Nov 18
Nov 18
Nov 18
QUESTIONS
(iv) Total sales were ` 18,00,000 of which ` 6,00,000 were for April to September.
(v) Happy Ltd. had to occupy additional space from 1 st Oct. 2017 for which rent was
` 2,400 per month.
Accounting for Bonus Issue
4. Following is the extract of the Balance Sheet of Xeta Ltd. as at 31 st March, 2017:
`
Authorised capital:
50,000 12% Preference shares of ` 10 each 5,00,000
4,00,000 Equity shares of ` 10 each 40,00,000
45,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of ` 10 each fully paid 2,40,000
2,70,000 Equity shares of ` 10 each, ` 8 paid up 21,60,000
Reserves and surplus:
General Reserve 3,60,000
Securities premium 1,00,000
Profit and Loss Account 6,00,000
On 1st April, 2017, the Company has made final call @ ` 2 each on 2,70,000 equity shares.
The call money was received by 20 th April, 2017. Thereafter, the company decided to
capitalize its reserves by way of bonus at the rate of one share for every four shares held.
You are required to give necessary journal entries in the books of the company and prepare
the extract of the balance sheet as on 30 th April, 2017 after bonus issue.
Right issue
5. Zeta Ltd. has decided to increase its existing share capital by making rights issue to its
existing shareholders. Zeta Ltd. is offering one new share for every two shares held by
the shareholder. The market value (cum-right) of the share is ` 360 and the company is
offering one right share of ` 180 each to its existing shareholders. You are required to
calculate the value of a right. What should be the ex-right value of a share?
Redemption of preference shares
6. The following are the extracts from the Balance Sheet of Meera Ltd. as on
31st December, 2017.
Share capital: 60,000 Equity shares of `10 each fully paid – ` 6,00,000; 1,500 10%
Redeemable preference shares of ` 100 each fully paid – `1,50,000.
Reserve & Surplus: Capital reserve – ` 75,000; Securities premium – ` 75,000; General
reserve – ` 1,12,500; Profit and Loss Account – ` 62,500
On 1st January 2018, the Board of Directors decided to redeem the preference shares at
premium of 10% by utilisation of reserve.
You are required to prepare necessary Journal Entries including cash transactions in the
books of the company.
Redemption of Debentures
7. The summarized Balance Sheet of Spices Ltd. as on 31 st March, 2018 read as under:
`
Liabilities:
Share Capital: 9,000 equity shares of ` 10 each, fully paid up 90,000
General Reserve 38,000
Debenture Redemption Reserve 35,000
12% Convertible Debentures : 1,200 Debentures of ` 50 each 60,000
Unsecured Loans 28,000
Short term borrowings 19,000
2,70,000
Assets:
Fixed Assets (at cost less depreciation) 72,000
Debenture Redemption Reserve Investments 34,000
Cash and Bank Balances 86,000
Other Current Assets 78,000
2,70,000
The debentures are due for redemption on 1 st April, 2018. The terms of issue of debentures
provided that they were redeemable at a premium 10% and also conferred option to the
debenture holders to convert 40% of their holding into equity shares at a predetermined
price of ` 11 per share and the balance payment in cash.
Assuming that:
(i) Except for debentureholders holding 200 debentures in aggregate, rest of them
exercised the option for maximum conversion,
(ii) The investments realized ` 56,000 on sale,
(iii) All the transactions were taken place on 1st April, 2018
(iv) Premium on redemption of debentures is to be adjusted against General Reserve.
Departmental Accounts
11. The following balances were extracted from the books of M/s Division. You are required
to prepare Departmental Trading Account and Profit and Loss account for the year ended
31st December, 2017 after adjusting the unrealized department profits if any.
Deptt. A Deptt. B
` `
Opening Stock 50,000 40,000
Purchases 6,50,000 9,10,000
Sales 10,00,000 15,00,000
General expenses incurred for both the departments were ` 1,25,000 and you are also
supplied with the following information: (a) Closing stock of Department A ` 1,00,000
including goods from Department B for ` 20,000 at cost of Department A. (b) Closing stock
of Department B ` 2,00,000 including goods from Department A for ` 30,000 at cost to
Department B. (c) Opening stock of Department A and Department B include goods of the
value of ` 10,000 and ` 15,000 taken from Department B and Department A respectively
at cost to transferee departments. (d) The rate of gross profit is uniform from year to year.
