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SUG

GGES
STED ANSW
WERS
S
TO

Q
QUESTIO
ONS
S AT THE
SET
T
I
INSTITUT
TES EXA
AMINATIO
ONS
M
MAY,
20044 NOVE
EMBER, 2013
2

A CO
OMPIL
LATIO
ON
INTERMEDIATE (IIPC) CO
OURSE
E
P
PAPER
1: ACC
COUNTING

BO
OARD OF ST
TUDIES
THE INSTIT
TUTE OF CH
HARTERED ACCOUNTA
ANTS OF IND
DIA
NOIDA

The Institute of Chartered Accountants of India

The Suggested Answers published in this volume do not constitute the basis for evaluation of
the students answers in the examinations. The answers are prepared with a view to assist the
students in their education. While due care is taken in preparation of the answers, if any errors
or omissions are noticed, the same may be brought to the attention of the Director of Studies.
The Council of the Institute is not responsible in any way for the correctness or otherwise of
the answers published therein.

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or
transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or
otherwise, without prior permission, in writing, from the publisher.

Website

Department/Committee :

www.icai.org

Board of Studies

E-mail

ISBN No.

Price

Published by

bosnoida@icai.in

The Publication Department on behalf of The Institute of


Chartered Accountants of India, ICAI Bhawan, Post Box No.
7100, Indraprastha Marg, New Delhi- 110 002, India
Typeset and designed at Board of Studies.

Printed by

The Institute of Chartered Accountants of India

The Institute of Chartered Accountants of India

Preparation of Financial 1(ii)


statements
1(v)
1(vi)
1(x)
6 (v)

Cash Flow Statements

Profits or Losses Prior to


Incorporation

Accounting for Bonus


Issue

Unit 1

Unit 2

5(b)

Financial Statements of
Companies

2
2
2
2
4
12
5 (b)

1(v)
1(vi)
1(viii)
6(b)
6(d)

2
2
4
4
12

1(vii )
1(viii)
6(ii)
6(iv)

Accounting Standards

2
2
2
4
4
14

May 2010

Nov. 2009

Topics

10
12

5(a)

16

5
5
4
4
18

6(a)

1(b)
1(d)
7(a)
7(c )

Nov. 2010

1 (a)
7 (b)

16

5
4
9

May 2011

6 (a)

4(b)

4(a)

1(a)

1(c)
7 (a)
7 (b)
7(c)
7 (d)
7(e)

10

5
4
4
4
4
4
25

Nov. 2011

Term of Examination

7(d)

1
7(c)

20
4
24

May 2012

3(b)

7(c)
7(d)

4
4
8

Nov.2012

6(a)

6(b)

7 (b)
7(c)
7 (d)
7(e)

4
4
4
4
16

May 2013

3(b)

16

20

Nov.2013

Paper 1 Accounting
Statement showing topic-wise distribution of Examination Questions along with Marks

The Institute of Chartered Accountants of India

Amalgamation

2
16
4
22

Hire Purchase
Instalment
Transactions

Investment Accounts

Insurance Claims for 4 (a)


Loss of Stock and Loss
of Profit

Issues in Partnership 1(iv)


Accounts
3

11

12

13

14

6 (vi)

1 (iii)

Accounts
from
Incomplete Records

10

and
Sale

Financial Statements of 1(i)


Not
for
Profit 1(ix)
Organisations
5 (a)

2
2
10
14

Self Balancing Ledgers

4 (b)

Account Current

16

Unit 2

7 Unit 1 Average Due Date

Internal Reconstruction

1 (i)
1 (vii)

1 (ix)

1(iii)
4(b)

2
2
4

2
6
8

2
2
10
14

16

2
1(ii)
1(x)
4(a)

16

5 (a)

1(iv)

1 (a)
4

7 (d)

6 (b)

5 (b)

7(e)

1 (c)

5
16
21

6*

16

1(c)
2
7 (c)

1(b)

1 (d)

7(e)

7(a)

5
16
4
25

16

16

16

1 (d)

5(a)

6 (b)

10

16

16

3(b)
7(b)

5(b)

5(a)*

3(a)

7(a)

8
4
12

16

16

16

1(b)
6

5(b)
7(b)

5(a)

1(c)
3(a)

1(d)

1(a)

7(a)

5
16
21

8
4
12

5
8*
13

16

16

1(c)

1(d)

1(a)
5(b)

5(a)

1(b)

16

5*
6*
11

16

10

16

7(a)

3(a)

7(c)

7(d)

7(b)

16

16

16

The Institute of Chartered Accountants of India

Accounting
Computerized
Environment

6 (iii)

in 6(i)

4
4
8
6(c)

7(b)

7(d)

5(b)

7(e)

7(e)

7(a)

7(e)

The given Matrix contains analysis of questions pertaining to Intermediate (IPC) Examinations.

*The questions are based on Stock & Debtors method and H.P. Trading A/c method which have been removed from the existing
syllabus.

Note: Q represents question numbers as they appeared in the question paper of respective examination. M represents the
marks which each question carries in that respective examination.
The question papers of all the past attempts of IPCC can be accessed from the BOS Knowledge Portal at the Students Page on
the Institutes website www.icai.org.

15

The Institute of Chartered Accountants of India

CONTENTS
Chapter

Chapter Heading

Page No.

Accounting Standards

1.1 1.35

Financial Statements of Companies

2.1 2.39

Unit-1: Preparation of Financial Statements of Companies

2.1 2.10

Unit-2: Cash Flow Statements

2.11 2.39

Profit or Loss Prior to Incorporation

3.1 3.10

Accounting for Bonus Issue

4.1 4.10

Internal Reconstruction

5.1 5.14

Amalgamation

6.1 6.24

Average Due Date and Account Current

7.1 7.13

Self Balancing Ledgers

8.1 8.10

Financial Statements of Not-for-Profit Organisations

9.1 9.40

10

Accounts from Incomplete Records

10.1 10.39

11

Hire Purchase & Instalment Sale Transactions

11.1 11.11

12

Investment Accounts

12.1 12.13

13

Insurance Claims for Loss of Stock & Loss of Profit

13.1 13.21

14

Issues in Partnership Accounts

14.1 14.46

15

Accounting in Computerised Environment

15.1 15.8

The Institute of Chartered Accountants of India

The Institute of Chartered Accountants of India

1
Accounting Standards
Question 1
Attempt any four of the following:
(a) X Ltd. received a grant of ` 2 crores from the Central Government for the purpose of a
special Machinery during 1998-99. The cost of Machinery was ` 20 crores and had a
useful life of 9 years. During 2002-03, the grant has become refundable due to nonfulfillment of certain conditions attached to it. Assuming the entire grant was deducted
from the cost of Machinery in the year of acquisition. State with reasons, the accounting
treatment to be followed in the year 2002-03.
(b) The company deals in three products, A, B and C, which are neither similar nor
interchangeable. At the time of closing of its account for the year 2002-03. The Historical
Cost and Net Realizable Value of the items of closing stock are determined as follows:
Items
A
B
C

Historical Cost
(` in lakhs)
40
32
16

Net Realisable Value


(` in lakhs)
28
32
24

What will be the value of Closing Stock?


