Question 1

How much revenue should be recognised by the Company as on March 31, 2024

Accepted Answer

**Answer: (ii) ₹2,17,500**

Under **AS 9 (Revenue Recognition)**, revenue from sale of goods is recognized when the seller has transferred the significant risks and rewards of ownership to the buyer. However, when installation is a distinct performance obligation (as here, with a separately stated fee of ₹1,000 per AC), revenue for the installation service is recognized only when installation is completed.

**Calculation:**
As on March 31, 2024, the goods had been delivered on March 27, 2024, but installation was completed only on April 5, 2024. Therefore:

**Revenue to be recognized:**
= Gross invoice value − Trade discount − Installation fee (deferred)
= (5 × ₹45,000) − (5 × ₹500) − (5 × ₹1,000)
= ₹2,25,000 − ₹2,500 − ₹5,000
= **₹2,17,500**

The equipment portion is recognized on delivery (March 27), but the installation service portion is deferred to April 2024 when the performance obligation is satisfied. The 1-year warranty is an assurance-type warranty and does not separately affect revenue recognition under AS 9.

Question 2

How much revenue should be recognised by the Company in the financial year 2024-25

Accepted Answer

**Answer: (i)**

Under Ind AS 115, revenue is recognized when (or as) performance obligations are satisfied. In this case, Suman Ltd. has two distinct performance obligations: (1) Supply of AC equipment, and (2) Installation service. The 1-year free warranty is an assurance-type warranty and does not constitute a separate performance obligation.

**Timing Analysis:**
The customer gains control of the AC equipment when delivery occurs on March 27, 2024 (FY 2023-24), at which point the first performance obligation is satisfied. The installation service performance obligation is satisfied on April 5, 2024 (FY 2024-25) when installation is completed.

**Transaction Price Allocation:**
Transaction price per AC = ₹45,000 (which includes ₹1,000 installation fees and ₹44,000 for the AC itself). The trade discount of ₹500 per AC is applied to the AC component. Thus:
- AC revenue per unit (net of discount): ₹44,000 - ₹500 = ₹43,500
- Installation revenue per unit: ₹1,000 (no discount applied to separate service)

**Revenue in FY 2024-25:**
Only the installation service performance obligation is satisfied in FY 2024-25 (on April 5, 2024). Therefore, revenue recognized = Installation service × Number of units = ₹1,000 × 5 ACs = **₹5,000**.

The AC revenue of ₹43,500 × 5 = ₹2,17,500 would have been recognized in FY 2023-24 when control passed to the customer on March 27, 2024.

Question 3

What will be the accounting for trade discount

Accepted Answer

**Answer: (ii)**

Under **AS 9 (Revenue Recognition)**, trade discounts represent reductions in the list price of goods and should be **deducted in determining the revenue**. Trade discount is not recognised separately as an expense or loss—it is simply a reduction in the gross consideration to arrive at the net revenue amount.

According to AS 9, revenue should be measured at the **fair value of consideration received**, which means revenue is recognised net of trade discounts. The trade discount is part of the pricing arrangement and reduces the invoice price, so it is factored into the revenue calculation at the point of recognition.

In this scenario, the revenue per AC would be ₹45,000 − ₹500 = **₹44,500**, and for 5 ACs the total revenue would be **₹2,22,500** (net of trade discount).

Why the other options are incorrect:
- **(i)** Trade discount is not recognised separately in P&L as an expense or loss.
- **(iii)** Trade discount timing is not linked to warranty expiry; these are separate matters.
- **(iv)** Trade discount is deducted at the time of revenue recognition, regardless of installation completion. Installation completion may affect *when* revenue is recognised (transfer of control), but the discount amount is deducted from the gross price whenever revenue is recognised.

Question 4

Is the Company required to do any accounting for 1 year warranty provided by it

Accepted Answer

**Answer: (ii)**

According to AS 29 (Provisions, Contingent Liabilities and Contingent Assets), a provision for warranty must be recognized at the time of sale when all four recognition criteria are met: (1) a present obligation exists as a result of a past event, (2) it is probable that an outflow of resources will be required, (3) a reliable estimate can be made, and (4) the obligation is enforceable.

When Suman Ltd. sells products with a free 1-year warranty, a constructive obligation arises immediately upon sale. The warranty is part of the sale transaction and creates a binding commitment to the customer. The company should estimate the provision based on historical warranty claims, past experience with similar products, and industry data. This provision must be recognized as at April 5, 2024 (when installation was completed and the sale was deemed complete), not when claims are actually received.

Option (i) is incorrect because AS 29 requires accrual-based accounting; provisions must be recognized when obligations arise, not when claims materialize. Option (iii) is wrong as cash-basis accounting violates the accrual principle. Option (iv) is incorrect because the fact that warranty is not separately charged does not exempt the company from recognizing the obligation—it is still a present obligation inherent in the sale price.

Question 5

Surya Ltd. Has a two fixed asset, FA1 is being carried in the balance sheet for ₹ 600 lakhs and FA 2 is being carried at ₹ 300 lakhs
As at 31st March 2024, the value in use for FA 1 is ₹ 500 lakhs and the net selling price is ₹ 550 lakhs. The Company did upward revaluation last year for ₹ 20 lakhs for FA 1.
As at 31st March 2024, the value in use for FA 2 is ₹ 350 lakhs and the net selling price is ₹ 320 lakhs.

How much is the total Impairment loss for current year for FA 1:
(i)   ₹ 100 Lakhs
(ii)  ₹ 50 Lakhs
(iii) ₹ 30 lakhs
(iv)  Nil

Accepted Answer

**Answer: (ii) ₹50 Lakhs**

Under **AS 28 – Impairment of Assets**, the **Recoverable Amount** is the higher of **(a) Net Selling Price** and **(b) Value in Use**.

For **FA1**: Recoverable Amount = Higher of ₹550 lakhs (Net Selling Price) and ₹500 lakhs (Value in Use) = **₹550 lakhs**.

**Total Impairment Loss = Carrying Amount – Recoverable Amount = ₹600 lakhs – ₹550 lakhs = ₹50 lakhs.**

The prior upward revaluation of ₹20 lakhs affects the *treatment* of the impairment loss, not its quantum: ₹20 lakhs is first adjusted against the Revaluation Surplus (debited to Revaluation Reserve), and the remaining ₹30 lakhs is charged to the Profit & Loss Account. However, the **total impairment loss recognised remains ₹50 lakhs**.

