Question 1

Surat Ltd. has received a grant of ` 40 crore for purchase of a qualified machine costing ` 90 crores. The residual value is ` 2 crore and expected useful life of the machine is 20 years.

Answer the following question as per the requirements of AS 12, Government Grants assuming that the depreciation method is straight line:

What is the nature of Grant being received by Surat Ltd.?
(i)   Non-Monetary Government Grant
(ii)  Grant related to specific fixed assets
(iii) Grant related to Revenue
(iv)  Promoter's Contribution

Accepted Answer

**Answer: (ii) Grant related to specific fixed assets**

Under **AS 12 – Accounting for Government Grants**, grants are classified based on their purpose. Since the ₹40 crore grant has been received specifically for the **purchase of a qualified machine** (a fixed asset), it qualifies as a **grant related to specific fixed assets**. Such grants are either deducted from the gross value of the asset (reducing the cost of the asset) or treated as deferred income to be recognised over the useful life of the asset. This is distinct from a non-monetary grant (where the asset itself is given), a revenue grant (linked to revenue expenditure/losses), or promoter's contribution (general capital contribution).

Question 2

Surat Ltd. has received a grant of ` 40 crore for purchase of a qualified machine costing ` 90 crores. The residual value is ` 2 crore and expected useful life of the machine is 20 years.

If Surat Ltd. has the policy to recognise the grant as deduction from the cost of the asset, what will be the amount of depreciation to be charged as expense in statement of profit and loss account every year:
(i)   ` 4.5 crores
(ii)  ` 2.5 crores
(iii) ` 2.4 crores
(iv)  ` 2 crores

Accepted Answer

**Answer: (iii) ₹ 2.4 crores**

Under **AS 12 – Accounting for Government Grants**, when a company adopts the **deduction from cost method**, the grant is deducted from the gross cost of the asset to arrive at the net carrying amount. Depreciation is then calculated on this **net cost**.

Net cost of machine = ₹ 90 crore – ₹ 40 crore (grant) = **₹ 50 crore**. Depreciable amount = Net cost – Residual value = ₹ 50 crore – ₹ 2 crore = ₹ 48 crore. Annual depreciation = ₹ 48 crore ÷ 20 years = **₹ 2.4 crores**.

Question 3

Surat Ltd. has received a grant of ` 40 crore for purchase of a qualified machine costing ` 90 crores. The residual value is ` 2 crore and expected useful life of the machine is 20 years.

If Surat Ltd. has the policy to recognise the grant as deferred income, what will be the amount of grant to be recognised as other income in statement of profit and loss account every year:
(i)   ` 4.5 crores
(ii)  ` 2.5 crores
(iii) ` 2 crores
(iv)  ` 1 crores

Accepted Answer

**Answer: (iii) ₹2 crores**

Under **AS 12 – Accounting for Government Grants**, when the **deferred income method** is followed, the grant received is treated as deferred income and recognised in the **Statement of Profit and Loss on a systematic and rational basis over the useful life of the asset**.

Grant received = ₹40 crores; Useful life = 20 years. Annual recognition = ₹40 crores ÷ 20 years = **₹2 crores per year**. The residual value is not relevant under the deferred income method, as the grant is spread over the useful life irrespective of the depreciation computation.

Question 4

Surat Ltd. has received a grant of ` 40 crore for purchase of a qualified machine costing ` 90 crores. The residual value is ` 2 crore and expected useful life of the machine is 20 years.

If Surat Ltd. has the policy to recognise the grant as deferred income, what will be the amount of depreciation to be charged as expense in statement of profit and loss account, every year:
(i)   ` 4.5 crores
(ii)  ` 4.4 crores
(iii) ` 2.5 crores
(iv)  ` 2 crores

Accepted Answer

**Answer: (ii) ₹4.4 crores**

Under **AS 12 – Accounting for Government Grants**, when an entity follows the **Deferred Income Method** (also called the Credit to P&L Method), the grant is NOT deducted from the cost of the asset. Instead, the asset is carried at its **full cost** and depreciated accordingly, while the grant is recognised as income on a systematic basis over the asset's useful life.

Depreciation is calculated on the **gross cost** of the machine:

Depreciation per year = (Cost – Residual Value) ÷ Useful Life = (₹90 crore – ₹2 crore) ÷ 20 years = **₹4.4 crores per year**.

Separately, ₹40 crore ÷ 20 years = ₹2 crore per year of grant income is credited to the Statement of Profit & Loss. However, the question specifically asks only for the **depreciation charge**, which is ₹4.4 crores.

Question 5

In the books of G Ltd., closing inventory as at 31.03.2024 amounts to ` 10,40,000 (on the basis of FIFO method).

The company decides to change from FIFO method to weighted average method for ascertaining the cost of inventory for 31.3.2024. On the basis of weighted average method, closing inventory as on 31.03.2024 amounts to ` 8,80,000. Realisable value of the inventory as on 31.03.2024 amounts to ` 12,00,000.

What will be the value of inventory in the books and what disclosure should be given in the financial statement on 31.3.2024?
(i)   The value of inventory will be ` 8,80,000 and the fact that the valuation method has changed to be disclosed in the financial statement.
(ii)  The value of inventory will be ` 12,00,000, and full disclosure with the amount the valuation method has cha…

Accepted Answer

**Answer: (iv)**

Under **AS 2 – Valuation of Inventories**, inventory must be valued at the **lower of cost or net realisable value (NRV)**. With the change to the weighted average method, cost = ₹8,80,000 and NRV = ₹12,00,000. Since cost (₹8,80,000) is lower than NRV (₹12,00,000), the inventory is valued at **₹8,80,000**.

A change from FIFO to weighted average is a **change in accounting policy** governed by **AS 1 – Disclosure of Accounting Policies**. AS 1 requires that when there is a change in accounting policy that has a material effect, the enterprise must disclose: (a) the fact of the change, and (b) the **quantified financial effect** of the change. Since the change reduces inventory by ₹1,60,000 (₹10,40,000 − ₹8,80,000), this is material and full disclosure including the amount of impact is mandatory.

