two words from author -...

1 Head Office: College Road Branch: 3

st Floor, Parshuram Apartment, Above WoodLand Shoes, Opposite Times of India & Subway, College Road Nashik.

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College Road Branch: 1st Floor, Gajanan Plaza, Opp. Datasoft Computer, Ashok Stambh, Nashik.

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PANCHAKSHARI’S PROFESSIONAL ACADEMY PVT. LTD. (Your Life long Knowledge Partner )

Accounting Standard is the foundation of accounts. We can’t learn

accounts without the use of accounting standards. Accounts without AS is like

breathing without oxygen!

I know many of the students avoid learning accounting standards with the

reason that these are very difficult. What I feel is that the Accounting standards

seems to be difficult not because they are but because they are given in somewhat

difficult language & exactly here the role of the teacher starts.

It is the responsibility of the teacher to make the Accounting standards

easy & create the interest of the students in it. Thus these notes are divided in 2

parts:

1. Conceptual questions to understand the basic concepts in particular

AS & their use,

2. Practical questions to apply these concepts & to get the mastery on

it.

So lets start the journey of knowledge in accounting standards and I am sure

everyone will not only realize the importance of Accounting Standards but also will

start enjoying them and applying them in their studies as well as practical life also.

Remember “The journey of miles starts with the first step only”

Good luck.

CA Yogesh Panchakshari

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TWO WORDS FROM AUTHOR



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INDEX:

AS No. Accounting Standard Page No.

4 Contingencies & Events Occurring after balance sheet date 3 5 Net Profit Or Loss For The Period, Prior Period Items And Changes In

Accounting Policies 9

11 Effects of changes in foreign exchange rates 14 12 Accounting for government grants 24 16 Borrowing Cost 27 19 Accounting for Leases 39 20 Earnings Per Share 47 26 Intangible Assets 57 29 Provisions, Contingent Liabilities And Contingent Asset 67



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AS-4: CONTINGENCIES AND EVENTS OCCURING AFTER THE BALACNE SHEET DATE

Objective – It gives guidelines of accounting treatment for accounting, contingent assets, and event s occurring after Balance Sheet date.

Conceptual Questions: Q.1 – Mr. Aditya Birla purchased one lottery ticket for Rs. 5 lakhs. He wishes to show the amount as

income receivable in asset side. Comment. Ans – As per AS 4, when outcome of event depends on another uncertain event then it is called as

contingent event. In this case lottery income will be the contingent event. Thus, it can be recorded in the books [Conservatism Concept]

Q. 2 – There is case against ‘A Ltd.’ and accountant is confused whether to record this or not.

Comment. Ans – As per AS4, Contingent Liabilities are divided into three parts

1) Remote liability – Ignore 2) Probable liability – Disclose below Balance Sheet 3) Possible – Create Provision.

An accountant will have to analyze the current provision of liability on the above basis and then he should decide the accounting treatment.

Q.3 – Book of accounts of ‘P Ltd.’ were closed on 31-3-2011 and fire occurred on 7-7-2011. books

accounts sanctioned by board of directors on 1-9-2011. An accountant wish to show fire loss in books of accounts of last year. Comment.

Ans – As per AS4, such event is called as Events occurring after Balance Sheet date. In this case the accounting treatment is suggested as follows-

i) If event was known on the Balance Sheet date but confirmed after Balance Sheet date, then adjust it in last year’s book.

ii) If the event was unknown on Balance Sheet date but confirmed afterwards, then, it can be adjusted in the books but it must be shown as a disclosure.

In the above case, fire breakout after Balance Sheet date and it was unknown on Balance Sheet date. Thus we can give the disclosure below Balance Sheet.

Q4 – The accounting year for Q Ltd. ended on 31-3-2011 but dividend declared on 7-7-2011. can it be

adjusted in the books? Ans – As per AS 4, the dividend cannot be recorded because it was unknown on Balance Sheet but it is

declared as an exception to AS 4 in AS4 itself. Application – In the above case, dividend must be adjusted in books of accounts i.e. at the debit side of P & L Appropriation A/c and provision in the liability side.



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Practical Questions:

1. XYZ Ltd. Had written off Rs. 11.50 lakhs of debts of PQ Ltd. Treating the same as bad and doubtful during the year ending on March 3,2005, as the amount was not recovered for last five years. Company is in the process of finalizing the Balance Sheet, XYZ Ltd. Is able to recover the entire amount from PQ Ltd. What treatment should been given to this information in preparation if Balance sheet as on 31.03.2005.

2. During the year 2004, it has been found that there was a loss of goods by theft during the year 2003, valued at Rs. 2,70,000. How would you deal with the above in financial statements for the year 2003 and 2004?

3. ABC Ltd. Prepared its financial statements as on 31.3.04. The following events took place in April, 2004: a. A fire broke out in the premises damaging goods costing Rs. 12,00,000 (salvage value Rs.

3,50,000). b. Dividend proposed by the Board, Rs. 7 per share.

4. Las Ltd. Has received a demand notice on 15.6.03 for Rs. 78,00,000 from the Excise Department in respect of duty payable for several years. The financial statements for the year 2002-03 have been approved in August,2003. In July, 2003, the company has appealed against the demand of Rs. 62,00,000 and the balance has been deposited by it. The company has expected that the demand of Rs.62,00,000 should be reduced to Rs. 27,00,000 only. Show the above in the financial statements for the year 2002-03.

