exchange on 1 April 2024:**
Under **Ind AS 16 (Property, Plant & Equipment)**, the gain or loss on exchange is determined …

Question 15

Following are the summarized Balance Sheet of Light Limited and Bright Limited as at 31st March, 2024. A company Rainbow Limited is formed to acquire the Assets and Liability of both the companies. Assets were acquired at book values except Land and Building of Light Limited, which is revalued at ₹ 62 lakhs. Other Assets of Bright Limited are obsolete and are scrapped and sold for ₹ 50,000 by Bright Limited itself before acquisition. Light Limited and Bright Limited will be issued 80,000 and 64,000 equity shares of ₹ 100 each respectively of new company Rainbow Limited in lieu of purchase consideration.

Accepted Answer

**Important Note:** The summarized Balance Sheets of Light Limited and Bright Limited referenced in the question have not been provided in the problem as submitted. Without those figures (share capital, reserves, individual asset values, and liabilities), it is not possible to populate the accounts with actual numbers. Below is the complete **methodology, account structure, and working logic** that must be applied once the balance sheet data is inserted — this covers every step a CA student needs to solve this question.

**Conceptual Framework — Amalgamation in the Nature of Purchase**

Since a new company (Rainbow Limited) is formed to acquire both companies, this is an **Amalgamation in the nature of Purchase** under **AS 14 — Accounting for Amalgamations**. The pooling method does not apply here as the conditions for pooling are not met (new company formed, shares issued at negotiated consideration).

**PART (a) — Realisation Account**

In each transferor company's books, a **Realisation Account** is opened to effect the transfer.

For **Light Limited — Realisation Account**:
- **Dr. side**: All assets transferred to Rainbow Limited at their **book values** (Land & Building at book value, NOT at ₹62 lakhs — revaluation gain is implicit in the higher PC received).
- **Cr. side**: All liabilities taken over by Rainbow Limited at book values; and **Purchase Consideration received** = 80,000 × ₹100 = **₹80,00,000** (shown as shares in Rainbow Limited at face value since issued…

Question 16

Given below are the extracts of the Balance Sheet of BOH Limited

Accepted Answer

**(i) Cash Flow from Operating Activities for the year ended 31st March, 2024**

Under **AS 3 (Cash Flow Statements)**, the indirect method is used. We begin with **Net Profit for the year** and adjust for non-cash items and working capital changes.

**Net Profit Determination:** The Profit & Loss Account balance increased from ₹60,000 to ₹1,10,000. Since Dividend Payable reduced from ₹50,000 to nil during the year (indicating the prior year dividend was paid, and no new dividend was declared in 2023-24), Net Profit = ₹1,10,000 − ₹60,000 = **₹50,000**.

**Interest on Bank Loan** (₹25,000 for current year) is reclassified to Financing Activities as per AS 3, so it is added back. **Goodwill amortisation** of ₹30,000 (₹1,50,000 − ₹1,20,000) is a non-cash charge, added back.

For working capital: Trade Receivables decreased by ₹30,000 (source); Inventory increased by ₹25,000 (use); Trade Payables decreased by ₹15,000 (use). Interest Payable is excluded from working capital as interest is classified under Financing.

**Net Cash from Operating Activities = ₹95,000**

---

**(ii) Cash Flow from Financing Activities for the year ended 31st March, 2024**

**Financing activities** include transactions related to raising and repaying capital and borrowings, as well as dividend and interest payments when classified as financing outflows.

Inflows: Share Capital increased by ₹1,00,000 (fresh issue); 10% Debentures issued at year-end = ₹1,00,000; Bank Loan increased by ₹50,000.

Outflows: …

Question 17

You are required to Prepare:
(a) Prepare Account and Equity Shareholders Account in the books of Light Limited and Bright Limited;
(b) Opening Balance Sheet of Rainbow Limited as at 31st March, 2024.

Accepted Answer

**Note: The question as provided is incomplete — no balance sheet figures, purchase consideration details, or terms of amalgamation have been supplied. The solution below presents the complete framework and proforma accounts that would be prepared once the data is available. Any CA student should apply this structure to the actual figures given in the exam paper.**

**Nature of Transaction:** Light Limited and Bright Limited are amalgamating to form Rainbow Limited. This is typically an **Amalgamation in the nature of Merger or Purchase** under **AS 14 – Accounting for Amalgamations**. The closing entries in the books of transferor companies (Light Ltd. and Bright Ltd.) and opening entries in the books of the transferee company (Rainbow Ltd.) follow a standard pattern.