Therefore, the correct answer is **(iv): inventory value = ₹8,80,000, with full disclosure including the amount of the change in valuation method.**

Question 6

Cost of current investment acquired was ` 1000 but the fair value was ` 800. The Investment was recorded at ` 800. Now the fair value of Investment is ` 1200. At what value should it be recorded and how much gain will be credited to profit and loss account.
(i)   No change is required and it will continue at ` 800
(ii)  Current investment will be recorded at ` 1000 and gain of ` 200 will be credited to profit and loss account.
(iii) Current investment will be recorded at ` 1200 and gain of ` 400 will be credited to profit and loss account.
(iv)  Current investment will be recorded at ` 1200 but no gain will be credited to profit and loss account.

Accepted Answer

**Answer: (ii)**

Under **AS 13 – Accounting for Investments**, **current investments** are carried at the **lower of cost or fair value**. When the fair value had fallen to ₹800 (below cost of ₹1,000), the investment was correctly written down to ₹800 and the loss of ₹200 was charged to the Profit & Loss account.

Now, when the fair value recovers to ₹1,200 (which exceeds the original cost of ₹1,000), the investment must be written back — but **only up to its original cost of ₹1,000**. This is because the lower of cost or fair value principle limits the carrying value to cost (₹1,000) even though fair value is ₹1,200. The reversal of the earlier write-down (₹1,000 − ₹800 = **₹200**) is **credited to the Profit & Loss account**. The investment cannot be revalued above cost under AS 13 for current investments.

Therefore, the current investment will be **recorded at ₹1,000** and a **gain of ₹200** will be credited to the Profit & Loss account.

Question 7

As per the revised scheme effective from accounting periods commencing on or after April 1, 2024, classify non-company entities for the purpose of applicability of Accounting Standards. Briefly explain the criteria for each category.

Accepted Answer

**Classification of Non-Company Entities for Applicability of Accounting Standards (Revised Scheme effective April 1, 2024)**

The Institute of Chartered Accountants of India (ICAI) issued a revised scheme for applicability of Accounting Standards to non-company entities, effective for accounting periods commencing on or after **April 1, 2024**. Under this scheme, non-company entities are classified into **four levels** based on their size, nature, and public interest.

**Level I Entities**

A non-company entity falls under Level I if it satisfies any one of the following criteria:
(i) Its securities (equity or debt) are listed or are in the process of listing on any stock exchange, whether in India or outside India.
(ii) It is a bank (including a co-operative bank), a financial institution, or carries on insurance business.
(iii) Its turnover (excluding other income) exceeds **₹250 crore** in the immediately preceding accounting year.
(iv) Its borrowings (including public deposits) exceed **₹50 crore** at any time during the immediately preceding accounting year.
(v) It is a holding, subsidiary, associate, or joint venture of any entity described in (i) to (iv) above.

Level I entities must comply with **all Accounting Standards** in full, without any relaxations.

**Level II Entities**

Entities not qualifying as Level I, but satisfying either of the following:
(i) Turnover exceeds **₹50 crore** but does not exceed **₹250 crore** in the immediately preceding accounting year…

Question 8

Lion Ltd., engaged in manufacturing and construction contracts, prepares its financial statements for the year ended 31st March 2025. The company follows historical cost for fixed assets, FIFO for inventory valuation, and percentage of completion method for revenue recognition in construction contracts. During the year, the management changes:
• The inventory valuation method from FIFO to Weighted Average due to volatility in raw material prices.
• The depreciation method from Straight Line Method (SLM) to Written Down Value (WDV) citing better reflection of asset usage.
The company discloses the change in inventory method in notes, but does not disclose the change in depreciation method, stating that it is not material.
Additionally, the company has not disclosed its accounting policy on …

Accepted Answer

**AS 1 – Disclosure of Accounting Policies** issued by ICAI governs the disclosure of significant accounting policies and changes therein. An analysis of Lion Ltd.'s practices reveals the following violations:

**Violation 1: Non-disclosure of Change in Depreciation Method (SLM to WDV)**

This is the most clear and significant violation. AS 1 stipulates that **accounting policies should be applied consistently** from period to period, and any **change in accounting policy** must be disclosed in the financial statements. The management's justification that the change is 'not material' does not excuse non-disclosure. AS 1 requires disclosure whenever there is a change, irrespective of whether the effect is material or not. If the effect is material, the **amount by which any item in the financial statements is affected** by such change must also be disclosed. A change from SLM to WDV is inherently significant — it directly impacts the depreciation charge, carrying value of fixed assets, and reported profits. The management cannot unilaterally suppress disclosure by invoking materiality. By failing to disclose this change at all, Lion Ltd. is in **direct violation of AS 1**.

**Violation 2: Incomplete Disclosure of Change in Inventory Method (FIFO to Weighted Average)**

Lion Ltd. does disclose the change in inventory valuation in the notes, which is a step in the right direction. However, AS 1 requires not merely the **fact of the change** but also: (a) the **reason for the cha…

Question 9

Lion Ltd., engaged in manufacturing and construction contracts, prepares its financial statements for the year ended 31st March 2025. The company follows historical cost for fixed assets, FIFO for inventory valuation, and percentage of completion method for revenue recognition in construction contracts. During the year, the management changes:
• The inventory valuation method from FIFO to Weighted Average due to volatility in raw material prices.
• The depreciation method from Straight Line Method (SLM) to Written Down Value (WDV) citing better reflection of asset usage.
The company discloses the change in inventory method in notes, but does not disclose the change in depreciation method, stating that it is not material.
Additionally, the company has not disclosed its accounting policy on …

Accepted Answer

**Materiality Cannot Justify Non-Disclosure of Accounting Policy Changes**

**AS 1 Requirement on Change in Accounting Policies:**
Accounting Standard 1 (Disclosure of Accounting Policies) mandates that when there is a change in an accounting policy, the nature of the change, reasons for the change, and the financial effect must be disclosed. The disclosure requirement is **absolute and non-negotiable**, irrespective of materiality considerations.

