Question 1

The firm of M/s Om has four partners - A,B,C & D and as of 31st March, 2021, its Balance Sheet stood as follows:

| Equity and Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| Capital A/cs: | | Land | 50,000 |
| A | 2,00,000 | Building | 2,50,000 |
| B | 2,00,000 | Office equipment | 1,25,000 |
| C | 1,00,000 | Computers | 70,000 |
| Current A/cs: | | Debtors | 4,00,000 |
| A | 50,000 | Stocks | 3,00,000 |
| B | 1,50,000 | Cash at Bank | 75,000 |
| C | 1,10,000 | Other Current Assets | 22,600 |
| Loan from NBFC | 5,00,000 | Current A/c: D | 87,400 |
| Current Liabilities | 70,000 | | |
| Total | 13,80,000 | Total | 13,80,000 |

The partners have been sharing profits and losses in the ratio of 4:4:1:1. It has been agreed to dissolve the firm on 1.4.2021 on the basis of the following under…

Accepted Answer

**DISSOLUTION OF M/S OM - ACCOUNTS**

**Step 1: Asset Realization Values**

Adjusted values of assets realized:
- Land: 50,000 × 200% = ₹1,00,000 (Gain: ₹50,000)
- Building: 2,50,000 × 120% = ₹3,00,000 (Gain: ₹50,000)
- Office Equipment: ₹1,25,000 (No adjustment stated, no change)
- Computers: 70,000 × 70% = ₹49,000 (Loss: ₹21,000)
- Debtors: 4,00,000 × 95% = ₹3,80,000 (Loss: ₹20,000)
- Stocks: 3,00,000 × 90% = ₹2,70,000 (Loss: ₹30,000)
- Other Current Assets: ₹22,600 (No change)

Total assets realized: ₹12,46,600
Total gains: ₹1,00,000 | Total losses: ₹71,000 | Net gain: ₹29,000

**Step 2: Additional Loss on Prepayment Premium**

NBFC Loan prepayment premium: 5,00,000 × 1% = ₹5,000
Net gain after premium: 29,000 − 5,000 = ₹24,000

**Step 3: Distribution of Gains and Premium Loss**

Profit-sharing ratio: A:B:C:D = 4:4:1:1 (Total = 10)

Net gain of ₹24,000 distributed:
- A: 24,000 × 4/10 = ₹9,600
- B: 24,000 × 4/10 = ₹9,600
- C: 24,000 × 1/10 = ₹2,400
- D: 24,000 × 1/10 = ₹2,400

**Step 4: Opening Balances and Adjusted Positions**

Opening balances:
- A: Capital ₹2,00,000 + Current ₹50,000 = ₹2,50,000
- B: Capital ₹2,00,000 + Current ₹1,50,000 = ₹3,50,000
- C: Capital ₹1,00,000 + Current ₹1,10,000 = ₹2,10,000
- D: Current A/c (Debit, shown on asset side) = ₹(87,400) [D owes the firm]

After adding gain of ₹24,000 (distributed as above):
- A: 2,50,000 + 9,600 = ₹2,59,600
- B: 3,50,000 + 9,600 = ₹3,59,600
- C: 2,10,000 + 2,400 = ₹2,12,400
- D: (87,400) + 2,400 = ₹(85,000) [D sti…

Question 2

Explain the nature of a Limited Liability Partnership. Under what circumstances, an LLP may be wound up voluntarily or by the Tribunal?

Accepted Answer

**Nature of a Limited Liability Partnership:**

A Limited Liability Partnership (LLP) is a body corporate formed and incorporated under the Limited Liability Partnership Act, 2008. It represents a hybrid corporate structure combining the characteristics of both a partnership and a company.

**Key Characteristics:**

**Separate Legal Entity** — An LLP is a legal entity distinct from its members. It can sue and be sued in its own name, own property, and enter into contracts independently.

**Limited Liability** — Members' liability is limited. They are not personally liable for the debts and obligations of the LLP, and their exposure is restricted to their capital contribution or agreed amount.

**Perpetual Succession** — The LLP continues to exist notwithstanding changes in its membership. Death, lunacy, or insolvency of a member does not affect the continuity of the LLP.

**Common Seal** — An LLP can have a common seal for executing documents.

**Contractual Flexibility** — Partners have the freedom to regulate their internal relations through an LLP agreement without statutory restrictions.

**Minimum Members** — An LLP must have at least two members; in case of individuals in certain professions, specific regulations apply.

**Circumstances for Voluntary Winding Up:**

Under **Section 61 of the Limited Liability Partnership Act, 2008**, an LLP may be wound up voluntarily when:

1. **Unanimous Consent** — All members agree by majority consent (as specified in the agreement) …

Question 3

U and V were in partnership with sharing of profit and loss equally. The firm's Balance sheet as at 31/12/2021 (for 9 months) was:

| Equity and Liabilities | ₹ | ₹ | Assets | ₹ |
|---|---|---|---|---|
| Partners' Capital Accounts: | | | Plant | 1,85,000 |
| U | 1,50,000 | | Building | 1,00,000 |
| V | 1,80,000 | 3,30,000 | Debtors | 85,000 |
| Sundry Creditors | 90,000 | | Stock | 56,000 |
| Bank Overdraft | 83,000 | | Profit & Loss A/c (Dr. balance) | 60,000 |
| Partners' Drawings Accounts: U | 8,000 | | | |
| V | 9,000 | 17,000 | | |
| Total | 5,03,000 | | Total | 5,03,000 |

The operations of the business were carried on till 31/03/2022. U and V both withdrew in equal amount half the amount of profit made during the current period of three months after charging depreciation of ₹ 5,000 …

Accepted Answer

**Working Note 1: Profit for the 3-month period (Jan–Mar 2022) and Drawings**

Let profit for the 3-month period (after depreciation of ₹5,000 on Plant and 5% write-off on Building) = P.

Each partner withdrew half the profit equally, i.e., P/4 each. Total drawings = P/2.

Using the Balance Sheet equation (Assets = Capital + Liabilities):

Assets at 31/03/2022 (in terms of P):
Plant (1,85,000 – 5,000) = 1,80,000; Building (1,00,000 – 5,000) = 95,000; Debtors = 40,500; Stock = 24,000; P&L A/c Dr. = (60,000 – P); U Drawings = (8,000 + P/4); V Drawings = (9,000 + P/4).
Total Assets = 4,16,500 – P/2

Liabilities: U Capital 1,50,000 + V Capital 1,80,000 + Creditors (90,000 – 50,000) 40,000 + Bank OD (83,000 – 50,000) 33,000 = **4,03,000**

Setting Assets = Liabilities:
4,16,500 – P/2 = 4,03,000 → P/2 = 13,500 → **P = ₹27,000**

Drawings per partner = 27,000/4 = **₹6,750 each**
P&L Dr. balance = 60,000 – 27,000 = **₹33,000**
U Drawings = 8,000 + 6,750 = **₹14,750**; V Drawings = 9,000 + 6,750 = **₹15,750**

---

**(i) Balance Sheet of the Firm as at 31st March 2022**

| Equity & Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| U's Capital | 1,50,000 | Plant (1,85,000 – 5,000 dep.) | 1,80,000 |
| V's Capital | 1,80,000 | Building (1,00,000 – 5,000 w/off) | 95,000 |
| Sundry Creditors | 40,000 | Debtors | 40,500 |
| Bank Overdraft | 33,000 | Stock | 24,000 |
| | | P&L A/c (Dr. balance) | 33,000 |
| | | U's Drawings A/c | 14,750 |
| | | V's Drawings A/c | 15,750 |
| **Total** | **4,…

Question 4

Noor Ltd. has its share capital divided into equity shares of ₹ 10 each. On 1.1.2021 it granted 4,000 employee stock options at ₹ 40 per share, when the market price was ₹ 60 per share. Fair value per option was ₹ 20. The options were to be exercised between 15th March, 2021 and 31st March, 2021. The employees exercised their options for 2,500 shares only and the remaining options lapsed. The company closes its books on 31st March every year. You are required to give Journal entries (with narration) as would appear in the books of the company for the year ended 31st March, 2021.

