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Similarly depreciation is also to be disclosed separately. From the information given, it may be inferred that the above conditions are more or less satisfied. Note : Students may assume any appropriate number of year s for the purpose of writing off - May [5] Ms. Make necessary assumptions. The lease term cov ers the entire economic life of the machinery i. Compute the v alue of machinery to be recognised by the lessee and also the finance charges every year on the basis of AS The sales were made to Y Limited at the normal selling price of X Limited.
The Chief Accountant of X Limited does not consider that these sales should be treated any differently from any other sale made by the company despite being made to a controlled company, because the sales wer e made at normal and, that too, at arms' length prices.
Discuss the above issue from the new point of AS This includes enterprises owned by directors or maj or shareholders of the reporting enterprise and enterprises that have a member of ke y management in common with the reporting enterprise.
The Company does not have any cash equivalents. Summary Cash Account for the year ended Is a separate disclosure necessary? In , the management of the company decided t o follow AS-2 and accordingly interest has been excluded from the val uation of closing stock. Is a disclosure necessary? If so, draft the same. Is a disclosure necessary for the amount paid in ? In the instant case, the company has changed its accountin g policy in order to conform with the AS-2 Revised on Valuation of Inventories.
Therefore, a disclosure is necessary in the following lines by way of notes to the annual accounts for the year Therefore wage s payable for the half year from 1. It may be mentioned that additional wages is an exp ense arising from the ordinary activities of the company. Although abnorm al in amount, such an expense does not qualify as an extraordinary item.
However, as per Para 12 of AS 5 Revised , when items of income and expense wi thin profit or loss from ordinary activities are of such size, nature or inc idence that their disclosure is relevant to explain the performance of the enterpri se of the period, the nature and amount of such items should be disclosed separa tely. The company started off with two lines of business namely 'Engineering Division' and 'Chemicals Division', with equal asset base wit h effect from 1st April, The 'Ceramics Division' was added by the company on 1st April, The following data is gathered from the books of account of Beta Enter prises Ltd.
The claim is hotly contested by the company on legal advice. The sales made to Alpha Ltd. You are required to prepare Profit and Loss Account for the year ended 31st March, and the Balance Sheet as at the date.
Y our answer should include notes and disclosures as per Accounting Standards. For the year ended It includes, individuals owning, directly or indirectl y, an interest in voting power of reporting enterprise which gives them control or si gnificant influence over the enterprises and relatives of any such individual. I n the instant case, Mr. Gamma as a managing director controls operating and financia l actions of Beta Enterprise Ltd.
Hence, Alpha Ltd. Is a related party as per par a 3 of AS Disclosure to be made : Name of the related party and nature of relationship Alpha Ltd. Common directo r Nature of the transaction Sale of goods at normal co mmercial terms Name of the transaction Sales to Alpha Ltd. How should the interest amount be tre ated in the Accounts of the Company?
The resultant exchange differences in the case of profit, is carried to other Liabilities Account and the Loss, if any, is charged to revenue. Experts are of the view that it may take four years to establis h whether the drug will be effective or not and even if found effective it may take two to three more years to produce the medicine, which can be marketed.
The company wa nts to treat the expenditure as deferred revenue expenditure. A few weeks later the company found that payments f rom some of the major debtors were not forthcoming. I s this to be considered as an extra-ordinary item or prior period item? The individual items in the financial statements of a foreign operation are translated as if all its transactions had been entered into by the reporting enterprise itself.
Individual items in the financial statements of the foreign operation are translated at the actual rate on the date of transa ction.
For practical reasons, a rate that approximates the actual rate at the date of tr ansaction is often used, for example, an average rate for a week or a month may be used for all transactions in each foreign currency during the period.
The for eign currency monetary items for example cash, receivables, payables should be reported using the closing rate at each balance sheet date. Non-monetary items for example, fixed assets, inventories, investments in equity shares which ar e carried in terms of historical cost denominated in a foreign currency should be re ported using the exchange date at the date of transaction.
Thus the cost and depreciation of the tangible fixed assets is translated using the exchange rate at the date of purchase of the asset if asset is carried at cost. If the fixed asset is carried at fair value, translation should be done using the rate existed on the date of the v aluation.
The cost of inventories is translated at the exchange rates that existed wh en the cost of inventory was incurred and realizable value is translated applyin g exchange rate when realizable value is determined which is generally closing rate.
I Paper - 1 Exchange difference arising on the translation of t he financial statements of integral foreign operation should be charged to pro fit and loss account.