Branch Accounting
12. Pass necessary Journal entries in the books of an independent Branch of M/s TPL Sons,
wherever required, to rectify or adjust the following transactions:
(i) Branch paid ` 5,000 as salary to a Head Office Manager, but the amount paid has
been debited by the Branch to Salaries Account.
(ii) A remittance of ` 1,50,000 sent by the Branch has not received by Head Office on
the date of reconciliation of Accounts.
(iii) Branch assets accounts retained at head office, depreciation charged for the year
` 15,000 not recorded by Branch.
(iv) Head Office expenses ` 75,000 allocated to the Branch, but not yet been recorded
by the Branch.
(v) Head Office collected ` 60,000 directly from a Branch Customer. The intimation of
the fact has not been received by the Branch.
(vi) Goods dispatched by the Head office amounting to ` 50,000, but not received by the
Branch till date of reconciliation.
(vii) Branch incurred advertisement expenses of ` 10,000 on behalf of other Branches,
but not recorded in the books of Branch.
(viii) Head office made payment of ` 16,000 for purchase of goods by branch, but not
recorded in branch books.
(b) Mohan started a business on 1 st April 2017 with ` 12,00,000 represented by 60,000
units of ` 20 each. During the financial year ending on 31 st March, 2018, he sold the
entire stock for ` 30 each. In order to maintain the capital intact, calculate the
maximum amount, which can be withdrawn by Mohan in the year 2017-18 if Financial
Capital is maintained at historical cost.
Accounting Standards
AS 2 Valuation of Inventories
16. (a) A Limited is engaged in manufacturing of Chemical Y for which Raw Material X is
required. The company provides you following information for the year ended
31st March, 2017.
` Per unit
Raw Material X
Cost price 380
Unloading Charges 20
Freight Inward 40
Replacement cost 300
Chemical Y
Material consumed 440
Direct Labour 120
Variable Overheads 80
Additional Information:
(i) Total fixed overhead for the year was ` 4,00,000 on normal capacity of 20,000
units.
(ii) Closing balance of Raw Material X was 1,000 units and Chemical Y was ` 2,400
units.
You are required to calculate the total value of closing stock of Raw Material X and
Chemical Y according to AS 2, when
(i) Net realizable value of Chemical Y is ` 800 per unit
(ii) Net realizable value of Chemical Y is ` 600 per unit
AS 4 Contingencies and Events Occurring after the Balance Sheet Date
(b) While preparing its final accounts for the year ended 31 st March, 2017, a company
made provision for bad debts @ 5% of its total debtors. In the last week of February,
2017 a debtor for ` 20 lakhs had suffered heavy loss due to an earthquake; the loss
was not covered by any insurance policy. In April, 2017 the debtor became a
bankrupt. Can the company provide for the full loss arising out of insolvency of the
debtor in the final accounts for the year ended 31 st March, 2017? You are required to
advise the company in line with AS 4.
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Polices
17. (a) The Accountant of Mobile Limited has sought your opinion with relevant reasons,
whether the following transactions will be treated as change in Accounting Pol icy or
not for the year ended 31 st March, 2017. You are required to advise him in the
following situations in accordance with the provisions of AS 5
(i) Provision for doubtful debts was created @ 2% till 31 st March, 2016. From the
Financial year 2016-2017, the rate of provision has been changed to 3%.
(ii) During the year ended 31 st March, 2017, the management has introduced a
formal gratuity scheme in place of ad-hoc ex-gratia payments to employees on
retirement.
(iii) Till the previous year the furniture was depreciated on straight line basis over a
period of 5 years. From current year, the useful life of furniture has been
changed to 3 years.
(iv) Management decided to pay pension to those employees who have retired after
completing 5 years of service in the organization. Such employees will get
pension of ` 20,000 per month. Earlier there was no such scheme of pension in
the organization.
(v) During the year ended 31st March, 2017, there was change in cost formula in
measuring the cost of inventories.