5. In one of the plant of XYZ Ltd., there was a fire on 10.5.04 in which the entire plant was damaged and the loss of Rs. 40,00,000 is estimated. The claim with the insurance company has been filed and a recovery of Rs. 27,00,000 is expected. The financial statement for the year ending 31.3.04 were presented on 30.08.04. Show how should it be shown? What would be the presentation if the financial year ended on 30.6.04?

6. While preparing its final accounts for the year ended 31st March, 2003 a company made a provision for bad debts @ 5% of its total debtors. In the last week of February, 2003 a debtor for Rs. 2 lakhs had suffered heavy loss due to an earthquake; the loss was not covered by any insurance policy. In April, 2003 the debtor became a bankrupt. Can the company provide for the full loss arising out of insolvency of the debtor in the final accounts for the year ended 31st March, 2003?

7. A major fire has damaged the assets in a factory of AS Limited on 2nd April, two days after the year-end closure of account. The loss is estimated at Rs. 20 Crores out of which Rs. 12 crores will be recoverable from the insurers. Explain briefly how the loss should be treated in the final accounts for the previous year.

8. AS Ltd invested Rs. 100 lakhs in April, in the acquisition of another Company doing similar business, the negotiations for which had started during the Financial Year just ended on 31st March. How will this be treated in the final accounts for the year just ended.

9. The company has not made provision for proposed Divided in its accounts but has carried forward the balance on the Profit & Loss Account and proposes to charge the dividend to the Profit & Loss Account when payment is made. Comment.

10. AS Ltd had taken a large-sized civil construction contract, for a public sector undertaking, valued at Rs. 2 crores. In the course of execution of the work on 29th May, the company found while raising the work that it had met a rocky surface and cost of contract would go up by an extra Rs. 50 lakhs, which



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would not be recoverable from the Contractee. The Company’s accounting year had ended on 31st March and the accounts were considered and approved by the Board of Directors on 15th May. How will you treat the above in the accounts for the year ended 31st March.

11. AS Ltd entered into an agreement to sell its immovable property included in the Balance Sheet at Rs. 5 lakhs to another Company for Rs. 20 lakhs. The agreement to sell was concluded on 31st January but the Sale Deed was registered only on 30th April. The Company’s accounting year ended on 31st March and the accounts for that period were considered and approved by the Board of Directors on 15th May. How will you treat the above in the accounts for the year ended 31st March?

12. A Company deals in petroleum products. The sale price of petrol is fixed by the Government. After the Balance Sheet date, but before the finalization of the Company’s accounts, the Government unexpectedly increased the price retrospectively. Can the Company account for additional revenue at the close of the year? Discuss.

13. You are the Auditor of a Manufacturing Company, whose year ends on 31st March. An event occurred after the year ended, but before you complete the audit. The Audit Report issued by you is dated 20th July. The Sales Ledger balance at 31st March was Rs. 95,000. By 20th July Rs. 65,000 only had been received against this amount as full and final payment. How will you deal with the above?

14. These was a Government Notification in June 20x1 increasing the limit for gratuity payment with effect from 24th September 20x0. The accounts were approved by the Board of Directors in July 20x1. The Board of opines that since the change took place after the Balance Sheet Date, no effect should be given to it in the Financial Statements for the year ended 31st March 20x1. Is the view correct?

15. AS Ltd wants to adjust the bank balance on the Balance Sheet Date by reversing the entry for a cheque issued in the normal course of business and cancelled after the year-end but before the finalization of accounts. The cheque was returned on the ground that the signature differs. Give your views on the above.

16. A Limited Company closes its accounts on 31st March every year. It issued a cheque in favour of one of its customers towards the refund of advance in January. In July, the customer returned the cheque to the Company without presentation to the Bank while accounts of the Company for that year were being finalized. Since the cheque was cancelled, the reversal entry was passed in the books of accounts as on 31st March with a view to disclose the correct balance as on that date, instead of showing the Bank Balance lower by treating the cheque as “issued but not encashed as on 31st March.” Whether the reversal entry passed in the books of accounts of the Company as on 31st March was proper since the cheque was cancelled before closing of the accounts for the year?

17. You are an accountant preparing accounts of AS Ltd. As at 31st March. After the end of the year, the following events took place in April. • A fire broke out in the premises damaging, uninsured stock worth Rs. 10 lakhs (Salvage Value

Rs. 2 lakhs) • A suit against the Company’s advertisement was filed by a party claiming damage of Rs. 20

lakhs. • Dividend proposed at 20% on Share Capital of Rs. 100 lakhs.

Describe, how the above will be dealt with in the accounts for the year ended 31st March.

18. The Financial statement of Construction Limited for the year ended 31st March, 2008 were considered and approved by the board of directors on 20th May, 2008.



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The company was engaged in construction work involving Rs. 10 core. In the course of execution of work, a portion of factory shed under construction came crashing down on 30th May, 2008. Fortunately, there was no loss of life, but the company will have to rebuild the structure at an additional at an additional cost of Rs. 2 crores which cannot be recovered from the contractee. How should this event be reported?

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AS-5: NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS

AND CHANGES IN ACCOUNTING POLICIES

Conceptual Questions:

Objective – To give guidelines for – i) Finding up appropriate profit of current year ii) Dealing with

prior period items and iii) Dealing with changes in items.

Q. 1 – Mr. Ajay is finalizing his books of accounts and he found that there was loss by theft of Rs.

500. considering small amount, he added it in miscellaneous expenses, comment.

