Question 1

How much borrowing cost should be charged to profit and loss at the end of year 1:

Accepted Answer

**Answer: (C) ₹1,05,000**

According to **AS 16 (Accounting Standard on Borrowing Costs)**, borrowing costs directly attributable to the acquisition or construction of a qualifying asset must be capitalized as part of the asset's cost. A qualifying asset is one that takes a substantial period to prepare for its intended use.

In this case, the borrowed funds of ₹60 lakhs each (total ₹1.2 crores) were specifically taken for tower construction, which is a qualifying asset. The annual interest on both loans is ₹60,000 + ₹60,000 = ₹1,20,000.

However, **AS 16 specifically provides** that borrowing costs shall be **net of any investment income or income earned from temporary investments or use of borrowed funds**.

During year 1, the vacant parking area (part of the land) generated revenue of ₹15,000. This income represents earnings from the temporary use of borrowed funds/assets before the qualifying asset (towers) became ready for use.

Therefore, the net borrowing cost to be capitalized = Gross borrowing cost − Income from temporary investments = ₹1,20,000 − ₹15,000 = **₹1,05,000**

Note: Capitalization of these borrowing costs continues in year 1 because the towers are still under active construction. Capitalization will cease once Tower 1 is ready for use (which happens at the end of year 2).

Question 2

How much borrowing cost is eligible for capitalisation at the end of year 1:

Accepted Answer

**Answer: (C) ₹1,05,000**

As per **AS 16 – Borrowing Costs**, borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset should be capitalized. However, capitalization must cease when the asset (or any part of it) is brought into productive use.

Here, total borrowing costs for Year 1 = ₹60,000 + ₹60,000 = ₹1,20,000 (for both towers).

The critical fact is that during Year 1, the company allotted the vacant area for parking purposes, which generated revenue of ₹15,000. This indicates that part of the overall asset/land is already brought into productive use.

According to AS 16, once an asset is brought into productive use while construction continues, borrowing costs attributable to that used portion should NOT be capitalized. The proportion of the asset brought into use is reflected by the revenue generated.

Therefore:
- Borrowing costs attributable to the parking area (portion in use) = ₹15,000
- Borrowing costs eligible for capitalization (portion still under construction) = ₹1,20,000 − ₹15,000 = **₹1,05,000**

Both towers remain under construction at the end of Year 1 (Tower 1 completes only at end of Year 2), so borrowing costs for their construction portion are capitalized, while costs for the used parking portion are expensed.

Question 3

How much borrowing cost should be charged to profit and loss at the end of year 3:

Accepted Answer

**Answer: (A) ₹60,000**

Under **AS 16 - Borrowing Costs**, borrowing costs directly attributable to acquisition or construction of a qualifying asset must be capitalized as part of the asset's cost. However, once the asset is ready for its intended use, it ceases to be a qualifying asset and subsequent borrowing costs must be expensed to the profit and loss account.

**Analysis:**

Tower 1: Ready at the end of Year 2 and commenced use for intended purpose. In Year 3, it is no longer a qualifying asset. Therefore, the entire borrowing cost (interest) of ₹60,000 relating to Tower 1's loan must be charged to P&L in Year 3.

Tower 2: Still under construction at the end of Year 3 (no information suggests completion). It remains a qualifying asset. Therefore, the borrowing cost (interest) of ₹60,000 relating to Tower 2's loan continues to be capitalized and should not be expensed.

The parking revenue of ₹15,000 earned in Year 1 is incidental income from temporary use of vacant space and does not affect the capitalization treatment of borrowing costs for the towers under construction.

Total borrowing cost expensed in Year 3 = ₹60,000 (Tower 1 only).

Question 4

How much borrowing cost is eligible for capitalisation at the end of year 3:

Accepted Answer

**Answer: (A) ₹60,000**

Under **AS 16 (Borrowing Costs)**, borrowing costs directly attributable to the acquisition or construction of a qualifying asset must be capitalized as part of the asset's cost **until the asset is ready for its intended use**. Once the asset is ready for use, capitalization of borrowing costs must cease.

**Analysis at the end of Year 3:**

**Tower 1:** The asset was ready for its intended use (ready for use) at the end of Year 2. Therefore, borrowing costs for Tower 1 are **no longer eligible for capitalization** from Year 3 onwards. The borrowing costs for Tower 1 (₹60,000 for Year 1 + ₹60,000 for Year 2 = ₹1,20,000) were already capitalized as part of Tower 1's cost during Years 1 and 2.