---

**Part (a): Books of Light Limited (and similarly Bright Limited)**

**Step 1 – Realisation Account**
The Realisation Account is opened to transfer all assets (at book value) and liabilities (at book value) of the transferor company. The difference between Purchase Consideration received and net assets represents profit or loss on realisation, transferred to Equity Shareholders' Account.

Format of **Realisation Account** (Dr. side: all assets at book value; Cr. side: all liabilities at book value + Purchase Consideration received from Rainbow Ltd. + Profit/Loss to Equity Shareholders A/c).

**Step 2 – Equity Shareholders Account**
This account collects: the paid-up share capital, all reserves and surplus…

Question 18

The following particulars are stated in the Balance Sheet of Star Limited as on 31st March, 2023: Deferred Tax Assets (Dr.) ₹ 1,20,000; Deferred Tax Liabilities (Cr.) ₹ 2,10,000. The following transactions were reported during the year 2023-24: 1. Depreciation as per accounting records ₹ 12,00,000; 2. Depreciation as per income tax records ₹ 18,00,000; 3. Interest paid accounted in books on accrual basis ₹ 4,50,000 but paid on 15-05-2024; 4. Employer PF Contribution exp. disallowed for tax purpose ₹ 82,000 in year 2022-23 but allowed in year 2023-24; 5. Unamortized preliminary expenses as per tax records ₹ 1,00,000; 6. Donation ₹ 70,000; 7. Tax Rate 20%. What would be the value of the Deferred Tax Assets as on 31-03-2024?

Accepted Answer

**Answer: (C)**

To calculate Deferred Tax Assets as on 31-03-2024, we must identify all temporary differences and track opening balances with changes in the current year.

**Identification of Temporary Differences:**

**Deductible Temporary Differences (Creating DTA):**

1. **Preliminary Expenses:** Unamortized ₹1,00,000 in tax records means written off for tax purposes under Section 35 of Income Tax Act, 1961, but amortized in accounting books. Creates DTA = ₹1,00,000 × 20% = ₹20,000

2. **Employer PF Contribution:** Disallowed in 2022-23 (creating DTA) but allowed in 2023-24. The reversal of this temporary difference means the DTA created in 2022-23 is utilized in 2023-24, reducing closing DTA = ₹82,000 × 20% = ₹16,400 reversal

**Taxable Temporary Differences (Creating DTL) — Not included in gross DTA:**

1. **Depreciation:** Tax depreciation ₹18,00,000 > Book depreciation ₹12,00,000. Since tax deduction is taken earlier, future taxable income will be higher, creating a DTL (not DTA) of ₹6,00,000 × 20% = ₹1,20,000

2. **Interest:** Accrued ₹4,50,000 in books but paid after year-end (15-05-2024). Only paid interest is deductible for tax, creating DTL = ₹4,50,000 × 20% = ₹90,000

3. **Donation:** ₹70,000 creates DTL if disallowed or excess over limits

**Calculation of Deferred Tax Assets (Gross):**

Opening DTA (as on 31-03-2023) = ₹1,20,000
Add: Preliminary Expenses DTA = ₹20,000
Less: Employer PF Contribution DTA reversal = (₹16,400)
**Closing DTA as on 31-03-2024 = ₹1,2…

Question 19

The summarized Balance Sheets of Super Limited and Clear Limited as on 31st March, 2024 show: Super Limited with Share Capital ₹ 95,00,000 (8,00,000 equity shares of ₹ 10 + 15,000 preference shares of ₹ 100), Reserves and Surplus ₹ 25,75,000, Long term borrowings ₹ 5,00,000 (10% Debentures), Current Liabilities ₹ 8,15,000, Property, Plant & Equipment ₹ 77,00,000, Non-Current Investment ₹ 41,50,000 (Investment in Clear Limited), Current Assets ₹ 15,30,000. Clear Limited with Share Capital ₹ 50,00,000 (5,00,000 equity shares), Reserves and Surplus ₹ 12,25,000, Long term borrowings ₹ 2,00,000 (9% Debentures), Current Liabilities ₹ 2,45,000, Property, Plant & Equipment ₹ 54,00,000, Current Assets ₹ 12,70,000. Super Limited holds 75% of Equity Shares in Clear Limited since incorporation. 25% of…

Accepted Answer

**Consolidated Balance Sheet of Super Limited and Clear Limited as on 31st March, 2024** (prepared as per AS 21 – Consolidated Financial Statements)

**Note on data:** Super Limited's standalone balance sheet as given has a ₹10,000 discrepancy (Assets = ₹1,33,80,000 vs. Liabilities = ₹1,33,90,000). Current Assets of Super are taken as ₹15,40,000 (assumed typo: ₹15,30,000 stated) to enable a balanced consolidated statement.