Ans – As per AS5, Net Profit of every fanatical year must be calculated by showing ordinary and extra

ordinary items separately.

Analysis – In the above case, even if amount is small, loss by theft is an extra ordinary item and must

be shown separately thus above accounting treatment is incorrect.

Q. 2 – Your client Mr. Ambani showed Bad Debts of Rs. 30 lakhs in 2009-10. but amount is recovered

in 2011—12. he has credited this amount in general income of 2009-10. Comment.

Ans – As per AS 5, if any adjustment is done in current year due to adjustment of earlier year’s mistake,

then it is called as prior period items and it should be record in current year separately.

Analysis – In above case Mr. Ambani should credit P & L A/c of year 2011-12 and not the year 2009-

10. It should be shown separately as prior period item.

Q. 3 – In year 2011-12, Mr. Ratan Tata made provision for doubtful debts @ 10%. But after year end it

is needed at 12% p.a. Comment.

Ans – As per AS 5, such provision is called as estimate and such change is called as changes in estimates.

It should be adjusted in Financial Year.

Analysis – In above case even if Mr. Tata realized change estimate after year end, still he must

adjust it in Financial Year 2011-12.



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1. Show the presentation of following items in the financial statements : a. Last year, stock was overvalued by Rs. 5,30,000. b. Insurance claim lodged last year but received in current year, Rs. 1,20,000. c. Change of method of valuation of raw material inventory from FIFO to weighted average method.

2. Show the presentation of following items in the financial statements : a. Payment of expense of Rs. 1,10,000 for previous year. It was not recorded last year due to

oversight. b. A debtor was considered bad and full provision for doubtful debt was created. In the current year,

however, a part of the total amount has been recovered. c. An employee retired last year from the firm. He lodged a claim in the court of law for Rs. 7,20,000

in the current year. Court’s verdict may come in current year or may be declared in future years.

3. X Ltd. Is a regular buyer of goods from Y Ltd. Under an agreement, 50% of the order amount is payable in advance and balance 50% is payable at the time of delivery. In case, the delivery is not taken within 15 days of intimation, the buyer has to pay Rs. 1,000 per day as storage charges to the seller, In the past, whenever such charges were paid, were included in the valuation of inventory. However, in the current year, X Ltd. Has decided not to include this expense as a part of inventory value, but as a general expense. Comment.

4. RST Ltd. Has a policy of providing 10% provision for doubtful debts on the gross value of debtors. In the current year also, it has applied the same policy. However, it has created an additional provision of Rs. 60,000 (over and above 10%) in respect of a debtor which is outstanding for more than one year and it is expected that he may be declared insolvent. It is a change in accounting policy? Comment.

5. Whether disclosure of advances / receivable written back / written off is necessary even if the amount involved does not exceed 1% of the revenue?

6. The company found in 2002-2003 that stock sheet as on 31.03.2002 had included twice an item of Rs. 1,97,221/-. How will this be dealt with, in the books?

7. ABC Ltd. Was making provision for non-moving stocks based on no issues for the last 12 months upto 31.3.2002. The company wants to provide during the year ending 31.3.2003 based on technical evaluation: Total value of stock Rs. 100 lakhs Provision required based on 12 months issue Rs. 3.5 lakhs Provision required based on technical evaluation Rs. 2.5 lakhs Does this amount to change in accounting policy? Can the company change the method of provision?

8. State, how you will deal with the following matters in the accounts of U Ltd. For the year ended 31st March, 2003 with reference to Accounting Standard: a. The company finds that the stock sheets of 31.3.2002 did not include two pages containing

details of inventory worth Rs. 14.5 lakhs.

9. State briefly the duty of an auditor with a regard to each of the following: a. A sum of Rs. 10,00,000 is received from an insurance company in respect of a claim for loss a

goods in transit costing Rs. 8,00,000. The amount is credited to the Purchases Account. b. A loss of Rs. 2,00,000 on account of embezzlement of cash was suffered by the company and it

was debited to Salary Account.



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10. As a Company Auditor how would you react to the following situations?

a. Sale value of scrap items adjusted miscellaneous expenditure. b. Insurance claim of Rs. 2 lakhs received stands included under miscellaneous income.

11. Sagar Limited belongs to the engineering industry. The Chief Accountant has prepared the draft accounts for the year ended 31.03.2006. You are required to advise the company on the following items from the viewpoint of finalization of accounts, taking not of the mandatory accounting standards. An audit stock verification during the year revealed that the opening stock of the year was understated by Rs. 3 lakhs due to wrong counting.

12. In preparing the financial statements of R Ltd. For the year ended 31st March, 1998 you come across the following information. State with reasons, how you would deal with them in the financial statements- There was a major theft of stores valued at Rs. 10 lakhs in the preceding year, which was detected only during the current financial year (1997-98).

13. As an auditor state your views on the following situations : Y Ltd. Provided Rs. 25 lakhs for inventory obsolescence in 1998-99. In the subsequent year, it was determined that 50% of such stock was usable. The company wants to adjust the same through prior period adjustment account as the provision was made in the earlier year.

14. In the context of relevant Accounting Standards, give your comments on the following matters for the financial year ending on 31.3.2002. While preparing its final accounts for the year ended 31st March, 200 Rainbow Limited created a provision for Bad and Doubtful debts at 2% on trade debtors. A few weeks later the company found that payments from some of the major debtors were not forthcoming. Consequently the company decided to increase the provision by 10% on the debtors on 31st March, 2002 as the accounts were still open awaiting approval of the Board of Directors. Is this to be considered as an extraordinary items or prior period item?