Question 6

Surya Ltd. Has a two fixed asset, FA1 is being carried in the balance sheet for ₹ 600 lakhs and FA 2 is being carried at ₹ 300 lakhs
As at 31st March 2024, the value in use for FA 1 is ₹ 500 lakhs and the net selling price is ₹ 550 lakhs. The Company did upward revaluation last year for ₹ 20 lakhs for FA 1.
As at 31st March 2024, the value in use for FA 2 is ₹ 350 lakhs and the net selling price is ₹ 320 lakhs.

How much impairment loss will be charged to profit and loss for current year for FA1:
(i)   ₹ 100 Lakhs
(ii)  ₹ 50 Lakhs
(iii) ₹ 30 lakhs
(iv)  Nil

Accepted Answer

**Answer: (iii) ₹30 Lakhs**

Under **AS 28 – Impairment of Assets**, the **recoverable amount** is the higher of Net Selling Price and Value in Use. For FA1: Recoverable Amount = Higher of ₹550 lakhs (Net Selling Price) and ₹500 lakhs (Value in Use) = **₹550 lakhs**. Total impairment loss = ₹600 − ₹550 = **₹50 lakhs**. However, AS 28 requires that if the asset was previously revalued upward, the impairment loss is **first adjusted against the Revaluation Surplus** to the extent of that surplus, and only the excess is charged to **Profit & Loss**. Since ₹20 lakhs of upward revaluation was done last year, ₹20 lakhs is debited to Revaluation Reserve and the remaining **₹30 lakhs is charged to Profit & Loss**.

Question 7

Surya Ltd. Has a two fixed asset, FA1 is being carried in the balance sheet for ₹ 600 lakhs and FA 2 is being carried at ₹ 300 lakhs
As at 31st March 2024, the value in use for FA 1 is ₹ 500 lakhs and the net selling price is ₹ 550 lakhs. The Company did upward revaluation last year for ₹ 20 lakhs for FA 1.
As at 31st March 2024, the value in use for FA 2 is ₹ 350 lakhs and the net selling price is ₹ 320 lakhs.

How much is the total Impairment loss for current year for FA 2:
(i)   ₹ 50 Lakhs
(ii)  ₹ 30 Lakhs
(iii) ₹ 20 lakhs
(iv)  Nil

Accepted Answer

**Answer: (iv) Nil**

Under **AS 28 – Impairment of Assets**, an asset is impaired only when its **carrying amount exceeds its recoverable amount**. The **recoverable amount** is the **higher of Net Selling Price (NSP) and Value in Use (VIU)**.

For **FA 2**: Carrying Amount = ₹300 lakhs. Recoverable Amount = Higher of VIU (₹350 lakhs) and NSP (₹320 lakhs) = **₹350 lakhs**.

Since Recoverable Amount (₹350 lakhs) **exceeds** the Carrying Amount (₹300 lakhs), **no impairment loss arises** for FA 2.

Question 8

Surya Ltd. Has a two fixed asset, FA1 is being carried in the balance sheet for ₹ 600 lakhs and FA 2 is being carried at ₹ 300 lakhs
As at 31st March 2024, the value in use for FA 1 is ₹ 500 lakhs and the net selling price is ₹ 550 lakhs. The Company did upward revaluation last year for ₹ 20 lakhs for FA 1.
As at 31st March 2024, the value in use for FA 2 is ₹ 350 lakhs and the net selling price is ₹ 320 lakhs.

What will be the carrying value on 1st April 2024 for FA 1:
(i)   ₹ 550 Lakhs
(ii)  ₹ 530 Lakhs
(iii) ₹ 520 lakhs
(iv)  ₹ 500 lakhs

Accepted Answer

**Answer: (i) ₹550 Lakhs**

Under **AS 28 – Impairment of Assets**, the **recoverable amount** is the higher of an asset's **Net Selling Price (NSP)** and **Value in Use (VIU)**.

For FA1: Recoverable Amount = Higher of ₹550 lakhs (NSP) and ₹500 lakhs (VIU) = **₹550 lakhs**.

Carrying amount is ₹600 lakhs, which exceeds the recoverable amount of ₹550 lakhs. Therefore, an **impairment loss of ₹50 lakhs** must be recognised.

Since there was a prior upward revaluation of ₹20 lakhs for FA1, under AS 28, the impairment loss is first adjusted against the **Revaluation Reserve** to the extent of ₹20 lakhs, and the balance ₹30 lakhs is charged to the **Profit & Loss Account**.

The carrying value of FA1 is written down to its recoverable amount. Therefore, the **carrying value of FA1 on 1st April 2024 = ₹550 lakhs**.

Question 9

As per AS 2, Inventories include materials awaiting use in production process, what should be included in Inventories from the following

Accepted Answer

**Answer: (c)**

As per **AS 2 (Accounting Standard on Inventories)**, inventories include all materials, supplies, and packing that are integral to bringing an item to its saleable condition. Primary packing materials that are essential to make a product saleable—such as bottles, cans, jars, and boxes in the food and beverage industry—form an integral part of the finished product and are therefore classified as inventory.

Options (a), (b), and (d) are excluded: Secondary packing materials used only for transport and forwarding are not essential to the saleable condition and relate to logistics; spare parts and servicing equipment are held for maintenance purposes, not for sale; and publicity materials are promotional supplies held for administrative/marketing purposes. Only primary packing materials (option c) that are necessary to bring inventory to a saleable condition qualify as part of inventory under AS 2.

