Question 1

What will be the value of inventory in the books and what disclosure should be given in the financial statement on 31.3.2024?

Accepted Answer

**Answer: (D)**

Under **AS 2 (Valuation of Inventories)**, inventories must be valued at the **lower of cost or net realisable value (NRV)**.

After the change in cost formula from FIFO to **Weighted Average Method**, the cost of closing inventory as at 31.03.2024 is **₹8,80,000**. The NRV is ₹12,00,000. Since cost (₹8,80,000) < NRV (₹12,00,000), the inventory is carried at **₹8,80,000**.

Regarding disclosure: a change in the cost formula (FIFO to Weighted Average) constitutes a **change in accounting policy** under **AS 5 (Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies)**. AS 5 requires that when a change in accounting policy has a **material effect**, the following must be disclosed: (i) the nature of the change, (ii) the reason for the change, and (iii) **the financial effect (amount) of the change**. The effect here is ₹10,40,000 − ₹8,80,000 = **₹1,60,000** reduction in inventory value (and corresponding reduction in profit). Full disclosure including this amount is mandatory.

Therefore, the value of inventory will be **₹8,80,000**, and **full disclosure along with the amount of change (₹1,60,000)** must be given in the financial statements.

Question 2

As per Schedule III to the Companies Act, 2013 loan is to be disclosed in the balance sheet as:

Accepted Answer

**Answer: (C)**

As per **Schedule III to the Companies Act, 2013**, the principal amount of the loan (₹16,00,000) is classified as a **secured loan under Long-Term Borrowings** (Non-Current Liabilities), secured by hypothecation of Plant and Machinery. The **interest accrued but not due** (₹1,15,000) represents a current liability and must be disclosed separately under **Other Current Liabilities** — it cannot be clubbed with the loan principal or ignored. This treatment ensures proper segregation of capital and revenue items in the Balance Sheet.

Question 3

Most by-products as well as scrap or waste materials, by their nature, are immaterial. Thus, these are measured at:

Accepted Answer

**Answer: (D)**

As per AS 2 (Valuation of Inventories), scrap and waste materials, which are immaterial by nature, are measured at **Net Realisable Value**. Since these materials lack a clearly identifiable or allocated cost basis and their primary value derives from potential recovery through sale, NRV is the appropriate measurement basis rather than cost or the lower of cost/NRV comparison applied to regular inventory.

Question 4

What do you mean by 'Accrual' in reference to AS-1? Also, specify any three reasons for 'Accrual Basis of Accounting'.

Accepted Answer

**Meaning of Accrual under AS-1:** Accrual, as per **AS 1 (Disclosure of Accounting Policies)**, refers to the recognition of revenues and expenses in the period in which they are earned or incurred, irrespective of the timing of actual cash receipts or disbursements. It is an accounting concept that matches expenses with corresponding revenues in the same accounting period. Under the accrual basis, transactions are recorded when economic events occur, ensuring that the financial statements reflect the actual economic performance of the entity rather than merely its cash position.

**Three Reasons for Accrual Basis of Accounting:**

**1. True and Fair Determination of Profit:** The accrual basis ensures accurate measurement of profit for a given period by applying the **matching principle**. This involves matching revenues earned during a period with all related expenses incurred to generate those revenues. This prevents distortion of profits due to timing differences between cash flows and economic transactions, thereby providing a true picture of the entity's profitability.

**2. Better Comparability and Analysis:** The accrual basis facilitates meaningful comparison of financial performance across different periods and between different entities. Since revenues and expenses are recognized consistently in the period they relate to, regardless of cash movements, financial statements become comparable year-on-year. This enables stakeholders to identify trends and make informe…

Question 5

From the following information provided by LMN Ltd. for the year 2024, you are required to compute the closing inventory: Raw Material A (Closing balance: 700 units; Cost price including GST ₹ 280; ITC available ₹ 25; Freight inward ₹ 35; Handling charges ₹ 20; Replacement cost ₹ 200). Finished Goods B (Closing balance: 1,800 units; Material consumed ₹ 280; Direct labour ₹ 80; Direct overhead ₹ 40; Total fixed overhead for the year ₹ 3,60,000 on normal capacity of 36,000 units, actual production 30,000 units).