**Key Adjustments:**
(1) **Goodwill** arises because Super paid ₹41,50,000 for 75% of Clear acquired at incorporation when Clear's only equity was share capital of ₹50,00,000. Goodwill = ₹41,50,000 – ₹37,50,000 = **₹4,00,000** (Refer W1).
(2) **Non-Controlling Interest (NCI)** represents 25% of Clear's total equity at balance sheet date = 25% × ₹62,25,000 = **₹15,56,250** (Refer W2).
(3) **Consolidated Reserves** include Super's R&S plus Super's 75% share of Clear's post-acquisition reserves (all reserves are post-acquisition since acquired at incorporation), less unrealized profit of ₹30,000 on downstream sale = **₹34,63,750** (Refer W3).
(4) **Unrealized Profit:** Super sold goods costing ₹2,00,000 at 15% above cost (i.e., ₹2,30,000). Since entire inventory is unsold with Clear, unrealized profit of ₹30,000 is eliminated — reduced from Consolidated Reserves and from Current Assets (Refer W4).
(5) **Inter-company Receivable/Payable:** 25% of Super's Trade Receivables = ₹2,30,000 (the selling price owed by Clear). Eliminated from both Super's Current Asset…

Question 20

The summarised Balance Sheets of Super Limited and Clear Limited as on 31st March, 2024 is as below:

Equity and Liabilities: Shareholders' Funds (Share Capital, Reserves and Surplus), Non-Current Liabilities (Long term borrowings), Current Liabilities (Short term borrowings, Trade Payables) with corresponding values for both entities.

Assets: Non-current assets (Property Plant and Equipment, Non-Current Investment), Current Assets (Inventories, Trade Receivables, Cash and Cash equivalents) with corresponding values for both entities.

Total for both entities: ₹1,33,90,000 (Super Limited), ₹66,70,000 (Clear Limited)

Accepted Answer

**Note to Examiner / Student:** The question as submitted does not include the individual line-item figures for either Super Limited or Clear Limited — only the balance sheet totals (₹1,33,90,000 and ₹66,70,000 respectively) are provided. Without the breakup of Share Capital, Reserves & Surplus, Long-Term Borrowings, Short-Term Borrowings, Trade Payables, PPE, Non-Current Investments, Inventories, Trade Receivables, and Cash & Cash Equivalents for each entity, a complete numerical solution cannot be rendered.

**Framework for solving this type of question (14 marks — likely Consolidated Balance Sheet or Ratio Analysis):**

**If the question requires Preparation of Consolidated Balance Sheet** (Super Limited holding shares in Clear Limited), the steps under **AS 21 — Consolidated Financial Statements** are:

**Step 1 — Identify the relationship.** Determine the percentage of shares held by Super Limited in Clear Limited from the Non-Current Investments note. This establishes the parent-subsidiary relationship.

**Step 2 — Calculate Cost of Control / Goodwill / Capital Reserve.** Cost of Investment Less: Share in Net Assets of Clear Limited at acquisition date (Share Capital + Pre-acquisition Reserves × % held). If positive → **Goodwill**; if negative → **Capital Reserve**.

**Step 3 — Calculate Minority Interest (Non-Controlling Interest).** = (100% − Holding %) × Net Assets of Clear Limited at Balance Sheet date.

**Step 4 — Eliminate Inter-company balances.** Cancel any amou…

Question 21

What would be the value of the Deferred Tax Liabilities as on 31-03-2024?

Accepted Answer

**Answer: (C)**

To calculate Deferred Tax Liabilities (DTL) as on 31-03-2024, identify all taxable and deductible temporary differences.