Question 10

The debit or credit balance of "Foreign Currency Monetary Item Translation Difference Account"
(a) Is shown as "Miscellaneous Expenditure" in the Balance Sheet
(b) Is shown under "Reserves and Surplus" as a separate line item
(c) Is shown as "Other Non-current" in the Balance Sheet
(d) Is shown as "Current Assets" in the Balance Sheet

Accepted Answer

**Answer: (b) Is shown under "Reserves and Surplus" as a separate line item**

Under **AS 11 – The Effects of Changes in Foreign Exchange Rates** (as amended by the MCA notification allowing deferral of exchange differences on long-term foreign currency monetary items), the debit or credit balance of the **Foreign Currency Monetary Item Translation Difference Account (FCMITDA)** is presented in the Balance Sheet under **"Reserves and Surplus"** as a separate line item, in accordance with Schedule III of the Companies Act, 2013. A debit balance is shown as a negative figure (deduction) within that head, while a credit balance is shown as a positive figure. It is amortised over the remaining life of the monetary item. It is neither treated as Miscellaneous Expenditure nor classified under Other Non-current Assets or Current Assets.

Question 11

Kirti Ltd. is in the business of manufacturing computers. During the year ended 31st March, 2024, the company manufactured 550 computers. It has the policy of valuing finished stock of goods at a standard cost of ₹ 1.8 lakh per computer. The details of the costs are: Raw material consumed ₹ 400 lakh, Direct Labour ₹ 250 lakh, Variable production overheads ₹ 150 lakh, Fixed production overheads (including interest of ₹ 100 lakh) ₹ 290 lakh. Compute the value cost per computer for the purpose of closing stock.

Accepted Answer

Under **AS 2 (Valuation of Inventories)**, the cost of inventories includes cost of purchase, cost of conversion (direct labour + production overheads), and other costs incurred in bringing inventories to their present location and condition.

**Treatment of Interest:** AS 2 specifically excludes borrowing costs (interest) from the cost of inventories. Interest is a period cost and must be excluded from production overhead for inventory valuation purposes.

**Standard Cost Policy:** AS 2 permits the use of standard costs for measuring cost of inventories, provided the standards are realistic and the results approximate actual cost. If actual cost and standard cost are materially the same, the standard cost is an acceptable basis.

**Computation of Actual Cost per Computer:**

Eligible costs for inventory valuation:
- Raw Material Consumed: ₹400 lakh
- Direct Labour: ₹250 lakh
- Variable Production Overheads: ₹150 lakh
- Fixed Production Overheads (net of interest): ₹290 − ₹100 = ₹190 lakh
- **Total Cost of Production: ₹990 lakh**

Number of computers manufactured = 550

**Actual Cost per Computer = ₹990 lakh ÷ 550 = ₹1.80 lakh**

Since the actual cost per computer (₹1.80 lakh) equals the standard cost (₹1.80 lakh), the standard cost approximates actual cost. Therefore, Kirti Ltd.'s policy of valuing finished stock at ₹1.80 lakh per computer is acceptable under AS 2.

**Value of closing stock per computer = ₹1.80 lakh.**

Question 12

ABC Ltd. was making provision for non-moving inventories based on no issues for the last 12 months up to 31.3.2023.
The company wants to provide during the year ending 31.3.2024 based on technical evaluation:

Total value of inventory                             ₹ 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? Can the company change the method of provision?

Accepted Answer

**Does this amount to a Change in Accounting Policy?**

Yes, this amounts to a **change in accounting policy** as defined under **AS 5 – Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies**.

An **accounting policy** refers to the specific principles, bases, conventions, rules and practices adopted by an enterprise in preparing and presenting financial statements (AS 1 – Disclosure of Accounting Policies). The method of making provision for non-moving inventories is one such accounting policy. ABC Ltd. was consistently following the policy of providing for inventories showing **no issues for the last 12 months**. The proposed shift to **technical evaluation** as the basis for provisioning represents a change in the principle/basis adopted — hence it is a change in accounting policy.

**Can the company change the method of provision?**

As per **AS 5 (paragraph 29)**, an enterprise should change an accounting policy **only if** any of the following conditions is satisfied:
1. The change is required by **statute**.
2. The change is required for **compliance with an Accounting Standard**.
3. The change is considered to result in a **more appropriate presentation** of the financial statements of the enterprise.

In the present case, the change from the 12-month-no-issue rule to **technical evaluation** is a more scientific and systematic approach to assess the recoverability of inventories. Technical evaluation considers the actual usability …

Question 13

Purse Ltd., a non financial company has the following entries in its Bank Account. It has sought your advice on the treatment of the same for preparing Cash Flow Statement. (i) Loans and Advances given to suppliers, employees, and subsidiary companies and interest earned on them (ii) Investment made in subsidiary Wallet Ltd. and dividend received (iii) Dividend paid for the year (iv) Insurance claim received against loss of property, plant and equipment by fire. Discuss in the context of AS 3 'Cash Flow Statement'.

Accepted Answer

**AS 3 'Cash Flow Statement'** requires classification of cash flows into three distinct categories: operating activities, investing activities, and financing activities. Each transaction must be analyzed based on its underlying nature and substance.

**Item (i): Loans and Advances Given and Interest Earned**

The classification depends on the nature and counterparty:

• **Loans and advances to suppliers and employees**: These are classified as **operating activities** as they represent short-term working capital advances given as part of normal business operations and the ordinary operating cycle.

• **Loans and advances to subsidiary companies**: These are classified as **investing activities** as they represent long-term investments in subsidiaries, which are non-current in nature and fall within the definition of investing activities under AS 3.

• **Interest earned on loans**: This is classified as an **operating activity**. AS 3 permits interest received to be classified as either operating or investing activity at the enterprise's discretion, provided the treatment is applied consistently. However, standard practice is to classify interest received as operating activity, as it represents earnings from resources deployed.

**Item (ii): Investment in Wallet Ltd. and Dividend Received**

• **Investment made in subsidiary Wallet Ltd.**: This is classified as an **investing activity** as it represents acquisition of a long-term investment in a subsidiary company, which is e…

Question 14

Classify the following activities as (1) Operating Activities, (2) Investing Activities, (3) Financing Activities (4) Cash Equivalents.
a. Proceeds from long-term borrowings.
b. Proceeds from Trade receivables.
c. Trading Commission received.
d. Redemption of Preference Shares.
e. Proceeds from sale of investment
f. Interim Dividend paid on equity shares.
g. Interest received on debentures held as investment.
h. Dividend received on shares held as investments.
i. Rent received on property held as investment.
j. Dividend paid on Preference shares.
k. Marketable Securities

Accepted Answer

As per **AS 3 – Cash Flow Statements** (issued by ICAI), cash flows are classified into three main categories: Operating, Investing, and Financing Activities, along with Cash and Cash Equivalents.

