FIFO ACADEMY- 0731-4995178 Accounting standard’s

Question 35
(a) Prepare Cash Flow from Investing Activities of M/s. Creative Furnishings Limited for the
year ended 31-3-2015.

Particulars `
Plant acquired by the issue of 8% Debentures 1,56,000
Claim received for loss of plant in fire 49,600
Unsecured loans given to subsidiaries 4,85,000
Interest on loan received from subsidiary companies 82,500
Pre-acquisition dividend received on investment made 62,400
Debenture interest paid 1,16,000
Term loan repaid 4,25,000
Interest received on investment 68,000
(TDS of ` 8,200 was deducted on the above interest)
Book value of plant sold (loss incurred ` 9,600) 84,000
(b) A construction contractor has a fixed price contract for ` 9,000 lacs to build a bridge in 3
years time frame. A summary of some of the financial data is a under:

(Amount ` in lacs)
Year 1 Year 2 Year 3
Initial Amount for revenue agreed in contract 9,000 9,000 9,000
Variation in Revenue (+) - 200 200
Contracts costs incurred up to the reporting date 2093 6168* 8100**
Estimated profit for whole contract 950 1000 1000

*Includes ` 100 lacs for standard materials stored at the site to be used in year 3 to
complete the work.
**Excludes ` 100 lacs for standard material brought forward from year 2.
The variation in cost and revenue in year 2 has been approved by customer.

Compute year wise amount of revenue, expenses, contract cost to complete and profit or loss to be
recognized in the Statement of Profit and Loss as per AS-7 (revised)

(c) 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.
(d) M/s. Laghu Udyog Limited has been charging depreciation on an item of Plant and
Machinery on straight line basis. The machine was purchased on 1-4-2012 at
` 3,25,000. It is expected to have a total useful life of 5 years from the date of purchase and
residual value of ` 25,000. Calculate the book value of the machine as on 1-4-2014 and the total
depreciation charged till 31-3-2014 under SLM. The company wants to change the method of
depreciation and charge depreciation @ 20% on WDV from 2014-15.

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Is it valid to change the method of depreciation? Explain the treatment required to be

done in the books of accounts in the context of AS-6.
Ascertain the amount of depreciation to be charged for 2014-15 and the net book value of the machine
as on 31-3-2015 after giving effect of the above change. (4 x 5 = 20 Marks)(MAY 2015)

Answer
(a) Cash Flow Statement from Investing Activities of
M/s Creative Furnishings Limited for the year ended 31-03-2015

Cash generated from investing activities ` `

Interest on loan received 82,500

Pre-acquisition dividend received on investment made 62,400
Unsecured loans given to subsidiaries (4,85,000)
Interest received on investments (gross value) 76,200
TDS deducted on interest (8200)
Sale of Plant 74,400
Cash used in investing activities (before extra ordinary
item) (1,97,700)

Net cash used in investing activities (after extra ordinary

item) (1,48,100)

NOTES:
1. Debenture interest paid and Term Loan repaid are financing activities and therefore
not considered for preparing cash flow from investing activities.
2. Plant acquired by issue of 8% debentures does not amount to cash outflow, hence
also not considered in the above cash flow statement.

(b) The amounts of revenue, expenses and profit recognized in the statement of profit and
loss in three years are shown below:
(Amount in ` lakhs)

Upto the Recognized in Recognized in

reporting date prior years current year
Year
1
Revenue (9,000 x 26%) 2,340 - 2,340
2,09
Expenses (8,050 x 26%) 3 - 2,093
Profit 247 - 247
Year
2
Revenue (9,200 x 74%) 6,808 2,340 4,468
6,06 2,09
Expenses (8,200 x 74%) 8 3 3,975
Profit 740 247 493
Year
3
Revenue (9,200 x 100%) 9,200 6,808 2,392
8,20 6,06
Expenses (8,200 x 100%) 0 8 2,132

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1,00
Profit 0 740 260

Working Note:

Year 1 Year 2 Year 3

Revenue after consider variations 9,000 9,200 9,200
Less: Estimated profit for whole contract 950 1,000 1,000
Estimated total cost of the contract (A) 8,050 8,200 8,200
Actual cost incurred upto the reporting date (B) 2,093 6,068 8,200
(6,168-100) (8,100+100)
Degree of completion (B/A) 26% 74% 100%

(c) 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. In such circumstances, 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.
Hence the valuation will be done as under:
(i) 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.
(ii) 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).
(iii) 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 Total Inventory as on 31.03.2015:

Units Cost (`) NRV/Replacement Value = units x cost

or NRV whichever
cost is
less (`)
Raw material A 600 120 90 54,000
Partly finished goods 500 260 240 1,20,000
Finished goods X 1,500 320 300 4,50,000
Value of Inventory 6,24,000

(d) Book Value of Machine and Depreciation under SLM as on 01-04-2014

Cost of Machine purchased on 01.04.2012 ` 3,25,000

Less: Residual Value ` 25,000
Depreciable amount ` 3,00,000
Useful life of Machine 5 Years
Depreciation for 2 Years (3,00,000 x 2/5) ` 1,20,000
Book value as on 01.04.2014 ` 2,05,000

As per AS 6 “Depreciation Accounting”, a change from one method of providing

depreciation to another should be made only if the adoption of the new method is required
by statute or for compliance with an accounting standard or if it is considered that the
change would result in a more appropriate preparation or presentation of the financial
statements of the enterprise

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Question 36: Given the following information of M/s. Paper Products Ltd.
(i) Goods of ` 60,000 were sold on 20-3-2015 but at the request of the buyer these
were delivered on 10-4-2015.
(ii) On 15-1-20l5 goods of ` 1,50,000 were sent on consignment basis of which 20% of
the goods unsold are lying with the consignee as on 31-3-2015.
(iii) ` 1,20,000 worth of goods were sold on approval basis on 1-12-2014. The period of
approval was 3 months after which they were considered sold. Buyer sent approval
for 75% goods up to 31-1-2015 and no approval or disapproval received for the
remaining goods till 31-3-2015.
(iv) Apart from the above, the company has made cash sales of ` 7,80,000 (gross).
Trade discount of 5% was allowed on the cash sales.