Accepted Answer

**Inventory Valuation under AS 2 (Valuation of Inventories)**

**Computation of Cost of Raw Material A (per unit):**

Under AS 2, cost of inventories comprises all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition. GST paid is reduced by Input Tax Credit (ITC) available, since ITC is a recoverable amount and does not form part of cost.

Cost of Raw Material A = (Cost including GST − ITC) + Freight inward + Handling charges = (₹280 − ₹25) + ₹35 + ₹20 = **₹310 per unit**

Replacement cost of Raw Material A = ₹200 per unit (relevant for NRV assessment below).

**Computation of Cost of Finished Goods B (per unit):**

Under AS 2, fixed production overheads are allocated based on **normal capacity**, not actual production. Fixed overhead rate = ₹3,60,000 ÷ 36,000 units = ₹10 per unit. The unabsorbed fixed overhead (due to actual production of 30,000 units being less than normal capacity of 36,000 units) is expensed to Profit & Loss and not included in inventory cost.

Cost per unit = Material ₹280 + Direct Labour ₹80 + Direct Overhead ₹40 + Fixed Overhead ₹10 = **₹410 per unit**

**(i) When NRV of Finished Goods B = ₹500 per unit:**

Since NRV (₹500) > Cost (₹410), Finished Goods B is valued at **cost = ₹410 per unit**.

Since finished goods are expected to be sold above cost, there is no anticipated loss. Therefore, Raw Material A is valued at **cost = ₹310 per unit** (AS 2 does not require write-do…

Question 6

From the following data of Vishnu Ltd. prepare cash flow statement from Operating activities using direct method as per AS 3: Current Assets (Inventory, Trade receivables, Cash & cash equivalents) and Current Liabilities (Trade payable, Provision for tax) as at 31.03.2024 and 31.03.2023, with Summary of Statement of Profit and Loss showing Sales ₹ 85,50,000, Cost of sales ₹ 56,00,000, Interest income ₹ 20,000, Fire insurance claim ₹ 1,10,000, Depreciation ₹ 24,000, Administrative and selling expenses ₹ 15,40,000, Interest expenses ₹ 36,000, Foreign exchange loss ₹ 18,000, Net Profit before tax ₹ 14,62,000, Income Tax ₹ 95,000, and Net Profit ₹ 13,67,000. Note: Trade receivables and Trade payables include amounts relating to credit sale and credit purchase only. Foreign exchange loss repres…

Accepted Answer

**CASH FLOW STATEMENT — OPERATING ACTIVITIES (DIRECT METHOD)**
**As per AS 3 (Revised) — Cash Flow Statements, for Vishnu Ltd.**

**Note on Missing Data:** The question references Current Assets and Current Liabilities as at 31.03.2024 and 31.03.2023 (Inventory, Trade Receivables, Cash & Cash Equivalents, Trade Payables, Provision for Tax), but the actual figures from the data table were not captured in the question text. The complete numerical answer requires those figures. The full methodology, classifications, and format are presented below so the answer can be completed once the balance sheet data is inserted.

**Classification of Statement of Profit & Loss Items:**

**Items forming part of Operating Activities:**
- **Sales ₹85,50,000** → Basis for Cash Receipts from Customers (adjusted for change in Trade Receivables)
- **Cost of Sales ₹56,00,000** → Basis for Cash Paid to Suppliers (adjusted for change in Inventory and Trade Payables)
- **Administrative and Selling Expenses ₹15,40,000** → Cash Paid for Operating Expenses
- **Income Tax ₹95,000** → Basis for Tax Paid (adjusted for opening/closing Provision for Tax)

**Items NOT forming part of Operating Activities (to be excluded):**
- **Interest Income ₹20,000** → Classified as **Investing Activity** (return on investments/loans given)
- **Fire Insurance Claim ₹1,10,000** → Classified as **Investing Activity** (proceeds relating to fixed assets/capital items)
- **Interest Expenses ₹36,000** → Classified as **Financing A…

Question 7

Smart Ltd. closes its books of accounts every year on 31st March. The financial statements for the year ended 31st March, 2024 are to be approved by the approving authority on 30th June 2024. During the first quarter of 2024-2025, the following events / transactions have taken place. You are required to state with reasons, how the above transactions will be dealt with in the financial statement for the year ended 31st March 2024.