(c) During the current year 20022003, X Limited made the following expenditure relating to
its plant building:

` in lakhs
Routine Repairs
Repairing
Partial replacement of roof tiles
Substantial improvements to the electrical wiring
system which will increase efficiency
What amount should be capitalized?
(d) A plant was depreciated under two different methods as under:

The Institute of Chartered Accountants of India

4
1
0.5
10

1.2

Accounting
Year
1
2
3
4
5

SLM
(` in lakhs)
7.80
7.80
7.80
7.80
31.20
7.80

W.D.V.
(` in lakhs)
21.38
15.80
11.68
8.64
57.50
6.38

What should be the amount of resultant surplus/deficiency, if the company decides to


switch over from W.D.V. method to SLM method for first four years? Also state, how will
you treat the same in Accounts.
(e) Write a short note on Firm underwriting and Partial underwriting along with firm
underwriting.
(f)

Briefly explain the methods of accounting for amalgamation as per Accounting Standard-14.
(4 4 = 16 Marks, May 2004) (PE II)

Answer
(a) As per para 11.3 of AS 12 on Accounting for Government Grants, the amount refundable
in respect of a government grant related to a specific fixed asset is recorded by
increasing the book value of the asset. Depreciation on the revised book value is
provided prospectively over the residual useful life of the asset. In the given case, book
value of machinery will be increased by ` 2 crores in the year 2002-2003. The
computations for the depreciation on machinery can be given as:
Cost of machinery
Less: Grant received
Cost of machinery
Useful life of machinery
Depreciation per year as per straight line method
(assuming residual value to be zero)
Total depreciation for 4 years (1998-99 to 2001-2002)
Book value (in year 2002-2003)
Add: Grant refunded
Revised book value
Remaining useful life
Revised annual depreciation

The Institute of Chartered Accountants of India

` 20 crores
` 2 crores
` 18 crores
9 years
` 18 crores/9
= ` 2 crores
` 8 crores
` 10 crores
` 2 crores
` 12 crores
5 years
` 12 crores/5
= 2.4 crores

Accounting Standards

1.3

Thus, book value of machinery will be ` 12 crores in the year 2002-2003 and the
depreciation amounting ` 2.4 crores will be charged on machinery. Annual depreciation
of ` 2.4 crores will be charged in the next four years.
(b) As per para 5 of AS 2 on 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 in the given case.
Items
A
B
C

Historical Cost
(` in lakhs)
40
32
16
88

Net Realisable Value


(` in lakhs)

Valuation of closing
stock (` in lakhs)

28
32
24
84

28
32
16
76

Hence, closing stock will be valued at ` 76 lakhs.


(c) As per para 12.1 of AS 10 on Accounting for Fixed Assets, 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. Hence, in
the given case, Repairs amounting ` 5 lakhs and Partial replacement of roof tiles should
be charged to profit and loss statement. ` 10 lakhs incurred for substantial improvement
to the electrical writing system which will increase efficiency should be capitalized.
(d) As per para 21 of AS 6 on Depreciation Accounting, when a change in the method of
depreciation is made, depreciation should be recalculated in accordance with the new
method from the date of the asset coming into use. The deficiency or surplus arising from
retrospective recomputation of depreciation in accordance with the new method should
be adjusted in the accounts in the year in which the method of depreciation is changed.
In the given case, there is a surplus of ` 26.30 lakhs on account of change in method of
depreciation, which will be credited to Profit and Loss Account. Such a change should be
treated as a change in accounting policy and its effect should be quantified and
disclosed.
(e) In firm underwriting the underwriter agrees to subscribe upto a certain number of
shares/debentures irrespective of the nature of public response to issue of securities. He
gets these securities even if the issue is fully subscribed or over-subscribed. These
securities are taken by the underwriter in addition to his liability for securities not
subscribed by the public. Under partial underwriting along with firm underwriting, unless
otherwise agreed, individual underwriter does not get the benefit of firm underwriting in
determination of number of shares/debentures to be taken up by him.
(f)

As per AS 14 on Accounting for Amalgamations, there are two main methods of


accounting for amalgamations:
(i)

The Pooling of Interest Method: Under this method, the assets, liabilities and

The Institute of Chartered Accountants of India

1.4

Accounting
reserves of the transferor company are recorded by the transferee company at their
existing carrying amounts (after making the necessary adjustments).
If at the time of amalgamation, the transferor and the transferee companies have
conflicting accounting policies, a uniform set of accounting policies is adopted
following the amalgamation. The effects on the financial statements of any changes
in accounting policies are reported in accordance with AS 5 on Net Profit or Loss
for the Period, Prior Period Items and Changes in Accounting Policies.
(ii)

The Purchase Method: Under the purchase method, the transferee company
accounts for the amalgamation either by incorporating the assets and liabilities at
their existing carrying amounts or by allocating the consideration to individual
identifiable assets and liabilities of the transferor company on the basis of their fair
values at the date of amalgamation. The identifiable assets and liabilities may
include assets and liabilities not recorded in the financial statements of the
transferor company.
Where assets and liabilities are restated on the basis of their fair values, the
determination of fair values may be influenced by the intentions of the transferee
company.

Question 2
(a) Under what circumstances can an enterprise change its accounting policy?
(b) Ram Co. (P) Ltd. furnishes you the following information for the year ended 31.3.2005:
Depreciation for the year ended 31.3.2005
(under straight line method)

` 100 lakhs

Depreciation for the year ended 31.3.2005


(under written down value method)

` 200 lakhs

Excess of depreciation for the earlier years calculated under written down
value method over straight line method

` 500 lakhs

The Company wants to change its method of claiming depreciation from straight line
method to written down value method.
Decide, how the depreciation should be disclosed in the Financial Statement for the year
ended 31.3.2005.
(4 4 = 16 Marks, November 2005) (PE II)
Answer
(a) A change in accounting policy is made only if the adoption of a different accounting policy
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. A more appropriate presentation of events or
transactions in the financial statements occurs when the new accounting policy results in

The Institute of Chartered Accountants of India

Accounting Standards

1.5

more relevant or reliable information about the financial position, performance or cash
flows of the enterprise.
(b) As per para 21 of AS 26 Intangible Assets, when a change in the method of depreciation
is made, depreciation should be calculated in accordance with the new method from the
date of the asset coming into use. The deficiency or surplus arising from retrospective
recomputation should be adjusted in the accounts in the year in which the method of
depreciation is changed. The deficiency should be charged to profit and loss account.
Similarly, any surplus should be credited in the statement of profit and loss. Such
change is a change in the accounting policy, and its effect should be quantified and
disclosed.
In the given case, the deficiency of ` 500 lakhs would be charged to the profit and loss
account of 31.3.2005. In the notes to account, the fact of change in method of
depreciation should be elaborated along with the effect of ` 500 lakhs. The current
depreciation charge of 200 lakhs determined in accordance with the written down value
method should be debited to the profit and loss account.
Question 3
Answer any four of the following:
(a) X Co. Limited purchased goods at the cost of `40 lakhs in October, 2005. Till March,
2006, 75% of the stocks were sold. The company wants to disclose closing stock at `10
lakhs. The expected sale value is `11 lakhs and a commission at 10% on sale is
payable to the agent. Advise, what is the correct closing stock to be disclosed as at
31.3.2006.
(b) Explain the Accounting of Revaluation of Assets with reference to AS 10.
(c) Arjun Ltd. sold farm equipments through its dealers. One of the conditions at the time of
sale is, payment of consideration in 14 days and in the event of delay interest is
chargeable @ 15% per annum. The Company has not realized interest from the dealers
in the past. However, for the year ended 31.3.2006, it wants to recognise interest due on
the balances due from dealers. The amount is ascertained at ` 9 lakhs. Decide whether
the income by way of interest from dealers is eligible for recognition as per AS 9.
(4 Marks each, May 2006)(PE II)
Answer
(a) As per Para 5 of AS 2 Valuation of Inventories, the inventories are to be valued at lower
of cost and net realizable value.
In this case, the cost of inventory is ` 10 lakhs. The net realizable value is 11,00,000
90% = ` 9,90,000. So, the stock should be valued at ` 9,90,000.
(b) As per Para 30 of AS 10 Accounting for Fixed Assets, an increase in net book value
arising on revaluation of fixed assets should be credited to owners interests under the

The Institute of Chartered Accountants of India

1.6

Accounting
head of revaluation reserve, except that, to the extent that such increase is related to
and not greater than a decrease arising on revaluation previously recorded as a charge
to the profit and loss statement, it may be credited to the profit and loss statement. A
decrease in net book value arising on revaluation of fixed assets is charged directly to
profit and loss statement except that to the extent such a decrease is related to an
increase which was previously recorded as a credit to revaluation reserve and which has
not been subsequently reversed or utilized , it may be charged directly to that account.

(c) As per 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 inverted. 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 make by the
dealers. Hence, it has to recognize the interest only if the ultimate collection is certain.
The interest income hence is not to be recognized.
Question 4
(i)

A machinery costing ` 10 lakhs has useful life of 5 years. After the end of 5 years, its
scrap value would be ` 1 lakh. How much depreciation is to be charged in the books of
the company as per Accounting Standard-6?

