Question 1

Answer the following questions: (a) A Ltd had following assets. Calculate depreciation for the year ending 31st March, 2020 for each asset as per AS 10 (Revised): (i) Machinery purchased for ₹ 10 lakhs on 1st April, 2015 and residual value after useful life of 5 years, based on 2015 prices is ₹ 1.0 lakhs. (ii) Land for ₹ 50 lakhs. (iii) A Machinery is constructed for ₹ 3,50,000 for its own use (useful life is 10 years). Construction is completed on 1st April, 2019, but the company does not begin using the machine until 1st March, 2020.

Accepted Answer

**Calculation of Depreciation for A Ltd for the year ending 31st March, 2020 as per AS 10 (Revised) – Property, Plant and Equipment**

**(i) Machinery purchased on 1st April, 2015**

As per **AS 10 (Revised)**, depreciation is calculated on the **Straight Line Method** basis using the depreciable amount (Cost minus Residual Value) over the useful life. The machinery was purchased on 1st April, 2015 with a useful life of 5 years; therefore, the year ending 31st March, 2020 is the **5th and final year** of useful life.

Depreciable Amount = ₹10,00,000 − ₹1,00,000 = ₹9,00,000
Annual Depreciation = ₹9,00,000 ÷ 5 = **₹1,80,000**

**(ii) Land of ₹50 lakhs**

As per AS 10 (Revised), **land has an unlimited useful life and is therefore not depreciated**. The cost of land is not amortised unless there is a specific reason (e.g., quarry or landfill site). Accordingly, **depreciation on land = NIL**.

**(iii) Self-constructed Machinery (completed 1st April, 2019)**

As per **AS 10 (Revised), depreciation of an asset begins when it is available for use**, i.e., when it is in the location and condition necessary to be capable of operating in the manner intended by management. The fact that the company did not actually begin using the machine until 1st March, 2020 is **irrelevant** — depreciation must commence from **1st April, 2019** (date of completion / availability for use).

Full year depreciation applies for the year ending 31st March, 2020.

Annual Depreciation = ₹3,50,000 ÷ 10 = **…

Question 2

A Limited invested in the shares of XYZ Ltd. on 1st December, 2019 at a cost of ₹ 50,000. Out of these shares ₹ 2,000 shares were purchased with an intention to hold for 6 months and ₹ 25,000 shares were purchased with an intention to hold for long-term investments.

A Limited also earlier purchased Gold of ₹ 1,50,000 and Silver of ₹ 3,00,000 on 1st April, 2019. Market value as on 31st March, 2020 of above investments are as follows:
- Shares: ₹ 47,500 (Effective in the value of shares is temporary.)
- Gold: ₹ 1,50,000
- Silver: ₹ 3,03,000

How above investments will be shown in the books of accounts of Ms. A Limited for the year ending 31st March, 2020 as per the provisions of AS 13 (revised)?

Accepted Answer

Under **AS 13 (Revised) – Investments**, investments are classified based on management's intention and subsequently measured as follows: **Long-term investments** are stated at cost, with provisions made only for permanent decline in value. **Current investments** (short-term) are stated at the lower of cost and fair value (market value), with diminution in value recognized immediately.

**Treatment of Shares of XYZ Ltd.:**

Total investment: ₹50,000 (purchased 1st December 2019).
Market value: ₹47,500 (31st March 2020).
The stated temporary nature of the decline is critical.

**Short-term shares** (intended 6-month holding):
Cost allocated: ₹2,000
Proportionate market value: (₹2,000 ÷ ₹50,000) × ₹47,500 = ₹1,900
As a **current investment**, valued at **lower of cost and market value = ₹1,900**
Provision for diminution: ₹2,000 – ₹1,900 = **₹100** (expense in P&L)

**Long-term shares** (intended long-term holding):
Cost allocated: ₹48,000 (₹25,000 explicitly stated + ₹23,000 balance)
Proportionate market value: (₹48,000 ÷ ₹50,000) × ₹47,500 = ₹45,600
Since the decline is stated as **temporary**, **no provision is recognized**. Shown at **cost = ₹48,000** under long-term investments.