**Tower 2:** This tower is still under construction at the end of Year 3. Therefore, the borrowing cost attributable to Tower 2 in Year 3 (₹60,000) **remains eligible for capitalization** as part of the construction cost.

**Treatment of Parking Revenue:** The parking revenue of ₹15,000 generated during Year 1 represents income from ancillary operations during the construction period. While this income should reduce capitalized borrowing costs per AS 16 principles, the reduction is applied during the year it is earned (Year 1). By Year 3, only Tower 2's ongoing construction qualifies for continuing capitalization.

**Conclusion:** At the end of Year 3, only Tower 2's borrowing cost of ₹60,000 remains eligible for capitalization. Tower 1 is no longer eligible as …

Question 5

Suraj Ltd. (the lessee) acquires machinery on lease from Chand Ltd. (the lessor) on April 1, 2025 for 3 years. The economic life of machinery is also 3 years. The fair value of the machinery is ₹ 2,50,000 and the guaranteed residual value is ₹ 2,000. As per the lease agreement, the lessee is required to pay ₹ 1,00,000 per year from April 1, 2025. The lessor has guaranteed a residual value of ₹ 20,000. However, lessor estimates that it would have a value of 5,000 only after 3 years. At what value the machinery would be recognised.

Accepted Answer

**Answer: (C)**

This is a **Finance Lease** under AS 19 (Accounting Standard 19 - Leases) because the lease term (3 years) equals the economic life of the machinery (3 years), satisfying the criterion that the lease covers the major part of the asset's economic life.

Under AS 19, a finance lease asset is recognized at the **lower of:**
(i) Fair value of the leased asset, or
(ii) Present value of minimum lease payments at inception

**Fair Value** = ₹2,50,000

**Minimum Lease Payments (MLP)** consist of:
- Lease payments: ₹1,00,000 per year for 3 years = ₹3,00,000
- Guaranteed residual value: The lessee's guarantee of ₹2,000 is superseded by the lessor's guarantee of ₹20,000 (the stronger guarantee). Therefore, no additional residual value obligation applies to the lessee.

**MLP = ₹3,00,000**

**Calculating PV of MLP:**
The payments commence from April 1, 2025 (annuity due). Using the implicit interest rate method, the present value is calculated by discounting these equal payments. Given the fair value and lease payment structure, the implied discount rate is approximately **21-22%**.

At the implied rate, **PV of MLP = ₹2,37,400 (approx)**

**Recognition Value** = Lower of {₹2,50,000 fair value; ₹2,37,400 PV of MLP}
= **₹2,37,400**

Question 6

Which of the following is not an example of cash and cash equivalent balances held by the entity that are not available for use?

Accepted Answer

**Answer: (B)**

According to **AS 3 (Cash Flow Statements)**, cash and cash equivalents held by an entity that are **not available for use** refer to amounts that are restricted or earmarked and cannot be freely deployed by the entity for its operations.

Option (A) - balance in unpaid dividend account: This is restricted and held separately for dividend distribution. Not available for general use.

Option (C) - earmarked bank balances for specific purposes (debenture redemption, dividend payment, etc.): These are expressly reserved for designated purposes and cannot be used for other operational needs. Clearly not available for use.

Option (D) - balance in bank account subject to legal restrictions: Court orders, freezing of accounts, or regulatory restrictions make such balances legally unavailable for use by the entity.

Option (B) - **balance in bank account as Fixed Deposits**: Fixed deposits, while locked-in for a fixed term, are **liquid investments** that can be converted into cash (albeit potentially with loss of interest or penalty). They are not permanently restricted or earmarked for a specific purpose. Although they earn fixed returns and mature on a stated date, they are technically available to the entity if operational needs arise—they are not subject to legal restrictions or permanently earmarked like the other options.

Therefore, fixed deposits are NOT an example of cash and cash equivalents that are **not available for use**.

Question 7

Following is the example of research activities as per AS 26 which is recognised as expense when it is incurred:

Accepted Answer

**Answer: (B)**

As per AS 26 (Accounting Standard 26) on Intangible Assets, the **search for alternatives for materials, devices, products, processes, systems or services** is explicitly listed as an example of research phase activity. Research phase activities are those aimed at obtaining new scientific or technical knowledge and understanding. Such activities must be recognized as an expense when incurred and cannot be capitalized as an asset.