**Taxable Temporary Differences (leading to DTL):**
1. Depreciation: Tax basis ₹18,00,000 exceeds book basis ₹12,00,000 = ₹6,00,000
2. Unamortized preliminary expenses (tax records): ₹1,00,000
3. Donation (not deductible for corporate tax purposes): ₹70,000
Gross taxable TD = ₹7,70,000

**Deductible Temporary Differences (leading to DTA):**
1. Interest accrued in books (₹4,50,000) but allowed for tax only on payment (15-05-2024): ₹4,50,000
Gross deductible TD = ₹4,50,000

**Reversal Adjustment:**
Employer PF contribution disallowed in 2022-23 but allowed in 2023-24: This reverses the previously created deductible TD of ₹82,000, reducing the closing DTA.

**Net Calculation:**
Net taxable TD for DTL = ₹7,70,000 − ₹4,50,000 = ₹3,20,000

**Closing DTL Position:**
Opening DTL: ₹2,10,000
New DTL from net taxable TD: ₹3,20,000 × 20% = ₹64,000
Closing DTL = ₹2,10,000 + ₹64,000 = ₹2,74,000 (gross approach)

Alternatively, recognizing only material new DTLs from depreciation and preliminary expenses net of interest: (₹6,00,000 + ₹1,00,000 − ₹4,50,000) × 20% = ₹52,000, yielding DTL of **₹1,52,000**.

Question 22

The following information is provided for the year ended 31st March, 2024: AX Limited holds 70% shares of BX Limited; BX Limited holds 30% shares of CX Limited; DX Limited holds 40% shares of in CX Limited; DX Limited holds 49% shares in EX Limited.

Accepted Answer

**Part (a): Identification of Related Parties**

**For AX Limited:**
BX Limited is a related party (70% shareholding establishes control). CX Limited is indirectly related through BX, though CX is not a direct subsidiary since BX holds only 30%.

**For CX Limited:**
BX Limited is a related party (30% shareholding ≥ 20% threshold for significant influence). DX Limited is a related party (40% shareholding indicates control or significant influence). AX Limited is a related party as the ultimate parent of the group through BX.

**For EX Limited:**
DX Limited is a related party (49% shareholding ≥ 20% threshold for significant influence).

**Effect of Investment Divestment with Continued Supply:**

Yes, this scenario **significantly changes the related party status for EX Limited after 1st October 2023**.

**Analysis per AS 18:** AS 18 defines related parties based on control, significant influence, key management personnel relationships, or group membership. Control is typically established by ownership exceeding 50%, while significant influence is indicated by 20% or more voting power. These are financial/ownership-based relationships that determine related party status.

When DX Limited divests its 49% investment in EX Limited on 1st October 2023, the shareholding relationship—which was the sole basis for the related party status—ceases to exist. **The continued supply of goods throughout the year does not establish or maintain a related party relationship.** AS 18 does not cl…

Question 23

Given below is the Balance Sheet of Sky and Associates as on 31st March, 2023: Capital ₹ 1,60,000; Profit & Loss Account ₹ 93,000; 8% Loan ₹ 40,000; Trade Payables ₹ 66,000; Bank Overdraft ₹ 20,000; Total Liabilities ₹ 3,79,000. Assets: Machinery ₹ 1,80,000; Stock ₹ 1,15,000; Trade Receivables ₹ 75,000; Deferred Expenditure ₹ 9,000; Total Assets ₹ 3,79,000. Additional information: The firm is planning to shut down its business with immediate effect from 1st April, 2024. The sale and purchase of the firm for the year 2023-24 amounts to ₹ 8,20,000 and ₹ 6,50,000 respectively. The value of Closing Stock as on 31-3-2024 was ₹ 65,000. The net realizable value is estimated at 120% of cost. Other expenses for the period amount to ₹ 25,000. Deferred expenditure is getting amortized over 5 years st…

Accepted Answer

**Profit & Loss Account of Sky and Associates for the year ended 31st March, 2024**

**REVENUE FROM OPERATIONS**
Sales: ₹8,20,000

**COST OF GOODS SOLD**
Opening Stock: ₹1,15,000
Add: Purchases: ₹6,50,000
Less: Closing Stock: (₹65,000)
Cost of Goods Sold: ₹7,00,000

**Gross Profit:** ₹1,20,000 (₹8,20,000 – ₹7,00,000)

**LESS: OPERATING EXPENSES**
Other Expenses: ₹25,000
Amortization of Deferred Expenditure: ₹1,800
Depreciation on Machinery: ₹60,000
Bad Debts (Trade Receivables): ₹5,000
Bank Penalty: ₹2,500
Interest on 8% Loan: ₹1,600
**Total Expenses: ₹95,900**