**Critical Distinction: Materiality in AS 1 Context:**
While materiality is an important concept in financial reporting, it must be understood in two distinct contexts:

1. **Quantitative Materiality**: The numerical impact of an item on profit, assets, or liabilities. This may sometimes be considered immaterial if below a predetermined threshold.

2. **Disclosure Materiality of Accounting Policy Changes**: Changes in accounting policies are **inherently material from a disclosure perspective** because they directly affect comparability of financial statements across periods. The change itself is a material qualitative event requiring disclosure, regardless of whether the quantitative impact appears small.

**Why Materiality Cannot Override Disclosure Requirements:**
AS 1 treats disclosure of accounting policy changes as a **mandatory compliance requirement**, not as a discretionary item subject to materiality thresholds. The rationale includes:

• **Comparability**: Users rely on accounting policy consistency to compare performanc…

Question 10

Lion Ltd., engaged in manufacturing and construction contracts, prepares its financial statements for the year ended 31st March 2025. The company follows historical cost for fixed assets, FIFO for inventory valuation, and percentage of completion method for revenue recognition in construction contracts. During the year, the management changes:
• The inventory valuation method from FIFO to Weighted Average due to volatility in raw material prices.
• The depreciation method from Straight Line Method (SLM) to Written Down Value (WDV) citing better reflection of asset usage.
The company discloses the change in inventory method in notes, but does not disclose the change in depreciation method, stating that it is not material.
Additionally, the company has not disclosed its accounting policy on …

Accepted Answer

**Classification: Change in Accounting Policy under AS 1 read with AS 5**

The change from **FIFO (First-In, First-Out) to Weighted Average Cost (WAC)** method for inventory valuation is a **change in accounting policy**, and NOT a change in accounting estimate.

**Basis of Distinction:**

Under **AS 1 (Disclosure of Accounting Policies)**, accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by an enterprise in the preparation and presentation of financial statements. These include the choice of measurement methods, recognition bases, and valuation techniques.

A **change in accounting policy** occurs when an enterprise adopts a different accounting principle or method from the one previously used (e.g., switching from one permissible inventory valuation method to another).

A **change in accounting estimate**, in contrast, arises from new information, new developments, or better judgment regarding the outcome of uncertain future events. Examples include revision of useful life of a fixed asset, change in percentage of provision for doubtful debts, or revised estimates of warranty costs. Estimates involve judgment in measuring uncertain items — not the choice of method itself.

**Application to Lion Ltd.:**

FIFO and Weighted Average are two distinct, permissible cost formulas for measuring the cost of inventories under **AS 2 (Valuation of Inventories)**. The selection between them is a **methodological choice*…

Question 11

The following information is available for Zing Ltd. for the year 2024-25:

Raw Material:
Closing Stock          700 units
Cost price             ` 35 per unit
Replacement cost       ` 20 per unit

Finished product:               FP 1        FP 2
Production (units)              3,000       1,600
Closing stock (units)             500          300
Material consumed                         ` 3,20,000
Direct labour                             ` 1,60,000
Direct expenses                           `    78,000

Fixed overhead for the year was ` 95,000, which includes godown rent of ` 15,000. Godown is used for storing finished products.

Besides 2 main products, 1000 units of a by-product (BY) also emerged in the production process which was sold @ ` 12 per unit after incurring an expense of ` 2,5…

Accepted Answer

**Valuation of Closing Stock of Zing Ltd. as per AS 2 (Valuation of Inventories)**

**AS 2** requires inventories to be valued at the **lower of cost or net realisable value (NRV)**. For joint products, joint costs are allocated on the basis of relative sales value at the point of separation.

**Step 1 – Treatment of By-product and Scrap**

As per AS 2, where by-products are immaterial, their NRV is deducted from the joint cost of main products. Similarly, scrap realisations reduce joint cost.

Net realisable value of by-product = (1,000 × ₹12) – ₹2,500 = ₹12,000 – ₹2,500 = **₹9,500**
Scrap realised = **₹4,800**
Total deduction from joint costs = ₹9,500 + ₹4,800 = **₹14,300**

**Step 2 – Computation of Net Joint Production Cost**

Fixed overhead for production excludes godown rent of ₹15,000 (being storage cost for finished goods — a period cost excluded per AS 2 Para 16).
Production fixed overhead = ₹95,000 – ₹15,000 = **₹80,000**

| Particulars | ₹ |
|---|---|
| Material consumed | 3,20,000 |
| Direct labour | 1,60,000 |
| Direct expenses | 78,000 |
| Fixed production overhead | 80,000 |
| **Total gross joint cost** | **6,38,000** |
| Less: By-product NRV | (9,500) |
| Less: Scrap realisation | (4,800) |
| **Net joint cost to be allocated** | **6,23,700** |

**Step 3 – Allocation of Joint Costs (Sales Value Basis)**

Sales value at point of separation:
- FP1: 3,000 × ₹160 = ₹4,80,000
- FP2: 1,600 × ₹100 = ₹1,60,000
- Total = **₹6,40,000**

Allocation:
- FP1 = ₹6,23,700 × (4…

Question 12

From the following information, prepare cash flow statement of Kiran Ltd. as at 31st March, 2025 by using indirect method:

2024          2025
                                            `             `
Liabilities
Share capital                        12,00,000   12,00,000
Profit & Loss A/c                     8,50,000   10,00,000
Long Term Loans                      10,00,000   10,60,000
Trade payables                        3,50,000    4,00,000
                                     34,00,000   36,60,000
Assets
Fixed Assets                         17,00,000   20,00,000
Investment in shares                  2,00,000    2,00,000
Inventory                             6,80,000    7,00,000
Trade receivables                     7,20,000    6,60,000
Cash  …

