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Gurukripas Guideline Answers for May 2015 CA Final Financial Reporting Exam

Gurukripas Guideline Answers to May 2015 Exam Questions


CA Final Financial Reporting
Question No.1 is compulsory (4 5 = 20 Marks).
Answer any five questions from the remaining six questions (16 5 = 80 Marks). [Answer any 4 out of 5 in Q.7]
Working Notes should form part of the answers.

Question 1 (a): AS 2
From the following information, value the Inventories as on 31st March, 2015:

5 Marks

Raw Material has been purchased at ` 125 per kg. Prices of Raw Material are on the decline. The Finished Goods being
manufactured with the Raw Material is also being sold at below Cost. The Stock of Raw Material is of 15,000 kg and the
Replacement Cost of Raw Material is ` 100 per kg.
Cost of Finished Goods per kg is as under:
Particulars
` per kg
Material Cost
125
Direct Labour Cost
20
Direct Variable Production Overhead
10
Fixed Production Overhead for the year for a normal capacity of 1,00,000 kgs of production is ` 10 Lakhs. At the year end, there
were 2,000 kgs of Finished Goods in stock. Net Realisable Value of Finished Goods is ` 140 per kg.
Solution:
Similar to Page 2.4, Q.No.16, Page 2.15, Q.No.50 of Padhukas Students Referencer on A/cg Standards[N 00]
1. Conversion Cost per kg of Finished Product = Direct Labour + Direct Variable Production OH + Fixed Production OH
` 10 Lakhs
= ` 40 per kg.
= ` 20 + ` 10 +
1 Lakh Kgs
2. Inventory Valuation is as under
(A) For Finished Goods
(a) Cost per kg for Finished Product = Material + Conversion

125 + 40 = ` 165 per kg

(b) Net Realisable Value of Finished Product if sold after Conversion

Given = ` 140 per kg

(c) Hence, Valuation Rate for Finished Goods = (a) or (b), whichever is lower.
(d) Value of Inventory 2,000 kg of Finished Product

` 140 per kg
2,000 kgs ` 140 = ` 2,80,000

(B) For Raw Materials


(a) Cost of Raw Material

Given = ` 125 per kg

(b) Replacement Cost of Material, i.e. Sale without Conversion

Given = ` 100 per kg

(c) Valuation Rate for Raw Material (i.e. least of Cost or NRV, least of (a) and (b)

` 100 per kg
(d) Value of Inventory 15,000 kg of Raw Material
15,000 kgs` 100= ` 15,00,000
Note: When the Finished Products in which the Raw Material is incorporated, are expected to be sold below Cost
(NRV ` 140 vs Cost ` 165), it is preferable to sell the product without Conversion. In such case, the Raw
Materials will be valued below cost, i.e. at NRV, being the Replacement Cost.
Question 1 (b): AS 26 Impairment of Assets
5 Marks
SMC Limited is having a Plant (an Asset) whose Carrying Amount as on 01102012 is ` 38,000 Lakhs and the Plant was
having a useful life till 31032020. The estimated Residual Value is ` 900 Lakhs. The Selling Price on 31st March 2015 is
expected to be ` 20,000 Lakhs and the Cost of Disposal is expected to be ` 100 Lakhs.
The Expected Cash Flows from the Plant are as under
Financial Year
20152016
20162017
4,100
5,900
Cash Flow ` Lakhs

20172018
6,000

20182019
7,800

20192020
4,500

The Company expects the Discount Rate of 10%. Discount Factor at 10% for 1, 2, 3, 4 and 5 years are 0.909, 0.826, 0.751, 0.683
and 0.621 respectively. The Company provides depreciation on SLM basis. You are required to determine as at 31st March 2015:
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(i) Value in Use of the Plant


(ii) Impairment Loss, if any, to be recognized for the year.
(iii) Revised Carrying Amount for the Financial Year ending 31st March 2015.
Solution: Similar to Page 28.15, Q.No.31 of Padhukas Students Referencer on Accounting Standards [RTP]
Fin. Year
20152016
20162017
20172018
20182019
20192020

1. Computation of Value in Use


Discount Rate at 10%
0.909
` 4,100 Lakhs
0.826
` 5,900 Lakhs
0.751
` 6,000 Lakhs
0.683
` 7,800 Lakhs
0.621
` 4,500 + ` 900 = ` 5,400 Lakhs
Cash Flow

Value in Use

Discounted Cash Flow

` 3,726.90 Lakhs
` 4,873.40 Lakhs
` 4,506.00 Lakhs
` 5,327.40 Lakhs
` 3,353.40 Lakhs
` 21,787.10 Lakhs

2. Computation of Other Particulars


Particulars

` Lakhs

1. Original Cost
2. Depreciation for Fin.Years 20122013, 20132014 and 20142015 (See Note below)
3. Carrying Amount on 31.03.2015 before Impairment (1 2)
4. Recoverable Amount (Net Selling Price 19,900 [or] Value in Use 21,787.10, whichever is higher)
5. Impairment Loss = Carrying Amount Less Recoverable Amount (3 4)
6. Revised Carrying Amount = Old Carrying Amount Less Impairment Loss (3 5)
7. Depreciation Charge from 20152016 onwards (21,787.10 900) 5 Years
Note:

38,000.00
(8,656.67)
29,343.33
21,787.10
7,556.23
21,787.10
4,177.42

Depreciation as per Initial Cost, etc. = Depreciable Value (38,000 900) = ` 37,100 Lakhs divided by 7.5 years (i.e.
from 01.10.2012 to 31.03.2020) = ` 4,946.67 Lakhs for each of the full financial years (20132014 onwards), and X
` 4,946.67 Lakhs = ` 2,473.33 Lakhs for the period 01.10.2012 to 31.03.2013 (6 months).

Total Depreciation upto 31.03.2015 = 2,473.33 + 4,946.67 + 4,946.67 = ` 8,656.67 Lakhs.

Question 1 (c): AS9


5 Marks
A Company sells the goods with right the return. The following pattern has been observed:
Timeframe of Return from date of purchase
% of Cumulative Sales
Within 10 days
5%
Between 11 days and 20 days
7%
Between 21 days and 30 days
8%
Between 31 days and 45 days
9%
The Company has made Sales of ` 30 Lakhs in the month of February 2015 and of ` 36 Lakhs in the month of March 2015. The
Total Sales for the Financial Year have been ` 450 Lakhs and the Cost of Sales was ` 360 Lakhs. Determine the amount of
Provision to be made and Revenue to be recognized in accordance with AS9. A year may be considered of 360 days.
Solution:
See Principles in EAC Opinion on Provisioning towards Sales Returns
Similar to Page 9.11, Q.No.32 of Padhukas Students Referencer on Accounting Standards [M 12 (Aud)]
1.

Principle: Delivery made, giving the Buyer an unlimited right of return: [Mar 2012 CA Journal Page 1355]:
(a) A Provision should be created on the B/S date, for Sales Returns after the Balance Sheet date, at the best estimate
of the loss expected, along with any estimated incremental cost that would be necessary to resell the goods
expected to be returned.
(b) Necessary adjustments to the provision should be made for actual sales return after Balance Sheet date up to the
date of approval of Financial Statements.

2.