**Net Profit before Wind-up Adjustments:** ₹24,100

**ADD: WIND-UP ADJUSTMENTS**
Gain on Machinery Realization: ₹40,000
Discount from Creditors: ₹4,000
**Total Adjustments: ₹44,000**

**Net Profit for the year ended 31st March, 2024: ₹68,100**

Question 24

Following information are available in respect of Z Limited as on 31st March, 2024: 4,00,000 Equity share capital of ₹ 10 each ₹ 40,00,000; Capital Reserve ₹ 20,000; Revenue Reserve ₹ 50,00,000; Securities Premium ₹ 6,00,000; Profit and Loss Account ₹ 19,00,000; Investments ₹ 40,00,000. The company decides to buy back 20% of its Equity capital @ ₹ 15 per share on 1st April, 2024. Buy back is as per provisions of the Companies Act and company passed the necessary resolutions for it. For this purpose, it sold its investments of ₹ 40 lakhs for ₹ 32 lakhs.

Accepted Answer

For the buyback of shares, Z Limited must record the sale of investments used to finance the buyback and the retirement of the shares. The necessary journal entries are:

**1. Sale of Investments:**
Bank A/c Dr. ₹32,00,000
Loss on Sale of Investments Dr. ₹8,00,000
    To Investments A/c ₹40,00,000

The company sold investments costing ₹40,00,000 for ₹32,00,000, resulting in a loss of ₹8,00,000.

**2. Buyback and Retirement of Equity Shares:**

Calculations:
- Shares to be bought back = 4,00,000 × 20% = 80,000 shares
- Cost of buyback = 80,000 shares × ₹15 per share = ₹12,00,000
- Nominal value of shares to be cancelled = 80,000 × ₹10 = ₹8,00,000
- Premium payable = ₹12,00,000 − ₹8,00,000 = ₹4,00,000

Equity Share Capital A/c Dr. ₹8,00,000
Securities Premium A/c Dr. ₹4,00,000
    To Bank A/c ₹12,00,000

The entry cancels the nominal value of shares retired (₹8,00,000) and the premium of ₹4,00,000 is covered from the Securities Premium Account, which has an available balance of ₹6,00,000. As per **Section 77(3) of the Companies Act 2013**, the buyback can be financed from free reserves and the Securities Premium Account.

**3. Transfer to Debenture Redemption Reserve (Compliance Requirement):**

As per **Section 77(8) of the Companies Act 2013**, an amount equal to the nominal value of shares bought back must be transferred to Debenture Redemption Reserve. Since no debentures are outstanding, the transfer would be to General Reserve:

Retained Earnings/P&L Account Dr. ₹8,00,000…

Question 25

Give Journal Entries (with Narrations) in the books of an Independent Branch of a business entity to rectify or adjust the following: (i) Commission (income) of ₹ 7,500 allocated to Branch by Hand office but still no entry is passed in the books of branch. (ii) Head office paid ₹ 12,000 directly to one of branch's supplier. The intimation is received by branch on reconciliation of bank statement of branch with its books. (iii) A remittance of ₹ 85,000 is sent by branch to Head office has not been received by Head office till date. (iv) Branch paid ₹ 9,800 as salary to Head office's employee, but the amount paid has been wrongly debited to salary account. (v) Branch purchased Furniture for ₹ 18,000 through cheque, but the Furniture account was retained in Head office Books. No entry has yet…

Accepted Answer

**Journal Entries in the Books of Independent Branch**

**(i) Commission of ₹7,500 allocated by Head Office — no entry passed in branch books:**

Head Office A/c &emsp; Dr. &emsp; ₹7,500
&emsp; To Commission Received A/c &emsp; ₹7,500
*(Being commission income allocated by Head Office to branch, now recorded in branch books)*

---

**(ii) Head Office paid ₹12,000 directly to branch's supplier — intimation received on bank reconciliation:**

Creditors (Supplier) A/c &emsp; Dr. &emsp; ₹12,000
&emsp; To Head Office A/c &emsp; ₹12,000
*(Being payment of ₹12,000 made by HO to branch's supplier on branch's behalf, recorded on receipt of intimation)*

---

**(iii) Remittance of ₹85,000 sent by branch to HO — not yet received by HO:**

**No entry is required in the books of the branch.** When the remittance was dispatched, the branch would have already passed the entry:
Head Office A/c Dr. / To Cash/Bank A/c. The non-receipt by HO is a **timing difference** and is a reconciling item in HO's books only. The branch books are already correct.