You are required to advise the accountant of M/s. Paper Products Ltd., with valid reasons, the amount to
be recognized as revenue in above cases in the context of AS-9 and also determine the total revenue to be
recognized for the year ending 31-3-2015.
(4 Marks, May 2015)

Answer: As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions are fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a
price or all significant risks and rewards of ownership have been transferred to
the buyer and the seller retains no effective control of the goods transferred to
a degree usually associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that
will be derived from the sale of the goods.
In case (i):
The sale is complete but delivery has been postponed at buyer’s request. M/s Paper Products Ltd.
should recognize the entire sale of ` 60,000 for the year ended 31st March, 2015.
In case (ii):
20% goods lying unsold with consignee should be treated as closing inventory and sales should be
recognized for ` 1,20,000 (80% of ` 1,50,000). In case of consignment sale revenue should not be
recognized until the goods are sold to a third party.
In case (iii):
In case of goods sold on approval basis, revenue should not be recognized until the goods have been
formally accepted by the buyer or the buyer has done an act adopting the transaction or the time period
for rejection has elapsed or where no time has been fixed, a reasonable time has elapsed. Therefore, in
case (iii) revenue should be recognized for the total sales amounting ` 1,20,000 as the time period for
rejecting the goods had expired.
In case (iv):
Trade discounts given should be deducted in determining revenue. Thus ` 39,000 should be deducted
from the amount of turnover of ` 7,80,000 for the purpose of recognition of revenue. Thus, revenue
should be ` 7,41,000.
Thus total revenue amounting ` 10,41,000 (60,000 + 1,20,000+ 1,20,000+7,41,000) will be recognized
for the year ended 31st March, 2015 in the books of M/s Paper Products Ltd.

Question 37: M/s. Versatile Limited purchased machinery for 4,80,000 (inclusive of excise duty of
40,000). CENVAT credit is available for 50% of the duty paid. The company incurred the following other
expenses for installation.
`

Cost of preparation of site for installation 21,000

Total labour charges 66,000
(200 out of the total of 600 men hours worked, were spent

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for installation of the machinery)

Spare parts and tools consumed in installation 6,000
Total salary of supervisor 24,000
(time spent for installation was 25% of the total time worked.)
Total administrative expenses 32,000
(1/10 relates to the plant installation)
Test run and experimental production expenses 23,000
Consultancy changes to architect for plant set up 9,000
Depreciation on assets used for the installation 12,000
The machine was ready for use on 15-1-2015 but was used from 1-2-2015. Due to this
delay further expenses of ` 19,000 were incurred. Calculate the value at which the plant
should be capitalized in the books of M/s. Versatile Limited. (4 Marks, May 2015)
Answer
Calculation of Cost of Fixed Asset (i.e. Machine)

Particulars `
Purchase Price Given 4,80,000
Add:
Site Preparation Cost Given 21,000
Labour charges (66,000/600x200) 22,000
Spare parts Given 6,000
Supervisor’s Salary 25% of ` 24,000 6,000
Administrative costs 1/10 of ` 32,000 3,200
Test run and experimental production Given 23,000
charges
Architect Fees for set up Given 9,000
Depreciation on assets used for
installation Given 12,000

Total Cost of Asset 5,82,200

Less: Cenvat credit receivable 50% of ` 40,000 20,000
5,62,200

Note: Expenses of ` 19,000 from 15.1.2015 to 1.2.2015 to be charged to profit and loss A/c as plant
were ready for production on 15.1.2015.

Question 38
(a) M/s Umang Ltd. sold goods through its agent. As per terms of sales, consideration is payable within
one month. In the event of delay in payment, interest is chargeable @ 12% p.a. from the agent. The
company has not realized interest from the agent in the past. For the year ended 31st March, 2015
interest due from agent (because of delay in payment) amounts to ` 1,72,000. The accountant of M/s
Umang Ltd. booked ` 1,72,000 as interest income in the year ended 31st March, 2015. Discuss the
contention of the accountant with reference to Accounting Standard-9.
(b) In the books of M/s Prashant Ltd., closing inventory as on 31.03.2015 amounts to 1,63,000 (on the
basis of FIFO method).
The company decides to change from FIFO method to weighted average method for ascertaining the
cost of inventory from the year 2014-15. On the basis of weighted average method, closing inventory as
on 31.03.2015 amounts to ` 1,47,000. Realisable value of the inventory as on 31.03.2015 amounts to `
1,95,000.
Discuss disclosure requirement of change in accounting policy as per AS-1.

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(c) A machinery with a useful life of 6 years was purchased on 1st April, 2012 for 1,50,000.
Depreciation was provided on straight line method for first three years considering a residual value of
10% of cost.
In the beginning of fourth year the company reassessed the remaining useful life of the
machinery at 4 years and residual value was estimated at 5% of original cost.
The accountant recalculated the revised depreciation historically and charged the difference to
profit and loss account. You are required to comment on the treatment by accountant and
calculate the depreciation to be charged for the fourth year.
(d) Briefly explain the treatment of following items as per relevant accounting standards:
(i) The accountant of Star Limited valued the Goodwill of the company at ` 50 lakhs and
showed the same as Fixed Asset in Balance Sheet. The corresponding credit was given
to Reserves.
(ii) An expense of ` 5 crores was incurred on a Machine towards its Repairs and
Maintenance. The accountant wants to capitalize the same considering the significance
of amount spent.
(iii) A plant was ready for commercial production on 01.04.2014 but could commence actual
production only on 01.06.2014. The company incurred ` 50 Iakhs as administrative
expenditure during the period of which 20% was allocable to the plant. The accountant added
` 10 lakhs to cost of plant (5 x 4 = 20 Marks)(Nov 2015)
Answer
a As per para 9.2 of AS 9 “Revenue Recognition”, “where the ability to assess the ultimate
collection with reasonable certainty is lacking at the time of raising any claim, the revenue
recognition is postponed to the extent of uncertainty involved. In such cases, the revenue is
recognized only when it is reasonably certain that the ultimate collection will be made”.