Accepted Answer

**Accounting for Employee Stock Options (ESOPs) — Noor Ltd.**

**Key Data:**
- Options granted: 4,000 @ exercise price ₹40; Face value ₹10; Market price ₹60; Fair value ₹20
- Vesting: Grant date 1.1.2021; Exercise window 15.3.2021 – 31.3.2021 (entire cycle within FY 2020-21)
- Options exercised: 2,500; Options lapsed: 1,500

**Total Employee Compensation Expense** = 4,000 options × ₹20 (fair value) = **₹80,000**

Since the entire vesting and exercise period falls within the year ended 31.3.2021, the full ₹80,000 is recognised in this year.

**Journal Entries in the books of Noor Ltd. for the year ended 31st March, 2021:**

**Entry 1 — On recognition of Employee Compensation Expense (during vesting period up to 15.3.2021):**
Employee Compensation Expense A/c     Dr.   ₹80,000
    To Employee Stock Options Outstanding A/c     ₹80,000
*(Being employee compensation expense recognised for 4,000 stock options at fair value of ₹20 each)*

**Entry 2 — On exercise of 2,500 options (between 15.3.2021 and 31.3.2021):**
Bank A/c     Dr.   ₹1,00,000
Employee Stock Options Outstanding A/c     Dr.   ₹50,000
    To Equity Share Capital A/c     ₹25,000
    To Securities Premium A/c     ₹1,25,000
*(Being 2,500 options exercised at ₹40 each; face value ₹10 credited to share capital; balan…

Question 5

Complicated Ltd. (an unlisted company) gives the following information as on 31.3.2021:

| Particulars | Amount (₹) |
|---|---|
| Equity shares of ₹ 10 each, fully paid up | 13,50,000 |
| Share option outstanding Account | 4,00,000 |
| Revenue Reserve | 15,00,000 |
| Securities Premium | 2,50,000 |
| Profit & Loss Account | 1,25,000 |
| Capital Reserve | 2,00,000 |
| Unpaid dividends | 1,00,000 |
| 12% Debentures (Secured) | 18,75,000 |
| Advance from related parties (Long term - Unsecured) | 10,00,000 |
| Current maturities of long term borrowings | 16,50,000 |
| Application money received for allotment due for refund | 2,00,000 |
| Property, plant and equipment | 46,50,000 |
| Current assets | 40,00,000 |

The Company wants to buy back 25,000 equity shares of ₹ 10 each, on 1st April, 202…

Accepted Answer

**Buy Back of Shares — Complicated Ltd.**

**Preliminary Calculations:**

Existing equity shares = ₹13,50,000 ÷ ₹10 = **1,35,000 shares**
Shares to be bought back = **25,000 shares** at ₹15 each
Total buy-back consideration = 25,000 × ₹15 = **₹3,75,000**
Nominal (face) value of shares bought back = 25,000 × ₹10 = **₹2,50,000**
Premium on buy-back = ₹3,75,000 − ₹2,50,000 = **₹1,25,000**

As per **Section 68(3) of the Companies Act, 2013**, when shares are bought back out of free reserves or securities premium, a sum equal to the **nominal value** of shares bought back must be transferred to the **Capital Redemption Reserve (CRR)**.

The premium on buy-back (₹1,25,000) is charged to **Securities Premium Account** as permitted under **Section 52(2)(e) of the Companies Act, 2013** (securities premium may be applied for purchase of own shares under Section 68). Securities Premium has a balance of ₹2,50,000, which is sufficient.

Transfer to CRR (₹2,50,000) is made from **Revenue Reserve**, which has a balance of ₹15,00,000.

---

**Journal Entries in the books of Complicated Ltd.**

**Entry 1 — Buy Back of Shares:**
Equity Share Capital A/c                Dr.  ₹2,50,000
Securities Premium A/c                  Dr.  ₹1,25,000
    To Bank A/c                                        ₹3,75,000
*(Being 25,000 equity shares of ₹10 each bought back at ₹15 per share, paid from bank)*

**Entry 2 — Transfer to Capital Redemption Reserve:**
Revenue Reserve A/c                     Dr.  ₹2,50,00…

Question 6

Explain the conditions for equity shares with differential rights under the Companies (Share Capital and Debentures) Rules.

Accepted Answer

**Equity shares with differential rights** are shares issued with rights that differ from the standard equity shares in terms of voting, dividends, capital participation, or transferability. These are regulated under **Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014**.

**Essential Conditions for Issue:**

**1. Articles of Association Provision** — The Articles of Association must explicitly authorize the company to issue equity shares with differential rights. Such authorization must be embedded in the Articles at the time of incorporation or incorporated through an amendment before such shares are issued.

**2. Special Resolution Requirement** — The company must obtain a **Special Resolution** (passed by not less than three-fourths majority) from its shareholders before issuing equity shares with differential rights. This ensures sufficient shareholder consent for creating differential share classes.

**3. Value Limit** — The aggregate value of differential voting shares **shall not exceed half of the total issued share capital or half of the paid-up share capital, whichever is lower**. This safeguard prevents disproportionate concentration of differential rights.

**4. Clear Specification of Rights** — All conditions, rights, and limitations attached to such shares must be clearly specified in the Articles of Association. There must be no ambiguity regarding voting rights, dividend entitlements, capital repayment priorities, or transferability restrictio…

Question 7

L, M, N and O hold Equity capital in the proportion of 30:30:20:20 in Hill Ltd. X, Y, Z and K hold preference share capital in the proportion of 40:30:20:10. You are required to identify the voting rights of shareholders in case of resolution of winding up of the company if the paid-up capital of the company is ₹ 60 Lakh and preference share capital is ₹ 30 Lakh.

Accepted Answer

**Applicable Provision:** As per **Section 47(2) of the Companies Act, 2013**, preference shareholders do not have voting rights on general resolutions. However, they are entitled to vote on **every resolution placed before the company** if dividends on preference shares are in arrears for two or more years. More importantly, on a resolution for **winding up of the company**, preference shareholders have voting rights since such a resolution directly affects their rights.

**Determination of Capital:**
Total paid-up capital of Hill Ltd. = ₹60 Lakh
Preference share capital = ₹30 Lakh
Equity share capital = ₹60 – ₹30 = **₹30 Lakh**

**Voting Rights of Equity Shareholders (in proportion to paid-up equity capital):**

L (30% of ₹30 L) = ₹9.00 Lakh → Voting right = 9/60 = **15%**
M (30% of ₹30 L) = ₹9.00 Lakh → Voting right = 9/60 = **15%**
N (20% of ₹30 L) = ₹6.00 Lakh → Voting right = 6/60 = **10%**
O (20% of ₹30 L) = ₹6.00 Lakh → Voting right = 6/60 = **10%**

**Voting Rights of Preference Shareholders (in proportion to paid-up preference capital):**
On a winding up resolution, their voting rights are in proportion to their paid-up capital as it bears to total paid-up capital.