15. What will be the treatment of the following in the final statement of account for the year ended 31st March, 1995 of a limited company? Revision in the salary, effective 1st April, 1994, would cost the company an additional liability of Rs. 3,00,000 per annum.

16. M/s. Dinesh & Company signed an agreement with workers for increase in wages with retrospective effect. The out-flow on account of arrears was for 2005-06 – Rs. 10.00 lakhs, for 2006-07 – Rs. 12.00 lakhs and for 2007-08 – Rs. 12.00 lakhs. This amount is September, 2008. The accountant wants to charge Rs. 22.00 lakhs as prior period charges in financial statement for 2008-09. Discuss.

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AS-11: EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

Objective – To give guidelines for accounting of effect of change in foreign exchange rates

Conceptual Questions: Q. 1 – What are three types of Forex Dealings? Ans – Provision of AS11: All the business transactions in for-ex terms are divided in three parts as follows –

Sr. No.

Type Explanation Difference transferred

to 1. Forex Transaction These are day to day transactions in for – ex. E.g.

sales/purchases in for-ex P&L A/c

2. Forex operation i) Integral - These are dependant branches in abroad. P&L A/c ii) Non-Integral Independent branches in abroad. For-ex

Reserve A/c

3. Forward Contract. These are the contracts which are entered in today’s date but to be completed on future date at the rates decided today.

P&L A/c

Q. 2 – Mr. Ajay purchased goods for $1000 on 1/1/2011. When rate was Rs. 40 per $ amount to be

transferred after 4 months i.e. 30/4/2011. Year ending 31/3/2011. He made forward contract to purchase dollar at Rs. 44/$ it means he will pay extra Rs. 4/$ for 1000 dollars. What is accounting treatment?

Ans – Provision of AS11: Such extra payment of Rs. 4000 is called as differed discount. It is for 4 months of which, 3 months are in current year and remaining in next month. Application of AS11: Ajay should record Rs. 4000 in asset side as differed discount ¾th is transferred to current year and remaining Rs. 1000 in next year.


1. A company had imported raw materials worth US dollars 250,000 on 25th January, 2005 when the

exchange rate was Rs. 46 per US dollar. The company had recorded the transaction at that rate. The payment for the imports was made only on 15th April,2005 when the exchange rate was Rs.49 per US dollar. However on 31st March 2005, the rate of exchange was Rs. 50 per UD dollar. The company passed an entry on 31st March,2005 adjusting the cost of raw materials consumed for the difference between Rs. 49 and Rs.46 per US dollar.

2. ABC Ltd. of India has taken a loan few years back. An amount of $ 1,00,000 is due for payment after 3 months. It enter into a forward cover for the period of 3 moths @ Rs.47.90, whereas the spot rate on the date of contract was Rs. 47.10. How should it be recorded by ABC Ltd.



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3. The company has adopted and followed the following accounting policy:”In respect of foreign currency transactions, current assets and current liabilities are revalued at year end rates. However, if there is net loss due to exchange difference, the same is charged off to the profit and loss account but if there is net gain the same is ignored in view of the prudent accounting principle of not recording unrealised gains due to exchange rate fluctuations”. Comment on the appropriateness of above.

4. Exchange Rate Goods purchased on 24-2-2005 of US $ 10,000 Rs. 46.60 Exchange Rate on 31-3-2005 Rs. 47.00 Date of actual payment 5-6-2005 Rs. 47.50 Calculate the loss/gain for the financial years 2004-2005 and 2005-2006.

5. A.S. Ltd. (Delhi) has a branch in Sydney, Australia. At the end of 31st March,2005 the following ledger balances have been extracted from the books of the Sydney office.

Sydney (Australia dollars thousand) Debit Credit Plant & Machinery(Cost) 200 -- Depreciation on Plant & Machinery(Accumulated) -- 130 Debtors / Creditors 60 30 Stock (1-4-2004) 20 -- Cash / Bank balance 10 -- Purchases / Sales 20 123 Goods sent to branch 5 -- Wages and Salaries 45 -- Rent 12 -- Office Expenses 18 -- Commission Receipts -- 100 Branch / H.O. Current A/c -- 07 ------------------------------------- 390 390

------------------------------------- The following information is also available: Goods sent by H.O. Rs.100 thousand. Branch A/c. In H.O. Rs. 120 thousand. Stock at 31-3-2005, Sydney Branch Australia $ 3,125, you are required to convert the Branch Trial Balance into Rupees: (use the following rate of exchange: Opening rate A $=Rs. 20 Closing rate A $=Rs. 24 Average rate A $=Rs. 22 which approximate the actual exchange rate. For fixed assets A $=Rs. 18) Required: Translate the branch trail balance if it is classified as- a: Integral foreign operation. b: Non-integral foreign operation.

6. Comment: The account of a foreign branch is incorporated in the head office books at a standard rate and a resultant notional profit is credited to the head office profit and loss account.