Accepted Answer

The relevant standard governing events after the balance sheet date is **AS 4 – Contingencies and Events Occurring After the Balance Sheet Date**. The balance sheet date is **31st March 2024** and the financial statements are approved on **30th June 2024**. Events occurring between these two dates must be classified as either **adjusting events** (conditions existing at balance sheet date → adjust figures) or **non-adjusting events** (new conditions arising after balance sheet date → disclose only).

**(i) Inventory of Stitching Machines – Adjusting Event**

The company already anticipated heavy decline in demand **as on 31st March 2024**. The sale of 5 machines in April 2024 at ₹4,000 per machine (against cost of ₹5,500) provides **evidence that the Net Realisable Value (NRV) was below cost at the balance sheet date**. This is an **adjusting event** under AS 4, as the condition (fall in NRV) existed at 31st March 2024.

As per **AS 2 – Valuation of Inventories**, inventories must be valued at the lower of cost or NRV. Accordingly, the inventory of **50 machines must be written down** to ₹4,000 per machine. A provision for diminution of **₹75,000** (50 × ₹1,500) must be recognised in the financial statements for the year ended 31st March 2024.

**(ii) Fire in Godown on 15th April 2024 – Non-Adjusting Event (Disclosure Required)**

The fire occurred on **15th April 2024**, which is after the balance sheet date. No condition related to the fire existed as on 31st March 2024. Th…

Question 8

The Accountant of Heera Ltd. has sought your opinion with relevant reasons, whether the following transactions will be treated as change in Accounting Policy or not for the year ended 31st March, 2024. Please advise him in accordance with the provisions of relevant Accounting Standard.

Accepted Answer

The distinction between changes in accounting policies and changes in accounting estimates (or new schemes) is governed by **AS 5: Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies**.

**(i) Change in Useful Life of Furniture (5 years to 3 years):**

This is **NOT a change in accounting policy**; it is a **change in accounting estimate**. The accounting standard AS 5 clearly distinguishes between a change in the fundamental accounting principle (policy) and a change in the quantitative assumption (estimate) applied to an asset. The depreciation method (straight-line basis) remains unchanged—only the estimate of useful life is revised based on new information or experience. AS 5 requires that changes in accounting estimates be accounted for prospectively by adjusting the carrying amount of the asset and depreciating the revised amount over the remaining revised useful life. No retrospective restatement of prior year figures is required.

**(ii) Introduction of Pension Scheme:**

This is **NOT a change in accounting policy**. This represents a new business decision by management to establish a pension obligation for employees, not a change in how existing transactions are accounted for. The accounting policy (accrual basis recognition of obligations) remains consistent. The introduction of the pension scheme creates a **new liability** that must be recognized and measured under **AS 29: Provisions, Contingent Liabilities and Contingent Ass…

Question 9

Comment on the treatment of construction contracts as per AS 7.

Accepted Answer

**AS 7 – Construction Contracts** governs the recognition of revenue and costs associated with construction contracts. The accounting treatment depends on identifying whether multiple contracts should be treated separately or combined.

**PART (i): Contract Identification**

AP Ltd. should treat these as **THREE SEPARATE CONTRACTS** based on the following principles under AS 7:

**When contracts should be treated separately:** If each contract can be separately identified with its own timeline, value, and performance obligations, they are recognized as separate contracts. Here, the agreement explicitly specifies separate values (₹50 Lakh, ₹60 Lakh, ₹75 Lakh) and separate completion times for each unit. This clear segregation indicates that each unit is a distinct contract with identifiable scope and timeline.

**When contracts should be combined:** AS 7 requires combining contracts only where: (a) they are negotiated as a single package deal, (b) the contracts are so closely linked that they form a single project, or (c) one contract cannot be performed without another. The facts given show no such interdependence. Each unit has independent specifications, making them separately performable.

**Practical implication:** Treating them as separate contracts allows AP Ltd. to recognize revenue on each unit independently based on its own percentage of completion. If one unit incurs a loss while others are profitable, the loss is recognized immediately for that contract, while othe…

Question 10

You are required to advise the accountant of B.S. Ltd., with valid reasons, the amount to be recognized as revenue for the year ended 31st March, 2024 in the following cases in the context of AS-9.

Accepted Answer

**(i) Bill and Hold Sale — ₹50,000**

Under **AS 9 (Revenue Recognition)**, revenue from sale of goods is recognized when the seller transfers to the buyer the **significant risks and rewards of ownership**. In a **bill and hold** arrangement, where delivery is deferred at the **buyer's specific request**, revenue can still be recognized at the time of sale, provided: (a) it is probable that delivery will be made, (b) the goods are identified and ready for delivery, and (c) the buyer acknowledges the deferred delivery.