X (40% of ₹30 L) = ₹12.00 Lakh → Voting right = 12/60 = **20%**
Y (30% of ₹30 L) = ₹9.00 Lakh → Voting right = 9/60 = **15%**
Z (20% of ₹30 L) = ₹6.00 Lakh → Voting right = 6/60 = **10%**
K (10% of ₹30 L) = ₹3.00 Lakh → Voting right = 3/60 = **5%**

**Total voting rights = 15+15+10+10+20+15+10+5 = 100%**…

Question 8

The following are the Balance Sheets of Aakash Limited and Ganga Limited as at March 31, 2021:

| Particulars | Note No. | Aakash Limited (₹) | Ganga Limited (₹) |
|---|---|---|---|
| Share Capital | 1 | 80,00,000 | 20,00,000 |
| Reserves and Surplus | 2 | (3,24,00,000) | 56,00,000 |
| Secured Loans | 3 | 3,20,00,000 | 1,60,00,000 |
| Unsecured Loans | 4 | 1,72,00,000 | - |
| Trade Payables | | 56,00,000 | 36,00,000 |
| Other Current Liabilities | 5 | 2,04,00,000 | 56,00,000 |
| Total | | 5,08,00,000 | 3,28,00,000 |
| Property, Plant & Equipment | | 68,00,000 | 1,36,00,000 |
| Inventories | | 3,68,00,000 | - |
| Other Current Assets | | 72,00,000 | 1,92,00,000 |
| Total | | 5,08,00,000 | 3,28,00,000 |

Notes to Accounts:
1. Share Capital — Aakash Limited: 6,00,000 Equity Shares of ₹10 each…

Accepted Answer

**Opening Balance Sheet of AakashGanga Limited as at 1st April 2021**

**EQUITY & LIABILITIES**

**Shareholders' Funds:**
Equity Share Capital — 14,00,000 shares of ₹10 each, fully paid up: **₹1,40,00,000**
*(Comprises: 4,00,000 shares issued to equity shareholders of Aakash and Ganga against cash; 40,000 shares to Aakash preference shareholders; 9,60,000 shares to employees in full settlement of dues)*

Reserves & Surplus — **Capital Deficit: (₹1,54,20,000)**

**Net Worth: (₹14,20,000)**

**Non-Current Liabilities:**
Secured Loans: **₹1,69,60,000**
*(Aakash: ₹3,20,00,000 − 80% × ₹3,68,00,000 = ₹25,60,000; Ganga: ₹1,60,00,000 − 50% × ₹32,00,000 = ₹1,44,00,000)*

Unsecured Loans: **₹43,00,000**
*(25% × ₹1,72,00,000)*

**Current Liabilities:**
Trade Payables: **₹73,60,000**
*(Aakash: 80% × ₹56,00,000 = ₹44,80,000; Ganga: 80% × ₹36,00,000 = ₹28,80,000)*

Statutory Liabilities: **₹1,64,00,000**
*(Aakash: ₹1,44,00,000 + Ganga: ₹20,00,000)*

**Total Equity & Liabilities: ₹4,36,00,000**

---

**ASSETS**

Property, Plant & Equipment: **₹2,04,00,000**
*(Aakash: ₹68,00,000 + Ganga: ₹1,36,00,000 — both at book value)*

Other Current Assets: **₹1,92,00,000**
*(Aakash: 80% × ₹72,00,000 = ₹57,60,000; Ganga: 70% × ₹1,92,00,000 = ₹1,34,40,000)*

Cash & Bank Balance: **₹40,00,000**
*(Cash received from 4,00,000 equity shares issued at par)*

**Total Assets: ₹4,36,00,000** ✓

---

**Key Notes:** (1) Pledged inventories of Aakash (₹3,68,00,000 BV) are NOT taken over; the secured lender recovers…

Question 9

Z Limited provides the following information as on 31st March, 2021:

| Particulars | Amount (₹) |
|---|---|
| 5,00,000 Equity shares of ₹ 10 each fully paid up | 50,00,000 |
| 9%, 20,000 Preference shares of ₹ 100 each fully paid up | 20,00,000 |
| Profit and Loss Account (Dr. balance) | 14,60,000 |
| 10% Secured Debentures | 16,00,000 |
| Interest due on Debentures | 1,60,000 |
| Trade Payables | 5,00,000 |
| Loan from Directors | 1,00,000 |
| Bank Overdraft | 1,00,000 |
| Provision for Tax | 1,00,000 |
| Land & Buildings | 30,00,000 |
| Plant & Machinery | 12,50,000 |
| Furniture & Fixtures | 2,50,000 |
| Goodwill | 11,00,000 |
| Patents | 5,00,000 |
| Trade Investments | 5,00,000 |
| Trade Receivables | 5,00,000 |
| Inventory | 10,00,000 |

Note: Preference dividend is in arrears for l…

Accepted Answer

**INTERNAL RECONSTRUCTION OF Z LIMITED — JOURNAL ENTRIES AND ACCOUNTS**

**Preliminary Working:**

Mr. Y's total debt: Debentures 60% × ₹16,00,000 = ₹9,60,000; Interest 60% × ₹1,60,000 = ₹96,000; Trade Payable = ₹1,00,000; **Total = ₹11,56,000.** 50% cancelled (₹5,78,000) → Reconstruction A/c; balance ₹5,78,000 settled: Cash ₹1,00,000 + 12% Debentures ₹4,78,000.

Mr. Z's total debt: Debentures 40% × ₹16,00,000 = ₹6,40,000; Interest 40% × ₹1,60,000 = ₹64,000; Trade Payable = ₹60,000; **Total = ₹7,64,000.** 50% cancelled (₹3,82,000) → Reconstruction A/c; balance ₹3,82,000 settled: Cash ₹60,000 + 12% Debentures ₹3,22,000.

Other Trade Payables: ₹5,00,000 − ₹1,00,000 − ₹60,000 = ₹3,40,000; 50% forgone = ₹1,70,000.

---

**JOURNAL ENTRIES IN THE BOOKS OF Z LIMITED**

**(i) Equity Share Capital Reduction (₹10 → ₹5 per share):**
Equity Share Capital A/c (₹10) Dr. **₹50,00,000**
  To Equity Share Capital A/c (₹5) **₹25,00,000**
  To Reconstruction A/c **₹25,00,000**
*(5,00,000 shares of ₹10 converted to 5,00,000 shares of ₹5; reduction credited to Reconstruction A/c)*

**(ii) Preference Share Capital Reduction (₹100 → ₹50; 9% → 10%; arrears waived):**
9% Preference Share Capital A/c Dr. **₹20,00,000**
  To 10% Preference Share Capital A/c **₹10,00,000**
  To Reconstruction A/c **₹10,00,000**
*(Preference dividend arrears of ₹3,60,000 for 2 years forgone — no separate entry as never declared/recorded)*