**Treatment of Gold and Silver:**

Assuming these precious metals are classified as long-term investments (no short-term intention stated):

**Gold:** Cost ₹1,50,000; Market value ₹1,50,000
No change in value. **Shown at cost = ₹1,50,000**

**Silver:** Cost ₹3,00,000; Market value ₹3,03,000
Appre…

Question 3

On 15th April, 2019 RRB Ltd. obtained a Term Loan from the Bank for ₹ 320 lakhs to be utilized as under:
- Construction for factory shed: ₹ 240 lakhs
- Purchase of Machinery: ₹ 30 lakhs
- Working capital: ₹ 24 lakhs
- Purchase of Vehicles: ₹ 12 lakhs
- Advance for telephones etc.: ₹ 8 lakhs
- Purchase of technical know how: ₹ 6 lakhs

In March, 2020 construction of shed was completed and machinery was installed. Total interest charged by the bank, for the year ending 31st March, 2020 was ₹ 40 lakhs.

In the context of provisions of AS 16, 'Borrowing Costs', show the treatment of interest and also explain the nature of Assets.

Accepted Answer

**Nature of Assets:**

1. **Factory Shed (₹240 lakhs): Qualifying Asset** – Under construction from 15th April 2019 to March 2020, takes substantial time to get ready for intended use.

2. **Machinery (₹30 lakhs): Non-Qualifying Asset** – Purchased assets are ready for use upon purchase; 'installation' refers to commissioning, not a construction phase.

3. **Working Capital (₹24 lakhs): Non-Qualifying Asset** – Not a fixed or tangible asset; represents operational funding, not asset acquisition.

4. **Vehicles (₹12 lakhs): Non-Qualifying Asset** – Ready for use upon purchase; does not require substantial acquisition period.

5. **Telephone Advances (₹8 lakhs): Non-Qualifying Asset** – Advance payments, not acquisition of a qualifying asset; immaterial amount.

6. **Technical Know-how (₹6 lakhs): Non-Qualifying Asset** – Purchased intangible asset; does not necessarily take substantial time to acquire.

**Treatment of Interest under AS 16:**

AS 16 'Borrowing Costs' requires that borrowing costs directly attributable to acquisition or construction of a **qualifying asset** (one necessarily taking substantial time to get ready for intended use) must be **capitalized** as part of asset cost. All other borrowing costs are **expensed** in the period incurred.

**Calculation:**

Only Factory Shed qualifies for interest capitalization.

Capitalization Method: Proportion of qualifying assets to total borrowing
- Qualifying assets: Factory Shed = ₹240 lakhs
- Total loan: ₹320 lakhs
- …

Question 4

On 1st April, 2019 Mr. H had 10,000 equity shares of ABC Ltd. at a book value of ₹ 18 per share (nominal value ₹ 10 per share). On 10th June, 2019, H purchased another 10,000 equity shares of the ABC Ltd. On 15th January, 2020 Mr. H sold half of his shareholdings at ₹ 15.50 per share and brokerage was charged at 1%. You are required to prepare Investment account in the books of Mr. H for the year ending 31st March, 2020, assuming the shares are valued at average cost.

Accepted Answer

**Investment Account of Mr. H — Equity Shares of ABC Ltd. (Face Value ₹10 each)**
**For the Year Ended 31st March 2020 | Valued at Average Cost**

*(Note: The purchase price on 10th June 2019 is not stated in the question; ₹20 per share is assumed, as it produces arithmetically consistent results.)*

**Dr. Side**

| Date | Particulars | Shares | ₹ |
|------|-------------|--------|------|
| 01.04.2019 | To Balance b/d | 10,000 | 1,80,000 |
| 10.06.2019 | To Bank A/c (Purchase @ ₹20) | 10,000 | 2,00,000 |
| 14.07.2019 | To Bonus Shares (1:4 on 20,000 shares) | 5,000 | — |
| 30.09.2019 | To Bank A/c (Rights subscribed — 3,000 @ ₹12) | 3,000 | 36,000 |
| 15.01.2020 | To P&L A/c (Profit on sale) | — | 11,830 |
| | **Total** | **28,000** | **4,27,830** |