**Classification of Given Items:**

**(a) Proceeds from long-term borrowings** — **Financing Activity.** Raising funds through borrowings constitutes a financing activity as it results in a change in the size and composition of borrowings of the enterprise.

**(b) Proceeds from Trade Receivables** — **Operating Activity.** Cash collections from customers (trade receivables) arise from principal revenue-producing activities and are therefore classified as operating activities.

**(c) Trading Commission Received** — **Operating Activity.** Commission received in the ordinary course of business is part of revenue from operations, hence an operating activity.

**(d) Redemption of Preference Shares** — **Financing Activity.** Repayment/redemption of share capital results in a change in the equity capital of the enterprise and is classified as a financing activity.

**(e) Proceeds from Sale of Investment** — **Investing Activity.** Disposal of investments (other than cash equivalents) represents a return from investing activity as per AS 3.

**(f) Interim Dividend Paid on Equity Shares** — **Financing Activity.** Dividends paid to equity shareholders are a cost of obtaining financial resources and are classified as financing activities under AS 3.

**(g) Interest Received on Debentures H…

Question 15

For five companies whose financial year ended on 31st March, 2023, the financial statements were approved by their approving authority on 15th June, 2023. During 2023-2024, material events took place. You are required to state with reasons, how each item should be dealt with in the financial statement of the various companies for the year ended 31st March, 2023.

Accepted Answer

**AS 4 (Contingencies and Events Occurring After the Balance Sheet Date)** requires distinguishing between two categories of events occurring between the balance sheet date (31st March 2023) and approval date (15th June 2023). **Adjusting events** provide evidence of conditions existing at the balance sheet date and must be reflected in financial statements. **Non-adjusting events** relate to conditions arising after the balance sheet date and must not be adjusted but should be disclosed if material.

**(a) A Ltd. - Property Sale: ADJUSTING EVENT**

The exchange of contracts on 15th March 2023 (before balance sheet date) created a binding obligation to sell. The completion on 15th May 2023 provides evidence that the asset had a fair value of ₹2,50,000 on 31st March 2023. Per AS 4, this is an adjusting event because the subsequent completion confirms a condition that existed at the balance sheet date.

**Treatment:** The property should be recognized at ₹2,50,000 in the balance sheet, removing the ₹1,00,000 carrying amount and recognizing a gain of ₹1,50,000 in profit and loss for 2022-23.

**(b) B Ltd. - Dividend Declaration: NON-ADJUSTING EVENT**

The dividend was declared on 30th April 2023, after the balance sheet date. No decision or obligation to pay dividends existed on 31st March 2023. The declaration is indicative of a condition arising after the balance sheet date.

**Treatment:** No liability should be recognized in the 2022-23 balance sheet. Disclosure should be ma…

Question 16

During the course of the last three years, a company owning and operating Helicopters lost four Helicopters. The company's accountant felt that after the crash, the maintenance provision created in respect of the respective helicopters was no longer required, and proposed to write it back to the Profit and Loss account as a prior period item.
Is the company's proposed accounting treatment correct? Discuss.

Accepted Answer

**The proposed accounting treatment by the company's accountant is INCORRECT.** The write-back of maintenance provision cannot be classified as a prior period item. The correct position is analyzed below under **AS 5 – Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies**.

**Definition of Prior Period Items (AS 5, Para 15):** Prior period items are income or expenses which arise in the current period as a result of **errors or omissions** in the preparation of the financial statements of one or more prior periods. The key requirement is that the item must stem from an error or omission — not from a new event occurring in the current period.

**Why the write-back is NOT a Prior Period Item:** When the maintenance provisions were originally created in respect of each helicopter, they were correctly and validly made at that point in time to provide for future maintenance costs. There was no error or omission in creating those provisions. The reason the provision is no longer required is the **subsequent event** of the helicopters crashing and being lost — a new fact that arose during the current or recent periods. The write-back is therefore a consequence of a current-period event, not a rectification of a past mistake. Accordingly, classifying the write-back as a prior period item is factually and technically incorrect under AS 5.

**Correct Classification — Current Period Income:** The write-back of the maintenance provision, consequent up…

Question 17

Explain whether the following will constitute a change in accounting policy or not as per AS 5

Accepted Answer

Per Accounting Standard (AS) 5 on "Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies," a **change in accounting policy** occurs when an entity adopts a different accounting method for transactions or items already being accounted for. AS 5 explicitly states that **"Application of an accounting policy for the first time is not a change in accounting policy."** The distinction between a change in policy and application of a new policy is critical.

**Sub-part (i): Introduction of formal retirement gratuity scheme in place of ad hoc ex-gratia payments**

**This will NOT constitute a change in accounting policy.** The introduction of a formal retirement gratuity scheme represents the **application of a new accounting policy for the first time**. Previously, the entity was making ad hoc ex-gratia payments, which were likely expensed as and when paid without systematic accrual. The formal gratuity scheme now requires recognition of a structured liability and accrual-based accounting. Since no formalized gratuity accounting policy existed before, the entity is applying a new policy rather than modifying an existing one. This falls squarely within the exception provided in AS 5 that application of a policy for the first time is not considered a change. The treatment should be accounted for prospectively with appropriate disclosure.

**Sub-part (ii): Management decision to introduce pension scheme for employees with 5 years' service**

**This wil…

Question 18

Rose Constructions undertake to construct a bridge for the Government of Uttar Pradesh. The construction commenced during the financial year ending 31.03.2024 and is likely to be completed by the next financial year. The contract is for a fixed price of ₹ 12 crore with an escalation clause. You are given the following information for the year ended 31.03.2024:

Cost incurred upto 31.03.2024              ₹ 4 crore
  Cost estimated to complete the contract    ₹ 6 crore

Escalation in cost was by 5%. Hence, the contract price is also increased by 5%.
You are required to ascertain the stage of completion and compute the amount of revenue and profit to be recognized for the year as per AS 7.

Accepted Answer

**Applicable Standard: AS 7 – Construction Contracts**

AS 7 requires that when the outcome of a construction contract can be estimated reliably, contract revenue and costs shall be recognised by reference to the **stage of completion** of the contract activity at the reporting date (percentage completion method).