(ii)

Garden Ltd. acquired fixed assets viz. plant and machinery for `20 lakhs. During the
same year it sold its furniture and fixtures for `5 lakhs. Can the company disclose, net
cash outflow towards purchase of fixed assets in the cash flow statement as per AS-3?

(iii) ABC Ltd. gave 50,000 equity shares of ` 10 each (fully paid up) in consideration for
supply of certain machinery by X & Co. The shares exchanged for machinery are quoted
on Bombay Stock Exchange (BSE) at ` 15 per share, at the time of transaction. In the
absence of fair market value of the machinery acquired, how the value of machinery
would be recorded in the books of the company?
(iv) A company took a construction contract for ` 100 lakhs in January, 2006. It was found
that 80% of the contract was completed at a cost of ` 92 lakhs on the closing date i.e. on
31.3.2007. The company estimates further expenditure of ` 23 lakhs for completing the
contract. The expected loss would be ` 15 lakhs. Can the company recognise the loss in
the financial statements prepared for the year ended 31.3.2007?
(2 Marks each, May, 2007) (PCC)
Answer
(i)

As per paragraph 20 of AS 6 Depreciation Accounting, the depreciable amount of a


depreciable asset should be allocated on a systematic basis to each accounting period
during the useful life of the asset. In the given case, the depreciation amount can be
calculated as follows:

The Institute of Chartered Accountants of India

Accounting Standards

1.7

`
Cost of machinery

10,00,000

Less: Scrap value at the end of useful life

1,00,000

Amount to be written off during useful life of machinery

9,00,000

Useful life of the asset

5 years

Depreciation to be provided each year (`9,00,000 / 5 years)

`1,80,000

(ii) According to Para 21 of AS 3 (Revised) Cash Flow Statements, an enterprise should


report separately major classes of gross cash receipts and gross cash payments arising
from investing and financing activities, except to the extent that cash flows described in
paragraphs 22 and 24 are reported on a net basis. Acquisition and disposal of fixed
assets is not prescribed in para 22 and 24 of the standard.
Hence, the company cannot disclose net cash flow in respect of acquisition of plant and
machinery and disposal of furnitures and fixtures.
(iii) As per paragraph 22 of AS 10 Accounting for Fixed Assets , fixed asset acquired in
exchange for shares or other securities in the enterprise should be recorded at its fair
market value, or the fair market value of the securities issued, whichever is more clearly
evident. Since, the market value of the shares exchanged for the asset is more clearly
evident, the company should record the value of machinery at ` 7,50,000. (i.e., 50,000
shares `15 per share being the market price)
(iv) As per paragraphs 31 and 35 of AS 7 on Construction Contracts, an expected loss on the
construction contract should be recognized as an expense immediately irrespective of (i)
whether or not the work has commenced on the contract; or (ii) the stage of completion of
the contract; or (iii) the amount of profits expected to arise in other contracts.
Hence, the company must recognize the loss immediately.
Question 5
When can a company change its accounting policy?
(4 Marks, May, 2007, PCC) (November 2012, IPCC)
Answer
A change in accounting policy should be made in the following conditions:
(i)

If the change is required by some statute or for compliance with an Accounting Standard.

(ii)

Change would result in more appropriate presentation of the financial statement.


Change in accounting policy may have a material effect on the items of financial
statements. For example, if depreciation method is changed from straight-line method to
written-down value method, or if cost formula used for inventory valuation is changed
from weighted average to FIFO, or if interest is capitalized which was earlier not in

The Institute of Chartered Accountants of India

1.8

Accounting
practice, or if proportionate amount of interest is changed to inventory which was earlier
not the practice, all these may increase or decrease the net profit. Unless the effect of
such change in accounting policy is quantified, the financial statements may not help the
users of accounts. Therefore, it is necessary to quantify the effect of change on financial
statement items like assets, liabilities, profit / loss.

Question 6
Mention six areas in which different accounting policies are followed by companies.
(4 Marks, November, 2007) (PCC)
Answer
Following are the examples of the areas in which different accounting policies may be adopted
by different enterprises:
(i)

Methods of depreciation, depletion and amortisation.

(ii)

Valuation of inventories.

(iii) Methods of valuing goodwill.


(iv) Valuation of investments.
Question 7
List the criteria to be applied for rating an enterprise as Level-I enterprise for the purpose of
compliance of Accounting Standards in India.
(4 Marks, November, 2007) (PCC)
Answer
Non-corporate entities which fall in any one or more of the following categories, at the end of
the relevant accounting period, are classified as Level I entities:
(i)

Entities whose equity or debt securities are listed or are in the process of listing on any
stock exchange, whether in India or outside India.

(ii)

Banks (including co-operative banks), financial institutions or entities carrying on


insurance business.

(iii) All commercial, industrial and business reporting entities, whose turnover (excluding
other income) exceeds rupees fifty crore in the immediately preceding accounting year.
(iv) All commercial, industrial and business reporting entities having borrowings (including
public deposits) in excess of rupees ten crore at any time during the immediately
preceding accounting year.
(v)

Holding and subsidiary entities of any one of the above.

Question 8
What is the accounting entry to be passed as per AS 10 for the following situations:
(a) Increase in value of fixed asset by ` 50,00,000 on account of revaluation.

The Institute of Chartered Accountants of India

Accounting Standards

1.9

(b) Decrease in the value of fixed asset by ` 30,00,000 on account of revaluation.


(2 Marks each, May, 2008) (PCC)
Answer
Journal entries

`
(a)

(b)

Fixed asset A/c


Dr.
To Revaluation reserve A/c
(Being the increase in value of fixed asset due to
upward revaluation)
Profit and loss A/c
Dr.
To Fixed asset A/c
(Being the decrease in net book value of fixed asset
due to downward revaluation)

50,00,000
50,00,000

30,00,000
30,00,000

Question 9
What are the items that are to be excluded in determination of the cost of inventories as per
AS 2 ?
(4 Marks each, May, 2008) (PCC)
Answer
Items that are to be excluded in determination of the cost of inventories as per para 13 of AS 2
on Valuation of Inventories are:
(i)

Abnormal amounts of wasted materials, labour or other production costs.

(ii)

Storage costs unless those costs are necessary in the production process prior to a
further production stage.

(iii) Administrative overheads that do not contribute to bringing the inventories to their
present location and condition; and
(iv) Selling and distribution costs.
Question 10
(i)

Mention four assets, in respect of which AS 6 (revised) is not applicable.

(ii)

Y Ltd. used certain resources of X Ltd. In return X Ltd. receives ` 10 lakhs and ` 15
lakhs as interest and royalties respectively, from Y Ltd. during the year 2007 2008.
State on what basis X Ltd. should recognize their revenue, as per AS 9.

The journal entries given are on the assumption that the revaluation is done for the first time, for that particular
fixed asset.

The Institute of Chartered Accountants of India

1.10

Accounting

(iii) Mention two categories of investments defined by AS 13 and also state their valuation
principles.
(2 Marks each, November, 2008) (PCC)
Answer
(i)

AS 6 on Depreciation Accounting, is not applicable in respect of following assets:


(1) Forest, plantations and similar regenerative natural resources.
(2) Goodwill.
(3) Livestock.
(4) Wasting assets or land (if it has unlimited useful life for the enterprise).

(ii) As per AS 9 on Revenue Recognition, interest of `10 lakhs received in the year
2007-2008 should be recognized on the time basis, whereas royalty of ` 15 lakhs
received in the same year should be recognized on accrual basis as per the terms of
relevant agreement.
(iii) As per para 7 and 8 of AS 13 on Accounting for Investments, there are two categories of
investments, viz., Current Investments and Long Term Investments. According to para
14 of the standard, the carrying amount for current investments is the lower of cost and
fair value whereas para 17 states that Long Term Investments are valued at cost less
permanent diminutions in value of investment. For current investments, para 16 of the
standard states that, any reduction to fair value and any reversals of such reductions are
included in the profit and loss statement.
Question 11
Name two methods of accounting for amalgamations as contemplated by AS 14.
(2 Marks each, June, 2009) (PCC)
Answer
Two methods of accounting for amalgamation as contemplated by AS 14 are:
(a) The pooling of interests method and
(b) The purchase method
Question 12
Sony Pharma ordered 12,000 kg. of certain material at `80 per unit. The purchase price
includes excise duty ` 4 per kg in respect of which full CENVAT credit is admissible. Freight
incurred amounted to ` 77,400. Normal transit loss is 3%. The company actually received
11,600 kg. and consumed 10,100 kg. of material. Compute cost of inventory under AS 2 and
abnormal loss.
(4 Marks, June, 2009) (PCC)
Answer
Purchase price (12,000 kg `80)

The Institute of Chartered Accountants of India

`
9,60,000

Accounting Standards
Less:

CENVAT credit (12,000 kg. `4)

1.11
48,000

9,12,000
77,400
9,89,400
11,640 kgs.