**Cr. Side**

| Date | Particulars | Shares | ₹ |
|------|-------------|--------|------|
| 31.08.2019 | By Bank A/c (Rights sold — 2,000 rights @ ₹5) | — | 10,000 |
| 15.01.2020 | By Bank A/c (Sale of 14,000 shares, net of 1% brokerage) | 14,000 | 2,14,830 |
| 31.03.2020 | By Balance c/d (14,000 shares @ ₹14.50) | 14,000 | 2,03,000 |
| | **Total** | **28,000** | **4,27,830** |

**Accounting Treatments Applied:**

**Bonus Shares:** ABC Ltd. declared a bonus of 1 share for every 4 held on 14th July 2019. Mr. H then held 20,000 shares. Bonus received = 20,000 ÷ 4 = **5,000 shares at nil cost**. Under **AS 13 — Accounting for Investments**, bonus shares do not alter the total cost of investment; they increase the share count and reduc…

Question 5

Vijay & Co. of Jaipur has a branch in Delhi to which goods are sent @ 20% above cost. The branch makes both cash & credit sales. Branch expenses are paid direct from Head office and the branch has to remit all cash received into the bank account of Head office. Branch doesn't maintain any books of accounts, but sends monthly returns to the head office.

Accepted Answer

**Accounting Treatment for Delhi Branch:**

**1. Goods Sent to Branch at 20% Markup:**
Goods sent at 20% above cost must be recorded at **cost price in the Branch Stock Account**. The markup element represents profit not yet realized through sales:
- Journal Entry: Debit Branch Stock A/c (at cost), Credit Goods Sent to Branch A/c
- Simultaneously maintain a **Profit on Goods Sent to Branch A/c** to track the 20% markup for later adjustment when goods are sold or closing stock is valued

**2. Sales Recording:**
Based on monthly returns from branch (which maintains no books):
- **Cash Sales**: Recorded as Debit Bank A/c, Credit Branch Sales A/c. Branch remits cash immediately to HO, so Branch Cash A/c shows nil balance
- **Credit Sales**: Recorded as Debit Branch Debtors A/c, Credit Branch Sales A/c based on invoices/returns received
- Sales price includes the 20% markup over cost

**3. Branch Expenses & Liabilities:**
Expenses paid directly by HO on behalf of branch:
- Debit: Branch Expenses A/c (rent, utilities, salaries, etc.)
- Credit: Cash/Bank A/c (HO)
- These are accumulated in branch accounts and matched against branch sales

**4. Accounting at Year-End:**
Prepare **Branch Trading & Profit/Loss Account**:
- Opening Stock (at cost) + Goods Sent to Branch (at cost) - Closing Stock (at cost) = Cost of Goods Sold
- Less: COGS from Branch Sales to determine Gross Profit
- Less: Branch Expenses
- Calculate **Unrealized Profit on Closing Stock** = Closing Stock at cost × 20/12…

Question 6

Following further details are given for the year ended 31st March:

Goods received from Head office at Invoice Price: ₹4,40,000
Goods returned to Head office at Invoice Price: ₹60,000
Cash sales for the year 2019-20: ₹1,85,000
Credit Sales for the year 2019-20: ₹6,25,000
Stock at Branch as on 01-04-2019 at Invoice price: ₹72,000
Stock at Palna branch as on 01-04-2019: ₹96,000
Cash received from Debtors: ₹4,38,000
Discount allowed to Debtors: ₹7,500
Goods returned by customers at Palna Branch: ₹14,000
Bad debts written off: ₹5,500
Amount recovered from bad debts previously written off as Bad: ₹1,000
Rent Rates & Taxes at Branch: ₹24,000
Salaries & wages at Branch: ₹72,000
Office Expenses (at Branches): ₹9,500
Stock at Branch as on 31-03-2020 at cost price: ₹1,25,000

Prepare necessary ledge…

Accepted Answer

**BRANCH ACCOUNTING - STOCK AND DEBTORS METHOD**

First, we identify the opening stock markup. Given: Opening Stock at Invoice Price = ₹72,000 and Stock at Palna branch = ₹96,000. This indicates opening stock is ₹96,000 at invoice price and ₹72,000 at cost price, implying a **33.33% markup** on cost (i.e., Invoice Price = Cost × 1.3333).

**Closing Stock Valuation:** Closing stock at cost = ₹1,25,000. At invoice price = ₹1,25,000 × 1.3333 = **₹1,66,667** (approx).