**(iii) Debt Settlement — Mr. Y:**
10% Secured Debentures A/c Dr. **₹9,60,000**
In…

Question 10

The Balance Sheet of Cloud Ltd., as at 31st March, 2021, being the date of voluntary winding up is as under:

| Particulars | Note | Amount (₹) |
|---|---|---|
| Share Capital | 1 | 21,00,000 |
| Reserve and Surplus | 2 | 4,00,000 |
| Long Term Borrowings | 3 | 4,20,000 |
| Short Term Borrowings | 4 | 9,70,000 |
| Trade Payables | | 12,00,000 |
| Other Current Liabilities | 5 | 2,10,000 |
| Total | | 53,00,000 |
| Property, Plant and Equipment | 6 | 26,00,000 |
| Inventories | | 6,50,000 |
| Trade Receivables | | 20,50,000 |
| Cash and Cash Equivalents | | - |
| Total | | 53,00,000 |

Notes to Accounts:

1. Share Capital — Issued, Subscribed & Paid up:

| Particulars | ₹ |
|---|---|
| 10,000 Equity Shares of ₹ 100 each, ₹ 60 paid up | 6,00,000 |
| 10,000 Equity Shares of ₹ 100 each, ₹ 50 p…

Accepted Answer

**Liquidator's Final Statement of Account of Cloud Ltd. (as at the date of winding up)**

**RECEIPTS**

The total assets realized by the liquidator are as follows: Land & Buildings ₹12,40,000; Plant & Machinery ₹14,20,000; Inventories ₹6,20,000; Trade Receivables ₹13,20,000. **Total Receipts = ₹46,00,000.**

**PAYMENTS (in order of priority)**

**Step 1 — Costs of Winding Up:**
Liquidation Expenses: ₹1,72,000. Liquidator's Remuneration @ 2% on ₹46,00,000 = ₹92,000.

**Step 2 — Preferential Creditors:**
Preferential Creditors (per Balance Sheet): ₹2,10,000. Income Tax Payable (government dues, rank as preferential): ₹1,34,000. Total: ₹3,44,000.

**Step 3 — Secured Creditors (10% Debenture Holders):**
Debenture Principal: ₹4,20,000. Interest for the year ended 31st March, 2021 (not yet accounted): 10% × ₹4,20,000 = ₹42,000. Total: ₹4,62,000.

**Step 4 — Unsecured Creditors:**
Bank Overdraft (unsecured): ₹9,70,000. Trade Payables: ₹12,00,000. Total: ₹21,70,000.

**Balance available after paying all creditors:** ₹46,00,000 − ₹2,64,000 − ₹3,44,000 − ₹4,62,000 − ₹21,70,000 = **₹13,60,000.**

**Step 5 — 10% Cumulative Preference Shareholders:**
Capital repayment: ₹10,00,000. Arrear dividends (cumulative, 3 years): 10% × ₹10,00,000 × 3 = ₹3,00,000. Total: ₹13,00,000.

**Balance available for Equity Shareholders:** ₹13,60,000 − ₹13,00,000 = **₹60,000.**

**Step 6 — Equity Shareholders:**
Total amount available: ₹60,000 against total paid-up equity of ₹11,00,000 (₹6,00,000 + ₹5,00,000)…

Question 11

Calculate 'Owned Fund' of an NBFC based on the following information:
Paid up share capital: ₹ 200 lakhs
Free reserves: ₹ 150 lakhs
Compulsory convertible preference shares (CCPS): ₹ 50 lakhs
Revaluation reserve: ₹ 50 lakhs (created by revaluation of assets)
Securities premium: ₹ 25 lakhs
Book value of intangible assets: ₹ 10 lakhs
Capital reserves (surplus arising out of sale proceeds of assets): ₹ 15 lakhs

Accepted Answer

**Owned Fund of an NBFC** is computed as per the RBI Master Direction – Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 (and related RBI circulars). Owned Fund broadly means paid-up equity capital, compulsorily convertible preference shares, free reserves, securities premium, and eligible capital reserves, reduced by book value of intangible assets.

**Treatment of each item:**

**Paid-up Share Capital (₹200 lakhs):** Included fully.

**Free Reserves (₹150 lakhs):** Included fully. Free reserves are those not created for any specific purpose and are freely available for distribution.

**Compulsory Convertible Preference Shares – CCPS (₹50 lakhs):** Included. CCPS are treated as quasi-equity and are specifically included in the Owned Fund definition since they are mandatorily convertible into equity.

**Revaluation Reserve (₹50 lakhs):** Excluded. Reserves created by revaluation of assets are specifically excluded from Owned Fund, as they do not represent real accretion of funds.

**Securities Premium (₹25 lakhs):** Included. Securities premium forms part of the share premium account and is expressly included.

**Book Value of Intangible Assets (₹10 lakhs):** Deducted. Intangible assets are to be deducted from the aggregate of the above items to arrive at Owned Fund.

**Capital Reserves – surplus from sale of assets (₹15 lakhs):** Included. Capital reserves representing surplus arising…

Question 12

While closing its books of account at year end, a Non-Banking Finance Company has its advances classified as follows:

| Category | ₹ in lakhs |
|---|---|
| Standard assets | 1,26,000 |
| Sub-standard assets | 10,050 |
| Secured portions of doubtful debts - up to one year | 2,400 |
| Secured portions of doubtful debts - one year to three years | 675 |
| Secured portions of doubtful debts - more than three years | 225 |
| Unsecured portions of doubtful debts | 727 |
| Loss assets | 360 |

Calculate the amount of provision, which must be made against the advances as per the Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016.

Accepted Answer

**Provision on Advances as per NBFC-ND-NSI (Reserve Bank) Directions, 2016**

As per the **Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016**, every NBFC is required to make provisions against its loan portfolio at the prescribed rates depending on the classification of the advance.

The applicable provision rates are:
- **Standard Assets**: 0.25% of the outstanding balance
- **Sub-standard Assets**: 10% of the outstanding balance
- **Doubtful Assets – Secured portion up to 1 year**: 25%
- **Doubtful Assets – Secured portion 1 to 3 years**: 40%
- **Doubtful Assets – Secured portion more than 3 years**: 100%
- **Doubtful Assets – Unsecured portion**: 100%
- **Loss Assets**: 100%

Applying these rates to the given data, the total **provision required = ₹3,502 lakhs**.

Question 13

The following figures are available from the books of Star Bank Ltd. for the year ended 31st March, 2021:

| Particulars | Amount in ₹ |
|---|---|
| Interest and Discounts Received | 1,52,00,640 |
| Interest Paid on Deposits | 91,81,440 |
| Salaries and Allowances | 10,00,000 |
| Directors' Fees and Allowances | 1,40,000 |
| Rent and Taxes Paid | 4,00,000 |
| Postage | 2,61,360 |
| Statutory Reserve Fund | 32,00,000 |
| Commission, Exchange and Brokerage Earned | 7,60,000 |
| Rent Received | 2,88,000 |
| Profit on sale of Investments | 9,03,200 |
| Depreciation on Assets | 1,60,000 |
| Statutory Expenses | 1,52,000 |
| Preliminary Expenses | 1,20,000 |
| Auditors' Fees | 48,000 |

The following further information is also available:
(i) Issued and Subscribed Capital of the Bank is ₹ 40,00,…

Accepted Answer

**Profit and Loss Account of Star Bank Ltd. for the year ended 31st March, 2021**

Banking companies prepare their financial statements as per **Form B of the Third Schedule to the Banking Regulation Act, 1949**. The Profit and Loss Account is supported by Schedules 13 to 16.