Add:
Freight
Total material cost
Number of units after normal loss = 97% of 12,000 kgs.

9,89,400
Normal cost per kg.

`85
11,640
Value of closing stock under AS 2 = (11,600 kgs. 10,100 kgs.) ` 85 = ` 1,27,500
Abnormal loss = (11,640 kgs. 11,600 kgs.) ` 85 = ` 3,400
Question 13
X Co. Ltd. having share capital of ` 50 lakhs divided into equity shares of ` 10 each was taken
over by Y Co. Ltd. X Co. Ltd. has General Reserve of ` 10,00,000 and Profit and Loss account Cr.
` 5,00,000. Y Co. Ltd. issued 11 equity shares of ` 10 each for every 10 shares of X Co. Ltd. How
the Journal entry would be passed in the books of Y Co. Ltd. for the shares issued under the
Pooling of interest method of amalgamation.
(2 Marks each, November, 2009) (IPCC)
Answer
In the books of Y Co. Ltd.
Journal Entries

Business Purchase A/c


Dr. 55,00,000
To Liquidator of X Co. Ltd.
55,00,000
(Being business of X Co. Ltd. purchased)
Assets A/c (Bal. Fig.)
Dr. 65,00,000
To Business Purchase A/c
55,00,000
5,00,000
To General Reserve A/c(10,00,000 5,00,000)
To Profit and Loss A/c
5,00,000
(Being assets and reserves and surplus taken over)
Liquidator of X Co. Ltd.
Dr. 55,00,000
To Equity share capital A/c
55,00,000
(Being purchase consideration discharged through equity
shares of Y Co. Ltd.)

Purchase consideration

` 55,00,000

Less : Share capital of X Co. Ltd.

` 50,00,000

To be adjusted from general reserve

` 5,00,000

The Institute of Chartered Accountants of India

1.12

Accounting

Question 14
(i) From the following data, find out value of inventory as on 30.04.2012 using (a) LIFO
method, and (b) FIFO method:

(ii)

(1)

01.04.2009 Purchased

10 units @ ` 70 per unit

(2)

06.04.2009 Sold

6 units @ ` 90 per unit

(3)

09.04.2009 Purchased

20 units @ ` 75 per unit

(4)

18.04.2009 Sold

14 units @ ` 100 per unit

Explain contract costs as per Accounting Standard-7 related to Construction Contracts.

(iii) Year to year results of a company were not found comparable on the basis of gross profit
margin. List out the probable reasons.
(iv) MY Ltd. had acquired 200 equity shares of YZ Ltd. at ` 105 per share on 01.01.2009 and
paid ` 200 towards brokerage, stamp duty and STT. On 31st March, 2009, shares of YZ
Ltd. were traded at ` 110 per share. At what value investment is to be shown in the
Balance Sheet of MY Ltd. as at 31st March, 2009.(2 Marks each, November, 2009) (IPCC)
Answer
(i)

(a) Statement showing valuation of closing inventory by LIFO method


Date

Receipts

Issue

Balance

Unit Cost/unit Amount Unit Cost/unit Amount Unit Cost/unit Amount

1.4.09

10

70

700

6.4.09
9.4.09

6
20

75

70

420

1500

18.4.09

14

75

1,050

10

70

700

70

280

70

280

20

75

1500

70

280

75

450

Value of closing inventory as per LIFO method:


4 units x `70 = `280
6 units x `75 = `450

`730

(b) Statement showing valuation of closing inventory by FIFO method


Date

Receipts

Issue

Unit Cost/unit Amount

1.4.09

10

70

700

The Institute of Chartered Accountants of India

Balance

Unit Cost/unit Amount Unit Cost/unit Amount

10

70

700

Accounting Standards

6.4.09
9.4.09

6
20

75

70

420

1500

18.4.09

70

280

10

75

750

1.13

70

280

70

280

20

75

1500

10

75

750

Value of closing inventory as per FIFO method:


10 Units x `75 = `750
(ii) As per para 15 of AS 7 Construction Contracts (revised 2002), contract cost should
comprise:

(a) costs that relate directly to the specific contract;


(b) costs that are attributable to contract activity in general and can be allocated to the
contract; and
(c) such other costs as are specifically chargeable to the customer under the terms of
the contract.
(iii) The probable reasons could be the change in the accounting policy viz.

(a) Change in method of recognition of sales revenue from cash basis to accrual basis
or vice versa; or
(b) Change in valuation of closing inventory by adopting different methods year to year
such as LIFO to FIFO to weighted average or vice versa.
(iv)

`
Purchase price of Equity shares of YZ Ltd.(200 shares x ` 105 per share)
Add:

Brokerage, stamp duty and STT

Cost of investment

21,000
200
21,200

If the investment is a long term investment than it will be shown at cost. Therefore value
of investment will be ` 21,200. However, if the investment is a current investment, then it
will be shown at lower of cost (i.e. ` 21,200) or net realizable value (i.e. ` 200 x 110 =
` 22,000). Therefore value of investment will be ` 21,200.
Question 15
(a) As per Accounting Standard-14, what are the conditions which must be satisfied for an
amalgamation in the nature of merger?
(b) Rose Ltd. had made an investment of ` 500 lakhs in the equity shares of Nose Ltd. on
10.01.2009. The realisable value of such investment on 31.03.2009 became ` 200 lakhs

The Institute of Chartered Accountants of India

1.14

Accounting
as Nose Ltd. lost a case of patent rights. Rose Ltd. follows financial year as accounting
year. How will you recognize this reduction in financial statements for the year 2008-09.
(4 Marks each, November, 2009) (IPCC)

Answer
(a) According to AS 14 Accounting for Amalgamations, Amalgamation in the nature of
merger is an amalgamation which satisfies all the following conditions:

(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 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.
(v) 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.
(b) Recognition of reduction in value of investment would depend upon the nature of
investment and nature of decline as per Accounting Standard 13 Accounting for
Investments. As per provisions of the standard, if the investments were acquired for long
term and decline is temporary in nature, reduction in value will not be recognized and
investments would be carried at cost. If the decline is of permanent nature, it will be
charged to profit and loss account. If the investments are current investments, then the
reduction should be recognized and charged to Profit and Loss Account as the current
investments are carried at cost or fair value, whichever is less.
Question 16
(a) A company acquired a machine on 1.4.2006 for ` 5,00,000. The company charged
depreciation upto 2008-09 on straight line basis with estimated working life of 10 years
and scrap value of ` 50,000. From 2009-10, the company decided to change
depreciation method at 20% on reducing balance method. Compute the amount
depreciation to be debited to Profit and Loss Account for the year 2009-10.