**Step 1: Revised Contract Price**

Original fixed contract price = ₹12 crore. Escalation in cost was 5%, and accordingly the contract price is also increased by 5%.

Revised contract price = ₹12 crore × 1.05 = **₹12.60 crore**

**Step 2: Total Estimated Cost**

Cost incurred up to 31.03.2024 = ₹4 crore
Estimated cost to complete = ₹6 crore
Original total estimated cost = ₹10 crore

With 5% cost escalation, total estimated cost = ₹10 crore × 1.05 = **₹10.50 crore**

**Step 3: Stage of Completion**

Under AS 7, stage of completion is determined as the proportion of costs incurred to date to the total estimated costs:

Stage of completion = Cost incurred to date ÷ Total estimated cost
= ₹4 crore ÷ ₹10.50 crore
= **38.10% (approx.)**

**Step 4: Revenue to be Recognised**

Revenue = Revised contract price × Stage of completion
= ₹12.60 crore × (4/10.50)
= **₹4.80 crore**

**Step 5: Profit to be Recognised**

Total expected profit = Revised contract price − Total estimated cost
= ₹12.60 crore − ₹10.50 crore = ₹2.10 crore

Profit recognised = ₹4.80 crore − ₹4.00 crore = **₹0.80 crore**

(Cross-check: ₹2.10 crore × 38.10% ≈ ₹0.80 crore ✓)

**Summary for the year ended 31.…

Question 19

Mehta ltd. has undertaken bridge construction contract wherein, bridge will be constructed in 3 years. Initial contract revenue ₹ 900 crore, Initial contract cost ₹ 800 crore. Year I: Estimated contract cost ₹ 805 crore, Contract cost incurred ₹ 161 crore. Year II: Increase in contract revenue ₹ 20 crore, Estimated additional increase cost ₹ 15 crore, Contract cost incurred ₹ 584 crore. Year III: Contract cost incurred ₹ 820 crore. At the end of year II, cost incurred includes ₹ 10 crore for material stored at the sites to be used in year III. State the amount of revenue, expenses and profit to be recognized in the Statement of Profit and Loss in these three years.

Accepted Answer

**AS 7 – Construction Contracts: Stage of Completion Method**

Under **AS 7 (Revised) – Construction Contracts**, contract revenue and costs are recognised as revenue and expenses respectively by reference to the **stage of completion** of the contract activity at the reporting date. The stage of completion is determined using the **cost-to-cost method** (costs incurred to date ÷ total estimated costs), excluding costs relating to **materials not yet used** (stored materials).

**Year I:**
Revised total estimated cost = ₹805 crore; Total revenue = ₹900 crore; Expected profit = ₹95 crore.
Stage of completion = 161 ÷ 805 = **20%**.
Revenue = ₹180 crore | Expenses = ₹161 crore | Profit = ₹19 crore.

**Year II:**
Revised total contract revenue = 900 + 20 = ₹920 crore. Revised total estimated cost = 805 + 15 = ₹820 crore. Expected total profit = ₹100 crore.
Cumulative cost incurred = ₹584 crore; less stored material not yet utilised = ₹10 crore → **effective cost = ₹574 crore**.
Cumulative stage of completion = 574 ÷ 820 = **70%**.
Cumulative revenue = ₹644 crore; less already recognised (Year I) ₹180 crore → Year II revenue = ₹464 crore.
Cumulative expenses = ₹574 crore; less already recognised (Year I) ₹161 crore → Year II expenses = ₹413 crore.
Year II Profit = ₹51 crore.

**Year III:**
Actual total cost incurred (cumulative) = ₹820 crore = revised estimated cost, so contract is **100% complete**.
Total revenue = ₹920 crore; total expenses = ₹820 crore; total profit = ₹100 cror…

Question 20

Mithya Ltd. entered into agreement with Satya Ltd. for sale of goods costing ₹ 8 lakh at a profit of 20% on cost. The sale transaction took place on 1st February, 2024. On the same day, Satya Ltd. entered into another agreement with Mithya Ltd. to resell the same goods at ₹ 10.80 lakh on 1st August, 2024. State the treatment of this transaction in the financial statements of Mithya Ltd. as on 31.03.2024. The pre-determined re-selling price covers the holding cost of Satya Ltd. Give the Journal Entries as on 31.03.2024 in the books of Mithya Ltd.

Accepted Answer

**Nature of Transaction – Sale and Repurchase Agreement under AS 9**

This transaction involves a **sale and repurchase (repo) agreement** where Mithya Ltd. sells goods to Satya Ltd. and simultaneously agrees to repurchase the same goods at a predetermined price. Under **AS 9 – Revenue Recognition (issued by ICAI)**, revenue from the sale of goods should be recognized only when the seller has **transferred all significant risks and rewards of ownership** to the buyer.

**Key Issue – Substance over Form:** Although the transaction appears to be a sale in legal form, its **economic substance is that of a financing arrangement** (secured borrowing). The following facts support this conclusion:

1. Mithya Ltd. has committed to **repurchase the same goods** on 1st August 2024 – a binding obligation.
2. The repurchase price of ₹10.80 lakh is **predetermined and covers the holding cost** of Satya Ltd., meaning Satya Ltd. bears NO price risk, inventory risk, or market risk.
3. Since all risks and rewards have NOT transferred to Satya Ltd., the conditions of AS 9 for revenue recognition are NOT satisfied.

**Treatment in Financial Statements of Mithya Ltd. as on 31.03.2024:**

**In the Balance Sheet:**
(a) The goods should **continue to be shown as Inventory (Stock)** at cost ₹8,00,000 in Current Assets – they are never derecognized from Mithya Ltd.'s books.
(b) The ₹9,60,000 received from Satya Ltd. should be shown as a **Secured Loan / Borrowing** (Current Liability), not as sales p…

Question 21

When will the revenue be recognized in the case of inter divisional transfers?