AS 10 Property, Plant and Equipment
(b) ABC Ltd. is installing a new plant at its production facility. It provides you the following
information:
`
Cost of the plant (cost as per supplier's invoice) 31,25,000
Estimated dismantling costs to be incurred after 5 years 2,50,000
Initial Operating losses before commercial production 3,75,000
Initial delivery and handling costs 1,85,000
Cost of site preparation 4,50,000
Consultants used for advice on the acquisition of the plant 6,50,000
You are required to compute the costs that can be capitalised for plant by ABC Ltd.,
in accordance with AS 10: Property, Plant and Equipment.
AS 11 The Effects of Changes in Foreign Exchange Rates
18. (a) (i) Classify the following items as monetary or non-monetary item:
Share Capital
Trade Receivables
Investment in Equity shares
Fixed Assets.
(ii) Exchange Rate per $
Goods purchased on 1.1.2017 for US $ 15,000 ` 75
Exchange rate on 31.3.2017 ` 74
Date of actual payment 7.7.2017 ` 73
You are required to ascertain the loss/gain for financial years 2016-17 and 2017-
18, also give their treatment as per AS 11.
AS 12 Government Grants
(b) A specific government grant of ` 15 lakhs was received by USB Ltd. for acquiring the
Hi-Tech Diary plant of ` 95 lakhs during the year 2014-15. Plant has useful life of 10
years. The grant received was credited to deferred income in the balance sheet. During
2017-18, due to non-compliance of conditions laid down for the grant, the company had
to refund the whole grant to the Government. Balance in the deferred income on that
date was ` 10.50 lakhs and written down value of plant was ` 66.50 lakhs.
(i) What should be the treatment of the refund of the grant and the effect on cost of
plant and the amount of depreciation to be charged during the year 2017 -18 in
profit and loss account?
(ii) What should be the treatment of the refund, if grant was deducted from the cost
of the plant during 2014-15 assuming plant account showed the balance of ` 56
lakhs as on 1.4.2017?
You are required to explain in the line with provisions of AS 12.
AS 13 Accounting for Investments
19. (a) M/s Active Builders Ltd. invested in the shares of another company (with an intention
to hold the shares for short term period )on 31st October, 2016 at a cost of ` 4,50,000.
It also earlier purchased Gold of ` 5,00,000 and Silver of ` 2,25,000 on 31st March,
2014.
Market values as on 31 st March, 2017 of the above investments are as follows:
Shares ` 3,75,000; Gold ` 7,50,000 and Silver ` 4,35,000
You are required explain how will the above investments be shown in the books of
account of M/s Active Builders Ltd. for the year ending 31 st March, 2017 as per the
provisions of AS 13?
AS 16 Borrowing costs
(b) A company incorporated in June 2017, has setup a factory within a period of 8 months
with borrowed funds. The construction period of the assets had reduced drastically due
to usage of technical innovations by the company. Whether interest on borrowings for
the period prior to the date of setting up the factory should be capitalized although it
has taken less than 12 months for the assets to get ready for use. You are required to
comment on the necessary treatment with reference to AS 16.
AS 17 Segment Reporting
20 (a) Calculate the segment results of a manufacturing organization from the following
information:
Segments A B C Total
Directly attributed revenue 5,00,000 3,00,000 1,00,000 9,00,000
Enterprise revenue 1,10,000
(allocated in 5 : 4 : 2 basis)
Revenue from transactions with
other segments
Transaction from B 1,00,000 50,000 1,50,000
Transaction from C 10,000 50,000 60,000
Transaction from A 25,000 1,00,000 1,25,000
Operating expenses 3,00,000 1,50,000 75,000 5,25,000
Enterprise expenses 77,000
(allocated in 5 : 4 : 2 basis)
Expenses on transactions with
other segments
Transaction from B 75,000 30,000
Transaction from C 6,000 40,000
Transaction from A 18,000 82,000
AS 22 Accounting for Taxes on Income
(b) Beta Ltd. is a full tax free enterprise for the first ten years of its existence and is in
the second year of its operation. Depreciation timing difference resulting in a tax
liability in year 1 and 2 is ` 1,000 lakhs and ` 2,000 lakhs respectively. From the
third year it is expected that the timing difference would reverse each year by ` 50
lakhs. Assuming tax rate of 40%, you are required to compute to the deferred tax
liability at the end of the second year and any charge to the Profit and Loss account.
SUGGESTED ANSWERS
Working Note:
Calculation of Dividend distribution tax
(i) Grossing-up of dividend:
`
Dividend distributed by Mehar Ltd.