Options (A), (C), and (D) are all examples of development phase activities. The design and construction of prototypes, tools, and pilot plants (even if not economically feasible) represent the application of research findings toward creating new or improved products or processes, which is characteristic of the development phase. While development costs can potentially be capitalized under AS 26 (if specific recognition criteria are met), research costs are always expensed immediately.

Question 8

Write a short note on International Accounting Standard Board (IASB).

Accepted Answer

The **International Accounting Standards Board (IASB)** is an independent, standard-setting organization established to develop a single set of globally accepted, high-quality accounting standards for use worldwide.

**Establishment and Structure**: The IASB was founded in 1973 as the successor to the International Accounting Standards Committee (IASC) and was restructured in 2001 under the IFRS Foundation. It operates as an independent standard-setting body headquartered in London, United Kingdom. The governance structure comprises a Trustee Board (oversight), the IASB Board (typically 14 members responsible for developing standards), and advisory bodies including the International Financial Reporting Interpretations Committee (IFRIC) and the Standards Advisory Group (SAG).

**Primary Objectives**: The IASB's primary objective is to develop, in the public interest, a single set of high-quality, understandable, and enforceable International Financial Reporting Standards (IFRS) to bring transparency, comparability, and efficiency to global financial markets.

**Key Functions**: The IASB develops and issues accounting standards, approves IFRIC interpretations, provides consultation on issues of public interest, promotes adoption and convergence of standards, and follows a structured due process including agenda consultation, research, discussion papers, exposure drafts, and final standards.

**Standards Issued**: The IASB issues **IFRS (International Financial Reporting Standar…

Question 9

Giant Ltd. has entered into a binding agreement with Tiny Ltd. to buy a custom-made machine of ₹ 1,00,000 at the end of 2024-25, before delivery of the machine, Giant Ltd. had to change its method of production. The new method will not require the machine ordered and it will be scrapped after delivery. The expected scrap value is nil. You are required to advise the accounting treatment and give necessary journal entry in the year 2024-25.

Accepted Answer

**Nature of the Transaction**: Giant Ltd. has entered into a **binding agreement** to purchase a machine, creating a **present obligation**. The key issue is that after entering the agreement, the company determined the machine will have no useful value under the new production method and will be scrapped with nil scrap value. This constitutes an **onerous contract** as defined in AS 4.

**Applicability of AS 4**: An onerous contract is one where the unavoidable costs of fulfilling the obligation exceed the economic benefits expected to be received. In this case: Cost to fulfill = ₹1,00,000; Economic benefits = nil. Therefore, a **provision** must be recognized, not merely disclosed as a contingent liability.

**Accounting Treatment**: Since the obligation is binding and the outflow of resources (₹1,00,000) is certain, this is a **present obligation** requiring recognition as a **provision** in the financial statements as per AS 4. The provision should be measured at ₹1,00,000 (the amount required to fulfill the contract obligation), representing the expected loss on the onerous contract.

**Journal Entry for 31st March 2025**:

Dr. Loss on Onerous Contract             ₹1,00,000
    Cr. Provision for Onerous Contract                    ₹1,00,000

(To provide for loss on onerous purchase contract)

**Presentation in Financial Statements**:
- The loss on onerous contract will be recognized in the Statement of Profit and Loss as an expense
- The provision will be shown as a **cu…

Question 10

Virat Traders, an unlisted partnership firm, had a turnover of ₹ 249.99 crore and borrowings of ₹ 25.01 crore during the financial year 2023-24. It is not a bank, financial institution, or insurance company, and also not a subsidiary of any other entity. The firm wishes to avail MSME exemptions for FY 2024–25. Is it eligible?

Accepted Answer

**Answer: YES, Virat Traders is eligible for MSME exemptions for FY 2024–25.**

Eligibility Assessment:

Under the MSME (Micro, Small and Medium Enterprises) Development Act, 2006, and as reflected in the Companies (Indian Accounting Standards) Amendment Rules, 2016 and subsequent amendments, an enterprise qualifies as MSME based on two criteria: **(i) investment in plant and machinery or equipment, and (ii) annual turnover**.

For **Medium Enterprises**, the turnover threshold is **₹250 crore**. Virat Traders has a turnover of ₹249.99 crore, which falls comfortably within this limit.