Accepted Answer

**Cash Flow Statement of Kiran Ltd. for the year ended 31st March, 2025**
*(Prepared as per AS 3 – Cash Flow Statements, using Indirect Method)*

---

**A. Cash Flow from Operating Activities**

**Net Profit before Tax** = ₹5,90,000

Adjustments for non-cash and non-operating items:
Add: Depreciation = ₹2,20,000
Add: Interest paid (financing cost) = ₹1,40,000
Less: Dividend received (investing income) = (₹50,000)

**Operating Profit before Working Capital Changes** = ₹9,00,000

Adjustments for changes in Working Capital:
Less: Increase in Inventory (₹7,00,000 – ₹6,80,000) = (₹20,000)
Add: Decrease in Trade Receivables (₹7,20,000 – ₹6,60,000) = ₹60,000
Add: Decrease in Bills Receivable (₹40,000 – ₹30,000) = ₹10,000
Add: Increase in Trade Payables (₹4,00,000 – ₹3,50,000) = ₹50,000

**Cash Generated from Operations** = ₹10,00,000
Less: Income Tax Paid = (₹2,60,000)

**Net Cash from Operating Activities (A)** = **₹7,40,000**

---

**B. Cash Flow from Investing Activities**

Purchase of Fixed Assets (Note 1) = (₹5,20,000)
Dividend Received = ₹50,000

**Net Cash used in Investing Activities (B)** = **(₹4,70,000)**

---

**C. Cash Flow from Financing Activities**

Proceeds from Long Term Loans (₹10,60,000 – ₹10,00,000) = ₹60,000
Interest Paid = (₹1,40,000)
Dividend Paid = (₹1,80,000)

**Net Cash used in Financing Activities (C)** = **(₹2,60,000)**

---

**Net Increase in Cash and Cash Equivalents (A+B+C)** = ₹7,40,000 – ₹4,70,000 – ₹2,60,000 = **₹10,000**

Add: Opening Cash and Cash…

Question 13

Garden Ltd. acquired fixed assets viz. plant and machinery for ` 20 lakhs. During the same year it sold its furniture and fixtures for ` 5 lakhs. Can the company disclose, net cash outflow towards purchase of fixed assets in the cash flow statement as per AS 3?

Accepted Answer

**AS 3 – Cash Flow Statements** requires that cash flows from **investing and financing activities** be reported on a **gross basis**, i.e., separately disclosing cash inflows and cash outflows. Netting of cash flows is permitted only in limited circumstances specified under AS 3.

**Permitted Net Reporting (AS 3 Para 22):** Net cash flows may be reported only when:
1. Cash receipts and payments are on behalf of customers and reflect the activities of the customer rather than the enterprise; or
2. Cash receipts and payments are in respect of items in which turnover is quick, amounts are large, and maturities are short (typically applicable to financial enterprises, e.g., short-term borrowings with maturity of three months or less).

**Application to Garden Ltd.:**

Garden Ltd. has two distinct transactions:
- **Purchase of plant and machinery** — cash outflow of ₹20 lakhs (investing activity)
- **Sale of furniture and fixtures** — cash inflow of ₹5 lakhs (investing activity)

These are **two independent, unrelated transactions** involving different categories of fixed assets. The purchase of plant and machinery and the sale of furniture and fixtures do not satisfy either of the conditions for permitted net reporting under AS 3. Neither transaction involves cash flows on behalf of customers, nor are they short-term, high-turnover financial transactions.

**Conclusion:** Garden Ltd. **cannot** disclose the net cash outflow of ₹15 lakhs (₹20 lakhs – ₹5 lakhs) in its cash flow st…

Question 14

When can an item qualify to be a prior period item as per AS 5?

Accepted Answer

**AS 5 – Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies** governs the treatment of prior period items.

**Definition of Prior Period Items:**
As per AS 5, **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.

**Conditions for an item to qualify as a Prior Period Item:**

An item qualifies as a prior period item only when **both** of the following conditions are satisfied:

1. **Arises in the current period** – The income or expense is recognised or comes to light during the current accounting period.

2. **Attributable to errors or omissions in prior periods** – The item must have its origin in a mistake (error) or a failure to include (omission) that occurred in the financial statements of one or more earlier periods. Mere changes in estimates do **not** give rise to prior period items.

**Important Distinction – Estimates vs. Prior Period Items:**
AS 5 explicitly clarifies that **changes in accounting estimates** do not constitute prior period items. Accounting estimates, by their nature, may need revision as new information becomes available. Such revisions are treated as **current period items**, not prior period items. For example, revision in the estimated useful life of an asset is a change in accounting estimate and is prospectively adjusted — it does not create a prior period item.

**…

Question 15

The company finds that the stock sheets of 31.3.2024 did not include two pages containing details of inventory worth ` 20 lakhs. State, how will you deal with this matter in the accounts of A Ltd., for the year ended 31st March, 2025 with reference to AS 5.

Accepted Answer

**Treatment under AS 5 – Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies**

**Nature of the Item:**
The omission of two pages of stock sheets as on 31st March 2024, containing inventory worth ₹20 lakhs, constitutes a **prior period item** as defined under **AS 5 (Revised)**. A prior period item is income or expense which arises in the current period as a result of errors or omissions in the preparation of financial statements of one or more prior periods.

The omission was not intentional but arose from an error in the preparation of the financial statements for the year ended 31st March 2024. Hence, this satisfies the definition of a prior period item under AS 5.

**Effect of the Omission:**
Since closing stock of 2023–24 was **understated by ₹20 lakhs**, the following effects flow through:
- **Profit for 2023–24** was understated by ₹20 lakhs (lower closing stock → higher COGS → lower profit).
- **Opening stock for 2024–25** is consequently understated by ₹20 lakhs.
- If left uncorrected in 2024–25, cost of goods sold would be understated and profit would be overstated.

**Accounting Treatment in 2024–25:**
Under AS 5, prior period items are **not adjusted against opening retained earnings**. Instead, they are **included in the determination of net profit or loss for the current period (2024–25)** and disclosed separately so that their impact can be distinctly perceived by users of financial statements.