The Institute of Chartered Accountants of India

Accounting Standards

1.15

(b) An unquoted long-term investment is carried in the books at cost of ` 2 lacs. The
published accounts of unlisted company received in May, 2009 showed that the company
has incurred cash losses with decline market share and the long-term investment may
not fetch more than ` 20,000. How you will deal with it in the financial statement of
investing company for the year ended 31.3.2009?
(c) According to Accounting Standard 9, when revenue from sales should be recognised?
(2 Marks each, May, 2010) (IPCC)
Answer
(a) Annual depreciation charged by the company up to 2008-09

Cost price of the machine - Scrap value


Useful life of the machine

5,00,000 50,000
= Rs.45,000
10

WDV of machine at the end of 2008-09 by Straight Line Method (SLM)


= `5,00,000 (`45,000 3) = `3,65,000
Depreciation by Reducing Balance Method (RBM)
Cost / WDV at the
beginning of the year

Depreciation WDV at the end


of the year

`
2006-07
2007-08
2008-09

5,00,000
4,00,000
3,20,000

5,00,000 20%
4,00,000 20%
3,20,000 20%

2009-10

2,56,000

2,56,000 20%

1,00,000
80,000
64,000
2,44,000
51,200

4,00,000
3,20,000
2,56,000
2,04,800

Depreciation to be charged in 2009 2010

`
Book value of the machine as per SLM as on 2008-09
Less:

Book value of the machine as per RBM as on 2008-09

3,65,000
(2,56,000)
1,09,000

Add:

Depreciation for the year 2009-10 as per RBM

Total depreciation debited to Profit and Loss account in the year 2009-10

51,200
1,60,200

(b) As per para 32 of AS 13 Accounting for Investments, investment classified as long term
investments should be carried in the financial statements at cost. However, provision for

The Institute of Chartered Accountants of India

1.16

Accounting

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. As per para 17 of the standard, indicators of the value of an investment are
obtained by reference to its market value, the investees assets and results and the
expected cash flows from the investment.
The facts of given case clearly suggest that there is decline in the market share of the
company and the investment will not fetch more than `20,000. Therefore, the provision of
`1,80,000 should be made to reduce the carrying amount of long term investment to
`20,000 in the financial statements for the year ended 31st March, 2009.
(c) As per para 11 of AS 9 Revenue Recognition, revenue from sales should be recognised
only when requirements as to performance are satisfied provided that at the time of
performance it is not unreasonable to expect ultimate collection. These requirements
can be given as follows:

(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.

Question 17
(a) During the current year 2011-12, M/s L & C Ltd. made the following expenditure relating
to its plant and machinery:
`
General repairs

4,00,000

Repairing of electric motors

1,00,000

Partial replacement of parts of machinery


Substantial improvements to the electrical wiring system which will
increase efficiency of the plant and machinery

50,000
10,00,000

What amount should be capitalised according to AS 10?


(b) 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.

The Institute of Chartered Accountants of India

Accounting Standards

1.17

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.
(4 Marks each, May, 2010) (IPCC)
Answer
(a)

As per para 12.1 of AS 10 Accounting for Fixed Assets, 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. Hence, in
the given case, repairs amounting ` 5 lakhs and partial replacement of parts of
machinery worth `50,000 should be charged to profit & loss account. `10 lakhs incurred
for substantial improvement to the electrical wiring system which will increase efficiency
should be capitalized.

(b) As per para 24 of 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 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.
Question 18
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:

This part of the question involves decision making which is not covered in Accounting Paper.

The Institute of Chartered Accountants of India

1.18

Accounting

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)

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) (IPCC)

Answer
`
(i)

(ii)

(iii)

Cost of closing inventory for 1,30,000 litres as on


1,00,000 litres @ `15.15
30,000 litres @ ` 14.25
Total
Calculation of cost of goods sold
Opening inventories (1,00,000 litres @ ` 15)
Purchases
June-1 (2,00,000 litres @ `14.25)
June-30 (1,00,000 litres @ `15.15)
Less: Closing inventories
Cost of goods sold
Calculation of profit
Sales (Given) (A)
Cost of goods sold
Add:
General overheads
Total cost (B)
Profit (A-B)

30th

June

15,15,000
4,27,500
19,42,500
15,00,000
28,50,000
15,15,000
58,65,000
(19,42,500)
39,22,500
47,25,000
39,22,500
1,25,000
40,47,500
6,77,500

Question 19
(a) A company installed a plant at a cost of ` 20 lacs with estimated useful life of 10 years
and decided to depreciate on straight line method. In the fifth year, company decided to

The Institute of Chartered Accountants of India

Accounting Standards

1.19

switch over from straight line method to written down value method. Compute the
resultant surplus/deficiency if any, and state how will you treat the same in the accounts.
(b) An amount of ` 9,90,000 was incurred on a contract work upto 31-03-2010. Certificates
have been received to date to the value of ` 12,00,000 against which ` 10,80,000 has
been received in cash. The cost of work done but not certified amounted to ` 22,500. It
is estimated that by spending an additional amount of ` 60,000 (including provision for
contingencies) the work can be completed in all respects in another two months. The
agreed contract price of work is ` 12,50,000. Compute a conservative estimate of the
profit to be taken to the Profit and Loss Account as per AS 7.
(4 Marks each, November, 2010) (IPCC)
Answer
(a) Table showing depreciation under Straight Line Method (SLM) and depreciation under
Written Down Value Method (WDV)

` in lacs
Depreciation
Year
I
II
III
IV
Total

SLM
2.001
2.00
2.00
2.00
8.00

WDV
2.002
1.80
1.62
1.46
6.88

Resultant surplus on change in method of depreciation from SLM to WDV = (8.00 6.88)
` 1.12 lakhs.
As per para 21 of AS 6 Depreciation Accounting, when a change in the method of
depreciation is made, depreciation should be re-calculated in accordance with the new
method from the date of the asset put to use. The deficiency or surplus arising from
retrospective re-computation of depreciation in accordance with the new method should
be adjusted in the accounts in the year in which the method of depreciation is changed.
In the given case, surplus amounting ` 1.12 lakhs (8.00 6.88) should be credited to
profit and loss statement in the fifth year. Such a change should be treated as a change
in accounting policy and its effect should be quantified and disclosed as per AS 5 Net
Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.

Depreciation as per SLM ` 20 lakhs/10years = ` 2 lakhs.


Depreciation rate under SLM is 10% [(2,00,000/20,00,000) 100]. It is assumed that depreciation
rate will remain same
under WDV method also.

Rounded off up to two decimals.


2

The Institute of Chartered Accountants of India

1.20

Accounting

(b)

Computation of estimate of profit as per AS 7

Expenditure incurred upto 31.3.2010


Estimated additional expenses (including provision for contingency)
Estimated cost (A)
Contract price (B)
Total estimated profit [(B-A)]
Percentage of completion (9,90,000 / 10,50,000) x 100

`
9,90,000
60,000
10,50,000
12,50,000
2,00,000
94.29%

Computation of estimate of the profit to be taken to Profit and Loss Account:

Total estimated profit


2,00,000

Expenses incurred till 31.3.2010


Total estimated cost

9,90,000
= ` 1,88,571
10,50,000

According to para 21 of AS 7 Construction Contracts, when the outcome of a


construction contract can be estimated reliably, contract revenue and contract costs
associated with the construction contract should be recognised as revenue and expenses
respectively by reference to stage of completion of the contract activity at the reporting
date. Thus estimated profit amounting ` 1,88,571 should be recognised as revenue in
the statement of profit and loss.
Question 20
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.
(5 Marks, November, 2010) (IPCC)
Answer

The following are examples of the areas in which different accounting policies may be
adopted by different enterprise:
-

Methods of depreciation, depletion and amortization;

Valuation of inventories;

Recognition of profit on long-term contracts;

Valuation of fixed assets.

The list of examples given here is not exhaustive.

The Institute of Chartered Accountants of India

Accounting Standards

1.21

Question 21
The abstract of the Balance Sheet of the AXE Ltd. as at 31st March 2010, are as follows:
Liabilities
Equity share capital (` 100 each)
12% Preference share capital (` 100 each)
13% Debentures

`
15,00,000
8,00,000
3,00,000

On 31st March, 2010, BXE Ltd. agreed to take over AXE Ltd. on the following terms:
(1) For each preference share in AXE Ltd., ` 10 in cash and one 9% preference share of
` 100 in BXE Ltd.
(2) For each equity share AXE Ltd. ` 20 in cash and one equity share in BXE Ltd. of
` 100 each. It was decided that the share in BXE Ltd. will be issued at market price
` 140 per share.
(3) Liquidation expenses of AXE Ltd. are to be reimbursed by BXE Ltd. to the extent of
` 10,000. Actual expenses amounted to ` 12,500.
You are required to compute the amount of purchase consideration.