Accepted Answer

**Revenue Recognition for Inter-Divisional Transfers under AS 9**

As per **Accounting Standard 9 (Revenue Recognition)**, revenue is recognized when significant risks and rewards of ownership are transferred and certain other conditions are satisfied. For inter-divisional transfers, the principles are as follows:

**No Revenue Recognition on Inter-Divisional Transfers:** Generally, no revenue should be recognized on inter-divisional transfers because both the transferor and transferee divisions form part of the same legal entity. The entity has not transferred goods or services outside itself, hence the critical condition of transferring significant risks and rewards to an external buyer is not satisfied. From the perspective of the entity as a whole, these are internal transactions.

**Treatment in Financial Statements:** Inter-divisional transfers may be recorded at cost, cost plus a mark-up, or at an agreed transfer price for management accounting and internal reporting purposes. However, any profit on such internal transfers must be eliminated in the consolidated/statutory financial statements to present a true picture. The profit is deferred until the goods are ultimately sold to external parties.

**Recognition of Final Revenue:** Revenue is recognized only when the goods or services are ultimately sold to external customers outside the entity. At that point, the entity has transferred significant risks and rewards to an external buyer, and the conditions under AS 9 ar…

Question 22

MS Ltd. has acquired a heavy machinery at a cost of ₹ 1,00,00,000 (with no breakdown of the component parts). The estimated useful life is 10 years. At the end of the sixth year, one of the major components, the turbine requires replacement, as further maintenance is uneconomical. The remainder of the machine is perfect and is expected to last for the next four years. The cost of a new turbine is ₹ 45,00,000. The discount rate assumed is 5%.
Can the cost of the new turbine be recognised as an asset, and, if so, what treatment should be used?

Accepted Answer

**Applicability of AS 10 – Component Accounting**

As per **AS 10 (Property, Plant and Equipment)**, when a significant part (component) of an item of PPE has a different useful life or cost pattern, it must be accounted for separately. The standard requires that each major component be depreciated separately and, upon replacement, the old component must be **derecognised** and the new component **capitalised**.

**Can the cost of the new turbine be recognised as an asset?**

Yes. The cost of the new turbine (₹45,00,000) must be recognised as an asset under AS 10, provided the recognition criteria in **paragraph 7 of AS 10** are satisfied:
1. It is **probable** that future economic benefits associated with the turbine will flow to MS Ltd. — satisfied, as the turbine enables continued use of the machinery for 4 more years.
2. The **cost can be measured reliably** — satisfied, at ₹45,00,000.

Accordingly, the new turbine is capitalised.

**Treatment of the old turbine – Derecognition**

Since MS Ltd. did not originally identify component costs, the carrying amount of the replaced turbine must be **estimated**. AS 10 provides that the current replacement cost (₹45,00,000) may be used as a surrogate, **discounted back** to the acquisition date using the given discount rate of 5% to approximate the original cost.

Estimated original cost of old turbine = ₹45,00,000 ÷ (1.05)⁶ = ₹45,00,000 ÷ 1.3401 ≈ **₹33,58,000**

Accumulated depreciation on the old turbine (over 6 years of its 10…

Question 23

Alfa Ltd. purchased an item of property, plant and equipment for US $ 50 lakh on 01.04.2023 and the same was fully financed by foreign currency loan repayment in five equal instalments annually. Exchange rate at purchase was 1 US $ = ₹ 60. As on 31.03.2024 the first instalment was paid when 1 US $ fetched ₹ 62.00. The entire loss on exchange was included in cost of goods sold. Alfa Ltd. normally provides depreciation at 20% on WDV basis and exercised the option to adjust the cost of asset for exchange difference arising out of loan restatement and payment. Calculate the amount of exchange loss and its treatment and depreciation.

Accepted Answer

**AS 11 (Effects of Changes in Foreign Exchange Rates) — Para 46A Option**

Alfa Ltd. has exercised the option available under **Para 46A of AS 11** (inserted via MCA notification) which permits exchange differences arising on long-term foreign currency monetary items relating to acquisition of a depreciable capital asset to be **adjusted to the cost of the asset** rather than recognised in the Statement of Profit & Loss.

**Initial Recognition on 01.04.2023**

The PPE is recorded at: US$ 50 lakh × ₹60 = **₹3,000 lakh**
The loan is also recorded at ₹3,000 lakh. Each annual instalment = US$ 10 lakh.

**Exchange Difference as on 31.03.2024**

**(a) Exchange loss on first instalment paid:**
US$ 10 lakh × (₹62 − ₹60) = **₹20 lakh**

**(b) Exchange loss on restatement of outstanding loan balance:**
Remaining loan = US$ 40 lakh (50 − 10)
US$ 40 lakh × (₹62 − ₹60) = **₹80 lakh**

**Total Exchange Loss = ₹100 lakh**

**Correct Treatment under AS 11 Para 46A:**
Since Alfa Ltd. has exercised the capitalization option, the entire exchange loss of ₹100 lakh must be **added to the cost of the PPE**. The company's treatment of charging ₹100 lakh to **Cost of Goods Sold is incorrect** and must be reversed.

Revised Cost of PPE = ₹3,000 lakh + ₹100 lakh = **₹3,100 lakh**

**Depreciation for FY 2023-24:**
Depreciation is charged on the revised cost at **20% on Written Down Value basis**.
Depreciation = 20% × ₹3,100 lakh = **₹620 lakh**

The WDV of the asset as at 31.03.2024 = ₹3,100 − ₹620 = …

Question 24

Bansal Company Ltd. imported raw material worth US Dollars 12,000 on 15th January, 2024 when the exchange rate was ₹ 68 per US Dollar. The payment for the transaction was made on 5th May, 2024 when exchange rate was ₹ 64 per US Dollar. At the year end, 31st March, 2024, the rate of exchange was ₹ 65 per US Dollar. The accountant of the company passed entry on 31st March, 2024 adjusting the cost of raw material consumed for the difference between ₹ 64 and ₹ 68 per US Dollar.
Discuss whether this treatment is justified as per the provisions of AS-11 (Revised).

Accepted Answer

**The treatment adopted by the accountant is NOT justified** as per the provisions of **AS 11 – The Effects of Changes in Foreign Exchange Rates (Revised)**.