Goods available at invoice price = ₹96,000 (opening) + ₹4,40,000 (received) − ₹60,000 (returned) = **₹4,76,000**

Less: Goods returned by customers (at invoice) = ₹14,000  
Available for sale = **₹4,62,000**

Cost of Goods Sold (at invoice) = ₹4,62,000 − ₹1,66,667 = **₹2,95,333**

**Net Sales** = ₹1,85,000 (cash) + ₹6,25,000 (credit) − ₹14,000 (returned) = **₹7,96,000**

**BRANCH DEBTORS ACCOUNT**

Opening Debtors (assumed ₹0) + Credit Sales ₹6,11,000 − Cash Received ₹4,38,000 − Bad Debts (net) ₹4,500 − Discount ₹7,500 = Closing Debtors ₹61,000

**BRANCH STOCK ACCOUNT** (at Invoice Price)

Opening Stock ₹96,000 + Goods Received ₹4,40,000 − Goods Returned ₹60,000 − COGS ₹2,95,333 = Closing Stock ₹1,66,667

**BRANCH PROFIT & LOSS ACCOUNT**

Gross Profit (₹7,96,000 − ₹2,95,333) = **₹5,00,667**

Less: Operating Expenses:
  - Rent, Rates & Taxes: ₹24,000
  - Salaries & Wages: ₹72,000
  - Office Expenses: ₹9,500
  - Discount Allowed: ₹7,500
  - Bad Debts (₹5,500 − ₹1,000 recovery): ₹4,500
  - **Total Expenses: ₹1,17,500*…

Question 7

A Fire occurred in the premises of M/s H.R. Co. on 30th September, 2019. The firm had taken an insurance policy for ₹ 2,30,000 which was subject to an average clause. Calculate the insurance claim based on the following particulars for the period from 1st April, 2018 to 30th September, 2019.

Accepted Answer

**Answer: ₹2,23,426**

The insurance claim under the Average Clause is calculated using the formula: **Claim = (Average Stock / Sum Insured) × Loss**

**Step 1: Calculate Average Stock**
Average Stock = (Opening Stock + Closing Stock) / 2 = (₹2,11,000 + ₹2,32,000) / 2 = **₹2,21,500**

Here, the opening stock as on 01-04-2018 is ₹2,11,000, and the closing stock as on 15-09-2019 (closest to the fire date of 30-09-2019) is ₹2,32,000.

**Step 2: Determine Loss**
The loss (cost of stock destroyed in fire) equals the closing stock as on the date of fire = **₹2,32,000**

**Step 3: Apply Average Clause Formula**
Since the average stock (₹2,21,500) is less than the sum insured (₹2,30,000), the claim is restricted:

Claim = (₹2,21,500 / ₹2,30,000) × ₹2,32,000 = 0.96304 × ₹2,32,000 = **₹2,23,426**

The Average Clause penalizes the insured because they failed to maintain stock equal to the policy amount. The insured acts as a co-insurer for the shortfall, reducing their recoverable claim accordingly.

Question 8

While valuing the Stock as 31st March, 2019, ₹8,000 were written off in respect of a slow moving item, cost of which was ₹12,000. A portion of the goods were sold at a loss of ₹4,000 on the original cost of ₹9,000. The remainder of the stock is estimated to be worth the original cost. The value of Goods salvaged was estimated at ₹35,000.

You are required to ascertain the amount of claim to be lodged with the Insurance Company for the loss of stock.

Prepare the Cash Flow statement as per AS 3 using indirect method.

Net profit before taking into account income tax and income from new suits but after taking into account the following items:
(a) Depreciation on Property, Plant & Equipment ₹7.50 lakhs
(b) Discount on issue of Debentures written off ₹45,000
(c) Interest on Debentures paid ₹2,…

Accepted Answer

**Part A: Ascertainment of Amount of Insurance Claim**

For **insurance claim purposes**, stock is valued at **cost price**, not NRV. The ₹8,000 write-down on the slow-moving item is an NRV adjustment under **AS 2 (Valuation of Inventories)** and does NOT reduce the insurance claim.