Equity shares dividend 6,00,000
Preference share dividend 4,00,000 10,00,000
Add: Increase for the purpose of grossing up of dividend
10,00,000 x [15 /(100-15)] 1,76,470
Gross dividend 11,76,470
Since PQ Ltd. is incurring losses and no special resolution has been passed by the
company for payment of remuneration, managerial remuneration will be calculated on
the basis of effective capital of the company, therefore maximum remuneration
payable to the Managing Director should be @ ` 60,00,000 per annum*.
*If the effective capital is less then 5 Crore, limit of yearly remuneration payable
should not exceed ` 60 lakhs as per Companies Act, 2013.
2. Harry Ltd.
Cash Flow Statement
for the year ended 31 st March, 2018
` `
Cash flows from operating activities
Net Profit before taxation 8,000
Adjustments for:
Depreciation (1,000 + 2,000 +5,000) 8,000
Profit on sale of Investment (8,000)
Profit on sale of car (1,400)
Operating profit before working capital changes 6,600
Increase in Trade receivables (2,000)
Increase in inventories (6,000)
Increase in Trade payables 3,000
Cash generated from operations 1,600
Income taxes paid (2,000)
Net cash generated from operating activities (A) (400)
Cash flows from investing activities
Sale of car 3,400
Purchase of car (16,000)
Sale of Investment 10,000
Purchase of Investment (6,000)
Purchase of Furniture & fixtures (14,000)
Net cash used in investing activities (B) (22,600)
Cash flows from financing activities
Issue of shares for cash 20,000
Dividends paid* (2,000)
Net cash from financing activities(C) 18,000
Net decrease in cash and cash equivalents (A + B +C) (5,000)
Cash and cash equivalents at beginning of period 17,000
Cash and cash equivalents at end of period 12,000
* Dividend declared for the year ended 31 st March, 2017 amounting ` 2,000 must have
been paid in the year 2017-18. Hence, it has been considered as cash outflow for
preparation of cash flow statement of 2017-18.
Working Notes:
1. Calculation of Income taxes paid
`
Income tax expense for the year 3,000
Add: Income tax liability at the beginning of the year 2,000
5,000
Less: Income tax liability at the end of the year (3,000)
2,000
2. Calculation of Fixed assets acquisitions
Furniture & Fixtures (`) Car (`)
W.D.V. at 31.3.2018 34,000 25,000
Add back: Depreciation for the year 2,000 5,000
Disposals — 2,000
36,000 32,000
Less: W.D.V. at 31. 3. 2017 (22,000) (16,000)
Acquisitions during 2016-2018 14,000 16,000
3. Pre-incorporation period is for two months, from 1st April, 2017 to 31 st May, 2017.
10 months’ period (from 1 st June, 2017 to 31st March, 2018) is post-incorporation period.
Statement showing calculation of profit/losses for pre and post incorporation
periods
Pre-Inc Post-Inc
` `
Gross Profit 50,000 4,00,000
Bad debts Recovery 14,000
64,000 4,00,000
Less: Salaries 24,000 1,20,000
Audit fees - 12,000
Depreciation 3,000 16,250
Sales commission 2,000 16,000
Bad Debts (49,000 + 14,000) 7,000 56,000
Interest on Debentures 36,000
7. Spices Ltd.
Balance Sheet as on 01.04.2018
Figures as at the
Particulars Note No. end of current
reporting period
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 1,10,000
(b) Reserves and Surplus 2 91,000
(2) Non-Current Liabilities
(a) Long-term borrowings - Unsecured Loans 28,000
(3) Current Liabilities
(a) Short-term borrowings 19,000
Total 2,48,000
II. Assets
(1) Non-current assets
(a) Fixed assets
(i) Tangible assets 72,000
(2) Current assets
(a) Cash and cash equivalents 98,000
(b) Other current assets 78,000
Total 2,48,000
Notes to Accounts
`
1 Share Capital
11,000 Equity Shares of ` 10 each 1,10,000
(Out of above, 2000 shares issued to debentures
holders who opted for conversion into shares)
2 Reserve and Surplus
General Reserve 38,000
Add: Debenture Redemption Reserve transfer 35,000
73,000
Add: Profit on sale of investments 22,000
95,000
2018
Feb. 1 To Profit & 13,750
Loss A/c
Mar.31 To Profit &
Loss A/c
(Dividend 8,000
income)
Working Notes:
1. Cost of shares sold — Amount paid for 8,000 shares
`
(` 60,000 + ` 14,000 + ` 12,500) 86,500
Less: Dividend on shares purchased on 1 st Sept, 2017 (2,000)
Cost of 8,000 shares 84,500
Cost of 4,000 shares (Average cost basis*) 42,250
Sale proceeds (4,000 shares @ 14/-) 56,000
Profit on sale 13,750
* For ascertainment of cost for equity shares sold, average cost basis has been
applied.