Thus, the treatment by the management of translatin g all assets and liabilities; income and expenditure items in respect of foreign branches at the prevailing rate at the year end and also the treatment of resultant exchange difference is not in consonance with AS Revised Note : for the purpose of translation of assets, liabilit ies, income and expenditure items of foreign operations, AS Revised c lassifies the foreign operation into two types- Integral foreign operation, Non-int egral foreign operation.
Integral foreign operation is a foreign operation, the activ ities of which are an integral part of those of the reporting enterprise. Non-integral foreign operation is a foreign operation that is not an integral foreign operation. The above answer has been given on the basis that the foreign branches referr ed in the question are integral foreign operations.
Consequently, the cost of retirement bene fits is accounted for in the period during which these services are rendered. Ac counting for retirement benefit cost only when employees retire or receive benefits payments i. Hence, the treatment of leave encashment benefit by the management is not in cons onance with AS Note : AS 15 was revised in March, AS revised 2 covers the leave encashment benefits under the category of short-ter m employee benefits.
Accumulating short-term compensated absence i. Earned leaves which are encashable on retirement or resignation are ve sting which entitle employees to receive cash payment for unused entitlements on leaving the enterprise accumulating compensated absences. It is an expense arising out of the ordinary activity of the enterpr ise. Therefore, it should have been charged during the year , and disclosed se parately.
Additionally, a change in the actuarial method used should be treated as a change in an accounting policy and disclosed in accordance with AS Note : AS was revised in March, Expenditure on research or on the research phase o f an internal project should be recognized as an expense when it is incurred. Th us the company cannot treat the expenditure as deferred revenue expenditure.
It may be necessary to revised an estimat e in a subsequent period if there is a change in the circumstances on which the estimate was based. Revision of an estimate does not bring the resulting amount within the definition either of prior period items or of an extraordinary item [par a 21, AS-5 Revised ].
As per AS 5 Revised , this change in estimate is neither a prior period item nor an extraordinary item. I Paper - 1 However, as per para 27 of AS-5 Revised , a change in accounting estimate which has a material effect in the current period s hould be disclosed and quantified.
Any change in an accounting estimate wh ich is expected to have a material effect in later periods should also be dis closed. Net profit attributable to the equity shareholders for the years ending Calculate: i Earnings per share for years ending Hence, for the purpose of computation of diluted earnings per share, options will be considered first.
Year ended I Paper - 1 iii Adjusted earnings per share and diluted earnin gs per share for the year ending Therefore, adjusted diluted earnings per share for the year ended Bonus is an issue without consideration, thus it wi ll be treated as if it had occurred prior to the beginning of 1 st April, , the earliest period reported.
The Balance Sheet of B Ltd. A Ltd. Calculate: i Goodwill if any on acquisition of B Ltd. Consolidated Balance Sheet as on Investment 3.
Dividend received from B Ltd. However goo dwill will not change. B Ltd. Investment in B Ltd. Dividend declared on 30th April, will not be recognised in the consolidated financial statements of A Ltd.
The company had a strike during June and hence could no t continue the work during June. Work was again commenced on 1st July and all the w orks were completed on 30th September. Assume that expenditure were incurred on 1st day of each month. Calculate : i Interest to be capitalised. Assume: a Overdraft will be less, if there is no capital e xpenditure. Hence, it is a case of specific borrowing as per AS - 16 on B orrowing Costs.
As per para 14 c of AS, the activities t hat are necessary to prepare the asset for its intended use or sale are in progress. The strike is not during extended period. Thus, during strike period, interest need t o be capitalised. Therefore, no amount should be capitalis ed during August as per para 14 b of AS- Do you agree? During the year the company want s to recognise the entire interest receivable. Please advise HSL using guidance note, if any issued on this, including valuation of stock.
The company wants to provide during the year ending Ca n the company change the method of provision? No provision for deferred tax liability was made in ac counts for the year ended While finalising the accounts for the ye ar ended To recognise revenue AS-9 requires that revenue ari ses from ordinary activities and that it is measurable and there shou ld be no uncertainty.
As per para 9. In such cases, it may be appropriate to recognise revenue only when it is re asonably certain that the ultimate collection will be made. In the given case, TVSM company wants to suddenly r ecognise Insurance claim because it has increased over the previous ye ar. But, there are uncertainties involved in the settlement of the claim. Also the c laim does not seem to be in the course of ordinary activity of the company.