Accordingly, the ₹20 lakhs re…

Question 16

A company took a construction contract for ` 100 lakhs in January, 2024. It was found that 80% of the contract was completed at a cost of ` 92 lakhs on the closing date i.e. on 31.3.2025. The company estimates further expenditure of ` 23 lakhs for completing the contract. The expected loss would be ` 15 lakhs. Can the company recognise the loss in the financial statements prepared for the year ended 31.3.2025?

Accepted Answer

**Yes**, the company can — and indeed **must** — recognise the expected loss of ₹15 lakhs in the financial statements for the year ended 31st March 2025.

**Applicable Standard:** AS 7 – Construction Contracts (issued by ICAI) governs the accounting treatment for construction contracts.

**Relevant Provision:** As per **paragraph 35 of AS 7**, when it is probable that **total contract costs will exceed total contract revenue**, the expected loss shall be **recognised as an expense immediately**, irrespective of the stage of completion of the contract.

**Analysis of the Given Contract:**

The contract price is ₹100 lakhs. The total estimated cost to complete the contract is ₹92 lakhs (already incurred) + ₹23 lakhs (further estimated) = **₹115 lakhs**. Since the total estimated cost (₹115 lakhs) exceeds the contract revenue (₹100 lakhs), there is a **foreseeable loss of ₹15 lakhs** on the entire contract.

**Treatment under AS 7:**

As at 31st March 2025, the stage of completion is 80%. The revenue to be recognised for the period is 80% × ₹100 lakhs = **₹80 lakhs**, and the corresponding cost recognised is ₹92 lakhs (actual cost incurred). This already results in a loss of ₹12 lakhs being reflected through the percentage-of-completion method. However, AS 7 requires that the **entire expected loss of ₹15 lakhs** be recognised immediately as an expense — not merely the proportionate portion. The **additional provision of ₹3 lakhs** (₹15 lakhs – ₹12 lakhs already reflected) must …

Question 17

Tonk Tanners is engaged in manufacturing of leather shoes. They provide you the following information for the year 2024-25:

(i)   On 31st December, 2024 shoes worth ` 3,20,000 were sent to Mohan Shoes for sale on consignment basis of which 25% shoes were unsold and lying with Mohan Shoes as on 31st March, 2025.

(ii)  On 10th January, 2025, Tonk Tanner supplied shoes worth ` 4,50,000 to Shani Shoes and concurrently agrees to re-purchase the same goods on 11th April 2025.

(iii) On 21st March, 2025 shoes worth ` 1,60,000 were sold to Shoe Shine but due to refurbishing of their showroom being underway, on their request, shoes were delivered on 12th April, 2025.

You are required to advise the accountant of Tonk Tanners, when amount is to be recognised as revenue in 2024-25 in above cases in…

Accepted Answer

**Applicability of AS 9 – Revenue Recognition to Tonk Tanners for 2024-25**

As per **AS 9 (Revenue Recognition)** issued by the ICAI, revenue from sale of goods is recognised when the seller has transferred to the buyer the **significant risks and rewards of ownership** of the goods, and no significant uncertainty exists regarding the amount of consideration.

**(i) Consignment Sale – Mohan Shoes**

Goods sent on consignment are **not a sale** until the consignee sells those goods to a third party. The consignor (Tonk Tanners) retains the risks and rewards of ownership until the consignee makes an actual sale. As per AS 9, revenue is recognised only to the extent of goods sold by the consignee.

Goods sent: ₹3,20,000. Unsold with Mohan Shoes as on 31st March, 2025: 25% = ₹80,000. Goods sold by consignee: 75% = ₹2,40,000.

**Revenue to be recognised in 2024-25: ₹2,40,000.** The balance ₹80,000 (unsold goods) will be treated as closing stock of Tonk Tanners and no revenue is recognised on the same.

**(ii) Sale with Agreement to Repurchase – Shani Shoes**

When a seller sells goods and **concurrently agrees to repurchase** the same goods at a future date, the transaction does not constitute a genuine sale. The seller has not transferred the significant risks and rewards of ownership — the repurchase agreement indicates that the seller retains the economic interest in the goods. Such an arrangement is in the nature of a **financing transaction**, not a sale.

As per AS 9, since…

Question 18

Precision Tools Ltd. provides the following details related to its fixed assets for the year ended 31st March 2025:

The company purchased a machine for ` 12,00,000 on 1st October 2024. The following expenses were also incurred:
Freight and insurance: ` 60,000
Erection charges: ` 40,000
Testing Cost: Raw materials used ` 25,000, Wages ` 10,000, Sale of finished goods from testing production ` 8,000.

On 1st December 2024, it replaced the motor of an old machine with a new one costing ` 1,20,000, improving the output capacity by 15%. The old motor had a Cost of ` 50,000 and Accumulated Depreciation of ` 35,000.

On 15th March 2025, the company shifted a machine from one factory to another. It incurred the following:
Dismantling cost: ` 12,000
Transport and installation: ` 18,000
Loss due to…

Accepted Answer

**As per AS 10 – Property, Plant and Equipment (Accounting Standard 10), issued by ICAI, the cost of an item of PPE comprises its purchase price plus any directly attributable costs of bringing the asset to its working condition for its intended use.**

**Case 1: Capitalisation of New Machine (Purchased on 1st October 2024)**

The purchase price of ₹12,00,000 is the primary component. **Freight and insurance** (₹60,000) and **erection charges** (₹40,000) are directly attributable costs and are therefore capitalised. **Testing costs** (raw materials ₹25,000 + wages ₹10,000 = ₹35,000) incurred to test whether the machine is functioning properly are also capitalised. However, **sale proceeds from finished goods produced during testing** (₹8,000) are deducted from the cost, as per AS 10, since only net testing costs form part of the asset's cost.