Total stock at cost = Slow-moving item (₹12,000) + Goods sold at a loss — cost (₹9,000) + Remainder salvaged unsold (₹35,000) = ₹56,000.
Goods salvaged = ₹9,000 (cost of goods sold post-loss for ₹5,000) + ₹35,000 (unsold salvage) = ₹44,000.
Stock LOST = ₹56,000 − ₹44,000 = ₹12,000.
**Amount of Claim to be lodged with Insurance Company = ₹12,000.**

---

**Part B: Cash Flow Statement as per AS 3 — Indirect Method**
**Year ended 31st March 2020**

*(Net profit figure is missing from question data; back-calculated as ₹19,66,939 — see WN1.)*

**A. Cash Flow from Operating Activities** .............. ₹
Net Profit before Tax .............. 19,66,939
Add: Depreciation on PPE .............. 7,50,000
Add: Discount on Debentures written off .............. 45,000
Add: Interest on Debentures paid .............. 2,25,000
Less: Profit on sale of Investments .............. (30,000)
Less: Interest received on Investments .............. (60,000)
Less: Compensation received (non-operating) .............. (1,35,000)
**Operating Profit before WC Changes .............. 27,61,939**
Increase in Inventories .............. (4,27,500)
Decrease in Trade Receivables .............. 8,850
Increase in Trade Payables ..........…

Question 9

Aman Ltd. (an unlisted company other than AIF, Banking company, NBFC and HFC) had ₹8,000, 9% debentures of ₹100 each outstanding as on 1st April, 2019, redeemable on 31st March, 2020.

Accepted Answer

**Accounting Treatment for Redemption of Debentures — Aman Ltd.**

**Applicable Law:** Rule 18 of Companies (Share Capital and Debentures) Rules, 2014 as amended by the Companies (Share Capital and Debentures) Amendment Rules, 2019 (effective 16th August 2019), read with Section 71 of the Companies Act, 2013.

**Step 1: Determination of Debenture Redemption Reserve (DRR) Requirement**

Aman Ltd. is an unlisted company (other than AIF, Banking Company, NBFC and HFC). Under the amended Rule 18, such companies are required to maintain **DRR equal to 10%** of the outstanding debenture amount before redemption. Since the debentures are redeemed on 31st March 2020, the amended rules (post-August 2019) are applicable.

Total face value of debentures = 8,000 × ₹100 = **₹8,00,000**

DRR required = 10% × ₹8,00,000 = **₹80,000**

The company must create ₹80,000 in DRR by appropriating from profits before redemption.

**Step 2: Debenture Redemption Investment (DRI) Requirement**

Under Rule 18(7), on or before **30th April 2019**, Aman Ltd. must invest or deposit a sum of not less than **15%** of the amount of debentures maturing during the year ending 31st March 2020, in specified instruments (e.g., Government Securities, FDs in scheduled banks).

Investment required = 15% × ₹8,00,000 = **₹1,20,000**

These investments must be kept unencumbered until the debentures are redeemed.

**Step 3: Interest Payment**

Annual interest on 9% debentures = 9% × ₹8,00,000 = ₹72,000 for the year 2019-…

Question 10

On 1st April, 2019, the following balances appeared in the books of accounts: Investment in 1,000, 7% secured Govt. bonds of ₹ 100 each, ₹ 1,00,000; Debenture Redemption Reserve is ₹ 60,000. Interest on investments is received yearly at the end of financial year. Long-term advances were purchased on 30th March, 2020 at an average price of ₹ 96.50 and cancelled on the same date. On 31st March, 2020, the investments were realised at par and the advances were redeemed. You are required to write up the following accounts in the books of Mr. Nitesh on 31st March, 2020:

Accepted Answer

**ACCOUNTS OF MR. NITESH AS ON 31ST MARCH, 2020**

**Note:** Based on the given information, the following transactions occurred: (i) Interest on Govt. bonds @ 7% per annum = ₹7,000; (ii) Govt. bonds sold at par (₹100 each) on 31st March 2020; (iii) 1,000 Deed Debentures (long-term advances) purchased at ₹96.50 each on 30th March 2020 and cancelled on 31st March 2020, resulting in gain of ₹3,500 (₹1,00,000 nominal value – ₹96,500 cost); (iv) Issued Debentures assumed to be ₹1,00,000 at opening, redeemed at redemption gain.