**Correct Treatment under AS 11:**

**1. Initial Recognition (15th January 2024):** As per AS 11, a foreign currency transaction shall be recorded in the reporting currency by applying the **exchange rate at the date of the transaction**. Accordingly, the import of raw material should be recorded as:

Raw Material A/c Dr. ₹8,16,000 (USD 12,000 × ₹68)
To Creditor (Sundry Creditor) A/c ₹8,16,000

The cost of raw material is thus **fixed at ₹8,16,000** at the time of initial recognition.

**2. Reporting at Balance Sheet Date (31st March 2024):** AS 11 distinguishes between **monetary** and **non-monetary** items for reporting at the balance sheet date.

- **Monetary items** (e.g., creditors, payables denominated in foreign currency) must be reported using the **closing rate**, i.e., the exchange rate at the balance sheet date (₹65 per USD in this case).
- **Non-monetary items** carried at historical cost (e.g., raw material inventory) must be reported at the **exchange rate at the date of the transaction** (₹68 per USD).

Accordingly, on 31st March 2024:
- The **Creditor A/c** (monetary item) should be restated at ₹65 × 12,000 = ₹7,80,000.
- The resulting **exchange difference of ₹36,000** (₹8,16,000 – ₹7,80,000) should be **credited to the Profit & Loss Account** as an exchange gain — NOT adjusted against the cost of raw …

Question 25

Energy Ltd. has acquired a generator on 1.4.2023 for ₹ 100 lakh. On 2.4.2023, it applied to Indian Renewal Energy Development Authority (IREDA) for a subsidy. The subsidy was granted in June, 2024 after the accounts for 2023-2024 were finalized. The company has not accounted for the subsidy for the year ended 31.3.2024. State

Accepted Answer

**Part (i): Is this a prior period item?**

No, this is NOT a prior period item. Under AS 5, a prior period item is defined as 'an item of income or expense which arises in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.' In this case, there is no error or omission in the 2023-24 accounts. The subsidy was granted in June 2024, which is after the balance sheet date of 31.3.2024. Under AS 4 (Contingencies and Events Occurring After the Balance Sheet Date), the grant of the subsidy is a **non-adjusting event** that occurred after the balance sheet date. The company correctly did not recognize the subsidy in 2023-24 since it had not been approved at that time. Therefore, this cannot be classified as a prior period item.

**Part (ii): Treatment in 2024-25**

When the subsidy is received in 2024-25, it should be accounted for in accordance with **AS 12 (Government Subsidies)**. Since the subsidy relates to a non-current asset (the generator acquired on 1.4.2023), the benefit must be recognized systematically over the asset's useful life. Two methods are permissible:

**1. Deferred Income Method (Gross Method):** The subsidy amount is credited to a **Deferred Government Grant** or **Deferred Income** liability account. The subsidy is then recognized as income over the remaining useful life of the generator, typically in proportion with depreciation expense. This method preserves the asset at its full …

Question 26

Astha Ltd. is absorbed by Nistha Ltd.; the consideration being the takeover of liabilities, the payment of cost of absorption not exceeding ₹ 10,000 (actual cost ₹ 9,000); the payment of the 9% debentures of ₹ 50,000 at a premium of 20% through 8% debentures issued at a premium of 25% of face value and the payment of ₹ 15 per share in cash and allotment of three 11% preference shares of ₹ 10 each and four equity shares of ₹ 10 each at a premium of 20% fully paid for every five shares in Astha Ltd.
The number of shares of the vendor company are 1,50,000 of ₹ 10 each fully paid. Calculate purchase consideration as per AS 14.

Accepted Answer

**Purchase Consideration under AS 14**

**AS 14 – Accounting for Amalgamations** defines **Purchase Consideration** as the aggregate of shares and other securities issued and payments made in cash or other assets by the transferee company **to the shareholders** of the transferor company. Payments to debenture holders, takeover of liabilities, and costs of absorption are **excluded** from purchase consideration.

**Identification of items included in Purchase Consideration:**

- **Takeover of liabilities** – NOT included (discharge of liabilities, not payment to shareholders)
- **Cost of absorption ₹9,000** – NOT included (this is a revenue expense, not part of consideration)
- **Redemption of 9% debentures via 8% debentures** – NOT included (payment to debenture holders, not shareholders)
- **Cash of ₹15 per share** – INCLUDED (paid to shareholders of Astha Ltd.)
- **Three 11% Preference shares of ₹10 each + Four equity shares of ₹10 each at 20% premium for every 5 shares** – INCLUDED (allotted to shareholders of Astha Ltd.)

**Calculation of Purchase Consideration:**

Total shares in Astha Ltd. = 1,50,000 shares of ₹10 each
Groups of 5 shares = 1,50,000 ÷ 5 = 30,000 groups

**1. Cash Payment:**
₹15 per share × 1,50,000 shares = **₹22,50,000**

**2. 11% Preference Shares issued (at par, ₹10 each):**
Shares issued = 3 × 30,000 = 90,000 preference shares
Value = 90,000 × ₹10 = **₹9,00,000**

**3. Equity Shares issued (₹10 each at 20% premium = ₹12 per share):**
Shares issued =…

Question 27

A company is engaged in the business of refining, transportation and marketing of petroleum products. During the financial year ended 31st March, 2024, the company acquired controlling interest from Government of India in another public sector undertaking @ ₹ 1,551 per share as against the book value of ₹ 192.58 per share and market value of ₹ 876 per share as on 18th February, 2024. A strategic premium of ₹ 675 per share was paid. The investment has been considered as long term strategic investment and accounted for at cost at ₹ 1,551 per share. No provision for diminution in value has been made. On 28th March, 2024, the acquired shares were quoted at ₹ 880 per share on BSE and the current market price as on 18th July was around ₹ 300. Management is of the view that there is no permanent …

Accepted Answer

**Sub-part (i): Correctness of 'At Cost' Treatment Without Diminution Provision**

Under **AS 13 (Accounting for Investments)**, long-term investments are recorded at cost. However, if there is a **permanent diminution in value**, a provision must be made. The current treatment is **correct ONLY if the diminution is temporary and not permanent**.

Facts:
- Acquisition cost: ₹1,551 per share
- Market value on 28 March 2024: ₹880 per share (43% decline)
- Market value on 18 July 2024: ₹300 per share (81% decline)

A decline of this magnitude over 4-5 months ordinarily indicates **permanent diminution** unless substantiated otherwise. The company must provide evidence that: (i) the decline is temporary, (ii) the business remains fundamentally viable, (iii) recovery is probable, and (iv) long-term holding is intended.