Here, the goods were sold on 18-03-2024 (within FY 2023-24), delivery was deferred solely at the **buyer's request**, and the goods are ready for dispatch. The risks and rewards have effectively passed to the buyer. Therefore, **₹50,000 should be recognized as revenue in FY 2023-24**.

**(ii) Consignment Sale — ₹1,25,000**

Under AS 9, where goods are sent on a **consignment basis**, the consignor does **not** transfer risks and rewards at the time of dispatch. The consignee acts as an agent; revenue is recognized only when the **consignee sells the goods** to the ultimate buyer.

As on 31-03-2024, 20% of goods worth ₹25,000 remain unsold with the consignee. These goods have not been sold and risks/rewards have not transferred. Only 80% of the goods have been sold by the consignee.

Revenue to be recognized = 80% × ₹1,25,000 = **₹1,00,000**.
The remaining **₹25,000 (20%)** should NOT be recognized as revenue in FY 2023-24 — it continues to be treated as invent…

Question 11

Shrishti Ltd. contracted with a supplier to purchase machinery to be installed in Department A in three months' time. Special foundations required costing ₹ 1,41,870. Technician employed at ₹ 45,000 per month supervised for 3 months, billed by Department B at ₹ 49,500 per month including 10% profit margin. Machine purchased at ₹ 1,58,34,000 inclusive of IGST @ 12% (input credit available). Transportation charges ₹ 55,770. Architect appointed at ₹ 30,000 to supervise installation. Ascertain the amount at which Machinery should be capitalized under AS 10 considering IGST credit is availed and internally booked profits eliminated.

Accepted Answer

**Capitalization of Machinery under AS 10 (Property, Plant and Equipment)**

As per **AS 10**, the cost of an item of property, plant and equipment comprises its purchase price (net of refundable taxes) and any directly attributable costs of bringing the asset to its working condition for its intended use. Internally generated profits within the entity are eliminated and borrowing costs are only included if qualifying under AS 16.

**Treatment of each component:**

**1. Special Foundations (₹1,41,870):** These are necessary to install the machinery and are directly attributable costs. Fully capitalized: **₹1,41,870**.

**2. Technician's Cost (Department B billing):** Department B bills ₹49,500 per month, which includes a 10% internal profit margin. Under AS 10, internally generated profits within the entity must be eliminated when determining the cost of a self-constructed or internally supervised asset. The actual cost is ₹45,000 per month × 3 months = **₹1,35,000**. The profit element of ₹4,500 × 3 = ₹13,500 is excluded.

**3. Machinery Purchase Price (net of IGST):** The machine is purchased at ₹1,58,34,000 inclusive of IGST @ 12%. Since input tax credit (ITC) is available, IGST is a refundable/recoverable tax and must be excluded from the cost as per AS 10. Net cost = ₹1,58,34,000 ÷ 1.12 = **₹1,41,37,500**.

**4. Transportation Charges (₹55,770):** Directly attributable cost of bringing the asset to its location. Fully capitalized: **₹55,770**.

**5. Architect's Fees (₹30…

Question 12

Legal Ltd. is engaged in manufacturing of rubber and requires machineries of latest technology. It resorts to Long Term Foreign Currency Borrowings. On 1st April, 2023, it borrowed US $1 million when exchange rate was 1 $ = ₹ 63. Funds used for acquiring machineries for three different plants. Machinery useful life 10 years, residual value ₹ 30,00,000. Earlier, company charged exchange differences to profit and loss account. Now for this new purchase, Legal Ltd. wants to capitalize the exchange difference. Exchange rate on 31st March, 2024 is 1 US $ = ₹ 62. Company has no old long term foreign currency borrowings except for this amount. Comment whether Legal Ltd. can capitalize the exchange difference to the cost of asset on 31st March, 2024. If yes, calculate the depreciation amount on ma…

Accepted Answer

**Whether Legal Ltd. can capitalize exchange differences:**

**Para 46 of AS 11 (The Effects of Changes in Foreign Exchange Rates)** — inserted by the Companies (Accounting Standards) Amendment Rules, 2009 — permits an entity to add or deduct exchange differences arising on long-term foreign currency monetary items to or from the cost of depreciable capital assets acquired using such borrowings. This is an **optional accounting policy** under AS 11.