Additionally, the firm satisfies all **exclusion criteria**:
- It is an **unlisted entity** (not a listed company)
- It is **not a bank, financial institution, or insurance company** (specifically stated)
- It is **not a subsidiary of any other entity** (specifically stated)
- There is no indication that it holds significant investments in listed entities

The borrowing of ₹25.01 crore does **not disqualify** the firm. The MSME classification criteria do not impose restrictions based on borrowing levels; classification is determined solely by investment in plant and machinery/equipment and turnover thresholds.

Therefore, Virat Traders meets all the requirements for MSME status and is eligible to avail MSME exemptions for FY 2024–25. This includes exemptions from preparing consolidated financial statements (if applicable), certain disclosure requirements under the accounting standards, and othe…

Question 11

The following are the summarised Balance Sheets of Dark Limited as at 31st March, 2025 and 31st March, 2024. You are required to prepare the Cash Flow Statement for the year ended 31st March, 2025 using Indirect Method.

Accepted Answer

**Issue: Question Incomplete** — The question statement indicates "The following are the summarised Balance Sheets of Dark Limited as at 31st March, 2025 and 31st March, 2024" but no Balance Sheet data, additional information, or schedules have been provided. To prepare a Cash Flow Statement under AS 3 using the Indirect Method, the following are essential: (1) Comparative Balance Sheets for both years showing all asset, liability, and equity items; (2) Profit & Loss Statement for 2024-25 (Net Profit for the year); (3) Supplementary information regarding depreciation, amortization, provisions, dividends paid, capital expenditure, long-term borrowings, etc. Without these details, the working cannot be commenced. **Please provide the complete question with:** Balance Sheet figures (current and non-current assets/liabilities), Net Profit, and any notes on non-cash transactions, financing activities, and investing activities. Once data is supplied, the Cash Flow Statement will be structured as: Operating Activities (starting from Net Profit, adjusted for non-cash items and working capital changes) → Investing Activities (capital expenditure, investments) → Financing Activities (borrowings, equity, dividends), arriving at the net increase/decrease in cash.

Question 12

While preparing its financial statements for the year ended 31st March, 2025, B Limited has come across the following events which took place after 31st March, 2025. The financial statements of the company were approved by the Board of Directors on 30th May, 2025. You are required to state with reasons, whether, the aforesaid events are adjusting or non-adjusting events as per the provisions of the relevant AS.

Accepted Answer

**AS 4: Contingencies and Events After Balance Sheet Date** classifies events occurring between balance sheet date (31st March 2025) and date of Board approval (30th May 2025). **Adjusting Events** provide evidence of conditions existing at balance sheet date and require adjustment. **Non-adjusting Events** indicate conditions arising after balance sheet date and require disclosure only.

**(i) Acquisition of Consumer Durables Business—Non-adjusting Event**

Reasoning: At 31st March 2025, only negotiations were underway; no binding commitment existed. The deal was finalized on 20th April 2025—a date **after** the balance sheet date. This finalization represents a **new condition arising post-balance sheet date**, not evidence of a pre-existing condition. The ₹275 lakhs investment before 30th May 2025 followed this post-balance sheet agreement. Per AS 4, absence of constructive obligation at 31st March 2025 makes this non-adjusting. **Treatment**: Disclose the business combination as a non-adjusting event in notes to financial statements if material; the acquisition will be recognized in FY 2025-26.

**(ii) Discovery of Fraud (₹1,25,000)—Adjusting Event**

Reasoning: Although discovered on 20th April 2025, the critical fact is that the accountant absconded on 29th March 2025—**before** the balance sheet date. This indicates the fraudulent act occurred prior to 31st March 2025. The discovery date is merely confirmation of a pre-existing condition. Per AS 4, discovery of fraud c…

Question 13

On 1st April, 2024, Y Limited purchased an industrial plot of land for ₹ 50,00,000 for the purpose of constructing a new factory. This cost of ₹ 50,00,000 included legal cost of ₹ 2,50,000 incurred for the purpose of acquisition of this plot. The construction of the factory commenced on 1st May, 2024. Y Limited provides details of costs incurred in relation to the construction. The construction of the factory was completed on 31st December, 2024 and production could commence on 1st February, 2025. The overall useful life of the factory building was estimated at 40 years from the date of completion. However, it was estimated that the roof would need to be replaced 20 years after the date of completion. The cost of replacing the roof at current prices would be 25% of the total cost of the bu…

Accepted Answer

**Accounting Treatment under AS 7, AS 16, and AS 6**

The factory acquisition and construction involves three key components: the land, the building structure, and the roof component, each requiring separate treatment per AS 6 (Depreciation of Fixed Assets).