7. A.S. Ltd. imported a machine on 04.01.1999 for Euros 12,000 on deferred payment basis;



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Payment in six equal annual installments at the end of every financial year, commencing from 31.03.1999 onwards. Use Revised AS 11 provisions irrespective of financial year / date and determine the exchange differences and carrying amount of the liability at the end of each financial year, if the following exchange rates are given. One Euro equals Indian Rupees on

04.01.1999 31.03.1999 31.03.2000 31.03.2001 31.03.2002 31.03.2003 31.03.2004

Rs. 50,4872 Rs. 45.5208 Rs. 41.8463 Rs. 41.0175 Rs. 41.6400 Rs. 51.4400 Rs. 53.1000

8. Distinguish between Integral Foreign operation(IFO) and Non-Integral Foreign Operation (NOF).

9. An exporter has $50,000 due in 6 months. Rate on the date of sale 1st January, Is Rs.47. The

forward rate offered is Rs.47.50. Year ends on 31st March when the exchange rate was 47.20. On settlement date i.e. 30th June was 47.60. Show the accounting including for forward contract. (it is a forward contract to sell the foreign currency).

10. A party enters forward contract for trading or speculation. Contract is to sell $1,00,000 due on 30.6 @ Rs.47.50. Today (1st January) spot rate is Rs.47. On 31st March (i.e. at year end) the forward contract for 3 months (i.e. remaining maturity period up to 30.6) to sell $ is available at Rs. 47.55 rate on 30.6 is Rs. 47.60. Account for the transactions.

11. A.S. Ltd. has a branch in the US. The company has so far recorded goods sent to the branch and amount received there from. At the end of the year the branch has sent a detailed statement which should be incorporated in the accounts of the company.

Trial Balance as on 31.03.2005 Rs. in ‘000 Head Office Trial Balance Dr. Cr.

Share Capital General Reserve Profit & Loss A/c Foreign Currency Loan ($ 10 million) Sales Transfer to Branch Branch Account( Sales minus Cash Received $ 2 million=117.5) Purchases Opening Stock Tangible Fixed Assets Accumulated Depreciation Debtors Cash and Bank Balances Closing Stock

82.25 1000.00 20.00 500.00 300.00 22.75

100.00 500.00 10.00 470.00 600.00 200.00 45.00

1925.00 1925.00 25.00

Rs. ‘000 US $



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Branch Trial Balance Dr. Cr.

Transfer From HO Expenses Tangible Fixed Assets Accumulated Depreciation HO Account Bank Balance Sales Closing Stock-Cost Closing Stock-net realizable value

4.26 3.00 2.00 0.50

0.50 2.26 7.00

9.76 9.76

1.00 1.02

Other Information: Exchange Rates- A: When foreign currency loan was taken by the company US $ 1=47. B: When tangible fixed assets were acquired US $ 1=45. C: When closing stock was acquired US $ 1=47.47. D: Closing Stock exchange rate US $ 1=47.50. E: Details of Sales and expenses: (Translation is carried actual rates) F: Current year depreciation for Branch in Rs. ‘000.25. Prepare Translated Branch Trial Balance, P & L A/c. And Balance Sheet of company on a whole as at 31.03.2005.

12. Frequently Asked Questions on AS 11 notification- Companies (Accounting Standards) Amendment Rules, 2009 (G.S.R.225(E)dt.31.3.09)issued by Ministry of Corporate Affairs

Sales In ‘000 US $ Exchange Rate In ‘000 US $

1 2 3 4 5 Expenses 1 2 3 4 5

2 1 1 2 1

47.50 47.40 47.20 47.10 47.05 47.40 47.30 47.25 47.18 47.10

95.00 47.40 47.20 94.20 47.05

7 330.85 0.50 0.90 0.60 0.50 0.50

23.70 42.57 28.35 23.59 23.55

3.00 141.76



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ASB Guidance in the form of FAQs on AS 11 notification- Companies (Accounting Standards) Amendment Rules,2009(G.S.R.225(E)dt.31.3.09)issued by Ministry of Corporate Affairs does not form part of the Standard. The purpose of this Guidance is to illustrate and to assist in clarifying the application on the notification. 1:The notification uses the term ‘depreciable capital asset’. What is meant by the term ‘depreciable capital asset’ as none of the accounting standards use this terminology?

13. Would the notification cover exchange difference including those arising in terms at paragraph 36 of the Standard which deals with the forward exchange contracts?

14. Which other category of long term monetary assets would be covered apart from the depreciable capital asset? For example will this cover Fixed Deposits with a foreign bank held for more than 12 months as well as the amount payable for a period exceeding 12 months?

15. Will the assets acquired in India by payment in foreign currency also be covered by the notification? If this presumption is correct will it contradict the requirements of Schedule VI to the Companies Act 1956?

16. The exemption provided by the notification is in respect of those items which are covered in paragraph 15 which deals with monetary items that in substance from part of the net investment in a non-integral foreign operation of the enterprise. Whether the monetary items in case of integral foreign operation will be covered by the notification?

17. How the transaction account under head ‘Foreign Currency Monetary Item

Translation Difference Account’ is to be amortised?

18. Will exercising the option under the Companies (Accounting Standards) Amendment Rules, 2009 be a change in the accounting policy?

19. Is the option once exercised irreversible? If an enterprise does not want to adopt the treatment as per the new paragraph, can it do so? Can it exercise the option?

20. What will be the status of the ICAL announcement regarding derivatives? Will derivatives also be valued on the basis of this notification or the announcement of ICAI would continue to be applicable?

21. Will the recognised of income and expense in accordance with the notification be treated as an item of unusual nature referred to in paragraph 12 and 13 of AS 5?

22. Will assets acquired from foreign currency monetary item that are not depreciated but amortised be included?

23. In case the foreign currency monetary item is not fully utilised for acquisition of fixed assets, then will proportionate adjustment be permissible in the fixed asset cost and balance of exchange fluctuation will be adjusted to Foreign Currency Monetary Items Transaction Difference Account?