Analysis and Conclusion:


Month
Revenue (i.e. Sales) to be recognised
Relevant Percentage of Sales Returns based on B/s Date 31st March
May 2015.2

Feb 2015

March 2015

` 30 Lakhs

` 36 Lakhs

9% 8% = 1%

9%

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Month
Amount of Sales Returns expected
Cost of Above Sales Returns (360 450 = 80% on Sales Value)
Provision for Loss due to Sales Returns = 100% 80% = 20% of Returns

Feb 2015

March 2015

` 30,000
` 24,000
` 6,000

` 3,24,000
` 2,59,200
` 64,800

Question 1 (d): AS25


5 Marks
Saurav Limited reported a Profit before Tax of ` 8.00 Lakhs for the 2nd quarter ending on 30th September 2014. On enquiry,
following issues were noticed:
(i) Property Tax of ` 60,000 paid during the quarter for the full year has been recognized in full.
(ii) 1/5th of ` 15 Lakhs being Marketing Promotional Expenses incurred on 23rd September, 2014 has been recognized based
on past experience of higher sales in the last quarter of the year.
(iii) 50% of the Loss of ` 2 Lakhs incurred on disposal of a Business Segment has been allocated to this quarter.
(iv) Cumulative Loss of ` 3 Lakhs resulting from the change in the method of Valuation of Inventory was recognised in the 2nd
quarter, which included ` 2 Lakhs related to earlier quarters.
(v) Gain of ` 15 Lakhs from Sale of Investments sold in the 1st quarter was apportioned equally over the full year.
You are required to give proper treatment as required by AS25 on Interim Financial Reporting and to recast the adjusted
Profit before Tax for the 2nd quarter.
Solution: Similar to Page No.25.12, Q.No.33 [N 08, M 12], and Page No.25.10 Q.No.29 [M 12] of Padhukas
Students Referencer on Accounting Standards
Item
Property Taxes

Marketing Promotional
Expenses
Loss on Disposal of
Business Segment
Loss due to change in
method of Valuation
Gain on Invts Sale

Treatment
Property Taxes of ` 60,000 relatable to the entire calendar year should be apportioned
on time basis, i.e. 3 months period expense ` 15,000 will be reported as Expense.
Costs should be anticipated or deferred only when
It is appropriate to anticipate that type of cost at the end of the fin.year, and
Costs are incurred unevenly during the fin.year of an Enterprise. [Para 38]
In this case, recognition of 1/5th of Expense is not proper.
Net Loss on Disposal of Business Segment ` 2,00,000 should be reported in full, since
the loss was incurred during the Interim Period.
The amount relating to earlier quarters to be taken and adjusted against those respective
periods.
Apportioned Gain on Sale of Investments in first quarter to be reversed.
Particulars

PBT as reported
Add:
Property Taxes to be recognised on time basis (0.60 0.15 to be recognised)
Loss on change in method of Inventory Valuation relating to previous quarters
Less: Sales Promotion Expenses relating to this Quarter (4/5th i.e. 80% 15.00)
Loss on Disposal of Business Segment to be reported in full (balance 50% of 2.00)
Apportioned Gain on Sale of Investments in first quarter to be reversed (15.00 4)
Adjusted PBT for the Second Quarter
Note: The Company should also restate the results of the previous quarters based on the above adjustments.

` Lakhs
8.00
0.45
2.00
(12.00)
(1.00)
(3.75)
(6.30)

Question 2: Corporate Restructuring Amalgamation


16 Marks
XY Limited has been incorporated with an Authorized Capital of 70 Lakhs Equity Shares of ` 10 each and 4 Lakhs Preference
Shares of ` 100 each. The Subscribers to the Memorandum of Association have subscribed and paid for 1 Lakh Equity Shares.
The expenses of incorporation incurred amounted to ` 8.09 Lakhs.
XY Limited desires to amalgamate X Limited and Y Limited as at 1st April, 2015. Following information is available.

May 2015.3

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Balance Sheet as on 31st March 2015 (Amounts in ` Lakhs)


Share Capital:
Reserves and Surplus:

Loans Funds:
Current Liabilities:

Fixed Assets:

Liabilities
Equity Shares (FV ` 100)
10% Preference Shares (FV ` 100)
Revaluation Reserve
Capital Reserve
Statutory Reserves
Profit and Loss Account
Secured Loans: 12.5% Debentures (FV ` 100)
Unsecured Loans
Trade Payables
Total
Assets
Land and Building
Plant and Machinery

Investments
Current Assets:

X Limited
750
420
125
270
60
35
50
25
165
1,900

Y Limited
725
180
75
190
40
12
28
0
75
1,325

470
310
75
345
345
355
1,900

290
210
50
270
254
251
1,325

Trade Receivables
Inventories
Cash and Cash Equivalents
Total
Before amalgamation, X Ltd and Y Ltd will make the following adjustments in their BalanceSheets:
(i) Pay off the Unsecured Loans.
(ii) X Limited will revalue its Land and Building by enhancing the Book Value by 10% and Y Limited will revalue the Land and
Building at ` 330 Lakhs.
(iii) Y Limited will revalue its Plant and Machinery at ` 220 Lakhs.
(iv) Investments will be disposed off. X Limited sold its Investments for ` 67 Lakhs and Y Limited disposed the same for ` 52 Lakhs.
(v) Debentureholders of X Limited and Y Limited will be discharged by XY Limited by issued of 15% Debentures of ` 100 each
for such an amount which will not put any additional burden of interest outgo on XY Limited than presently payable by X
Limited and Y Limited.
(vi) Preference Shareholders of X Limited and Y Limited will be issued 15% Preference Shares in XY Limited in the ratio 2:3,
i.e. 2 Shares will be issued for every 3 Shares held at a premium of ` 25.
(vii) Equity Shares in XY Limited will be issued as under:
(a) Shareholders of X Limited in the ratio of 4:1 at ` 35 per Share, and
(b) Shareholders of Y Limited in the ratio of 3:1 at ` 32 per Share.
(viii) Statutory Reserves having met its purpose will be merged with Capital Reserves.
Prepare the amalgamated Balance Sheet of XY Limited as on 31st March 2015 as per Schedule III to the Companies Act, 2013
with Notes to Accounts.
Solution:
Selling Co: X Ltd, Y Ltd
Buying Co: XY Ltd

1. Basic Information
Date of B/S : 31.03.2015
Nature of Amalgamation:
Purchase
(since
all Assets are not taken over at Book Value)
Date of Amg: 31.03.2015
2. Computation of Purchase Consideration:
X Ltd

Particulars
Number of Equity Shares
Number of Preference Shares
Purchase Consideration
Equity Share Capital (` 10)
Premium on ESC at ` 25 & ` 22
(A)

Y Ltd

Total

750 4
= 30 Lakh Equity Shares
100 1

725 3
=21.75 Lakh Equity Shares
100 1

51.75

420 2
= 2.8 Lakh Pref. Shares
100 3

180 2
= 1.2 Lakh Pref. Shares
100 3

4.20

` in Lakhs
3010 = 300.00
30 25 = 750.00
1,050.00

` in Lakhs
21.75 10 = 217.50
21.75 22 = 478.50
696.00

May 2015.4

Total
517.50
1,228.50
1,746.00

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Particulars
Preference Share Capital (` 100)
Premium on PSC at ` 25 Per Share
(B)
Total of A + B