Where there is no uncertainty as to ultimate collection, revenue is recognised at the time of sa le or rendering of service even though payments are made by instalments.
Thus, SCL Ltd. Hence, the company is advised to recognise interest receivable only on receipt basis. Only the collection part of it is shifted to the stage of removal. Further, paragraph 23 i of the Guidance Note makes it clear that excise duty should be considered as a manufacturing expense and like other manufacturing expense and like other manufacturing expenses be co nsidered as an element of cost for inventory valuation. Therefore, in the given case of HSL Ltd.
Excise duty on goods meant for exports, should be p rovided for, since the liability for excise duty arises when the manufactu re of the goods is completed. However, if it is assumed that all the conditions s pecified in Rule 19 of the Central Excise Rules regarding export of excisable goo ds without payment of duty are fulfilled by HSL Ltd. Accounting policy of a company may require that provision for non-moving stocks should be made.
The method of estimating the amount of provision may be changed in case a more prudent estimate can be made. The disclosure can be made fo r such change in the following lines by way of notes to the accounts in the annual accounts of ABC Ltd. In other words, the deferred taxes not provided for alone can be adjust ed against opening reserves. For the ye ars ending By the end of There is no difference between taxable income and accounting income except that th e carry forward loss is allowed in the years ending and for tax purposes.
Pr epare a statement of Profit and Loss for the years ending , and Rectification of error in stock valuation is a prio r period item vide Para 4 of AS Separate disclosure of this item as a prior period item is required as per para 15 of AS What is the additional provision for foreseeable loss, which must be made in the final accounts for the year ended 31st March, as per provisions of Account ing Standard 7 on "Accounting for Construction Contracts"?
In April, the debtor became a bankrupt. Can the company provide f or the full loss arising out of insolvency of the debtor in the final accounts for the year ended 31st March, ? It is because earthquake took place be fore the balance sheet date. Had the earthquake taken place after 31st March, , then mere disclosure required as per para 15, would have been sufficient. Ascertain the amount of contingent loss and the accounting treatment in res pect thereof.
Therefore, the pr oper treatment is to disclose the contingent loss in respect of these ca ses as per para 11 of AS- 4. To disclose contingent liability on the basis of maximum loss w ill be highly unrealistic.
The existence of unabsorbed depreciation or carry f orward of losses is strong evidence that future taxable income may not be avai lable. You are required to compute the basic earning per share : Accounting year 1.
Right Issue : One new share for each four outstanding i. Fair rate of one Equity share immediately prior to exercise right on Leased a machinery to B.
Ascertain unearned financial Income and necessary entries may be passed in the books of the Lessee in the First year. However t he entire expenditure was allowed for Income-tax purposes. Where : a Gross investment in the lease is the aggregate of i minimum lease payments from the standpoint of the lessor, and ii any unguaranteed residual value accruing to the lessor.
To A Ltd,s. To A Ltd. To Depreciation Account To Finance Charges Account Being the depreciation and finance charges transfe rred to Profit and Loss Account 4,31, 1,72, 2,58, Note : According to AS, the lessee should recognise the lease as an asset and a liability at an amount equal to the fair value of t he leased asset at the inception of lease.
However, if the fair value exceeds the present valu e of minimum lease payments from the views of lessee, the amount recorded should be the present value of these minimum lease payments. Lessee at the inception of lease. Working Note : Table showing apportionment of lease payments by B Ltd. Transactions Analysis Nature of differenceEffect Amount Difference in depreciation Disallowances, as per IT Act, of earlier years Interest to financial institutions Donation to private trusts share issue expenses Repairs to plant and machinery Generally, written down value method of depre- ciation is adopted under IT Act which leads to higher depreciation in earlier years of useful life of the asset in compari- son to later years.
Tax payable for the earlier year was higher on this account. It is allowed as deduction under section 43 B of the IT Act, if the payment is made before the due date of filing the return of income i.
Due to disallowance of full expenditure under IT Act, tax payable in the earlier years was higher. Due to allowance of full expenditure under IT Act, tax payable of the current year will be less. Act in 5. The amount will be paid in 3 instalments and at the termination of lease lesso r will get back the equipment. The p resent value of annuity factor of Re. The present value of Re.
The quarterly sales pattern of the product is given below : Quarter. The ex penditure are uniform throughout all quarters. At the time of registration, only the study material is provided by ICAI. The reference books can be purchased online. Usually, the entrance exams of CA finals are conducted twice in a year i.
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