---

**PROFIT AND LOSS ACCOUNT**
For the year ended 31st March, 2021

| **Expenditure** | **₹** | **Income** | **₹** |
|---|---|---|---|
| I. Interest Expended (Schedule 15) | 91,81,440 | I. Interest Earned (Schedule 13) | 1,51,80,640 |
| II. Operating Expenses (Schedule 16) | 22,81,360 | II. Other Income (Schedule 14) | 19,51,200 |
| III. Provisions & Contingencies | 46,00,000 | | |
| IV. **Net Profit for the year** | **10,69,040** | | |
| **Total** | **1,71,31,840** | **Total** | **1,71,31,840** |

---

**PROFIT AND LOSS APPROPRIATION ACCOUNT**

| **Dr.** | **₹** | **Cr.** | **₹** |
|---|---|---|---|
| Transfer to Statutory Reserve Fund (25%) | 2,67,260 | Net Profit b/d | 10,69,040 |
| Balance carried forward to Balance Sheet | 8,01,780 | | |
| **Total** | **10,69,040** | **Total** | **10,69,040** |

*(Transfer to Statutory Reserve under Section 17 of the Banking Regulation Act, 1949 — minimum 25% of net profit is mandatory before any dividend.)*

---

**SCHEDULE 13 — Interest Earned**

| Particulars | ₹ |
|---|---|
| Interest and Discounts Received | 1,52,00,640 |
| Add: Opening Rebate on Bills Discounted (31.03.2020) | 60,000 |
| Less: Closing Rebate on Bills Discounted (31.03.2021) | (80,000) |
| *…

Question 14

From the following information of Beta Ltd. and its subsidiary Gamma Ltd. drawn up at 31st March, 2021, prepare a consolidated balance sheet as at that date:

| Particulars | Beta Ltd. ₹ | Gamma Ltd. ₹ |
|---|---|---|
| Share Capital (Shares of ₹ 100 each) | 15,00,000 | 2,50,000 |
| Reserves | 5,00,000 | 1,87,500 |
| Profit and Loss Account | 2,50,000 | 62,500 |
| Trade Payables | 3,75,000 | 1,42,500 |
| Machinery | 7,50,000 | 2,25,000 |
| Furniture | 3,75,000 | 42,500 |
| Other non-current assets | 11,00,000 | 3,75,000 |
| Shares in Gamma Ltd. (2,000 shares at ₹ 200 each) | 4,00,000 | - |

Other information: Reserves and Profit and Loss Account of Gamma Ltd. stood at ₹ 62,500 and ₹ 37,500 respectively on the date of acquisition of its 80% shares by Beta Ltd. on 1st April, 2020. Machinery …

Accepted Answer

**Consolidated Balance Sheet of Beta Ltd. and its Subsidiary Gamma Ltd. as at 31st March, 2021**

**Step 1 – Identify the holding percentage and cost of investment**

Beta Ltd. acquired 2,000 shares of Gamma Ltd. (total shares = 2,50,000 ÷ 100 = 2,500 shares) on 1st April, 2020.
Holding = 2,000 ÷ 2,500 = **80%**; Minority Interest (MI) = **20%**.
Cost of Investment = 2,000 × ₹200 = **₹4,00,000**.

**Step 2 – Revaluation of Gamma's Assets at acquisition date**

Machinery revaluation surplus = ₹3,75,000 – ₹2,50,000 = ₹1,25,000
Furniture revaluation deficit = ₹37,500 – ₹50,000 = (₹12,500)
**Net Revaluation Surplus at acquisition = ₹1,12,500**

**Step 3 – Net Assets of Gamma at acquisition (1st April, 2020)**

Share Capital ₹2,50,000 + Reserves ₹62,500 + P&L ₹37,500 + Net Revaluation Surplus ₹1,12,500 = **₹4,62,500**

**Step 4 – Goodwill on Consolidation**

Beta's 80% share of net assets at acquisition = 80% × ₹4,62,500 = ₹3,70,000
Cost of Investment = ₹4,00,000
**Goodwill = ₹4,00,000 – ₹3,70,000 = ₹30,000**

**Step 5 – Additional Depreciation on Revalued Assets (1 year)**

Additional depreciation on Machinery surplus: 10% × ₹1,25,000 = ₹12,500 (charge)
Depreciation saving on Furniture deficit: 15% × ₹12,500 = ₹1,875 (benefit)
**Net additional depreciation charge = ₹10,625** (debited to P&L of Gamma)

**Step 6 – Consolidated Asset Values of Gamma (at revalued cost, net of depreciation)**

Machinery: ₹3,75,000 – 10% × ₹3,75,000 = ₹3,37,500
Furniture: ₹37,500 – 15% × ₹37,500 = ₹31,…

Question 15

Tee Ltd. closes its books of accounts every year on 31st March. The financial statements for the year ended 31st March 2020 are to be approved by the approving authority on 30th June 2020. During the first quarter of 2020-2021, the following events/transactions have taken place. You are required to state with reasons, how the above transactions will be dealt with in the financial statements for the year ended 31 March 2020.

Accepted Answer

**Treatment of Post-Balance Sheet Events under AS 4**

As per AS 4 - Contingencies and Events After Balance Sheet Date, events occurring between the balance sheet date (31st March 2020) and the approval date (30th June 2020) are classified as either adjusting or non-adjusting events.

**(i) Inventory of Stitching Machines**

**Classification: ADJUSTING EVENT**

**Reason:** The sale of machines at ₹4,000 per unit in April 2020 provides evidence that the net realizable value (NRV) as on 31st March 2020 was lower than cost. Although the company discovered this fact in April, the condition (impairment of NRV) existed at the balance sheet date. As per AS 2 (Valuation of Inventories), inventories must be valued at cost or NRV, whichever is lower. The decline in demand and resultant price fall indicate that the NRV was already impaired on 31st March.

**Treatment:** The inventory must be adjusted in the financial statements for the year ended 31st March 2020. The inventories should be written down from cost to NRV of ₹4,000 per machine. A provision of ₹75,000 (50 machines × ₹5,500 - 50 machines × ₹4,000) should be created, reducing inventory value and recognizing a write-down loss in the profit and loss statement.

**(ii) Fire Loss in Godown**

**Classification: NON-ADJUSTING EVENT**

**Reason:** The fire occurred on 15th April 2020, which is after the balance sheet date. There was no condition existing at 31st March 2020 that would have indicated or necessitated recognition of this…

Question 16

The Accountant of Mobile Limited has sought your opinion with relevant reasons, whether the following transactions will be treated as change in Accounting Policy or not for the year ended 31st March, 2021. Please advise him in the following situations in accordance with the provisions of relevant Accounting Standard:

Accepted Answer

**Analysis of Accounting Policy vs. Accounting Estimate under AS 5**

**AS 5 Perspective:** A **change in accounting policy** occurs when a company shifts from one acceptable accounting method to another different method (e.g., FIFO to Weighted Average). A **change in accounting estimate** occurs when the estimated amount of an asset, liability, or periodic consumption changes due to new information or developments, while the fundamental accounting principle remains unchanged.

**(i) Provision for Doubtful Debts: 2% to 3% — CHANGE IN ACCOUNTING ESTIMATE**

This is **NOT a change in accounting policy**. The company continues to recognize a provision for doubtful debts; only the estimated percentage has been revised from 2% to 3% based on management's reassessment of the company's historical bad debt experience and current economic conditions. Per AS 5, revisions in estimated amounts are changes in accounting estimates and are applied prospectively without restating prior periods. The underlying principle of providing for doubtful debts remains constant; the methodology does not change.