In this case, the company never realized interest for the delayed payments made by the agent.
Hence, based on the past experience, the realization of interest for the delayed payments by
the agent is very much uncertain. The interest should be recognized only if the ultimate
collection is certain. Therefore, the interest income of ` 1,72,000 should not be recognized in
the books for the year ended 31st March, 2015. Thus the contention of accountant is incorrect.
However, if the agents have agreed to pay the amount of interest and there is an element of
certainty associated with these receipts, the accountant is correct regarding booking of `
1,72,000 as interest amount.
b As per para 22 of AS 1 “Disclosure of Accounting Policies”, any change in an accounting policy
which has a material effect should be disclosed in the financial statements. 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. Thus Prashant Ltd. should disclose the change in valuation method of
inventory and its effect on financial statements. The company may disclose the change in
accounting policy in the following manner:
‘The company values its inventory at lower of cost and net realisable value. Since net realisable
value of all items of inventory in the current year was greater than respective costs, the
company valued its inventory at cost. In the present year i.e. 2014-15, the company has
changed to weighted average method, which better reflects the consumption pattern of
inventory, for ascertaining inventory costs from the earlier practice of using FIFO for the
purpose. The change in policy has reduced current profit and value of inventory by ` 16,000’.

c As per AS 6 “Depreciation Accounting”, when there is a revision of the estimated useful life of an
asset, the unamortized depreciable amount should be charged over the revised remaining useful life.
Accordingly revised depreciation shall be calculated prospectively. Thus, the treatment done by the
accountant regarding recalculating the revised depreciation historically i.e. retrospectively is incorrect.

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As per para 18 of AS 6, if the depreciable assets are revalued, the provision for depreciation should be based
on the revalued amount and on the estimate of the remaining useful lives of such assets. In case the
revaluation has a material effect on the amount of depreciation, the same should be disclosed separately in
the year in which revaluation is carried out.
Calculation of Depreciation
Depreciation per year charged for first three years = ` (1,50,000 - 15,000) / 6
= ` 22,500
WDV of the machine at the beginning of the fourth year = ` 1,50,000 – (` 22,500× 3)
= ` 82,500
Depreciable amount after reassessment of residual vale = ` 82,500 – (1,50,000 x 5%)
= ` 75,000
Remaining useful life as per revised estimate = 4 years Depreciation from the fourth
year onwards = ` 75,000 / 4 = ` 18,750

(d) Treatment of given items

a. As per AS 10 “Accounting for Fixed Assets”, goodwill, in general, is recorded in the books
only when some consideration in money or money’s worth has been paid for it. In the given
situation, the company has valued its goodwill which will be considered as earned over the
years i.e. it is self-generated goodwill. Therefore, the same shall not be recorded in the
books, as consideration in money or money’s worth has not been paid for it. Thus raising
goodwill by giving corresponding credit to Reserve is incorrect.

b. Only expenditure that increases the future benefits from the existing asset beyond its
previously assessed standard of performance is included in the gross book value, e.g., an
increase in capacity. The cost of an addition or extension to an existing asset which is of a
capital nature and which becomes an integral part of the existing asset is usually added to
its gross book value. Any other expenses incurred, though substantial, on machine towards
its repairs and maintenance should not be capitalized but charged to profit and loss account
since it does not increase capacity.
c. If the interval between the date a project is ready to commence commercial production and
the date at which commercial production actually begins is prolonged, all expenses incurred
during this period are charged to the profit and loss statement. However, the expenditure
incurred during this period is also sometimes treated as deferred revenue expenditure, to
be amortized over a period not exceeding 3 to 5 years, after the commencement of
commercial production. Thus the amount of ` 10 lakh should either be charged to profit and
loss statement in the year ended 31st March, 2015 or may be amortized for a future period
(e) not exceeding 3 to 5 years after the commencement of commercial production i.e. 1.6.2014.
Question 39 Describe the conditions to be satisfied for Amalgamation in the nature of merger as per AS-14.
(a) Marks, Nov 2015)
Answer: An amalgamation should be considered as an amalgamation in the nature of merger if the following
conditions are satisfied:
(i) All the assets and liabilities of the transferor company become, after amalgamation, the
assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity shares already held therein, immediately before
the amalgamation, by the transferee company or its subsidiaries or their nominees)
become equity shareholders of the transferee company by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity shareholders of the
transferor company who agree to become equity shareholders of the transferee company

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is discharged by the transferee company wholly by the issue of equity shares in the
transferee company, except that cash may be paid in respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company
when they are incorporated in the financial statements of the transferee company except to ensure uniformity of
accounting policies.

Question 40
(a) Uday Constructions undertake to construct a·bridge for the Government of Uttar Pradesh. The
construction commenced during the financial year ending 31.03.2016 and is likely to be completed by
the next financial year. The contract is for a fixed price of ` 12 crores with an escalation clause. The
costs to complete the whole contract are estimated at ` 9.50 crores of rupees. You are·given the
following information for the year ended 31.03.2016:

Cost incurred upto 31.03.2016 ` 4 crores

.Cost estimated to complete the contract ` 6 crores
Escalation in cost by 5% and accordingly the contract price· is increased by 5%.
You are required to ascertain the state of completion and state the revenue and profit to be
recognized for the year as per AS-7.
(b) M/s Active Builders Ltd. invested in the shares of another company on 31 st October, 2015 at a
cost of ` 4,50,000. It also earlier purchased Gold of ` 5,00,000 and Silver of 2,25,000
on 31st March, 2013.
Market values as on 31st March, 2016 of the above investments are as follows:
Shares ` 3,75,000; Gold ` 7,50,000 and Silver ` 4,35,000
How will the above investments be shown in the books of account of M/s Active Builders Ltd.
for the year ending 31st March, 2016 as per the provision of AS-13?
(c) Argon Ltd. purchased a shop on 1st January, 2001 at a cost of ` 8,50,000. The useful life of the
shop is estimated as 30 years with residual value of ` 25,000 and depreciation is provided on
a straight line basis. The shop was revalued on 30th June, 2015 for
(d) 19,50,000 and the revaluation was incorporated in the accounts.
Calculate:
a. The surplus on revaluation;
b. Depreciation to be charged in the Profit and Loss account for the year ended on 31st
December, 2015.
( d) 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 in the form of cash
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. (4 x 5 = 20 Marks)(May 2016)

Answer
(a)

` in crore
Cost of construction of bridge incurred 31.3.16 4.00
Add: Estimated future cost 6.00

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Total estimated cost of construction 10.00

Contract Price (12 crore x 1.05) 12.60 crore

Stage of completion
Percentage of completion till date to total estimated cost of construction =
(4/10)100 = 40%
Revenue and Profit to be recognized for the year ended 31st March, 2016 as per AS 7