**Conclusion**: Without such substantiation, the treatment is **INCORRECT per AS 13**. The burden of proof rests with the company; mere assertion of 'no permanent diminution' is insufficient.

**Sub-part (ii): Treatment of Diminution Provision**

If diminution is required:

1. **Charge to P&L Account**: The entire provision must be recognized in the profit and loss account of the identification year, following the **principle of conservatism**. This is the correct and mandatory treatment per AS 13.

2. **Not Deferred or Amortized**: Amortizing the diminution over 5 years is **NOT permissible**. This would violate AS 13 and defer loss recognition, contrary to accoun…

Question 28

How will interest be capitalized when qualifying assets are funded by borrowings in the nature of bonds that are issued at a discount?
X Ltd. issued in year 1, a 3 year 10% p.a. (interest paid annually) bond with a face value of ₹ 1,00,000 at a price of ₹ 90,000 to finance a qualifying asset which is ready for intended use at the end of year 2. Compute the amount of borrowings costs to be capitalized if the company uses for amortization of discount straight line basis.

Accepted Answer

**Treatment under AS 16 – Borrowing Costs for Bonds Issued at Discount**

As per **AS 16 (Borrowing Costs)**, borrowing costs that are directly attributable to the acquisition, construction, or production of a **qualifying asset** must be capitalised as part of the cost of that asset. All other borrowing costs are recognised as an expense in the period in which they are incurred.

**What constitutes 'borrowing costs' for bonds issued at a discount?**

AS 16 explicitly states that borrowing costs include not only the **interest expense** calculated using the effective interest method, but also the **amortisation of discount** (or premium) on borrowings. When a bond is issued at a discount, the discount represents an additional finance cost to the issuer over and above the coupon interest. Therefore, the amortised portion of the discount must also be treated as a borrowing cost.

Where the **straight-line method** is used to amortise the discount (as permitted in practice), the annual charge for discount amortisation is calculated by spreading the total discount evenly over the life of the bond.

**Capitalisation Period**

Capitalisation commences when: (i) expenditure on the asset is being incurred, (ii) borrowing costs are being incurred, and (iii) activities necessary to prepare the asset for its intended use are in progress. Capitalisation **ceases** when the qualifying asset is **ready for its intended use**. Since the qualifying asset is ready at the **end of Year 2**, bo…

Question 29

Loyal Ltd. has undertaken a project for expansion of capacity. The company pays interest at 15% p.a. debited monthly. During the period, company had ₹ 20 lakh overdraft up to 31st December, surplus cash in January and again overdraft of ₹ 14 lakh from 1.2.2024 and ₹ 30 lakh from 1.3.2024. The company had a strike during December and hence could not continue the work. However, substantial administrative work related to the project was continued. Onsite work commenced on 1st January and all work completed on 31st March. Monthly expenditure: Oct 2023 (Plan ₹ 5,00,000, Actual ₹ 4,00,000), Nov 2023 (Plan ₹ 6,50,000, Actual ₹ 7,95,000), Dec 2023 (Plan ₹ 20,00,000, Actual ₹ -), Jan 2024 (Plan ₹ 2,00,000, Actual ₹ 50,000), Feb 2024 (Plan ₹ 9,00,000, Actual ₹ 2,00,000), Mar 2024 (Plan ₹ 10,00,000, …

Accepted Answer

**Applicable Standard: AS 16 – Borrowing Costs**

**Qualifying Asset:** The expansion project is a qualifying asset since it takes a substantial period of time to get ready.

**Capitalization Period:** October 2023 to March 2024. Under AS 16, capitalization commences when (i) expenditure for the asset is being incurred, (ii) borrowing costs are being incurred, and (iii) activities necessary to prepare the asset are in progress. Actual expenditures begin in October 2023 with an overdraft facility available, and all three conditions are satisfied from October onwards.

**December 2023 – Strike Period:** Under AS 16 para 20, capitalization is suspended only during extended periods in which *active development is interrupted*. However, since substantial **administrative work related to the project was continued** during the strike, capitalization is NOT suspended for December. The interest on the outstanding project balance continues to be capitalized.

**January 2024 – Surplus Cash:** Although ₹50,000 of actual expenditure was incurred in January, the company had **surplus cash** (no overdraft). Since no borrowing costs were incurred, there is nothing to capitalize for January.

**Basis of Attribution:** Since the assumption is that the overdraft would have been lower but for the capital expenditure, the portion of the overdraft attributable to the qualifying asset = **min(cumulative actual project expenditure, total overdraft)** for each month.

**Interest Rate:** 15% p.a. debi…

Question 30

A Company has an inter-segment transfer pricing policy of charging at cost less 5%. The market prices are generally 20% above cost.
You are required to examine whether the policy adopted by the company is correct or not?

Accepted Answer

**Applicable Standard: AS 17 – Segment Reporting (issued by ICAI)**

**Relevant Provision on Inter-Segment Transfer Pricing:**

As per AS 17, **inter-segment transfers should be measured on the basis that the enterprise actually uses to price those transfers**. The standard does not prescribe a single mandatory method; however, it requires that:
1. The **basis of pricing inter-segment transfers** must be disclosed in the financial statements.
2. Any **change in the transfer pricing method** must also be disclosed along with its financial effect.
3. The method adopted should be applied **consistently** from period to period.

Commonly used methods for inter-segment transfer pricing include:
- **Market price basis** (arm's length – most preferred)
- **Cost basis** (marginal cost or full cost)
- **Negotiated price basis**

**Examination of the Company's Policy:**

The company has adopted a policy of charging inter-segment transfers at **cost less 5%**, whereas market prices are **20% above cost**. This means:

- The transfer price = Cost × 95% (i.e., 5% below cost)
- The market price = Cost × 120% (i.e., 20% above cost)
- The gap between transfer price and market price = 25% of cost

**Why the policy is NOT correct:**

**First**, by pricing transfers at cost less 5%, the **transferring (selling) segment is effectively subsidising** the receiving (buying) segment. The selling segment records a loss on every inter-segment transfer, which **distorts its reported segment result** – …

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