**(ii) Introduction of Formal Gratuity Scheme Replacing Ad-hoc Ex-gratia Payments — CHANGE IN ACCOUNTING POLICY**

This **IS a change in accounting policy**. Previously, the company paid ex-gratia amounts on an ad-hoc basis as they became due, likely expensing them in the period of payment. By introducing a formal gratuity scheme, the company fundamentally changes how it accounts for employee b…

Question 17

B Ltd. undertook a construction contract for ₹ 50 crores in April, 2020. The cost of construction was initially estimated at ₹ 35 crores. The contract is to be completed in 3 years. While executing the contract, the company estimated that the cost of completion of the contract would be ₹ 53 crores. Can the company provide for the expected loss in the financial Statements for the year ended 31st March, 2021? Explain.

Accepted Answer

**Answer: YES, B Ltd. must provide for the expected loss of ₹3 crores in the financial statements for the year ended 31st March 2021.**

**Nature of the Contract:** The contract has become an onerous contract. Initially estimated at a profit (Contract value ₹50 crores - Estimated cost ₹35 crores = ₹15 crores profit), the revised estimate now shows a loss (Contract value ₹50 crores - Revised estimated cost ₹53 crores = ₹3 crores loss).

**Requirement under AS 7 - Construction Contracts:** Paragraph 36 of AS 7 mandates that an enterprise must recognize a provision as a liability when an onerous contract exists. An onerous contract is one in which the unavoidable costs of meeting the contractual obligations exceed the economic benefits expected to be received under the contract. The unavoidable costs comprise the least net cost of exiting from the contract.

**Why Provision Must Be Made in FY 2020-21:** Once the loss becomes apparent during the year ended 31st March 2021 (when the revised estimate was made), the entire expected loss must be recognized immediately in that year's financial statements. The provision is not deferred or spread over the remaining contract period. This is a fundamental principle: losses on onerous contracts must be recognized in full as soon as they become evident, while profits on contracts may only be recognized based on stage of completion.

**Measurement of Provision:** The provision should be measured as the excess of unavoidable costs over the co…

Question 18

An infrastructure company has constructed a mall and entered into agreement with tenants towards license fee (monthly rental) and variable license fee, a percentage on the turnover of the tenant (on an annual basis). Chief Financial Officer of the company wants to account/recognize license fee as income for 12 months during current year and variable license fee as income during next year, since invoice is raised in the subsequent year. Comment whether the treatment desired by the CFO is correct or not.

Accepted Answer

The CFO's proposed treatment is **partially incorrect**. While the treatment of fixed license fee is correct, the treatment of variable license fee violates the principles of **AS 9 (Revenue Recognition)**.

**Fixed License Fee (Monthly Rental) — CORRECT:**
The CFO's proposal to recognize the monthly license fee for all 12 months during the current year is **correct**. As per AS 9, revenue from services rendered should be recognized in the period to which it relates, applying the accrual concept. Since the company is providing occupancy rights and related services during the current year, revenue must be recognized in that year regardless of when the invoice is raised or cash is received.

**Variable License Fee (Percentage on Turnover) — INCORRECT:**
The CFO's proposal to defer variable license fee recognition to the next year (when invoice is raised) is **incorrect**. This approach improperly substitutes an invoice-based method for the accrual method mandated by AS 9.

As per **AS 9, Paragraph 5**, revenue should be recognized when: (1) it is probable that economic benefits will inure to the entity, (2) the amount can be measured reliably, and (3) the performance condition is satisfied. For variable fee arrangements, the underlying performance (tenant's turnover generation) occurs during the current year. Once the annual turnover is earned and becomes measurable, the corresponding revenue must be recognized in that year, not deferred to when the invoice is administratively …

Question 19

Indicate in each case whether revenue can be recognized and when it will be recognized as per AS 9.

Accepted Answer

**AS 9 Revenue Recognition — Analysis of Transactions**

**(1) Trade Discount and Volume Rebate Received**

**Revenue Recognition:** NO revenue is recognized.

Trade discounts and volume rebates **received** (by the purchaser) are adjustments to the purchase price and cost of goods. These are deductions from gross purchase price to arrive at the net cost of inventory. Under AS 9, these do not constitute revenue transactions for the entity receiving them. They are treated as reductions in cost of purchases/inventory, not as revenue items. The purchaser recognizes these only as cost adjustments.

**(2) Sale of Goods to Distributors or Others for Resale**

**Revenue Recognition:** YES, revenue can be recognized.

**When Recognized:** Upon transfer of property in goods to the distributors, provided all recognition criteria of AS 9 are satisfied:
- The seller has transferred substantial property in the goods
- The buyer has accepted delivery
- The amount of revenue is reasonably certain or can be reliably measured
- Collection is reasonably certain

Typically, revenue is recognized at the point of delivery or when transfer of property takes place, as this is when the seller has fulfilled its performance obligation and risks/rewards pass to the buyer.

**(3) Sale with Concurrent Repurchase Agreement**

**Revenue Recognition:** NO, revenue cannot be recognized at the time of sale.

**Reason:** When the seller concurrently agrees to repurchase the same goods sold at a later date, the…

Question 20

Company A is engaged in the manufacture and sale of products, which constitute two distinct business segments. The products of the Company are sold in the domestic market only. The management information system of the Company is organized to reflect operating information by two broad market segments, rural and urban. Besides the two business segments, how should Company A identify geographical segments? Do geographical segments exist within the same country? Explain in line with the provisions of AS 17.

Accepted Answer

**Definition and Identification of Geographical Segments under AS 17:**

A **geographical segment** as defined under AS 17 is a distinguishable component of an enterprise engaged in providing products or services within a particular economic environment, subject to risks and returns that differ from those operating in other economic environments.

**How Company A Should Identify Geographical Segments:**

Despite operating only in the domestic market, Company A can identify geographical segments based on the organization of its management information system. The rural and urban market segments identified by Company A's management information system represent **different geographical areas within the same country**. These constitute geographical segments under AS 17 because they:

1. Represent **distinguishable components** within the enterprise organized by geographic location rather than business type
2. Operate in **different economic environments** (rural versus urban economies have different characteristics, consumption patterns, purchasing power, distribution channels, and business conditions)
3. Are **subject to different risks and returns** – rural markets may face different growth rates, price sensitivities, distribution costs, and market dynamics compared to urban markets
4. Follow the **management information system organization** – AS 17 permits geographical segments to be identified based on how management internally organizes operational information

**Geographica…

Question 21

A Company has an inter-segment transfer pricing policy of charging at cost less 10%. The market prices are generally 20% above cost. You are required to examine whether the policy adopted by the company is correct or not?

Accepted Answer

**Analysis of Inter-segment Transfer Pricing Policy under AS 17**

**AS 17 Requirement**: Accounting Standard 17 (Segment Reporting) requires that inter-segment transfers be accounted for at **arm's length prices**—that is, prices at which similar transactions would occur between unrelated parties in comparable circumstances. The standard mandates using **market prices** as the basis for such transfers.

**Examination of Company's Policy**: The company's policy of charging at **cost less 10%** (i.e., 90% of cost) is **INCORRECT** for the following reasons:

**1. Violation of Arm's Length Principle**: The policy transfers goods below cost, which is inconsistent with market-based pricing. Unrelated parties would not transact at sub-cost prices in normal commercial dealings. The arm's length principle is violated.