X Ltd
2.8 100 = 280.00
2.8 25 = 70.00
350.00
1,400.00

Y Ltd
1.2 100 = 120.00
1.2 25 = 30.00
150.00
846.00

Total
400.00
100.00
500.00
2,246.00

2. Computation of Debentures to be issued


Total Debentures of X Ltd & Y Ltd (50 Lakhs + 28 Lakhs) = ` 78 Lakhs. Interest @ 12.5% thereon = ` 9.75 Lakhs
9.75 Lakhs
1
Number of 15% Debentures to be issued at ` 100 each =

= 0.65 Lakhs
15%
100
Thus, Total Value of 15% Debentures issued = 0.65 Lakhs 100 = ` 65 Lakhs (X: Y as 50:28, i.e. ` 41.67 & ` 23.30 Lakhs)

I
(1)

(2)
(3)
II
(1)
(2)

3. Balance Sheet of X Ltd and Y Ltd as on 31.03.2015 (before absorption)


Particulars as at 31st March
Note
X Ltd
EQUITY AND LIABILITIES
Shareholders Funds:
750
(a) Share Capital Equity Shares of ` 100 each
420
Preference Shares of ` 100 each
(b) Reserves & Surplus: (Note 1)
Non Current Liabilities: Secured Loan 12.5% Debentures
Current Liabilities: Trade Payables (Creditors)
Total
ASSETS
NonCurrent Assets:
Fixed Assets Land & Building
Plant & Machinery
Current Assets
(a) Inventories
(b) Trade Receivables
Debtors
(c) Cash and Cash Equivalents
(Note 2)
Total

Note 1: Reserves & Surplus (` Lakhs)


Particulars
Revaluation Reserves: Given Balance + Revaluation of L&B & P&M
Capital Reserve (after Transfer of Statutory Reserves)
P&L A/C (Net of Loss/ Gain on Sale of Investments)
Total

369
28
75
1,377

470 + 47 = 517
310

Given = 330
220

345
345
397
1,914

254
270
303
1,377

X Ltd
125+10% of 470= 172
270 + 60 = 330
35 8 = 27
529

Y Ltd
75+40+10 = 125
190+40 = 230
12 + 2 = 14
369

X Ltd
355
(25)
67
397

Y Ltd
251

52
303

Y Ltd

in ` Lakhs
Total

330
220
270
254
303
1,377

847
530
615
599
700
3,291

4. Computation of Goodwill / Capital Reserve on 31.03.2015


Particulars
X Ltd
Assets taken over
(a) Land & Building
517
(b) Plant & Machinery
310
(c) Trade Receivables
345
(d) Inventories
345
(e) Cash & Cash Equivalents
397
Total [A]
1,914
May 2015.5

725
180

529
50
165
1,914

Note 2: Cash & Cash Equivalents (` Lakhs)


Particulars
Given Balance
Less: Repayment of Unsecured Loan
Add:
Sale of Investments
Revised Balance

A)

in ` Lakhs
Y Ltd

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Less:

Less:

Particulars
Liabilities taken over
(a) Trade Payables
(b) Debentures issued
Total [B]
Net Worth [AB]
Purchase Consideration
Capital Reserve

X Ltd

Y Ltd

Total

165
41.67
206.67

75
23.30
98.30

240
65
305
2,986
2,246
740

6. Other Adjustments
(a) Subscribers to the Memorandum (Promoters) subscribed 1 Lakh Equity Shares at ` 10 each = ` 10 Lakhs.
(b) Preliminary Expenses incurred = ` 8.09 Lakhs. Hence, Balance Cash in Hand = 10 8.09 = ` 1.91 Lakhs.
7. Balance Sheet of XY Ltd as on 31.03.2015 in ` Lakhs
Particulars as at 31st March
Note
This Year
Prev. Yr
I
EQUITY AND LIABILITIES
(1) Shareholders Funds:
(a) Share Capital
1
927.50
(b) Reserves & Surplus
2
2,068.50
(2) NonCurrent Liabilities:
Long Term Borrowings Secured Loan 15% Debentures
65.00
(3) Current Liabilities:
Trade Payables (Creditors)
240.00
Total
3,301.00
II
ASSETS
(1) NonCurrent Assets
(a) Fixed Assets:
(517 + 330 + 310 + 220)
1,377.00
(2) Current Assets
(a) Inventories
599.00
(b) Trade Receivables
615.00
(c) Cash & Cash Equivalents
(1.91 + 397 + 303)
701.91
(d) Preliminary Expenses
(See Note below)
8.09
Total
3,301.00
Note: It is assumed that the Preliminary Expenses shall be written off in the short term against Profits. Alternatively, the
Company may resolve to write off Preliminary Expenses against Capital Reserve arising on Amalgamation.
Notes to the Balance Sheet
Note 1: Share Capital
Particulars
Authorised:

70 Lakhs Equity Shares of ` 10 each


4 Lakhs Preference Shares of ` 100 each

Issued, Subscribed & Paid up: 52.75 Lakhs Equity Shares of ` 10 each
4 Lakhs Preference Shares of ` 100 each
(Of the above, 51.75 Lakhs Equity Shares and 4 Lakhs Preference Shares are issued for Non
Cash Consideration pursuant to a scheme of amalgamation, Order No. .. dated //)
Total
Shares Reconciliation Statement:
Particulars

in ` Lakhs
Prev. Year

This Year
700.00
400.00
527.50
400.00

927.50

Equity

` Lakhs

Lakh Shares

` Lakhs

1
51.75
52.75

10
517.50
527.50

4
4

400
400

Opening Balance
Add: Issued on Amalgamation
Closing Balance

May 2015.6

Preference

Lakh Shares

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Note 2: Reserves and Surplus
Particulars
Opening Balance
Add:
Acquired on Amalgamation
Closing Balance

Capital Reserve

740
740

Share Premium

1,328.50
1,328.50

Total

2,068.50
2,068.50

Question 3: Consolidation of Financial Statements


16 Marks
Draw the Consolidated BalanceSheet as on 31st March 2015 as per ScheduleIII with Notes to Accounts (following Indirect
Method) based on the following information:
Balance Sheet as on 31st March 2015 (` in Lakhs)
Liabilities
P
Q
R
600
400
100
Share Capital:
Equity Share Capital (FV ` 100)
Reserves and Surplus:
Reserves
40
10
20
Surplus in Profit and Loss Account
60
40
30
Current Liabilities:
Trade Payables
30
10
35
Other Payables: Q Limited
15
R Limited
50
Total
780
460
200
Assets
P
Q
R
Fixed Assets (Net of Depreciation)
230
150
100
Investments:
Q Limited
320
R Limited
40
100
Current Assets:
Inventories
50
30
40
Trade Receivables
60
50
20
Other Receivables:
R Limited
40
P Limited
30
Bank Balance
80
90
10
Total
780
460
200
Additional Information:
(a) P Limited acquired 1,50,000 (cum Bonus) Shares of Q Limited and 30,000 Shares or R Limited and Q Limited acquired
50,000 Shares of R Limited on 29th March 2014.
(b) Q Limited fixed 1st April 2014 as Record Date for allotment of Bonus Shares in the ratio of 1:1 and the same were duly allotted.
(c) P Limited proposed Dividend at 7.50% for the year ended on 31st March 2015.
(d) In December 2014, Q Limited invoiced goods to P Limited for ` 30 Lakhs on a load of 25% on cost. 1/3rd of such goods are
in Stock with P Limited as at the end of the year.
(e) R Limited sold to Q Limited on 1st January 2015, as asset costing ` 20 Lakhs and made a profit of 20% on Invoice Value. Q
has provided depreciation at 10% per annum on such assets.
(f) As on 31st March 2014, the balances in Reserves and Profit & Loss Account of Q Limited were ` 5 Lakhs and ` 15 Lakhs
respectively.
(g) R Limited made a Profit of ` 12.40 Lakhs during the current year. During the year, ` 0.55 Lakhs was received from
Insurance Company against Loss of Stock due to flood which occurred on 31st January 2014 in which goods worth ` 0.75
Lakhs were damaged and were part of Rs Stock as on 31st March 2014.
(h) R Limited transferred, at the yearend on 31st March 2015, an amount from Profit and Loss Account to Reserves which
equals to 20% of the reported aggregate figures of Reserves and Profit and Loss Account in the Balance Sheet.
Solution:
Refer Page No. 3.108, Q.No 42 of Padhukas Students Guide on Financial Reporting [M 98, N 08, M 11]