Legal Ltd. previously charged exchange differences to P&L. Changing to the capitalization approach constitutes a **change in accounting policy** under **AS 5 (Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies)**. A change is permissible if it results in a more appropriate presentation or is required by statute or an accounting standard.

Since Legal Ltd. has **no old long-term foreign currency borrowings (LTFCB)**, there are no prior-period inconsistencies or retroactive adjustments required. The company can legitimately **adopt the capitalization policy prospectively** for this new borrowing. The change should be disclosed in the financial statements as required by AS 5.

**Therefore, Yes — Legal Ltd. can capitalize the exchange difference to the cost of the machinery.**

**Nature of exchange difference:**

The US dollar has **depreciated** against the rupee (from ₹63 to ₹62). This results in an **exchange gain** of ₹10,00,000, which is **deducted from the cost of the asset** under Para 46 …

Question 13

XYZ Limited has set-up its business in a designated backward area which entitles the company to receive from the Government of India a subsidy of 20% of the cost of investment. Having fulfilled all conditions under the scheme, the company on its investment of ₹ 75 crore received ₹ 15 crore as subsidy from the Government in January 2024. The company wants to treat this receipt as an item of revenue and thereby reduce the losses for the year ended on 31st March, 2024. Keeping in view the relevant Accounting Standard, examine whether this action is justified or not.

Accepted Answer

The company's proposed treatment is **NOT justified** under AS 12 (Accounting Standard 12 - Accounting for Government Grants).

**Nature of the Grant**: The subsidy of ₹15 crore received by XYZ Limited is a **capital grant** (related to assets), not a revenue grant. This is evident because: (i) the grant is linked to capital investment of ₹75 crore in setting up the business; (ii) the scheme provides assistance for capital expenditure in a backward area; and (iii) the benefit will accrue over the useful life of the assets acquired.

**AS 12 Provisions on Capital Grants**: According to AS 12, government grants related to assets should NOT be recognized as revenue income. Instead, the standard prescribes two acceptable treatments:

**Method 1 - Net Presentation**: The grant should be deducted from the cost of the related asset. Thus, the asset cost would be ₹75 crore less ₹15 crore = ₹60 crore.

**Method 2 - Deferred Income**: The grant should be recognized as deferred income in the Balance Sheet and systematically recognized in the Profit & Loss Statement over the useful life of the asset. This ensures the grant benefit is matched with the depreciation charge of the asset.

**Why the Company's Treatment is Incorrect**: (i) Recognizing the capital grant as revenue income in 2023-24 distorts the true profit for that year by artificially inflating it; (ii) AS 12 explicitly requires matching the recognition of capital grants with the asset's useful life, not immediate recognition;…

Question 14

Mr. Harsh provides the following details relating to his holding in 10% debentures (face value ₹ 100 each) of Exe Ltd. held as current assets: 1.4.2023 Opening balance - 12,500 debentures, cost ₹ 12,25,000; 1.6.2023 Purchased 9,000 debentures @ ₹ 98 each ex-interest; 1.11.2023 Purchased 12,000 debentures @ ₹ 115 each cum interest; 31.1.2024 Sold 13,500 debentures @ ₹ 110 each cum-interest; 31.3.2024 Market value ₹ 115 each. Due dates of interest: 30th June and 31st December. Brokerage 1% on each transaction. Mr. Harsh closes books on 31.3.2024. Show investment account as it would appear in his books assuming FIFO method.

Accepted Answer

**Investment in 10% Debentures of Exe Ltd. — Ledger Account (FIFO Method)**

The investment is held as a **current asset**, so under **AS 13 (Accounting Standard on Accounting for Investments)**, it is valued at the **lower of cost or net realisable value (NRV)**.

The account is maintained with three columns on each side: **Units**, **Interest**, and **Cost (Principal)**.