**2. Artificial Underpricing**: By charging cost less 10%, the transferring segment is subsidizing the receiving segment artificially. This does not reflect genuine commercial transactions and distorts segment profitability analysis, which is the core purpose of segment reporting.

**3. Departure from Market Price**: The question explicitly states that **market prices are generally 20% above cost**. The company should use this market price (cost plus 20%) as the basis for inter-segment transfers. The difference between cost plus 20% and cost less 10% is 30 percentage points—a significant deviation that misrepresents the true economic performance of both segments.

**4…

Question 22

In respect of a key supplier who is dependent on the company for its existence and the company enjoys influence over the prices of this supplier (which may not be formally demonstrable), can the supplier and the company be considered as related parties?

Accepted Answer

**Answer: Yes**, the supplier and the company can be considered as related parties under AS 18 – Related Party Disclosures.

**Reasoning:**

AS 18 defines a related party as one where a party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. The concept of 'ability to exercise influence' is critical — it is not dependent on formal documentation or demonstrable control structures.

**Significant Influence** under AS 18 is the power to participate in financial and operating policy decisions, even without actual control. It encompasses situations where:
- One party has the ability to exert pressure on pricing, terms, or other key decisions of another party
- Economic dependence exists between the parties
- One party is in a position to materially affect the financial outcomes of the other

**Application to the Given Scenario:**

In this case, the company clearly possesses **significant influence** over the supplier through multiple indicators:

1. **Ability to Influence Prices**: The company's demonstrated ability to influence the supplier's prices is a direct indicator of significant influence over the supplier's financial decisions. Even if this influence is not formally documented (through contracts or board resolutions), it represents the actual ability to shape the supplier's commercial decisions.

2. **Economic Dependence**: The supplier's dependence on the company for its existenc…

Question 23

Define 'Key management personnel' in the context of AS 18.

Accepted Answer

**Key Management Personnel (KMP)** under AS 18 (Related Party Transactions) are those persons who have the authority and responsibility for planning, directing, and controlling the activities of the enterprise, either directly or indirectly. These individuals exercise significant influence over the organization's operations and strategic decisions.

**Characteristics of KMP:**

**Authority and Responsibility**: KMP must hold positions where they have decision-making power and accountability for the enterprise's key functions and strategic direction.

**Direct or Indirect Control**: Authority may be exercised directly (through formal positions) or indirectly (through influence over policies and operations).

**Scope of Influence**: KMP typically include persons whose decisions and actions affect a substantial portion of the enterprise's operations, financial performance, and future direction.

**Typical Examples of KMP** include Managing Director, Chief Executive Officer (CEO), whole-time Directors, Chief Financial Officer (CFO), Chief Operating Officer (COO), Company Secretary, and senior management executives who hold positions of significant influence in the organization.

**Significance in Related Party Transactions**: The identification of KMP is crucial under AS 18 because transactions with KMP and their relatives are classified as related party transactions, requiring disclosure. Any compensation, benefits, advances, or transactions between the enterprise and its KMP mu…

Question 24

Classify the following into either operating or finance lease:

Accepted Answer

**AS 19 - Classification of Leases** provides criteria to determine whether a lease is a finance lease or operating lease based on whether the lease transfers substantially all risks and rewards of ownership to the lessee.

**(i) PV of MLP = Fair Value of Asset**

**Classification: FINANCE LEASE**

When the present value of minimum lease payments equals the fair value of the asset (100%), this represents a critical indicator of a finance lease under AS 19. The lessee is committed to paying lease rentals equivalent to the entire fair value of the asset. Since the PV of MLP at 100% far exceeds the 90% threshold prescribed by AS 19, substantially all risks and rewards of ownership transfer to the lessee. The lessee bears the economic burden of the full asset value through mandatory lease payments, indicating a finance lease.

**(ii) Lease Term 6.5 years, Economic Life 7 years, No Ownership Transfer**

**Classification: FINANCE LEASE**

The lease term as a percentage of economic life = 6.5 ÷ 7 = 92.86%. AS 19 states that when the lease term is at least 75% of the economic life of the asset, it is an indicator of a finance lease. Here, at 92.86%, the lessee is committed to use the asset for substantially its entire useful life. The absence of ownership transfer is outweighed by this strong indicator. The lessee effectively controls and uses the asset throughout its economic life, transferring substantially all risks and rewards to the lessee. This meets the criteria for classifica…

Question 25

Viral Ltd. sold machinery having WDV of ₹ 40 lakhs to Saral Ltd. for ₹ 50 lakhs and the same machinery was leased back by Saral Ltd. to Viral Ltd. The lease back is in nature of operating lease. You are required to explain the treatment in the given cases:

Accepted Answer

**Applicable Standard: AS 19 – Leases (Sale and Leaseback Transactions)** When a sale and leaseback transaction results in an **operating lease**, the accounting treatment depends on the relationship between **sale price**, **fair value**, and the **carrying amount (WDV)** of the asset. **Key Rules under AS 19 (Para 49):** - If sale price **≤ Fair Value**: Any profit or loss is **recognised immediately** in the Statement of Profit and Loss. - If sale price **> Fair Value**: The **excess of sale price over fair value is deferred** and amortised over the lease term. The gain equal to (Fair Value – WDV), if positive, is recognised immediately. If Fair Value < WDV, that loss is recognised immediately. **Given:** WDV of machinery = ₹40 lakhs (constant in all cases) --- **(i) Fair Value = ₹45 lakhs; Sale Price = ₹39 lakhs** Since Sale Price (₹39L) **< Fair Value** (₹45L), the entire profit or loss is recognised immediately. Profit/(Loss) = Sale Price – WDV = ₹39L – ₹40L = **(₹1 lakh Loss)** This **loss of ₹1 lakh is recognised immediately** in the P&L of Viral Ltd. No deferral is required. (Exception: if the loss is compensated by below-market future lease rentals, it should be deferred and amortised over the lease period — this fact is not given, so immediate recognition applies.) --- **(ii) Fair Value = ₹40 lakhs; Sale Price = ₹49 lakhs** Since Sale Price (₹49L) **> Fair Value** (₹40L): - Excess of sale price over fair value = ₹49L – ₹40L = **₹9 lakhs → Deferred** and…

Question 26

Stock options have been granted by AB Limited to its employees and they vest equally over 5 years, i.e., 20 per cent at the end of each year from the date of grant. The options will vest only if the employee is still employed with the company at the end of the year. If the employee leaves the company during the vesting period, the options that have vested can be exercised, while the others would lapse. Currently, AB Limited includes only the vested options for calculating Diluted EPS. Should only completely vested options be included for computation of Diluted EPS? Is this in accordance with the provisions of AS 20? Explain.

Accepted Answer

**Answer: No, only completely vested options should NOT be included for computing Diluted EPS. This approach does not fully comply with AS 20.**

**Treatment of Stock Options under AS 20:**
AS 20 (Accounting Standard 20 - Earnings Per Share) requires that **all contingently issuable shares** be evaluated for inclusion in the diluted EPS calculation. Stock options, including those with vesting conditions, are contingently issuable shares and must be assessed for their dilutive potential at the reporting date.

