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(a) Treatment of Interest Income — AS-9 (Revenue Recognition)
Contention of the accountant is incorrect.
AS-9 (Revenue Recognition) lays down that revenue arising from the use by others of enterprise resources yielding interest should be recognized only when no significant uncertainty as to measurability or collectability exists (AS-9, Para 13).
In the case of M/s Umang Ltd., the company has a track record of not having realized interest from the agent in the past. This clearly indicates that there is significant uncertainty regarding the collectability of the interest amount of ₹1,72,000. Merely because interest is due as per the contractual terms does not make it realizable in the absence of past collection history.
Therefore, the recognition of ₹1,72,000 as interest income in the year ended 31st March 2015 is not appropriate. The accountant should not book this amount as income; it should be disclosed as a contingent asset or simply noted. Recognition should happen only when actual collection becomes reasonably certain.
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(b) Disclosure of Change in Accounting Policy — AS-1 and AS-2
M/s Prashant Ltd. has changed its method of inventory valuation from FIFO to Weighted Average — this constitutes a change in accounting policy as per AS-1 (Disclosure of Accounting Policies).
AS-2 (Valuation of Inventories) requires inventory to be valued at lower of cost or net realisable value (NRV).
- Closing inventory under FIFO: ₹1,63,000; NRV: ₹1,95,000 → Value = ₹1,63,000
- Closing inventory under Weighted Average: ₹1,47,000; NRV: ₹1,95,000 → Value = ₹1,47,000
Effect of change: Closing inventory reduces by ₹16,000 (₹1,63,000 – ₹1,47,000), which increases cost of goods sold and reduces net profit by ₹16,000.
Disclosure requirements under AS-1:
1. The fact of change in accounting policy (from FIFO to Weighted Average) must be disclosed.
2. The reason for the change should be stated.
3. The quantitative impact on financial statements — i.e., profit is lower by ₹16,000 due to this change — must be disclosed.
The change should be applied from the current year (2014-15) and the financial statements should reflect the new policy with appropriate note disclosure.
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(c) Revision of Depreciation Estimates — AS-6
The accountant's treatment is incorrect.
AS-6 (Depreciation Accounting) Para 21 states that where there is a revision of the estimated useful life of an asset, the unamortized depreciable amount should be charged over the revised remaining useful life prospectively. Retrospective recalculation and charging the difference to P&L is not permitted under AS-6.
Correct treatment and calculation:
Step 1 — Original depreciation (Years 1–3):
- Depreciable amount = ₹1,50,000 – 10% of ₹1,50,000 = ₹1,35,000
- Annual depreciation = ₹1,35,000 ÷ 6 = ₹22,500
- Accumulated depreciation (3 years) = ₹67,500
Step 2 — WDV at beginning of 4th year:
- WDV = ₹1,50,000 – ₹67,500 = ₹82,500
Step 3 — Revised calculation for 4th year onwards:
- Revised residual value = 5% × ₹1,50,000 = ₹7,500
- Revised remaining useful life = 4 years
- Revised depreciable amount = ₹82,500 – ₹7,500 = ₹75,000
- Revised annual depreciation = ₹75,000 ÷ 4 = ₹18,750
Depreciation to be charged for the 4th year = ₹18,750 (applied prospectively).
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(d) Treatment of Specific Items
(i) Internally Generated Goodwill — AS-26:
As per AS-26 (Intangible Assets), internally generated goodwill should not be recognized as an asset because it is not an identifiable resource controlled by the enterprise that can be reliably measured. Only purchased goodwill (arising from a business combination) can be recognized. The accountant's treatment of valuing self-generated goodwill at ₹50 lakhs and crediting Reserves is incorrect and not permissible under AS-26. The entry should be reversed.
(ii) Repairs and Maintenance Expenditure — AS-10:
As per AS-10 (Property, Plant and Equipment), expenditure on repairs and maintenance is a revenue expenditure and must be charged to the Profit and Loss account. Capitalization is permitted only when the expenditure increases the future economic benefits beyond the originally assessed standard of performance (e.g., capacity enhancement or life extension). The mere significance of the amount (₹5 crores) does not justify capitalization. The accountant's intention to capitalize is incorrect; ₹5 crores should be expensed.
(iii) Administrative Expenditure After Asset is Ready — AS-10:
As per AS-10, the cost of an item of PPE includes only those costs incurred up to the date the asset is available for use (i.e., ready for its intended use). The plant was ready for commercial production on 01.04.2014. Therefore, administrative expenditure incurred after 01.04.2014 — even if production commenced only on 01.06.2014 — cannot be capitalized. The ₹10 lakhs (20% of ₹50 lakhs allocable to plant) should be charged to the Profit and Loss account. The accountant's treatment of adding ₹10 lakhs to the cost of the plant is incorrect.