(5 Marks, May, 2011)

Answer
Calculation of purchase consideration

II

80,000
8,00,000

8,80,000

Payment made to shareholders of 8,000 preference


shares of AXE Ltd. :
Cash @ ` 10 per share (8,000 preference shares x ` 10)
9% Preference shares in BXE Ltd. @ ` 100 each
Payment made to Equity shareholders of 15,000 equity
shares of AXE Ltd. :
Cash @ ` 20 per share (15,000 shares x ` 20)
Equity shares in BXE Ltd. issued at market price
` 140 each (15,000 shares x ` 140)
Total purchase consideration

3,00,000
21,00,000

24,00,000
32,80,000

Note: Re-imbursement of liquidation expenses of AXE Ltd. to the extent of ` 10,000, will not
be included in the calculation of purchase consideration.

8,00,000

= 8,000 preference shares


100
15,00,000

= 15,000 equity shares


100

The Institute of Chartered Accountants of India

1.22

Accounting

Question 22
Best Ltd. deals in five products, P, Q, R, S, and T which are neither similar nor
interchangeable. At the time of closing of its accounts for the year ending 31st March 2010, the
historical cost and net realizable value of the items of the closing stock are determined as
follows:
Items
P
Q
R
S
T

Historical cost

Net realizable value

5,70,000
9,80,000
3,16,000
4,25,000
1,60,000

4,75,000
10,32,000
2,89,000
4,25,000
2,15,000

What will be the value of closing stock for the year ending 31st March, 2012 as per AS 2
Valuation of Inventories?
(4 Marks, May, 2011) (IPCC)
Answer

As per para 5 of AS 2 Valuation of Inventories, inventories should be valued at the lower of


cost and net relizable value. Inventories should be written down to net realizable value on an
item-by-item basis.
Valuation of inventory (item wise) for the year ending 31st March 2012
Item

P
Q
R
S
T

Historical Cost

Net realizable value

Valuation of closing stock

`
5,70,000
9,80,000
3,16,000
4,25,000
1,60,000

`
4,75,000
10,32,000
2,89,000
4,25,000
2,15,000

`
4,75,000
9,80,000
2,89,000
4,25,000
1,60,000
23,29,000

The value of inventory for the year ending 31st March 2012 = ` 23,29,000.
Question 23
In the Trial Balance of M/s. Sun Ltd. as on 31-3-2011, balance of machinery appears
` 5,60,000. The company follows rate of depreciation on machinery @ 10% p.a. on Written
Down Value Method. On scrutiny it was found that a machine appearing in the books on
1-4-2010 at ` 1,60,000 was disposed of on 30-9-2010 at ` 1,35,000 in part exchange of a new
machine costing ` 1,50,000.

The Institute of Chartered Accountants of India

Accounting Standards

1.23

You are required to calculate:


(i)

Total depreciation to be charged in the Profit and Loss Account.

(ii)

Loss on exchange of machine.

(iii) Book value of machinery in the Balance Sheet as on 31.3.2011.


(5 Marks, November, 2011) (IPCC)
Answer
(i)

Total Depreciation to be charged in the Profit and Loss Account

Depreciation on old machinery in use [10% of (5,60,000-1,60,000)]


Add: Depreciation on new machine @ 10% for six months
6

1,50,000 10%

12

`
40,000

7,500

Total depreciation on machinery in use


Add: Depreciation on machine disposed of (10% for 6 months)
6

1,60,000 10%

12

47,500

So, total depreciation to be charged in Profit and Loss A/c

55,500

8,000

(ii) Loss on Exchange of Machine

Book value of machine as on 1.4.2011


Less: Depreciation for 6 months @ 10%
Written Down Value as on 30.9.2011
Less: Exchange value
Loss on exchange of machine

`
1,60,000
(8,000)
1,52,000
(1,35,000)
17,000

(iii) Book Value of Machinery in the Balance Sheet as on 31.03.2011

Balance as per trial balance


Less: Book value of machine sold
Add: Purchase of new machine
Less: Depreciation on machinery in use

The Institute of Chartered Accountants of India

`
5,60,000
(1,60,000)
4,00,000
1,50,000
5,50,000
(47,500)
5,02,500

1.24

Accounting

Question 24
(a) M/s. Tiger Ltd. allotted 7,500 equity shares of ` 100 each fully paid up to Lion Ltd. in
consideration for supply of a special machinery. The shares exchanged for machinery are
quoted at National Stock Exchange (NSE) at ` 95 per share, at the time of transaction. In
the absence of fair market value of the machinery acquired, show how the value of the
machinery would be recorded in the books of Tiger Ltd.?
(b) M/s. Sea Ltd. recognized ` 5.00 lakhs, on accrual basis, income from dividend during the
year 2010-11, on shares of the face value of ` 25.00 lakhs held by it in Rock Ltd. as at
31st March, 2011. Rock Ltd. proposed dividend @ 20% on 10th April, 2011. However,
dividend was declared on 30th June, 2011. Please state with reference to relevant
Accounting Standard, whether the treatment accorded by Sea Ltd. is in order.
(c)

What disclosures should be made in the first financial statements following the
amalgamation?

(d) From the following data, show Profit and Loss A/c (Extract) as would appear in the books
of a contractor following Accounting Standard-7:
(` in lakhs)
Contract price (fixed)

480.00

Cost incurred to date

300.00

Estimated cost to complete

200.00

(e) M/s. Son Ltd. charged depreciation on its assets on SLM basis. In the year ended
31st March, 2012, it changed to WDV basis. The impact of the change when computed
from the date of the assets putting into use amounts to ` 18 lakhs being additional
depreciation. Discuss, when should an enterprise change method of charging
depreciation and how it should be dealt with in the Profit and Loss Alc.
(4 Marks each, November, 2011) (IPCC)
Answer
(a) As per para 11 of AS 10 Accounting for Fixed Assets, fixed asset acquired in exchange
for shares or other securities in the enterprise should be recorded at its fair market value,
or the fair market value of the securities issued, whichever is more clearly evident.
Since, in the given situation, the market value of the shares exchanged for the asset is
more clearly evident, the company should record the value of machinery at ` 7,12,500
(i.e., 7,500 shares x ` 95 per share) being the market price of the shares issued in
exchange.
(b) Para 8.4 of AS 9 Revenue Recognition states that dividend from investments in shares
are not recognized in the statement of Profit and Loss until the right to receive dividend is
established.

In the given case, the dividend is proposed on 10th April, 2011, while it was declared on

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Accounting Standards

1.25

30th June, 2011. Hence, the right to receive dividend is established on 30th June, 2011
only. Therefore, on applying the provisions stated in the standard, income from dividend
on shares should be recognized by Sea Ltd. in the financial year 2011-2012 only.
Therefore, the recognition of income from dividend of ` 5 lakhs, on accrual basis, in the
financial year 2010-11 is not in accordance with AS 9.
(c) Para 24 of AS 14 Accounting for Amalgamations states that for all amalgamations
(whether for amalgamations accounted for under the pooling of interests method or
amalgamations accounted for under the purchase method), the following disclosures are
considered appropriate in the first financial statements following the amalgamation:

(a) Names and general nature of business of the amalgamating companies;


(b) Effective date of amalgamation for accounting purposes;
(c) The method of accounting used to reflect the amalgamation; and
(d) Particulars of the scheme sanctioned under a statute.
(d) Calculation of Estimated Total Cost
(` in lakhs)

Cost incurred to date

300

Estimate of cost to completion

200

Estimated total cost in completing the contract

500

Percentage of completion (300/500) x 100 = 60%


Revenue recognised as a percentage to contract price
= 60% of ` 480 lakhs = ` 288 lakhs
As per para 35 of AS 7 Construction Contracts, when it is probable that total contract
costs will exceed total contract revenue, the expected loss should be recognised as an
expense immediately. Accordingly, expenses to be recognized in the Profit and Loss
Account will be
Total foreseeable loss (500-480)
Less: Loss for the current year (300-288)
Expected loss to be recognized immediately as per para 35 of AS 7

(` in lakhs)
20
(12)
8

Profit and Loss A/c (An Extract)


To Construction cost
To Estimated loss on completion of
contract

The Institute of Chartered Accountants of India

(` in lakhs)
300 By Contract price
8

(` in lakhs)
288

1.26

Accounting

(e) As per para 21 of AS 6 Depreciation Accounting, an enterprise can change one method
of charging depreciation to another method 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.