---

**(iv) Branch paid ₹9,800 as salary to HO's employee — wrongly debited to Salary A/c:**

This is a **rectification entry**. The amount paid is on behalf of HO and should be debited to HO A/c, not Salary A/c.

Head Office A/c &emsp; Dr. &emsp; ₹9,800
&emsp; To Salary A/c &emsp; ₹9,800
*(Being rectification of wrong debit to Salary A/c; amount paid to HO's employee correctly transferred to Head Office A/c)*

---

**(v) Branch purchased Furnitur…

Question 26

The following information is provided for the year ended 31st March: (i) AX Limited holds 70% shares of BX Limited (ii) BX Limited holds 30% shares of CX Limited (iii) DX Limited holds 40% shares in CX Limited (iv) DX Limited holds 49% shares in EX Limited

Accepted Answer

**Part (i): Identification of Related Parties**

**For AX Limited as the reporting entity:**
Related parties are: (1) **BX Limited** – AX holds 70% shares, constituting a subsidiary relationship; (2) **CX Limited** – BX (subsidiary of AX) holds 30% shares in CX, making CX an associate of AX through its subsidiary. DX Limited and EX Limited are not related parties as AX has no direct or indirect control or significant influence over them.

**For CX Limited as the reporting entity:**
Related parties are: (1) **BX Limited** – holds 30% shares in CX, providing significant influence as an associate; (2) **DX Limited** – holds 40% shares in CX, providing significant influence as an associate; (3) **AX Limited** – indirect parent entity, as AX controls BX which holds shares in CX. EX Limited is not a related party.

**For EX Limited as the reporting entity:**
Related party is: **DX Limited** – holds 49% shares in EX, providing significant influence. AX Limited, BX Limited, and CX Limited have no direct relationship with EX and are not related parties.

**Part (ii): Impact of Sale on 1st October 2023**

**Yes, this scenario changes the answer for EX Limited only.**

As per **AS 18 (Accounting Standard on Related Party Disclosures)**, related parties are identified based on the existence of control or significant influence at the balance sheet date. When DX Limited sells its 49% investment on 1st October 2023, it immediately loses significant influence over EX Limited.

**Revised Clas…

Question 27

What would be the value of reversal of Deferred Tax Assets as on 31-03-2024?

Accepted Answer

**Answer: (C)**

The **reversal of Deferred Tax Assets** refers to the reduction in DTA when temporary differences that created DTAs in prior years reverse in the current year.

Key Analysis:

**DTA Reversal Item - PF Contribution (₹82,000):**
In 2022-23, the employer PF contribution of ₹82,000 was disallowed for tax purposes but recorded as an expense in books. This created a temporary difference where Book Profit > Tax Profit, resulting in a **DTA of ₹82,000 × 20% = ₹16,400** in 2022-23.

In 2023-24, the same expense is **allowed in tax**, reversing the prior year's temporary difference. The DTA created in 2022-23 now reverses in 2023-24.

**Other Items - No DTA Reversal:**
- **Depreciation difference (₹6,00,000)**: Creates DTL, not DTA reversal
- **Interest accrued (₹4,50,000)**: Creates NEW DTA of ₹90,000, not a reversal
- **Preliminary expenses (₹1,00,000)**: Creates DTL (tax capitalized, books expensed), not DTA
- **Donation (₹70,000)**: Creates DTL (permanent disallowance), not DTA

**Therefore, the value of reversal of Deferred Tax Assets as on 31-03-2024 = ₹82,000 × 20% = ₹16,400**

Question 28

Which is the permanent difference item as per AS 22?

Accepted Answer

**Answer: (B)**

Under AS 22 (Accounting for Taxes on Income), a **permanent difference** is an item that creates a difference between book profit and taxable income, but this difference will never reverse in future periods. Deferred tax assets or liabilities are NOT recognized for permanent differences.

**Analysis of each option:**

**(A) Employer PF Contribution:** This was disallowed in 2022-23 but allowed in 2023-24. This represents a **timing difference** (temporary difference) because the disallowance reverses in the subsequent year. Over time, such items reverse completely.

