Worked Solution
✓ Verified## Part (a): Operating Lease Rent Recognition
(i) Annual Lease Rent:
Total revenue required by lessor = Cost + Profit margin
= Rs. 1,50,000 + (30% × Rs. 1,50,000)
= Rs. 1,50,000 + Rs. 45,000
= Rs. 1,95,000
Since rental is for 3 equal years:
Annual Lease Rent = Rs. 1,95,000 ÷ 3 = Rs. 65,000
(ii) Lease Rent Income Recognition Each Operating Year:
Under AS 11 (Operating Leases), lease income is recognized over the lease period. Given that output-based depreciation is specified, the lease rent income should be recognized based on the pattern of machine usage (output method), as this represents the pattern of benefit derivation.
Total output during 3-year lease = 40,000 + 50,000 + 60,000 = 150,000 units
Lease rent income each year = (Output in year / Total lease output) × Total lease rent
- Year 1: (40,000 ÷ 150,000) × Rs. 1,95,000 = Rs. 52,000
- Year 2: (50,000 ÷ 150,000) × Rs. 1,95,000 = Rs. 65,000
- Year 3: (60,000 ÷ 150,000) × Rs. 1,95,000 = Rs. 78,000
Total = Rs. 1,95,000 ✓
## Part (b): Software Development Costs
Under AS 26 (Intangible Assets), development phase costs are capitalized only after technical feasibility is established, subject to other recognition criteria. Costs before technical feasibility and post-completion costs are expensed.
Phase 1 (Detailed program & design): Rs. 50,000 - EXPENSE (incurred before technical feasibility)
Phase 2 (Coding & Testing): Rs. 40,000 - EXPENSE (technical feasibility established after Phase 2 completion, hence Phase 2 costs are pre-feasibility)
Phase 3 & 4 (Other coding): Rs. 63,000 - CAPITALIZE (incurred after technical feasibility established)
Phase 3 & 4 (Testing costs): Rs. 18,000 - CAPITALIZE (incurred after technical feasibility)
Phase 5 (Product masters for training): Rs. 19,500 - EXPENSE (post-development training materials)
Phase 6 (Packing): Rs. 16,500 - EXPENSE (pre-distribution packaging costs)
Summary of Accounting Treatment:
- Capitalize as Intangible Asset: Rs. 63,000 + Rs. 18,000 = Rs. 81,000
- Expense through P&L: Rs. 50,000 + Rs. 40,000 + Rs. 19,500 + Rs. 16,500 = Rs. 1,26,000
## Part (c): AS 4 - Classification of Post Balance Sheet Date Events
Financial year-end: March 31
(i) Fire damage on April 5:
This is an event (not a contingency) occurring 5 days after year-end. The fire represents a non-adjusting event because:
- The condition causing the fire did not exist at March 31
- It reflects a condition arising after the balance sheet date
- Under AS 4, events after year-end that do not provide evidence of year-end conditions are non-adjusting
Treatment: Disclose in notes to the financial statements (after approval, if it occurs before approval). No adjustment to financial statements. The fact that the asset is uninsured may be mentioned separately.
(ii) Lawsuit filed on April 10:
The lawsuit filed on April 10 is a non-adjusting event because:
- The suit was filed after March 31, indicating a condition arising post-balance sheet date
- Unless there was an existing underlying dispute at year-end (which would be a contingency), this is clearly a new claim
- Under AS 4, events after year-end reflecting new conditions are non-adjusting
Treatment: Disclose in notes to the financial statements. If it relates to an existing contingency at year-end, that contingency should have been disclosed; this new suit is the realization of that contingency post-year-end. Otherwise, it is simply disclosed as a non-adjusting event.
## Part (d): Basic Earnings Per Share
Calculation of Weighted Average Shares for FY 2019-20:
Rights issue: 1 new share for every 5 existing shares = 4,00,000 new shares
Last day to exercise: June 1, 2019 (during FY 2019-20)
- April 1 to May 31 (2 months): 20,00,000 shares
- June 1 to March 31 (10 months): 24,00,000 shares
Weighted average shares = (20,00,000 × 2/12) + (24,00,000 × 10/12) = 23,33,333 shares
EPS Calculations:
Basic EPS for 2018-19:
EPS = Rs. 30,00,000 ÷ 20,00,000 = Rs. 1.50 per share
Basic EPS for 2019-20:
EPS = Rs. 50,00,000 ÷ 23,33,333 = Rs. 2.14 per share (rounded)
Restated EPS for 2018-19:
To make prior year EPS comparable with current year (reflecting the dilution from rights issue), an adjustment is made using the ex-rights factor.
Theoretical ex-rights price = [(20,00,000 × Rs. 26) + (4,00,000 × Rs. 20)] ÷ 24,00,000
= Rs. 6,00,00,000 ÷ 24,00,000 = Rs. 25 per share
Adjustment factor = Ex-rights price ÷ Fair value before exercise
= Rs. 25 ÷ Rs. 26 = 0.9615
Restated EPS for 2018-19 = Rs. 1.50 × 0.9615 = Rs. 1.44 per share
Summary:
- EPS 2018-19: Rs. 1.50
- EPS 2019-20: Rs. 2.14
- Restated EPS 2018-19: Rs. 1.44
Write it like this
1The skeleton
- Name the AS in line 1 of every part — write 'As per AS 19 (Leases)' or 'As per AS 26 (Intangible Assets)' before any number; examiners allocate presentation marks for this and it anchors your answer immediately.
- In Part (a), derive Total Lease Rent first, then split by output ratio — showing Rs. 1,95,000 before the year-wise split proves your logic flows top-down; jumping to Year 1 straight away looks like guesswork even if the number is right.
- In Part (b), use a Phase → Amount → Capitalize/Expense → One-line reason format — a mini-table or consistent three-column structure lets the examiner tick each phase individually; prose paragraphs get partial credit at best because the examiner can't locate your reasoning fast.
- In Part (c), drop the label 'Adjusting Event' or 'Non-Adjusting Event' in bold as your very first word — that IS the answer; everything after is just your justification, and examiners award the classification mark in the first scan.
- In Part (d), write the Theoretical Ex-Rights Price formula explicitly before plugging in numbers — step marks exist for the formula; if your final EPS is off by a rounding error but the formula is visible, you still collect those marks.
- Close Part (d) with a boxed or underlined three-row summary — EPS 2018-19 (original), Restated EPS 2018-19, and EPS 2019-20 on separate lines; restated EPS is the highest-value line and burying it mid-calculation is how students lose the presentation mark.
2Examiner-rewarded phrases
3Common trap
The single killer mistake in Part (b) is capitalizing Phase 2 coding costs — students think 'coding = development phase = capitalize' and lose 3-4 marks. Phase 2 ends BEFORE technical feasibility is established, so it's pre-feasibility and must be expensed; only Phase 3 onwards qualifies. Also watch Part (a) — if you see output figures in the question, the examiner is screaming 'use output-based recognition', not straight-line; writing equal annual rent of Rs. 65,000 each year scores zero on the recognition part even though the total is correct.