When such a change in the method of depreciation is made, depreciation should be


recalculated in accordance with the new method from the date of the asset coming into
use. The deficiency or surplus arising from retrospective recomputation of depreciation
in accordance with the new method should be adjusted in the accounts through
statement of profit and loss in the year in which the method of depreciation is changed. In
case the change in the method results in deficiency in depreciation in respect of past
years, the deficiency should be charged in the statement of profit and loss.
Question 25
(a) M/s Excellent Construction Company Limited under took a contract to construct a
building for ` 3 crore on 1st September, 2011. On 31st March, 2012 the company found
that it had already spent ` 1 crore 80 lakhs on the construction. Prudent estimate of
additional cost for completion was ` 1 crore 40 lakhs. What amount should be charged,
to revenue in the final accounts for the year ended on 31st March, 2012, as per the
provisions of Accounting Standard 7 "Construction Contracts (Revised)" ?
(b) M/s Innovative Garments Manufacturing Company Limited invested in the shares of
another company on 1st October, 2011 at a cost of ` 2,50,000. It also earlier purchased
Gold of ` 4,00,000 and Silver of ` 2,00,000 on 1st March, 2009. Market value as on
31st March, 2012 of above investments are as follows:

`
Shares

2,25,000

Gold

6,00,000

Silver

3,50,000

How above investments will be shown in the books of accounts of M/s Innovative
Garments Manufacturing Company Limited for the year ending 31st March, 2012 as per
the provisions of Accounting Standard 13 "Accounting for Investments"?
(c) MIs Progressive Company Limited has not charged depreciation for the year ended on
31st March, 2012, in respect of a spare bus purchased during the financial year 2011-12
and kept ready by the company for use as a stand-by, on the ground that, it was not
actually used during the year. State your views with reference to Accounting Standard 6
"Depreciation Accounting".
Further during the year company made additions to its factory by using its own workforce,
at a cost of ` 4,50,000 as wages and materials. The lowest estimate from an outside
contractor to carry out the same work was ` 6,00,000. The directors contend that, since

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1.27

they are fully entitled to employ an outside contractor, it is reasonable to debit the
Factory Building Account with ` 6,00,000. Comment whether the directors' contention is
right in view of the provisions of Accounting Standard 10 "Accounting for Fixed Assets"?
(d) Briefly explain the types of Amalgamations?

(5 Marks each, May 2012) (IPCC)

Answer
(a) Calculation of Estimated Cost of Construction

Cost of construction incurred till date


Add: Estimated future cost
Total estimated cost of construction

` in crores
1.80
1.40
3.20

Percentage of completion of contract till date to total estimated cost of construction


= ` (1.80/3.20)100 = 56.25%
Proportion of total contract value recognised as revenue as per AS 7 (Revised)
= Contract price x percentage of completion
= ` 3 crores x 56.25% = ` 1.6875 crores
(b) As per AS 13 Accounting for Investments, for investment in shares - if shares are
purchased with an intention to hold for short-term period then it will be shown at the
realizable value of ` 2,25,000 as on 31st March, 2012.

However, if equity shares are acquired with an intention to hold for long term period then
it will be shown at cost of ` 2,50,000 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 shares.
As per the standard, investment acquired for long term period shall be shown at cost.
Gold and silver are generally purchased with an intention to hold it for long term period
untill and unless given otherwise. Hence, the investment in Gold and Silver (purchased
on 1st March, 2009) shall continue to be shown at cost as on 31st March, 2012 i.e.,
` 4,00,000 and ` 2,00,000 respectively, though their realizable values have been
increased.
(c) According to para no. 3.1 of AS 6, Depreciation Accounting, depreciation is a measure
of wearing out, consumption or other loss of value of a depreciable asset arising from
use, effluxion of time or obsolescence through technology and market changes.
Accordingly, depreciation may arise even when asset has not been used in the current
year but was ready for use in that year.

The need for using the stand by bus may not have arisen during the year but that does
not imply that the useful life of the bus has not been affected. Therefore, non-provision

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1.28

Accounting

of depreciation on the ground that the bus was not used during the year is not tenable.
As per para no. 10.1 of AS 10, Accounting for Fixed Assets, clearly states that the gross
book value of the self constructed fixed asset includes the costs of construction that
relate directly to the specific asset and the costs that are attributable to the construction
activity in general can be allocated to the specific asset. If any internal profit is there it
should be eliminated. Saving of ` 1,50,000 on account of using its on work force is an
unrealized/ internal profit, which should not be capitalized/recorded as per the standard.
Thus, only ` 4,50,000 should be debited to the factory building account and not
` 6,00,000. Hence, the contention of the directors of the company to capitalize
` 6,00,000 as cost of factory building, on the ground that the company is fully entitled to
employ an outside contractor is not justifiable.
(d) As per AS 14, Accounting for Amalgamations there are two types of amalgamation. In
first type of amalgamation there is a genuine pooling not merely of assets and liabilities
of the amalgamating companies but also of the shareholders interests and of the
businesses of the companies. Such amalgamations are amalgamations which are in the
nature of merger and the accounting treatment of such amalgamations should ensure
that the resultant figures of assets, liabilities, capital and reserves more or less represent
the sum of the relevant figures of the amalgamating companies.

In the second category are those amalgamations which are in effect a mode by which
one company acquires another company and, as a consequence, the share holders of
the company which is acquired normally do not continue to have a proportionate share in
the equity of the combined company, or the business of the company which is acquired is
not intended to be continued. Such amalgamations are amalgamations in the nature of
purchase.
Note: It is possible to answer this question by specifying all the conditions to be satisfied for
an amalgamation to be an amalgamation in the nature of merger. The amalgamation would to
be an amalgamation in the nature of purchase if any one or more of the said conditions are
not satisfied.
Question 26
A computer costing ` 60,000 is depreciated on straight line basis, assuming 10 years working
life and Nil residual value, for three years. The estimate of remaining useful life after third year
was reassessed at 5 years. Calculate depreciation as per the provisions of Accounting
Standard 6 "Depreciation Accounting".
(4 Marks, May 2012) (IPCC)
Answer

Depreciation per year = ` 60,000 / 10 = ` 6,000


Depreciation on SLM charged for three years = ` 6,000 x 3 years = ` 18,000
Book value of the computer at the end of third year = ` 60,000 ` 18,000 = ` 42,000.
Remaining useful life as per previous estimate = 7 years

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Accounting Standards

1.29

Remaining useful life as per revised estimate = 5 years


Depreciation from the fourth year onwards = ` 42,000 / 5 = ` 8,400 per annum
Question 27
(a) From the following information, ascertain the value of stock as on 31st March, 2012:

`
Stock as on 01-04-2011
Purchases

28,500
1,52,500

Manufacturing Expenses

30,000

Selling Expenses

12,100

Administration Expenses

6,000

Financial Expenses

4,300

Sales

2,49,000

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.
(b) PQR Ltd. constructed a fixed asset and incurred the following expenses on its
construction:

`
Materials

16,00,000

Direct Expenses

3,00,000

Total Direct Labour

6,00,000

(1/15th of the total labour time was chargeable to the construction)


Total Office & Administrative Expenses

9,00,000

(4% is chargeable to the construction)


Depreciation on assets used for the construction of this asset

15,000

Calculate the cost of the fixed asset.


(c) "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. (4 Marks each, November 2012) (IPCC)

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1.30

Accounting

Answer
(a)

Statement showing valuation of stock as on 31.3.2012


`

Stock as on 01.04.2011

28,500

Less: Book value of abnormal stock


(` 10,000 ` 3,500)

22,000

6,500

Add: Purchases

1,52,500

Manufacturing Expenses

30,000
2,04,500

Less: Cost of Sales:

Sales as per Books

2,49,000

Less: Sales of Abnormal item

(9,000)
2,40,000

Less: G.P. @ 20%

Value of Stock as on

31st

(48,000)

(1,92,000)

March, 2012

12,500

(b) Calculation of cost of fixed assets


`

Materials

16,00,000

Direct expenses
Direct labour

(1/15th

3,00,000
40,000

of ` 6,00,000)

Office and administrative expenses (4% ` 9,00,000)

36,000

Depreciation on assets
Cost of fixed asset

15,000
19,91,000

(c) 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 amounts 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

It is assumed that 4% of office and administrative expenses are specifically attributable to construction
of a fixed asset.