---

**Dr Side**

| Date | Particulars | Units | Interest ₹ | Cost ₹ |
|---|---|---|---|---|
| 1.4.2023 | To Balance b/d | 12,500 | — | 12,25,000 |
| 1.6.2023 | To Bank A/c (Purchase — ex-interest) | 9,000 | — | 8,90,820 |
| 1.11.2023 | To Bank A/c (Purchase — cum-interest) | 12,000 | 40,000 | 13,53,800 |
| 31.3.2024 | To Profit & Loss A/c (Profit on sale) | — | — | 1,34,920 |
| 31.3.2024 | To Profit & Loss A/c (Net interest income) | — | 1,87,500 | — |
| | **Total** | **33,500** | **2,27,500** | **36,04,540** |

**Cr Side**

| Date | Particulars | Units | Interest ₹ | Cost ₹ |
|---|---|---|---|---|
| 30.6.2023 | By Bank A/c (Interest received) | — | 38,750 | — |
| 31.12.2023 | By Bank A/c (Interest received) | — | 1,27,500 | — |
| 31.1.2024 | By Bank A/c (Sale — cum-interest) | 13,500 | 11,250 | 14,58,900 |
| 31.3.2024 | By Accrued Interest A/c (c/d) | — | 50,000 | — |
| 31.3.2024 | By Balance c/d | 20,000 | — | 21,45,640 |
| | **Total** | **33,500** | **2,27,500** | **36,04,540** |

---

**Key conclusions:**

- **Profit on sale** (31.1.2024) = ₹1,34,920
- **Net interest income** for the year = ₹1,87,500
…

Question 15

The Summarized Balance Sheets of Gyan Ltd. And Kiran Ltd. as on 31st March 2024 are given. Gyan Ltd. has acquired the business of Kiran Ltd. as on 31 March 2024 as per a specified scheme of merger: (1) Banks agreed to waive-off 50% loan of Gyan Ltd.; (2) Gyan Ltd. will reduce its shares to ₹ 2 per share and then consolidate 5 such shares into one share of ₹ 10; (3) Gyan Ltd. will issue 2 equity shares (new) for 3 equity shares of Kiran Ltd. at ₹ 20 each with face value ₹ 10; (4) Preference shareholders of Kiran Ltd. will be paid off by issuing equivalent number of 10% Preference shares of Gyan Ltd. at ₹ 105 per share; (5) Dividend of Kiran Ltd. will be paid after merger; (6) Trade payables of Gyan Ltd. include ₹ 50 lakhs payable to Kiran Ltd. Pass necessary Journal entries in the books of …

Accepted Answer

**Incomplete Data — Balance Sheet Figures Not Provided**

The question states that the Summarised Balance Sheets of **Gyan Ltd.** and **Kiran Ltd.** as on 31st March 2024 are given, but the actual figures (share capital, reserves, loans, trade payables, assets, etc.) have **not been included** in the question as submitted.

To solve this question completely under **AS 14 — Accounting for Amalgamations**, the following data is required:

1. **Gyan Ltd. Balance Sheet** — Equity share capital (number of shares × face value), bank loan amount, trade payables (including the ₹50 lakhs to Kiran Ltd.), other liabilities, and all assets.

2. **Kiran Ltd. Balance Sheet** — Equity share capital (number of shares), preference share capital (number of shares × face value), proposed dividend amount, trade receivables (including ₹50 lakhs from Gyan Ltd.), all assets and liabilities.

**Methodology that will be applied once data is available (Pooling of Interests / Purchase Method per AS 14):**

- Since this is described as a 'merger' scheme, it will likely be treated as **Amalgamation in the Nature of Merger** (Pooling of Interests Method) — all assets and liabilities of Kiran Ltd. recorded at book values; difference adjusted to **Reserves**.
- If conditions of AS 14 para 27 are not fully met, **Purchase Method** applies — difference goes to **Goodwill or Capital Reserve**.

**Journal Entries framework in Gyan Ltd.'s books:**

(1) Bank Loan Waiver → Dr. Bank Loan A/c, Cr. Capital Reserve A/…

Question 16

U Limited has obtained a term loan of ₹ 620 lacs for a complete renovation and modernisation of its Factory on 1st April, 2023. Plant and Machinery was acquired under the modernisation scheme and installation was completed on 30th April, 2024. Expenditure of ₹ 510 lacs was incurred on installation of Plant and Machinery. ₹ 54 lacs has been advanced to suppliers for additional assets which were also received and installed before 30th April, 2024 (additional asset has taken substantial period of time in its installation). Balance loan of ₹ 56 lacs has been used for working capital purposes. The company has paid total interest of ₹ 68.20 lacs during financial year 2023-2024. The accountant seeks your advice how to account for the interest paid in the books of accounts.

Accepted Answer

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

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. A qualifying asset is one that necessarily takes a **substantial period of time** to get ready for its intended use.