**(1) DEBENTURES ACCOUNT (Issued Debentures – being redeemed)**

Dr. | Cr.
--- | ---
Cancellation/Redemption on 31.3.2020: ₹1,00,000 | Opening Balance (Issued): ₹1,00,000
Closing Balance: – |

**(2) DEBENTURE REDEMPTION RESERVE ACCOUNT**

Dr. | Cr.
Closing Balance: ₹60,000 | Opening Balance: ₹60,000

The Debenture Redemption Reserve remains intact. If debentures were redeemed at a gain, such gain may be transferred to General Reserve or retained as per company policy. However, based on typical treatment, the DRR is carried forward unless specifically used for redemption.

**(3) INVESTMENT ACCOUNT (7% Secured Govt. Bonds)**

Dr. | Cr.
Opening Balance: ₹1,00,000 | Sale (31.3.2020): ₹1,00,000
Closing Balance: – |

**Interest on Investments:** ₹7,000 (separately credited to Interest Income Account). The sale proceeds of ₹1,00,000 plus accrued interest of ₹7,000 totalling ₹1,07,000 were received on 31st March 2020.

**(4) DEED DEBENTURES ACCOUNT (Investment i…

Question 11

Mr. Nitesh adopted the Interest Suspense method for recording his Hire purchase transactions. You are required to: Prepare the Tractor account, Interest Suspense account and Raj Lida account in the books of Mr. Nitesh.

Accepted Answer

**Hire Purchase Accounting – Interest Suspense Method in the books of Mr. Nitesh**

Under the **Interest Suspense Method**, the asset is recorded at **cash price**, the HP vendor is credited at the **total hire purchase price** (cash price + total interest), and a **Interest Suspense Account** is opened as a suspense/contra account for the total interest, which is written off year by year as interest accrues.

**Step 1 – Determine HP Price and Interest Schedule**

Cash Price = ₹11,50,000 | Down Payment = ₹2,50,000 | Balance (principal) = ₹9,00,000
Three annual instalments of ₹3,00,000 principal + 8% interest on outstanding balance:

- Year 1 Interest: 8% × ₹9,00,000 = ₹72,000 → Instalment = ₹3,72,000
- Year 2 Interest: 8% × ₹6,00,000 = ₹48,000 → Instalment = ₹3,48,000
- Year 3 Interest: 8% × ₹3,00,000 = ₹24,000 → Instalment = ₹3,24,000
- **Total Interest = ₹1,44,000 | Total HP Price = ₹12,94,000**

**SLM Depreciation** = 10% × ₹11,50,000 = **₹1,15,000 p.a.**

---

**TRACTOR ACCOUNT (in the books of Mr. Nitesh)**

| Dr. | | | Cr. | | |
|---|---|---|---|---|---|
| **Date** | **Particulars** | **₹** | **Date** | **Particulars** | **₹** |
| 6/4/2017 | To Raj Ltd A/c (Cash Price) | 11,50,000 | 31/3/2018 | By Depreciation A/c | 1,15,000 |
| | | | 31/3/2018 | By Balance c/d | 10,35,000 |
| | **Total** | **11,50,000** | | **Total** | **11,50,000** |
| 1/4/2018 | To Balance b/d | 10,35,000 | 31/3/2019 | By Depreciation A/c | 1,15,000 |
| | | | 31/3/2019 | By Balance c/d | 9,20,000 |
|…

Question 12

Following is the draft Profit & Loss Account of X Ltd for the year ended 31st March, 2020:

Accepted Answer

**Analysis and Presentation of Profit & Loss Account of X Ltd for the year ended 31st March, 2020**

The draft Profit & Loss Account is analysed below to identify the nature of each item and present the results in a structured manner as required under **Schedule III of the Companies Act, 2013**.

**Classification of Items on the Debit Side:**

The expenses charged against profit (i.e., revenue expenses) are: Administrative Expenses ₹5,96,400; Advertisement Expenses ₹1,10,500; Sales Commission ₹1,05,550; Director's Fees ₹1,48,900; Interest on Debentures ₹56,000; Managerial Remuneration ₹3,05,540; and Depreciation on Fixed Assets ₹5,78,530. These together constitute the total operating and financial charges = **₹19,01,420**.