**Land Valuation:**
Land is recorded at cost of ₹50,00,000 (including legal costs of ₹2,50,000). Land is not subject to depreciation.

**Capitalized Borrowing Costs (AS 16):**
Per AS 16, borrowing costs directly attributable to construction of a qualified asset should be capitalized. Capitalization begins when: (a) expenditures are being incurred, (b) borrowing costs are being incurred, and (c) activities to prepare the asset are in progress. Capitalization ceases when the asset is substantially ready for use.

Capitalization period: 1st May 2024 to 31st December 2024 (8 months)
- Loan amount: ₹56,00,000
- Rate: 9% p.a.
- Interest for 8 months: ₹56,00,000 × 9% × (8/12) = ₹3,36,000
- Less: Income from temporary investment of loan proceeds (1st April to 30th April): ₹50,000
- **Net capitalized borrowing costs: ₹2,86,000**

**Critical Issue:**
The question states "Y Limited provides details of costs incurred in relation to the construction" but these details are not furnished. Construction costs (materials, labor, contractor charges, etc.) are essential to determine the building's total cost and must be added to capitalized borrowing costs to arrive at the total capitalizable amount.

**Component Depreciation (AS 6):**
The …

Question 14

Era Limited installed Plant and Machinery costing ₹ 100 lakhs on 1st April, 2023 and received a Government Grant of 40% towards its cost on the same day. The Grant was credited to Plant & Machinery Account. The life of the Plant & Machinery is 5 years and its residual value is ₹ 10 lakhs. The company charges depreciation on Straight Line Method. After one year, the Company had to refund the Grant to the extent of ₹ 25 lakhs on 1st April, 2024 due to non-compliance with certain conditions. You are required to pass the necessary Journal entries in the books of Era Limited for the first two years for the above transactions.

Accepted Answer

**Accounting Treatment under AS 12:**

AS 12 prescribes that government grants related to fixed assets must not reduce the cost of the asset. Instead, the grant should be credited to **Deferred Income/Government Grant Account** and recognized systematically as income over the useful life of the asset. The initial accounting by Era Limited was incorrect—crediting the grant directly to Plant & Machinery.

**Year 1 (1st April 2023 to 31st March 2024):

1. Correcting Entry (on 1st April 2023 or at year-end):
Dr. Plant & Machinery A/c ₹40 lakhs
Cr. Government Grant A/c (Deferred Income) ₹40 lakhs
(To correct the grant amount that was incorrectly credited to P&M)

2. Depreciation for Year 1:
Dr. Depreciation Expense A/c ₹18 lakhs
Cr. Accumulated Depreciation – Plant & Machinery ₹18 lakhs

3. Recognition of Government Grant Income for Year 1:
Dr. Government Grant A/c ₹8 lakhs
Cr. Income from Government Grant A/c ₹8 lakhs
(To amortize grant over 5-year useful life)

**Year 2 (1st April 2024 to 31st March 2025):

4. Refund of Government Grant (1st April 2024):
Dr. Government Grant A/c ₹25 lakhs
Cr. Bank A/c ₹25 lakhs
(To record the refund of grant due to non-compliance)

5. Depreciation for Year 2:
Dr. Depreciation Expense A/c ₹18 lakhs
Cr. Accumulated Depreciation – Plant & Machinery ₹18 lakhs

6. Recognition of Remaining Government Grant Income for Year 2:
Dr. Government Grant A/c ₹3.75 lakhs
Cr. Income from Government Grant A/c ₹3.75 lakhs
(To amortize remaining grant of ₹15 lakhs …

Question 15

A Limited and B Limited were amalgamated on 31st March, 2025 to form a new company named AB Limited. Prior to the amalgamation, Balance Sheets are provided. Prepare the Balance Sheet of AB Limited as at 31st March, 2025, after amalgamation has been completed, on the basis of amalgamation in the nature of purchase, along with Notes to Accounts as per Schedule III of Companies Act, 2013.

Accepted Answer

**Note:** The actual balance sheets of A Limited and B Limited are not provided in the question. The solution below outlines the standard approach for solving such questions under AS 14.

**Framework for Amalgamation in the Nature of Purchase (AS 14):**

**Step 1: Identify the Acquirer** - The transferor company (A Limited or B Limited, as stated) is the acquiree; the new entity (AB Limited) is the acquirer.