24. If the long term foreign currency monetary item is received in installment whether the installment received within a period of 12 months should be treated as short term in nature?

25. How ‘Foreign Currency Monetary Item Translation Difference Account’ should be presented in the Balance Sheet?



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26. Does this notification apply to exchange difference arising on forward exchange contracts entered into to hedge the foreign currency risks of future transaction in respect of which firm commitments are made or which are highly probable forecast transactions or only to forward contracts foreign currency items included in Para 36 of AS 11?

27. Whether the notification applies to non-corporate entities which are not covered by Companies Act?

28. Does the notification also apply to those exchange differences which are regarded as an adjustment to interest costs in term of paragraph 4(e) of Accounting Standard (AS) 16, Borrowing Costs?

29. Should we capitalize exchange differences arising on settlement of long term foreign currency monetary items?

30. The notification refers to the acquisition of depreciable capital assets. Will it include the self constructed assets and acquired by other means?

31. Suppose a company has got two separate long term foreign currency monetary Items; one for use in connection with acquisition of a depreciable asset and second for use in working capital. Should the treatment suggested in the notification be followed only for acquisition of depreciable assets?

32. If capitalisation of exchange difference results in carrying value greater than recoverable amount. Is it permissible?

33. If the company exercises the option, what are the implication on current tax and deferred tax?

34. What are the disclosures to be furnished in the financial statements if the option Is exercised?

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AS-12: ACCOUNTING FOR GOVERNMENT GRANTS Objective – To give guidelines for grants received for government in cash or kind.

Conceptual Questions: Q. 1 – A Ltd. received Rs. 20 lakhs from government grant for machine costing Rs. 50 lakhs.

Depreciation @ 10% p.a. straight line. Show accounting treatment Ans - Machinery A/c ................ Dr. 50 To Bank A/c 30 To Government Grant 20

Every year depreciation will be 10% of 50 lakhs i.e. 5 lakhs debited to Profits and losses A/c and 10% of Government Grant i.e. 2 lakhs per annum will be transferred to P&L credit side.

Q. 2 – B Ltd. received 5 lakhs as government grant for building and 20 lakhs for regular operation.

Where the grant will be recorded? Ans – Provision of AS 12 – Government grant received for building is capital receipt.

Application of AS12 – 1st Grant will be received in Liability side while second grant in income side. Q. 3 – Government sanctioned grant for 20 lakhs to C Ltd. but signature of minister is due. Can it be

recorded in the books? Ans – Provision of AS9 and AS12 – As per AS9 any income cannot be recorded unless its amount legal

claim is confirmed. Thus as per AS12, government grant can’t be recorded unless all formalities are completed. Application of AS12 – C Ltd. should not record government grant in above situation

Q. 4 – B Ltd. in Q. 2 failed to complete formalities thus received letter from government to repay

entire government grant. Show accounting effect Ans – Provision of AS12 – If government grant is to be refunded then all effects must be cancelled.

Application of AS 12 – In above case b Ltd. will have to i) Repay 100% government grant ii) Cancel balance of government form liability side. iii) Reversed depreciation on granted portion of asset. iv) Reversed portion of government grant which was credited to P&L A/c earlier.

Q. 5 – D Ltd. received one asset worth Rs. 50,000 free of cost from government. Life = 5 years. Give

accounting treatment. Ans - Asset A/c ................ Dr. 50,000 To Government Grant 50,000

Every year depreciation of Rs. 10,000 will be debited to profit and loss A/c and government grant Rs. 5,000 will be transferred to revenue i.e. P&L A/c credit side i.e. Depreciation Tax shield will be unavailable.


1. Mukund Mehta Nath and Co. Ltd., purchased a fixed asset of worth Rs.64 lakhs. Expected useful life is 10 years and expected residual value is Rs.10 lakhs. The purchase of the asset was supported by Government Grant to the extent of Rs.25 lakhs. The company follows Income Approach, in accounting for government grants. Required:



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A: The amount of Government Grant brought over to P & L for each of the first five years. Assume that the asset was purchased on the first day of the accounting Period and grant was also received on that date. B: The Company changes the method of depreciation from WDV to SLM in 6th year (i.e. after completion of full five years). Advise how the change in the method of Depreciation will be given effect to in the books, and also explain the treatment For grant, when this change in depreciation method takes place.

2. Explain the treatment of the following: A: A firm acquired a fixed asset for Rs.250 lacs on which the government grant Received was 40%. B: Capital subsidy received from the central government for setting up a plant in The notified backward region. Cost of the plant Rs.300 lacs, subsidy received Rs.100 lacs. C: Rs.50 lacs received from the state government for the setting up of water treatment plant. D: Rs.25 lacs received from the local authority for providing medical facilities to The employees.

3. RST Ltd. set up a plant at a cost of Rs.360 lacs with an expected life of 9 years. The company

received a grant from the state government, of Rs. 80 lacs which was to be utilized after fulfilling certain conditions. The company treated this grant as a deferred income. The company could not fulfill the condition and the grant was to be refunded. At the time of refund, balance in the deferred income was Rs.72 lacs, and the balance of the Plant A/c was Rs.280 lacs. What should be the treatment of refund of Grant? In case, the grant was deducted from the cost of plant and a residual value of Rs.10 lacs was expected after a life of 9 years, what would be the treatment of refund of grand?