**Provision for Taxation** ₹12,50,600 represents a charge against profit for income tax liability for the year and is shown as **Tax Expense** in the Statement of Profit & Loss under Schedule III.

**Appropriations of Profit:** Transfer to General Reserve ₹3,50,000 and Transfer to Investment Revaluation Reserve ₹25,800 are **appropriations** of profit (not charges), totalling ₹3,75,800. Under Schedule III format, these are shown as movements in **Other Equity** and not in the Statement of P&L.

**Note on Investment Revaluation Reserve:** Transfer to Investment Revaluation Reserve (₹25,800) represents unrealised gains/losses on revaluation of investments. Under **AS 13 (Accounting for Investments)**, such reserves are created for long-term investments and a…

Question 13

Depreciation on Fixed Assets as per Schedule II of the Companies Act, 2013 was ₹ 63,750. You are required to calculate the maximum limits of the managerial remuneration as per Companies Act, 2013.

Following is the Balance Sheet of M/S. S. Traders as on 31st March, 2019:

| Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| Capital | 1,60,000 | Fixed Assets | 1,03,000 |
| Bank Loan | 80,000 | Closing stock | 76,000 |
| Trade payables | 32,000 | Debtors | 68,000 |
| Profit & Loss A/c | 56,000 | Deferred Expenditure | 24,000 |
| | | Cash & Bank | 65,000 |
| Total | 3,28,000 | Total | 3,28,000 |

Additional Information:
(i) Remaining life of Fixed Assets is 4 years with zero scrap. The net realizable value of Fixed Assets as on 31st March, 2020 is ₹ 90,000.
(ii) Firm's Sales & Purchases for t…

Accepted Answer

**Computation of Net Profit under Section 198 of the Companies Act, 2013 for the year ending 31st March, 2020:**

**Step 1 – Trading Account (2019-20)**
Opening Stock (from 31.3.2019 Balance Sheet) is ₹76,000. Purchases for the year are ₹6,25,000. Sales are ₹7,50,000. Closing Stock is taken at its **Net Realisable Value (NRV)** of ₹90,000 (lower of cost or NRV, per AS 2 – Valuation of Inventories). **Gross Profit = ₹7,50,000 + ₹90,000 − ₹76,000 − ₹6,25,000 = ₹1,39,000.**

**Step 2 – Net Profit (before managerial remuneration)**
From Gross Profit of ₹1,39,000, the following are deducted:
- **Depreciation as per Schedule II of the Companies Act, 2013**: ₹63,750 (given; this is the permissible depreciation for Section 198 purposes)
- **Deferred Expenditure written off**: ₹24,000 (unamortised deferred expense carried in the 31.3.2019 Balance Sheet; must be charged off as it is a fictitious asset not recognised under current framework)

**Net Profit = ₹1,39,000 − ₹63,750 − ₹24,000 = ₹51,250**

**Step 3 – Maximum Limits of Managerial Remuneration under Section 197 of the Companies Act, 2013**

Section 197 prescribes the following ceilings computed on **Net Profits determined under Section 198**:

(a) **Overall ceiling** (all managerial personnel combined): **11% of Net Profits = 11% × ₹51,250 = ₹5,637.50**

(b) For a **single Managing Director / Whole-Time Director / Manager**: **5% of Net Profits = ₹2,562.50**

(c) For **more than one MD/WTD/Manager**: **10% of Net Profits = ₹5,12…

Question 14

Additional Information (Continued):
(iii) The cost & net realizable value of the stock as on 31st March, 2020 was ₹ 60,000 and ₹ 66,000 respectively.
(iv) General expenses (including interest on Loan) for the year 2019-20 were ₹ 33,900.
(v) Deferred expenditure is normally amortized equally over 3 years starting from the Financial year 2018-19 i.e. ₹ 6,000 per year.
(vi) Debtors on 31st March, 2020 is ₹ 65,000 of which ₹ 5,000 is doubtful. Collection of another ₹ 10,000 debtors depends on successful negotiations of certain products supplied to the customer.
(vii) Closing Trade payable ₹ 48,000, which is likely to be settled at 5% discount.
(viii) There is a prepayment penalty of ₹ 4,000 for Bank loan outstanding.
(ix) Cash & Bank balances as on 31st March, 2020 is ₹ 1,65,200.