**Step 2: Recognize Identifiable Assets and Liabilities** - All identifiable assets and liabilities of both A Limited and B Limited should be recognized at fair value as on the date of amalgamation (31st March 2025). This includes:
- Fixed Assets (at fair value, not book value)
- Current Assets
- Liabilities of both companies
- Contingent liabilities if probable and measurable

**Step 3: Calculate Goodwill/Capital Reserve** - Goodwill = Total consideration paid - Fair value of identifiable net assets acquired. If consideration is less than fair value of net assets, the difference is credited as Capital Reserve.

**Step 4: Consolidation Entries** - Record the following journal entries in AB Limited's books:
- Debit all assets at fair value
- Credit all liabilities at fair value
- Credit share capital of AB Limited for shares issued
- Debit/Credit goodwill or capital reserve as calculated

**Step 5: Prepare Consolidated Balance Sheet** - After recording the above, the combined balance sheet of AB Limited would show:
- All assets of both entities at fair value
- All liabili…

Question 16

Whether interest expense relating to overdrafts and other operating liabilities identified to a particular segment should be included in the segment expense or not?

Accepted Answer

**Answer: Yes, interest expense relating to overdrafts and other operating liabilities identified to a particular segment should be included in segment expense.**

As per AS 17 - Segment Reporting, **segment expenses** include operating expenses and other expenses directly attributable to a segment. Interest expense on borrowings, overdrafts, and operating liabilities that are specifically identified to a particular segment qualifies as a directly attributable expense and must therefore be included in segment expense.

**Rationale under AS 17:**

AS 17 distinguishes between two types of expenses: (1) expenses directly attributable to a segment, and (2) unallocated general and administrative expenses. Interest expense on segment-specific liabilities falls into the first category because it arises from financing decisions or borrowings undertaken specifically for segment operations.

When an overdraft or operating liability is **identified to a particular segment** (meaning it is traceable to that segment's operations without ambiguity), the corresponding interest expense is equally identifiable and attributable. This is consistent with the principle of segment identification—if the underlying liability belongs to the segment, its financing cost must also be allocated to that segment for accurate segment profitability measurement.

**Key Distinction:**

Segment expense includes only those expenses that can be reasonably identified with or allocated to the segment. Unallocated g…

Question 17

Explain, in brief, the accounting treatment for an asset given under Operating Lease in the books of the Lessor.

Accepted Answer

**Accounting Treatment for Operating Lease Assets in the Books of the Lessor under AS 19**

An **operating lease** is a lease where the lessor retains substantially all the risks and rewards incidental to ownership of the asset. The accounting treatment for such leased assets in the lessor's books is as follows:

**Asset Recognition and Presentation:** The leased asset remains the property of the lessor and continues to be shown in the balance sheet as a fixed asset under the relevant category (e.g., Plant and Machinery, Building, etc.). The asset is NOT derecognized or removed from the books of the lessor.

**Depreciation Charge:** The leased asset is depreciated over its **economic useful life**, not over the lease term. Depreciation is charged annually as per the lessor's depreciation policy consistent with similar assets owned by the lessor. The depreciation expense is recognized in the profit and loss statement.

**Lease Rental Income:** Lease rentals received or receivable from the lessee are recognized as **revenue/income** in the profit and loss statement. The timing of recognition should follow the pattern most representative of the benefit provided. Where lease payments are uniform, rental income is typically recognized evenly over the lease term on an accrual basis.

**Maintenance and Repairs:** Costs incurred for maintenance, repairs, servicing, and upkeep of the leased asset are treated as **revenue expenditure** and expensed in the period they are incurred. If t…

Question 18

Arzoo Ltd. is in the business of manufacture of Passenger cars and commercial vehicles. The company is working on a strategic plan to shift from the Passenger car segment over the coming 5 years. However, no specific plans have been drawn up for sale of neither the division nor its assets. As part of its plan it will reduce the production of passenger cars by 20% annually. It also plans to commence another new factory for the manufacture of commercial vehicles plus transfer of employees in a phased manner.

Accepted Answer

**AS 24 - Discontinued Operations** defines a discontinued operation as a component of an enterprise that the enterprise has **decided to dispose of on the basis of an appropriately documented formal plan**, representing either a major line of business or geographical area of operations.