**Identification of qualifying vs. non-qualifying use:**

Out of the total term loan of ₹620 lacs:
- ₹510 lacs was used for installation of Plant and Machinery under modernisation — this is a **qualifying asset** (installation took from April 2023 to April 2024, i.e., more than 12 months).
- ₹54 lacs was advanced to suppliers for additional assets that also took a substantial period for installation — this is also a **qualifying asset**.
- ₹56 lacs was used for **working capital purposes** — this is **not** a qualifying asset.

**Allocation of interest:**

Since the loan of ₹620 lacs is used for both qualifying and non-qualifying purposes, interest must be allocated proportionately.

Total interest for FY 2023–24 = ₹68.20 lacs
Implied interest rate = 68.20 ÷ 620 = **11% p.a.**

**Interest to be capitalised** (on ₹510 + ₹54 = ₹564 lacs):
= 564 × 11% = **₹62.04 lacs** — to be added to the cost of Plant and Machinery.

**Interest to be expensed** (on ₹56 lacs used for working capital):
= 56 × 11% = **₹6.16 lacs** — to be charged to the **Statement of Profit and Loss**.

**Conclusion:** The accountant shoul…

Question 17

SP hotels Limited enters into an agreement with Mr. A for running its hotel for a fixed return payable to him every year. The contract involves the day-to-day management of the hotel, while all financial and operating policy decisions are taken by the Board of Directors of the company. Mr. A does not own any voting power in SP Hotels Limited. Would he be considered as a related party of SP Hotels Limited?

Accepted Answer

**No, Mr. A would not be considered a related party of SP Hotels Limited.**

According to **AS 18 (Related Party Disclosures)**, a related party is a person or entity that is related to the reporting entity through control, joint control, significant influence, or through being key management personnel or immediate family member of such personnel.

**Analysis under AS 18:**

**Control or Significant Influence:** Mr. A does not own any voting power in SP Hotels Limited. The facts explicitly state that all financial and operating policy decisions are taken by the Board of Directors, not by Mr. A. Therefore, Mr. A has neither control nor significant influence over the entity's financial and operating policies.

**Key Management Personnel Test:** The critical issue is whether Mr. A qualifies as key management personnel. According to AS 18, key management personnel are those persons having authority and responsibility for planning, directing, and controlling the activities of the entity, directly or indirectly, including directors and senior management.

In this case, Mr. A's role is limited to day-to-day management of hotel operations only. He executes the management decisions but does not participate in formulating financial and operating policies. The agreement provides him a fixed return for his services, which is essentially a service contract—an arrangement to provide operational services rather than assume managerial responsibility.

**Conclusion:** Since Mr. A:
• Does not …

Question 18

Sun Limited wishes to obtain a machine costing ₹ 30 lakhs by way of lease. The effective life of the machine is 14 years, but the company requires it only for the first 3 years. It enters into an agreement with Star Ltd., for a lease rental for ₹ 3 lakhs p.a. payable in arrears and the implicit rate of interest is 15%. The chief accountant of Sun Limited is not sure about the treatment of these lease rentals and seeks your advice. (Use annuity factor at @ 15% for 3 years as 3.36)

Accepted Answer

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

AS 19 issued by the Institute of Chartered Accountants of India classifies leases as either a **Finance Lease** or an **Operating Lease** based on the substance of the transaction rather than its legal form.

**A Finance Lease** is one that transfers substantially all the risks and rewards incidental to ownership to the lessee. Key indicators include: (i) transfer of ownership at the end of the lease term; (ii) bargain purchase option; (iii) lease term covers the **major part of the economic life** of the asset; or (iv) **present value of minimum lease payments (MLP) amounts to substantially all of the fair value** of the leased asset.

**An Operating Lease** is a lease other than a finance lease — one where the lessor retains substantially all risks and rewards of ownership.

**Test 1 — Lease Term vs. Economic Life:**
Lease term = 3 years; Effective life of machine = 14 years.
Proportion = 3 ÷ 14 = **21.4%** — this is NOT a major part of the economic life of the asset.

**Test 2 — Present Value of Minimum Lease Payments vs. Fair Value:**
Minimum Lease Payments = ₹3 lakhs p.a. for 3 years (in arrears).
Present Value of MLP = ₹3 lakhs × Annuity Factor (15%, 3 years) = ₹3 × 3.36 = **₹10.08 lakhs**
Fair value of asset = ₹30 lakhs.
Proportion = 10.08 ÷ 30 = **33.6%** — this does NOT constitute substantially all of the fair value.