Proportion of total contract value recognized as revenue = Contract price x percentage of

completion
=` 12.60 crore x 40% =` 5.04 crore
Profit for the year ended 31st March, 2016 = ` 5.04 crore less ` 4 crore = 1.04 crore
i. As per AS 13 „Accounting for Investments‟, if the shares are purchased with an
intention to hold for short-term period then investment will be shown at the realizable value.
If equity shares are acquired with an intention to hold for long term period then it will continue
to be shown at cost in the Balance Sheet of the company. However, provision for diminution
shall be made to recognize a decline, if other than temporary, in the value of the investments.
In the given case, shares purchased on 31st October, 2015, will be valued at ` 3,75,000 as on
31st March, 2016.
Gold and silver are generally purchased with an intention to hold it for long term period
until and unless given otherwise. Hence, the investment in gold and silver (purchased on 31st
March, 2013) shall continue to be shown at cost as on 31 st March, 2016 i.e., 5,00,000 and `
2,25,000 respectively, though their realizable values have been increased.

Thus the shares, gold and silver will be shown at ` 3,75,000, ` 5,00,000 and ` 2,25,000
respectively and hence, total investment will be valued at ` 11,00,000 in the books of account
of M/s Active Builders for the year ending 31st March, 2016 as per provisions of AS 13.
(c) As per AS 6 “Depreciation Accounting”, where the depreciable assets are revalued, the
provision for depreciation should be based on the revalued amount and on the estimate of the
remaining useful lives of such assets.
Surplus on revaluation
Depreciation provided upto 30th June, 2015 ` 27,500 [(` 8,50,000 – ` 25,000)/30] p.a.]
Total depreciation ` 3,98,750 (` 27,500 p.a. for 14.5 years)
W.D. V of shop on 30th June, 2015 (a) ` 4,51,250
[` 8,50,000 less ` 3,98,750]
Revalued value (b) ` 19,50,000
Surplus [(b) less (a)] ` 14,98,750

Depreciation to be charged in the profit and loss account for the year ended 31st Dec., 2015
Depreciation for Jan. to June 15 (before revaluation) ` 13,750 (` 27,500 /2)
Remaining useful life 15.5 years
Depreciation for July to Dec. 15(after revaluation) ` 62,097
[` 19,25,000 (19,50,000 less
25,000) / 15.5 x 1/2]
Total Depreciation for the year ended 31st Dec., 2015 ` 75,847[` 13,750 + ` 62,097]
Note:

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Depreciation for the year ended 31st Dec., 2015 has been computed on the basis of assumption that there is
no change in residual value and the remaining useful life after revaluation of the shop
(d) Cost of inventory and allocation of material cost

`
Purchase price (13,000 Kg. x ` 89) 11,57,000
Less: CENVAT Credit (13,000 Kg. x ` 5) (65,000)
10,92,000
Add: Freight 30,000
Allocated Administrative expenses 10,000
A. Total material cost 11,32,000

B. Number of units to be normally received = 96% of 13,000 Kg. Kg. 12,480

C. Normal cost per Kg. (A/B) 90.705
Allocation of material cost

Kg. `/Kg. `
Materials consumed 10,000 9,07,050
Cost of inventory (12,400- 10,000) 2,400 90.705(approx.) 2,17,692
Abnormal loss 80 7,258*
Total material cost 12,480 11,32,000
*The difference due to rounding off of normal cost per Kg has been adjusted.
Thus the inventory will be valued at ` 2,17,692.
Note:
1. The Company has received trade discount in the form of cash. Th is discount has been
treated as trade discount in the given answer.
2. Abnormal losses are recognized as separate expenses.
3. 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.
Alternatively, the sales value of container amount of ` 500 may be deducted, while computing material
cost. In that case the material cost will be computed as` 11,31,500 (11,32,000-500) instead of `
11,32,000. Accordingly the allocation of material cost will get changed.
State VAT has not been included in the cost of materials in the above answer as VAT is generally credited in the
later course of time.

Question 41 Classify the following activities as per AS 3 Cash Flow Statement:

(i) Interest paid by financial enterprise
(ii) Dividend paid
(iii) Tax deducted at source on interest received from subsidiary company
(iv) Deposit with Bank for a term of two years
(v) Insurance claim received towards loss of machinery by fire
(vi) 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 ? (4Marks)(May 2016)
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Answer (i) Interest paid by financial enterprise Cash

flows from operating activities
(ii) Dividend paid
Cash flows from financing activities
(iii) TDS on interest received from subsidiary company
Cash flows from investing activities
(iv) Deposit with bank for a term of two years

Cash flows from investing activities

(v) 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‟
(vi) Bad debts written off
It is a non-cash item which is adjusted from net profit/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.

Question 42
a) GTI Ltd. negotiates with Bharat Oil Corporation Ltd. (BOCL), for construction of “Retail Petrol
& Diesel Outlet Stations”. Based on proposals submitted to different Regional Offices of BOCL,
the final approval for one outlet each in Region X, Region Y, Region Z is awarded to GTI Ltd.
A single agreement is entered into between two. The agreement lays down values for each of
the three outlets i.e. `102 lacs, `150 lacs, `130 lacs for Region X, Region Y, Region Z
respectively. Agreement also lays down completion time for each Region.
Comment whether GTI Ltd. will treat it as single contract or three separate contracts with
reference to AS-7?
b) Hema Ltd. purchased a machinery on 1.04.2008 for `15,00,000. The company charged straight
line depreciation based on 15 years working life estimate and residual value `3,00,000. At the
beginning of the 4th year, the company by way of systematic evaluation revalued the machinery
upward by 20% of net book value as on date and also re-estimated the useful life as 7 years
and scrap value as nil. The increase in net book value was credited directly to revaluation
reserves. Deprecation (on SLM basis) later on was charged to Profit & Loss Account. At the
beginning of 8th year the company decided to dispose off the machinery and estimated the
realizable value to `2,00,000.
You are required to ascertain the amount to be charged to Profit & Loss Account at the
beginning of 8th year with reference to AS-10.
c) How you will deal with following in the financial statement of the Paridhi Electronics Ltd. as on
31.3.16 with reference to AS-13?
i. Paridhi Electronics Ltd. invested in the shares of another unlised company on 1st
May 2012 at a cost of `3,00,000 with the intention of holding more than a year. The
published accounts of unlisted company received in January, 2016 reveals that the
company has incurred cash losses with decline market share and investment of
Paridhi Electronics Ltd. may not fetch more than `45,000.