Company Status
Holding Company
=P
Subsidiary
=Q
SubSubsidiary
=R

1. Basic Information
Dates
Acquisition:
29.03.2014
Consolidation: 31.03.2015

(a) Holding Co.


(b) Minority Int.

May 2015.7

Holding Status
Q
(P) 75%

25%

R
(P) 30%
(Q) 50%
20%

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Note: Shareholding Pattern is as under
Company
Held by P
Held by Q
Q
300 (75%)
N.A.
R
30 (30%)
50 (50 %)

Total Holdings
300 (75%)
80 (80%)

Minority Interest
100 (25%)
20 (20%)

Total No. of Shares


400 (100%)
100 (100%)

2. Analysis of Reserves and Surplus of Subsidiary Companies


(a) General Reserve (` in Lakhs)
Q
R
On B/s date ` 10

On B/s date ` 20

DoA to DoC ` 7

31.3.14
`5
Less: Bonus issue
(2)
Pre Acquisition ` 3

31.3.14 ` 10 (Bal. fig)

Post Acquisition

Transfer (` 50 ` 10
20%)

Pre Acquisition

Post Acquisition

(b) Profit & Loss Account (` in Lakhs)


Q
On B/s date ` 40
31.3.14 ` 15

R (See Note)
On B/s date ` 30

DoA to DoC ` 25

31.3.14 ` 17.60
DoA to DoC ` 12.40
Less: Adjustment (0.20)
Add: Adjustment
0.20
Pre Acquisition
Post Acquisition
Pre Acquisition 17.40
Post Acquisition
12.60
Note: Since loss on damaged goods (`0.75 0.55 = `0.20) relates to last year, it is added to Current year Profit and
deducted from last year Profit i.e. Pre acquisition reserve.
3. Consolidation of Balances (` in Lakhs)
Particulars
Total Minority
PreAcqn.
Interest
R Ltd (Holding 80%, Minority 20%)
Equity Capital
100
20
80
8
Reserves
20
4
(10 80%)
13.92
P&L A/c
30
6
(17.40 80%)
Unrealized Profit on Sale of Asset
(4.875)
(0.975)

SubTotal
29.025
101.92
Q Ltd (Holding 75%, Minority 25%)
Equity Capital
400
100
300
2.25
Reserves
10
2.5
(375%)
P&L A/c
40
10 (1575%)=11.25
Stock Reserve [Upstream]
(2)
(0.5)

Share in Pre Acquisition Reserves of R Ltd


50%
[(13.92+8) Qs Share
25%)]
3.425
(3.425)
80%
Minoritys Share in Post Acqn. Res. of R Ltd:
50%
Gen. Res. (8 Qs Share
25%)
1.25

80%
50%
25%)
P&L A/c (6.18 Qs Share
0.966

80%
Sub Total
117.641
310.075
Total [Cr]
Cost of Investment [Dr.] [320 + 40 + 100]

(460)
Parents Balances in Reserves

Proposed Dividend (7.5% ` 600)


For Consolidated B/s
146.666
48.005
Goodwill or Cost
of Control

May 2015.8

Post Acquisition
Reserves
P&L A/c

(10 80%)
10.08

(12.60 80%)
4.87580%=(3.9)
8
6.18

5.25
(775%)

(2575%)=18.75
(1.5)

(1.25)

(0.966)

16.284

40

52

60
(45)
37.464

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Notes:

Sale by Q Ltd to P Ltd: Q Ltd has sold goods at ` 30 Lakhs at Cost Plus 25%. Therefore, the unrealized profit on
25
Upstream Transaction is ` 6 Lakhs [` 30
]. Since only 1/3rd of such goods are in Stock, Proportionate unrealized
125
gain is ` 2 Lakhs [6 1/3]. The unrealized profits should be adjusted against Group Reserves and Minority Interest.

Sale of Fixed Assets by R Ltd to Q Ltd: (` in Lakhs)


20
Profit on Sale [` 20
]
80
Less:

3
5

]
12
35

Proportionate Depreciation [` 25 10%

(0.125)

Unrealized Profit
4.875
The above Unrealized Profit is in the nature of Upstream Transaction, and hence should be adjusted against Group
Reserves and Minority Interest.
4. Consolidated Balance Sheet of P and its Subsidiaries Q and R as at 31.03.2015 (` in Lakhs)
Particulars as at 31st March
WN
This Year
Prev. Yr
I
(1)

EQUITY AND LIABILITIES


Shareholders Funds:

600

(a) Share Capital: 6,00,000 Equity Shares of ` 100 each


(b) Reserves & Surplus
(2)

Minority Interest

(3)

Current Liabilities

(a) Trade Payables

Creditors (30 + 10 + 35)

75

(b) Short Term Provisions Proposed Dividend

45

Total
II

ASSETS

(1)

NonCurrent Assets

956.13

Intangible Assets (Good Will or Cost of Control)


Fixed Assets
(2)

89.464
146.666

48.005

Tangible Assets (230 + 150+ 100 4.875)

475.125

Current Assets

(a) Inventories

= 50 + 30 + 40 2

118

(b) Trade Receivables Debtors (60 + 50 + 20)

130

(c) Cash and Cash Equivalents

2
Total

185
956.13

Note: Inter Company Owings have been eliminated in full. Detailed Notes under Schedule III Requirements have not been
provided for the above items.
Computational Notes for items in CBS: Note 1: Reserves and Surplus
Particulars

(a) Reserves
(b) Surplus (Balance in P & L A/c)

52.000
37.464
89.464

Total
Note 2: Cash and Cash Equivalents
Particulars

(a) Cheque in Transit


(b) Bank Balance

` Lakhs

= 40 + 30 15 50
= 80 + 90 + 10

` Lakhs
5
180
185

Total

May 2015.9

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Question 4 (a): Financial Institutions


8 Marks
Team Ltd is a NonBanking Finance Company. It accepts Public Deposits and also deals in Hire Purchase business. It provides
you with the following information regarding major hire purchase deals as on 31032013.
Few Machines were sold on Hire Purchase basis. The Hire Purchase Price was set at ` 100 Lakhs as against the Cash Price of
` 80 Lakhs. ` 20 Lakhs were payable as Down Payment and the balance was payable in 5 equal installments. The Hire Vendor
collected the first installment as on 31032014, but could not collect the second installment which was due on 31032015.
The Company was finalizing accounts for the year ended on 31032015. Till 15042015, the date on which the Board of
Directors signed the accounts, the second installment was not collected. Presume IRR to be 10.42%.
Required:
(i) What should be the Principal Outstanding on 01042014? Should the Company recognize Finance Charge for the year
20142015 as Income?
(ii) What should be the Net Book Value of Assets as on 31032015 as per NBFC Prudential Norms Requirement for
provisioning?
(iii) What should be the amount of Provision to be made as per Prudential Norms of NBFC laid down by the RBI?
Solution:

Same as Page No. 6.27, Q.No.5 of Padhukas Students Guide on Financial Reporting [N 12]
1. Basic Computations
Particulars

(a)
(b)
(c)
(d)
(e)
(f)
(g)

HP Price
Down Payment
Balance amount payable (a) (b)
Amount payable in each instalment (80 Lakhs 5 instalments)
Annuity Factor at 10.42% for 5 Years
PV of the instalments (d) (e)
Interest Component (c) (f)

` in Lakhs
100
20
80
16
3.7505
60
20

2. Loan Repayment Schedule


Opening Principal
Instalment Amt
Interest
Principal Repaid Closing Principal
(2)
(3)
(4)=(2)10.42%
(5) = (3) (4)
(6) = (2) (5)
60.000
16
6.252
9.748
50.252
50.252
16
5.236
10.764
39.488
39.488
16
4.115
11.885
27.603
27.603
16
2.876
13.124
14.479
14.479
16
1.521
14.479
Nil
Total
80
20
60
Principal Outstanding as on 01.04.2014 = ` 50.252 Lakhs. Finance Charges for the year 20142015 can be recognized as
Income, since the instalments are overdue for a period less than 12 months.
Year
(1)
20132014
20142015
20152016
20162017
20172018

3.Computation of Net Book Value Assets


Particulars

(a)
(b)
(c)
(d)

Aggregate of Overdue and Future Instalments Receivable (` 16 Lakhs 4)


Balance of Unmatured Finance Charges (4.115 + 2.876 + 1.521)
Provision for NonPerforming Assets (Note)
Net Book Value of the Asset

` in Lakhs
64.000
8.512
7.488
48.000

Note:
Particulars

` in Lakhs

(a) Aggregate of Overdue and Future Instalments Receivable


(b) Balance of Unmatured Finance Charges
(c) Depreciated Value of the Asset [` 80 Lakhs (80 Lakhs 20% 2 years)]

64.000
8.512
48.000

(d) Provision to be created (a) (b) (c)

7.488

May 2015.10

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Question 4 (b): AS31


8 Marks
Lovely Limited has advanced Staff Loan of ` 50 Lakhs to its Employees on 1st July 2014 at a concessional rate of 6% per
annum, to be repaid in 5 semiannual installments along with interest thereon. The prevailing rate is 8% per annum.
Find out the value at which the Loan should initially be recognsied and its amortization till closure thereof. Also give necessary
journal entries with appropriate narration for financial year 20142015. The Discounted Values at 8% and 4% are as under:
Period
1
2
3
4
5
8%
0.9259
0.8573
0.7938
0.7350
0.6806
4%
0.9615
0.9246
0.8890
0.8548
0.8219
Solution: Similar to Page 32.14, Q.No.21 of Padhukas Students Referencer on Accounting Standards [M 10]
1. Computation of Initial Recognition Amount of Loan to Employees (Amount in `)
Cash Inflow
Total
PVF at 4% Present Value
Period
Principal
Interest at 6%
Jul to Dec 2014
10,00,000
50,00,000 6% yr = 1,50,000
11,50,000
0.9615
11,05,725
Jan to Jun 2015
10,00,000
40,00,000 6% yr = 1,20,000
11,20,000
0.9246
10,35,552
Jul to Dec 2015
10,00,000
30,00,000 6% yr = 90,000
10,90,000
0.8890
9,69,010
Jan to Jun 2016
10,00,000
20,00,000 6% yr = 60,000
10,60,000
0.8548
9,06,088
Jul to Dec 2016
10,00,000
10,00,000 6% yr = 30,000
10,30,000
0.8219
8,46,557
Present Value or Fair Value at Initial Recognition
48,62,932
Note: Discounting is at 8% p.a (or) 4% for the 6 Months Period.

Period

Jul to Dec 2014


Jan to Jun 2015
Jul to Dec 2015
Jan to Jun 2016
Jul to Dec 2016
S.No.
1

2. Computation of Amortised Cost of Loan to Employees (Amount in `)


Amortised Cost
Interest to be
Repayment
Amortised Cost
(Opening Balance)
recognized at 8% (including interest)
(Closing Balance)
(1)
(2)
(3)
(4) = (1) + (2) (3)
48,62,932
1,94,517
11,50,000
39,07,449
39,07,449
1,56,298
11,20,000
29,43,747
29,43,747
1,17,750
10,90,000
19,71,497
19,71,497
78,860
10,60,000
9,90,357
(bal. fig.) 39,643
9,90,357
10,30,000
Nil

3. Journal Entries for first half year (regarding Loan to Employees)


Particulars
Dr.(`)
Staff Loan A/c
Dr. 50,00,000
To Bank A/c
(Being the disbursement of Loans to Staff)
Staff Cost A/c (WN 2)
(50,00,000 48,62,932)
Dr.
1,37,068
To Staff Loan A/c
(Being write off of excess of Loan Balance over present value thereof, in order to
reflect the Loan at its Present Value of ` 48,62,932) [W.N. 1]
Profit and Loss A/c
Dr.
1,37,068
To Staff Cost A/c
(Being transfer of balance in the Staff Cost A/c to P&L A/c)
Staff Loan A/c
Dr.
1,94,517
To Interest on Staff Loan A/c
(Being Interest charged at market rate of 8% on the Loan, for first 6 months period)
Bank A/c
Dr. 11,50,000
To Staff Loan A/c
(Being amount received on repayment)
Interest on Staff Loan A/c
Dr.
1,94,517
To Profit & Loss A/c
(Being transfer of bal. in Staff Loan Int. A/c to P&L)

May 2015.11

Cr.(`)

10,00,000

1,37,068

1,37,068

1,94,517

11,50,000

1,94,517

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Question 5 (a): Valuation of Business


8 Marks
The summarized Balance Sheets of Rose Ltd for 3 years ended on 31st March are as follows: (` in Thousands)
Particulars as on
31st March 2013
31st March 2014 31st March 2015
6,400
6,400
6,400
Liabilities:
6,40,000 Equity Shares of ` 10 each fully paid up
General Reserves
4,800
5,600
6,400
Profit and Loss Account
560
640
960
Trade Payables
2,400
3,200
4,000
Total Liabilities
14,160
15,840
17,760
Assets:
Goodwill
4,000
3,200
2,400
Tangible Assets (Net)
5,600
6,400
6,400
Inventories
4,000
4,800
5,600
Trade Receivables
80
640
1,760
Cash and Cash Equivalents
480
800
1,600
Total Assets
14,160
15,840
17,760
Additional Information:
(i) Actual Valuation were as under:
Tangible Assets
7,200
8,000
8,800
Inventories
4,800
5,600
6,400
Net Profit (including Opening Balance after writing off Depreciation,
1,680
2,480
3,280
Goodwill, Tax Provision and Transfer to General Reserves)
(ii) Capital Employed in the business at Market Value at the beginning of 20122013 was ` 1,46,40,000 which included Cost of
Goodwill. The Normal Annual Return on Average Capital Employed in the line of business in which Rose Limited is
engaged is 12.50%
(iii) The balance in General Reserve as on 1st April 2012 was ` 40 Lakhs.
(iv) The Goodwill shown as on 31st March 2013 was purchased on 1st April 2012 for ` 40 Lakhs and the balance in Profit and
Loss Account as on 1st April 2012 was ` 4,80,000.
(v) Goodwill is to be valued at 5 years purchase of Super Profit by using Simple Average Method.
Find out the Average Capital Employed in each year and Total Value of Business as on 31st March 2015.
Solution: Refer Page No. 4.103, Q.No.1 of Padhukas Students Guide on Financial Reporting [N 03, M 09]

Less:
Less:
Add:
Add:
Add:

1. Computation of Average Maintainable Profit


Year ending 31st March
2013
Net Profit as given
16,80,000
Opening Balance
(4,80,000)
Undervaluation of Opening Stock

Undervaluation of Closing Stock


8,00,000
Goodwill written off (Diff. between Closing & Opening Balance.)

Transfer to Reserves (Diff. between Closing & Opening Balance.)


8,00,000
Adjusted Net Profit
28,00,000

2. Computation of Average Capital Employed


As at 31.3.2013 As at 31.3.2014
Tangible Assets (Actual Amount)
72,00,000
80,00,000
Inventories (Actual Amount)
48,00,000
56,00,000
Trade Receivables
80,000
6,40,000
Cash and Cash equivalents
4,80,000
8,00,000
Trade Payables
(24,00,000)
(32,00,000)
Closing Capital Employed
1,01,60,000
1,18,40,000
Opening Capital Employed (Excluding G/w)
1,06,40,000
1,01,60,000
2,08,00,000
2,20,00,000
Total of above
Average Capital Employed = (A + B) 2
1,04,00,000
1,10,00,000

Particulars

Less:
A.
B.
C.

2014
24,80,000
(5,60,000)
(8,00,000)
8,00,000
8,00,000
8,00,000
35,20,000

May 2015.12

2015
32,80,000
(6,40,000)
(8,00,000)
8,00,000
8,00,000
8,00,000
42,40,000

As at 31.3.2015
88,00,000
64,00,000
17,60,000
16,00,000
(40,00,000)
1,45,60,000
1,18,40,000
2,64,00,000
1,32,00,000

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Less:

Year ending 31st March


Adjusted Net Profit (WN 1)
Normal Return at 12% of
Average Capital Employed
Super Profits
Average Super Profits

Goodwill

Add:

3. Computation of Super Profits


2013
2014
28,00,000
35,20,000
1,04,00,000 12% 1,10,00,000 12%
= 13,00,000
= 13,75,000
15,00,000
21,45,000

2015
42,40,000
1,32,00,000 12%
= 16,50,000
25,90,000

(15,00,000 + 21,45,000 + 25,90,000) 3 = ` 20,78,333

4. Valuation of Goodwill
= Amount of Super Profits No. of. Years of Purchase of Super Profits agreed upon
= ` 20,78,333 5 = ` 1,03,91,667

5. Valuation of Business
Closing Capital Employed as at 31.3.2015
Goodwill as per WN 4 above
Value of Business

` 1,45,60,000
` 1,03,91,667
` 2,49,51,667

Question 5 (b): Valuation of Brand


8 Marks
Agile Limited is a ManufacturercumDealer of R Tuff Brand of Trousers. With passage of time, its Brand has been well
accepted in the market, the Company has been approached by a Foreign Company engaged in the same trade to enter as
Partner in its business. Agile, in order to negotiate the deal, wants to get its Brand valued. The following information based on
Market Research is available:
(i)

Garment Industry of which Agile is a constituent, is expected to grow by 9% annum during the next five years. The present
Market Size of the Industry is ` 7,500 Crores.
(ii) There are other brands both National and International in the market. The existence of Duplicate Brands is unavoidable. The
Share of such players is estimated to be 63% of the Total Industry Market. The Market Share of other National Brands will
increase @ 0.25% yearonyear basis in the next 5 years. The share of International Brands is expected to grow 1.5 times of
National Brands. But the existence of Duplicate Brands is to fall by 2.5% over the period of next 5 years, spread equally.
(iii) The expected Foreign Partner needs the production line of the company to be reengineered which will lead to an increase
in the yield of the Company by 3% after one year over the present yield of 10%, followed thereafter by further increase of
5% year on year.

Following the MarketOriented Approach, determine the Brand Value to be used for negotiation with the Foreign Company,
considering the Discount Factor for 1st five years as 0.909, 0.826, 0.751, 0.683 and 0.621 (Monetary value in Crores to be
rounded off to nearest 2 decimal places).
Solution:

Refer Page No. 4.8, Q.No.1 of Padhukas Students Guide on Financial Reporting
1. Market Share of Agile Ltd

(a) Current Market Share = 100% (National + International + Duplicate Brands) = 100% 63% = 37%
(b) Increase or Decrease in Market Share: National Brands 0.25% + International Brands 0.375% Fall in Duplicate
Brands 0.5% = 0.125% increase other products market share. Hence, Agiles Market Share is expected to fall by
0.125% every year, from current 37%. Therefore, next year it will be 36.875%, the year after 36.75%, etc.
2. Brand Valuation under Market Approach (` Crores)
Market Share Market Share
Discount
Year
Market Size (%)
Expected Profit
(%)
(Amt)
Factor at 15%
1
7,500.00 + 9% = 8,175.00
36.875%
3,014.53
@ 13% = 391.88
0.909
2
8,175.00 + 9% = 8,910.75
36.75%
3,274.70
@ 18% = 589.45
0.826
3
8,910.75 + 9% = 9,712.72
36.625%
3,557.28
@ 23% = 818.17
0.751
4
9,712.72 + 9% = 10,586.86
36.50%
3,864.20
@ 28% = 1081.98
0.683
5
10,586.86+ 9% = 11,539.67
36.375%
4,197.55
@ 33% = 1385.19
0.621
Brand Value
Brand Value of Agile Ltd under Market Oriented Approach is ` 3,056.74 Crores

May 2015.13

PV of Profit

356.22
486.88
614.45
738.99
860.20
3,056.74

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Question 6 (a): Value Added Statement


8 Marks
Famous Corporation has been preparing Value Added Statement for the past five years. The Human Resource Manager of the
Company has suggested introducing a Value Added Incentive Scheme to motivate the Employees for their better performance.
To introduce the Scheme, it is proposed that the Best Index Performance (favourable to Employer), i.e. Employee Costs to
Added Value for the last five years, will be used as the Target Index for future calculations of the bonus to be paid
After the Target Index is determined, any actual improvement in the Index will be rewarded. The Employer & the Employee will be
sharing any such improvement in the ratio 1:2. The bonus is given at the end of the year, after the profit for the year is determined.
The following information is available:
Particulars
Sales
Less: Bought in Goods, Services
Added Value
Employee Costs
Dividend
Taxes
Depreciation
Debenture Interest
Retained Earning
Added Value

Income:

Value Added Statement for 5 years (` in Thousands)


2010
2011
2012
2013
5.600
7,600
9,200
10,400
2,560
4,000
5,000
5,600
3,040
3,600
4,200
4,800
1,300
1,520
1,680
1,968
200
300
400
480
640
760
840
1.000
520
620
720
880
80
80
80
80
300
320
480
392
3,040
3,600
4,200
4,800

2014
12,000
6,400
5,600
2,240
600
1,120
1,120
80
440
5,600

Summarized Profit and Loss Account for the year ended on 31st March 2015 (` in Thousands)
Particulars
Amount
Sales less Returns
13,600
Dividends and Interest
500
Miscellaneous Income
500

Expenditure:
Production and Operational Expenses:

Administrative Expenses:
Selling and Distribution Expenses:

Cost of Materials
Wages & Salaries
Other Manufacturing Expenses
Administration Salaries
Administration Expenses
Selling and Distribution Salaries
Selling Expenses
Debenture Interest

14,600

5,000
1,800
1,400
600
600
120
400

8,200
1,200

Finance Expenses:
Depreciation
Total Expenditure
Profit before Taxation
Less: Provision for Taxation
Profit after Taxation
From the above information, prepare Value Added Statement for the year 20142015 and determine the amount of
Payable to Employees, if any.
Solution:

520
80
1,520
11,520
3,080
770
2,310
Bonus

Refer Page No. 7.14, Q.No.5 of Padhukas Students Guide on Financial Reporting

1. Computation of Target Index


Year ending 31st March
2010
2011
2012
Employee Cost
1,300
1,520
1,680
Value Added
3,040
3,600
4,200
42.76% 42.22% 40.00%
Ratio (Employee Cost Value Added)
Target Index is taken as least of the above on conservative basis = 40% (Favorable to Employer)

May 2015.14

2013
1,968
4,800
41.00%

2014
2,240
5,600
40.00%

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2. Computation of Bonus for Year ending 31st March 2015
Particulars
Less:

Add:
1.

2.
3.
4.
5.

Sales
Bought in Goods & Services:
Cost of Materials
Production Expenses
Administration Office Expenses
Sales Office Expenses
Value Added from Manufacturing and Trading Activities
Other Income (500 + 500)
Net Value Added

` 000s

` 000s
13,600

5,000
1,400
600
400

Employees Cost, i.e. Wages & Salaries


[Wages & Salaries ` 1,800 +
Administration Salaries ` 600 + Selling & Distribution Salaries ` 120]
Employee Cost
for the Year
Net Value Added

7,400
6,200
1,000
7,200
2,520

2,520
7,200

35%

Improvement for the Year eligible for Bonus = Target 40% Ratio as above 35%
Bonus Payable for the Year = Value Added ` 7,200 5% Employee Share 2/3rd
3. Statement of Application of Value Added
Particulars

1. To Employees:

As above 2,520 + Bonus 240

2. To Government:

Taxes

5%
240

` 000s

3. To Providers of Capital: Interest on Debentures


4. To Retained Profits, etc. (a) Depreciation

2,760

38.33%

770

10.69%

80

1.11%

3,590

48.87%

1,520

(b) Retained Profits (given 2,310 Incentive 240)

2,070

Total
Note: It is assumed that Taxation Expense is not affected by the above Bonus/ Incentive Payment.

7,200 100.00%

Question 6 (b):IFRS vs AS
Give major differences between IFRS and AS (applicable in India) with respect to Property, Plant and Equipment.
Solution:

IFRS / IAS

Non
Current
Assets held
for sale or
disposal

Biological
Assets

8 Marks

Refer Page No. 9.79, Para 9B.3.16 of Padhukas Students Guide on Financial Reporting

Particulars
Historical
Cost,
Revaluation,
Fair Value,
etc.

` 000s

Indian A/cg Stds

Historical Cost or Revalued Amounts are used.


On opting for revaluation, regular valuations of
entire classes of assets are required.
Some Intangible Assets, Property, Plant and
Equipment and also Investments may be revalued
to Fair Value.
IFRS / IAS requires revaluation of Derivatives,
Biological Assets and certain securities at Fair Value.
NonCurrent Asset is classified as held for sale, if its
Carrying Amount will be recovered through a sale
transaction rather than through continuing use.
A NonCurrent Asset classified as held for sale is
measured at the lower of its Carrying Amount and
Fair Value less costs to sell.
Comparative B/Sheet is not restated.
Measured at Fair Value less estimated PointofSale
costs.

May 2015.15

Historical Cost is used.


Revaluations are permitted. But, frequency
of revaluation is not mentioned.
On revaluation, an entire class of assets is
revalued, or assets to be revalued are
selected on systematic basis.
Certain Financial Instruments (AS 30, 31,
32) are carried at Fair Value.

There is no specific requirement to classify and


present an asset as held for sale on the face of
the Balance Sheet or in the Notes.

No specific guidance has been issued. Historical


Cost is used in general.

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Question 7 (a): AS10, 11, 16


4 Marks
AB Limited acquired at the start of the financial year, Fixed Assets from USA at a price of US$ 1,25,000 and made a down
payment of US$ 25,000. The Exchange Rate was ` 61.50 per Dollar at the date of transaction. The balance amount was payable
in 4 equal halfyearly installments with interest @ 8% per annum. The Exchange Rate on the due dates of installment has been
` 61.60, ` 61.80, ` 61.90 and ` 62.10. The Asset was under construction during the period of six months from its acquisition.
Ascertain the amount to be capitalized and the Gain or Loss to be recognised in each of the years.
Solution:
Repayment
6th Month
12th Month
18th Month
24th Month

Note: Borrowed Amount = Cost USD 1,25,000 () Down Payment USD 25,000 = 1,00,000 USD
Principal
25,000
25,000
25,000
25,000

1. Computation of Interest Costs & its treatment


Interest (USD) Total (USD)
10,00008% 6/12 =
4,000
29,000
75,000 8% 6/12 =
3,000
28,000
50,000 8% 6/12 =
2,000
27,000
25,000 8% 6/12 =
1,000
26,000

INR to USD
61.60
61.80
61.90
62.10

Interest Exp `
2,46,400
1,85,400
1,23,800
62,100

Note: The above Interest Cost will be expensed in the Statement of P&L under the head Finance Charges.
The above asset is a Qualifying Asset for Capitalizing Interest Costs on the following grounds

(a) Qualifying Asset is an asset that takes substantial period of time to get ready for its intended use. [Substantial Period of
Time = 12 months unless shorter time is justified]
(b) It is given that the Asset was under construction for 6 months. So, it is assumed that the same is not a Qualifying Asset.
(c) Even if it is assumed to be a Qualifying Asset, for capitalising the FOREX Costs as Borrowing Cost, the information on
prevailing interest rates in India is not available. Hence, no part of Interest Cost is capitalised.
Hence, Asset will be capitalized initially at ` 61.50 USD 1,25,000 = ` 76,87,500
2.Computation of FOREX Loss on Settlement

As per AS 11, the Settlement Difference on account of FOREX Loan will be written off to the Statement of P&L.

Also, since the Forex Loan is a Monetary Item, the same has to be restated based on Closing Rate. The difference
thereon is taken to the Statement of P&L.

The above loan is recognized initially @ ` 61.50 per USD. On repayment the Forex Loss /Gain is recognised.
Loss on Settlement (`)
Repayment
Balance Loan O/s (USD)
Restatement Loss on o/s Bal.
6th Month
(61.6061.50) 25,000 =
2,500
75,000
No restatement
th
12 Month
(61.8061.50) 25,000 =
7,500
50,000
(61.8061.50) 50,000= 15,000
18th Month
(61.9061.80) 25,000 =
2,500
25,000
No restatement
24th Month
(62.1061.80) 25,000 =
7,500
0
No restatement
3.Summary of Debit to P&L A/c:
Year
Interest Cost
Settlement Loss
Restatement Loss
Year 1
2,46,400 + 1,85,400 = 4,31,800 2,500 + 7,500 = 10,000
15,000
Year 2
1,23,800 + 62,100 = 1,85,900
2,500 + 7,500 =10,000
Note: Option is available to Companies, to adjust the Exchange Differences relating to Foreign Currency Borrowings for
Depreciable Fixed Assets, in the Cost of such Asset, as per MCA Notification.

Question 7 (b): Guidance Note in Excise Duty


4 Marks
HS Limited manufactures goods and caters to both national and international markets. As on 31st March 2015, it has the
following Stocks in its Warehouse at Factory:
Goods meant for National Market Sale Value of ` 100 Lakhs
Goods meant for International Market Export Value of ` 50 Lakhs
The Company has a policy to mark up the products for national markets at onethird of cost while those for exports are marked
up at 150% of its cost. Excise Duty on goods is payable @ 12.36%. The Management is of the opinion that Excise is payable
only on clearance of goods from Factory and as such the same should not be a part of Cost of Inventory.
You are required to guide the Company in the light of relevant Guidance Note.
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Solution:

Refer Page No. 8.14, Part 3 Illustration of Padhukas Students Guide on Financial Reporting

1.

Local Market: As per the ICAIs Guidance Note on Accounting Treatment for Excise Duty, Provision for the Unpaid
Liability of Excise Duty should be made. Therefore, in the above case, Excise Duty on the goods meant for Local Sales
should be provided at the rate of 12.36% on the Selling Price, of ` 100 Lakhs for valuation of Stock.

2.

Export Goods: Assuming that all the conditions specified in the Central Excise Rules, regarding export of excisable
goods without payment of duty are fulfilled by the Company, Excise Duty may not be provided for the goods meant for
exports, even though the manufacture thereof is complete.

Question 7 (c): AS9


8 Marks
Krishna sold goods to Madhav for ` 100 Crores against an export order of Madhav. Subsequent to the sale by Krishna, the
export order of Madhav was cancelled for unavoidable reasons. Madhav decided to sell the good in local market, provided a
Price Discount is allowed by Krishna. Krishna acceded to the request of Madhav. Advise how the discount given shall be dealt
in the books of accounts of Krishna.
Solution: Similar to Page 9.8, Q.No.22 of Padhukas Students Referencer on A/cg Standards [M 06, M 00]

1.

Krishna has sold goods for ` 100 Crores to Madhav. Hence, the sale is complete in all respects. Madhavs decision to
sell the same in the domestic market at a discount does not affect the amount recognised as Sales Income by Krishna.

2.

Price Discount offered by Krishna at the request of Madhav is not in the nature of discount given during the ordinary
course of trade, since it would have been given at the time of sale itself.

3.

As there appears to be an uncertainty relating to realisability of the Discount portion, which has arisen subsequent to
the time of sale, Krishna should make a separate provision to reflect the uncertainty relating to collectibility, rather
than to adjust the amount of Revenue originally recorded.

4.

The Discount Allowed should be shown as an Expense in the Statement of P & L of Krishna separately, and not
shown as deduction from the Sales figure.

Question 7 (d): AS5


4 Marks
A Company desires to make provision in respect of its nonmoving or slow moving items of stock. The following information is
available: (amounts ` in Lakhs)
Particulars
Current Year
Previous Year
Value of Closing Stock
169
105
Provision based on No. of issues during the year
4.50
4.00
Provision based on products technicality
5.50
4.25
The Company has been making provision based on number of issues. However, from this year, the Management has decided
to make provision based on technical evaluation.
Explain whether such change will amount to change in Accounting Policy. Also draw a suitable Note, if in your view the
proposed change requires the same to be given in the Financial Statement of the Current Year.
Solution:
Refer Page No.5.9, Q.No.29 of Padhukas Students Referencer on Accounting Standards [M 03, N 08, M 12]

1.

Analysis:
(a) Changes: The Companys accounting policy requires that provision should be made in respect of nonmoving
stocks. The method of estimating the provision can be changed based on new developments, additional
information, etc. if a more prudent estimate of the amount can be made.

(b) Nature: The decision to make provision for nonmoving stock on the basis of technical evaluation is only a
change in accounting estimate, and does not amount to a change in accounting policy.
(c) Materiality: The change in the amount of required provision is ` 1,00,000 which is only 0.59 % of the Total Stock
Value, and is hence not material.

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2.

Conclusion:
(a) Change in Provision from Number of issues to technical evaluation will not result in any change in accounting
policy, as there will only be a change in accounting estimate.

(b) The Company should be able to demonstrate reasonably that provision made on the basis of technical evaluation
provides more satisfactory results than the provision based on Number of Issues. In such case, the Company can
change the method of provision.

Question 7 (e): AS29


4 Marks
Lucky P Limited has been assessed to Income Tax, in which a demand of ` 10 lakhs has been made. The Company has gone
in appeal. The Company has deposited ` 6.00 Lakhs against the demand, on being pursued by the Department. The Company
has been advised by its Counsel that there is 80% chance of losing in respect of one of the ground which may end up
confirming the demand of ` 4.00 Lakhs, while on other ground, there is fair chance of winning the appeal. How the Company
should treat the same while preparing the Final Accounts for the year ending 31st March 2015?
Solution: Refer Page No.29.13, Q.No.29 of Padhukas Students Referencer on Accounting Standards

1.

Recognition: As per AS 29 a Provision should be recognized if the following conditions are satisfied
Condition (1)
Condition (2)
Condition (3)
Reliable estimate of the
Present obligation as a result of past
Outflow of Resources to settle the
event.
obligation is probable.
amount.
Liability for Income Tax existed on the
There will be an outflow of resources
Tax Liability is ascertained at
B/S date, as per the Demand Notice.
to settle the obligation, if the Company
an amount of ` 10 Lakhs, as
There is a present obligation.
does not win the case in appeal.
per the Demand Notice.
Note: Merely because an appeal has been made, the character of the obligation is not lost.

2.

Provision and Contingent Liability:


(a) Since all the conditions for recognition of a Provision are satisfied, a Provision for Tax Liability ` 4 Lakhs should be
recognized for 20142015, since the probability of confirmation of demand for this amount is very high 80%. This
will be disclosed as Short Term Provisions under Current Liabilities

(b) For the balance portion of ` 6 Lakhs, where there is a fair chance of winning the appeal, the Company should
disclose a Contingent Liability, in the Notes to Accounts.
(c) The amount paid as Deposit ` 6 Lakhs should be shown as Other NonCurrent Assets in the Financial Statements,
along with a clear description of the nature of item.

May 2015.18
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