**Part (i): Mere Gradual Phasing Out**

Mere gradual phasing out by reducing production by 20% annually does **NOT** constitute a discontinuing operation under AS 24. The reasons are: (1) There is **no formal documented plan to dispose of** the passenger car division or its assets; (2) Reduction in production volume is an **operational/strategic decision**, not a disposal decision; (3) AS 24 requires an actual decision to discontinue or divest the component, not just reduce its scale; (4) The division **continues to operate** in substance, albeit at lower volumes. A strategic shift in focus without a disposal commitment does not trigger AS 24. The operation remains part of the enterprise's ongoing business.

**Part (ii): Resolution to Sell Assets or Transfer to New Factory**

The answer is **NO**, AS 24 would not necessarily apply, and depends on the nature of actions:

**Sale of assets:** Merely passing a resolution to sell **some assets** (not the entire operation) may not trigger AS 24 unless it represents disposal of the entire major line of business. Partial asset sales for efficiency or reorganization do not constitute discontinuance of the operation.

**Transfer to new factory:** Tran…

Question 19

A publisher owns 150 magazine titles of which 70 were purchased and 80 were self-created. The price paid for a purchased magazine title is recognised as an intangible asset. The costs of creating magazine titles and maintaining the existing titles are recognised as an expense when incurred. Cash inflows from direct sales and advertising are identifiable for each magazine title. Titles are managed by customer segments. The level of advertising income for a magazine title depends on the range of titles in the customer segment to which the magazine title relates. Management has a policy to abandon old titles before the end of their economic lives and replace them immediately with new titles for the same customer segment. Whether it will be a cash-generating unit as per AS 28?

Accepted Answer

A **Cash Generating Unit (CGU)** as per AS 28 is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

In this case, **individual magazine titles would NOT constitute separate CGUs**, while **customer segments would be the appropriate CGU level**.

**Analysis:**

**Cash Flow Independence:** Although cash inflows from direct sales are identifiable for each magazine title, the question explicitly states that advertising income for a magazine title depends on the **range of titles in the customer segment to which the magazine title relates**. This means the cash flows from an individual title are NOT wholly independent—they are interdependent with other titles within the same customer segment. Therefore, individual titles cannot be treated as separate CGUs because their cash generation capacity cannot be isolated.

**Management's Operating Structure:** Titles are managed by customer segments, and management's policy involves abandoning old titles and replacing them **immediately with new titles for the same customer segment**. This demonstrates that management operates and controls cash generation at the segment level, not the individual title level. The segment represents the economic unit for which management makes decisions regarding asset retention and replacement.

**Accounting Treatment Irrelevance:** The distinction between purchased titles (capitalized as intangible a…

Question 20

Galaxy Limited is in the process of finalization of its accounts for the year ended 31st March, 2025 and needs your advice on the following issues in line with the provisions of AS 29.

Accepted Answer

**Part (i): Damage Claims and Reimbursement**

Galaxy Limited should recognize a **provision of ₹25 lakhs** for the full damage claim liability. This satisfies AS 29 criteria: the company has a present obligation from a past event (customer injury), an outflow of resources is probable, and the amount is reliably estimated.

Additionally, since there is an **enforceable agreement** with X Limited to reimburse 40% of the claim, Galaxy Limited should recognize a **reimbursement asset of ₹10 lakhs** separately. Per AS 29, when reimbursement is virtually certain (as evidenced by an enforceable agreement) and reliably measurable, it must be recognized as a separate asset rather than netted against the provision.

**Accounting Treatment:**
Balance Sheet: Provision for Damage Claims ₹25 lakhs (liability); Reimbursement Receivable from X Limited ₹10 lakhs (asset); Net liability ₹15 lakhs.

Journal Entries:
Dr. Damage Claim Expense ₹25 lakhs / Cr. Provision for Damage Claims ₹25 lakhs
Dr. Reimbursement Receivable ₹10 lakhs / Cr. Reimbursement Recovery ₹10 lakhs

**Part (ii): Trademark Infringement Case**

**No Provision for Penalty:** Since there is a 70% probability that the penalty will NOT be imposed, the probability of actual imposition is only 30%. Per AS 29, a provision is recognized only when an outflow is **probable** (probability exceeding 50%). At 30%, this threshold is not met, so **no provision should be recognized** for the ₹50 lakhs penalty.

**Contingent Liability Disclo…

Question 21

The following is the Trial Balance of Anmol Limited as on 31st March, 2025 with various adjustments provided. You are required to prepare Balance Sheet as on 31st March 2025 and Statement of Profit and Loss with Note to Accounts for the year ending 31st March, 2025 as per Schedule III of the Companies Act, 2013.