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ii. Also Paridhi Electronics Ltd. has current investment (X Ltd.’s shares) purchased for
`5 lakhs, which the company want to reclassify as long term investment. The market
value of these investments as on date of Balance Sheet was ` 2.5 lakhs.
d) A manufacturing company has the following stages of production and sale in manufacturing
Fine paper rolls:
Date Activity Cost to Date Net Realizable
(`) Value (`)
15.1.16 Raw Material 1,00,000 80,000
20.1.16 Pulp (WIP 1) 1,20,000 1,20,000
27.1.16 Rough & thick paper (WIP 2) 1,50,000 1,80,000
15.2.16 Fine Paper Rolls 1,80,000 3,50,000
20.2.16 Ready for sale 1,80,000 3,50,000
15.3.16 Sale agreed and invoice raised 2,00,000 3,50,000
02.4.16 Delivered and paid for 2,00,000 3,50,000
Explain the stage on which you think revenue will be generated and state how much would be
net profit for year ending 31.3.16 on this product according to AS-9.
(4 x 5 = 20 Marks)(nov 2016)
Answer
i. As per AS 7 ‘Construction Contracts’, when a contract covers number of assets, the
construction of each asset should be treated as a separate construction contract when:
a. separate proposals have been submitted for each asset;
b. each asset has been subject to separate negotiation and the contractor and customer have
been able to accept or reject that part of the contract relating to each asset; and
c. the costs and revenues of each asset can be identified.
In the given case, each outlet is submitted as a separate proposal to different Zonal Offices,
which can be separately negotiated, and costs and revenues thereof can be separately
identified. Hence, each asset will be treated as a “single contract” even if there is one single
agreement for contracts.
Therefore, three separate contract accounts must be recorded and maintained in the books of
GTI Ltd. For each contract, principles of revenue and cost recognition must be applied
separately and net income will be determined for each asset as per AS 7.

(b)

`
Depreciation charged for first three years [(15,00,000 - 3,00,000)/15] x 3 2,40,000
W.D.V. at beginning of 4th year (15,00,000 – 2,40,000) 12,60,000
Add: Upward revaluation 2,52,000
Revalued Value (12,60,000 x 120%) 15,12,000
Revised useful life 7 years
Depreciation from 4th year onwards (15,12,000/ 7) 2,16,000
Depreciation from 4th to 7th year (2,16,000 x 4) 8,64,000
W.D.V. at beginning of 8th year (15,12,000 - 8,64,000) 6,48,000
Disposal value 2,00,000
Loss on disposal (6,48,000 – 2,00,000) 4,48,000

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Loss to be charged against revaluation reserve as per AS 10 2,52,000

Amount to be charged to P & L Account at beginning of 8th year 1,96,000
(4,48,000 - 2,52,000)
Note: Information regarding revaluation and re-estimation of the useful life has been given in
the question. It has been given that at the beginning of the 4th year, useful life was re-estimated
as 7 years. In the above solution, this useful life has been considered as remaining useful life.
Alternatively, it may also be assumed as the total useful life. In that case the remaining useful
life will be considered as 4 years because 3 years have already passed.

© As per AS 13, “Accounting for investments” Investments classified as long term investments should be
carried in the financial statements at cost. However, provision for diminution shall be made to recognise a
decline, other than temporary, in the value of the investments, such reduction being determined and made for
each investment individually. The standard also states that indicators of the value of an investment are
obtained by reference to its market value, the investee's assets and results and the expected cash flows from
the investment.
I. On this basis, the facts of the given case clearly suggest that the provision for diminution should be
made to reduce the carrying amount of shares to ` 45,000 in the financial statements for the year
ended 31st March, 2016 and charge the difference of loss of ` 2,55,000 to Profit and Loss account.

II. As per AS 13 ‘Accounting for Investments’, where investments are reclassified from current to long-
term, transfers are made at the lower of cost or fair value at the date of transfer.In the given case,
the market value of the investment (X Ltd. shares) is ` 2.50 lakhs, which is lower than its cost i.e. `5
lakhs. Therefore, the transfer to long term investments should be made at cost i.e. `2.50 lakhs. The
loss of ` 2.50 lakhs should be charged to profit and loss account.

(d) According to AS 9 “Revenue Recognition”, in a transaction involving the sale of goods,

performance should be regarded as being achieved when the following conditions have been fulfilled
 the seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the
seller retains no effective control of the goods transferred to a degree usually associated
with ownership; and
 no significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
Thus, sales will be recognized only when following two conditions are satisfied:
i. The sale value is fixed and determinable.
ii. Property of the goods is transferred to the customer.
Both these conditions are satisfied only on 15.3.2016 when sales are agreed upon at a price and goods are
allocated for delivery purpose through invoice. The amount of net profit ` 150,000 (3,50,000 – 2,00,000) would
be recognized in the books for the year ending 31st March, 2016.

Question 43
a) 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, a s 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

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considers that these claims are in the nature of “claims against the company not acknowledged
as debt”, and the same has been disclosed by wa y 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.
b) Explain the meaning of the terms ‘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.
c) Akar Ltd. Signed on 01/04/16, a construction contract for ` 1,50,00,000. Following particulars
are extracted in respect of contract, for the period ending 31/03/17.
Materials issued ` 75,00,000
Labour charges paid ` 36,00,000

Hire charges of plant ` 10,00,000 Other contract cost incurred ` 15,00,000

Out of material issued, material lying unused at the end of period is ` 4,00,000
Labour charges of ` 2,00,000 are still outstanding on 31.3.17.
It is estimated that by spending further ` 33,50,000 the work can be completed in all respect.
You are required to compute profit/loss to be taken to Profit & Loss Account and additional provision for
foreseeable loss as per AS -7.
(d) Raj Ltd. entered into an agreement with Heena Ltd. to dispatch goods valuing
5,00,000 every month for next 6 months on receipt of entire payment. Heena Ltd. accordingly made the entire
payment of ` 30,00,000 and Raj Ltd. started dispatching the goods. In fourth month, due to fire in premise of
Heena Ltd., Heena Ltd. requested to Raj Ltd. not to dispatch goods worth ` 15,00,000 ready for dispatch. Raj
Ltd. Accounted 15,00,000 as sales and transferred the balance to Advance received against Sales account.
Comment upon the above treatment by Raj Ltd. With reference to the provision of AS-9.
(4 x 5 Marks = 20 Marks)(May 2017)

Answer
(a) AS1 ‘Disclosure of Accounting Policies’ recognizes 'prudence' as one of the major considerations
governing the selection and application of accounting policies. In view o f 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. 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.
Hence, the company should provide for the liability (since it is not waived by 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.