**Amount to be capitalised = ₹13,27,000**

**Case 2: Replacement of Motor of Old Machine (1st December 2024)**

As per AS 10, when a **component** of an item of PPE is replaced, the cost of the new component is **capitalised** if it is probable that future economic benefits will flow to the entity and the cost can be measured reliably. Since the new motor improves output capacity by 15%, it clearly qualifies as a capital expenditure. The cost of the new motor **₹1,20,000 is capitalised**.

Simultaneously, the **carrying amount of the old motor must be derecognised**. The old motor had a cost of ₹50,000 and accumulated depreciation of ₹3…

Question 19

Zenith Industries Ltd., a manufacturing company, is expanding its operations and has recently undertaken two major initiatives involving government assistance.

(i)   The company received a sum of ` 65 lakhs from the local authority to develop medical facilities for its employees at its newly built township near the factory premises.

(ii)  Additionally, it received ` 82 lakhs as a subsidy from the Central Government for establishing a new production unit in a notified backward area. This subsidy has been classified as one in the nature of promoters' contribution, intended to support the long-term development of the enterprise.

You are required to explain how the above transactions should be accounted for in the books of Zenith Industries Ltd. in accordance with Accounting Standard (AS) 1…

Accepted Answer

**Accounting Treatment under AS 12 – Accounting for Government Grants**

**Governing Standard:** AS 12 – Accounting for Government Grants (issued by ICAI) governs the recognition, measurement and disclosure of government grants received by an enterprise.

**Transaction (i): ₹65 Lakhs received from Local Authority for developing medical facilities**

This grant has been received for a specific revenue purpose — to develop medical facilities for employees. Since the grant is intended to compensate for expenditure of a revenue nature incurred (or to be incurred) by the enterprise, it is classified as a **Revenue Grant** under AS 12.

As per AS 12, government grants related to revenue should be **recognised as income** over the periods necessary to match them on a systematic basis with the costs they are intended to compensate. Such grants should not be credited directly to shareholders' funds.

The accounting treatment for Zenith Industries Ltd. shall be as follows:

- The amount of ₹65 lakhs should be **credited to the Profit and Loss Account** as income in the period(s) to which the related medical facility costs pertain.
- It may be presented either as **'Other Income'** in the Statement of Profit and Loss, or alternatively, it may be deducted from the related expenses (e.g., employee welfare expenses) — both presentations are permitted under AS 12.
- If the grant relates to future periods or covers costs yet to be incurred, the unapplied portion shall be deferred and recogni…

Question 20

On 1st April 2024, Kesar held 75,000 equity shares of Beta Ltd., recorded at a book value of ` 15 per share (with a nominal value of ` 10 each). The following transactions took place during the year:

1. On 20th June 2024, Kesar purchased 15,000 additional shares of Beta Ltd. at ` 16 per share.

2. On 1st August 2024, Beta Ltd. declared a bonus issue of one share for every six shares held.

3. On 31st October 2024, the company announced a rights issue, offering three shares for every seven held at a price of ` 15 per share. Shareholders were allowed to fully or partially renounce their rights.

Kesar sold one-third of his rights entitlement to Megha at ` 2 per share and subscribed to the remaining rights on 5th November 2024.

You are required to prepare the Investment Account in the books…

Accepted Answer

**Applicable Standard: AS 13 – Accounting for Investments**

Under **AS 13**, investments in shares are recorded at cost. Bonus shares received do not alter the total carrying cost — they only increase the number of units, thereby reducing the average cost per share. When rights are **renounced (sold)**, the sale proceeds are credited to the Investment Account (reducing cost), not treated as income, because the rights arise from the existing investment with no separate cost. When rights are **exercised**, the new shares are debited at the issue price paid.

**Investment Account in the books of Kesar**
**(Equity Shares of Beta Ltd. — FV ₹10 each)**

| Date | Particulars | No. of Shares | Amount (₹) |
|---|---|---|---|
| 1.4.2024 | To Balance b/d | 75,000 | 11,25,000 |
| 20.6.2024 | To Bank A/c (Purchase @ ₹16) | 15,000 | 2,40,000 |
| 1.8.2024 | To Bonus Shares (1:6, NIL cost) | 15,000 | — |
| 5.11.2024 | To Bank A/c (Rights subscribed @ ₹15) | 30,000 | 4,50,000 |
| | **Total** | **1,35,000** | **18,15,000** |

| Date | Particulars | No. of Shares | Amount (₹) |
|---|---|---|---|
| 5.11.2024 | By Bank A/c (Rights renounced — 15,000 @ ₹2) | — | 30,000 |
| 31.3.2025 | By Balance c/d | 1,35,000 | 17,85,000 |
| | **Total** | **1,35,000** | **18,15,000** |

**Closing Balance: 1,35,000 shares at a total cost of ₹17,85,000 (average ₹13.22 per share)**

**Key treatments applied:**
- **Bonus shares** → No cost assigned; total cost ₹13,65,000 spread over 1,05,000 shares (avg = ₹13)
- **R…

Question 21

X Co. Ltd. having share capital of ` 50 lakhs divided into equity shares of ` 10 each was taken over by Y Co. Ltd. X Co. Ltd. has General Reserve of ` 10,00,000 and Profit and Loss account Cr. ` 5,00,000. Y Co. Ltd. issued 11 equity shares of ` 10 each for every 10 shares of X Co. Ltd.

How the Journal entry would be passed in the books of Y Co. Ltd. for the shares issued under the 'Pooling of interest method' of amalgamation.

Accepted Answer

**AS 14 – Amalgamation by Pooling of Interest Method**

**Relevant Provisions under AS 14:**
Under the **Pooling of Interest Method**, assets, liabilities, and reserves of the transferor company are incorporated in the books of the transferee company at their **existing carrying amounts**. The reserves of the transferor are also maintained in the books of the transferee. The difference between the consideration paid and the share capital of the transferor company is adjusted against reserves.