2. Value of investment at the end of the year
Closing balance will be valued based on lower of cost (` 42,250) or net realizable
value (`13 x 4,000). Thus investment will be valued at ` 42,250.
3. Calculation of sale of right entitlement
1,000 shares x ` 8 per share = ` 8,000
Amount received from sale of rights will be credited to P & L A/c as per AS 13
‘Accounting for Investments’.
4. Dividend received on investment held as on 1 st April, 2017
= 4,000 shares x ` 10 x 20%
= ` 8,000 will be transferred to Profit and Loss A/c
Dividend received on shares purchased on 1 st Sep. 2017
= 1,000 shares x ` 10 x 20% = ` 2,000 will be adjusted to Investment A/c
Working Notes:
1. Stock of department A will be adjusted according to the rate gross profit applicable to
department B = [(7,50,000 ÷ 15,00,000) х 100] = 50%
2. Stock of department B will be adjusted according to the gross profit rate applicable to
department A = [(4,00,000 ÷ 10,00,000) х 100] = 40%
12. Books of Branch
Journal Entries
Amounts `
Dr. Cr.
(i) Head Office Account Dr. 5,000
To Salaries Account 5,000
(Being rectification of salary paid on behalf of Head
Office)
(ii) No entry in Branch Books is required.
(iii) Depreciation A/c Dr. 15,000
To Head Office Account 15,000
(Being depreciation of assets accounted for)
(iv) Expenses Account Dr. 75,000
To Head Office Account 75,000
(Being allocated expenses of Head Office recorded)
(v) Head Office Account Dr. 60,000
To Debtors Account 60,000
(Being adjustment entry for collection from Branch
Debtors directly by Head Office)
(vi) Goods in-transit Account Dr. 50,000
To Head Office Account 50,000
(Being goods sent by Head Office still in-transit)
(vii) Head Office Account Dr. 10,000
To expenses Account 10,000
(Being expenditure incurred, wrongly recorded in
books)
(vii) Purchases account A/c Dr. 16,000
To Head Office Account 16,000
(Being purchases booked)
Working Notes:
(1) Capital on 1 st April, 2016
Balance Sheet as on 1 st April, 2016
Liabilities ` Assets `
Capital (Bal.fig.) 1,88,000 Furniture (w.d.v.) 60,000
Creditors 1,10,000 Closing Inventory 80,000
Outstanding expenses 20,000 Sundry debtors 1,60,000
Cash in hand and at bank 12,000
Prepaid expenses 6,000
3,18,000 3,18,000
(2) Purchases made during the year
Sundry Creditors Account
` `
To Cash and bank A/c 3,92,000 By Balance b/d 1,10,000
To Discount received A/c 8,000 By Sundry debtors A/c 4,000
To Bills Receivable A/c 20,000 By Purchases A/c 4,56,000
To Balance c/d 1,50,000 (Balancing figure)
5,70,000 5,70,000
(3) Sales made during the year
`
Opening inventory 80,000
Purchases 4,56,000
Less: For advertising (9,000) 4,47,000
Freight inwards 30,000
5,57,000
Less: C’s
remuneration of 10%
of the amount
distributed to
partners (79,200 x (7,200)
10/110)
72,000
Less: Paid to A, B, C
in 5:4:4 for (W.N.) (72,000) (27,692) 22,154 (22,154)
nil 52,754 42,203 42,203
Amount of 4th and 56,000
last instalment
Less: C’s
remuneration of 1%
on assets realized
(56,000 x 1%)
(560)
55,440
Less: C’s
remuneration of 10%
of the amount
distributed to
partners (55,440 x
10/110) (5,040)
Less: Paid to A, B 50,400
and C in 5:4:4
(19,384) 15,508 (15,508)
Loss suffered by 33,370 26,695 26,695
partners
Working Note:
(i) ` 2,200 added to the first instalment received on sale of assets represents the Cash
in Bank
(ii) The amount due to Creditors at the end of the utilization of First Instalment is ` 6,092.