**Test 3 — Other Indicators:**
The question does not mention any transfer of ownership or bargain pur…

Question 19

The following information relates to XYZ Limited for the year ended 31st March, 2024: Net Profit for the year after tax ₹ 37,50,000; Number of Equity Shares of ₹ 10 each outstanding ₹ 5,00,000; Convertible Debentures Issued by the Company (at the beginning of the year): 8% Convertible Debentures of ₹ 100 each - 50,000 Nos., to be converted into 55,000 Equity Shares. Rate of Income Tax 30%. You are required to calculate Basic and Diluted Earnings Per Share (EPS).

Accepted Answer

**Basic Earnings Per Share (EPS):**

Basic EPS is calculated by dividing the net profit attributable to equity shareholders by the weighted average number of equity shares outstanding during the year, as per **AS 20 – Earnings Per Share** issued by the Institute of Chartered Accountants of India.

**Basic EPS = Net Profit after Tax / Weighted Average Equity Shares**
= ₹37,50,000 / 5,00,000 shares
= **₹7.50 per share**

**Diluted Earnings Per Share:**

For diluted EPS, the potential dilutive effect of conversion of the 8% Convertible Debentures is considered. Since the debentures were issued at the beginning of the year, the full-year interest and corresponding shares are included.

**Adjusted Numerator (Earnings):**
Interest on debentures saved (before tax): 50,000 × ₹100 × 8% = ₹4,00,000
Tax effect @ 30%: ₹4,00,000 × 30% = ₹1,20,000
Net after-tax saving added back = ₹4,00,000 − ₹1,20,000 = ₹2,80,000
Adjusted Earnings = ₹37,50,000 + ₹2,80,000 = **₹40,30,000**

**Adjusted Denominator (Shares):**
Existing equity shares = 5,00,000
Additional shares on conversion of debentures = 55,000
Adjusted shares = **5,55,000**

**Diluted EPS = ₹40,30,000 / 5,55,000 = ₹7.26 per share** (rounded to 2 decimal places)

Since Diluted EPS (₹7.26) < Basic EPS (₹7.50), the convertible debentures are **dilutive** and are correctly included in the diluted EPS calculation.

**Summary:** Basic EPS = ₹7.50 | Diluted EPS = ₹7.26

Question 20

Saharsh Ltd. is engaged in manufacturing of electric home appliances. The company is in the process of finalizing its accounts for the year ended 31.3.2023 and needs your expert advice on the following issues. Give your answers based on relevant Accounting standard.

Accepted Answer

**Advice to Saharsh Ltd. under AS 29 – Provisions, Contingent Liabilities and Contingent Assets (for the year ended 31.3.2023)**

**(i) Plant Shutdown – Rental Agreement (Onerous Contract)**

Since the plant is being shut down, the lease becomes an **onerous contract** under AS 29 — one where the unavoidable costs exceed the expected economic benefits. A provision must be recognised for the best estimate of the cost to settle the obligation.

The company has three options for the remaining lease period of **12 months** (1.4.2023 to 31.3.2024):
- **Continue paying rent:** 12 × ₹80,000 = ₹9,60,000
- **Cancel the lease (pay penalty):** 6 × ₹80,000 = ₹4,80,000
- **Sub-let the site (net cost):** (₹80,000 – ₹45,000) × 12 = ₹4,20,000

Under AS 29, for an onerous contract, the provision should be the **lower of the cost of fulfilling the contract or the cost of exiting it**. The most economical option is sub-letting at a net cost of ₹4,20,000.

**Provision to be made: ₹4,20,000**

**(ii) Consumer Court Case – Contingent Liability**

AS 29 requires a **provision** only when: (a) there is a present obligation, (b) an outflow of resources is **probable** (i.e., more likely than not — >50%), and (c) a reliable estimate can be made.

Here, the probability that the penalty WILL be levied is only **25%** (since there is a 75% chance it will NOT be levied). Since outflow is not probable, **no provision** should be made for the ₹20 lakh penalty. It should be **disclosed as a contingent liabil…

CA Inter Adv Accounting

Drill 5 questions from this paper — instant grading

Worked Solution

Write it like this

1The skeleton

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3Common trap