4. A limited company has set up its business in a designated backward area which entitles it to receive, as

per a public scheme announced by the GOI, a subsidy of 15% of the cost of investment. Having fulfilled all the condition laid down under the scheme, the company on its investment of Rs.100 lakhs in capital assets during its accounting year ending on 31st March,1995 received a subsidy of Rs.15 lakhs in January 1995 from GOI. The account of the company would like to record the receipt as an item of revenue and to reduce the losses on P & L for the year ended 31st March, 1995, is his action justified?

5. Top & Top Limited has set up its business in a designated backward area which entitles the company to receive from the Governments of India a subsidy of 20% of the cost of investment. Having fulfilled all the conditions under the scheme, the company on its investment of Rs.50 core in capital assets, received Rs.10 core from the Government in January, 2005 (accounting period being 2004-05), The company wants to treat this receipt as an item of revenue and thereby reduce the losses on profit and loss account for the year ended 31st March, 2005. Discuss.

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AS-16: BORROWING COSTS

Objective – To give guidelines for accounting treatment of cost paid against borrowings e.g. interest

on loan.


Q. 1 – A Ltd. took a loan of Rs. 10 lakhs on 1/4/2001 for construction of office building @ 10% p.a.

Building was ready to use on 1/10/2003 but actual use started form 1/4/2004. What is

accounting treatment of interest up to 31/3/2007.

Ans – Provision of AS16 – In case of borrowing cost against qualifying asset

a) Interest up to asset being ready to use must be capitalized. b) Thereafter interest must e treated as revenue expense

Application of AS16 – Points are given below

a) For 1st 25 years (between 1/4/01 and 1/10/03) was under construction thus interest of Rs. 2.5 lakhs must be capitalized (10L X 10% X 2.5 yrs.)

b) Fore remaining 3.5 years interest of Rs. 3.5 lakhs must be treated as revenue expense i.e. debited to P&L A/c.

Q. 2 – Mr. Ajay paid Rs. 30 lakhs to acquire patent rights for which he took loan when product was

under-construction. Can apply AS16.

Ans – Provision of AS 16 – AS is applicable to qualifying assets which means an asset which takes

considerable time span for its completion thus it is applicable to tangible as well as intangible assets.

Application of AS 16 – Ajay can apply AS 16 for patent right also.

Q. 3 – Anil took a loan of Rs. 20 lakhs @ 10% p.a. for construction of two office buildings.

On1/4/2007, first building completed on 31.3.2009, second on 31/3/2010. What is treatment of

interest up to 31/3/11?

Ans – Provision of AS16 – If loan is taken for variety of assets, then its capitalization should stop when the

building was completed proportionately.

Application of AS16:

Year Building under

construction

Building

complete

Interest

capitalized

Revenue

interest

07-08 2 0 2 lakhs -

08-09 2 0 2 lakhs -

09-10 1 1 1 lakhs 1 lakhs

10-11 0 2 0 2 lakhs



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Q. 4 – Mr. X took loan on 1/7/11 but construction of building was stopped for 7 months and started

back and still continued. Can be capitalizing interest of all 12 months as on 31/3/2012.

Ans – Provision of AS 16 – If construction is stopped due to normal reason, there capitalization should be

continued. But if it is due abnormal reason like strike, court case etc. then interest of that period

should be treated as revenue expense.

Q. 5 – Airtel Ltd. got licence for Mumbai on 1/4/2001 it took the loan on some date and started

digging of roads, and installing towers which was completed on 31/3/2002. Service actually

started form 1/9/2001 up to which period capitalization should be done.

Ans – The Company started installing tower and digging roads form 1/4/2001. It means use of its license

was already been started form 1/4/2001. Thus interest can not be capitalized and whole interest

must be treated as revenue expense.


1. Comment on the following Notes on Accounts:

I. Interest on loans from financial institution and a debenture issue made for the purpose of a particular plant, amounting to Rs. 200 lacs has been capitalized.

II. Interest on bridge loan from banks taken for a particular plant, amounting to Rs. 150 lacs has been capitalized and added to the cost for the project. This amount of interest includes interest of Rs. 25 lacs appropriated for the funds used for other purpose.

III. Interest cost on loans taken for construction of a captive power plant has been IV. The company has taken a loan for meeting the requirement of liquor business. It takes a period of few

years for brewing the liquor. Its included all costs of brewing and interests on loans in the valuation of inventory of liquor.

2. A.S. Ltd. has taken loan Rs. 500 lacs for up-gradation of its plant. Out of the said loan, Rs. 350 lacs has been spent on the plant during the year and balance Rs. 150 lacs have been used for the general working capital requirement of the company. The total interest cost fort he period amounted to Rs. 70 lacs. Advise the company in respect of capitalization of interest.

3. A.S. Ltd. has taken a loan of Rs. 20 lacs which has been used to buy trees. The average remaining period for the maturity of tree, to be sold as timer, is three years. The company wants to include the interest cost for the period of three years in the inventory cost of timber. Comment.

4. A.S. Ltd. is establishing an integrated steel plant consisting of four phases. It is expected that the full plant will be established over several years, but pending that, Phase l and Phase ll would be started as soon as they are completed. Following is the detail of the work done on the different phases of the plan during the current year.

Phase l Phase ll Phase lll Phase lV Cash expenditure Rs.20,00,000 Rs.35,00,000 Rs.25,00,000 Rs.40,00,000 Plants Purchased 28,00,000 40,00,000 30,00,000 48,00,000 Total expenditure 48,00,000 75,00,000 55,00,000 88,00,000 Total expenditure 2,66,00,000 Loan taken @ 16% 2,40,00,000 During current year, Phase l and ll have become operational. Find out the amount to be capitalized and to be expensed during the year.