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1.31

present location and condition; and


(d) selling and distribution costs.
Question 28
What are the three fundamental accounting assumptions recognised by Accounting Standard
(AS) 1? Briefly describe each one of them.
(4 Marks, May 2013) (IPCC)
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
accounting 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.
Question 29
(a) 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.


(b) M/s. Moon Ltd. sold goods worth ` 6,50,000 to Mr. Star. Mr. Star asked for a trade
discount amounting to ` 53,000 and same was agreed to by M/s. Moon Ltd. The sale was
effected and goods were dispatched. On receipt of goods, Mr. Star has found that goods
worth ` 67,000 are defective. Mr. Star returned defective goods to M/s. Moon Ltd. and
made payment due amounting to ` 5,30,000. The accountant of M/s. Moon Ltd. booked
the sale for ` 5,30,000. Discuss the contention of the accountant with reference to
Accounting Standard (AS) 9.
(c) What are the issues, with which Accounting Standards deal?

(4 Marks each, May 2013) (IPCC)

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1.32

Accounting

Answer
(a) Valuation of unfinished unit

Net selling price


Less: Estimated cost of completion
Less: Brokerage (4% of 750)

Net Realisable Value


Cost of inventory
Value of inventory (Lower of cost and net realisable value)

`
750
(310)
440
30
410
530
410

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.
Note: The above answer is given on the assumption that partly finished unit cannot be
sold in semi finished form and its NRV is zero without processing it further.
(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 discounts allowed by M/s. Moon Ltd. are given in the ordinary
course of business, M/s. Moon Ltd. should record the sales at ` 5,97,000 (i.e.
` 6,50,000 ` 53,000) and goods returned worth ` 67,000 are to be recorded in the
form of sales return. However, when trade discount allowed by M/s. Moon Ltd. is not in
the ordinary course of business, M/s. Moon Ltd. should record the sales at gross value of
` 6,50,000. Discount of ` 53,000 in price and return of goods worth ` 67,000 are to be
adjusted by suitable provisions. M/s Moon Ltd. might have sent the credit note of
` 1,20,000 to Mr. Star to account for these adjustments. In both the cases, the contention
of the accountant to book the sales for ` 5,30,000 is not correct.
(c) Accounting Standards deal with the issues of

(i)

Recognition of events and transactions in the financial statements,

(ii)

Measurement of these transactions and events,

(iii) Presentation of these transactions and events in the financial statements in a


manner that is meaningful and understandable to the reader, and

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1.33

(iv) 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 30
(a) Amna Ltd. contracted with a supplier to purchase a specific machinery to be installed
in Department A in two months time. Special foundations were required for the plant,
which were to be prepared within this supply lead time. The cost of site preparation
and laying foundations were ` 47,290. These activities were supervised by a
technician during the entire period, who is employed for this purpose of ` 15,000 per
month. The Technician's services were given to Department A by Department B,
which billed the services at ` 16,500 per month after adding 10% profit margin.
The machine was purchased at ` 52,78,000. Sales Tax was charged at 4% on the
invoice ` 18,590 transportation charges were incurred to bring the machine to the
factory. An Architect was engaged at a fee of ` 10,000 to supervise machinery
installation at the factory premises. Also, payment under the invoice was due in 3
months. However, the Company made the payment in 2nd month. The company operates
on Bank Overdraft@ 11%.
Ascertain the amount at which the asset should be capitalized under AS 10.

(b) Narmada Ltd. purchased an existing bottling unit from Kaveri Ltd. Kaveri Ltd. followed
straight line method of charging depreciation on machinery of the sold unit whereas
Narmada Ltd. followed written down value method in its other units. The directors of
Narmada Ltd. want to continue to charge depreciation for the acquired unit in Straight
Line Method which is not consistent with the WDV method followed in other units.
Discuss the contention of the directors with reference to the Accounting Standard 6.
Further during the year, Narmada Ltd. set up a new plant on coastal land. In view of the
corrosive climate, the Company felt that its machine life is reducing faster. Can the
Company charge a higher rate of depreciation?
(c) A Ltd. entered into a contract with B Ltd. to despatch goods valuing ` 25,000 every
month for 4 months upon receipt of entire payment. B Ltd. accordingly made the payment
of ` 1,00,000 and A Ltd. started despatching the goods. In third month, due to a natural
calamity, B Ltd. requested A Ltd. not to despatch goods until further notice though A Ltd.
is holding the remaining goods worth ` 50,000 ready for despatch. A Ltd. accounted
` 50,000 as sales and transferred the balance to Advance Received against Sales.
Comment upon the treatment of balance amount with reference to the provisions of
Accounting Standard 9.
(d) A Ltd. is amalgamating with B Ltd. They are undecided on the method of accounting to
be followed. You are required to advice the management of B Ltd. on the method of
accounting that can be adopted under AS-14.
(5 Marks each, November 2013) (IPCC)

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1.34

Accounting

Answer
(a) Calculation of Cost of Fixed Asset (i.e. Machine)

Particulars
Purchase Price
Add:

Given

`
52,78,000
2,11,120
47,290
30,000

Sales Tax at 4%

` 52,78,000 x 4%

Site Preparation Cost

Given

Technicians Salary

Specific/Attributable
overheads for 2 months (See
Note)

Initial Delivery Cost

Transportation

18,590

Professional Fees for


Installation

Architects Fees

10,000

Total Cost of Asset

55,95,000

Note:

(i)

Interest on Bank Overdraft for earlier payment of invoice is not relevant under AS 10.

(ii)

Internally booked profits should be eliminated in arriving at the cost of Fixed Assets.

(iii) It has been assumed that the purchase price of ` 52,78,000 excludes amount of
sales tax.
(b) According to para 12 of AS 6 Deprecation Accounting, there are several methods of
allocating depreciation over the useful life of the assets. The management of a business
selects the most appropriate method(s) based on various important factors e.g., (i) type
of asset, (ii) the nature of the use of such asset and (iii) circumstances prevailing in the
business. A combination of more than one method is sometimes used. A company may
adopt different methods of depreciation for different types of assets, provided the same
methods are followed consistently. Thus Narmada Ltd. can continue to charge
depreciation for the acquired unit as per straight line method.

The statute governing an enterprise may provide the basis for computation of the
depreciation. For example, the Companies Act lays down the rates of depreciation in
respect of various assets. Where the managements estimate of the useful life of an
asset of the enterprise is shorter than that envisaged under the provisions of the relevant
statute, the depreciation provision is appropriately computed by applying a higher rate.
Therefore, in the given case, the Company can charge higher rates of depreciation based
on its estimate of the useful life of machinery, provided that such estimate is not less
than the rate prescribed by the Companies Act, for that class of assets. However, such
higher depreciation rates and/or the reduced useful lives of the assets should be
disclosed by way of notes to the accounts in the Financial Statements.

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Accounting Standards

1.35

(c) As per para 11 of 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 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
buyers request. A Ltd. should recognize the entire sale of ` 1,00,000 (` 25,000 x 4) and
no part of the same is to be treated as Advance Receipt against Sales.
(d) An amalgamation may be either an amalgamation in the nature of merger, or an
amalgamation in the nature of purchase. The selection of method of accounting for
amalgamation (pooling of interests or purchase method) is to be judged after considering
the intentions of the both the companies.

If genuine pooling of all assets, liabilities, shareholders interest is intended; separate


businesses of both the companies are continued and their amalgamation scheme
satisfies all the conditions necessary for merger as specified in AS 14 Accounting for
Amalgamations, pooling of interests method is adopted.
However, if B Ltd. or A Ltd. wants to acquire the other company, then purchase method
needs to be adopted. In that case, the shareholders of the acquired company dont
continue to have proportional share in equity of the combined company and the business
of the acquired company is not intended to be continued. The object of the purchase
method is to account for the amalgamation by applying the same principles as are
applied in the normal purchase of assets.
Thus choice of accounting method depends on the fact whether B Ltd. wants to continue
its business or not.

The Institute of Chartered Accountants of India