**Application of Treasury Stock Method:**
AS 20 prescribes the **treasury stock method** for options and warrants. Under this method: (1) all in-the-money options are assumed to be exercised at the end of the reporting period; (2) the hypothetical proceeds from exercise are assumed to be used to repurchase shares at the average market price during the period; (3) the net increase in shares is included in the denominator for diluted EPS. This method applies to **all in-the-money options**, regardless of vesting status.

**Unvested Options and Service Conditions:**
Unvested options represent contingent shares that are likely to be issued if: (a) the employee continues employment (service condition is satisfied), and (b) the option remains in-the-money. Service conditions should be evaluated based on the **expected vesting probability**, not only actual vesting. For AB Limited's situation, options vesting at 20% per annum should be included progressively as the service cond…

Question 27

X Limited, as at March 31, 2021, has income from continuing ordinary operations of ₹ 2,40,000, a loss from discontinuing operations of ₹ 3,60,000 and accordingly a net loss of ₹ 1,20,000. The Company has 1,000 equity shares and 200 potential equity shares outstanding as at March 31, 2021. You are required to compute Basic and Diluted EPS.

Accepted Answer

**Computation of Basic and Diluted EPS for X Limited (AS 20 – Earnings Per Share)**

**Basic EPS** is calculated by dividing the earnings attributable to equity shareholders by the weighted average number of equity shares outstanding during the period.

Basic shares = **1,000 equity shares**

**Basic EPS from Continuing Operations** = ₹2,40,000 ÷ 1,000 = **₹240 per share**

**Basic EPS from Discontinuing Operations** = (₹3,60,000) ÷ 1,000 = **₹(360) per share**

**Basic EPS (Net)** = (₹1,20,000) ÷ 1,000 = **₹(120) per share**

**Diluted EPS** requires inclusion of potential equity shares (200 shares), but only if they are **dilutive**. As per **AS 20 (Earnings Per Share)**, the **'control number'** used to determine whether potential equity shares are dilutive or anti-dilutive is **income from continuing ordinary operations** (not the net figure).

Here, income from continuing operations = ₹2,40,000 (positive). Including 200 potential equity shares reduces EPS from ₹240 to ₹200, which is a reduction — hence they are **dilutive**. Therefore, diluted shares = 1,000 + 200 = **1,200 shares**.

**Diluted EPS from Continuing Operations** = ₹2,40,000 ÷ 1,200 = **₹200 per share**

**Diluted EPS from Discontinuing Operations** = (₹3,60,000) ÷ 1,200 = **₹(300) per share**

**Diluted EPS (Net)** = (₹1,20,000) ÷ 1,200 = **₹(100) per share**

**Note:** Although the net figure is a loss and adding potential shares reduces the per-share loss (which would be anti-dilutive for the net figure)…

Question 28

The following transactions were reported by PQR Ltd. during the year 2020-2021. Tax Rate: 30%.

| Items | ₹ in lakh |
|---|---|
| Items disallowed in 2019-2020 and allowed for tax purposes in 2020-2021 | 20.00 |
| Interest to Financial Institutions accounted in the books on accrual basis, but actual payment was made before the due date of filing return and allowed for tax purpose also | 20.00 |
| Donations to Private Trust made in 2020-2021 (not allowed under Income Tax Laws) | 10.00 |

You are required to show impact of the above items in terms of Deferred Tax Assets/Deferred Tax Liability for the year ended 31.03.2021.

Accepted Answer

**AS 22 – Accounting for Taxes on Income** requires recognition of deferred tax on **timing differences** (differences between taxable income and book income that originate in one period and reverse in a subsequent period). Permanent differences do not give rise to deferred tax.

**Item 1 – Items disallowed in 2019-20, allowed in 2020-21 (₹20 lakh)**

In 2019-20, these items were charged to the Profit & Loss account but were disallowed for tax purposes, creating a **timing difference**. Accordingly, a Deferred Tax Asset (DTA) of ₹6 lakh (₹20 lakh × 30%) was recognised in 2019-20. In 2020-21, these items are allowed as a deduction for tax purposes — the timing difference **reverses**. Therefore, the DTA of ₹6 lakh stands **reversed** in 2020-21 (i.e., deferred tax expense of ₹6 lakh is recognised, reducing the DTA balance by ₹6 lakh).

**Item 2 – Interest to Financial Institutions on accrual basis, paid before due date of filing return (₹20 lakh)**

Under Section 43B of the Income Tax Act 1961, interest payable to financial institutions is ordinarily deductible only on actual payment. However, since actual payment was made **before the due date of filing the return**, it is allowed as a deduction in 2020-21 itself — the same year in which it is recognised in the books on accrual basis. Therefore, there is **no timing difference** between book treatment and tax treatment. **No Deferred Tax Asset or Liability arises** on this item.

**Item 3 – Donations to Private Trust (₹10 lak…

Question 29

AS 24 Discontinuing Operations:

Accepted Answer

**AS 24 - Discontinuing Operations: Disclosure and Presentation Requirements**

**(i) Disclosure and Presentation Requirements:**

AS 24 requires that discontinuing operations be clearly distinguished in financial statements to provide users with transparent information about the entity's continuing and discontinued activities.

**Presentation in Profit and Loss Statement:** Results of discontinuing operations must be presented separately from continuing operations. This includes revenue, expenses, profit/loss before and after tax arising from discontinuing operations. Comparative figures for prior periods must be restated and presented separately to enable meaningful comparison.

**Disclosure Requirements in Notes to Financial Statements:**

1. **Description and Decision:** Description of the discontinuing operation and the facts and circumstances leading to the discontinuance decision, including the date of the management's decision to discontinue.

2. **Expected Completion Date:** The expected date of completion of the discontinuance process and expected manner (sale, liquidation, or abandonment).

3. **Gain or Loss:** The amount of any gain or loss recognized as a result of the discontinuance, with details of how it was calculated.

4. **Estimation Basis:** Where loss is expected from discontinuance, the basis and key assumptions used for estimation of such loss.

5. **Comparison with Prior Estimates:** If discontinuance occurred in prior period, comparison of actual resu…

Question 30

PQR Ltd. has acquired a Brand from another company for ₹ 100 lakhs. PQR Ltd. contends that since the said brand is a very popular and famous brand, no amortization needs to be provided. Comment on this in line with the Accounting Standards.

Accepted Answer

Under **AS 26 (Intangible Assets)**, the company's contention is incorrect. An acquired brand must be amortized unless there is conclusive evidence supporting an indefinite useful life.

**Recognition and Measurement**: The brand acquired for ₹100 lakhs meets the recognition criteria as an intangible asset under AS 26. It should be measured at cost and recognized in the balance sheet.

**Amortization Requirement**: AS 26 mandates that an intangible asset with a **finite useful life** must be systematically amortized over that life. The amortization method should reflect the pattern in which economic benefits are consumed. There is a rebuttable presumption that the useful life of an acquired intangible asset is finite; indefinite useful life is an exception, not the norm.

**Why Fame Does Not Exempt from Amortization**: The popularity and fame of the brand do not automatically establish an indefinite useful life. Key considerations are: (1) Market conditions and consumer preferences evolve; (2) Competitive pressures intensify over time; (3) Technological obsolescence may occur; (4) Regulatory changes could impact brand value; (5) The entity's business strategy may shift. Even iconic brands face these risks and their ability to generate future economic benefits is not indefinite.

**Indefinite Useful Life – Exception**: AS 26 permits indefinite useful life only where there is **clear, reliable evidence** that: (1) No legal, contractual, competitive, or other time limitations ex…

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