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(b) 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.
In the given 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. Therefore, 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 betw een 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 .
c Statement showing the amount of profit/loss to be taken to Profit and Loss Account and
additional provision for the foreseeable loss as per AS 7

Cost of Construction ` `
Material Issued 75,00,000
Less: Unused Material at the end of period 4,00,000 71,00,000
Labour Charges paid 36,00,000
Add: Outstanding on 31.03.2017 2,00,000 38,00,000
Hire Charges of Plant 10,00,000
Other Contract cost incurred 15,00,000
Cost incurred upto 31.03.2017 1,34,00,000
Add: Estimated future cost* 33,50,000
Total Estimated cost of construction 1,67,50,000
Degree of completion (1,34,00,000/1,67,50,000 x 100) 80%
Revenue recognized (80% of 1,50,00,000) 1,20,00,000
Total foreseeable loss (1,67,50,000 - 1,50,00,000) 17,50,000
Less: Loss for the current year (1,34,00,000 - 1,20,00,000) 14,00,000
Loss to be provided for 3,50,000

(d) As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance should
be regarded as being achieved when the following conditions are fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods fo r a price or all
significant risks and rewards of ownership have been transferred to the buyer and the seller retains
no effective control of the goods transferred to a degree usually associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
In the given case, transfer of property in goods results in or coincides with the transfer of significant risks and
rewards of ownership to the buyer. Also, the sale price has been recovered by the seller. Hence, the sale is
complete but delivery has been postponed at buyer’s request. Raj Ltd. should recognize the entire sale of `
30,00,000 (` 5,00,000 x 6) and no part of the same is to be treated as Advance Received ag ainst Sales.

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Question 44
a) ABC Ltd. is installing a new plant at its production factory. It provides you the following
information:
Cost of the plant (cost as per supplier's invoice) ` 31,25,000
Estimated dismantling costs to be incurred after 5 years ` 2,50,000
Initial Operating losses before commercial production ` 3,75,000
Initial delivery and handling costs ` 1,85,000
Cost of site preparation ` 4,50,000
Consultants used for advice on the acquisition of the plant ` 6,50,000
Please advise ABC Ltd. on the costs that can be capitalised for plant in accordance with AS
10: Property, Plant and Equipment.
(b) A Limited is engaged in manufacturing of Chemical Y for which Raw Material X is required. The
company provides you following information for the year ended 31st March, 2017.

` Per unit
Raw Material X
Cost price 380
Unloading Charges 20
Freight Inward 40
Replacement cost 300
Chemical Y
Material consumed 440
Direct Labour 120
Variable Overheads 80
Additional Information:
i. Total fixed overhead for the year was ` 4,00,000 on normal capacity of 20,000 units.
ii. Closing balance of Raw Material X was 1,000 units and Chemical Y was 2,400 units.

You are required to calculate the total value of closing stock of Raw M aterial 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

d Fashion Limited is engaged in manufacturing of readymade garments. They provide you the
following information on 31st March, 2017:
1. On 15th January, 2017 garments worth ` 4,00,000 were sent to Anand on consignment
basis of which 25% garments unsold were lying with Anand as on 31st March, 2017.
2. Garments worth ` 1,95,000 were sold to Shine boutique on 25th March, 2017 but at the
request of Shine Boutique, these were delivered on 15 th April, 2017.
3. On 1st November, 2016 garments worth ` 2,50,000 were sold on approval basis. The
period of approval was 4 months after which they were considered sold. Buyer sent
approval for 75% goods up to 31st December, 2016 and no approval or disapproval
received for the remaining goods till 31st March, 2017.
You are required to advise the accountant of Fashion Limited, the amount to be recognised
as revenue in above cases in the context of AS 9.

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(d) What are Accounting Standards? Explain the issues, with which they deal.
(4 x 5 Marks = 20 Marks)(nov 2017)
Answer
(a) According to AS 10 on Property, Plant and Equipment, the costs which will be capitalized by ABC
Ltd. are as follows:

`
Cost of the plant 31,25,000
Initial delivery and handling costs 1,85,000
Cost of site preparation 4,50,000
Consultants’ fees 6,50,000
Estimated dismantling costs to be incurred after 5 years 2,50,000
Total cost of Plant 46,60,000

Note: Operating losses before commercial production amounting ` 3,75,000 will not be
capitalized as per AS 10. They should be written off to the Statement of Profit and Loss in the
period they are incurred.
(b) (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:

Qty. Rate (`) Amount (`)

Raw Material X 1,000 440 4,40,000
Finished Goods Y 2,400 660 15,84,000
Total Value of Closing Stock 20,24,000
(d) When Net Realizable Value of the Chemical Y is ` 600 per unit
NRV is less than the cost of Finished Goods Y i.e. ` 660. Hence, Raw Material is to be
valued at replacement cost and Finished Goods are to be valued at NRV since NRV is
less than the cost.
Value of Closing Stock:

Qty. Rate (`) Amount (`)

Raw Material X 1,000 300 3,00,000
Finished Goods Y 2,400 600 14,40,000
Total Value of Closing Stock 17,40,000

Working Note:
Statement showing cost calculation of Raw material X and Chemical Y
Raw Material X `
Cost Price 380
Add: Freight Inward 40
Unloading charges 20
Cost 440
Chemical Y `
Materials consumed 440
Direct Labour 120
Variable overheads 80

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Fixed overheads (`4,00,000/20,000 units) 20

Cost 660
(c) As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions are fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the
seller retains no effective control of the goods transferred to a degree usually associated
with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
Case (i): 25% goods lying unsold with consignee should be treated as closing inventory and
sales should be recognized for ` 3,00,000 (75% of ` 4,00,000) for the year ended on 31.3.17.
In case of consignment sale, revenue should not be recognized until the goods are sold to a
third party.
Case (ii): The sale is complete but delivery has been po stponed at buyer’s request. Fashion
Ltd. should recognize the entire sale of `1,95,000 for the year ended 31st March, 2017.