**Step 1 – Computation of Shares to be Issued by Y Co. Ltd.**

Number of equity shares of X Co. Ltd. = ₹50,00,000 ÷ ₹10 = **5,00,000 shares**

Shares issued by Y Co. Ltd. (11 for every 10 shares of X) = 5,00,000 × 11/10 = **5,50,000 shares**

Value of shares issued = 5,50,000 × ₹10 = **₹55,00,000**

**Step 2 – Purchase Consideration vs. Share Capital of X**

Purchase Consideration (PC) = ₹55,00,000
Share Capital of X Co. Ltd. = ₹50,00,000
Excess of PC over Share Capital of X = ₹5,00,000 → adjusted against **General Reserve** of X.

**Step 3 – Journal Entries in the Books of Y Co. Ltd.**

**Entry 1:** For recording purchase consideration
Business Purchase A/c &emsp;&emsp;&emsp;&emsp; Dr. &emsp; 55,00,000
&emsp; To Liquidator of X Co. Ltd. A/c &emsp;&emsp;&emsp;&emsp;&emsp;&emsp; 55,00,000
*(Being purchase consideration for amalgamation with X Co. Ltd. determined)*

**Entry 2:** For incorporating assets, liabilities, and reserves of X Co. Ltd. at book values
Sundry Assets A/c &emsp;&emsp;…

Question 22

Is it permissible to capitalise borrowing costs incurred on assets which are necessary for the construction of qualifying assets? A company is in the process of constructing a large manufacturing plant in a backward area. As a part of this project it has also purchased a residential building, which is to be used for housing the workers engaged in the construction of the plant. The purchase cost of the building is met by raising a long term loan. The company intends to dispose off the building once the construction of the manufacturing plant is complete. If the manufacturing plant meets the definition of a qualifying asset, would the borrowing costs incurred on funds borrowed to purchase the residential building be eligible for capitalisation?

Accepted Answer

**Permissibility of Capitalising Borrowing Costs on Ancillary Assets**

AS 16 – Borrowing Costs permits capitalisation of borrowing costs incurred on funds borrowed to acquire or construct **qualifying assets**. A qualifying asset is one that requires a substantial period of time to prepare for its intended use or sale. However, AS 16 extends this principle to allow capitalisation of borrowing costs on funds borrowed for **ancillary assets that are necessary for the construction of qualifying assets**, provided these borrowing costs are directly attributable to the acquisition of such ancillary assets.

**Application to the Given Scenario**

In this case, the manufacturing plant qualifies as a qualifying asset as it requires substantial time to construct. The residential building is an ancillary asset as it is necessary for the project—providing housing for workers engaged in construction.

However, **the borrowing costs on the residential building would NOT be eligible for capitalisation** for the following reasons:

**First**, AS 16 permits capitalisation of borrowing costs on ancillary assets only when such assets are long-term in nature and will be retained and used as permanent assets in the business operations. Here, the building is explicitly intended to be **disposed of once construction is complete**, indicating it is a temporary facility.

**Second**, the borrowing costs form part of the cost of the asset acquired (the residential building itself), not the qualifyin…

Question 23

The Chief Accountant of Cotton Garments Limited gives the following data regarding its five segments:

(` in Crore)
Particulars           A      B     C     D     E    Total
Segment Assets       40     15    10    10     5       80
Segment Results     (95)     5     5    (5)   15      (75)
Segment Revenue     310     40    30    40    30      450

The Chief Accountant is of the opinion that segment "A" alone should be reported. Is he justified in his view? Examine his opinion in the light of provisions of AS 17 'Segment Reporting'.

Accepted Answer

**Conclusion: The Chief Accountant is NOT justified** in his opinion. Under **AS 17 – Segment Reporting**, a segment is identified as a **reportable segment** if it satisfies ANY ONE of the following three quantitative thresholds (the '10% tests'):

**Test 1 – Revenue Test:** Segment revenue is 10% or more of the total combined revenue of all segments.
10% of ₹450 crore = **₹45 crore**

**Test 2 – Result Test:** The absolute amount of the segment result is 10% or more of the greater of (a) the combined result of all profit-making segments, or (b) the combined absolute result of all loss-making segments.
Profit segments (B + C + E) = 5 + 5 + 15 = ₹25 crore
Loss segments (A + D) = 95 + 5 = ₹100 crore (absolute)
Greater of the two = ₹100 crore; 10% thereof = **₹10 crore**

**Test 3 – Assets Test:** Segment assets are 10% or more of the total assets of all segments.
10% of ₹80 crore = **₹8 crore**

**Application to each segment:**

**Segment A:** Revenue ₹310 cr ≥ ₹45 cr ✓ | Assets ₹40 cr ≥ ₹8 cr ✓ | Result |₹95 cr loss| ≥ ₹10 cr ✓ → **Reportable** (passes all three tests)

**Segment B:** Revenue ₹40 cr < ₹45 cr ✗ | Assets ₹15 cr ≥ ₹8 cr ✓ → **Reportable** (passes Assets test)

**Segment C:** Revenue ₹30 cr < ₹45 cr ✗ | Assets ₹10 cr ≥ ₹8 cr ✓ → **Reportable** (passes Assets test)

**Segment D:** Revenue ₹40 cr < ₹45 cr ✗ | Assets ₹10 cr ≥ ₹8 cr ✓ → **Reportable** (passes Assets test)

**Segment E:** Revenue ₹30 cr < ₹45 cr ✗ | Assets ₹5 cr < ₹8 cr ✗ | Result |₹15 cr profit| ≥ ₹1…

Question 24

X Ltd. sold goods to its associate company for the 1st quarter ending 30.6.2024. After that, the related party relationship ceased to exist. However, goods were supplied as was supplied to any other ordinary customer. Decide whether transactions of the entire year have to be disclosed as related party transaction.

Accepted Answer

**Applicable Standard: AS 18 – Related Party Disclosures (issued by ICAI)**

The core question here is whether transactions of the **entire financial year 2024-25** must be disclosed as related party transactions, given that the related party relationship existed only during Q1 (April to June 2024) and ceased thereafter.