Accepted Answer

**This question cannot be solved as presented — the Trial Balance and adjustments are not provided.** To prepare the Balance Sheet and Statement of Profit and Loss for Anmol Limited as on 31st March 2025 under Schedule III of the Companies Act, 2013, the following information is essential: (1) Complete Trial Balance with all ledger account balances; (2) All adjustment entries (e.g., depreciation, provision for doubtful debts, accrued income/expenses, inventory closing); (3) Opening inventory (if not in Trial Balance); (4) Closing inventory. **Approach to solve:** Once data is provided, classify Trial Balance items into Assets, Liabilities, and Equity for Balance Sheet, and into Income and Expense items for Statement of Profit and Loss. Apply adjustments to respective accounts. Balance Sheet must show Non-Current and Current Assets/Liabilities as per Schedule III. Statement of Profit and Loss must present Revenue from Operations, Other Income, Expenses (with five-point classification: Cost of Materials Consumed, Employee Benefits, Depreciation, Other Expenses), Finance Costs, and Profit Before/After Tax. Include Notes to Accounts for material items as required by Schedule III and relevant Accounting Standards (Ind AS 1). All figures must balance: Assets = Liabilities + Equity; Revenue − Expenses = Profit/Loss.

Question 22

Following is the Balance Sheet of Ellora Limited as at 31st March, 2025 showing continued losses and liquidity constraints. A scheme of internal reconstruction was approved by the shareholders and sanctioned by the Tribunal.

Accepted Answer

**INCOMPLETE QUESTION DATA** — The Balance Sheet of Ellora Limited and the scheme of internal reconstruction details are not provided in the question. Without the specific Balance Sheet figures, capital structure, liabilities, and the reconstruction scheme terms (such as reduction ratio for shares, debt restructuring details, write-down of assets, etc.), the Journal Entries and Capital Reduction Account cannot be accurately prepared.

**General Framework for Internal Reconstruction:**

(a) **Journal Entries** would typically include: (1) Write-down of assets to their reduced values; (2) Cancellation of existing shares/debentures as per scheme; (3) Issue of new shares/debentures in exchange; (4) Adjustment of capital, reserves, and liabilities as per scheme; (5) Transfer to Capital Reduction Account of any surplus arising from asset write-downs.

(b) **Capital Reduction Account** is a memorandum account used to record the reduction of capital. It shows: opening capital, reductions authorized, amounts written-off, and closing capital. The account demonstrates the credit side adjustments and the ultimate extinguishing of accumulated losses.

**Required Information Missing:**
- Balance Sheet with specific amounts (assets, liabilities, capital, reserves)
- Details of reconstruction scheme (reduction percentages, debt restructuring, asset write-downs)
- Exchange terms for shares/debentures if any

Please provide the complete Balance Sheet and scheme details for a full solution.

Question 23

Following is the Trial Balance as on 31st December, 2025 of the Cambridge Branch of Harry Limited whose Head Office is situated at Pune, India. In the books of Head Office, the Branch Account is provided with additional information about goods being sent at cost plus 10% and branch selling at invoice price plus 25%, furniture depreciation, and branch manager commission.

Accepted Answer

The question appears to be **incomplete**. While the question mentions a Trial Balance as on 31st December, 2025 for Cambridge Branch of Harry Limited, the actual trial balance figures and complete additional information are not provided in the question statement.

To properly solve this branch accounting question, the following details are essential:

**Missing Information:**
1. **Trial Balance figures** for all accounts (assets, liabilities, income, expenses) with their debit/credit balances
2. **Complete additional information** such as:
   - Opening inventory figures
   - Closing inventory figures
   - Specific amounts for goods sent at cost plus 10%
   - Selling price details (invoice price plus 25%)
   - Furniture cost and depreciation rate
   - Branch manager commission amount/basis
3. **Whether adjustments are needed** for:
   - Inter-branch unrealized profit
   - Goods in transit
   - Any other branch-specific items
4. **The specific requirement** - whether final accounts need to be prepared, reconciliation required, or specific adjustments to be identified

**Standard Approach for Branch Accounting (when complete data is provided):**
The solution would typically involve: (1) preparing the branch trial balance; (2) adjusting for goods sent at mark-up (unrealized profit adjustment); (3) recording depreciation and other expenses; (4) eliminating inter-company transactions; (5) preparing branch final accounts; (6) reconciling branch and head office books as per AS 11 (A…

CA Inter Adv Accounting

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Worked Solution

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