However, since the creditors were settled for ` 1,27,200 only the balance ` 1,292
were paid and the balance ` 4,800 was transferred to the Profit & Loss Account.
(iii) Highest Relative Capital Basis
A B C
` ` `
Balance of Capital Accounts (1) 1,20,000 80,000 1,00,000
of future net cash flows that are expected to be required to settle the liability in
the normal course of business.
(b)
Particulars Financial Capital Maintenance at
Historical Cost (`)
Closing equity
18,00,000 represented by cash
(` 30 x 60,000 units)
Opening equity 60,000 units x ` 20 = 12,00,000
Permissible drawings to keep Capital intact 6,00,000 (18,00,000 – 12,00,000)
Thus, in order to maintain the capital intact Mohan can withdraw ` 6,00,000 as the
maximum amount
16. (a) (i) When Net Realizable Value of the Chemical Y is ` 800 per unit
NRV is greater than the cost of Finished Goods Y i.e. ` 660 (Refer W.N.)
Hence, Raw Material and Finished Goods are to be valued at cost.
Value of Closing Stock:
Qty. Rate (`) Amount (`)
Raw Material X 1,000 440 4,40,000
Finished Goods Y 2,400 660 15,84,000
Total Value of Closing Stock 20,24,000
(ii) When Net Realizable Value of the Chemical Y is ` 600 per unit
NRV is less than the cost of Finished Goods Y i.e. ` 660. Hence, Raw Material
is to be valued at replacement cost and Finished Goods are to be valued at NRV
since NRV is less than the cost.
Value of Closing Stock:
Qty. Rate (`) Amount (`)
Raw Material X 1,000 300 3,00,000
Finished Goods Y 2,400 600 14,40,000
Total Value of Closing Stock 17,40,000
Working Note:
Statement showing cost calculation of Raw material X and Chemical Y
Raw Material X `
Cost Price 380
(iv) Adoption of a new accounting policy for events or transactions which did not
occur previously should not be treated as a change in an accounting policy.
Hence the introduction of new pension scheme is not a change in accounting
policy.
(v) Change in cost formula used in measurement of cost of inventories is a change
in accounting policy.
(b) According to AS 10 on Property, Plant and Equipment, the costs which will be
capitalized by ABC Ltd.:
`
Cost of the plant 31,25,000
Initial delivery and handling costs 1,85,000
Cost of site preparation 4,50,000
Consultants’ fees 6,50,000
Estimated dismantling costs to be incurred after 5 years 2,50,000
Total cost of Plant 46,60,000
Note: Operating losses before commercial production amounting to ` 3,75,000 will
not be capitalized as per AS 10. They should be written off to the Statement of Profit
and Loss in the period they are incurred.
18. (a) (i)
Share capital Non-monetary
Trade receivables Monetary
Investment in equity shares Non-monetary
Fixed assets Non-monetary
(ii) As per AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’, all foreign
currency transactions should be recorded by applying the exchange rate on the
date of transactions. Thus, goods purchased on 1.1.2017 and corresponding
creditor would be recorded at ` 11,25,000 (i.e. $15,000 × ` 75)
According to the standard, at the balance sheet date all monetary transactions
should be reported using the closing rate. Thus, creditors of US $15,000 on
31.3.2017 will be reported at ` 11,10,000 (i.e. $15,000 × ` 74) and exchange
profit of ` 15,000 (i.e. 11,25,000 – 11,10,000) should be credited to Profit and
Loss account in the year 2016-17.
On 7.7.2017, creditors of $15,000 is paid at the rate of ` 73. As per AS 11,
exchange difference on settlement of the account should also be transferred to
Profit and Loss account. Therefore, ` 15,000 (i.e. 11,10,000 – 10,95,000) will
be credited to Profit and Loss account in the year 2017-18.
