Worked Solution
✓ VerifiedPart (a): Computation of Basic EPS as per AS 20
Under AS 20 'Earnings Per Share', the Basic EPS is computed by dividing earnings attributable to equity shareholders by the weighted average number of equity shares outstanding during the period. Partly paid-up shares are treated as a fraction of an equity share to the extent they participate in dividends relative to a fully paid-up share.
The net profit of ₹21,96,000 is stated after considering preference dividend of ₹3,40,000. Hence, earnings attributable to equity shareholders = ₹21,96,000.
For the weighted average number of shares: From 1 April 2019 to 31 August 2019 (5 months), all 6,00,000 shares were ₹5 paid-up (half of ₹10), so each counts as 0.5 share → 3,00,000 equivalent shares. From 1 September 2019 to 31 March 2020 (7 months), 5,40,000 shares became fully paid; 60,000 shares (held by the defaulting shareholder) remained ₹5 paid → 30,000 equivalent shares. Total equivalent shares in this period = 5,70,000.
Weighted average = (3,00,000 × 5/12) + (5,70,000 × 7/12) = 1,25,000 + 3,32,500 = 4,57,500 shares.
Basic EPS = ₹21,96,000 ÷ 4,57,500 = ₹4.80 per share.
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Part (b): Events After Reporting Date — AS 4
Under AS 4 'Contingencies and Events Occurring After the Balance Sheet Date', events are classified as adjusting (conditions existing at balance sheet date) or non-adjusting (conditions arising after balance sheet date). Financial statements are approved on 30 June 2020.
(i) Decline in inventory prices: The company was already expecting a decline as on 31 March 2020. The subsequent sale at ₹4,000 per machine in April 2020 provides evidence of the Net Realisable Value (NRV) at the balance sheet date. This is an adjusting event. Under AS 2, inventories must be valued at cost or NRV, whichever is lower. The inventories (50 machines) should be written down from ₹5,500 to ₹4,000 per machine, recognising a write-down of ₹75,000 (₹1,500 × 50) in the financial statements for 2019-20.
(ii) Fire on 15 April 2020: The fire occurred after the balance sheet date; no condition existed on 31 March 2020. This is a non-adjusting event. No adjustment is required in the financial statements. However, since the amount is material (₹25 lakhs gross loss; net loss ₹6.25 lakhs after 75% insurance recovery), it must be disclosed by way of a note — nature of event, estimated gross loss of ₹25 lakhs, and expected insurance recovery of ₹18.75 lakhs.
(iii) Sale agreement dated 30 March 2020: Under AS 9, revenue from sale of property is recognised only when significant risks and rewards of ownership are transferred. The transfer of possession and execution of conveyance deed occurred in May 2020. Hence, as at 31 March 2020, the sale is not complete and no revenue or profit (₹2,00,000) should be recognised. The property continues to be shown at its carrying value of ₹5,50,000. The existence of the sale agreement should be disclosed as a post-balance-sheet commitment.
(iv) Notice for refund of government grant (15 June 2020): The violation of grant conditions occurred during 2019-2020 (the year under report), and the notice was received before the financial statements were approved (30 June 2020). The underlying condition thus existed at the balance sheet date. This is an adjusting event. Under AS 12, the grant repayment of ₹15 lakhs must be recorded in the financial statements for the year ended 31 March 2020 — by reversing the deferred income or increasing the asset's carrying amount as applicable, and creating a liability for the refund payable.
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Part (c): Sale and Leaseback (Operating Lease) — AS 19
Under AS 19 'Leases', when a sale and leaseback results in an operating lease, the accounting treatment depends on the relationship between sale price, fair value (FV), and book value (WDV = ₹400 lakhs).
(i) Sale price ₹500 lakhs = Fair Value ₹500 lakhs: The transaction is at fair value. Profit = ₹500 – ₹400 = ₹100 lakhs is recognised immediately in the Statement of Profit & Loss. No deferral is required.
(ii) Fair Value ₹450 lakhs, Sale Price ₹380 lakhs (below FV): Sale price is below both WDV and FV. Loss = ₹400 – ₹380 = ₹20 lakhs. This loss should be recognised immediately, unless future lease rentals are at below-market rates (which would compensate the seller). Since no such indication is given, the ₹20 lakhs loss is recognised in P&L immediately.