Prepare Prof…

Accepted Answer

**Note:** This question references 'Additional Information (Continued)', indicating it is part of a larger question whose main data (Trial Balance / Opening Balance Sheet) has not been provided here. The solution below presents the **non-going concern adjustments** derivable from the given additional information, along with the complete framework for Profit & Loss Account and Balance Sheet.

**Concept — Non-Going Concern (Break-Up) Basis:**
When a firm is NOT a going concern, financial statements are prepared on a **break-up/realisable value basis** rather than historical cost. Key differences: (a) assets are valued at net realisable values, (b) all fictitious/deferred assets are written off immediately, (c) penalties and settlement discounts are recognised, and (d) contingent losses are fully provided for.

**Adjustment-wise Analysis of Additional Information:**

**(iii) Closing Stock:**
Cost = ₹60,000; NRV = ₹66,000. Under going concern (AS 2 — Valuation of Inventories), stock is valued at lower of cost or NRV = ₹60,000. Under **non-going concern basis**, stock is valued at NRV (realisable value) = **₹66,000**. Surplus of ₹6,000 is a gain in P&L.

**(iv) General Expenses:**
General expenses including interest on loan = ₹33,900. Charged to P&L account as normal.

**(v) Deferred Expenditure — Full Write-off:**
Total deferred expenditure = ₹6,000 × 3 years = ₹18,000. Amortisation: 2018-19: ₹6,000; 2019-20: ₹6,000 (normal); Remaining for 2020-21: ₹6,000. Under non-going concern…

Question 15

Moon Ltd. was incorporated on 1st August, 2019 to take over the running business of a partnership firm as of 1st August, 2019. The summarized Profit & Loss Account for the year ended 31st March, 2020 is as under:

Gross Profit: ₹ 6,30,000
Less:
  Salaries: 1,26,000
  Rent, Rates & Taxes: 72,000
  Commission on sales: 40,000
  Depreciation: 60,000
  Interest on Debentures: 36,000
  Director's fees: 24,000
  Advertisement: 48,000
  Total: 4,36,000
Net profit for the year: 1,93,600

Moon Ltd. initiated an advertising campaign which resulted in increase of monthly sales by 25% post incorporation.

Accepted Answer

**Part (a): Statement of Pre and Post-Incorporation Profits**

**Determination of Key Ratios:**

Moon Ltd. was incorporated on 1st August, 2019. The financial year runs from 1st April, 2019 to 31st March, 2020.
- **Pre-incorporation period:** 1st April, 2019 to 31st July, 2019 = **4 months**
- **Post-incorporation period:** 1st August, 2019 to 31st March, 2020 = **8 months**
- **Time ratio (Pre : Post) = 4 : 8 = 1 : 2**

Since Moon Ltd. initiated an advertising campaign that increased monthly sales by 25% post-incorporation, monthly sales post-incorporation = 1.25 units vs. 1 unit pre-incorporation.
- Pre-incorporation total sales = 4 × 1 = 4 units
- Post-incorporation total sales = 8 × 1.25 = 10 units
- **Sales ratio (Pre : Post) = 4 : 10 = 2 : 5**

**Basis of Allocation of Expenses:**

| Item | Basis | Reason |
|---|---|---|
| Gross Profit | Sales (2:5) | Sales vary with volume |
| Salaries | Time (1:2) | Accrues evenly over time |
| Rent, Rates & Taxes | Time (1:2) | Accrues evenly over time |
| Commission on Sales | Sales (2:5) | Directly linked to sales |
| Depreciation | Time (1:2) | Accrues evenly over time |
| Interest on Debentures | Post only | Debentures issued by company after incorporation |
| Director's Fees | Post only | Directors exist only after incorporation |
| Advertisement | Post only | Campaign initiated by Moon Ltd. after incorporation |

**Statement Showing Pre and Post-Incorporation Profits**

| Particulars | Pre-Incorporation (₹) | Post-Incorporation…

CA Inter Audit & Ethics

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Asset	Depreciation (₹)
(i) Purchased Machinery	1,80,000
(ii) Land	Nil
(iii) Self-constructed Machinery	35,000
Total	2,15,000