(b) As per para 21 of AS 12, ‘Accounting for Government Grants’, “the amount refundable
in respect of a grant related to specific fixed asset should be recorded by reducing
the deferred income balance. To the extent the amount refundable exceeds any such
deferred credit, the amount should be charged to profit and loss statement.
(i) In this case the grant refunded is ` 15 lakhs and balance in deferred income is
` 10.50 lakhs, ` 4.50 lakhs shall be charged to the profit and loss account for
the year 2017-18. There will be no effect on the cost of the fixed asset and
depreciation charged will be on the same basis as charged in the earlier years.
(ii) If the grant was deducted from the cost of the plant in the year 2014-15 then,
para 21 of AS 12 states that the amount refundable in respect of grant which
relates to specific fixed assets should be recorded by increasing the book value
of the assets, by the amount refundable. Where the book value of the asset is
increased, depreciation on the revised book value should be provided
prospectively over the residual useful life of the asset. Therefore, in this case,
the book value of the plant shall be increased by ` 15 lakhs. The increased cost
of ` 15 lakhs of the plant should be amortized over 7 years (residual life).
Depreciation charged during the year 2017-18 shall be (56+15)/7 years =
` 10.14 lakhs presuming the depreciation is charged on SLM.
19. (a) As per AS 13 ‘Accounting for Investments’, if the shares are purchased with an
intention to hold for short-term period then investment will be shown at the realizable
value. In the given case, shares purchased on 31 st October, 2016, will be valued at `
3,75,000 as on 31st March, 2017.
Gold and silver are generally purchased with an intention to hold it for long term period
until and unless given otherwise. Hence, the investment in gold and silver (purchased
on 31st March, 2014) shall continue to be shown at cost as on 31 st March, 2017 i.e.,
` 5,00,000 and ` 2,25,000 respectively, though their realizable values have been
increased.
Thus the shares, gold and silver will be shown at ` 3,75,000, ` 5,00,000 and
` 2,25,000 respectively and hence, total investment will be valued at ` 11,00,000 in
the books of account of M/s Active Builders for the year ending 31 st March, 2017 as
per provisions of AS 13.
(b) As per para 3.2 to AS 16 ‘Borrowing Costs’, a qualifying asset is an asset that
necessarily takes a substantial period of time to get ready for its intended use or sale.
Further, Explanation to the above para states that what constitutes a substantial
period of time primarily depends on the facts and circumstances of each case.
However, ordinarily, a period of twelve months is considered as substantial period of
time unless a shorter or longer period can be justified on the basis of facts and
circumstances of the case. In estimating the period, time which an asset takes,
technologically and commercially, to get it ready for its intended use or sale is
considered.
It may be implied that there is a rebuttable presumption that a 12 months period
constitutes substantial period of time.
Under present circumstances where construction period has reduced drastically due
to technical innovation, the 12 months period should at best be looked at as a
benchmark and not as a conclusive yardstick. It may so happen that an asset under
normal circumstances may take more than 12 months to complete. However, an
enterprise that completes the asset in 8 months should not be penalized for its
efficiency by denying it interest capitalization and vice versa.
The substantial period criteria ensures that enterprises do not spend a lot of time and
effort capturing immaterial interest cost for purposes of capitalization.
Therefore, if the factory is constructed in 8 months then it shall be considered as a
qualifying asset. The interest on borrowings for the same shall be capitalised
although it has taken less than 12 months for the asset to get ready to use.
20. (a) Calculation of segment result
Segments A B C Total
` ` ` `
Directly attributed revenue 5,00,000 3,00,000 1,00,000 9,00,000
Enterprise revenue 50,000 40,000 20,000 1,10,000
(allocated in 5 : 4 : 2 basis)
Revenue from transactions with
other segments
Transaction from B 1,00,000 50,000 1,50,000
Transaction from C 10,000 50,000 60,000
Transaction from A 25,000 1,00,000 1,25,000
Total segment revenue as per
AS 17 (A) 6,60,000 4,15,000 2,70,000 13,45,000
Operating expenses 3,00,000 1,50,000 75,000 5,25,000
Enterprise expenses 35,000 28,000 14,000 77,000
(allocated in 5 : 4 : 2 basis)
Expenses on transactions with
other segments
Transaction from B 75,000 30,000 1,05,000
Transaction from C 6,000 40,000 46,000
Transaction from A 18,000 82,000 1,00,000