(iii) Fair Value ₹400 lakhs, Sale Price ₹500 lakhs (above FV): Sale price exceeds fair value. The excess over FV = ₹500 – ₹400 = ₹100 lakhs is not a real gain — it represents future lease rentals pre-paid in advance. This excess of ₹100 lakhs must be deferred and amortised over the lease term. Profit based on FV vs WDV = ₹400 – ₹400 = Nil — no immediate profit recognition.
(iv) Fair Value ₹460 lakhs, Sale Price ₹500 lakhs (above FV): Sale price exceeds FV by ₹500 – ₹460 = ₹40 lakhs → deferred and amortised over lease term. Profit up to FV = ₹460 – ₹400 = ₹60 lakhs → recognised immediately in P&L.
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Part (d): Provisions and Contingent Liabilities — AS 29
Under AS 29 'Provisions, Contingent Liabilities and Contingent Assets', a provision is recognised when: (a) a present obligation exists, (b) outflow of resources is probable (more likely than not), and (c) a reliable estimate can be made.
(i) Consumer court case — penalty of ₹20 lakhs: There is only a 25% probability of the penalty being levied (75% chance it will not be levied). Since this is not probable, no provision is required for the ₹20 lakhs penalty. It should be disclosed as a contingent liability in the notes. Regarding legal fees: the ₹2 lakhs is a definite contractual obligation — ₹1 lakh already paid should be charged as an expense; the remaining ₹1 lakh (50% balance payable on conclusion) should be accrued as a provision since the obligation is certain and can be reliably estimated.
(ii) Consignment accident and dealer's compensation claim: Three accounting treatments arise:
- Loss on goods destroyed: Goods worth ₹30 lakhs lost in accident. Insurance covers 90% = ₹27 lakhs (confirmed as collectible per surveyor's report). The ₹27 lakhs insurance receivable should be recognised as an asset. The ₹3 lakhs (unrecoverable 10%) should be charged to P&L as a loss.
- Compensation to dealer: The contract provides for 15% compensation on delayed/lost consignment. On ₹30 lakhs: 15% = ₹4.5 lakhs. Since the dealer has already claimed this amount and the obligation is certain and reliably estimable, a provision of ₹4.5 lakhs must be created before closing the books.
- The remaining consignment of ₹70 lakhs is unaffected.
Write it like this
1The skeleton
- Lead every sub-part with the AS number and its title — write 'Under AS 20 Earnings Per Share' before any computation, because examiners tick the standard citation first and your numbers second.
- For EPS: show weighted average as a two-row table or two-line breakup — period, shares, fraction, product — so the examiner sees exactly where your 4,57,500 came from; a bare final number with no workings scores zero even if correct.
- For AS 4: classify first, then treat — write 'This is an adjusting / non-adjusting event because…' in one crisp line before you say what to do; skipping the classification label is the single fastest way to lose the reasoning mark.
- For sale and leaseback: anchor every scenario to the sale price vs fair value vs WDV comparison — state all three values upfront, then derive profit/loss; examiners are checking whether you know the three-way comparison, not just arithmetic.
- For AS 29: state all three recognition criteria once, then map each scenario to them — 'present obligation exists ✓, outflow probable — only 25% ✗, therefore no provision' reads like a checklist the examiner can follow and tick.
- End numerical parts with a boxed or underlined conclusion line — 'Basic EPS = ₹4.80 per share' or 'Provision of ₹4.5 lakhs to be created' signals where to award the answer mark without hunting through your workings.
2Examiner-rewarded phrases
3Common trap
Heads up — on the AS 4 sale-agreement scenario (part b-iii), most students recognise profit and then add a disclosure note, which is backwards; the whole point is that revenue isn't recognised at all on 31 March because possession hasn't transferred, so there's nothing to disclose as a profit — only the agreement itself as a post-balance-sheet commitment. Also, in part (d) almost everyone provisions the full ₹20 lakh penalty despite the 25% probability, confusing 'possible' with 'probable' — if it's below 50%, it's a contingent liability, not a provision.