**Principle under AS 18:**

AS 18 requires disclosure of transactions between a reporting enterprise and its related parties **during the period in which the related party relationship exists**. The standard does not require disclosure of transactions that occur after the relationship has ceased, provided those subsequent transactions are conducted on terms no different from those applicable to ordinary customers.

**Application to the given case:**

In the given case, X Ltd. sold goods to its associate company during Q1 ending 30.6.2024. The associate relationship — which makes the other company a **related party** under AS 18 (an associate being one over which the investor has significant influence) — ceased to exist after 30.6.2024. Post cessation, goods were supplied on the same terms as those applicable to any other ordinary customer.

Since the related party relationship existed **only during Q1**, the transactions effected in Q1 constitute related party transactions and **must be disclosed** in accordance with AS 18. These include the nature of the relationship, the description of the transaction, the volume or amount involved, and any outstanding bal…

Question 25

On 1st April, 2024, Mansi Ltd. sold a plant for ` 8,52,800. The carrying amount of the plant on that date was ` 1,80,000. The sale was a part of the package under which Akash Ltd. leased the asset to Mansi Ltd. for eight years term.

The economic life of the asset is estimated as 8 years. The minimum lease rents payable by the lessee has fixed at ` 1,60,000 payable annually beginning from 31st March, 2025.

The incremental borrowing interest rate of Mansi Ltd. is estimated at 10% p.a.

Calculate the net effect on the Statement of profit and loss in the books of Mansi Ltd.

Accepted Answer

**Nature of Transaction — Sale and Leaseback resulting in a Finance Lease**

As per **AS 19 – Leases** (issued by ICAI), a sale and leaseback transaction must first be classified. Since the lease term (8 years) equals the **estimated economic life** of the asset (8 years), this qualifies as a **finance lease** under AS 19.

**Accounting Treatment in the books of Mansi Ltd. (Lessee)**

As per **para 52 of AS 19**, when a sale and leaseback results in a finance lease, any excess of sale proceeds over the carrying amount shall **not be immediately recognised as income**. It is **deferred and amortised** over the lease term in proportion to the depreciation of the leased asset.

The asset is re-recognised as a leased asset at its **fair value**, and a corresponding lease liability is created.

**Step 1 – Gain on Sale (to be deferred)**

Sale proceeds: ₹8,52,800 | Carrying amount: ₹1,80,000
Gain = ₹8,52,800 – ₹1,80,000 = **₹6,72,800** → Deferred, amortised over 8 years.

Gain recognised in Year 1 P&L = ₹6,72,800 ÷ 8 = **₹84,100 (Credit)**

**Step 2 – Depreciation on Leased Asset**

The asset is recorded at ₹8,52,800. Lease term = Economic life = 8 years.
Annual depreciation = ₹8,52,800 ÷ 8 = **₹1,06,600 (Debit)**

**Step 3 – Finance Charge (Interest on Lease Liability)**

Lease liability at inception = ₹8,52,800 (equal to PV of minimum lease payments at 10%, confirming 10% is the implicit rate).
Finance charge for Year 1 = ₹8,52,800 × 10% = **₹85,280 (Debit)**

**Net Effect on Sta…

Question 26

Following is the trial balance of ABC Limited as on 31.3.2025.
                                                              (Figures in ` '000)

Particulars                    Debit    Particulars                       Credit
Land at cost                     800    Equity capital (shares of ` 10)      500
Calls in arrears                   5    10% Debentures                        300
Cash in hand                       2    General reserve                       150
Plant & Machinery at cost        824    Profit & Loss A/c (F.Y. 2023-24)       75
Trade receivables                120    Securities premium                     40
Inventories (31-3-25)             96    Sales                               1,200
Cash at Bank                      28    Trade payables                         30
…

Accepted Answer

**ABC LIMITED — STATEMENT OF PROFIT AND LOSS for the year ended 31.03.2025**
(All figures in ₹ '000)

| Particulars | Note No. | ₹ |
|---|---|---|
| **I. Revenue from Operations** | 1 | 1,200 |
| **II. Other Income** | 2 | 6 |
| **III. Total Revenue (I + II)** | | **1,206** |
| **IV. Expenses:** | | |
| Cost of Materials Consumed (Adjusted Purchases) | | 400 |
| Finance Costs | 3 | 30 |
| Depreciation and Amortisation Expense | | 80 |
| Other Expenses | 4 | 150 |
| **Total Expenses** | | **660** |
| **V. Profit before Tax (III − IV)** | | **546** |
| VI. Tax Expense | | — |
| **VII. Profit for the Year** | | **546** |

---

**ABC LIMITED — BALANCE SHEET as at 31.03.2025**
(All figures in ₹ '000)

| Particulars | Note No. | ₹ |
|---|---|---|
| **I. EQUITY AND LIABILITIES** | | |
| **1. Shareholders' Funds** | | |
| (a) Share Capital | 5 | 495 |
| (b) Reserves and Surplus | 6 | 971 |
| **2. Non-Current Liabilities** | | |
| (a) Long-term Borrowings | 7 | 300 |
| **3. Current Liabilities** | | |
| (a) Trade Payables | | 30 |
| **TOTAL** | | **1,796** |
| **II. ASSETS** | | |
| **1. Non-Current Assets** | | |
| (a) Fixed Assets — Tangible Assets | 8 | 1,550 |
| **2. Current Assets** | | |
| (a) Inventories | | 96 |
| (b) Trade Receivables | | 120 |
| (c) Cash and Cash Equivalents | 9 | 30 |
| **TOTAL** | | **1,796** |

---

**NOTES TO ACCOUNTS**

**Note 1 — Revenue from Operations**
Sale of Products: ₹1,200

**Note 2 — Other Income**
Profit on Sale of Plant & Machinery: ₹6
*(Sale…

CA Inter Adv Accounting — Revision Test Paper (RTP) — September 2025