Case (iii): In case of goods sold on approval basis, revenue should not be recognized until the
goods have been formally accepted by the buyer or the buyer has done an act accepting the
transaction or the time period for rejection has elapsed or where no time has been fixed, a
reasonable time has elapsed. Therefore, revenue should be recognized for the total sales
amounting ` 2,50,000 as the time period for rejecting the goods had expired.

Thus total revenue amounting ` 7,45,000 (3,00,000+1,95,000+2,50,000) will be recognized for

the year ended 31st March, 2017 in the books of Fashion Ltd.
(d) Accounting Standards (ASs) are written policy documents issued by expert accounting body
or by government or other regulatory body covering the aspects of recognition, measurement,
presentation and disclosure of accounting transactions in the financial statements. Accounting
Standards reduce the accounting alternatives in the preparation of financial statements and
ensure standardization of alternative accounting treatments and comparability of financial
statements of different enterprises.
Accounting Standards deal with the issues of
Recognition of events and transactions in the financial statements,
Measurement of these transactions and events,
Presentation of these transactions and events in the financial statements in a manner
that is meaningful and understandable to the reader, and
Disclosure requirements which should be there to enable the public at large and the
stakeholders and the potential investors, in particular, to get an insight into what these
financial statements are trying to reflect and thereby facilitating them to take prudent and
informed business decisions.

Question 45
1. 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?
(i) 10% Debentures issued: As on 01-04-2017 ` 1,10,000
As on 31-03-2018 ` 77,000

(ii Debentures were redeemed at 5% premium at the end of the year. Premium was charged to the
Profit & Loss Account for the year.
(iii) Unpaid Interest on Debentures: As on 01-04-2017 ` 275
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As on 31-03-2018 ` 1,175
Debtors of ` 36,000 were written off against the Provision for Doubtful Debts A/c during
the year.
(v) 10% Bonds (Investments): As on 01-04-2017 ` 3,50,000
As on 31-03-2018 ` 3,50,000
(vii) Accrued Interest on Investments: As on 31-03-2018 ` 10,500

2. State whether the following statements are 'True' or 'False'. Also give reason for your answer.
c. 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.
d. If fundamental accounting assumptions are not followed in presentation and preparation
of financial statements, a specific disclosure is not required.
e. All significant accounting policies adopted in the preparation and presentation of
financial statements should form part of the financial statements.

f. 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.
g. There is no single list of accounting policies which are applicable to all circumstances.

3. Explain 'Bearer Plant' & 'Biological Asset' as per AS-10.

(3 Parts x 5 Marks = 15 Marks)( May 2018, ipcc)
Answer
(a) Cash Flow Statement of M/s GAGAN Ltd. for the year ended March 31, 2018
A Cash Flow from Operating Activities
Net Profit as per Profit & Loss A/c --------
Add: Premium on Redemption of Debentures 1,650
Add: Interest on 10% Debentures 11,000
Less: Interest on 10% Investments (35,000)
B Cash Flow from Investing Activities
Interest on Investments [35,000-10,500] 24,500
C Cash Flow from Financing Activities
Interest on Debentures paid [11,000 - (1,175 - 275)] (10,100)
Redemption of Debentures [(1,10,000 - 77,000) at 5% premium] (34,650)
Note: Debtors written off against provision for doubtful debts does not require any further adjustment in Cash
Flow Statement

(b) (i) False; As per AS 1 “Disclosure of Accounting Policies”, certain fundamental accounting
assumptions underlie the preparation and presentation of finan cial 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 assumption is not followed, the fact should be
disclosed.
(iii) True; To ensure proper understanding of financial statements, it is necessa ry that all
significant accounting policies adopted in the preparation and presentation of financial

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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 ascerta inable, 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.

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 (d) 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:
(i) plants cultivated to be harvested as agricultural produce (for example, trees
grown for use as lumber);
(ii) 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
(iii) 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.

Question 46 Sun Ltd. wants to re-classify its investments in accordance with AS-13. State the values at
which the investments have to be re-classified as per AS-13 in the following cases:
(1) Current investments in Company Fine Ltd. costing ` 39,000 are to be re-classified
as long term investments. The fair value on the date of transfer is ` 37,000.
(2) Long term investment in Company Bold Ltd., costing ` 16 lakhs are to be re-
classified as current investments. The fair value on the date of transfer is ` 15 lakhs
and book value is ` 16 lakhs.
(4 Marks, May 2018, Ipcc)
answer: Re-classification will be done on the following basis:
(i) As per AS 13, where investments are reclassified from current to long term, transfers are
made at lower of cost and fair value on the date of transfer. In this case, fair value is `
37,000 which is lower than the cost of ` 39,000. The reclassification of current investment
as long -term investments will be made at ` 37,000.

(ii) As per AS 13 ‘Accounting for Investments’, where long -term investments are reclassified
as current investments, transfers are made at the lower of cost and carrying amount at
the date of transfer. The carrying / book value of the long term investment is same as cost
i.e. ` 16 lakhs. Hence this long term investment will be reclassified as current investment
at book value of ` 16 lakhs only.
Question 47
(a) Shrishti Ltd. contracted with a supplier to purchase machinery which is to be installed in its
Department A in three months' time. Special foundations were required for the machinery which
were to be prepared within this supply lead time. The cost of the site preparation and laying
foundations were ` 1,41,870. These activities were supervised by a technician during the entire
period, who is employed for this purpose of ` 45,000 per month. The technician's services were given
by Department B to Department A, which billed the services at ` 49,500 per month after adding
10% profit margin.
The machine was purchased at ` 1,58,34,000 inclusive of IGST @ 12% for which input credit is
 available to Shrishti Ltd. ` 55,770 transportation charges were incurred to bring the machine to the
factory site. An Architect was appointed at a fee of ` 30,000 to supervise machinery installation at
the factory site.
Also, payment under the invoice was due in 5 months. However, the Company made the payment in
3rd month. The company operates on Bank Overdraft @ 14% p.a.
Ascertain the amount at which the Machinery should be capitalized under AS 10.
(b) Goods worth ` 6,62,500 were sold on 31.10.2017 by X Ltd. to Y Ltd. Y Ltd. requested for a trade
discount of 8% which was agreed by X Ltd. The sale was effected and goods were dispatched,
However, on receipt of the goods, Y Ltd. found that goods worth
` 77,500 were damaged. Consequently, Y Ltd. returned the damaged goods to X Ltd. and made
the due payment amounting to ` 5,32,000. The accountant of X Ltd. booked the sale for ` 5,32,000.
Discuss the above treatment by the accountant with reference to applicable Accounting Standard.
(c) M/s Action Construction Company Ltd. undertook a fixed price construction contract to construct a
building within 3 years time for ` 10,000 lakhs.
A summary of the financial data during the construction period is as follows:

(` lakhs)
Year-1 Year-2 Year-3
Initial amount for revenue agreed in contract 10000 10000 10000
Initial amount for revenue agreed in contract 10000 10000 10000
Variation in Revenue (+) - 500 1000
Contract costs incurred upto the reporting date 2415 6375 8500
Estimated profit for whole contract 1950 2000 2500
The variation in cost and revenue in year 2 and 3 has been approved by customer.
Determine the stage of completion of contract and amount of revenue expenses and profit or
loss to be recognised in the statement of Profit and Loss for three years as per AS-7 (Revised).
(d) Enumerate type of alternatives available to a business entity for accounting in computerized
environment.
Also, describe the criteria for selection among above alternatives.
(3 Parts x 5 Marks=15 Marks)( Nov 2018, IPCC)
Answer
(a) Calculation of Cost of Fixed Asset (i.e. Machinery)

Particulars `
Purchase Price Given (` 158,34,000 x 100/112) 1,41,37,500
Add: Site Preparation Given 1,41,870
Cost
T echnician’s Salary Specific/Attributable overheads 1,35,000
for 3 months (See Note)
(45,000 x3)
Initial Delivery Cost T ransportation 55,770
Professional Fees Architect’s Fees 30,000
for Installation
T otal Cost of Asset 1,45,00,140
Note:
(i) Interest on Bank Overdraft for earlier payment of invoic e is not relevant
under AS 10.
(ii) Internally booked profits should be eliminated in arriving at the cost of machine.
Note: T he above solution is given on the basis that IGST credit is availed by the Shristhi
Limited.
(b) As per AS 9 ‘Revenue Recognition’, revenue is the gross inflow of cash, receivable or other
consideration arising in the course of the ordinary activities of an enterprise from the
sale of goods. However, trade discounts and volume rebates given in the ordinary course
of business should be deducted in determining revenue. Revenue from sales should be
recognized at the time of transfer of significant risks and rewards. If the delivery of
the sales is not subject to approval from customers, then the transfer of significant risks
and rewards would take place when the sale is affected and goods are dispatched.
In the given case, if trade discount allowed by X Ltd. is given in the ordinary course of
business, X Ltd. should record the sales at ` 6,09,500 (after deducting 8% trade discount
from 6,62,500) and goods returned worth ` 77,500 are to be recorded in the form of
sales return.
However, when trade discount allowed by X Ltd. is not in the ordinary course of business,
X Ltd. should record the sales at gross value of ` 6,62,500. Discount of ` 53,000 in price
and return of goods worth ` 77,500 are to be adjusted by suitable provisions. X Ltd.
might have sent the credit note of ` 1,30,500 to Y Ltd. to account for these adjustments.
In both the cases, the contention of the accountant to book the sales for ` 5,32,000 is not
correct.
(c) T he amounts of revenue, expenses and profit recognized in the statement of profit
and loss in three years are computed below:
(Amount in ` lakhs)

Up to the Recogni Recognized in

reporting zed in current year
date previous
years
Year 1
Revenue (10,000 x30%) 3,000 - 3,000
Expenses (8,050 x 30%) 2,415 - 2,415
Profit 585 - 585
Year 2
Revenue (10,500 x75%) 7,875 3,000 4,875
Expenses (8,500 x 75%) 6,375 2,415 3,960
Profit 1,500 585 915
Year 3
Revenue (11,000 x 100%) 11,000 7,875 3,125
Expenses (8,500 x 100%) 8,500 6,375 2,125
Profit 2,500 1,500 1,000
Working Note - Calculation of stage of completion of contract
 Year 1 Year 2 Year 3
Revenue after considering 10,00 10,50 11,00
variations 0 0 0
Less: Estimated profit for whole 2,00 2,50
contract 1,950 0 0

Estimated total cost of the contract 8,050 8,500 8,500

(A)
Actual cost incurred upto the 2,415 6,375 8,500
reporting date (B)
Degree of completion (B/A) 30% 75% 100%

Question 48: The Investment portfolio of XYZ Ltd. as on 31.03.2018 consisted of the following :
(` in lacs)
Fair Value as
Current Investments Cost
on
31.03.201
8

(1) 1000 Equity Shares of A Ltd. 5 7

(2) 500 Equity Shares of B Ltd. 10 15
(3) 1000 Equity Shares of C Ltd. 15 12
Total 30 34
Give your comments on below:
(i) The company wants to value the above portfolio at ` 30 lakhs being lower of cost
or fair market value.
(ii) Company wants to transfer 1000 Equity Shares of C Ltd. from current
investments to long term investments on 31.03.2018 at cost of ` 15 lakhs. ( 4
Marks, Nov 2018, IPCC)
Answer
(i) As per AS 13 “Accounting for Investments”, Valuation of current investments on
overall (or global) basis is not considered appropriate. Sometimes, the concern of
an enterprise may be with the value of a category of related current investments
and not with each individual investment, and accordingly the investments may be
carried at the lower of cost and fair value computed category-wise (i.e. equity
shares, preference shares, convertible debentures, etc.). However, the more
prudent and appropriate method is to carry investments individually at the lower
of cost and fair value. Hence the company has to value the current investment at
` 27 Lacs (A Ltd. shares at ` 5 lacs; B Ltd. shares at ` 10 lacs and C Ltd. shares at `
12 lacs). T he company’s decision to value the portfolio at ` 30 lacs is not
appropriate.
(ii) Moreover, where investments are reclassified from current to long-term,
transfers are made at the lower of cost and fair value at the date of transfer.
Hence, the company has to make transfer of 1,000 equity shares of C Ltd.at ` 12 lacs (fair value)
and not ` 15 lacs (cost) as the fair value is less than cost.