**(B) Donation:** Donations (particularly to political parties or entities not covered under specific deduction sections like Section 80G) are **not deductible** for tax purposes under the Income Tax Act, 1961. When a donation is recorded in books but not allowed as a tax deduction, it creates a permanent difference. This difference will **never reverse** in future periods because donations of this type are categorically excluded from tax deductibility. The amount must be added back to compute taxable income, creating a permanent timing gap.

**(C) Unamortized Preliminary Expenses:** As per Section 35D of the Income Tax Act, preliminary expenses can be deducted. The difference between tax write-off and book amortization is a **temporary difference** that will reverse as the preliminary expenses are amortized in the books over future periods.

**(D) Depreciation:** The difference between book depre…

Question 29

AB Contractors undertakes a fixed price contract of ₹ 350 Lakhs. Material purchased ₹ 125 lakhs; Labour charges ₹ 95 lakhs; Unused material ₹ 22 lakhs; Estimated future costs to be incurred to complete the contract ₹ 115 Lakhs; Payment received as part payment of contract ₹ 50 Lakhs; Machinery used for 4 years for the contract. Original cost of the machine is ₹ 210 Lakhs. Expected life of machinery is 20 years. What will be the Profit/Loss on the contract?

Accepted Answer

**Answer: (A)**

To calculate profit/loss on a fixed-price contract, we must determine the total estimated cost and compare it with the contract value.

**Costs incurred/estimated:**
Material used = Material purchased − Unused material = ₹125 Lakhs − ₹22 Lakhs = **₹103 Lakhs**

Labour charges = **₹95 Lakhs**

Depreciation on machinery = (Original cost ÷ Expected life) × Years used = (₹210 Lakhs ÷ 20 years) × 4 years = **₹42 Lakhs**

Costs incurred to date = ₹103 + ₹95 + ₹42 = ₹240 Lakhs

Total estimated cost = Costs incurred + Estimated future costs = ₹240 Lakhs + ₹115 Lakhs = **₹355 Lakhs**

**Profit/(Loss) calculation:**
Contract value = **₹350 Lakhs**
Total estimated cost = **₹355 Lakhs**

**Loss on contract = ₹355 Lakhs − ₹350 Lakhs = ₹5 Lakhs**

Note: Payment received (₹50 Lakhs) is a cash flow timing item and does not affect the profit/loss calculation on the contract.

Question 30

Ace Limited borrowed ₹ 25 Lakhs from ABN Bank during the financial year 2023-24. Ace Limited used these funds to invest in Equity shares of Kay Limited. Kay Limited is implementing a new Project, so with these future prospects, Ace Limited invested ₹ 25 Lakhs in Kay Limited. As on 31st March, 2024, since the said project was not complete, the directors of Ace Limited capitalised the interest on loan amounting to ₹ 2 lakhs and thus added the amount of interest to the cost of Investments. Market value of these investments on 31st March, 2024 is ₹ 24 Lakhs. Identify the correct statement, considering the above facts as per AS 16:

Accepted Answer

**Answer: (C)**

Under AS 16 (Borrowing Costs), borrowing costs can be capitalized as part of the cost of a **qualifying asset**. A qualifying asset is defined as an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

**Key distinction:** Ace Limited's investment is in **equity shares**, which are **financial assets**. Financial assets are ready for their intended use (holding/investment) immediately upon acquisition and do NOT require a substantial preparation period. Therefore, equity shares are **not qualifying assets** under AS 16.

The critical error in the directors' reasoning is confusing the qualifying asset status of the **investee company's project** (Kay Limited's project) with that of **Ace Limited's investment**. For Ace Limited, the asset in question is the equity share investment itself, not Kay Limited's underlying project. Ace Limited's equity share investment is immediately ready for its intended use and therefore does not meet the definition of a qualifying asset.

**Treatment:** Since the equity share investment is not a qualifying asset, the ₹2 Lakhs interest on the borrowed funds must be **charged to the Profit and Loss Account** as an expense in the period incurred, not capitalized as part of the investment cost.

Note: Even though the market value (₹24 Lakhs) is below cost (₹25 Lakhs), the accounting treatment of interest capitalization is determined by AS 16 (not market value considerations), and optio…

CA Inter Adv Accounting

Drill 5 questions from this paper — instant grading

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap