CA Intermediate

AS 12: Accounting for Governments Grants – CA Inter Accounts Study Material

AS 12: Accounting for Governments Grants – CA Inter Accounts Study Material is designed strictly as per the latest syllabus and exam pattern.

AS 12: Accounting for Governments Grants – CA Inter Accounts Study Material

Grant Related To Specific Fixed Assets (Based On Para No. 8)

Question 1.
Weak Ltd. acquired the fixed assets of ₹ 100 lakhs on which it received the grant of ₹ 10 lakhs. What will be the cost of the fixed assets as per AS 12 and how it will be disclosed in the financial statements? (4 Marks) (May 2010)
Answer:
Paragraphs 8 and 14 of AS 12 ‘Accounting for Government Grants’ deal with the presentation of government grants related to specific fixed assets. It prescribes two different methods for recognition of a government grant. In the first method, Government grants related to specific fixed assets should be presented in the balance sheet by showing the grant as a deduction from the gross value of the assets concerned in arriving at their book value.

Under the second method, government grants related to depreciable fixed assets may be treated as deferred income which should be recognised in the profit and loss statement on a systematic and rational basis over the useful life of the asset, i.e., such grants should be allocated to income over the periods and in the proportions in which depreciation on those assets is charged.

Analysis and conclusion:
First Method:
Fixed assets should be presented at ₹ 90 lakhs (₹ 100 lakhs less ₹ 10 lakhs) in the balance sheet of Weak Ltd.

Second Method:
Fixed assets will be shown at ₹ 100 lakhs in the balance sheet of Weak Ltd. and the corresponding grant amounting ₹ 10 lakhs will be treated as deferred income to be recognized over useful life of the fixed asset.

AS 12: Accounting for Governments Grants - CA Inter Accounts Study Material

Question 2.
D Ltd. acquired a machine on 01-04-2012 for ₹ 20,00,000. The useful life is 5 years. The company had applied on 01-04-2012, for a subsidy to the tune of 80% of the cost. The sanction letter for subsidy was received in November 2015. The Company’s Fixed Assets Account for the financial year 2015-16 shows a credit balance as under:
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 1
You are required to state how should the company deal with this asset in its accounts for 2015-16? (RTP)
Answer:
It can be inferred from above, that the Company follows Reduction Method for accounting of Government Grants.

Accordingly, out of the ₹ 16,00,000 that has been received, ₹ 8,00,000 (being the balance in Machinery A/c) should be credited to the machinery A/c.

The balance ₹ 8,00,000 may be credited to P&L A/c, since already the cost of the asset to the tune of ₹ 12,00,000 had been debited to P&L A/c in the earlier years by way of depreciation charge, and ₹ 8,00,000 transferred to P&L A/c now would be partial recovery of that cost.

There is no need to provide depreciation for 2015-16 or 2016-17 as the depreciable amount is now Nil.

AS 12: Accounting for Governments Grants - CA Inter Accounts Study Material

Question 3.
ABC Limited purchased a machinery for ₹ 25,00,000 which has estimated useful life of 10 years with the salvage value of ₹ 5,00,000. On purchase of the assets Central Government pays a grant for ₹ 5,00,000. Pass the journal entries with narrations in the books of the company for the first year, treating grant as deferred income. (5 Marks) (May 12)
Answer:
Journal Entries
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 2

Grant Related To Promoters Contribution (Based On Para No. 10)

Question 4.
Santosh Ltd. has received a grant of ₹ 8 crores from the Government for setting up a factory in a backward area. Out of this grant, the company distributed ₹ 2 crores as dividend. Also, Santosh Ltd. received land free of cost from the State Government but it has not recorded it at all in the books as no money has been spent. In the light of AS 12 examine, whether the treatment of both the grants is correct. (2 Marks) (May 2010)
Answer:
Analysis:
As per AS 12 ‘Accounting for Government Grants’, when government grant is received for a specific purpose, it should be utilised for the same.

Also, the grant received for setting up a factory is not available for distribution of dividend.

Even if the company has not spent money for the acquisition of land, land should be recorded in the books of account at a nominal value.

Conclusion:
The treatment of both the elements of the grant is incorrect as per AS 12.

AS 12: Accounting for Governments Grants - CA Inter Accounts Study Material

Question 5.
M/s. A Ltd. has set up its business in a designated backward area with an investment of ₹ 200 Lakhs. The Company is eligible for 25% subsidy and has received ₹ 50 Lakhs from the Government.

Explain the treatment of the Capital Subsidy received from the Government in the Books of the Company. (4 Marks) (May 2015)
Answer:
As per para 10 of AS 12 ‘Accounting for Govt. Grants’, where the government grants are of the nature of promoters’ contribution, i.e., they are given with reference to the total investment in an undertaking or by way of contribution towards its total capital outlay (for example, central investment subsidy scheme) and no repayment is ordinarily expected in respect thereof, the grants are treated as capital reserve.

Analysis:
Subsidy received by A Ltd. is in the nature of promoter’s contribution, since this grant is given with reference to the total investment in an undertaking and by way of contribution towards its total capital outlay and no repayment is ordinarily expected in respect thereof.

Conclusion:
Therefore, this grant should be treated as capital reserve which can be neither distributed as dividend nor considered as deferred income.

Refund Of Government Grants (Based On Para No. 11)

Question 6.
S Ltd. received a grant of ₹ 2,500 lakhs during the accounting year 2010¬11 from government for welfare activities to be carried on by the company for its employees. The grant prescribed conditions for its utilization. However, during the year 2011-12, it was found that the conditions of grants were not complied with and the grant had to be refunded to the government in full. Elucidate the current accounting treatment, with reference to the provisions ofAS-12.
Answer:
As per para 11 of AS 12 Accounting for Government Grants \ Government grants sometimes become refundable because certain conditions are notfulfdled. A government grant that becomes refundable is treated as an extraordinary item as per AS 5.

Analysis:
The amount refundable in respect of a government grant related to revenue is applied first against any unamortized deferred credit remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount is charged immediately to profit and loss statement.

Conclusion:
In the present case, the amount of refund of government grant should be shown in the profit & loss account of the company as an extraordinary item during the year 2011-12.

AS 12: Accounting for Governments Grants - CA Inter Accounts Study Material

Question 7.
A Ltd. purchased a machinery for ₹ 40 lakhs. (Useful life 4 years and residual value ₹ 8 lakhs) Government grant received is ₹ 16 lakhs.
Show the Journal Entry to be passed at the time of refund of grant and the value of the fixed assets, if:

  1. the grant is credited to Fixed Assets A/c.
  2. the grant is credited to Deferred Grant A/c.

Answer:
Journal Entries
(1) If the grant was credited to Fixed Assets Account earlier:
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 3
Note: The balance of fixed assets after two years depreciation will be ₹ 16 lakhs (W.N.l) and now it will become (₹ 16 lakhs + ₹ 12 lakhs) = ₹ 28 lakhs on which depreciation will be charged for remaining two years.
Depreciation = (28-8)/2 = ₹ 10 lakhs p.a. will be charged for next two years.

(2) If the grant was credited to Deferred Grant Account earlier:
In the first two years (₹ 16 lakhs/4 years) = ₹ 4 lakhs p.a. × 2 years = ₹ 8 lakhs were credited to Profit and Loss Account and ₹ 8 lakhs were the balance of Deferred Grant Account after two years.

Therefore, on refund in the 3rd year, following entry will be passed:
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 4
Note: Deferred grant account will become Nil. The fixed assets will continue to be shown in the books at ₹ 24 lakhs (W.N.2) and depreciation will continue to be charged at ₹ 8 lakhs per annum.

Working Notes:
1. Balance of Fixed Assets after two years but before refund (under 1st alternative)
Fixed assets initially recorded in the books = ₹ 40 lakhs – ₹ 16 lakhs = ₹ 24 lakhs Depreciation p.a. = ₹ 24 lakhs – ₹ 8 lakhs)/4 years = ₹ 4 lakhs per year
Value of fixed assets after two years but before refund of grant
= ₹ 24 lakhs – (₹ 4 lakhs × 2 years) = ₹ 16 lakhs

2. Balance of Fixed Assets after two years but before refund (under 2nd alternative)
Fixed assets initially recorded in the books = ₹ 40 lakhs
Depreciation p.a. = (₹ 40 lakhs – ₹ 8 lakhs)/4 years = ₹ 8 lakhs per year
Book value of hxed assets after two years = ₹ 40 lakhs – (₹ 8 lakhs × 2 years) = ₹ 24 lakh

AS 12: Accounting for Governments Grants - CA Inter Accounts Study Material

Question 8.
A fixed asset is purchased for ₹ 20 lakhs. Government grant received towards it is ₹ 8 lakhs. Residual Value is ₹ 4 lakhs and useful life is 4 years. Assume depreciation on the basis of Straight-Line method. Asset is shown in the balance sheet net of grant. After 1 year, grant becomes refundable to the extent of ₹ 5 lakhs due to non-compliance with certain conditions. Pass journal entries for first two years. (RTP)
Answer:
Journal Entries
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 5
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 6

Working Notes:
1. Depreciation for Year 1
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 7

2. Depreciation for Year 2
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 8

AS 12: Accounting for Governments Grants - CA Inter Accounts Study Material

Question 9.
Y Ltd. received a specific grant of ₹ 300 lakhs for acquiring the plant of ₹ 1,500 lakhs during 2009-10 having useful life of 10 years. The grant received was credited to deferred income and shown in the balance sheet. During 2012-13, due to non-compliance of conditions laid down for the grant the company had to refund the grant to the Government. Balance in the deferred income on that date was ₹ 210 lakhs and written down value of plant was ₹ 1,050 lakhs.

(i) What should be the treatment for the refund of the grant and the effect on cost of the fixed asset and the amount of depreciation to be charged during the year 2012-13 in profit and loss account? Assume that depreciation is charged on assets as per straight line method.

(ii) What should be the treatment of the refund if grant was deducted from the cost of the plant during 2009-10? (RTP)
Answer:
As per para 21 of AS 12, Accounting for Government Grants’, amount refundable in respect of a grant related to revenue should be applied first against any unamortized deferred credit remaining in respect of the grant. To the extent the amount refundable exceeds any such deferred credit, the amount should be charged to the Statement of Profit and Loss.

Analysis of Conclusion :
(i) The grant refunded is ₹ 300 lakhs and balance in deferred income is ₹ 210 lakhs, therefore, ₹ 90 lakhs shall be charged to the Statement of Profit and Loss for the year 2012-13. There will be no effect on the cost of the fixed asset and depreciation charged will be same as charged in the earlier years.

(ii) The book value of the plant shall be increased by ₹ 300 lakhs. The increased cost of ₹ 300 lakhs of the plant should be amortised over 7 years (remaining useful life). Depreciation charged during the year 2012-13 shall be 1200/10 + 300/7= 162.86 lakhs.

AS 12: Accounting for Governments Grants - CA Inter Accounts Study Material

Question 10.
On 1.4.2011, A Ltd. received Government grant of ₹ 300 lakhs for acquisition of machinery costing ₹ 1,500 lakhs. The grant was credited to the cost of the asset. The life of the machinery is 5 years. The machinery is depreciated at 20% on WDV basis. The Company had to refund the grant in May 2014 due to non-fulfilment of certain conditions.

How you would deal with the refund of grant in the books of A Ltd.? (RTP)
Answer:
According to para 21 of AS 12 on Accounting for Government Grants, the amount refundable in respect of a grant related to a specific fixed asset should be recorded by increasing the book value of the asset or by reducing deferred income balance, as appropriate, by the amount refundable. Where the book value is increased, depreciation on the revised book value should be provided prospectively over the residual useful life of the asset.

Analysis of Conclusion :
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 9
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 10
Depreciation @ 20% on the revised book value amounting ₹ 914.40 lakhs is to be provided prospectively over the remaining useful life of the asset i.e. years ended 31st March, 2015 and 31st March, 2016.

AS 12: Accounting for Governments Grants - CA Inter Accounts Study Material

Question 11.
White Ltd. A fixed asset is purchased for ₹ 25 lakhs. Government grant received towards it is ₹ 10 lakhs. Residual Value is ₹ 5 lakhs and useful life is 5 years. Assume depreciation on the basis of Straight-Line method. Asset is shown in the balance sheet net of grant. After 1 year, grant becomes refundable to the extent of ₹ 6 lakhs due to non-compliance with certain conditions. Pass journal entries for first two years. (RTP)
Answer:
Journal Entries
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 11
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 12

Working Notes:
1. Depreciation for Year 1
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 13

2. Depreciation for Year 2
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 14

3. Computation of average accumulated expenses
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 15

AS 12: Accounting for Governments Grants - CA Inter Accounts Study Material

Question 12.
X Ltd. received a revenue grant of ₹ 10 crores during 2006-07 from Government for welfare activities to be carried on by the company for its employees. The grant prescribed the conditions for utilization.

However, during the year 2008-09, it was found that the prescribed conditions were not fulfilled and the grant should be refunded to the Government.

State how this matter will have to be dealt with in the financial statements of X Ltd. for the year ended 2008-09. (2 Marks) (Nov. 2009)
Answer:
As per para 11 of AS 12 ‘Government Grants’, a grant that became refundable should be treated as an extra-ordinary item as per Accounting Standard 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’.

The amount refundable in respect of a government grant related to revenue, is applied first against any unamortised deferred credit remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount is charged immediately to profit and loss statement.

Analysis and conclusion:
Refund of grant of ₹ 10 crores should be shown in the profit and loss account of the company as an extraordinary item during the financial year 2008-09.

AS 12: Accounting for Governments Grants - CA Inter Accounts Study Material

Question 13.
Siva Limited received a grant of ₹ 1,500 lakhs during the last accounting year (2009-10) from Government for welfare activities to be carried on by the company for its employees. The grant prescribed conditions for its utilization. However, during the year 2010-11, it w as found that the conditions of the grant were not complied with and the grant had to be refunded to the Government in full. Elucidate the current accounting treatment with reference to the provisions of AS-12. (4 Marks) (May 2011)
Answer:
As per para 11 of AS 12 ‘Accounting for Government Grants ’ Government Grant may, sometimes, become refundable if certain conditions are notfulfiled. A government grant that becomes refundable is treated as extraordinary item as per AS, 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’.

The amount refundable in respect of a government grant related to revenue is applied first against any unamortized deferred credit remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount is charged immediately to profit and loss statement.

Analysis and conclusion:
The amount of refund of grant of ₹ 1,500 lakhs should be charged to the profit and loss account in the year 2010-2011 as an extraordinary item.

AS 12: Accounting for Governments Grants - CA Inter Accounts Study Material

Question 14.
Explain the treatment of refund of Government Grants as per Accounting Standard 12. (4 Marks) (Nov 2011)
Answer:
Para 11 of AS 12,‘Accounting for Government Grants’, explains treatment of government grants in following situations:
(i) When government grant is related to revenue
(a) When deferred credit account has a balance. The amount of government grant refundable will be adjusted against unamortized deferred credit balance remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit the amount is immediately charged to profit and loss account.
(b) Where no deferred credit account balance exists: The amount of government grant refundable will be charged to profit and Loss account.

(ii) When government grant is related to specific fixed assets
(a) Where at the time of receipt, the amount of government grant reduced the cost of asset The amount of government grant refundable will increase the book value of the asset.
(b) Where at the time of receipt, the amount of government grant was credited to ‘Deferred Grant Account’: The amount of government grant refundable will reduce the capital reserve or unamortized balance of deferred grant account as appropriate.

(iii) When government grant is in the nature of Promoter’s contribution The amount of government grants refundable in part or in full on non-fulfillment of specific conditions, the relevant amount recoverable by the government will be reduced from capital reserve.

A government grant that becomes refundable is treated as an extraordinary item.

AS 12: Accounting for Governments Grants - CA Inter Accounts Study Material

Question 15.
Explain in brief the treatment of Refund of Government Grants in line with AS 12 in the following three situations: (4 Marks) (May 2014)
(i) When Government Grant is related to revenue,
(ii) When Government Grant is related to specific fixed assets,
(iii) When Government Grant is in the nature of Promoter’s contribution.
Answer:
Para 11 of AS 12,‘Accounting for Government Grants’, explains treatment of government grants in following situations:
(i) When government grant is related to revenue
(a) When deferred credit account has a balance. The amount of government grant refundable will be adjusted against unamortized deferred credit balance remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit the amount is immediately charged to profit and loss account.
(b) Where no deferred credit account balance exists: The amount of government grant refundable will be charged to profit and Loss account.

(ii) When government grant is related to specific fixed assets
(a) Where at the time of receipt, the amount of government grant reduced the cost of asset The amount of government grant refundable will increase the book value of the asset.
(b) Where at the time of receipt, the amount of government grant was credited to ‘Deferred Grant Account’: The amount of government grant refundable will reduce the capital reserve or unamortized balance of deferred grant account as appropriate.

(iii) When government grant is in the nature of Promoter’s contribution The amount of government grants refundable in part or in full on non-fulfillment of specific conditions, the relevant amount recoverable by the government will be reduced from capital reserve.

A government grant that becomes refundable is treated as an extraordinary item.

AS 12: Accounting for Governments Grants - CA Inter Accounts Study Material

Question 16.
ABC Ltd. purchased fixed assets for ₹ 50,00,000. Government grant received towards it is 20%. Residual value is ₹ 8,00,000 and useful life is 8 years. Assumed depreciation is on the basis of Straight-Line Method, asset is shown in the Balance Sheet net of grant.

After one year, grant becomes refundable to the extent of ₹ 7,00,000 due to non-compliance of certain conditions.
Pass Journal entries for 2nd year in the books of the company. (5 Marks) (May 2016)
Answer:
Journal Entries for 2nd year
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 16
Working Note:
Depreciation for year 2
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 17

Question 17.
Ram Ltd. purchased machinery for 80 lakhs, (useful life 4 years and residual value 8 lakhs). Government grant received is 32 lakhs. Show the Journal Entry to be passed at the time of refund of grant and the value of the fixed assets in the third year and the amount of depreciation for remaining two years, if : (5 Marks) (May 2017)
(i) the grant is credited to Fixed Assets A/c.
(ii) the grant is credited to Deferred Grant A/c.
Answer:
Journal Entries
(1) If the grant is credited to Fixed Assets Account earlier:
1. Journal Entry (at the time of refund of grant)
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 18

2. Value of Fixed Assets after two years but before refund of grant
Fixed assets initially recorded in the books = ₹ 80 lakhs – ₹ 32 lakhs
= ₹ 48 lakhs
Depreciation for each year = (48 lakhs – 8 lakhs)/4 years = ₹ 10 lakhs per year for first two years.
Value of the assets before refund of grant = 48 lakhs – 20 lakhs
= 28 lakhs
The difference between this figure and guaranteed residual value (₹ 50,000) is due to rounding off.

3. Value of Fixed Assets after refund of grant
Value of Fixed Assets before refund of grant – ₹ 28 lakhs
Add Refund of grant – ₹32 lakhs
₹ 60 lakhs

4. Amount of depreciation for remaining two years
Value of the fixed assets after refund of grant -residual value of the assets/No. of years
= ₹ 60 lakhs – ₹ 8 lakhs/2
= ₹ 26 lakhs per annum will be charged for next two years.

AS 12: Accounting for Governments Grants - CA Inter Accounts Study Material

(2) If the grant is credited to Deferred Grant Account earlier:
As per AS 12 ‘Accounting for Government Grants,’ income from Deferred Grant Account is allocated to Profit and Loss account usually over the periods and in the proportions in which depreciation on related assets is charged.

Accordingly, in the first two years (₹ 32 lakhs/4 years) = ₹ 8 lakhs × 2 years = ₹ 16 lakhs will be credited to Profit and Loss Account and ₹ 16 lakhs will be the balance of Deferred Grant Account after two years.

Therefore, on refund of grant, following entry will be passed:
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 19

1. Value of Fixed Assets after two years but before refund of grant
Fixed assets initially recorded in the books = ₹ 80 lakhs
Depreciation for each year = (₹ 80 lakhs – ₹ 8 lakhs)/4 years = ₹ 18 lakhs per year
Book value of fixed assets after two years = ₹ 80 lakhs – (₹ 18 lakhs × 2 years) = ₹ 44 lakhs

2. Value of Fixed Assets after refund of grant
On refund of grant the balance of deferred grant account will become nil. The fixed assets will continue to be shown in the books at ₹ 44 lakhs.

3. Amount of depreciation for remaining two years
Depreciation will continue to be charged at ₹ 18 lakhs per annum for the remaining two years.

AS 12: Accounting for Governments Grants - CA Inter Accounts Study Material

Question 18.
On 01.04.2014, XYZ Ltd. received Government grant of ₹ 100 Lakhs for an acquisition of new machinery costing ₹ 500 lakhs. The grant was received and credited to the cost of the assets. The life span of the machinery is 5 years. The machinery is depreciated at 20% on WDV method.

The company had to refund the entire grant in 2nd April, 2017 due to non-fulfilment of certain conditions which was imposed by the government at the time of approval of grant.

How do you deal with the refund of grant to the Government in the books of XYZ Ltd., as per AS 12? (5 Marks) (May 2018)
Answer:
According to AS 12 on Accounting for Government Grants, the amount refundable in respect of a grant related to a specific fixed asset (if the grant had been credited to the cost of fixed asset at the time of receipt of grant) should be recorded by increasing the book value of the asset, by the amount refundable. Where the book value is increased, depreciation on the revised book value should be provided prospectively over the residual useful life of the asset.
AS 12 Accounting for Governments Grants - CA Inter Accounts Study Material 20
Depreciation @ 20% on the revised book value amounting ₹ 304.80 lakhs is to be provided prospectively over the residual useful life of the asset.

Departmental Accounts – CA Inter Accounts Study Material

Departmental Accounts – CA Inter Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Departmental Accounts – CA Inter Accounts Study Material

Apportionment Of Expenses

Question 1.
State the basis on which the following common expenses, the benefit of which is shared by all the departments is distributed among the departments:
(i) Rent, rates and taxes, insurance of building;
(ii) Selling expenses such as discount, bad debts, selling commission and other such selling expenses;
(Hi) Carriage Inward;
(iv) Depreciation;
(v) Interest on loan;
(vi) Profit or loss on sale of investment;
(vii) Wages;
(viii) Lighting and Heating Expenses. (4 marks) (Nov. 2013)
Answer:

S.No. Expenses

Basis of allocation

(i) Rent, rates and taxes, repairs, insurance of building Floor area occupied by each depart­ment (if given) otherwise on time basis
(ii) Selling expenses, e.g., discount, bad debts, selling commission, and other such selling expenses Sales of each department
(iii) Carriage inward Purchases of each department
(iv) Depreciation Value of assets of each department otherwise on time basis
(v) Interest on loan Utilization of loan amount in each department (if can be identified), oth­erwise in combined P&L A/c
(vi) Profit & loss on sale of investment Value of investments sold in each de­partment (if value can be identified), otherwise in combined P&L A/c
(vii) Wages Time devoted to each department
 (viii) Lighting and Heating expenses (e.g. energy expenses) Consumption of energy by each de­partment

Question 2.
Give the basis of allocation of the following common expenditure among different departments:
(i) Insurance of Building
(ii) Discount and bad debts
(iii) Discount received
(iv) Repairs and maintenance of capital assets
(v) Advertisement expenses
(vi) Labour welfare expenses
(vii) PF/ESI contributions
(viii) Carriage inward (4 marks) (May 2016)
Answer:

S.No. Expenses Basis of allocation
(i) Insurance of Building Floor area occupied by each department (if given) otherwise on time basis
(ii) Discount and Bad debts Sales of each department
(iii) Discount received Purchases of each department
(iv) Repairs and maintenance of capital assets Value of assets of each department otherwise on time basis
(v) Advertisement expenses Sales of each department otherwise on time basis or equally among departments
(vi) Labour welfare expenses Number of employees in each department
(vii) PF/ESI contributions Wages and salaries of each department
(viii) Carriage inward Purchases of each department

Departmental Accounts – CA Inter Accounts Study Material

Basic Questions

Question 3.
A Ltd. has three departments and submits the following information for the year ending on 31st March, 2014:
Departmental Accounts – CA Inter Accounts Study Material 97
You are required to prepare departmental trading account of A Ltd., assuming that the rate of profit on sales is uniform in each case. (RTP)
Answer:
Departmental Trading Account for the year ended on 31st March, 2014
Departmental Accounts – CA Inter Accounts Study Material 1

Working Notes:
Departmental Accounts – CA Inter Accounts Study Material 2

(2) Statement showing computation department-wise per unit Cost and Purchase Cost
Departmental Accounts – CA Inter Accounts Study Material 3

(3) Statement showing computation of department-wise Opening Stock (in Units)
Departmental Accounts – CA Inter Accounts Study Material 4

(4) Statement showing computation of department-wise cost of Opening Stock and Closing Stock
Departmental Accounts – CA Inter Accounts Study Material 5

Departmental Accounts – CA Inter Accounts Study Material

Question 4.
Brahma Limited has three departments and submits the following information for the year ending on 31st March, 2011:
Departmental Accounts – CA Inter Accounts Study Material 6
You are required to prepare departmental trading account of Brahma Limited assuming that the rate of profit on sales is uniform in each case. (5 Marks) (May 2011)
Answer:
Departmental Trading Account for the year ended 31st March, 2011
Departmental Accounts – CA Inter Accounts Study Material 7

Working Notes:

(1) Computation of Gross profit ratio
Departmental Accounts – CA Inter Accounts Study Material 8
Gross Profit Ratio \(=\frac{\text { Gross profit }}{\text { Selling price }}\) × 100 = \(\frac{5,60,000}{14,00,000}\) × 100

(2) Statement showing computation of department-wise per unit cost arid purchase cost
Departmental Accounts – CA Inter Accounts Study Material 9

(3) Statement showing computation of department-wise Opening Stock (in units)
Departmental Accounts – CA Inter Accounts Study Material 10

(4) Statement showing computation of department-wise cost of Opening and Closing Stock
Departmental Accounts – CA Inter Accounts Study Material 11

Question 5.
M/s. Delta is a Departmental Store having three departments X, Y and Z. The information regarding three departments for the year ended 31st March, 2018 are given below:
Departmental Accounts – CA Inter Accounts Study Material 12
Additional Information:
Departmental Accounts – CA Inter Accounts Study Material 13
Prepare Departmental Trading and Profit & Loss Account for the year ended 31st March, 2018 after providing provision for Bad Debts at 5%. (10 Marks) (May 2018)
Answer:
Departmental Trading and Profit and Loss Account for the year ended 31st March, 2018
Departmental Accounts – CA Inter Accounts Study Material 14
Departmental Accounts – CA Inter Accounts Study Material 15

Departmental Accounts – CA Inter Accounts Study Material

Working Note:

Basis of allocation of expenses
Carriage inwards Purchases (3:2:1)
Carriage outwards Turnover (4:3:2)
Salaries No. of Employees (5:4:3)
Advertisement Turnover (4:3:2)
Discount allowed Turnover (4:3:2)
Discount received Purchases (3:2:1)
Rent, Rates and Taxes Floor Space occupied (6:5:4)
Depreciation on furniture Value of furniture (2:2:1)
Labour welfare expenses No. of Employees (5:4:3)
Electricity expense Units consumed (3:2:1)
Provision for bad debts Debtors balances (3:2:2)

Computation of Stock Reserve

Question 6.
Goods are transferred from Department P to Department 0 at a price 50% above cost.
If closing stock of Department Q is ₹ 27,000, compute the amount of stock reserve. (2 Marks) (Nov. 2009)
Answer:
Computation of Stock Reserve

Closing stock of Department Q 27,000
Goods sent by Department P to Department Q at a price 50% above cost. Hence, profit of Department P included in the stock will be \( \left(\frac{\text { Rs. } 27,000 \times 50}{150}\right) \) 9,000
Amount of stock reserve will be ₹ 9,000

Question 7.
Department A sells goods to Department B at a profit of 50% on cost and to Department C at 20% on cost. Department B sells goods to A and C at a profit of 25% and 15% respectively on sales. Department C charges 30% and 40% profit on cost to Department A and B respectively.
Stock lying at different departments at the end of the year are as under:
Departmental Accounts – CA Inter Accounts Study Material 16
Calculate the unrealized profit of each department and also total unrealized profit. (4 Marks) (May 2013)
Answer:
Computation of unrealized profit
[for each department and total unrealized profit]
Departmental Accounts – CA Inter Accounts Study Material 17

Question 8.
Department X sells goods to Department Y at a profit of 50% on cost and to Department Z at 20% on cost. Department Y sells goods to Department X and Z at a profit of 25% and 15% respectively on sales. Department Z charges 30% profit on cost to Department X and 40 profit on sale to Y.
Stocks lying at different departments at the end of the year are as under:
Departmental Accounts – CA Inter Accounts Study Material 18
Calculate the unrealized profit of each department and also total unrealized profit. (4 Marks) (Nov. 2017)
Answer:
Computation of unrealized profit
[For each department and total unrealized profit]
Departmental Accounts – CA Inter Accounts Study Material 19
Departmental Accounts – CA Inter Accounts Study Material 20

Departmental Accounts – CA Inter Accounts Study Material

Inter departmental Transfers — Content Ratio and G.P. ratio both given

Question 9.
M/s. AM Enterprise had two departments, Cloth and Readymade Clothes. The readymade clothes were made by the firm itself out of the cloth supplied by the Cloth Department at its usual selling price. From the following figures, prepare Departmental Trading and Profit & Loss Account for the year ended 31st March, 2011:
Departmental Accounts – CA Inter Accounts Study Material 21
In addition to the above, the following information is made available for necessary consideration:

The stock in the Readymade Clothes Department may be considered as consisting of 75% cloth and 25% other expenses. The Cloth Department earned a gross profit at the rate of 15% in 2009-10. General expenses of the business as a whole amount to ₹ 10,85,000. (8 Marks) (Nov. 2011)
Answer:
Departmental Trading and Profit and Loss Account for the year ended 31st March, 2011
Departmental Accounts – CA Inter Accounts Study Material 22
Departmental Accounts – CA Inter Accounts Study Material 23

General Profit and Loss A/c

Departmental Accounts – CA Inter Accounts Study Material 24

Working Note:

Computation of Stock Reserve

Rate of Gross Profit of Cloth Department, for the year 2010-11 \(=\frac{\text { Gross Profit }}{\text { Total Sales }}\) × 100
\(\frac{\text { Rs. } 42,00,000 \times 100}{\text { Rs. }(2,31,00,000+31,50,000}\) × 100 = 16%
Closing Stock of cloth in Readymade Clothes Department = 75%
i. e. ₹ 6,72,000 × 75% = ₹ 5,04,000
Stock Reserve required for unrealized profit @ 16% on closing stock
₹ 5,04,000 × 16% = ₹ 80,640
Stock reserve for unrealized profit included in opening stock of readymade clothes @ 15% i.e.
(₹ 5,32,000 × 75% × 15%) = ₹ 59,850
Additional Stock Reserve required during the year = ₹ 80,640 – ₹ 59,850 = ₹ 20,790.

Departmental Accounts – CA Inter Accounts Study Material

Inter Departmental Transfers — Content Ratio Given But G.P. Ratio Missing

Question 10.
The following balances were extracted from the books of M/s ABC. You are required to prepare Departmental Trading Account and Profit and Loss account for the year ended 31st December, 2018 after adjusting the unrealized department profits if any.
Departmental Accounts – CA Inter Accounts Study Material 25
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. (RTP)
Answer:
Departmental Trading and Loss Account for the year ended 31st December, 2016
Departmental Accounts – CA Inter Accounts Study Material 26

General Profit and Loss A/c
Departmental Accounts – CA Inter Accounts Study Material 27
Departmental Accounts – CA Inter Accounts Study Material 28

Working Notes:

  1. Stock of department A will be adjusted according to the rate applicable to department B = \(\frac{7,50,000}{15,00,000}\) × 100 = 50%
  2. Stock of department B will be adjusted according to the rate applicable to department A = \(\frac{4,00,000}{10,00,000}\) × 100 = 40%

Question 11.
Mega Ltd. has two departments, A and B. From the following particulars, prepare departmental Trading A/c and General Profit & Loss Account for the year ended 31st March, 2014.
Departmental Accounts – CA Inter Accounts Study Material 29
Purchased goods have been transferred mutually at their respective departmental purchase cost and finished goods at departmental market price and that 30% of the closing finished stock with each department represents finished goods received from the other department. (8 Marks) (Nov. 2014)
Answer:
Department Trading Account for the year ended 31st March, 2014
Departmental Accounts – CA Inter Accounts Study Material 30

Departmental Accounts – CA Inter Accounts Study Material

Working Note:

1. Finished goods from other department included in closing stock
Departmental Accounts – CA Inter Accounts Study Material 31

2. Net transfer of Finished Goods
By Department A to B = ₹ (1,75,000 – 45,000) = ₹ 1,30,000
By Department B to A = ₹ (1,50,000 – 32,000) = ₹ 1,18,000

Profit and Loss A/c
For the year ended 31st March, 2014

Departmental Accounts – CA Inter Accounts Study Material 32
Departmental Accounts – CA Inter Accounts Study Material 33

Working Notes :

3. Computation of gross profit ratio
Departmental Accounts – CA Inter Accounts Study Material 34

4. Unrealized profit included in the closing stock
Department A = 27.16% of ₹ 30,600 (30% of Stock of Finished Goods ₹ 1,02,000)
= ₹ 8311.00
Department B = 24.79% of ₹ 18,600 (30% of Stock of Finished Goods ₹ 62,000)
= ₹ 4611.00

Departmental Accounts – CA Inter Accounts Study Material

Question 12.
M/s. Suman Enterprises has two Departments, Finished Leather and Shoes. Shoes are made by the Firm itself out of leather supplied by Leather Department at its usual selling price. From the following figures, prepare Departmental Trading and Profit & Loss Account for the year ended 31st March, 2014:
Departmental Accounts – CA Inter Accounts Study Material 35
The following further information are available for necessary consideration:
(i) The stock in Shoes Department may be considered as consisting of 75% of Leather and 25% of other expenses.
(ii) The Finished Leather Department earned a Gross Profit @ 15% in 2012-13.
(iii) General expenses of the business as a whole amount to t 8,50,000. (8 Marks) (May 2015)
Answer:
Departmental Trading and Profit and Loss Account for the year ended 31st March, 2014
Departmental Accounts – CA Inter Accounts Study Material 36
General Profit and Loss A/c
Departmental Accounts – CA Inter Accounts Study Material 37

Working Note:

Calculation of Stock Reserve

Rate of Gross Profit of Finished leather Department, for the ear 2013-14

\(=\frac{\text { Gross Profit }}{\text { Total Sales }}\) × 100 = [(42,00,000)/(1,80,000 + 30,00,000)] × 100 = 20%

Closing Stock of Finished leather in Shoes Department = 75% i.e. ₹ 5,00,000 × 75% = ₹ 3,75,000
Stock Reserve required for unrealized profit ‘ 20% on closing stock ₹ 3,75,000 × 20% = ₹ 75,000
Stock reserve for unrealized profit included in opening stock of Shoes deptt. ; 15% i.e.
(₹ 4,30,000 × 75% × 15%) = ₹ 48,375
Additional Stock Reserve required during the year = ₹ 75,000 – ₹ 48,375 = ₹ 26,625

Departmental Accounts – CA Inter Accounts Study Material

Question 13.
The following balances were extracted from the books of Beta. You are required to prepare Departmental Trading Account and general Profit & Loss Account for the year ended 31st December, 2016:
Departmental Accounts – CA Inter Accounts Study Material 38
General expenses incurred for both the Departments were ₹ 7,50,000 and you are also supplied with the following information:

  1. Closing stock of Department, A ₹ 6,00,000 including goods from Department B for ₹ 1,20,000 at cost to Department A.
  2. Closing stock of Department B ₹ 12,00,000 including goods from Department A for ₹ 1,80,000 at cost to Department B.
  3. Opening stock of Department A and Department B include goods of the value of ₹ 60,000 and ₹ 90,000 taken from Department B and Department A respectively at cost to transferee departments.
  4. The gross profit is uniform from year to year. (8 Marks) (May 2017)

Answer:
Departmental Trading Account for the year ended on 31st December, 2016
Departmental Accounts – CA Inter Accounts Study Material 39

General profit and loss A/c for the year ended on 31st December, 2016
Departmental Accounts – CA Inter Accounts Study Material 40

Note:
General expenses haven’t been allocated to individual department and is being therefore charged to General Profit and Loss A/c.

Working Notes:
Departmental Accounts – CA Inter Accounts Study Material 41

Departmental Accounts – CA Inter Accounts Study Material

Question 14.
M/s. P have 2 Departments – X and Y. From the following information, prepare departmental Trading A/c and General Profit & Loss Account for the year ended on 31st March 2018.
Departmental Accounts – CA Inter Accounts Study Material 42
Departmental Accounts – CA Inter Accounts Study Material 43

Purchased goods have been transferred mutually at their respective departmental purchase cost and finished goodš at departmental market price and 30% of the closing finished stock with each department represents finished goods received from the other department. (8 Marks) (May 2018)
Answer:
Departmental Trading Account for the year ended 31st March 2018
Departmental Accounts – CA Inter Accounts Study Material 44
Genemi Profit and Loss A/c for the year ended 31st March, 2018
Departmental Accounts – CA Inter Accounts Study Material 45

Working Notes:

1. Computation of gross profit
Departmental Accounts – CA Inter Accounts Study Material 46

Departmental Accounts – CA Inter Accounts Study Material

Final Accounts

Question 15.
Following is the Trial Balance of Mr. A as on 31.03.2017:
Departmental Accounts – CA Inter Accounts Study Material 47
Departmental Accounts – CA Inter Accounts Study Material 48
You are required to prepare Department Trading, Profit and Loss Account and the Balance Sheet taking into account the following adjustments:
(а) Outstanding Wages: Department B – ₹ 150, Department C – ₹ 50.
(b) Depreciate Plant and Machinery and Motor Vehicles at the rate of 10%.
(c) Each Department shall share all expenses in proportion to their sales.
(d) Closing Stock: Department A – ₹ 3,500, Department B – ₹ 2,000, Department C – ₹ 1,500. (RTP)
Answer:
Trading and Profit and Loss Account for the year ended on 31st March, 2017
Departmental Accounts – CA Inter Accounts Study Material 49
Departmental Accounts – CA Inter Accounts Study Material 50

Balance Sheet as at 31.03.2017
Departmental Accounts – CA Inter Accounts Study Material 51

Note:
Allocation of expenses has been done in proportion of sales.

Managers Commission

Question 16.
There is transfer/sale among the three departments as below:
Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at 20% profit on cost.
Department Y sells goods to X and Z at a profit of 15% and 20% on sales respectively.
Department Z charges 20% and 25% profit on cost to Departments X and Y respectively.
Department Managers are entitled to 10% commission on net profit subject to unrealized profit on departmental sales being eliminated.
Departmental profits after charging Managers’ commission, but before adjustment of unrealized profit are as under:
Departmental Accounts – CA Inter Accounts Study Material 52
Stocks lying at different Departments at the end of the year are as under:
Departmental Accounts – CA Inter Accounts Study Material 53
Find out the correct departmental profits after charging Managers’ commission. (8 Marks) (May 2016)
Answer:
Computation of Rectified Profit
Departmental Accounts – CA Inter Accounts Study Material 54
Working Note:
computation of stock reserve on unsold stock
Departmental Accounts – CA Inter Accounts Study Material 55

Departmental Accounts – CA Inter Accounts Study Material

Question 17.
M/s. X and Co., had four departments A, B, C and D. Each department being managed by manager whose commission was 10% of the respective departmental profit, subject to a minimum of ₹ 6,000 in each case. Inter departmental transfers took place at a ‘loaded’ price as follows:
From Department A to Department B 10% abosre cost
From Department A to Department D 20% above cost
From Department C to Department D 20% above cost
From Department C to Department B 20% above cost

For the year ending on 31st March, 2014 the firm had already prepared and closed the departmental Trading and Profit and Loss Account. Subsequently, it was discovered that the closing stocks of departments had included inter departmentally transferred goods at loaded price instead of cost price. From the following information prepare a statement recomputing the departmental profit or loss:
Departmental Accounts – CA Inter Accounts Study Material 56
Answer:
Statement showing Computation of Rectified Profit
Departmental Accounts – CA Inter Accounts Study Material 57
Departmental Accounts – CA Inter Accounts Study Material 58

Working Note:
1. Computation of Manager ‘s Commission:
Departmental Accounts – CA Inter Accounts Study Material 59
2. Computation of Unrealized Profit:
Departmental Accounts – CA Inter Accounts Study Material 60

Question 18.
Department R sells goods to Department S at a profit of 25% on cost and Department T at 10% profit on cost. Department S sells goods to R and T at a profit of 15% and 20% on sales respectively. Department T charges 20% and 25% profit on cost to Department R and S respectively.
Department managers are entitled to 10% commission on net profit subject to unrealized profit on departmental sales being eliminated. Departmental profits after charging manager’s commission, but before adjustment of unrealized
Departmental Accounts – CA Inter Accounts Study Material 61
Stock lying at different departments at the end of the year are as under:
Departmental Accounts – CA Inter Accounts Study Material 62
Find out the correct departmental profits after charging manager’s commission. (8 Marks) (Nov. 2010)
Answer:
Computation of Rectified Profit
Departmental Accounts – CA Inter Accounts Study Material 63

Working Notes:

Computation of unrealised profit

Departmental Accounts – CA Inter Accounts Study Material 64

Question 19.
Department A sells goods to Department B at a profit of 20% on cost and Department C at 15% profit on cost. Department B sells goods to A and C at a profit of 10% and 20% on sales respectively. Department C sells goods to A and B at 15% and 10% profit on cost respectively.

Departmental managers are entitled to 10% commission on net profit subject to unrealized profit on departmental sales being eliminated. Departmental profits after charging manager’s commission, but before adjustment of unrealized profit are as under:
Departmental Accounts – CA Inter Accounts Study Material 65
Stock lying at different departments at the end of the year are as below:
Departmental Accounts – CA Inter Accounts Study Material 66
Find out correct departmental profits after charging manager’s commission. (8 Marks) (Nov. 2012)
Answer:
Computation of Rectified Profit
Departmental Accounts – CA Inter Accounts Study Material 67
Working Note:
Departmental Accounts – CA Inter Accounts Study Material 68

Departmental Accounts – CA Inter Accounts Study Material

Question 20.
Department P sells goods to Department S at a profit of 25% on cost and to Department Q at a profit of 15% on cost. Department S sells goods to P and 0 at a profit of 20% and 30% on sales respectively. Department 0 sells goods to P and S at 20% and 10% profit on cost respectively.

Departmental Managers are entitled to 10% commission on net profit subject to unrealized profit on departmental sales being eliminated. Departmental profits after charging Manager’s commission, but before adjustment of unrealized profits are as below:
Departmental Accounts – CA Inter Accounts Study Material 69
Stock lying at different Departments at the end of the year are as below:
Departmental Accounts – CA Inter Accounts Study Material 70
Find out correct Departmental Profits after charging Managers’ Commission. (8 Marks) (May 2014)
Answer:
Computation of rectified profits
Departmental Accounts – CA Inter Accounts Study Material 71

Working Notes:
Departmental Accounts – CA Inter Accounts Study Material 72

Question 21.
Axe Limited has four departments, A, B, C and D. Department A sells goods to other departments at a profit of 25% on cost. Department B sells goods to other department at a profit of 30% on sales. Department C sells goods to other departments at a profit of 10% on cost. Department D sells goods to other departments at a profit of 15% on sales.
Stock lying at different departments at the year-end was as follows:
Departmental Accounts – CA Inter Accounts Study Material 73
Departmental managers are entitled to 10% commission on net profit subject to unrealized profit on departmental sales being eliminated.
Departmental profits after charging manager’s commission, but before adjustment of unrealized profit are as under:
Departmental Accounts – CA Inter Accounts Study Material 74
Calculate the correct departmental profits after charging Manager’s commission. (5 Marks) (Nov. 2018)
Answer:
Computation of Rectified Profits
Departmental Accounts – CA Inter Accounts Study Material 75
Departmental Accounts – CA Inter Accounts Study Material 76

Working Note:

Stock Reserve on stock lying unsold
Departmental Accounts – CA Inter Accounts Study Material 77

Departmental Accounts – CA Inter Accounts Study Material

Memorandum Accounts

Question 22.
Martis Ltd. has several departments. Goods supplied to each department are debited to a Memorandum Departmental Stock Account at cost, plus a fixed percentage (mark-up) to give the normal selling price. The mark-up is credited to a memorandum departmental Mark-up account’, any reduction in selling prices (mark-down) will require adjustment in the stock account and in mark-up account. The mark-up for Department A for the last three years has been 25%. Figures relevant to Department A for the year ended 31st March, 2013 were as follows:
Opening stock as on 1st April, 2012, at cost ₹ 65,000
Purchase at cost ₹ 2,00,000
Sales ₹ 3,00,000

It is further ascertained that:

  1. Shortage of stock found in the year ending 31.03.2013, costing ₹ 1,000 were written off.
  2. Opening stock on 01.04.2012 IncludIng goods costing ₹ 6,000 had been sold during the year and had been marked down in the selling price by ₹ 600. The remaining stock had been sold during the year.
  3. Goods purchased during the year were marked down by ₹ 1,200 from a cost of ₹ 15,000. Marked-down stock costing ₹ 5,000 remained unsold on 31.03.2013.
  4. The departmental closing stock is to be valued at cost subject to ad-justment for mark-up and mark-down.

You are required to prepare:

(i) A Departmental Trading Account for Department A for the year ended 31st March, 2013 in the books of Head Office.
(ii) A Memorandum Stock Account for the year.
(iii) A Memorandum Mark-up Account for the year. (12 Marks) (Nov. 2013)

Answer:
(i) Department Trading Account

For the year ending on 31.03.2013
Departmental Accounts – CA Inter Accounts Study Material 78

(ii) Memorandum stock account
(for Department A – at selling price)
Departmental Accounts – CA Inter Accounts Study Material 79

(iii) Memorandum Departmental Mark-up Account

Departmental Accounts – CA Inter Accounts Study Material 80
* [₹ 1,200 × 5,000/15,000] = 400

Working Notes:

(i) Computation of Cost of Sales
Departmental Accounts – CA Inter Accounts Study Material 81

(ii) Computation of Closing Stock
Departmental Accounts – CA Inter Accounts Study Material 82

Departmental Accounts – CA Inter Accounts Study Material

Question 23.
R Limited is a retail organization with several departments. Goods supplied to each department are debited to a Memorandum Departmental Stock Account at cost, plus fixed percentage (mark-up) to give the normal selling price. The mark up is credited to a Memorandum Departmental ‘Mark-up Account’. Any reduction in selling prices (mark-down) will require adjustment in the stock account and in mark-up account. The mark up for Department A for the last three years has been 40%. Figures relevant to Department A for the ended 31st March, 2016 were as follows:
Stock 1st April, 2015 at cost, ₹ 2,40,000, Purchases at cost ₹ 5,40,000, Sales ₹ 9,60,000. It is further ascertained that:
(a) Goods purchased in the period were marked-down by ₹ 4,200 from a cost of ₹ 48,000. Marked-down stock costing ₹ 12,000 remained unsold on 31st March, 2016.
(b) Stock shortages at the year end, which had cost ₹ 3,600 were to be written off.
(c) Stock at 1st April, 2015 including goods costing ₹ 24,600 had been sold during the year and has been mark-down in the selling price by ₹ 2,220. The remaining stock had been sold during the year.
(d) The departmental closing stock is to be valued at cost subject to adjustments for mark-up and mark-down.

Required: Prepare

(i) Departmental Trading Account
(ii) Memorandum Stock Account
(iii) Memorandum Mark-up Account for the year 2015-2016. (RTF)

Answer:
Departmental Trading Account for the year ending on 31st March, 2016
Departmental Accounts – CA Inter Accounts Study Material 83

Memorandum Departmental Stock Account (At Selling Price)
Departmental Accounts – CA Inter Accounts Study Material 84
Departmental Accounts – CA Inter Accounts Study Material 85

Memorandum Departmental Mark-up Account
Departmental Accounts – CA Inter Accounts Study Material 86
*[₹ 4200 × 12,000/48,000 = 1,050]

Working Notes:
Departmental Accounts – CA Inter Accounts Study Material 87

Question 24.
M/s. Sham Udyog, a retail store, has two departments, Department X and Department Y for each of which stock account and memorandum ‘mark-up’ account are kept. All the goods supplied to each department are debited to the stock account at cost plus a ‘mark-up’, which together make-up the selling price of the goods and in the account the sale proceeds of the goods are credited. The amount of ‘mark-up’ is credited to the Departmental Mark-up Account. If the selling price of any goods is reduced below its normal selling price, the reduction ‘marked-down’ is adjusted both in the Stock Account and the Departmental Mark-up Account. The rate of ‘Mark-up’ for X Department is 33-1/3% of the cost and for Y Department it is 50% of the cost.
The following figures have been taken from the books for the year ended March, 2016:
Departmental Accounts – CA Inter Accounts Study Material 88

  1. The stock of Department X on April 1, 2015 included goods the selling price of which had been marked-down by ₹ 37,800, These goods were sold during the year at the reduced prices.
  2. Certain stock of the value of ₹ 2,07,000 purchased from the Department X was later in the year transferred to the Department Y and sold for ₹ 31,05,000. As a result, though cost of the goods is included in the Department X the sale proceeds have been credited to the Department Y.
  3. During the year 2015-16 to promote the goods, they were marked-down as follows:
    Departmental Accounts – CA Inter Accounts Study Material 89
    All the goods marked-down, w ere sold except of Department Y of the value of ₹ 1,50,000 marked-down by ₹ 30,000.
  4. At the time of stock taking on 31st March, 2016, it was discovered that cloth of Department X of the cost of ₹ 11,700 was missing and it was decided that the amount be written-off.

You are required to prepare for both the departments for the year ended 31st March, 2016:
(a) The Memorandum Stock Account; and
(b) The Memorandum Mark-up Account. (8 Marks) (Nov. 2016)

Answer:

Department X Memorandum Stock A/c
Departmental Accounts – CA Inter Accounts Study Material 90
Department X Memorandum Mark-up Account
Departmental Accounts – CA Inter Accounts Study Material 91

Working Note:

Departmental Accounts – CA Inter Accounts Study Material 92

Department Y Memorandum Stock Account
Departmental Accounts – CA Inter Accounts Study Material 93
Departmental Accounts – CA Inter Accounts Study Material 94

Department Y Memorandum Mark-Up Account
Departmental Accounts – CA Inter Accounts Study Material 95

Working Notes:

Departmental Accounts – CA Inter Accounts Study Material 96

AS 11: The Effects of Changes in Foreign Exchange Rates – CA Inter Accounts Study Material

AS 11: The Effects of Changes in Foreign Exchange Rates – CA Inter Accounts Study Material is designed strictly as per the latest syllabus and exam pattern.

AS 11: The Effects of Changes in Foreign Exchange Rates – CA Inter Accounts Study Material

Monetary And Non Monetary Items (Based On Para No. 7)

Question 1.
Explain ‘monetary item’ as per Accounting Standard 11. How are foreign currency monetary items to be recognized at each Balance Sheet date? Classify the following as monetary or non-monetary item: (4 Marks) (May 2013)

  1. Share Capital
  2. Trade Receivables
  3. Investments
  4. Fixed Assets.

Answer:
As per AS 11 ‘The Effects of Changes in Foreign Exchange Rates’ Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money.

Foreign currency monetary items should be reported using the closing rate at each balance sheet date. However, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amount in reporting currency that is likely to be realised from, or required to disburse, a foreign currency monetary item at the balance sheet date. In such circumstances, the relevant monetary item should be reported in the reporting currency at the amount which is likely to be realised from or required to disburse, such item at the balance sheet date.

Share capital – Non-monetary
Trade receivables – Monetary
Investments – Non-monetary
Fixed assets – Non-monetary

AS

Foreign Currency Transactions (Based On Para Nos. 8 To 14)

Question 2.
A Ltd. purchased fixed assets costing ₹ 6,000 lakhs on 1.1.2010. This was financed by foreign currency loan (U.S. Dollars) payable in three annual equal instalments. Exchange rates were 1 Dollar = ₹ 40 and ₹ 45 as on 1.1.2010 and 31.12.2010 respectively. First instalment was paid on 31.12.2010.
You are required to state, how these transactions would be accounted for?
Answer:
As per para 13 of AS 11 (Revised) ‘The Effects of Changes in Foreign Exchange Rates’, exchange differences arising on the settlement of monetary items or on reporting an enterprise’s monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should he recognised as income or as an expense in the period in which they arise. Tims, exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets cue recognised as income or expenses.

Computation of exchange difference:
Foreign Exchange Loan = \(\frac{6000}{40}\) = US $ 150 lakhs
Exchange Difference = US $ 150 lakhs × (45 – 40) = ₹ 750 lakhs.
Loss due to exchange difference amounting ₹ 750 lakhs should be charged to profit and loss account for the year ended 31st December, 2010.

AS

Question 3.
AS 11 The Effects of Changes in Foreign Exchange Rates - CA Inter Accounts Study Material 1
Ascertain the loss/gain for financial years 2010-11 and 2011-12, also give their treatment as per AS 11.
Answer:
Av 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 1.1.2011 and corresponding creditor would be recorded at ₹ 4,50,000 (i.e. $10,000 × ₹ 45)

Balance Sheet Date:
According to the standard, at the balance sheet date all monetary transactions should be reported using the closing rate.
Thus, creditor of US $10,000 on 31.3.2011 will be reported at ₹ 4,40,000 (i.e. $10,000 × ₹ 44) and exchange profit of ₹ 10,000 (i.e. 4,50,000 – 4,40,000) should be credited to Profit and Loss account in the year 2010-11.

Payment Date:
On 7.7.2011, creditor of $10,000 is paid at the rate of ₹ 43. As per AS 11, exchange difference on settlement of the account should also be transferred to Profit and Loss account.

Therefore, ₹ 10,000 (i.e. 4,40,000 – 4,30,000) will be credited to Profit and Loss account in the year 2011-12.

AS

Question 4.
S Limited imported raw materials worth US Dollars 9,000 on 25th February, 2011, when the exchange rate was ₹ 44 per US Dollar. The transaction was recorded in the books at the above-mentioned rate. The payment for the transaction was made on 10th April, 2011, when the exchange rate was ₹ 48 per US Dollar. At the year end 31st March, 2011, the rate of exchange was ₹ 49 per US Dollar.

The Chief Accountant of the company passed an entry on 31st March, 2011 adjusting the cost of raw material consumed for the difference between ₹ 48 and ₹ 44 per US Dollar. Discuss whether this treatment is justified as per the provisions of AS-11 (Revised).
Answer:
As per para 9 of AS 11, ‘The Effects of Changes in Foreign Exchange Rates’, initial recognition of a foreign currency transaction is done in the reporting currency by applying the exchange rate at the date of the transaction.

Date of Transaction:
Accordingly, on 25th February 2011, the raw material purchased and its creditors will be recorded at US dollar 9,000 × ? 44 = ₹ 3,96,000.

Balance Sheet Date:
As per para 11 of the standard, on balance sheet date such transaction is reported at closing rate of exchange, hence it will be valued at the closing rate i.e. ? 49 per US dollar (USD 9,000 × ₹ 49 = ₹ 4,41,000) at 31st March, 2011, irrespective of the payment made for the same subsequently at lower rate in the next financial year.

The difference of ₹ 5 (49 – 44) per US dollar i.e. ₹ 45,000 (USD 9,000 × ₹ 5) will be shown as an exchange loss in the profit and loss account for the year ended 31st March, 2011 and will not be adjusted against the cost of raw materials.

Subsequent Measurement:
In the subsequent year on settlement date, the company would recognize or provide in the Profit and Loss account an exchange gain of ₹ 1 per US dollar, i.e. the difference from balance sheet date to the date of settlement between ₹ 49 and ₹ 48 per US dollar i.e. ₹ 9,000.

Hence, the accounting treatment adopted by the Chief Accountant of the company is incorrect i.e. it is not in accordance with the provisions of AS 11.

AS

Question 5.
A Ltd. borrowed US $ 5,00,000 on 31-12-2012 which will be repaid (settled) as on 30-6-2013. A Ltd. prepares its financial statements ending on 31-3-2013. Rate of exchange between reporting currency (Rupee) and foreign currency (US $) on different dates are as under:
31-12-2012 – 1 US $ = ₹ 44.00
31-3-2013 – 1 US $ = ₹ 44.50
30-6-2013 – 1 US $ = ₹44.75
Calculate borrowings in reporting currency to be recognised in the books on above mentioned dates & also show journal entries for the same. (RTP)
Answer:
As per para 9 of AS 11 ‘The Effects of Changes in Foreign Exchange Rates ’ a foreign currency transaction should be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. Accordingly, on 31.12.2012, borrowings will be recorded at ₹ 2,20,00,000 (i.e. $ 5,00,000 × ₹ 44.00)

As per para 11(a) of the standard, at each balance sheet date, foreign currency monetary items should be reported using the closing rate.

Accordingly, on 31.03.2013, borrowings (monetary items) will be recorded at ₹ 2,22,50,000 (i.e. $ 5,00,000 × ₹ 44.50).
Journal Entries
AS 11 The Effects of Changes in Foreign Exchange Rates - CA Inter Accounts Study Material 2

Working Notes:

  1. The exchange difference of ₹ 2,50,000 is arising because the transaction has been reported at different rate 44.50 = 1 US $) from the rate initially recorded (i.e. ₹ 44 = 1 US $).
  2. The exchange difference of ₹ 1,25,000 is arising because the transaction has been settled at an exchange rate 44.75 = 1 US $) different from the rate at which reported in the last financial statement 44.50= 1 US $).

AS

Question 6.
A company had imported raw materials worth US Dollars 6,00,000 on 5th January, 2017, when the exchange rate was ₹43 per US Dollar. The company had recorded the transaction in the books at the above mentioned rate. The payment for the import transaction was made on 5th April, 2017 when the exchange rate was ₹ 47 per US Dollar. However, on 31st March, 2017, the rate of exchange was ₹ 48 per US Dollar. The company passed an entry on 31st March, 2017 adjusting the cost of raw materials consumed for the difference between ₹ 47 and ₹ 43 per US Dollar.

In the background of the relevant accounting standard, is the company’s accounting treatment correct? Discuss. (RTP)
Answer:
As per AS 11 (revised 2003), ‘The Effects of Changes in Foreign Exchange Rates’, monetary items denominated in a foreign currency should be reported using the closing rate at each balance sheet date. The effect of exchange difference should be taken into profit and loss account.

Trade payables is a monetary item, hence should be valued at the closing rate i.e., ₹ 48 at 31st March, 2014 irrespective of the payment for the same subsequently at lower rate in the next financial year. The difference of ₹ 5 (₹ 48 less ₹ 43) per US dollar should be shown as an exchange loss in the profit and loss account for the year ended 31st March, 2014 and is not to be adjusted against the cost of raw materials.

In the subsequent year, the company would record an exchange gain of ₹ 1 per US dollar, i.e., the difference between ₹ 48 and ₹ 47 per US dollar. Hence, the accounting treatment adopted by the company is incorrect.

AS

Question 7.
Sunshine Company Limited imported raw materials worth US Dollars 9,000 on 25th February, 2011, when the exchange rate was ₹ 44 per US Dollar. The transaction was recorded in the books at the above mentioned rate. The payment for the transaction was made on 10th April, 2011, when the exchange rate was ₹ 48 per US Dollar. At the year end 31st March, 2011, the rate of exchange was ₹ 49 per US Dollar.

The Chief Accountant of the company passed an entry on 31st March, 2011 adjusting the cost of raw material consumed for the difference between ₹ 48 and ₹ 44 per US Dollar. Discuss whether this treatment is justified as per the provisions of AS-11 (Revised). (4 Marks) (Nov. 2011)
Answer:
As per para 9 of AS 11, ‘The Effects of Changes in Foreign Exchange Rates’, initial recognition of a foreign currency transaction is done in the reporting currency by applying the exchange rate at the date of the transaction.

Date of Transaction:
Accordingly, on 25th February 2011, the raw material purchased and its creditors will be recorded at US dollar 9,000 × ₹ 44 = ₹ 3,96,000.

Balance Sheet Date:
As per para 11 of the standard, on balance sheet date such transaction is reported at closing rate of exchange, hence it will be valued at the closing rate i.e. ₹ 49 per US dollar (USD 9,000 × ₹ 49 = ₹ 4,41,000) at 31st March, 2011, irrespective of the payment made for the same subsequently at lower rate in the next financial year.

The difference of ₹ 5 (49 – 44) per US dollar i.e. ₹ 45,000 (USD 9,000 × ₹ 5) will be shown as an exchange loss in the profit and loss account for the year ended 31st March, 2011 and will not be adjusted against the cost of raw materials.

Subsequent Measurement:
In the subsequent year on settlement date, the company would recognize or provide in the Profit and Loss account an exchange gain of ₹ 1 per US dollar, i.e. the difference from balance sheet date to the date of settlement between ₹ 49 and ₹ 48 per US dollar i.e. ₹ 9,000.

Hence, the accounting treatment adopted by the Chief Accountant of the company is incorrect i.e. it is not in accordance with the provisions of AS 11.

AS

Question 8.
AS 11 The Effects of Changes in Foreign Exchange Rates - CA Inter Accounts Study Material 3
You are required to ascertain the loss/gain for financial years 2016-17 and 2017-18, also give their treatment as per AS 11. (RTP)
Answer:
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.

Date of Transaction:
Thus, goods purchased on 1.1.2017 and corresponding creditor would be recorded at ₹ 11,25,000 (i.e. $15,000 × ₹ 75)

Balance Sheet Date:
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.

Date of Payment:
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.

AS

Question 9.
ABC Ltd. borrowed US $ 5,00,000 on 01/07/2017, which was repaid as on 31 /07/2017. ABC Ltd. prepares financial statement ending on 31 /03 /2017. Rate of Exchange between reporting currency (INR) and foreign currency (USD) on different dates are as under:
AS 11 The Effects of Changes in Foreign Exchange Rates - CA Inter Accounts Study Material 4
You are required to pass necessary journal entries in the books of ABC Ltd. as per AS11. (5 Marks) (May 2018)
Answer:
Journal Entries
AS 11 The Effects of Changes in Foreign Exchange Rates - CA Inter Accounts Study Material 5

AS

Foreign Operations – Classification (Based On Para Nos. 17 To 20)

Question 10.
‘Assets and liabilities and income and expenditure items in respect of dependent foreign branches are translated into Indian rupees at the prevailing rate of exchange at the end of the year. The resultant exchange differences in the case of profit, is carried to other Liabilities Account and the Loss, if any, is charged to revenue.’ Comment. (RTP)
Answer:
The financial statements of an integral foreign operation (dependent foreign branches) should be translated using the principles and procedures described in paragraphs 8 to 16 of AS 11 The Effects of Changes in Foreign Exchange Rates’ (Revised 2003). 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 transaction. For practical reasons, a rate that approximates the actual rate at the date of transaction 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 foreign 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 are carried in terms of historical cost denominated in a foreign currency should be reported 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 valuation. The cost of inventories is translated at the exchange rates that existed when the cost of inventory was incurred and realizable value is translated applying exchange rate when realizable value is determined which is generally closing rate.

Exchange difference arising on the translation of the financial statements of integral foreign operation should be charged to profit and loss account. Thus, the treatment by the management of translating 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 11 (Revised 2003).

AS

Question 11.
Stem Ltd. purchased a Plant for US$ 30,000 on 30th November, 2013 payable after 6 months. The company entered into a forward contract for 6 months @ ₹ 62.15 per dollar. On 30th November, 2013; the exchange rate was ₹ 60.75 per dollar.

How will you recognise the profit or loss on forward contract in the books of Stem Ltd. for the year ended 31st March, 2014? (5 Marks) (Nov 2014)
Answer:
Computation of Profit or Loss:
AS 11 The Effects of Changes in Foreign Exchange Rates - CA Inter Accounts Study Material 6
Out of total contract period of 6 months, 4 months are falling in the financial year 2013-14. Loss for the period from 1st Dec. 2013 to 31st March, 2014= (₹ 42,000/6) × 4 = ₹ 28,000.

Thus, the loss amounting to ₹ 28,000 for the period is to be recognised in the year 2013-14.

Question 12.
With reference to AS 11, define the following:
(i) Integral Foreign Operation.
(ii) Non-Integral Foreign Operation. (4 Marks) (Nov. 2016)
Answer:
Integral Foreign Operation (IFO):
It is a foreign operation, the activities of which are an integral part of those of the reporting enterprise. The business of IFO is carried on as if it were an extension of the reporting enterprise’s operations. Generally, IFO carries on business in a single foreign currency, i.e. of the country where it is located. For example, sale of goods imported from the reporting enterprise and remittance of proceeds to the reporting enterprise.

Non-Integral Foreign Operation (NFO):
It is a foreign operation that is not an Integral Foreign Operation. The business of a NFO is carried on in a substantially independent way by accumulating cash and other monetary items, incurring expenses, generating income and arranging borrowing in its local currency.

An NFO may also enter transactions in foreign currencies, including transactions in the reporting currency. An example of NFO may be production in a foreign currency out of the resources available in such country independent of the reporting enterprise.

AS

Question 13.
What are the indicators of Non-Integral Foreign Operation (NFO)? (4 Marks) (Nov. 2014)
Answer:
The following are the indicators of Non-Integral Foreign Operations (NFO):

  1. While the reporting enterprise may control the foreign operation, the activities of foreign operations are carried independently without much dependence on reporting enterprise.
  2. Transactions with the reporting enterprise are not a high proportion of the foreign operation’s activities.
  3. Activities of foreign operation are mainly financed by its operations or from local borrowings. In other words, it raises finance independently and is in no way dependent on reporting enterprises.
  4. Foreign operation’s sales are mainly in currencies other than reporting currency.
  5. Day-to-day cash flow of the reporting enterprises is independent of the foreign operation’s cash flow.
  6. Sales price of the foreign operations are not affected by the day-to-day changes in exchange rate of the reporting currency but determined more by local competition or local government regulations.
  7. There is an active local sales market for the foreign operation’s product, although there may be significant amount of exports.
  8. Costs of labour, material and other components of foreign operation’s products or services are primarily paid or settled in the local currency rather than in the reporting currency.

Forward Exchange Contracts (Based On Para Nos. 36 To 39)

Question 14.
P Ltd. purchased a plant for US$ 50,000 on 31st October, 2016 payable after 6 months. The company entered into a forward contract for 6 months @ ₹ 64.25 per Dollar. On 31st October, 2016, the exchange rate was ₹ 61.50 per Dollar.

You are required to recognize the profit or loss on forward contract in the books of the company for the year ended 31st March, 2017. (RTP)
Answer:
Computation of profit or loss:
AS 11 The Effects of Changes in Foreign Exchange Rates - CA Inter Accounts Study Material 7
Thus, the loss amounting to ₹ 1,14,583 for the period is to be recognized in the year ended 31st March, 2017.

AS

Question 15.
Sterling Ltd. purchased a plant for US $ 20,000 on 31st December, 2007 payable after 4 months. The company entered into a forward contract for 4 months @ ₹ 48.85 per dollar. On 31st December, 2007, the exchange rate was ₹ 47.50 per dollar.

How will you recognize the profit or loss on forward contract in the books of Sterling Limited for the year ended 31st March, 2008. (2 Marks) (Nov. 2009)
Answer:
Calculation of profit or loss to be recognised in the books of Sterling Limited
AS 11 The Effects of Changes in Foreign Exchange Rates - CA Inter Accounts Study Material 8
Balance loss of ₹ 6,750 (i.e. ₹ 27,000 – ₹ 20,250) for the month of April, 2008 will be recognised in the financial year 2008-2009.

Question 16.
Power Track Ltd. purchased a plant for US$ 50,000 on 31st October, 2015 payable after 6 months. The company entered into a forward contract for 6 months @ ₹ 64.25 per Dollar. On 31st October, 2015, the exchange rate was ₹ 61.50 per Dollar.

You are required to recognise the profit or loss on forward contract in the books of the company for the year ended 31st March, 2016. (5 Marks) (May 2016)
Answer:
Computation of profit or loss:
AS 11 The Effects of Changes in Foreign Exchange Rates - CA Inter Accounts Study Material 9
Thus, the loss amounting to ₹ 1,14,583 for the period is to be recognized in the year ended 31st March, 2016.

AS

Question 17.
AXE Limited purchased fixed assets costing $ 5,00,000 on 1st Jan. 2018 from an American company M/s M&M Limited. The amount was payable after 6 months. The company entered into a forward contract on 1st January 2018 for five months @ ₹ 62.50 per dollar. The exchange rate per dollar was as follows:

On 1st January, 2018 ₹ 60.75 per dollar
On 31st March, 2018 ₹ 63.00 per dollar

You are required to state how the profit or loss on forward contract would be recognized in the books of AXE Limited for the year ending 2017-18, as per the provisions of AS 11.
Answer:
As per AS 11 ‘The Effects of Changes in Foreign Exchange Rates’, an enterprise may enter into a forward exchange contract to establish the amount of the reporting currency required, the premium or discount arising at the inception of such a forward exchange contract should be amortized as expenses or income over the life of the contract.
AS 11 The Effects of Changes in Foreign Exchange Rates - CA Inter Accounts Study Material 10

AS

Contract period 5 months
3 months are falling in the year 2017-18;
Therefore, loss to be recognized in 2017-18 (8,75,000/5) × 3 = ₹ 5,25,000. Rest ₹ 3,50,000 will be recognized in the following year 2018-19.

Exchange Gain/Loss On Long Term Foreign Currency Mon-Etary Items (Based On Para Nos. 46 And 46a)

Question 18.
Explain briefly the accounting treatment needed in the following cases as per AS 11:
(i) Sundry Debtors include amount receivable from Ted of U.S., ₹ 5,00,000 recorded at the prevailing exchange rate on the date of sales, transaction recorded at $1 = ₹ 38,70.
(ii) Long term loan taken from a U.S. Company, amounting to ₹ 60,00,000. It was recorded at $1 = ₹ 35.60, taking exchange rate prevailing at the date of transactions.
Exchange rates at the end of the year were as under:
$1 Receivable = ₹ 45.80
$1 Payable = ₹ 45.90 (RTP)
Answer:
AS 11 ‘The Effects of Changes in Foreign Exchange Rates’ provides that exchange differences attributable to monetary items should be taken to Statement of Profit and Loss. In case the option under para 46A is exercised, the exchange differences arising on long-term foreign currency monetary items can be adjusted in the cost of the depreciable capital asset or in other cases transferred in Foreign Currency Monetary Item Translation Difference Account (.FCMITD) and amortised.

(i) Sundry Debtors:
AS 11 The Effects of Changes in Foreign Exchange Rates - CA Inter Accounts Study Material 11

(ii) Long Term loan
AS 11 The Effects of Changes in Foreign Exchange Rates - CA Inter Accounts Study Material 12

AS

Question 19.
Beekay Ltd. purchased fixed assets costing ₹ 5,000 lakh on 01.04.2012 payable in foreign currency (US$) on 05.04.2013. Exchange rate of 1 US$ = ₹ 50.00 and ₹ 54.98 as on 01.04.2012 and 31.03.2013 respectively.

The company also obtained a soft loan of US$ 1 lakh on 01.04.2012 payable in three annual equal instalments. First instalment was due on 01.05.2013.

You are required to state, how these transactions would be accounted for in the books of account ending 31st March, 2013. (5 Marks) (Nov. 2013)
Answer:
Ministry of Corporate Affairs has amended AS 11 through a notification. As per the notification, exchange difference arising on reporting of long-term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, in so far as they relate to requisition of depreciable capital asset, can be added to or deducted from cost of asset.

The MCA has given an option for the enterprises to capitalize the exchange differences arising on reporting of long- term foreign currency monetary items till 31 st March, 2020. Thus, the company can capitalize the exchange differences arising due to long term loans-linked with the acquisition of fixed assets.

Transaction 1:
Calculation of exchange difference on fixed assets
Foreign Exchange Liability = \(\frac{5000}{50}\) = US $ 100 lakhs
Exchange Difference = US $ 100 lakhs × (₹ 54.98 – ₹ 50) = ₹ 498 lakhs.
Loss due to exchange difference amounting 498 lakhs will be capitalised and added in the carrying value of fixed assets. Depreciation on the unamortised amount will be provided in the remaining years.

Transaction 2:
Soft loan exchange difference (US $ 1 lakh i.e. ₹ 50 lakhs)
Value of loan 31.3.13 – US $ 1 lakh × 54.98 = ₹ 54,98,000
AS 11 also provides that in case of liability designated as long-term foreign currency monetary item, the exchange difference is to be accumulated in the Foreign Currency Monetary Item Translation Difference (FCMITD) and should be written off over the useful life of such long-term liability, by recognition as income or expenses in each of such periods.

Exchange difference between reporting currency (INR) and foreign currency (USD) as on 31.03.2013 = US$1.00 lakh × ₹ (54.98 – 50) = ₹ 4.98 lakh.

Loan account is to be increased to 54.98 lakh and FCMITD account is to be debited by 4.98 lakh. Since loan is repayable in 3 equal annual instalments, ₹ 4.98 lakh/3 = ₹ 1.66 lakh is to be charged in Profit and Loss Account for the year ended 31st March, 2013 and balance in FCMITD A/c ₹ (4.98 lakh – 1.66 lakh) = ₹ 3.32 lakh is to be shown on the ‘Equity & Liabilities’ side of the Balance Sheet as a negative figure under the head ‘Reserve and Surplus’ as a separate line item.

AS

Question 20.
(i) ABC Ltd. an Indian Company obtained long term loan from WWW Private Ltd., a U.S. company amounting to ₹ 30,00,000. It was recorded at US $1 = ₹ 60.00, taking exchange rate prevailing at the date of transaction. The exchange rate on balance sheet date (31.03.2018) was US $1 = ₹ 62.00.

(ii) Trade receivable includes amount receivable from Preksha Ltd., ₹ 10,00,000 recorded at the prevailing exchange rate on the date of sales, transaction recorded at US $1 = ₹ 59.00. The exchange rate on balance sheet date (31.03.2018) was US $1 = ₹ 62.00.

You are required to calculate the amount of exchange difference and also explain the accounting treatment needed in the above two cases as per AS 11 in the books of ABC Ltd. (5 Marks) (Nov. 2018)
Answer:
Computation of Exchange difference and its Accounting Treatment
AS 11 The Effects of Changes in Foreign Exchange Rates - CA Inter Accounts Study Material 13
Note:
Exchange Difference on Long term loan amounting ₹ 1,00,000 may either be charged to Profit and Loss A/c or to Foreign Currency Monetary Item Translation Difference Account but exchange difference on trade receivables amounting ₹ 50,847.456 is required to be transferred to Profit and Loss A/c.

Redemption of Preference Shares – CA Inter Accounts Study Material

Redemption of Preference Shares – CA Inter Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Redemption of Preference Shares – CA Inter Accounts Study Material

Theory Questions

Question 1.
Explain the conditions when a company should issue new equity shares for redemption of the preference shares. Also discuss the advantages and disadvantages of redemption of preference shares by issue of equity shares. (4 Marks) (November 2018)
Answer:
A company may prefer issue of new equity shares in the following situations:
(a) When the company realizes that the capital is needed permanently and it makes more sense to issue Equity Shares in place of Redeemable Preference Shares which carry a fixed rate of dividend.
(b) When the balance of profit, which would otherwise be available for dividend, is insufficient.
(c) When the liquidity position of the company is not good enough.

Advantages of redemption of preference shares by issue of fresh equity shares

  1. No cash outflow of money is required – now or later.
  2. New equity shares may be valued at a premium.
  3. Shareholders retain their equity interest.

Disadvantages of redemption of preference shares by issue of fresh equity shares

  1. There will be dilution of future earnings;
  2. Shareholding in the company is changed.

Computation Of No. Of Shares To Be Issued For Redemption Of Preference Shares

Question 2.
The Board of Directors of a Company decide to issue minimum number of equity shares of ₹ 9 to redeem ₹ 5,00,000 preference shares. The maximum amount of divisible profits available for redemption is ₹ 3,00,000.

Calculate the number of shares to be issued by the company to ensure that provisions of Section 55 are not violated. Also determine the number of shares if the company decides to issue shares in multiples of ₹ 50 only.
Answer:
Nominal value of preference shares ₹ 5,00,000
Maximum possible redemption out of profits ₹ 3,00,000
Minimum proceeds of fresh issue ₹ 5,00,000 – 3,00,000 = ₹ 2,00,000
Proceed of one share = ₹ 9
Minimum number of shares = \(\frac{2,00,000}{9}\) = 22,222.22 shares
As fractional shares cannot be issued, the minimum number of shares to be issued is rounded off to higher side i.e. 22,223 shares.

Note:
If shares are to be issued in multiples of 50, then the next higher figure which is a multiple of 50 is 22,250.

Redemption of Preference Shares – CA Inter Accounts Study Material

Basic Questions

Question 3.
Dheeraj Limited had 5,000, 10% Redeemable Preference Shares of ₹ 100 each, fully paid up. The company had to redeem these shares at a premium of 10%.

It was decided by the company to issue the following:

  1. 40,000 Equity Shares of ₹ 10 each at par
  2. 2,000 12% Debentures of ₹ 700 each.

The issue was fully subscribed and all amounts were received in full. The payment was duly made. The company had sufficient profits. Show journal entries in the books of the company. (10 Marks) (May 2018)
Answer:
Journal Entries
Redemption of Preference Shares – CA Inter Accounts Study Material 1
Redemption of Preference Shares – CA Inter Accounts Study Material 2

Working Note:
Amount to be transferred to Capital Redemption Reserve Account

Redemption of Preference Shares – CA Inter Accounts Study Material 3

Question 4.
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 1 st 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. (RTF)
Answer:
Journal Entries
Redemption of Preference Shares – CA Inter Accounts Study Material 4

Redemption of Preference Shares – CA Inter Accounts Study Material

Question 5.
The capital structure of A Ltd. consists of 20,000 Equity Shares of ₹ 10 each fully paid up and 1,000 8% Redeemable Preference Shares of ₹ 100 each fully paid up (issued on 1.4.20X1).

Undistributed reserve and surplus stood as: General Reserve ₹ 80,000; Profit and Loss Account ₹ 20,000; Investment Allowance Reserve out of which ₹ 5,000, (not free for distribution as dividend) ₹ 10,000; Cash at bank amounted to ₹ 98,000. Preference shares are to be redeemed at a Premium of 10% and for the purpose of redemption, the directors are empowered to make fresh issue of Equity Shares at par after utilising the undistributed reserve and surplus, subject to the conditions that a sum of ₹ 20,000 shall be retained in general reserve and which should not be utilised.

Pass Journal Entries to give effect to the above arrangements and also show how the relevant items will appear in the Balance Sheet of the company after the redemption carried out. (RTP)
Answer:
Journal Entries
Redemption of Preference Shares – CA Inter Accounts Study Material 5

Balance Sheet [Extract]
Redemption of Preference Shares – CA Inter Accounts Study Material 6

Notes to accounts

1. Share Capital
22,500 Equity shares (20,000 + 2,500) of ₹ 10 each fully paid up 2,25,000

2. Reserves and Surplus
Redemption of Preference Shares – CA Inter Accounts Study Material 7

Working Note:

Redemption of Preference Shares – CA Inter Accounts Study Material 8
Therefore, No. of shares to be issued = 25,000/₹ 10 = 2,500 shares.

Question 6.
G India Ltd. had 9,000 10% redeemable Preference Shares of ₹ 10 each, fully paid up. The company decided to redeem these preference shares at par by the issue of sufficient number of equity shares of ₹ 9 each fully paid up.
You are required to prepare necessary Journal Entries including cash transactions in the books of the company.
Answer:
Journal Entries
Redemption of Preference Shares – CA Inter Accounts Study Material 9

Redemption of Preference Shares – CA Inter Accounts Study Material

Question 7.
The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December, 20X1.
Share capital: 40,000 Equity shares of ₹ 10 each fully paid – ₹ 4,00,000; 1,000 10% Redeemable preference shares of ₹ 100 each fully paid – ₹ 1,00,000.

Reserve & Surplus: Capital reserve – ₹ 50,000; Securities premium – ₹ 50,000; General reserve – ₹ 75,000; Profit and Loss Account – ₹ 35,000

On 1st January, 20X2, the Board of Directors decided to redeem the preference shares at par by utilisation of reserve.

You are required to pass necessary Journal Entries including cash transactions in the books of the company.
Answer:
Journal Entries
Redemption of Preference Shares – CA Inter Accounts Study Material 10

Advanced Questions

Question 8.
The Balance Sheet of XYZ as at 31st December, 20X1 Inter alia Includes the following:
Redemption of Preference Shares – CA Inter Accounts Study Material 11
Under the terms of their issue, the preference shares are redeemable on 31st March, 20X2 at 5% premium. In order to finance the redemption, the company makes a rights issue of 50,000 equity shares of X 100 each at X 110 per share, X 20 being payable on application, X 35 (including premium) on allotment and the balance on 1st January, 20X3. The issue was fully subscribed and allotment made on 1st March, 20X2. The money due on allotment were received by 31st March, 20X2. The preference shares were redeemed after fulfilling the necessary conditions of section 55 of the Companies Act, 2013.

You are asked to pass the necessary Journal Entries and show the relevant extracts from the balance sheet as on 31 st March, 20X2 with the corresponding figures as on 31st December, 20X1.
Answer:
Journal Entries
Redemption of Preference Shares – CA Inter Accounts Study Material 12
Redemption of Preference Shares – CA Inter Accounts Study Material 13

Balance Sheet (Extract)
Redemption of Preference Shares – CA Inter Accounts Study Material 14

Notes to accounts
Redemption of Preference Shares – CA Inter Accounts Study Material 15
Redemption of Preference Shares – CA Inter Accounts Study Material 16

Note:

It is important to keep in mind that only the amount received (excluding premium) on fresh issue of shares till the date of redemption should be considered for calculation of proceeds of fresh issue of shares.
Accordingly, we have considered proceeds of fresh issue of shares as ₹ 22,50,000 (₹ 10,00,000 application money plus ₹ 12,50,000 received on allotment towards share capital).

Redemption of Preference Shares – CA Inter Accounts Study Material

Mix Questions

Question 9.
The following is the summarized Balance Sheet of Y Ltd. as at 31.3.20X1:
Redemption of Preference Shares – CA Inter Accounts Study Material 17

For the year ended 31.3.20X2, the company made a net profit of ₹ 35,000 after providing ₹ 20,000 depreciation.
The following additional information is available with regard to company’s operation:

  1. The preference dividend for the year ended 31.3.20X2 was paid.
  2. Except cash and bank balances other current assets and current liabilities as on 31.3.20X2, was the same as on 31.3.20X1.
  3. The company redeemed the preference shares at a premium of 10%.
  4. The company issued bonus shares in the ratio of one share for every equity share held as on 31.3.20X2.
  5. To meet the cash requirements of redemption, the company sold investments.
  6. Investments were sold at 90% of cost on 31.3.20X2.

You are required to prepare necessary journal entries to record redemption and issue of bonus shares.
Answer:
Journal Entries
Redemption of Preference Shares – CA Inter Accounts Study Material 18
Redemption of Preference Shares – CA Inter Accounts Study Material 19

AS 10: Property, Plant and Equipment – CA Inter Accounts Study Material

AS 10: Property, Plant and Equipment – CA Inter Accounts Study Material is designed strictly as per the latest syllabus and exam pattern.

AS 10: Property, Plant and Equipment – CA Inter Accounts Study Material

Definitions And Recognition (Based On Para Nos. 6 To 10)

Question 1.
In the year 2016-17, an entity has acquired a new freehold building with a useful life of 50 years for ₹ 90,00,000. The entity desires to calculate the depreciation charge per annum using a straight-line method. It has identified the following components (with no residual value of lifts & fixtures at the end of their useful life) as follows:
AS 10 Property, Plant and Equipment - CA Inter Accounts Study Material 1
Calculate depreciation for the year 2016-17 as per componentization method. (RTP)
Answer:
Computation of depreciation (Using Component approach)
AS 10 Property, Plant and Equipment - CA Inter Accounts Study Material 2

AS 10: Property, Plant and Equipment - CA Inter Accounts Study Material

Question 2.
Explain ‘Bearer Plant’ & ‘Biological Asset’ as per AS-10. (5 Marks) (May 2018)
Answer:
As per AS 10 Property, Plant and Equipment Bearer plant is a plant that—
(a) is used in the production or supply of agricultural produce;
(b) is expected to bear produce for more than a period of twelve months; and
(c) has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

(d) The following are not bearer plants:

  1. plants cultivated to be harvested as agricultural produce (for example, trees grown for use as lumber);
  2. plants cultivated to produce agricultural produce when there is more than a remote likelihood that the entity will also harvest and sell the plant as agricultural produce, other than as incidental scrap sales (for example, trees that are cultivated both for their fruit and their lumber); and
  3. annual crops (for example, maize and wheat).

When bearer plants are no longer used to bear produce, they might be cut down and sold as scrap, for example, for use as firewood. Such incidental scrap sales would not prevent the plant from satisfying the definition of a bearer plant.
Biological Asset is a living animal or plant.

AS 10: Property, Plant and Equipment - CA Inter Accounts Study Material

Measurement – Initial [Acquired And Self Constructed] (Based On Para Nos. 16 To 23)

Question 3.
ABC Ltd. is installing a new plant at its production factory. It provides you the following information:
AS 10 Property, Plant and Equipment - CA Inter Accounts Study Material 3
Please advise ABC Ltd. on the costs that can be capitalised for plant in accordance with AS 10: Property, Plant and Equipment. (5 Marks) (Nov. 2017)
Answer:
As per AS 10 on Property, Plant and Equipment, the costs which will be capitalized by ABC Ltd. are as follows:
AS 10 Property, Plant and Equipment - CA Inter Accounts Study Material 4
Note: Operating losses before commercial production 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.

AS 10: Property, Plant and Equipment - CA Inter Accounts Study Material

Question 4.
Y Ltd. is installing a new plant at its production facility. It has incurred these costs:
AS 10 Property, Plant and Equipment - CA Inter Accounts Study Material 5
Please advise Y Ltd. on the costs that can be capitalised in accordance with AS 10 (Revised). (RTP)
Answer:
As per AS 10, the following costs can be capitalised:
AS 10 Property, Plant and Equipment - CA Inter Accounts Study Material 6
Note : Interest charges paid on ‘Deferred credit terms’ are not regarded as directly attributable costs and thus cannot be capitalised. They should be written off to the Statement of Profit and Loss in the period they are incurred.

AS 10: Property, Plant and Equipment - CA Inter Accounts Study Material

Question 5.
Neon Enterprise operates a major chain of restaurants located in different cities. The company has acquired a new restaurant located at Chandigarh. The new-restaurant requires significant renovation expenditure. Management expects that the renovations will last for 3 months during which the restaurant will be closed.

Management has prepared the following budget for this period—
Salaries of the staff engaged in preparation of restaurant before its ₹ 7,50,000 opening
Construction and remodelling cost of restaurant ₹ 30,00,000
Explain the treatment of these expenditures as per the provisions of AS 10 ‘Property, Plant and Equipment’. (5 Marks) (Nov. 2018)
Answer:
As per provisions of AS 10, any cost directly attributable to bring the assets to the location and conditions necessary for it to he capable of operating in the manner indicated by the management are called directly attributable costs and would be included in the costs of an item of PPE.

Analysis and conclusion:
Management of Neon Enterprise should capitalize the costs of construction and remodelling the restaurant, because they are necessary to bring the restaurant to the condition necessary for it to be capable of operating in the manner intended by management. The restaurant cannot be opened without incurring the construction and remodelling expenditure amounting ₹ 30,00,000 and thus the expenditure should be considered part of the asset.

However, the cost of salaries of staff engaged in preparation of restaurant ₹ 7,50,000 before its opening are in the nature of operating expenditure that would be incurred if the restaurant was open and these costs are not necessary to bring the restaurant to the conditions necessary for it to be capable of operating in the manner intended by management. Hence, ₹ 7,50,000 should be expensed.

AS 10: Property, Plant and Equipment - CA Inter Accounts Study Material

Question 6.
G Ltd. has an existing freehold factory property, which it intends to knock down and redevelop. During the redevelopment period the company will move its production facilities to another (temporary) site.
The following incremental costs will be incurred:
Setup costs of ₹ 5,00,000 to install machinery in the new location.
Rent of ₹ 15,00,000
Removal costs of ₹ 3,00,000 to transport the machinery from the old location to the temporary location.
You are required to examine in line with AS 10 ‘Property, Plant and Equipment’ whether these costs can be capitalized into the cost of the new building.
Answer:
Constructing or acquiring a new asset may result in incremental costs that would have been avoided if the asset had not been constructed or acquired. These costs are not be included in the cost of the asset if they are not directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

Analysis and conclusion:
The costs to be incurred by the company are in the nature of costs of reducing or reorganizing the operations of the accompany. These costs do not meet that requirement of AS 10 ‘Property, Plant and Equipment’ and cannot, therefore, be capitalized.

AS 10: Property, Plant and Equipment - CA Inter Accounts Study Material

Measurement – Initial (Deferred; Exchange Etc.) (Based On Para Nos. 25, 26 And 29 To 31)

Question 7.
Entity A exchanges surplus land with a book value of ₹ 10,00,000 for cash of ₹ 20,00,000 and plant and machinery valued at ₹ 25,00,000. What will be the measurement cost of the assets received?
Answer:
Since the transaction has commercial substance. The plant and machinery would be recorded at ₹ 25,00,000, which is equivalent to the fair value of the land of ₹ 45,00,000 less the cash received of ₹ 20,00,000.

Question 8.
Entity A exchanges car X with a book value of ₹ 13,00,000 and a fair value of ₹ 13,25,000 for cash of ₹ 15,000 and car Y which has a fair value of ₹ 13,10,000. The transaction lacks commercial substance as the company’s cash flows are not expected to change as a result of the exchange. It is in the same position as it was before the transaction. What will be the measurement cost of the assets received?
Answer:
The entity recognises the assets received at the book value of car X. Therefore, it recognises cash of ₹ 15,000 and car Y as PPE with a carrying value of ₹ 12,85,000.

Measurement – Subsequent (Based On Para Nos. 32 To 44)

Question 9.
Entity A is a large manufacturing group. It owns a number of industrial buildings, such as factories and warehouses and office buildings in several capital cities. The industrial buildings are located in industrial zones, whereas the office buildings are in central business districts of the cities. Entity A’s management want to apply the revaluation model as per AS 10 (Revised) to the subsequent measurement of the office buildings but continue to apply the historical cost model to the industrial buildings. State whether this is acceptable under AS 10 (Revised) or not with reasons?
Answer:
Entity A’s management can apply the revaluation model only to the office buildings. The office buildings can be clearly distinguished from the industrial buildings in terms of their function, their nature and their general location. AS 10 (Revised) permits assets to be revalued on a class by class basis.

The different characteristics of the buildings enable them to be classified as different PPE classes. The different measurement models can, therefore, be applied to these classes for subsequent measurement.

However, all properties within the class of office buildings must be carried at revalued amount.

AS 10: Property, Plant and Equipment - CA Inter Accounts Study Material

Depreciation (Based On Para Nos. 45, 50, 53, 56, 57 And 62 To 65)

Question 10.
Entity A has a policy of not providing for depreciation on PPE capitalised in the year until the following year, but provides for a full year’s depreciation in the year of disposal of an asset is this acceptable?
Answer:
The depreciable amount of a tangible fixed asset should be allocated on a systematic basis over its useful life. The depreciation method should reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.

Analysis and conclusion:
Useful life means the period over which the asset is expected to be available for use by the entity. Depreciation should commence as soon as the asset is acquired and is available for use. Thus, the policy of Entity A is not acceptable.

Question 11.
Entity A purchased an asset on 1st January 2013 for ₹ 1,00,000 and the asset had an estimated useful life of 10 years and a residual value of nil.
On 1st January 2017, the directors review the estimated life and decide that the asset will probably be useful for a further 4 years.
Calculate the amount of depreciation for each year, if company charges depreciation on Straight Line basis.
Answer:
The entity has charged depreciation using the straight-line method at ₹ 10,000 per annum i.e. (1,00,000/10 years).

On 1st January 2017, the asset’s net book value is [1,00,000 – (10,000 × 4)] ₹ 60,000. The remaining useful life is 4 years.

The company should amend the annual provision for depreciation to charge the unamortised cost over the revised remaining life of four years. Consequently, it should charge depreciation for the next 4 years at ₹ 15,000 per annum i.e. (60,000/4 years).

AS 10: Property, Plant and Equipment - CA Inter Accounts Study Material

Question 12.
A property costing ₹ 10,00,000 is bought in 2016. Its estimated total physical life is 50 years. However, the company considers it likely that it will sell the property after 20 years.
The estimated residual value in 20 years’ time, based on 2016 prices, is:
Case (a) ₹ 10,00,000
Case (b) ₹ 9,00,000
You are required to compute the amount of depreciation charged for the year 2016. (RTP)
Answer:
Case (a)
The company considers that the residual value, based on prices prevailing at the balance sheet date, will equal the cost.
There is, therefore, no depreciable amount and depreciation is zero.

Case (b)
The company considers that the residual value, based on prices prevailing at the balance sheet date, will be ₹ 9,00,000 and the depreciable amount is, therefore, ₹ 1,00,000.

Annual depreciation (on a straight-line basis) will be ₹ 5,000 [{10,00,000 – 9,00,000} ÷ 20].

AS 10: Property, Plant and Equipment - CA Inter Accounts Study Material

Question 13.
Entity A, a supermarket chain, is renovating one of its major stores. The store will have more available space for in store promotion outlets after the renovation and will include a restaurant. Management is preparing the budgets for the year after the store reopens, which include the cost of remodelling and the expectation of a 15% increase in sales resulting from the store renovations, which will attract new customers.
Decide whether the remodelling cost will be capitalized or not. (RTP)
Answer:
The expenditure in remodelling the store will create future economic benefits (in the form of 15°6 of increase in sales). Moreover, the cost of remodelling can be measured reliably, therefore, it should be capitalized in line with AS 10 PPE.

Question 14.
M Ltd. purchased an asset on 1st January 2013 for ₹ 5,00,000 and the asset had an estimated useful life of 5 years and a residual value of nil. On 1st January 2017, the directors review the estimated life and decide that the asset will probably be useful for a further 4 years.
You are required to compute the amount of depreciation for each year, if company charges depreciation on Straight Line basis.
Answer:
The entity has charged depreciation using the straight-line method at ₹ 1,00,000 per annum i.e. (5,00,000/5 years). On 1st January 2017, the asset’s net book value is [5,00,000 – (1,00,000 × 4)] ₹ 1,00,000. The remaining useful life is 4 years.

The company should amend the annual provision for depreciation to charge the unamortized cost over the revised remaining life of four years. Consequently, it should charge depreciation for the next 4 years at ₹ 25,000 per annum i.e. (1,00,000/4 years).

AS 10: Property, Plant and Equipment - CA Inter Accounts Study Material

Retirement And Derecognition (Based On Para Nos. 73, 74 And 79)

Question 15.
Entity A carried plant and machinery in its books at ? 2,00,000. These were destroyed in a fire. The assets were insured ‘New for old’ and were replaced by the insurance company with new machines that cost ₹ 20,00,000. The machines were acquired by the insurance company and the company did not receive the ₹ 20,00,000 as cash compensation. State, how Entity A should account for the same?
Answer:
Entity A should account for a loss in the Statement of Profit and Loss on de-recognition of the carrying value of plant and machinery in accordance with AS 10.

Entity A should separately recognise a receivable and a gain in the income statement resulting from the insurance proceeds under AS 29 once receipt is virtually certain. The receivable should be measured at the fair value of assets that will be provided by the insurer.

AS 3: Cash Flow Statements – CA Inter Accounts Study Material

AS 3: Cash Flow Statements – CA Inter Accounts Study Material is designed strictly as per the latest syllabus and exam pattern.

AS 3: Cash Flow Statements – CA Inter Accounts Study Material

Classification Of Activities + Cash And Cash Equivalents (Based On Para Nos. 3, 11 To 14, 15 To 16 And 17)

Question 1.
X Ltd., a non-financial company has the following entries in its Bank Account. It has sought your advice on the treatment of the same for preparing Cash Flow Statement.
(i) Loans and Advances given to the following and interest earned on them: (!) to suppliers
(2) to employees
(3) to its subsidiaries companies
(ii) Investment made in subsidiary Smart Ltd. and dividend received
(iii) Dividend paid for the year
(iv) TDS on interest income earned on investments made
(v) TDS on interest earned on advance given to suppliers
(vi) Insurance claim received against loss of fixed asset by fire
Classify the above transactions as per AS-3.
Answer:
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 1
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 2

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 2.
X Ltd. purchased debentures of ₹ 10 lacs of Y Ltd., which are traded in stock exchange. How will you show this item as per AS 3 while preparing cash flow statement for the year ended on 31st March, 2011?
Answer:
As per AS 3 on ‘Cash flow Statement’, cash and cash equivalents consist of cash in hand, balance with banks and short-term, highly liquid investments.

As per para 6 of AS 3, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say three months or less from the date of acquisition.

Analysis and conclusion:
If investment, of ₹ 10 lacs, made in debentures is for short-term period then it is an item of ‘cash equivalents’.
However, if investment of ₹ 10 lacs made in debentures is for long-term period then as per AS 3, it should be shown as cash flow from investing activities.

Question 3.
Classify the following activities as (1) Operating Activities, (2) Investing Activities, (3) Financing Activities:
(a) Purchase of Machinery.
(b) Proceeds from issuance of equity share capital.
(c) Cash Sales.
(d) Proceeds from long-term borrowings.
(e) Proceeds from Debtors.
(f) Brokerage paid on purchase of investments.
Answer:
Operating Activities: c, e.
Investing Activities: a, f.
Financing Activities: b, d.

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 4.
Classify the following activities as

  1. Operating Activities,
  2. Investing Activities,
  3. Financing Activities.

(a) Rent received on property held as investment.
(b) Selling and distribution expense paid.
(c) Income tax paid.
(d) Dividend paid on Preference shares.
(e) Underwriting Commission paid.
(f) Rent paid.
(g) Brokerage paid on purchase of investments.
(h) Long term Bank loan.
(i) Refund of Income Tax.
Answer:

  1. Operating Activities: (b), (c), (f) & (i).
  2. Investing Activities: (a), (g).
  3. Financing Activities: (d), (e), (h).

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 5.
Classify the following activities as

  1. Operating Activities,
  2. Investing Activities,
  3. Financing Activities
  4. Cash Equivalents.

(a) Purchase of Machinery.
(b) Proceeds from issuance of equity share capital.
(c) Cash Sales.
(d) Proceeds from long-term borrowings.
(e) Proceeds from Trade receivables.
(f) Cash receipts from Trade receivables.
(g) Trading Commission received.
(h) Purchase of investment.
(i) Redemption of Preference Shares.
(j) Cash Purchases.
(k) Proceeds from sale of investment.
(l) Purchase of fixed asset.
(m) Cash paid to suppliers.
(n) Interim Dividend paid on equity shares.
(o) Wages and salaries paid.
(p) Proceed from sale of patents.
(q) Interest received on debentures held as investment.
(r) Interest paid on Long-term borrowings.
(s) Office and Administration Expenses paid.
(t) Manufacturing Overheads paid.
(u) Dividend received on shares held as investments.
(v) Rent received on property held as investment.
(w) Selling and distribution expense paid.
(x) Income tax paid.
(y) Dividend paid on Preference shares.
(z) Underwritings Commission paid.
(aa) Rent paid.
(bb) Brokerage paid on purchase of investments.
(cc) Bank Overdraft (dd) Cash Credit.
(ee) Short-term Deposits (ff) Marketable Securities.
(gg) Refund of Income Tax received. (RTP)
Answer:

  1. Operating Activities: (c), (e), (f), (g), (j), (m), (o), (s), (t), (w), (x), (aa) & (gg)
  2. Investing Activities: (a), (h), (k), (1), (p), (q), (u), (v), (bb) & (ee).
  3. Financing Activities: (b), (d), (i), (n), (r), (v), (z), (cc) & (dd).
  4. Cash Equivalent: (ff).

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 6.
Explain the meaning of the terms ‘cash’ and ‘cash equivalent’ for the purpose of Cash Flow Statement as per AS-3.
(a) R Ltd. had a bank balance of USD 25,000, stated in books at ₹ 16,76,250 using the rate of exchange ₹ 67.05 per USD prevailing on the date of receipt of dollars. However, on the balance sheet date, the closing rate of exchange was ₹ 67.80 and the bank balance had to be restated at ₹ 16,95,000.

Comment on the effect of change in bank balance due to exchange rate fluctuation and also discuss how it will be disclosed in Cash Flow Statement of Ruby Exports with reference to AS-3.
Answer:
Cash flow statement consists of: (a) Cash in hand and deposits repayable on demand with any bank or other financial institutions and (b) Cash equivalents, which are short-term, highly liquid investments that are readily convertible into known amounts of cash and are subject to insignificant risk or change in value. Cash flows are inflows (Le. receipts) and outflows (le. payments) of cash and cash equivalents. Any transaction, which does not result in cash flow, should not he reported in the cash flow statement.

(a) Analysis:
In the above case, due to increase in rate of foreign exchange by 75 paise, there is increase (change) in bank balance. This increase of ₹ 18,750 (25,000 × 0.75) is not a cash flow because neither there is any cash inflow nor there is any cash outflow.

Conclusion:
Therefore, this change in bank balance amounting ₹ 18,750 need not be disclosed in Cash Flow Statement of Ruby exports.

Thus, the net increase/decrease in Cash/Cash equivalents in the Cash Flow Statements are stated exclusive of exchange gains and losses. The resultant difference between Cash and Cash Equivalents as per the Cash flow statement and that recognized in the balance sheet is reconciled in the note on cash flow statements.

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 7.
Intelligent Ltd., a non-financial company has the following entries in its Bank Account. It has sought your advice on the treatment of the same for preparing Cash Flow Statement.

  1. Loans and Advances given to the following and interest earned on them:
    (1) to suppliers
    (2) to employees
    (3) to its subsidiaries companies
  2. Investment made in subsidiary Smart Ltd. and dividend received
  3. Dividend paid for the year
  4. TDS on interest income earned on investments made
  5. TDS on interest earned on advance given to suppliers
  6. Insurance claim received against loss of fixed asset by fire

Discuss in the context of AS 3 Cash Flow Statement (4 Marks) (May 2014)
Answer:

  1. Loans and advances given and interest earned
    (1) to suppliers Operating Cash flow
    (2) to employees Operating Cash flow
    (3) to its subsidiary companies Investing Cash flow
  2. Investment made in subsidiary company and dividend received Investing Cash flow
  3. Dividend paid for the year Financing Cash Outflow
  4. TDS on interest income earned on investments made Investing Cash Outflow
  5. TDS on interest earned on advance given to suppliers Operating Cash Outflow
  6. Insurance claim received of amount loss of fixed asset by fire

Extraordinary item to be shown under a separate heading as ‘Cash inflow from Operating activities’.

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 8.
Classify the following activities as per AS 3 Cash Flow Statement:

  1. Interest paid by financial enterprise
  2. Dividend paid
  3. Tax deducted at source on interest received from subsidiary company
  4. Deposit with Bank for a term of two years
  5. Insurance claim received towards loss of machinery by fire
  6. Bad debts written off

Which activity does the purchase of business falls under and whether netting off of aggregate cash flows from disposal and acquisition of business units is possible? (4 Marks) (May 2016)
Answer:

  1. Interest paid by financial enterprise Cash flows from operating activities
  2. Dividend paid
    Cash flows from financing activities
  3. TDS on interest received from subsidiary company Cash flows from investing activities
  4. Deposit with bank for a term of two years Cash flows from investing activities
  5. Insurance claim received against loss of fixed asset by fire
    Extraordinary item to be shown as a separate heading under ‘Cash flow from investing activities’
  6. Bad debts written off
    It is a non-cash item which is adjusted from net prof t/loss under indirect method, to arrive at net cash flow from operating activity.

Purchase of business falls under Investing Activities as per AS 3 ‘Cash Flow Statement’. The aggregate cash flows arising from acquisitions and from disposals of other business units should be presented separately and classified as investing activities. Thus, netting of aggregate cash flows from disposal and acquisition of business units is not possible.

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 9.
Explain the meaning of the term ‘cash’ and ‘cash equivalent’ for the purpose of Cash Flow Statement as per AS-3.

Ruby Exports had a bank balance of USD 25,000, stated in books at ₹ 16,76,250 using the rate of exchange ₹ 67.05 per USD prevailing on the date of receipt of dollars. However, on the balance sheet date, the closing rate of exchange was ₹ 67.80 and the bank balance had to be restated at ₹ 16,95,000.

Comment on the effect of change in bank balance due to exchange rate fluctuation and also discuss how it will be disclosed in Cash Flow Statement of Ruby Exports with reference to AS-3. (5 Marks) (May 2017)
Answer:
Cash flow statement consists of: (a) Cash in hand and deposits repayable on demand with any bank or other financial institutions and (b) Cash equivalents, which are short term, highly liquid investments that are readily convertible into known amounts of cash and are subject to insignificant risk or change in value.

Cash flows are inflows (i.e. receipts) and outflows (i.e. payments) of cash and cash equivalents. Any transaction, which does not result in cash flow, should not be reported in the cash flow statement. Movements within cash or cash equivalents are not cash flows because they do not change cash as defined by AS 3 ‘Cash Flow Statements’ which is sum of cash, bank and cash equivalents.

Analysis:
In the above case, due to increase in rate of foreign exchange by 75 paise, there is increase (change) in bank balance. This increase of ₹ 18,750 (25,000 x 0.75) is not a cash flow because neither there is any cash inflow nor there is any cash outflow.

Conclusion:
This change in bank balance amounting ₹ 18,750 need not be disclosed in Cash Flow Statement of Ruby exports.

The net increase/decrease in Cash/Cash equivalents in the Cash Flow Statements are stated exclusive of exchange gains and losses. The resultant difference between Cash and Cash Equivalents as per the Cash flow statement and that recognized in the balance sheet is reconciled in the note on cash flow statements.

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 10.
How will you disclose following items while preparing Cash Flow Statement of Gagan Ltd. as per AS-3 for the year ended 31st March, 2018? (5 Marks) (May 2018)
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 3
Answer:
Cash Flow Statement for the year ended March 31, 2018
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 4

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Basic Questions – Direct Method

Question 11.
From the following Summary Cash Account of X Ltd. prepare Cash Flow Statement for the year ended 31st March, 20X1 in accordance with AS 3 (Revised) using the direct method. The company does not have any cash equivalents.
Summary Cash Account for the year ended 31.3.20X1
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 5
Answer:
Cash Flow Statement for the year ended 31st March, 20X1 (Direct method)
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 6

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 12.
Following is the cash flow abstract of A Ltd. for the year ended 31st March, 2011:
Cash Flow (Abstract)
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 7
Prepare Cash Flow Statement for the year ended 31 st March, 2011 in accordance with Accounting standard 3.
Answer:
Cash Flow Statement for the year ended 31.3.2011
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 8

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 13.
On the basis of the following information prepare a Cash Flow Statement for the year ended 31st March, 2013:
(i) Total sales for the year were ₹ 199 crore out of which cash sales amount ed to ₹ 131 crore.
(ii) Cash collections from credit customers during the year, totalled ₹ 67 crore.
(iii) Cash paid to suppliers of goods and services and to the employees of the enterprise amounted to ₹ 159 crore.
(iv) Fully paid preference shares of the face value of ₹ 16 crore was redeemed and equity shares of the face value of ₹ 16 crore were allotted as fully paid up at a premium of 25%.
(v) ₹ 13 crore was paid by way of income tax.
(vi) Machine of the book value of ₹ 21 crore was sold at a loss of ₹ 30 lakhs and a new machine was installed at a total cost of ₹ 40 crore.
(vii) Debenture interest amounting ₹ 1 crore was paid.
(viii) Dividends totalling ₹ 10 crore was paid on equity and preference shares. Corporate dividend tax @ 17% was also paid.
(ix) On 31st March, 2012 balance with bank and cash on hand totalled ₹ 9 crore. (8 Marks) (May 2013)
Answer:
Cash flow statement for the year ended 31st March, 2013
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 9

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 14.
Prepare Cash Flow from Investing Activities of M/s. Creative Furnishings Limited for the year ended 31-3-2015.
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 10
Answer:
Cash Flow Statement for the year ended 31-3-2015 [Extract – Investing Activities]
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 11
Note:
Plant acquired by issue of 8% debentures does not amount to cash outflow, hence not considered in the cash flow statement.

Basic Questions – Indirect Method

Question 15.
B Ltd. submits the following information pertaining to year 2012-2013. Using the given data, you are required to prepare Cash Flow Statement for the year ended 31st March, 2013 by indirect method.
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 12
Answer:
Cash Flow Statement for the year ended 31st March, 2013
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 13

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 16.
J Ltd. presents you the following information for the year ended 31st March, 2015:
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 14
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 15
You are required to prepare a cash flow statement as per AS-3 (Revised). (RTP)
Answer:
Cash Flow Statement
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 16
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 17

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 17.
The following are the summarized Balance Sheets of Lotus Ltd. as on 31st March 2010 and 2011:
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 18
Additional information:

  1. Depreciation written off on land and building ₹ 20,000.
  2. The company sold some investment at a profit of ₹ 10,000, which was credited to Capital Reserve.
  3. Income-tax provided during the year ₹ 55,000.
  4. During the year, the company purchased a machinery for ₹ 2,25,000. They paid ₹ 1,25,000 in cash and issued 10,000 equity shares of ₹ 10 each at par.

You are required to prepare a cash flow statement for the year ended 31st March 2011 as per AS 3 by using indirect method. (16 Marks) (May 2011)
Answer:
Cash Flow Statement for the year ending 31st March, 2011
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 19
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 20
Working Notes:
1. Computation of Net Profit before tax
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 21

2. Depreciation for the year on Machinery
Machinery A/c
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 22

3. Computation of tax paid during the year
Provision for Taxation A/c
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 23

4. Computation of sales value of investment sold
Investment A/c
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 24

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 18.
Balance Sheet of M/s Hero Ltd. as on 31st March, 2010 and 2011 are as follows:
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 25
Additional information:

  1. Dividend of ₹ 1,00,000 was paid during the year ended 31st March, 2011.
  2. Machinery purchased during the year for ₹ 1,25,000.
  3. Company sold some investment at a profit of ₹ 10,000 which was credited to capital reserve.
  4. Depreciation written off on land and building ₹ 20,000.
  5. Income tax provided during the year ₹ 55,000.

From the above particulars, prepare a cash flow statement for the year ended 31st March, 2011 as per AS 3 using indirect method. (10 Marks) (Nov. 2011)
# As per Revised AS-4, proposed dividend cannot appear in the Balance Sheet. It would hopefully not appear in future questions. In the solution it has been dealt as per the old concept i.e. Last year paid in current year and current year declared in current year.
Answer:
Cash Flow Statement for the year ended on 31st March, 2011
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 26

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Working Notes:
1. Net profit (before tax) made during the year
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 27
4. Proposed Dividend A/c
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 28

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 19.
Surya Ltd. has provided you the following particulars. Prepare Cash Flow from Operating Activities by Indirect Method in accordance with AS 3: Profit & Loss Account of Surya Ltd. for the year ended 31st March. 2013. (16 Marks) (Nov. 2013)
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 29
Answer:
Cash flow Statement [Extract – Operating activities] for the year ended 31st March, 2013
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 30

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 20.
The Balance Sheet of Harry Ltd. for the year ending 31st March, 2017 and 31st March, 2016 were summarised as:
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 31
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 32
Further Infromation is available:

  1. Depreciation on Building ₹ 1,000
  2. Depreciation on Furniture & Fixtures for the year ₹ 2,000
  3. Depreciation on Cars for the year ₹ 5,000. One car was disposed during the year for ₹ 3,400 whose written down value was ₹ 2,000.
  4. Purchase investments for ₹ 6,000.
  5. Sold investments for ₹ 10,000, these investments cost ₹ 2,000.

Prepare Cash Flow Statements as per AS-3 (revised) using indirect method. (12 Marks) (Nov. 2017)
# As per Revised AS-4, proposed dividend cannot appear in the Balance Sheet, It would hopefully not appear in future questions. In the solution it has been dealt as per the old concept i.e. Last year paid in current year and current year declared in current year.
Answer:
Harry Ltd.
Cash Flow Statement for the year ended 31st March, 2017
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 33
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 34

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Working Notes:
1. Computation of Income taxes paid
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 35

2. Computation of Fixed assets acquisitions
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 36

Question 21.
The following particulars relate to Bee Ltd., for the year ended 31st March, 2010:
(i) Furniture of book value of ₹ 15,500 was disposed off for ₹ 12,000.
(ii) Machinery costing ₹ 3,10,000 was purchased and ₹ 20,000 were spent on its erection.
(iii) Fully paid 8% preference shares of the face value of ₹ 10,00,000 were redeemed at a premium of 3%. In this connection 60,000 equity shares of ₹ 10 each were issued at a premium of ₹ 2 per share. The entire money being received with applications.
(iv) Dividend was paid as follows:
On 8% preference shares ₹ 40,000
On equity shares for the year 2009-10 ₹ 1,10,000
(v) Total sales were ₹ 32,00,000 out of which cash sales were ₹ 11,50,000.
(vi) Total purchases were ₹ 8,00,000 including cash purchase of ₹ 60,000.
(vii) Total expenses were ₹ 12,40,000 charged to Profit and Loss A/c.
(viii) Taxes paid including dividend distribution tax of ₹ 22,500 were ₹ 3,30,000.
(ix) Cash and cash equivalents as on 31st March, 2010 were ₹ 1,25,000.
You are requested to prepare Cash Flow Statement as per AS 3 for the year ended 31st March, 2010 after taking into consideration the following also: (8 Marks) (May 2010)
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 37
Answer:
Cash Flow Statement for the year ended 31st March, 2010
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 38

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Working Notes:
1. Cash collected from customers:
Credit sales = Total sales ₹ 32,00,000 – Cash sales ₹ 11,50,000 = 120,50,000
Debtors Account
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 39
Total sale receipts = ₹ 20,53,000 + ₹ 11,50,000 = ₹ 32,03,000

2. Cash payment to suppliers:
Credit Purchases = Total purchases ₹ 8,00,000 – Cash purchases ₹ 60,000 = ₹ 7,40,000
Creditors Account
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 40
Total payments to suppliers = ₹ 7,35,000 + ₹ 60,000 = ₹ 7,95,000

3. Cash paid to suppliers and payment for expenses
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 41
Total of payment to suppliers and payment for expenses
= ₹ 7,95,000 + ₹ 12,48,000 = ₹ 20,43,000

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 22.
From the following information, prepare a Cash Flow Statement as per AS 3 for Banjara Ltd., using direct method:
Balance Sheet as on March 31, 2010 (₹ ‘000)
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 42
Statement of Profit or Loss for the year ended 31-3-2010
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 43
Additional information:

  1. An amount of ₹ 250 was raised from the issue of share capital and a further ₹ 250 was raised from long-term borrowings.
  2. Interest expense was ₹ 400 of which ₹ 170 was paid during the period ₹ 100 relating to interest expense of the prior period was also paid during the period.
  3. Dividends paid were ₹ 1,200.
  4. Tax deducted at source on dividends received (including in the tax expense of ₹ 300 for the year) amounted to ₹ 40.
  5. During the period the enterprise acquired fixed assets for ₹ 350. The payment was made in cash.
  6. Plant with original cost of ₹ 80 and accumulated depreciation of ₹ 60 was sold for ₹ 20.
  7. Sundry debtors and Sundry creditors include amounts relating to credit sales and credit purchase only. (16 Marks) (Nov. 2010)

Answer:
Cash Flow Statement
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 44
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 45

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Working Notes:
(1) Statement showing Cash and cash equivalents
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 46

(2) Cash collected from customers
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 47

(3) Cash paid to suppliers, employees and expenses
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 48

(4) Income tax paid (including TDS from dividends received)
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 49

(5) Repayment of long-term borrowings during the year
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 50

(6) Interest paid during the year
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 51

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 23.
Prepare Cash flow for Gamma Ltd., for the year ending 31.3.2014 from the following information:
(1) Sales for the year amounted to ₹ 135 crores out of which 60% was cash sales.
(2) Purchases for the year amounted to ₹ 55 crores out of which credit purchase was 80%.
(3) Administrative and selling expenses amounted to ₹ 18 crores and salary paid amounted to ₹ 22 crores.
(4) The Company redeemed debentures of ₹ 20 crores at a premium of 10%. Debenture holders were issued equity shares of ₹ 15 crores towards redemption and the balance was paid in cash. Debenture interest paid during the year was ₹ 1.5 crores.
(5) Dividend paid during the year amounted to ₹ 10 crores. Dividend distribution tax @ 17% was also paid.
(6) Investment costing ₹ 12 crores were sold at a profit of ₹ 2.4 crores.
(7) ₹ 8 crores were paid towards income tax during the year.
(8) A new plant costing ₹ 21 crores were purchased in part exchange of an old plant. The book value of the old plant was ₹ 12 crores but the vendor took over the old plant at a value of ₹ 10 crores only. The balance was paid in cash to the vendor.
(9) The following balances are also provided. (16 Marks) (Nov. 2014)
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 52
Answer:
Cash Flow Statement for the year ended 31st March, 2014
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 53

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Question 24.
On the basis of the following information prepare a Cash Flow Statement for the year ended 31st March, 2016 (Using direct method):
(i) Total sales for the year were ₹ 398 crores out of which cash sales amounted to 262 crores.
(ii) Receipts from credit customers during the year, totalled ₹ 134 crores.

(iii) Purchases for the year amounted to ₹ 220 crores out of which credit purchase was 80%.
Balance in creditors as on
1.4.2015 – ₹ 84 crores
31.3.2016 – ₹ 92 crores

(iv) Suppliers of other consumables and services were paid 19 crores in cash.
(v) Employees of the enterprises were paid 20 crores in cash.
(vi) Fully paid preference shares of the face value of ₹ 32 crores were re-deemed. Equity shares of the face value of 20 crores were allotted as fully paid up at premium of 20%.

(vii) Debentures of ₹ 20 crores at a premium of 10% were redeemed. De-benture holders were issued equity shares in lieu of their debentures.

(viii) ₹ 26 crores were paid by way of income tax.

(ix) A new machinery costing ₹ 25 crores were purchased in part exchange of an old machinery. The book value of the old machinery was ₹ 13 crores. Through the negotiations, the vendor agreed to take over the old machinery at a higher value of ₹ 15 crores. The balance was paid in cash to the vendor.

(x) Investment costing ₹ 18 crores were sold at a loss of ₹ 2 crores.
(xi) Dividends totalling ₹ 15 crores (including dividend distribution tax of ₹ 2.7 crores) was also paid.
(xii) Debenture interest amounting ₹ 2 crores was paid.
(xiii) On 31st March 2015, Balance with Bank and Cash on hand totalled ₹ 2 crores. (8 Marks) (Nov. 2016)
Answer:
Cash flow statement for the year ended 31st March, 2016
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 54
Working Note:
Computation of cash paid to suppliers and employees
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 55

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Comprehensive Questions – Indirect Method

Question 25.
The Balance Sheet of B Ltd. for the years ended 31st March, 20X0 and 20X1 are as follows:
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 56
Additional information:

  1. The company sold one fixed asset for ₹ 1,00,000, the cost of which was ₹ 2,00,000 and the depreciation provided on it was ₹ 80,000.
  2. The company also decided to write off another fixed asset costing ₹ 56,000 on which depreciation amounting to ₹ 40,000 has been provided.
  3. Depreciation on fixed assets provided ₹ 3,60,000.
  4. Company sold some investment at a profit of ₹ 40,000, which was credited to capital reserve.
  5. Debentures and preference share capital redeemed at 5% premium.
  6. Company decided to value inventory at cost, whereas previously the practice was to value inventory at cost less 10%. The inventory according to books on 31.3.20X0 was ₹ 2,16,000. The inventory on 31.3.20X1 was correctly valued at ₹ 3,00,000.

Prepare Cash Flow Statement as per revised Accounting Standard 3 by indirect method.
Answer:
Cash Flow Statement for the year ended 31st March, 20X1
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 57
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 58

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Working Notes:
1. Revaluation of inventory will increase opening inventory by ₹ 24,000.
2,16,000/90 × 100 – ₹ 24,000
Therefore, opening balance of other current assets would be as follows:
₹ 11,10,000 + ₹ 24,000 = ₹ 11,34,000
Due to under valuation of inventory, the opening balance of profit and loss account be increased by ₹ 24,000.
The opening balance of profit and loss account after revaluation of inventory will be
₹ 2,40,000 + ₹ 24,000 = ₹ 2,64,000

2. Investment A/c
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 59

3. Fixed Assets A/c
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 60

4. Accumulated Depreciation A/c
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 61

Question 26.
The Balance Sheet of H Ltd. for the year ending 31st March, 2018 and 31st March, 2017 were summarised as:
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 62
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 63
The Profit and Loss account for the year ended 31st March, 2018 disclosed:
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 64

Prepare Cash Flow Statements as per AS-3 (revised) using indirect method. (RTP)
# As per Revised AS-4, proposed dividend cannot appear in the Balance Sheet. It would hopefully not appear in future questions. In the solution it has been dealt as per the old concept i.e. Last year paid in current year and current year declared in current year.
Answer:
Cash Flow Statement for the year ended 31st March, 2018
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 65

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Working Notes:
1. Computation of Income taxes paid
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 66

2. Computation of Fixed assets acquisitions
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 67

AS 3: Cash Flow Statements - CA Inter Accounts Study Material

Both Methods [Direct + Indirect]

Question 27.
Given below is the Statement of Profit and Loss of ABC Ltd. and relevant Balance Sheet information:
Statement of Profit and Loss of ABC Ltd. for the year ended 31st March, 20X1
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 68
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 69
Compute cash flow from operating activities using both direct and indirect method.
Answer:
Direct method Cash Flow from Operating Activities
AS 3 Cash Flow Statements - CA Inter Accounts Study Material 70

Investment Accounts – CA Inter Accounts Study Material

Investment Accounts – CA Inter Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Investment Accounts – CA Inter Accounts Study Material

Fixed Return Securities — Simple Questions

Question 1.
In 2015, R Ltd. issued 12% fully paid debentures of ₹ 100 each, interest being payable half yearly on 30th September and 31st March of every accounting year.

On 1st December, 2016, M/s. K purchased 10,000 of these debentures at ₹ 101 cum-interest price, also paying brokerage @ 1% of cum-interest amount of the purchase. On 1st March, 2017 the firm sold all of these debentures at ₹ 106 cum-interest price, again paying brokerage @ 1 % of cum-interest amount. Prepare Investment Account in the books of M/s. K for the period 1st December, 2016 to 1st March, 2017.
Answer:
Investment Account for the period from 1st December, 2016 to 1st March, 2017
(Scrip: 12% Debentures of R Ltd.)
Investment Accounts – CA Inter Accounts Study Material 1

Working Notes:

(i)
Investment Accounts – CA Inter Accounts Study Material 2

(ii)
Investment Accounts – CA Inter Accounts Study Material 3

Investment Accounts – CA Inter Accounts Study Material

Question 2.
G holds 2,000, 15% Debentures of ₹ 100 each in R Ltd. as on April 1, 2015 at a cost of ₹ 2,10,000. Interest is payable on June, 30 and December, 31 each year. On May 1, 2015, 1,000 debentures are purchased cum-interest at ₹ 1,07,000. On November 1, 2015, 1,200 debentures are sold ex-interest at ₹ 1,14,600. On November 30, 2015, 800 debentures are purchased ex-interest at ₹ 76,800. On December 31, 2015, 800 debentures are sold cum- interest for ₹ 1,10,000. You are required to prepare the Investment Account showing value of holdings on March 31, 2016 at cost, using FIFO Method.
Answer:
Investment Account of G
For the year ended 31.3.2016
(Script: 15% Debentures in R Ltd.)
(Interest payable on 30th June and 31st December)
Investment Accounts – CA Inter Accounts Study Material 4

Working Notes:

  1. Accrued Interest as on 1st April, 2015 = ₹ 2,00,000 × \(\frac{15}{100}\) × \(\frac{3}{12}\) = ₹ 7,500
  2. Accrued Interest as on 1.5.2015 = ₹ 1,00,000 × \(\frac{15}{100}\) × \(\frac{4}{12}\) = ₹ 5,000
  3. Cost of Investment for purchase on 1st May = ₹ 1,07,000 – ₹ 5,000 = ₹ 1,02,000
  4. Interest received as on 30.6.2015 = ₹ 3,00,000 × \(\frac{15}{100}\) × \(\frac{6}{12}\) = ₹ 22,500
  5. Accruedlnterestondebenturessoldon 1.11.2015 = ₹ 1,20,000 × \(\frac{15}{100}\) × \(\frac{4}{12}\) = ₹ 6,000
  6. Accrued Interest = ₹ 80,000 × \(\frac{15}{100}\) × \(\frac{5}{12}\) = ₹ 5,000
  7. Accrued Interest on sold debentures 31.12.2015 =
    ₹ 80,000 × \(\frac{15}{100}\) × \(\frac{6}{12}\) = ₹ 6,000
  8. Loss on Sale of Debenture on 1.1.2015
    Investment Accounts – CA Inter Accounts Study Material 5
  9. Accrued interest as on 31.12.2015 = ₹ 1,80,000 × \(\frac{15}{100}\) × \(\frac{6}{12}\) = ₹ 13,500
  10. Accrued Interest = ₹ 1,80,000 × \(\frac{15}{100}\) × \(\frac{3}{12}\) = ₹ 6,750
  11. Cost of investment as on 31st March = ₹ 1,02,000 + ₹ 76,800 = ₹ 1,78,800
  12. Profit on debentures sold on 31st December = ₹ 1,04,000 – (₹ 2,10,000 × 800/2,000) = ₹ 20,000

Investment Accounts – CA Inter Accounts Study Material

Fixed Return Securities — Advanced Questions

Question 3.
M purchased 5,000, 13.5% Debentures of Face Value of ₹ 100 each of S Ltd. on 1st May, 2016 @ ₹ 105 on cum interest basis. The interest on these debentures is payable on 31st & 30th of March & September respectively. On August 1st 2016 she again purchased 2,500 of such debentures @ ₹ 102.50 each on cum interest basis. On October 1st, 2016 she sold 2,000 Debentures @ ₹ 103 each. The market value of the debentures as at the close of the year was ₹ 106. Prepare the Debenture Investment Account in the books of M for the year ended 31st Dec. 2016 on Average Cost Basis. (RTP)
Answer:
Books of M Ltd.
Investment in 13.5% Debentures in S Ltd. Account (Interest payable on 31st March & 30th September)
Investment Accounts – CA Inter Accounts Study Material 6

Note: Cost being lower than Market Value the debentures are carried forward at Cost.

Working Notes:

  1. Interest paid on ₹ 5,00,000 purchased on May 1st, 2016 For the month oF April 2016, as part of purchase price: 5,00,000 × 13.5% × 1/12 = 5,625
  2. interest reccivcd on 30th Sept. 2016
    Investment Accounts – CA Inter Accounts Study Material 7
  3. Interest paid on ₹ 2,50,000 purchased on Aug. 1st 2016 for Apr11 2016 to Jul 2016 as part of purchase price:
    2,50,000 × 13.5% × 4/12 = ₹ 11.250
  4. Loss on Sale of Debentures
    Investment Accounts – CA Inter Accounts Study Material 8
  5. Cost of Balance Debentures
    (₹ 5,19,375 + ₹ 2,45,000) × ₹ 5,50,000/₹ 7,50.000 = ₹ 5,60,542
  6. Interest on Closing Debentures for period Oct.- Dcc. 2016 carried
    forward (accrued interest)
    ₹ 5,50,000 × 13.5% × 3/12 = ₹ 18,563

Question 4.
On 1st May, 2012, S purchased 5,000, 13.5% Convertible Debentures in X Ltd. of face value of ₹ 100 each @ 105 ex-interest. Interest on Debentures is payable each year on 31st March and 30th September. The accounting year is the calendar year. The following other transactions were entered into during 2012:
August 1
Purchased ₹ 2,50,000 Debentures @ 107 cum interest.
Oct. 1
Sale of ₹ 2,00,000 Debentures @ 103.
Dec. 31st
Receipt of 10,000 Equity shares in X Ltd. of ₹ 10 each on conversion of 20% of the Debentures held. Further, it also received interest on Debentures converted in cash at the time of conversion.
The market price of a Debenture and an Equity share in X Ltd. as on 31st Dec., 2012 was ₹ 106 and ₹ 15.
S held the Debentures as current assets. You are required to prepare Debenture Investment account In the books of S on Average cost basis. (RTP)
Answer:
Books of S
Debenture Investment Account for the year ending on 31-12-2012
(Scrip: 13.5% Convertible Debentures in X Limited)
(Interest payable on 31st March and 30th September)
Investment Accounts – CA Inter Accounts Study Material 9

Working Notes

  1. Cost of Debentures purchased on 1st August, 2012 = 107% of ₹ 2,50,000 – ₹ 11,250 (Interest) = ₹ 2,56,250
  2. Cost of Debentures sold on 1st October, 2012
    = (₹ 5,25,000 + ₹ 2,56,250) × 2,00,000/7,50,000 = ₹ 2,08,333
  3. Loss on sale of Debentures = ₹ 2,08,333 – ₹ 2,06,000 = ₹ 2,333
  4. Cost of Debentures converted
    = (₹ 5,25,000 + ₹ 2,56,250) × 1,10,000/7,50,000 = ₹ 1,14,583
  5. Cost of Debentures in hand on 31st December, 2012
    = (₹ 5,25,000 + ₹ 2,56,250) × 4,40,000/7,50,000 = ₹ 4,58,334 (approx.)
  6. Interest on Debentures converted = ₹ 1,10,000 × 13.5% × 3/12 = ₹ 3,713
  7. Closing balance of Debentures has been valued at cost (₹ 4,58,334) being lower than the market value ₹ 4,66,400 (₹ 4,400 × 106)

Question 5.
A Ltd. purchased on 1st April, 2018 8% convertible debenture in C Ltd. of face value of ₹ 2,00,000 @ ₹ 108. On 1st July, 2018 A Ltd. purchased another ₹ 1,00,000 debenture @ ₹ 112 cum interest.

On 1st October, 2018 ₹ 80,000 debenture was sold @ ₹ 108. On 1st December, 2018, C Ltd, give option for conversion of 8% convertible debentures into equity share of ₹ 10 each. A Ltd. receive 5,000 equity share in C Ltd. in conversion of 25% debenture held on that date. The market price of debenture and equity share in C Ltd. at the end of year 2018 is ₹ 110 and ₹ 15 respectively.

Interest on debenture is payable each year on 31 st March, and 30th September. The accounting year of A Ltd. is calendar year. Prepare investment account in the books of A Ltd. on average cost basis. Insurance Claim for loss of stock or profit (RTP)
Answer:
Investment Account for the year ending on 31st December, 2018
Scrip: 8% Convertible Debentures in C Ltd.
[Interest Payable on 31st March and 30th September]
Investment Accounts – CA Inter Accounts Study Material 10
Investment Accounts – CA Inter Accounts Study Material 11
SCRIP: Equity Shares in C LTD.
Investment Accounts – CA Inter Accounts Study Material 12

Working Notes:

  1. Cost of Debenture purchased on 1st July = ₹ 1,12,000 – ₹ 2,000 (Interest) = ₹ 1,10,000
  2. Cost of Debentures sold on 1st Oct.
    = (₹ 2,16,000 + ₹ 1,10,000) × 80,000/3,00,000 = ₹ 86,933
  3. Loss on sale of Debentures = ₹ 86,933 – ₹ 84,000 = ₹ 2,933
    Nominal value of debentures converted into equity shares = ₹ 55,000 [(₹ 3,00,000 – 80,000) × 2.5]
    Interest received before the conversion of debentures Interest on 25% of total debentures = 55,000 × 8% × 2/12 = 733
  4. Cost of Debentures converted = (₹ 2,16,000 + ₹ 1,10,000) × 55,000/3,00,000 = ₹ 59,767
  5. Cost of closing balance of Debentures = (₹ 2,16,000 + ₹ 1,10,000) × 1,65,000/3,00,000 = ₹ 1,79,300
  6. Closing balance of Debentures has been valued at cost being lower than the market value i.e. ₹ 1,81,500 (₹ 1,65,000 @ ₹ 110)
  7. 5,000 equity Shares in C Ltd. will be valued at cost of ₹ 59,767 being lower than the market value ₹ 75,000 (₹ 15 × 5,000)

Note:
It has been assumed that interest on debentures, which were converted into cash, had been received at the time of conversion.

Investment Accounts – CA Inter Accounts Study Material

Question 6.
Gaama Investment Company holds 1,000, 15% debentures of ₹ 100 each in Beta Industries Ltd. as on April 1, 2009 at a cost of ₹ 1,05,000. Interest is payable on June, 30 and December, 31 each year.

On May 1, 2009, 500 debentures are purchased cum-interest at ₹ 53,500. On November 1, 2009, 600 debentures are sold ex-interest at ₹ 57,300. On November 30, 2009, 400 debentures are purchased ex-interest at ₹ 38,400. On December 31, 2009, 400 debentures are sold cum-interest for ₹ 55,000.

Prepare the investment account showing value of holdings on March 31,2010 at cost, using FIFO method. (6 Marks) (May 2010)
Answer:
In the books of Gaama Investments Ltd. Investment Account (15% Debentures in Beta Industries Ltd.)
Investment Accounts – CA Inter Accounts Study Material 13

Working Notes:

  1. Accrued interest as on 1.4.09 = ₹ 1,00,000 × \(\frac{15}{100}\) × \(\frac{3}{12}\) = ₹ 3,750
  2. Accrued interest = ₹ 50,000 × \(\frac{15}{100}\) × \(\frac{4}{12}\) = ₹ 2,500
    Cost of investment for purchase on 1.5.09 = ₹ 53,500 – ₹ 2,500 = ₹ 51,000
  3. Interest received = ₹ 1,50,000 × \(\frac{15}{100}\) × \(\frac{4}{12}\) = ₹ 11,250
  4. Accrued interest = ₹ 60,000 × \(\frac{15}{100}\) × \(\frac{4}{12}\) = ₹ 3,000
  5. Accrued interest = ₹ 40,000 × \(\frac{15}{100}\) × \(\frac{5}{12}\) = ₹ 2,500
  6. Accrued interest = ₹ 40,000 × \(\frac{15}{100}\) × \(\frac{6}{12}\) = ₹ 3,000
  7. Sale price of investment on 31.12.09 = ₹ 55,000 – ₹ 3,000 = ₹ 52,000
  8. Accrued interest = ₹ 90,000 × \(\frac{15}{100}\) × \(\frac{6}{12}\) = ₹ 6,750
  9. Accrued interest = ₹ 90,000 × \(\frac{15}{100}\) × \(\frac{3}{12}\) = ₹ 3,375
  10. Cost of investment as on 31.3.10 = ₹ 51,000 + ₹ 38,400 = ₹ 89,400
  11. Loss on debentures sold on 1.11.2009:
    Sales price of debentures ₹ 57,300
    Less: Cost or investment sold = \(=\frac{\text { Rs. } 1,05,000}{1,000}\) × 600 = ₹ 63,000
    Loss on sale = ₹ 5,700
  12. Profit on debentures sold on 31.12.2009:
    Sales price of debentures ₹ 52,000
    Less: Cost ot investment sold = \(=\frac{\text { Rs. } 1,05,000}{1,000}\) × 400 = ₹ 42,000
    Profit on sale ₹ 10.000

Question 7.
Mr. Chatur had 12% Debentures of Face Value ₹ 100 of M/s. Unnati Ltd. as current investments.
He provides the following details relating to the investments.
1-4-2014 Opening balance 4000 debentures costing ₹ 98 each
1-6-2014 Purchased 2000 debentures @ ₹ 120 cum interest
1-9-2014 Sold 3000 debentures @ ₹ 110 cum interest
1-12-2014 Sold 2000 debentures @ ₹ 105 ex-interest
31-1-2015 Purchased 3000 debentures @ ₹ 100 ex-interest 31-3-2015 Market value of the investments ₹ 105 each Interest due dates are 30th June and 31st December.

Mr. Chatur closes his books on 31-3-2015. He incurred 2% brokerage for all his transactions.
Show investment account in the books of Mr. Chatur assuming FIFO method is followed. (8 Marks) (May 2015)
Answer:
Investment A/c of Mr. Chatur for the year ending on 31-3-2015
(Scrip: 12% Debentures of Unnati Limited)
(Interest Payable on 30th June and 31st December)
Investment Accounts – CA Inter Accounts Study Material 14
Investment Accounts – CA Inter Accounts Study Material 15

Working Notes:

1. Valuation of closing balance as on 31.3.2015:
Investment Accounts – CA Inter Accounts Study Material 16
Value at the end = ₹ 4,20,000 ie. whichever is less

2. Profit on sale of debentures as on 1.9.2014
Investment Accounts – CA Inter Accounts Study Material 17

3. Loss on sale of debentures as on 1.12.2014
Investment Accounts – CA Inter Accounts Study Material 18

Investment Accounts – CA Inter Accounts Study Material

4. Purchase cost of 2,000 debentures on 1.6.2014
Investment Accounts – CA Inter Accounts Study Material 19
5. Sale value for 3,000 debentures on 1.9.2014
Investment Accounts – CA Inter Accounts Study Material 20

Question 8.
A Ltd. purchased on 1st April, 2015 8% convertible debenture in C Ltd. of face value of ₹ 2,00,000 @ ₹ 108. On 1st July, 2015 A Ltd. purchased another ₹ 1,00,000 debenture @ ₹ 112 cum interest.

On 1st October, 2015 ₹ 80,000 debenture was sold @ ₹ 105. On 1st December, 2015, C Ltd. give option for conversion of 8% convertible debentures into equity share of ₹ 10 each. A Ltd. receive 5,000 equity share in C Ltd. in conversion of 25% debenture held on that date. The market price of debenture and equity share in C Ltd. at the end of year 2015 is ₹ 110 and ₹ 15 respectively.

Interest on debenture is payable each year on 31 st March, and 30th September. The accounting year of A Ltd. is calendar year.

Prepare investment account in the books of A Ltd. on average cost basis. (8 Marks) (May 2016)
Answer:
Investment Account for the year ending on 31st December, 2015
Scrip: 8% Convertible Debentures in C Ltd.
[Interest Payable on 31st March and 30th September]
Investment Accounts – CA Inter Accounts Study Material 21
Investment Accounts – CA Inter Accounts Study Material 22

Scrip : Equity Shares in C LTD.

Investment Accounts – CA Inter Accounts Study Material 23

Working Notes:

  1. Cost of Debenture purchased OR 1st July = ₹ 1,12,000 – ₹ 2,000 = ₹ 1,10,000 (Interest)
  2. Cost of Debentures sold on 1st Oct.
    = (₹ 2,16,000 + ₹ 1,10,000) × 80,000/3,00,000 = ₹ 86,933
  3. Loss on sale of Debentures = ₹ 86,933 – ₹ 84,000 = ₹ 2,933
    Nominal value of debentures converted into equity shares = ₹ 55,000
    [₹ 3,00,000 – 80,000) × .25]
    Interest received before the conversion of debentures
    Interest on 25% of total debentures = 55,000 × 8% × 2/12 = 733
  4. Cost of Debentures converted = (₹ 2,16,000 + ₹ 1,10,000) x = ₹ 59,767
    55,000/3,00,000
  5. Cost of closing balance of Debentures = (₹ 2,16,000 + ₹ 1,10,000) = ₹ 1,79,300
    x 1,65,000/3,00,000
  6. Closing balance of Debentures has been valued at cost being lower than the market value ie. ₹ 1,81,500 ft (₹ 1,65,000 @ ₹ 110)
  7. 5,000 equity Shares in C Ltd. will be valued at cost of ₹ 59,767 being lower than the market value ₹ 75,000 ft 15 × 5,000)

Note:
It has been assumed that interest on debentures, which were converted into cash, had been received at the time of conversion.

Investment Accounts – CA Inter Accounts Study Material

Variable Return Securities — Simple Questions

Question 9.
M carried out the following transactions in the shares of K Ltd.:

(1) On 1st April, 2017 she purchased 40,000 equity shares of ₹ 1 each fully paid up for ₹ 60,000.
(2) On 15th May 2017, Meera sold 8,000 shares for ₹ 15,200.
(3) At a meeting on 15th June, 2017, the company decided:

(i) To make a bonus issue of one fully paid up share for every four shares held on 1st June, 2017, and

(ii) To give its members the right to apply for one share for every five shares held on 1st June, 2017 at a price of ₹ 1.50 per share of which 75 paise is payable on or before 15th July, 2017 and the balance, 75 paise per share, on or before 15th September, 2017.

The shares issued under (i) and (ii) were not to rank for dividend for the year ending 31st December, 2017.

(a) M received her bonus shares and took up 4000 shares under the right issue, paying the sum thereon when due and selling the rights of the remaining shares at 40 paise per share; the proceeds were received on 30th September 2017.

(b) On 15th March, 2018, she received a dividend from K Ltd. of 15 per cent in respect of the year ended 31st Dec., 2017.

(c) On 30th March, 2018 she received ₹ 28,000 from the sale of 20,000 shares.
You are required to record these transactions in the Investment Account in M’s books for the year ended 31st March, 2018 transferring any profits or losses on these transactions to Profit and Loss account. Apply average cost basis.

Expenses and tax to be ignored.
Answer:
Books of M
Investment Account
(Shares in K Limited)
Investment Accounts – CA Inter Accounts Study Material 24
Investment Accounts – CA Inter Accounts Study Material 25

Working Notes:

Investment Accounts – CA Inter Accounts Study Material 26

Variable Return Securities — Advanced Questions

Question 10.
On 1 st January, 20X1, Singh had 20,000 equity shares in X Ltd. Nominal value of the shares was ₹ 10 each but their book value was ₹ 16 per share. On 1st June 20X1, Singh purchased 5,000 more equity shares in the company at a premium of ₹ 4 per share.
On 30th June, 20X1, the directors of X Ltd. announced a bonus and rights issue. Bonus was declared at the rate of one equity share for every five shares held and these shares were received on 2nd August, 20X1.

The terms of the rights Issue were:

(a) Rights shares to be issued to the existing holders on 10th August, 20X1.
(b) Rights issue would entitle the holders to subscribe to additional equity shares in the Company at the rate of one share per every three held at ₹ 15 per share the whole sum being payable by 30th September, 20X1.
(e) Existing shareholders were entitled to transfer their rights to outsiders, either wholly or in part
(d) Singh exercised his option under the issue for 50% of his entitlements and the balance of rights he sold to Ananth for a consideration of ₹ 1.50 per share.
(e) Dividends for the year ended 31st March, 20X1, at the rate of 15% were declared by the Company and received by Singh on 20th October, 20X1.
(f) On 1st November, 20X1, Singh sold 20,000 equity shares at a premium of ₹ 3 per share.
The market price of share on 31-12-20X1 was ₹ 14. Show the Investment Account as it would appear in Singh’s books on 31- 12-20X1 and the value of shares held on that date.
Answer:
Investment Account-Equity Shares in X Ltd.
Investment Accounts – CA Inter Accounts Study Material 27
* Dividend = [20,000 × 10 × 15%] [5,000 × 10 × 15%]

Working Notes:

1. Right shares
No. of right shares issued = (20,000 + 5,000 + 5,000)/3 = 10,000 shares
No. of right shares subscribed = 10,000 × 50% = 5,000
shares Amount of right shares issued = 5,000 × 15 = ₹ 75,000
No. of right shares sold = 10,000 – 5,000 = 5,000 shares
Sale of right shares = 5,000 × 1.5 = ₹ 7,500 to be credited to statement of profit and loss

Investment Accounts – CA Inter Accounts Study Material

2. Cost of shares sold
Investment Accounts – CA Inter Accounts Study Material 28
Investment Accounts – CA Inter Accounts Study Material 29

3. Value of investment at the end of the year
Assuming investment as current investment, closing balance will be valued based on lower of cost or net realisable value.

Here, Net realisable value is ₹ 14 per share Le. 15,000 shares x ₹ 14 = ₹ 2,10,000 and cost = 4,57,500/35,000 × 15,000 = ₹ 1,96,071. Therefore, value pf investment at the end of the year will be ₹ 1,96,071.

Question 11.
On 1st April, 2014, Hasan has 20,000 equity shares of Vayu Ltd., at a book value of ₹ 20 per share (face value of 10 each). He provides the following information:

(i) On 10th June, 2014, he purchased another 5,000 shares in Vayu Ltd., @ ₹ 15 per share.
(ii) On 1st August, 2014 Vayu Ltd., issued one bonus share for every five shares held by the shareholders.
(iii) On 31st August 2014, the directors of Vayu Ltd, announced a rights issue which entitle the shareholders to subscribe two shares for every six shares held @ of 15 per share. The shareholders can transfer their rights in full or in part.

Hasan sold 1 /4th of his right shares holding to Harsh for a consideration of 3 per share and subscribed the rest on 31st of October, 2014.
Prepare Investment A/c in the books of Hasan as on 31st October, 2014. (8 Marks) (Nov. 2014)
Answer:
Investment Account in the books of Hasan
(Equity shares in Vayu Ltd.)
Investment Accounts – CA Inter Accounts Study Material 30

Working Notes:

  1. Bonus shares = 25,000/5 = 5,000 shares
  2. Right shares = \(\frac{25,000+5,000}{6}\) × 2 = 10,000 shares
  3. Sale of rights = 10,000 shares × 1/4 × ₹ 3 = ₹ 7,500
  4. Rights subscribed = 10,000 × \(\frac{3}{4}\) × ₹ 15 = ₹ 1,12,500

Question 12.
Akash Ltd. had 4,000 equity share of X Limited, at a book value of ₹ 15 per share (face value of ₹ 10 each) on 1st April, 2016. On 1st September, 2016, Akash Ltd. acquired 1,000 equity shares of X Limited at a premium of ₹ 4 per share. X Limited announced a bonus and right issue for existing shareholders.

The terms of bonus and right issue were—

  1. Bonus was declared, at the rate of two equity shares for every five equity shares held on 30th September, 2016.
  2. Right shares are to be issued to the existing shareholders on 1st Decem-ber, 2016. The company issued two right shares for every seven shares held at 25% premium. No dividend. Was payable on these shares. The whole sum being payable by 31st December, 2016.
  3. Existing shareholders were entitled to transfer their rights to outsiders, either wholly or in part.
  4. Akash Ltd. exercised its option under the issue for 50% of its entitlements and sold the remaining rights for ₹ 8 per share.
  5. Dividend for the year ended 31st March, 2016, at the rate of 20% was declared by the company and received by Akash Ltd., on 20th January, 2017.
  6. On 1st February, 2017, Akash Ltd., sold half of its shareholdings at a premium of ₹ 4 per share.
  7. The market price of share on 31.03.2017 was ₹ 13 per share.
    You are required to prepare the Investment Account of Akash Ltd. for the year ended 31st March, 2017 and determine the value of share held on that date assuming the investment as current investment. (8 Marks) (May 2017)

Answer:
Investment Account Equity Shares in X Ltd.
Investment Accounts – CA Inter Accounts Study Material 31
Investment Accounts – CA Inter Accounts Study Material 32

Working Notes:

1. Cost of shares sold — Amount paid for 8,000 shares
Investment Accounts – CA Inter Accounts Study Material 33
* For ascertainment of cost for equity shares sold, average cost basis has been applied.

Investment Accounts – CA Inter Accounts Study Material

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 × 4,000). Thus, investment will be valued at ₹ 42,250.

3. Calculation of sale of right
1,000 shares × ₹ 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 1st April, 2016
= 4,000 shares × ₹ 10 × 20%
= ₹ 8,000 will be transferred to Profit and Loss A/c
Dividend received on shares purchased on 1st Sep. 2016
= 1,000 shares × ₹ 10 × 20% = ₹ 2,000 will be adjusted to Investment A/c

Note:
It has been assumed that no dividend is received on bonus shares as bonus shares are declared on 30th Sept., 2016 and dividend pertains to the year ended 31.3.2016.

Mix Questions

Question 13.
Smart Investments made the following investments in the year 2013-14:
12% State Government Bonds having face value ₹ 100
Investment Accounts – CA Inter Accounts Study Material 34
Interest on the bonds is received on 30th June and 31st Dec. each year.
Investment Accounts – CA Inter Accounts Study Material 35
Prepare Investment Accounts in the books of Smart Investments. Assume that the average cost method is followed. (8 Marks) (May 2014)
Answer:
In the books of Smart Investments
12% Govt. Bonds for the year ended 31st March, 2014
Investment Accounts – CA Inter Accounts Study Material 36
Investment Accounts – CA Inter Accounts Study Material 37

Investments in Equity shares of X Ltd. for year ended 31.3.2014

Investment Accounts – CA Inter Accounts Study Material 38

Investment Accounts – CA Inter Accounts Study Material

Working Notes:

1. Profit on sale of bonds on 30.9.13
= Sales proceeds – Average cost
Sales proceeds = ₹ 1,57,500
Average cost = ₹ [(1,26,000+1,92,000) × 1,500/3,200] = 1,49,062.50
Profit = 1,57,500 – ₹ 1,49,062.50 = ₹ 8,437.50

2. Valuation of bonds on 31st March, 2014
Cost = ₹ 3,18,000/3,200 × 1,700 = 1,68,937.50

3. Cost of equity shares purchased on 15-4-2013 = Cost + Brokerage = (5,000 × ₹ 200) + 1% of (5,000 × ₹ 200) = ₹ 10,10,000

4. Sale proceeds of equity shares on 15-12-2013 = Sale price – Brokerage
= (3,000 × ₹ 300) – 1% of (3,000 × ₹ 300) = ₹ 8,91,000.

5. Profit on sale of shares on 15-12-2013 = Sales proceeds – Average cost Sales proceeds = ₹ 8,91,000
Average cost = ₹ [(10,10,000 + 2,00,000 – 12,000 – 7,500) × 3,000/7,800]
= ₹ [11,90,500 × 3,000/7,800] – 4,57,885
Profit = ₹ 8,91,000 – ₹ 4,57,885 = ₹ 4,33,115.

6. Valuation of equity shares on 31st March, 2014
Cost = ₹ [11,90,500 × 4,800/7,800] = ₹ 7,32,615
Market Value = 4,800 shares × ₹ 220 = ₹ 10,56,000
Closing stock of equity shares has been valued at ₹ 7,32,615 i.e. cost being lower than the market value.

Note:
It has been assumed that no dividend is received on bonus shares as bonus shares are declared on 3-6-2013 and dividend pertains to the year ended 31-3-2013.

AS 2: Valuation of Inventories – CA Inter Accounts Study Material

AS 2: Valuation of Inventories – CA Inter Accounts Study Material is designed strictly as per the latest syllabus and exam pattern.

AS 2: Valuation of Inventories – CA Inter Accounts Study Material

Definition (Based On Para No. 3)

Question 1.
Alpha Ltd. sells beer to customers; some of the customers consume the beer in the bars run by Alpha Limited. While leaving the bars, the consumers leave the empty bottles in the bars and the company takes possession of these empty bottles. The company has laid down a detailed internal record procedure for accounting for these empty bottles which are sold by the company by calling for tenders. Keeping this in view:
(i) Decide whether the inventory of empty bottles is an asset of the company;
(ii) If so, whether the inventory of empty bottles existing as on the date of Balance Sheet is to be considered as inventories of the company and valued as per AS 2 or to be treated as scrap and shown at realizable value with corresponding credit to ‘Other Income’? (5 Marks) (May 2014)
Answer:
(i) Analysis:
Tangible objects or intangible rights carrying probable future benefits, owned by an enterprise are called assets. The company sells these empty bottles by calling tenders.
It means further benefits are accrued on its sale.

Conclusion:
Therefore, empty bottles are assets for the company.

(ii) Analysis:
As per AS 2 ‘Valuation of Inventories’, inventories are assets held for sale in the ordinary course of business. Inventory of empty bottles existing on the Balance Sheet date is the inventory and Alpha Ltd. has detailed controlled recording and accounting procedure which duly signify its materiality.

Conclusion:
Inventory of empty bottles cannot be considered as scrap and should be valued as inventory in accordance with AS 2.

AS 2: Valuation of Inventories - CA Inter Accounts Study Material

Scope (Based On Para Nos. 1 And 2)

Question 2.
A private limited company manufacturing fancy terry towels had valued its closing inventory of inventories of finished goods at the realisable value, inclusive of profit and the export cash incentives. Firm contracts had been received and goods were packed for export, but the ownership in these goods had not been transferred to the foreign buyers.
Comment on the valuation of the inventories by the company. (5 Marks) (May 2018)
Answer:
Accounting Standard 2 ‘Valuation of Inventories’ states that inventories should be value dat lower of historical cost and net realizable value. The standard states, ‘at certain stages in specific industries, such as when agricultural crops have been harvested or mineral ores have been extracted, performance may be substantially complete prior to the execution of the transaction generating .revenue. In such cases, when sale is assured under forward contract or a government guarantee or when market exists and there is a negligible risk of failure to sell, the goods are often valued at net realisable value at certain stages of production.’

Analysis:
Terry Towels do not fall in the category of agricultural crops or mineral ores. Accordingly, taking into account the facts stated, the closing inventory of finished goods (Fancy terry towel) should have been valued at lower of cost and net realisable value and not at net realisable value. Further, export incentives are recorded only in the year the export sale takes place.

Conclusion:
The policy adopted by the company for valuing its closing inventory of inventories of finished goods is not correct.

AS 2: Valuation of Inventories - CA Inter Accounts Study Material

Cost (Based On Para Nos. 6 To 13)

Question 3.
‘In determining the cost of inventories, it is appropriate to exclude certain costs and recognize them as expenses in the period in which they are incurred’. Provide examples of such costs as per AS 2 ‘Valuation of Inventories’. (5 Marks) (November 2012)
Answer:
As per AS 2 ‘Valuation of Inventories’, certain costs are excluded from the cost of the inventories and are recognised as expenses in the period in which incurred. Examples of such costs are:
(a) abnormal amount of wasted materials, labour, or other production costs;
(b) storage costs, unless those costs are necessary in the production process prior to a further production stage;
(c) administrative overheads that do not contribute to bringing the inventories to their present location and condition; and
(d) selling and distribution costs.

Question 4.
The company X Ltd., has to pay for delay in cotton clearing charges. The company up to 31.3.2010 has included such charges in the valuation of closing stock. This being in the nature of interest, X Ltd. decided to exclude such charges from closing stock for the year 2010-11. This would result in decrease in profit by ₹ 5 lakhs. Comment.
Answer:
As per para 12 of AS 2 (revised}, interest and other borrowing costs are usually considered as not relating to bringing the inventories to their present location and condition and are therefore, usually not included in the cost of inventories.

Analysis:
X Ltd. was in practice to charge the cost for delay in cotton clearing in the closing stock. As X Ltd. decided to change this valuation procedure of closing stock, this treatment will be considered as a change in accounting policy and such fact to be disclosed as per AS 1.

Conclusion:
Any change in amount mentioned in financial statement, which will affect the financial position of the company should be disclosed properly as per AS 1, AS 2 and AS 5.

A note should be given in the annual accounts that, had the company followed earlier system of valuation of closing stock, the profit before tax would have been higher by ₹ 5 lakhs.

AS 2: Valuation of Inventories - CA Inter Accounts Study Material

Question 5.
In a production process, normal waste is 5% of input. 5,000 MT of input were put in process resulting in wastage of 300 MT. Cost per MT of input is ₹ 1,000. The entire quantity of waste is on stock at the year end. State with reference to Accounting Standard, how will you value the inventories in this case?
Answer:
Ax per para 13 of AS 2 (Revised), abnormal amounts of wasted materials, labour and other production costs are excluded from cost of inventories and such costs are recognized as expenses in the period in which they are incurred.

Analysis:
In this case, normal waste is 250 MT and abnormal waste is 50 MT.

Conclusion:
The cost of 250 MT will be included in determining the cost of inventories (finished goods) at the year end. The cost of abnormal waste amounting to ₹ 50,000 (50 MT × ₹ 1,000) will be charged to the profit and loss statement.

Question 6.
From the following information, ascertain the value of stock as on 31st March, 2012
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 1
At the time of valuing stock as on 31st March, 2011, a sum of ₹ 3,500 was written off on a particular item, which was originally purchased for ₹ 10,000 and was sold during the year for ₹ 9,000. Barring the transaction relating to this item, the gross profit earned during the year was 20% on sales. (5 Marks) (November 2012)
Answer:
Statement showing stock valuation as on 31.3.2012
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 2

AS 2: Valuation of Inventories - CA Inter Accounts Study Material

Question 7.
Capital Cables Ltd., has a normal wastage of 4% in the production process. During the year 2013-14 the Company used 12,000 MT of raw material costing ₹ 150 per MT.
At the end of the year 630 MT of wastage was in stock. The accountant wants to know how this wastage is to be treated in the books.
Explain in the context of AS 2 the treatment of abnormal loss and abnormal loss and also find out the amount of abnormal loss if any. (5 Marks) (November 2014)
Answer:
As per AS 2 (Revised) ‘Valuation of Inventories’, abnormal amounts of wasted materials, labour and other production costs are excluded from cost of inventories and such costs are recognized as expenses in the period in which they are incurred.

The normal loss will be included in determining the cost of inventories (finished goods) at the year end.

Amount of Abnormal Loss:
Macrial used – 12,000 MT @ ₹ 150 = ₹ 1 8,00,000
Normal Loss (12,000 MT 4%) – 480 MT
Net quantity of material – 11,520 MT
Abnormal Loss in quantity – 150 MT
Abnormal Loss – ₹ 23,437.50
[150 units @ ₹ 156.25 (₹ 18,00,000/11,520)]
Amount ₹ 23,437.50 will be charged to the Profit and Loss statement.

AS 2: Valuation of Inventories - CA Inter Accounts Study Material

Question 8.
Z Limited ordered 13,000 kg. of chemicals at ₹ 90 per kg. The purchase price includes excise duty of ₹ 5 per kg, in respect of which full CENVAT credit is admissible. Further, State VAT is leviable at ₹ 2.5 per kg on purchase price. Freight incurred amounted to ₹ 30,000.

Normal transit loss is 4%. The company actually received 12,400 kg and consumed 10,000 kg. The company has received trade discount amounting to ₹ 1 per kg. The chemicals were delivered in containers. The containers were not reusable, hence sold for ₹ 500. The administrative expenses incurred to bring the chemicals were ₹ 10,000.
Compute the value of inventory and allocate the material cost as per AS-2. (5 Marks) (May 2016)
Answer:
Statement showing Inventory valuation
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 3
# This is now covered in GST. But the answer would remain same.

Statement showing allocation of material cost
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 4
Note:
Containers are used for delivery of the chemicals and are not reusable. Cost of these containers is treated as selling and distribution expense. The sale value of these containers will be credited to Profit and Loss Account and shall not be considered for the purpose of valuation of inventory.

AS 2: Valuation of Inventories - CA Inter Accounts Study Material

Measurement Of Inventories (Based On Para Nos. 5 And 24)

Question 9.
Raw materials inventory of a company includes certain material purchased at ₹ 100 per kg. The price of the material is on decline and replacement cost of the inventory at the year end is ₹ 75 per kg. It is possible to convert the material into finished product at conversion cost of ₹ 125.

Decide whether to make the product or not to make the product, if selling price is (i) ₹ 175 and (ii) ₹ 225. Also find out the value of inventory in each case. (5 Marks) (May 2010)
Answer:
As per para 24 of AS 2 ‘Valuation of Inventories’, materiab and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realizable value, the materials are written down to net realisable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value.

(i) When selling price is ₹ 175
Incremental Profit = ₹ 175 – ₹ 125 = ₹ 50
Current price of the material = ₹ 75
Therefore, it is better not to make the product. Raw material inventory would be valued at net realisable value i.e. ₹ 75 because the selling price of the finished product is less than ₹ 225 (100+125) per kg.

(ii) When selling price is ₹ 225
Incremental Profit = ₹ 225 – ₹ 125 = ₹ 100
Current price of the raw material = ₹ 75.
Therefore, it is better to make the product.
Raw material inventory would be valued at ₹ 100 per kg because the selling price of the finished product is not less than ₹ 225.

AS 2: Valuation of Inventories - CA Inter Accounts Study Material

Question 10.
Best Ltd. deals In five products, P, 0, R, S and T which are neither similar nor inter-changeable. At the time of closing of its accounts for the year ending 31st March 2011, the historical cost and net realizable value of the items of the closing stock are determined as follows:
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 5
What will be the value of closing stock for the year ending 31st March, 2011 as per AS 2 ‘Valuation of Inventories’? (5 Marks) (May 2011)
Answer:
As per para 5 of AS 2 ‘Valuation of Inventories’ inventories should be valued at the lower of cost and net realizable value. Inventories should be written down to net realizable value on an item-by-item basis.
Valuation of inventory for the year ending 31st March 2011
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 6

Question 11.
On 31st March 2013 a business firm finds that cost of a partly finished unit on that date is ₹ 530. The unit can be finished in 2013-14 by an additional expenditure of ₹ 310. The finished unit can be sold for ₹ 750 subject to payment of 4% brokerage on selling price. The firm seeks your advice regarding: –
(i) the amount at which the unfinished unit should be valued as at 31st March, 2013 for preparation of final accounts and
(ii) the desirability or otherwise of producing the finished unit. (5 Marks)(May 2013)
Answer:
Valuation of WIP:
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 7
Incremental cost ₹ 310 (cost to complete) is less than incremental revenue ₹ 720 (₹ 750 – ₹ 30). The enterprise will therefore decide to finish the unit for sale at ₹ 750.

AS 2: Valuation of Inventories - CA Inter Accounts Study Material

Question 12.
Calculate the value of raw materials and closing stock based on the following information:
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 8
Total Fixed overhead for the year was ₹ 2,00,000 on normal capacity of 20,000 units.
Calculate the value of the closing stock, when
(i) Net Realizable Value of the Finished Goods Y is ₹ 400.
(ii) Net Realizable Value of the Finished Goods Y is ₹ 300. (5 Marks) (May 2014)
Answer:
Working Notes:
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 9

AS 2: Valuation of Inventories - CA Inter Accounts Study Material

# (Now covered in GST) – Treatment still remains the same
Situation (i)
When Net Realisable Value of the Finished Goods Y is ₹ 400
NRV is greater than the cost of Finished Goods Y i.e. ₹ 330
Hence, Raw Material and Finished Goods are to be valued at cost
Value of Closing Stock:
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 10

Situation (ii)
When Net Realisable Value of the Finished Goods Y is ₹ 300
NRV is less than the cost of Finished Goods Y i.e. ₹ 330
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:
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 11

AS 2: Valuation of Inventories - CA Inter Accounts Study Material

Question 13.
Mr. Mehul gives the following information relating to items forming part of inventory as on 31-3-2015. His factory produces Product X using Raw material A.
(i) 600 units of Raw material A (purchased @ ₹ 120). Replacement cost of raw material A as on 31-3-2015 is ₹ 90 per unit.
(ii) 500 units of partly finished goods in the process of producing X and cost incurred till date ₹ 260 per unit. These units can be finished next year by incurring additional cost of ₹ 60 per unit.
(iii) 1500 units of finished Product X and total cost incurred ₹ 320 per unit. Expected selling price of Product X is ₹ 300 per unit.
Determine how each item of inventory will be valued as on 31-3-2015. Also calculate the value of total inventory as on 31-3-2015. (5 Marks) (May 2015)
Answer:
As- per AS 2 ‘Valuation of Inventories’, materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at cost or above cost. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realizable value, the materials are written down to net realizable value.

Analysis:
The replacement cost of the materials may be the best available measure of their net realizable value. In the given case, selling price of product X is ₹ 300 and total cost per unit for production is ₹ 320.

Conclusion:
The valuation will be done as under:

  1. 600 units of raw material will be written down to replacement cost as market value of finished product is less than its cost, hence valued at ₹ 90 per unit.
  2. 500 units of partly finished goods will be valued at 240 per unit i.e. lower of cost ₹ 320 (₹ 260 + additional cost ₹ 60) or Net estimated selling price ₹ 240 (Estimated selling price ₹ 300 per unit less additional cost of ₹ 60).
  3. 1500 units of finished product X will be valued at NRV of ₹ 300 per unit since it is lower than cost ₹ 320 of product X

Valuation of Inventory
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 12

Question 14.
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.
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 13
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
(a) Net realizable value of Chemical Y is ₹ 800 per unit
(b) Net realizable value of Chemical Y is ₹ 600 per unit (5 Marks) (November 2017)
Answer:
(a) 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:
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 14

AS 2: Valuation of Inventories - CA Inter Accounts Study Material

(b) 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:
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 15
Working Note:
Statement showing cost of Raw material X and Chemical Y
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 16

Net Realisable Value (Based On Para NOS, 20 To 23 And 25)

Question 15.
The dosing inventory at cost of XYZ Ltd. amounted to ₹ 9,56,700. 350 Shirts, which had cost ₹ 380 each and normally sold for ₹ 750 each are included in this amount of ₹ 9,56,700. Owing to a defect in manufacture, they were all sold after the Balance Sheet date at 50% of their normal price. Selling expenses amounted to 5% of the proceeds. What should be the closing inventory value? (5 Marks) (May 2013)
Answer:
Value of closing inventory
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 17
Working Notes :
1. Valuation of Shirts as per AS 2
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 18
Therefore, value of inventory of shirts to be reduced by ₹ 8,313 (₹ 23.75 × 350 shirts)

General Questions

Question 16.
HP is a leading distributor of petrol. A detail inventory of petrol in hand is taken when the books are closed at the end of each month. At the end of month following information is available:
Sales – ₹ 47,25,000
General overheads cost – ₹ 1,25,000
Inventory at beginning – 1,00,000 litres @15 per litre
Purchases
June 1 two lakh litres @ 14.25
June 30 one lakh litres @ 15.15
Closing inventory 1.30 lakh litres
Compute the following by the FIFO as per AS 2:
(i) B. Value of Inventory on June, 30.
(ii) Amount of cost of goods sold for June.
(iii) Profit/Loss for the month of June. (5 Marks) (November 2010)
Answer:
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 19

AS 2: Valuation of Inventories - CA Inter Accounts Study Material

Question 17.
On the basis of information given below, find the value of inventory (by periodic inventory method) as per AS 2, to be considered while preparing the Balance Sheet as on 31st March, 2017 on weighted Average Basis.
Details of Purchases:
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 20
Net realizable value of inventory as on 31st March, 2017 is ₹ 107.75 per unit. You are required to compute the value of Inventory as per AS 2.
Answer:
Net Realisable Value of Inventory as on 31st March, 2017
= ₹ 107.75 × 20 units = ₹ 2,155
Value of inventory as per Weighted Average basis
Total units purchased and total cost:
AS 2 Valuation of Inventories - CA Inter Accounts Study Material 21
Weighted Average Cost = ₹ 8640/80 units = ₹ 108
Total cost = ₹ 108 × 20 units = ₹ 2,160
Value of inventory to be considered while preparing Balance Sheet as on 31st March, 2017 is, Cost or Net Realisable value whichever is lower i.e. ₹ 2,155

Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material

Hire Purchase and Instalment Sale Transactions – CA Inter Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material

Theory Questions

Question 1.
What are the differences between Hire Purchase and Instalment System? (4 marks) (Nov. 2014)
Answer:
Differences between Hire Purchase and Instalment System

Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 1
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 2

Question 2.
Distinguish between Hire Purchase System and Instalment system. (4 marks) (May 2017)
Answer:
Differences between Hire Purchase and Instalment System

Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 1
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 2

Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material

Question 3.
Explain the special features of hire purchase agreement. (4 marks) (Nov. 2017)
Answer:
Special features of Hire Purchase Agreement

  1. Possession:
    The hire vendor transfers possession of the goods to the hire purchaser immediately after the contract for hire purchase is made.
  2. Instalments:
    The goods are delivered by the hire vendor on the condition that a hire purchaser should pay the amount in periodical instalments.
  3. Down Payment:
    The hire purchaser generally makes a down payment i.e. an amount on signing the agreement.
  4. Constituents of Hire purchase instalments:
    Each instalment consists partly of a finance charge (interest) and partly of a capital payment.
  5. Ownership:
    The property in goods is to pass to the hire purchaser on the payment of the last instalment and exercising the option conferred upon him under the agreement.
  6. Repossession:
    In case of default in respect of payment of even the last instalment, the hire vendor has the right to take the goods back without making any compensation.

Computation Of Interest; Cash Retail Price

Question 4.
On 1st April, 2009 a car company sold to Arya Bros., a motor car on hire-purchase basis. The total hire-purchase price was ₹ 4,60,000 with down payment of ₹ 1,60,000. Balance amount was to be paid in three annual instalments of ₹ 1,00,000 each. The first instalment payable on 31st March, 2010. The cash price of the car was ₹ 4,00,000.
How will Arya Bros, account for interest over three accounting years assuming books of account are closed on 31st March every year? (2 Marks) {May 2010)
Answer:
Total interest on hire purchase transactions = ₹ 4,60,000 – ₹ 4,00,000 = ₹ 60,000
As balance payment is made in three equal instalments, so interest is to be allocated in the ratio of 3:2:1
Therefore, interest for 1st year = ₹ 60,000 × \(\frac{3}{6}\) = ₹ 30,000
find year = ₹ 60,000 × \(\frac{2}{6}\) = ₹ 20,000
Bird year = ₹ 60,000 × \(\frac{1}{6}\) = ₹ 10,000

Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material

Question 5.
G Ltd, acquired a delivery van on hire purchase on 01.04.2014 from Gab a Enterprises. The terms were as follows:
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 3
Cash price of van ₹ 1,50,000 and depreciation is charged at 10% WDV.
You are required to calculate Total Interest and Interest included in each instalment (RTP)
Answer:
Calculation of total Interest and Interest included in each instalment Hire Purchase Price (HPP) = Down Payment + instalments = 30,000 + 50,000 + 50,000 + 30,000 + 20,000 = 1,80,000
Total Interest = 1,80,000 – 1,50,000 = 30,000

Computation of Ratio of HPP
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 4
Ratio of outstanding HPP at beginning for each year = 15 : 10 : 5 : 2
Total Interest is of ₹ 30,000
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 5

Question 6.
(i) From the following, calculate the cash price of the asset:
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 6
(ii) On 1st April, 2009 a car company sold to Arya Bros., a motor car on hire-purchase basis. The total hire-purchase price was ₹ 4,60,000 with down payment of ₹ 1,60,000. Balance amount was to be paid in three annual instalments of ₹ 1,00,000 each. The first instalment payable on 31st March, 2010. The cash price of the car was ₹ 4,00,000.
How will Arya Bros, account for interest over three accounting years assuming books of account are closed on 31st March every year? (2 × 2 = 4 Marks) (May 2010)
Answer:
(i) Computation of cash price of the asset
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 7
Cash price of the asset = Down payment + ₹ 35,459
= ₹ 10,000 + ₹ 35,459
= ₹ 45,459

(ii) Total interest on hire purchase transactions = ₹ 4,60,000 – ₹ 4,00,000 = ₹ 60,000
As balance payment is made in three equal instalments, so interest is to be allocated in the ratio of 3 : 2 : 1
Therefore, interest for 1st year = ₹ 60,000 × \(\frac{3}{6}\) = ₹ 30,000
IInd year = ₹ 60,000 × \(\frac{2}{6}\) = ₹ 20,000
IIIrd year = ₹ 60,000 × \(\frac{1}{6}\) = ₹ 10,000

Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material

Question 7.
On 1st April, 2012, Fastrack Motors Co. sells a truck on hire purchase basis to Teja Transport Co. for a total hire purchase price of ₹ 9,00,000 payable as to ₹ 2,40,000 as Question No. 1 is compulsory Candidates are also required to answer any five questions from the remaining six questions. Wherever necessary suitable assumptions may be made and disclosed by way of a note. Working Notes should form part of the answer. (5 Marks) (Nov. 2012)
Answer:
Ratio of interest and amount due \(=\frac{\text { Rate of interest }}{100+\text { Rate of interest }}\) = \(\frac{10}{110}\) = 1/11
There is no interest element in the down payment as it is paid on the date of the transaction. Instalments paid after certain period includes interest portion also. Therefore, to ascertain cash price, interest will be calculated from last instalment to first instalment as follows:
Computation of Interest and Cash Price
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 8
Total cash price = ₹ 5,47,107 + 2,40,000 (down payment) = ₹ 7,87,107.

Working Notes:

  1. ₹ 2,00,000 + 2nd instalment of ₹ 2,20,000 = ₹ 4,20,000.
  2. ₹ 3,81,818 + 1st instalment of ₹ 2,20,000 = ₹ 6,01,818.

Problems Without Repossession

Question 8.
Happy Valley Florists Ltd. acquired a delivery van on hire purchase on 01.04.2010 from Ganesh Enterprises. The terms were as follows:
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 9
Cash price of van ₹ 1,50,000 and depreciation is charged at 10% WDV.

You are required to:

  1. Calculate Total Interest and Interest included in each instalment
  2. Prepare Van A/c., Ganesh Enterprises A/c. in the books of Happy Valley Florists Ltd. up to 31.03.2014. (8 Marks) (May 2014)

Answer:
Computation of total Interest and Interest included in each instalment
Hire Purchase Price (HPP) = Down Payment + instalments
= 30,000 + 50,000 + 50,000 + 30,000 + 20,000
= 1,80,000
Total Interest = 1,80,000 – 1,50,000 = 30,000

Calculation of Ratio of HPP in beginning of each year
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 10

1. Ratio of outstanding HPP at beginning for each year = 15 : 10 : 5 : 2 Total Interest is of ₹ 30,000
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 11
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 12

Books of Happy Valley Florist Ltd. Van A/c
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 13

Ganesh Enterprises A/c
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 14

Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material

Question 9.
M/s. Kodam Enterprises purchased a generator on hire purchase from M/s. Sanctum Ltd. on 1st April, 2017. The hire purchase price was ₹ 48,000. Down payment was ₹ 12,000 and the balance is payable in 3 annual instalments
of ₹ 12,000 each payable at the end of each financial year. Interest is payable @ 8% p.a. and is included in the annual payment of ₹ 12,000.
Depreciation at 10% p.a. is to be written of using the straight -line method.
You are required to:

(i) calculate the cash price of the generator and the interest paid on each instalment.
(ii) pass relevant journal entries in the books of M/s. Kodam Enterprises from 1 st April, 2017 to 31 st March, 2018 following the interest suspense method. (8 Marks) (May 2018)

Answer:

(i) Computation of Interest and Cash Price
Ratio of interest and amount due = 8/(100 + rate of interest) Le. 8/108
To ascertain cash price, interest will be calculated from last instalment to first instalment as follows:
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 15
Total cash price = ₹ 30,925 + 12,000 (down payment) = ₹ 42,925

Working Notes:

  1. ₹ 11,111 + 2nd instalment of ₹ 12,000 = ₹ 23,111
  2. ₹ 21,399 + 1st instalment of ₹ 12,000 = ₹ 33,399

(ii) Journal Entries
Books of M/s Kodam Enterprises
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 16
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 17

Problems With Repossession

Question 10.
The following particulars relate to hire purchase transactions:
(a) X purchased three cars from Y on hire purchase basis, the cash price of each car being ₹ 2,00,000.
(b) The hire purchaser charged depreciation @ 20% on diminishing balance method.
(c) Two cars were seized by on hire vendor when second instalment was not paid at the end of the second year. The hire vendor valued the two cars at cash price less 30% depreciation charged under it diminishing balance method.
(d) The hire vendor spent ₹ 10,000 on repairs of the cars and then sold them for a total amount of ₹ 1,70,000.
You are required to compute:

(i) Agreed value of two cars taken back by the hire vendor.
(ii) Book value of car left with the hire purchaser.
(iii) Profit or loss to hire purchaser on two cars taken back by the hire vendor.
(iv) Profit or loss of cars repossessed, when sold by the hire vendor. (RTP)

Answer:
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 18

Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material

Question 11.
On 1st April, 2012, M/s. Power Motors sold on hire purchase basis a truck whose cash price was ₹ 9,00,000 to M/s. Singh & Singh, a transport firm. The terms of the contract were that the transporters were to pay ₹ 3,00,000 down and six four-monthly instalments of ₹ 1,00,000 plus interest on outstanding amount of cash price for the intervening four months. The instalments were payable on 31st July, 30th November and 31st March in each one of the two accounting years. Interest was calculated @ 12% per annum.

M/s. Singh & Singh duly paid the instalment on 31st July, 2012 but failed to pay the instalment on 30th November, 2012. M/s. Power Motors, after legal formalities, repossessed the truck valuing it at ₹ 7,00,000.
M/s. Power Motors spent ₹ 80,000 on repairs and repainting of the truck and on 7th January, 2013 sold it for ₹ 7,50,000 cash.

You are required to prepare M/s. Singh & Singh’s A/c and Goods Repossessed Account in the books of M/s. Power Motors. (6 Marks) (May 2013)
Answer:
In the books of M/s. Power Motors M/s. Singh & Singh’s A/c
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 19

Goods Repossessed A/c
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 20

Question 12.
Lucky bought 2 tractors from Happy on 1-10-2011 on the following terms:

Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 21
Lucky provides depreciation @ 20% on the diminishing balances.

On 30-9-2014 Lucky failed to pay the 3rd instalment upon which Happy repossessed 1 tractor. Happy agreed to leave one tractor with Lucky and adjusted the value of the tractor against the amount due. The tractor taken over was valued on the basis of 30% depreciation annually on written down basis. The balance amount remaining in the vendor’s account after the above adjustment was paid by Lucky after 3 months with interest @ 18% p.a.
You are required to:

  1. Calculate the cash price of the tractors and the interest paid with each instalment.
  2. Prepare Tractor Account and Happy Account in the books of Lucky assuming that books are closed on September 30 every year. Figures may be rounded off to the nearest rupee. (8 Marks) (May 2015)

Answer:
Computation of Interest and Cash Price
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 22
Total cash price = ₹ 6,50,000 + 5,00,000 (down payment) = ₹ 11,50,000.

Books of Lucky Tractor A/c
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 23
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 24

Happy A/c
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 25

Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material

Question 13.
Girish Transport Ltd. purchased from NCR Motors 3 electric rickshaws costing ₹ 60,000 each on the hire purchase system on 01.01.2013. Payment was to be made ₹ 30,000 down and the remainder in 3 equal instalments payable on 31.12.2013, 31.12.2014 and 31.12.2015 together with interest @ 10% p.a. Girish Transport Ltd. writes off depreciation @ 20% p.a. on the reducing balance. It paid the instalment due at the end of 1st year i.e. 31.12.2013 but could not pay next on 31.12.2014. NCR Motors agreed to leave one e-rickshaw with the purchaser on 31.12.2014 adjusting the value of the other two e-rickshaws against the amount due on 31.12.2014. The e-rickshaws were valued on the basis of 30% depreciation annually on WDV basis.

Show the necessary Ledger accounts in the books of Girish Transport Ltd. for the years 2013, 2014, and 2015. (8 Marks) (May 2016)
Answer:
Books of Girish Transport Ltd.
E-Rickshaw A/c
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 26

NCR Motors A/c
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 27

Note:
In the absence of any information it has been assumed that the balance payment amounting ₹ 56,320 had not been made till 31st Dec. 2015.

Question 14.
Srikumar bought 2 cars from ‘Fair Value Motors Pvt. Ltd’, on 1.4.2012 on the following terms:
Down payment – 6,00,000
1st Instalment at the end of first year – 4,20,000
2nd Instalment at the end of 2nd year – 4,90,000
3rd Instalment at the end of 3rd year – 5,50,000
Interest is charged at 10% p.a.
Srikumar provides depreciation @ 25% on the diminishing balances.

On 31.3.2015 Srikumar failed to pay the 3rd instalment upon which ‘Fair Value Motors Pvt. Ltd.’ repossessed 1 car. Srikumar agreed to leave one car with Fair Value Motors Pvt. Ltd. and adjusted the value of the car against the amount due. The car taken over was valued on the basis of 40% depreciation annually on written down basis. The balance amount remaining in the vendor’s account after the above adjustment was paid by Srikumar after 3 months with interest @ 20% p.a.

You are required to:

(i) Calculate the cash price of the cars and the interest paid with each instalment.
(ii) Prepare Car Account and Fair Value Motors Pvt. Ltd. Account in the books of Srikumar assuming books are closed on March 31, every year. Figures may be rounded off to the nearest rupee. (8 Marks) (Nov. 2016)

Answer:

(i) Computation of Interest and Cash Price
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 28
Total cash price = ₹ 12,00,000 + 6,00,000 (down payment) = ₹ 18,00,000.

(ii) In the books of Srikumar
Cars A/c
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 29
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 30
* May be rounded off as 1,85,287. In that case, the balance in cars account will be 3,79,688.

Fair Value Motors Pvt. Ltd. A/c
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 31
Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material 32

Accounts from Incomplete Records – CA Inter Accounts Study Material

Accounts from Incomplete Records – CA Inter Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Accounts from Incomplete Records – CA Inter Accounts Study Material

Statement Of Affairs Method — Simple Problems

Question 1.
The Income Tax Officer, on assessing the income of Mr, X for the financial years 2015-2016 and 2016-17 feels that Mr. X has not disclosed the full income. He gives you the following particulars of assets and liabilities of Mr. X as on 1st April, 2015 and 1st April, 2017.
Accounts from Incomplete Records – CA Inter Accounts Study Material 1
During the two years the domestic expenditure was ₹ 4,000 p.m. The declared income of the financial years was ₹ 1,05,000 for 2015-16 and ₹ 1,23,000 for 2016-17 respectively.
State whether the Income-tax Officer’s contention is correct. Explain by giving your workings.
Answer:
Computation of Capital Balance of Mr. X
Accounts from Incomplete Records – CA Inter Accounts Study Material 2
Conclusion:
The contention of Income-tax officer’s is correct.

Accounts from Incomplete Records – CA Inter Accounts Study Material

Question 2.
Mr. Aman is running a business of readymade garments. He does not maintain his books of account under double entry system. While assessing the income of Mr. Aman for the financial year 2016-17, Income Tax Officer feels that he has not disclosed the full income earned by him from his business. He provides you the following information:
Accounts from Incomplete Records – CA Inter Accounts Study Material 3
Accounts from Incomplete Records – CA Inter Accounts Study Material 4
During the year 2016-17, one life insurance policy of Mr. Aman was matured and amount received ₹ 50,000 was retained in the business.
State whether the Income Tax Officer’s contention is correct. Explain by giving your working. (4 Marks) (Nov. 2017)
Answer:
Computation of Capital balances of Mr. Aman
Accounts from Incomplete Records – CA Inter Accounts Study Material 145
Computation of Profit
Accounts from Incomplete Records – CA Inter Accounts Study Material 6
Conclusion:
The contention of Income-tax Officer’s is correct.

Statement Of Affairs Method — Advanced Problems

Question 3.
A and B are in Partnership having Profit sharing ratio 2:1. The following information is available about their assets and liabilities:
Accounts from Incomplete Records – CA Inter Accounts Study Material 7
Accounts from Incomplete Records – CA Inter Accounts Study Material 8
The partners are entitled to salary @ ₹ 2,000 p.m. They contributed proportionate capital. Interest is paid @ 6% on capital and charged @ 10% on drawings.
Drawings of A and B
Accounts from Incomplete Records – CA Inter Accounts Study Material 9
On 30th June, they took C as 1 /3rd partner who contributed ₹ 75,000. C is entitled to share of 9 months’ profit. The new profit ratio becomes 1:1:1. A withdrew his proportionate share. Depreciate furniture @ 10% p a., new purchases ₹ 10,000 may be depreciated for l/4th of a year.
Current account balances as on 31-3-2016: A ₹ 5,000 (Cr.), B ₹ 2,000 (Dr.)
Prepare Statement of Profit, Current Accounts of partners and Statement of Affairs as on 31-3-2017. (Examination Ques.)
Answer:
Statement of Affairs as on 31-3-2016 and 31-3-2017
Accounts from Incomplete Records – CA Inter Accounts Study Material 10
Accounts from Incomplete Records – CA Inter Accounts Study Material 11
# See current. A/cs.

Accounts from Incomplete Records – CA Inter Accounts Study Material

Notes:

Accounts from Incomplete Records – CA Inter Accounts Study Material 12
This is after adding salary, interest on capital and deducting drawings and interest on drawings.
Accounts from Incomplete Records – CA Inter Accounts Study Material 13

Accounts from Incomplete Records – CA Inter Accounts Study Material 14

Current Accounts
Accounts from Incomplete Records – CA Inter Accounts Study Material 15

Statement showing Computation of Profit
Accounts from Incomplete Records – CA Inter Accounts Study Material 16

Final Accounts Method/Conversion Method — Simple Problems

Question 4.
The following is the Balance Sheet of the retail business of Mr. A as at 31st December, 2015:
Accounts from Incomplete Records – CA Inter Accounts Study Material 17
Accounts from Incomplete Records – CA Inter Accounts Study Material 18
You are furnished with the following information:
(1) A sell’s his goods at a profit of 20% on sales.
(2) Goods are sold for cash and credit. Credit customers pay by cheques only.
(3) Payments for purchases are always made by cheques.
(4) It is the practice of A to send to the bank every weekend the collections of the week after paying every week, salary of ₹ 300 to the clerk, Sundry expenses of ₹ 50 and personal expenses ₹ 100.
Analysis of the Bank Pass-Book for the 13 weeks period ending 31st March, 2016 disclosed the following:
Payments to creditors ?
Accounts from Incomplete Records – CA Inter Accounts Study Material 19
On the evening of 31st March, 2016, the Cashier absconded with the available cash in the cash box. There was no cash deposit in the week ended on that date. You are required to prepare a statement showing the amount of cash defalcated by the Cashier and also a Profit and Loss Account for the period ended 31st March, 2016 and a Balance Sheet as on that date.
Answer:
Statement showing computation of cash defalcated by the cashier
Accounts from Incomplete Records – CA Inter Accounts Study Material 20
Trading and Profit and Loss Account for the 13-week period ended 31st March, 2016
Accounts from Incomplete Records – CA Inter Accounts Study Material 21
Balance Sheet as on 31st March, 2016
Accounts from Incomplete Records – CA Inter Accounts Study Material 22

Accounts from Incomplete Records – CA Inter Accounts Study Material

Working Notes

1. Computation of Purchases
Creditors Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 23

2. Computation of Total sales
Accounts from Incomplete Records – CA Inter Accounts Study Material 24
Accounts from Incomplete Records – CA Inter Accounts Study Material 25

3. Computation of Credit Sales
Debtors Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 26

4. Computation of Cash Sales
Accounts from Incomplete Records – CA Inter Accounts Study Material 27

5. Bank balance as on 31.3.2016
Accounts from Incomplete Records – CA Inter Accounts Study Material 28

Question 5.
The books of account of Ruk Ruk Maan of Mumbai showed the following figures:
Accounts from Incomplete Records – CA Inter Accounts Study Material 29
An analysis of the cash book revealed the following:
Accounts from Incomplete Records – CA Inter Accounts Study Material 30
Accounts from Incomplete Records – CA Inter Accounts Study Material 31
Depreciation is provided on furniture & fixtures @10% p.a. on diminishing balance method. Ruk Ruk Maan maintains a steady gross profit rate of 25% on sales.
You are required to prepare Trading and Profit and Loss account for the year ended 31st March, 2009 and Balance Sheet as on that date. (16 Marks) (May 2010)
Answer:
Trading & Profit & Loss Account for the year ended 31st March, 2009
Accounts from Incomplete Records – CA Inter Accounts Study Material 32
Balance Sheet as at 31st March, 2009
Accounts from Incomplete Records – CA Inter Accounts Study Material 33
Accounts from Incomplete Records – CA Inter Accounts Study Material 34

Accounts from Incomplete Records – CA Inter Accounts Study Material

Working Notes:

1. Bills Payable Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 35

2. Creditors Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 36

3. Computation of credit sales
Accounts from Incomplete Records – CA Inter Accounts Study Material 37

4. Debtors Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 38

5. Salaries
Accounts from Incomplete Records – CA Inter Accounts Study Material 39

6. Cash /Bank Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 40

7. Balance Sheet
Accounts from Incomplete Records – CA Inter Accounts Study Material 41

Question 6.
Mr. A runs a business of readymade garments. He closes the books of account on 31st March, 2010. The Balance Sheet as on 31st March, 2010 was as follows:
Accounts from Incomplete Records – CA Inter Accounts Study Material 42
Accounts from Incomplete Records – CA Inter Accounts Study Material 43
You are furnished with the following information:

  1. His sales, for the year ended 31st March, 2011 were 20% higher than the sales of previous year, out of which 20% sales was cash sales.
    Total sales during the year 2009-10 were ₹ 5,00,000.
  2. Payments for all the purchases were made by cheques only.
  3. Goods were sold for cash and credit both. Credit customers pay be cheques only.
  4. Deprecation on furniture is to be charged 10% p.a.
  5. Mr. A sent to the bank the collection of the month at the last date of each month after paying salary of ₹ 2,000 to the clerk, office expenses ₹ 1,200 and personal expenses ₹ 500.

Analysis of bank pass book for the year ending 31st March, 2011 disclosed the following:
Accounts from Incomplete Records – CA Inter Accounts Study Material 44
The following are the balances on 31st March, 2011:
Accounts from Incomplete Records – CA Inter Accounts Study Material 45
On the evening of 31st March, 2011, the cashier absconded with the available cash in the cash book.

You are required to prepare Trading and Profit and Loss A/c for the year ended 31st March, 2011 and Balance Sheet as on that date. All the workings should form part of the answer. (16 Marks) (May 2011)
Answer:
Trading and Profit and Loss Account for the year ending 31st March, 2011
Accounts from Incomplete Records – CA Inter Accounts Study Material 46
Accounts from Incomplete Records – CA Inter Accounts Study Material 47
Balance Sheet as on 31st March, 2011
Accounts from Incomplete Records – CA Inter Accounts Study Material 48

Accounts from Incomplete Records – CA Inter Accounts Study Material

Working Notes:

(1) Computation of purchases

Creditors Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 49

(2) Computation of total sales
Accounts from Incomplete Records – CA Inter Accounts Study Material 50

(3) Computation of credit sales
Accounts from Incomplete Records – CA Inter Accounts Study Material 51

(4) Computation of cash collections from debtors
Debtors Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 52

(5) Computation of closing balance of cash at bank
Bank Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 53

(6) Computation of cash defalcated by the cashier
Accounts from Incomplete Records – CA Inter Accounts Study Material 54

Accounts from Incomplete Records – CA Inter Accounts Study Material

Question 7.
Following are the incomplete information of Moonlight Traders: The following balances are available as on 31.3.2013 and 31.3.2014.
Accounts from Incomplete Records – CA Inter Accounts Study Material 55
Accounts from Incomplete Records – CA Inter Accounts Study Material 56
Other adjustments:

  1. On 1.10.13 they sold machine having Book Value ₹ 40,000 (as on 31.3.2013) at a loss of ₹ 15,000. New machine was purchased on 1.1.2014.
  2. Office equipment was sold at its book value on 1.4.2013.
  3. Loan was partly repaid on 31.3.14 together with interest for the year. Prepare Trading P&LA/’c and Balance Sheet as on 31.3.2014. (16 Marks) (May 2014)

Answer:
Trading Account for the year ended 31.3.2014
Accounts from Incomplete Records – CA Inter Accounts Study Material 57
Profit and Loss Account for the year ended 31.3.2014
Accounts from Incomplete Records – CA Inter Accounts Study Material 58
Accounts from Incomplete Records – CA Inter Accounts Study Material 59
Balance sheet as on 31.3.2014
Accounts from Incomplete Records – CA Inter Accounts Study Material 60

Working Notes:

1. Computation of Total Sales
Accounts from Incomplete Records – CA Inter Accounts Study Material 61

2. Computation of Total Purchases
Accounts from Incomplete Records – CA Inter Accounts Study Material 62

3. Office Expenses Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 63

Question 8.
Ram carried on business as retail merchant. He has not maintained regular account books. However, he always maintained ₹ 10,000 in cash and deposited the balance into the bank account. He informs you that he has sold goods at profit of 25% on sales.

Following information is given to you:
Accounts from Incomplete Records – CA Inter Accounts Study Material 64
Analysis of his bank pass book reveals the following information:
(a) Payment to creditors ₹ 7,00,000
(b) Payment for business expenses ₹ 1,20,000
(c) Receipts from debtors ₹ 7,50,000
(d) Loan from Laxman ₹ 1,00,000 taken on 1.10.2016 at 10% per annum
(e) Cash deposited in the bank ₹ 1,00,000
He informs you that he paid creditors for goods ₹ 20,000 in cash and salaries ₹ 40,000 in cash. He has drawn ₹ 80,000 in cash for personal expenses. During the year Ram had not introduced any additional capital. Surplus cash if any, to be taken as cash sales.

You are required to prepare:

  1. Trading and Profit and Loss Account for the year ended 31.3.2017.
  2. Balance Sheet as at 31st March, 2017.

Answer:
Trading and Profit and Loss Account for the year ended 31st March, 2017
Accounts from Incomplete Records – CA Inter Accounts Study Material 65
Balance Sheet as at 31st March, 2017
Accounts from Incomplete Records – CA Inter Accounts Study Material 66

Working Notes:

1. Sundry Debtors Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 67

2. Sundry Creditors Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 68

3. Cash and Bank Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 69

Question 9.
The following is the Balance Sheet of Chirag as on 31st March, 2015:
Accounts from Incomplete Records – CA Inter Accounts Study Material 70
A riot occurred on the night of 31 st March, 2016 in which all books and records were lost. The cashier had absconded with the available cash. He gives you the following information:

(a) His sales for the year ended 31st March, 2016 were 20% higher than the previous year’s. He always sells his goods at cost plus 25%; 20% of the total sales for the year ended 31st March, 2016 were for cash. There were no cash purchases
(b) On 1st April, 2015 the stock level was raised to ₹ 30,000 and stock was maintained at this new level all throughout the year.
(c) Collection from debtors amounted to ₹ 1,40,000 of which ₹ 35,000 was received in cash, Business expenses amounted to ₹ 20,000 of which ₹ 5,000 was outstanding on 31st March, 2016 and ₹ 6,000 was paid by cheques.
(d) Analysis of the Pass Book revealed the Payment to Creditors ₹ 1,37,500, Personal Drawing ₹ 7,500, Cash deposited in Bank ₹ 71,500, and Cash withdrawn from Bank ₹ 12,000.
(e) Gross profit as per last year’s audited accounts was ₹ 30,000.
(f) Provide depreciation on Building and Furniture at 5% and Motor Car at 20%.
(g) The amount defalcated by the cashier may be treated as recoverable from him.
You are required to prepare the Trading and Profit and Loss Account for the year ended 31st March, 2016 and Balance Sheet as on that date.
Answer:
Trading and Profit and Loss Account
For the year ending on 31st March, 2016
Accounts from Incomplete Records – CA Inter Accounts Study Material 71
Balance Sheet as at 31st March, 2016
Accounts from Incomplete Records – CA Inter Accounts Study Material 72

Working Notes:

(i) Debtors Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 73

(ii) Creditors Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 74

(iii) Cash Book
Accounts from Incomplete Records – CA Inter Accounts Study Material 75

(iv) Last year’s Total Sales = Gross Profit × 100/20 = ₹ 30,000 × 100/20 = ₹ 1,50,000

(v) Current year’s Total Sales = ₹ 1,50,000 + 20% of ₹ 1,50,000 = ₹ 1,80,000

(vi) Current year’s Credit Sales = ₹ 1,80,000 × 80% = ₹ 1,44,000

(vii) Cost of Goods Sold = Sales – G.P. = ₹ 1,80,000 – ₹ 36,000 = ₹ 1,44,000

(viii) Purchases = Cost of Goods Sold + Closing Stock – Opening Stock = ₹ 1,44,000 + ₹ 30,000 – ₹ 20,000 = ₹ 1,54,000

Final Accounts Method/Conversion Method — Advanced Problems

Question 10.
Following information of the Final Accounts of Kumaran Ltd. are missing as shown below:

Trading and Profit & Loss A/c for the year ended 31-3-2012
Accounts from Incomplete Records – CA Inter Accounts Study Material 76

Balance Sheet as on 31-3-2012
Accounts from Incomplete Records – CA Inter Accounts Study Material 77
You are required to provide the missing figures with the help of following information:

  1. Current ratio 2:1.
  2. Closing stock is 25% of sales.
  3. Proposed dividends are 40% of the paid-up capital.
  4. Gross profit ratio is 60%.
  5. Ratio of Current Liabilities to Debentures is 2 : 1.
  6. Transfer to General Reserves is equal to proposed dividends.
  7. Profit carried forward are 10% of the proposed dividends.
  8. Provision for taxation is 50% of profits.
  9. Balance to the credit of General Reserves at the beginning of the year is twice the amount transferred to that account from the current profits. (16 Marks) Nov. 2012)

Answer:
1. Amount of debentures
Accounts from Incomplete Records – CA Inter Accounts Study Material 78

2. Amount of proposed dividend
= Paid up share capital × 40% = 10,000 × 40% = 4,000

3. Transfer to general reserves
= Amount of proposed dividend i.e. 4,000

4. Profit carried forward
= 10% of proposed dividend = 10% of 4,000 = 400

5. Net profit for the year
= Proposed dividend + Transfer to general reserve + Profit carried forward – Net profit carried forward
= (4,000 + 4,000 + 400) – 1,400 = 7,000

6. Provision for taxation
Provision for taxation = 50% of profit (i.e. before net profit)
It means that net profit is 50% and provision for tax is 50%.
Therefore, if net profit is 7,000 then, Provision for taxation is also 7,000

7. Gross profit
= Net profit + All expenses – Commission received
= (7,000 + 7,000 + 600 + 7,400) – 1,000 = 21,000

8. Sales
Accounts from Incomplete Records – CA Inter Accounts Study Material 79

9. Closing stock
= 25% of sàles
= 25% × 35,000 = 8,750

10. Purchases
= (Sales + Closing stock) – (Opening stock + Manufacturing expenses + Gross profit)
= (35,000 + 8,750) – (7,000 + 1,750 + 21,000)
43,750 – 29,750 = 14,000

11. Balance of General Reserve as on 1.4.20 1 1
= Twice the amount transferred to general reserve during the year
= 2 × 4,000 = 8,000

12. Current Liabilities
= Current liabilities are twice of amount of debentures
= 2 × 6,000 = 12,000

13. Current Assets
Current Assets = Current ratio × Current liabilities
= 2 × 12,000 = 24,000

14. Sundry Debtors
Sundry Debtors = Current assets – Stock in trade – Bank balance
24,000 – 8,750 – 1,250 = 14,000

15. Total of Liabilities part of the balance sheet
= Shareholders’ capital + Non-current liabilities + Current liabilities
= (10,000 + 12,000 + 400) + 6,000 + 12,000 = 40,400

16. Other Fixed Assets
= Total of Liabilities part of the balance sheet – (Current assets + Plant and Machinery)
= 40,400 – (24,000 + 14,000) = 2,400.

Accounts from Incomplete Records – CA Inter Accounts Study Material

Question 11.
A sole trader requests you to prepare his Trading and Profit & Loss Account ended 31st March, 2013 and Balance Sheet as at that date. He provides you information:
Statement of Affairs as at 31st March, 2012
Accounts from Incomplete Records – CA Inter Accounts Study Material 80
He informs you that there has been no addition to or sale of Furniture, Computer and Mobile Phone during the accounting year 2012-13. The other assets and liabilities on 31st March, 2013 are as follows:
Accounts from Incomplete Records – CA Inter Accounts Study Material 81
He also provides you the following summary of his cash transactions:
Accounts from Incomplete Records – CA Inter Accounts Study Material 82
It is found prudent to depreciate Furniture @ 5%, Computer @ 10% and Mobile Phone @ 25%. A provision for bad debts @ 5% on Trade Debtors is also considered desirable. (16 Marks) (May 2013)
Answer:
Trading and Profit and Loss Account for the year ended 31st March, 2013
Accounts from Incomplete Records – CA Inter Accounts Study Material 83
Accounts from Incomplete Records – CA Inter Accounts Study Material 84
Balance Sheet as on 31st March, 2013
Accounts from Incomplete Records – CA Inter Accounts Study Material 85

Working Notes:

1. Debtors Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 86

2. Bills Receivable Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 87

3. Creditors Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 88

4. Bills Payable Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 89

5. Insurance expenses for P&L
Accounts from Incomplete Records – CA Inter Accounts Study Material 90

6. Salaries for P&L
Accounts from Incomplete Records – CA Inter Accounts Study Material 91

7. Rent expenses for P&L
Accounts from Incomplete Records – CA Inter Accounts Study Material 92

8. Stationery expenses for P&L
Accounts from Incomplete Records – CA Inter Accounts Study Material 93

Accounts from Incomplete Records – CA Inter Accounts Study Material

Question 12.
The following is the Balance Sheet of M/s. Care Traders as on 1-4-2014:
Accounts from Incomplete Records – CA Inter Accounts Study Material 94

A fire broke out in the premises on 31-3-2015 and destroyed the books of account. The accountant could however provide the following information:

  1. Sales for the year ended 31-3-2014 was ₹ 18,60,000. Sales for the current year was 20% higher than the last year.
  2. 25% sales were made in cash and the balance was on credit.
  3. Gross profit on sales is 30%.
  4. Terms of Credit
    Debtor: 2 months
    Creditors: 1 month
    All creditor is paid by cheque and all credit sales are collected in cheque.
  5. The Bank Pass Book has the following details (other than payment to creditors and collection from debtors)
    Accounts from Incomplete Records – CA Inter Accounts Study Material 95
    Accounts from Incomplete Records – CA Inter Accounts Study Material 96
  6. Machinery was purchased on 1-10-2014.
  7. Rent was paid for 11 months only and 25% of the advertisement expenses relates to the next year.
  8. Travelling expenses of ₹ 7,800 for which cheques were issued but not presented in bank.
  9. Furniture was sold on 1-4-2014 at a loss of ₹ 2,900 on book value.
  10. Physical verification as on 31-3-2015 ascertained the stock position at ₹ 1,81,000 and petty cash balance at nil.
  11. There was no change in unsecured loan during the year.
  12. Depreciation is to be provided at 10% on machinery and 20% on furniture.

Prepare Bank Account, Trading and Profit and Loss Account for the year ended 31-3-2015 in the books of M/s. Care Traders and a Balance Sheet as on that date. Make necessary assumptions wherever necessary. (16 Marks) (May 2015)
Answer:
Bank Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 97

Trading and Profit and Loss Account For the year ended 31st March, 2015
Accounts from Incomplete Records – CA Inter Accounts Study Material 98

Balance Sheet as on 1.4.2015
Accounts from Incomplete Records – CA Inter Accounts Study Material 99
Accounts from Incomplete Records – CA Inter Accounts Study Material 100

Working Notes:

Accounts from Incomplete Records – CA Inter Accounts Study Material 101

2. Purchases for the year ended 31.3.2015
Accounts from Incomplete Records – CA Inter Accounts Study Material 102

3. Debtors as on 31.3.2015
Accounts from Incomplete Records – CA Inter Accounts Study Material 103

4. Debtors account
Accounts from Incomplete Records – CA Inter Accounts Study Material 104

5. Creditors as on 31.3.2015
Accounts from Incomplete Records – CA Inter Accounts Study Material 105

6. Creditors account
Accounts from Incomplete Records – CA Inter Accounts Study Material 106

7. Machinery Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 107

8. Depreciation on Machinery f
Accounts from Incomplete Records – CA Inter Accounts Study Material 108

9. Furniture Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 109

Accounts from Incomplete Records – CA Inter Accounts Study Material

Question 13.
The following information relates to the business of ABC Enterprises, who requests you to prepare a Trading and Profit & Loss A/c for the year ended 31st March, 2017 and a Balance Sheet as on that date.

(a) Assets and Liabilities as on:
Accounts from Incomplete Records – CA Inter Accounts Study Material 110

(b) Cash transaction during the year:

  1. Collection from Debtors, after allowing discount of ₹ 15,000 amounted to ₹ 5,85,000.
  2. Collection on discounting of Bills of Exchange, after deduction of discount of ₹ 1,250 by bank, totalled to ₹ 61,250.
  3. Creditors of ₹ 4,00,000 were paid ₹ 3,92,000 in full settlement of their dues.
  4. Payment of Freight inward of ₹ 30,000.
  5. Amount withdrawn for personal use ₹ 70,000.
  6. Payment for office furniture ₹ 10,000.
  7. Investment carrying annual interest of 6% were purchased at ₹ 95 (200 shares, face Value ₹ 100 each) on 1st October 2016 and payment made thereof.
  8. Expenses including salaries paid ₹ 95,000.
  9. Miscellaneous receipt of ₹ 5,000.

(c) Bills of exchange drawn on and accepted by customers during the year amounted to ₹ 1,00,000. Of these, bills of exchange of ₹ 20,000 were endorsed in favour of creditors. An endorsed bill of exchange of ₹ 4,000 was dishonoured,
(d) Goods costing ₹ 9,000 were used as advertising material.
(e) Goods are invariably sold to show a gross profit of 20% on sales.
(₹) Difference in cash book, if any, is to be treated as further drawing or introduction of capital by proprietor of ABC enterprises.
(f) Provide at 2% for doubtful debts on closing debtor. (16 Marks) (May 2017)
Answer:
Trading and Profit and Loss A/c for the year ended 31st March, 2017
Accounts from Incomplete Records – CA Inter Accounts Study Material 111
Accounts from Incomplete Records – CA Inter Accounts Study Material 112
Balance Sheet as on 31st March, 2017
Accounts from Incomplete Records – CA Inter Accounts Study Material 113

Working Notes:

(1) Capital (Opening)
Balance Sheet as on 1st April, 2016
Accounts from Incomplete Records – CA Inter Accounts Study Material 114

(2) Purchases made during the year
Creditors Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 115

(3) Sales made during the year
Accounts from Incomplete Records – CA Inter Accounts Study Material 116

(4) Debtors (Closing)

Sundry Debtors Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 117

(5) Additional drawings
Cash and Bank Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 118

(6) Expenses for Profit and Loss A/c
Sundry Expenses Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 119

(7) Bills Receivable (Closing)
Bills Receivable Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 120

Accounts from Incomplete Records – CA Inter Accounts Study Material

Question 14.
Aman, a readymade garment trader, keeps his books of account under single entry system. On the closing date, i.e. on 31st March, 2017 his statement of affairs stood as follows:
Accounts from Incomplete Records – CA Inter Accounts Study Material 121
Riots occurred and a fire broke out on the evening of 31st March, 2018, destroying the books of account. On that day, the cashier had absconded with the available cash. You are furnished with the following information:

  1. Sales for the year ended 31st March, 2018 were 20% higher than the previous year’s sales, out of which, 20% sales were for cash. He always sells his goods at cost plus 25%. There were no cash purchases.
  2. Collection from debtors amounted to ₹ 14,00,000, out of which ₹ 3,50,000 was received in cash.
  3. Business expenses amounted to ₹ 2,00,000, of which ₹ 50,000 were outstanding on 31st March, 2018 and ₹ 60,000 paid by cheques.
  4. Gross profit as per last year’s audited accounts was ₹ 3,00,000.
  5. Provide depreciation on building and furniture at 5% each and motor car at 20%.
  6. His private records and the Bank Pass Book disclosed the following transactions for the year 2017-18:
    Accounts from Incomplete Records – CA Inter Accounts Study Material 122
  7. Stock level was maintained at ₹ 3,00,000 all throughout the year.
  8. The amount defalcated by the cashier is to be written off to the Profit and Loss Account.

You are required to prepare Trading and Profit and Loss A/c for the year ended 31st March, 2018 and Balance Sheet as on that date of Aman. All the workings should form part of the answer. (15 Marks) (November 2018)
Answer:
Trading and Profit and Loss Account for the year ended 31st March, 2018
Accounts from Incomplete Records – CA Inter Accounts Study Material 123
Accounts from Incomplete Records – CA Inter Accounts Study Material 124
Balance Sheet as on 31st March, 2018
Accounts from Incomplete Records – CA Inter Accounts Study Material 125

Working Notes:

1. Cash and Bank Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 126

Accounts from Incomplete Records – CA Inter Accounts Study Material

2. Computation of sales during 2017-2018
Accounts from Incomplete Records – CA Inter Accounts Study Material 127
Accounts from Incomplete Records – CA Inter Accounts Study Material 128

3. Debtors Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 129

4. Creditors Account
Accounts from Incomplete Records – CA Inter Accounts Study Material 130

Question 15.
From the following information in respect of Mr. P, prepare Trading and Profit and Loss Account for the year ended 31st March, 2018 and a Balance Sheet as at that date:
Accounts from Incomplete Records – CA Inter Accounts Study Material 131
Accounts from Incomplete Records – CA Inter Accounts Study Material 132
Answer:
Trading and Profit and Loss Account for the year ended 31st March, 2018
Accounts from Incomplete Records – CA Inter Accounts Study Material 133
Balance Sheet as on 31st March, 2018
Accounts from Incomplete Records – CA Inter Accounts Study Material 134
Accounts from Incomplete Records – CA Inter Accounts Study Material 135

Working Notes:

1. Furniture account
Accounts from Incomplete Records – CA Inter Accounts Study Material 136

2. Cash and Bank account
Accounts from Incomplete Records – CA Inter Accounts Study Material 137

3. Debtors account
Accounts from Incomplete Records – CA Inter Accounts Study Material 138

4. Bills Receivable account
Accounts from Incomplete Records – CA Inter Accounts Study Material 139

5. Creditors account
Accounts from Incomplete Records – CA Inter Accounts Study Material 140

Accounts from Incomplete Records – CA Inter Accounts Study Material

6. Balance Sheet as on 1st April, 2017
Accounts from Incomplete Records – CA Inter Accounts Study Material 141

7. Expenses for P&L
Accounts from Incomplete Records – CA Inter Accounts Study Material 142

8. Interest on Government securities
2,00,000 × 12% × 6/12 = ₹ 12,000
Interest on Government securities receivables for 6 months = ₹ 12,000

9. Discount allowed
Accounts from Incomplete Records – CA Inter Accounts Study Material 143

10. Discount received
Accounts from Incomplete Records – CA Inter Accounts Study Material 144

11. Credit sales
Cost of Goods sold = Opening stock + Net purchases – Closing stock
= ₹ 1,60,000 + ₹ 9,12,000 – ₹ 1,40,000
= ₹ 9,32,000
Sale price = ₹ 9,32,000 + 50% of 9,32,000 = ₹ 13,98,000

AS 1: Disclosure of Accounting Policies – CA Inter Accounts Study Material

AS 1: Disclosure of Accounting Policies – CA Inter Accounts Study Material is designed strictly as per the latest syllabus and exam pattern.

AS 1: Disclosure of Accounting Policies – CA Inter Accounts Study Material

Fundamental Accounting Assumptions (Based On Para Nos. 9, 10 And 27)

Question 1.
A limited has sold its building for ₹ 50 lakhs and the purchaser has paid the full price. The Company has given possession to the purchaser. The book value of the building is ₹ 35 lakhs. As at 31st March 2017, documentation and legal formalities are pending. The company has not recorded the sale. It has shown the amount received as advance. Do you agree with this treatment?
What accounting treatment should the buyer give in its financial statements? (5 Mark) {November 2017)
Answer:
Analysis:
Although legal title has not been transferred, the economic reality and substance is that the rights and beneficial interest in the immovable property have been transferred.

Therefore, recording of acquisition /disposal (by the transferee and transferor respectively) would, in substance, represent the purchase/sale.

Conclusion:
Thus, A Ltd., should record the sales and recognize the profit of ₹ 15 lakhs in its profit and loss account. It should eliminate building from its balance sheet.

In notes to accounts, it should disclose that building has been sold, full consideration has been received, possession has been handed over to the buyer and documentation and legal formalities are pending.

The buyer should recognize the building as an asset in his balance sheet and charge depreciation on it. The buyer should disclose in his notes to account that possession has been received however documentation and legal formalities are pending.

AS 1: Disclosure of Accounting Policies - CA Inter Accounts Study Material

Question 2.
What are the three fundamental accounting assumptions recognised by Accounting Standard (AS) 1? Briefly describe each one of them. (4 Marks) (May 2013)
Answer:
Accounting Standard (AS) 1 recognizes three fundamental accounting assumptions. These are as follows:
(i) Going Concern:
The financial statements are normally prepared on the assumption that an enterprise will continue its operations in the foreseeable future and neither there is intention, nor there is need to materially curtail the scale of operations.

(ii) Consistency:
The principle of consistency refers to the practice of using same account¬ing policies for similar transactions in all accounting periods unless the change is required (i) by a statute, (ii) by an accounting standard or (iii) for more appropriate presentation of financial statements.

(iii) Accrual basis of accounting:
Under this basis of accounting, transactions are recognised as soon as they occur, whether or not cash or cash equivalent is actually received or paid.

AS 1: Disclosure of Accounting Policies - CA Inter Accounts Study Material

Question 3.
Briefly define the Fundamental Accounting Assumptions? (4 Marks) (November 2017)
Answer:
Accounting Standard (AS) 1 recognizes three fundamental accounting assumptions. These are as follows:
(i) Going Concern:
The financial statements are normally prepared on the assumption that an enterprise will continue its operations in the foreseeable future and neither there is intention, nor there is need to materially curtail the scale of operations.

(ii) Consistency:
The principle of consistency refers to the practice of using same account¬ing policies for similar transactions in all accounting periods unless the change is required (?) by a statute, (it) by an accounting standard or (iii) for more appropriate presentation of financial statements.

(iii) Accrual basis of accounting:
Under this basis of accounting, transactions are recognised as soon as they occur, whether or not cash or cash equivalent is actually received or paid.

Areas In Which Different Accounting Policies Are Encountered (Based On Para Nos. 14 And 15)

Question 4.
‘Recognizing the need to harmonize the diverse accounting policies and practices, accounting standards are framed.’ Give examples of areas in which different accounting policies may be adopted by the enterprise. (4 Marks) (November 2010)
Answer:
The following are examples of the areas in which different accounting policies may be adopted by different enterprise:

  1. Methods of depreciation, depletion and amortization.
  2. Valuation of inventories.
  3. Recognition of profit on long-term contracts.
  4. Valuation of PPE.

AS 1: Disclosure of Accounting Policies - CA Inter Accounts Study Material

Considerations In Selection Of Accounting Policies (Based On Para Nos. 16 And 17)

Question 5.
ABC Financial Services Ltd. is engaged in the business of financial services and is undergoing tight liquidity position, since most of the assets of the company are blocked in various claims/petitions in a Special Court. ABC Financial Services Ltd. has accepted Inter Corporate Deposits (ICDs) and it is making its best efforts to settle the dues. There were claims at varied rates of interest, from lenders, from the due date of ICDs to the date of repayment. The company has provided interest, as per the terms of the contract till the due date and a note for non-provision of interest from the due date to date of repayment was mentioned in financial statements.

On account of uncertainties existing regarding the determination of the amount and in the absence of any specific legal obligation at present as per the terms of contracts, the company considers that these claims are in the nature of ‘claims against the company not acknowledged as debt’, and the same has been disclosed by way of a note in the accounts instead of making a provision in the Profit and Loss Account.

State whether the treatment done by the company is correct or not as per relevant accounting Standard. (5 Marks) (May 2017)
Answer:
AS 1 ‘Disclosure of Accounting Policies’ recognizes ‘prudence’as one of the major considerations governing the selection and application of accounting policies. In view of the uncertainty attached to future events, profits are not anticipated but recognized only when realized though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information.

As per AS 1, ‘accrual’ is one of the fundamental accounting assumptions.

Analysis:
Irrespective of the terms of the contract, so long as the principal amount of a loan is not repaid, the lender cannot be placed in a disadvantageous position for non-payment of interest in respect of overdue amount. From the facts given in the question, it is apparent that the company has an obligation to pay because of the overdue interest amount.

AS 1: Disclosure of Accounting Policies - CA Inter Accounts Study Material

Conclusion:
Thus, the company should provide for the liability (since it is not waived bv the lenders) at an amount estimated or on reasonable basis based on facts and circumstances of each case. However, in respect of the overdue interest amounts, which are settled, the liability should be accrued to the extent of amounts settled. Non-provision of the overdue interest liability amounts to violation of accrual basis of accounting.

Therefore, the treatment, done by the company, of not providing the interest amount from due date to the date of repayment, is not correct.

Disclosure Of Accounting Policies (Based On Para Nos. 18 To 26)

Question 6.
Jagannath Ltd. had made a rights issue of shares in 2014. In the offer document to its members, it had projected a surplus of ₹ 40 crores during the accounting year to end on 31st March, 2015. The draft results for the year, prepared on the hitherto followed accounting policies and presented for perusal of the board of directors showed a deficit of ₹ 10 crores. The board in consultation with the managing director, decided on the following:
(i) Value year-end inventory at works cost (₹ 50 crores) instead of the hitherto method of valuation of inventory at prime cost (₹ 30 crores).
(ii) Provide depreciation for the year on straight line basis on account of substantial additions in gross block during the year, instead of on the reducing balance method, which was hitherto adopted. As a consequence, the charge for depreciation at ₹ 27 crores is lower than the amount of ₹ 45 crores which would have been provided had the old method been followed, by ₹ 18 crores.
(iii) Provide for permanent fall in the value of investments – which fall had taken place over the past five years – the provision being ₹ 10 crores.
As chief accountant of the company, you are asked by the managing director to draft the notes on accounts for inclusion in the annual report for 2014-15. (5 Marks) (November 2015)
Answer:
As per AS 1, any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. In the case of a change in accounting policies which has a material effect in the current period, the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. Accordingly, the notes on accounts should properly disclose the change and its effect.

AS 1: Disclosure of Accounting Policies - CA Inter Accounts Study Material

Drafting of Notes to Accounts:
(i) During the year inventory has been valued at factory cost, against the practice of valuing it at prime cost as was the practice till last year. This has been done to take cognizance of the more capital-intensive method of production on account of heavy capital expenditure during the year. As a result of this change, the year-end inventory has been valued at ₹ 50 crores and the profit for the year is increased by ₹ 20 crores.

(ii) In view of the heavy capital-intensive method of production introduced during the year, the company has decided to change the method of providing depreciation from reducing balance method to straight line method.

As a result of this change, depreciation has been provided at ₹ 27 crores which is lower than the charge which would have been made had the old method and the old rates been applied, by ₹ 18 crores. To that extent, the profit for the year is increased.

(iii) The company has decided to provide ₹ 10 crores for the permanent fall in the value of investments which has taken place over the period of past five years.
The provision so made has reduced the profit disclosed in the accounts by ₹ 10 crores.

Question 7.
Mini Ltd. was making provision for non-moving stocks based on no issues for the last 12 months up to 31.3.2016.
The company wants to provide during the year ending 31.3.2016 based on technical evaluation:
Total value of stock – ₹ 100 lakhs
Provision required based on 12 months issue – ₹ 3.5 lakhs
Provision required based on technical evaluation – ₹ 2.5 lakhs
Does this amount to change in Accounting Policy? Can the company change the method of provision? (5 Marks) (May 2017)
Answer:
Analysis:
The decision of making provision for non-moving stocks on the basis of technical evaluation does not amount to change in accounting policy. Requirement to provide for non-moving stocks may be said as accounting policy but the basis for making provision will not constitute accounting policy. It will be considered as an accounting estimate. Further, the method of estimating the amount of provision may be changed in case a more prudent estimate can be made.

AS 1: Disclosure of Accounting Policies - CA Inter Accounts Study Material

Conclusion:
In the given case, considering the total value of stock, the change in the amount of required provision of non-moving stock from ₹ 3.5 lakhs to ₹ 2.5 lakhs is also not material.

The disclosure can be made for such change by way of notes to the accounts in the annual accounts of Mini Ltd. for the year 2015-16:

Notes to Accounts: [DRAFT]
‘The company has provided for non-moving stocks on the basis of technical evaluation unlike preceding years. Had the same method been followed as in the previous year, the profit for the year and the corresponding effect on the year end net assets would have been higher by ₹ 1 lakh.’

Question 8.
J Ltd. had made a rights issue of shares in 2016. In the offer document to its members, it had projected a surplus of ₹ 40 crores during the accounting year to end on 31st March, 2017. The draft results for the year, prepared on the hitherto followed accounting policies and presented for perusal of the board of directors showed a deficit of ₹ 10 crores. The board in consultation with the managing director, decided on the following:

(i) Value year-end inventory at works cost (₹ 50 crores) instead of the hitherto method of valuation of inventory at prime cost (₹ 30 crores).
(ii) Provide for permanent fall in the value of investments – this fall had taken place over the past five years – the provision being ₹ 10 crores.
As chief accountant of the company, you are asked by the managing director to draft the notes on accounts for inclusion in the annual report for 2016-17. (5 Marks) (May 2018)
Answer:
As per AS 1, any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. In the case of a change in accounting policies which has a material effect in the current period, the amount by which any item in the financial statements is affected by such change should abo be disclosed to the extent ascertainable. Where such amount b not ascertainable, wholly or in part, the fact should be indicated. Accordingly, the notes on accounts should properly disclose the change and its effect.

AS 1: Disclosure of Accounting Policies - CA Inter Accounts Study Material

Drafting of Notes on Accounts:
(i) During the year inventory has been valued at factory cost, against the practice of valuing it at prime cost as was the practice till last year. This has been done to take cognizance of the more capital-intensive method of production on account of heavy capital expenditure during the year. As a result of this change, the year-end inventory has been valued at ₹ 50 crores and the profit for the year is increased by ₹ 20 crores.

(ii) The company has decided to provide ₹ 10 crores for the permanent fall in the value of investments which has taken place over the period of past five years.
The provision so made has reduced the profit disclosed in the accounts by ₹ 10 crores.

Question 9.
State whether the following statements are ‘True’ or ‘False’. Also give reason for your answer.
(i) Certain fundamental accounting assumptions underline the preparation and presentation of financial statements. They are usually specifically stated because their acceptance and use are not assumed.
(ii) If fundamental accounting assumptions are not followed in presentation and preparation of financial statements, a specific disclosure is not required.
(iii) All significant accounting policies adopted in the preparation and presentation of financial statements should form part of the financial statements.
(iv) Any change in an accounting policy, which has a material effect should be disclosed. Where the amount by which any item in the financial statements is affected by such change is not ascertainable, wholly or in part, the fact need not to be indicated.
(v) There is no single list of accounting policies which are applicable to all circumstances. (5 Marks) (May 2018)
Answer:
(i) False.
As per AS 1 ‘Disclosure of Accounting Policies’, certain fundamental accounting assumptions underline the preparation and presentation of financial statements. They are usually not specifically stated because their acceptance and use are assumed. Disclosure is necessary if they are not followed.

(ii) False.
As per AS 1, if the fundamental accounting assumptions, viz. Going Concern, Consistency and Accrual are followed in financial statements, specific disclosure is not required. If a fundamental accounting assump¬tion is not followed, the fact should be disclosed.

AS 1: Disclosure of Accounting Policies - CA Inter Accounts Study Material

(iii) True.
To ensure proper understanding of financial statements, it is necessary that all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. The disclosure of the significant accounting policies as such should form part of the financial statements and they should be disclosed in one place.

(iv) False.
Any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. Where such amount is not ascertainable, wholly or in part, the fact should be indicated.

(v) True.
As per AS 1, there is no single list of accounting policies which are applicable to all circumstances. The differing circumstances in which enterprises operate in a situation of diverse and complex economic activity make alternative accounting principles and methods of applying those principles acceptable.

Question 10.
A Ltd. had made a rights issue of shares in 2017. In the offer document to its members, it had projected a surplus of ₹ 40 crores during the accounting year to end on 31st March, 2017. The draft results for the year, prepared on the hitherto followed accounting policies and presented for perusal of the board of directors showed a deficit of ₹ 10 crores. The board in consultation with the managing director, decided not to provide for ‘after sales expenses’ during the warranty period. Till the last year, provision at 2% of sales used to be made under the concept of ‘matching of costs against revenue’ and actual expenses used to be charged against the provision. The board now decided to account for expenses as and when actually incurred. Sales during the year total to ₹ 600 crores.

As chief accountant of the company, you are asked by the managing director to prepare the notes on accounts for inclusion in the annual report for 2016-17.
Answer:
As per AS 1, any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. In the case of a change in accounting policies which has a material effect in the current period, the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. Accordingly, the notes on accounts should properly disclose the change and its effect.

AS 1: Disclosure of Accounting Policies - CA Inter Accounts Study Material

Drafting of Notes on Accounts:
So far, the company has been providing 2% of sales for meeting after sales expenses during the warranty period. With the improved method of production, the probability of defects occurring in the products has reduced considerably.

Hence, the company has decided not to make provision for such expenses but to account for the same as and when expenses are incurred. Due to this change, the profit for the year is increased by ₹ 12 crores than would have been the case if the old policy were to continue.