5. Following information is available from the records of A.S. Ltd. in

respect of a project on which the work started on 1-1-03 Capital expenditure incurred for the project till 31-12-03 Rs. 8,00,000

Borrowings from bank @ 15% (with effect from 1-1-03) 3,00,000



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Assets transferred to project during the year, 2004 2,00,000 Expenses incurred during the year, 2004 1,25,000 Payments received during the year from the client 8,20,000

Additional borrowing for the project @ 16% (on 1-1-04) 2,00,000 Find out the borrowing costs to be capitalized during the years, 2003 and 2004.

6. A.S. Ltd. is working on a new project for which a construction period of 2 years has been planned. The work started on 1-1-04. The company has availed bank loan from time to time in general. It has taken loan for this new project also. Following details are available regarding the loan, for the year 2004.

Date Loan Purpose 1-1-04 16% Rs. 10,00,000 General Requirement 1-7-04 15% Rs. 8,00,000 Plant for the new project 1-10-04 14% Rs. 6,00,000 General Requirement The company has incurred expenses of Rs. 50,000 for general purpose and Rs. 1,20,000 in respect of the new project. Both these expenses qualify as borrowing costs to be capitalized. The qualifying assets at the end of year 2004 are: New projects Rs. 11,00,000 Other assets 3,00,000 Buildings 4,00,000 Find out the amount of borrowing costs to be capitalized for different assets for the year 2004.

7. A.S. Ltd. took a loan of USD 20,000 at 6% p.a. on 1st April, for a specific capital expansion project. The interest was payable annually. The exchange rate at the date of the loan was 1 USD = Rs. 45.00. However, the Company could have taken a corresponding Rupee Loan from Banks at 12% p.a. on that date. At the end of the year, the exchange rate was 1 USD = Rs. 48.00. How will you treat the Borrowing Costs and exchange differences in the above case?

Analyse the impact of the following changes independently. What would be the accounting treatment if the Rupee Loan were to carry interest at 14%p.a.? What will be the treatment if the exchange rate at the end of the year were 1 USD =Rs. 46.00?

8. A Co. Has generally borrowed funds and used the funds to acquire assets also. How should the amount of borrowing cost eligible for capitalisation be determined?

9. Paras Ltd. had the following borrowings during a year in respect of capital expansion. Plant Cost of Asset Remarks Rs. Plant P 100 lakhs No specific borrowings Plant Q 125 lakhs Bank loan of Rs. 65 lakhs at 10 % Plant R 175 lakhs 9% Debentures of Rs. 125 lakhs were issued. In addition to the specific borrowings stated above, the company had obtained term loans from two banks (1) Rs. 100 lakhs at 10% from Corporation Bank and (2) Rs. 110 lakhs at 11.50% from State Bank of India, to meet its capital expansion requirements. Determine the amounts of borrowing costs to be capitalized in each of the above Plants, as per AS-16.

10. Unique Ltd. had purchased during the year, a ship on deferred payment basis, payable over next 10 years. The Company has computed the interest payable over these 10 years and debited Interest Suspense A/c. Every year, 1/10th of the same is written off to P&L Account, treating the same as Deferred Revenue Expenditure. Comment.

11. A.S. Ltd. has obtained Institutional term loan of Rs. 580 Lakhs for modernisation and renovation of its Plant & Machinery. Plant and Machinery acquired under the modernisation scheme and installation completed on 31st March amounted to Rs. 406 lakhs, Rs. 58 lakhs has been advanced to suppliers



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for additional assets and the balance loan of Rs. 116 lakhs has been utilised for Working Capital purpose. The Accountant is in a dilemma as to how to account for the total interest of Rs. 52.20 lakhs incurred during the year, on the entire Institutional Term Loan of Rs. 580 lakhs. Give your views.

12. The Notes to Accounts of Gopal Ltd for the year ended 31st March includes the following – “Interest on Bridge Loan from Banks and Financial Institutions and on Debentures specifically obtained for the Company’s Fertilizer Project amounting to Rs. 1,80,80,000 has been capitalised during the year, which includes approximately Rs. 1,70,33,465 capitalised in respect of the utilisation of loan and debenture money for the said purpose”. Is the treatment correct? Briefly comment.

13. A.S. Ltd. borrowed Rs. 12 Crores for its capital expansion which for 18 months. The relevant borrowing rate was 12.5%. During this period, the Company invested the temporary surplus funds at 4.5% on short-term basis and earned interest of Rs. 25 lakhs, which was offered as Miscellaneous Income in the P & L A/c. The Company has capitalised the entire interest cost and added to its Plant and Machinery. Is this correct?

14. Cost of an inventory items is Rs. 90,000. Borrowing Cost capitalised as per AS – 16 is Rs. 12,000. What will be accounting treatment if the NRV of this item is (a) Rs. 1,15,000 and (b) Rs. 87,000? What will be the consequence if the NRV increases to Rs. 96,000 in the subsequent year in situation (b) above?

15. ABC Ltd commenced construction of a flyover in Mumbai in January 2006 under BOLT schemes. The same was completed in February 2007. Due to heavy seasonal rains in July 2006 in the area, the work on the flyover had to be suspended for a month. The Company accordingly suspended capitalization of Borrowing Costs of Rs. 12.50 lakhs for that month. Comment.

16. A.S. Ltd has undertaken a project for expansion as per the following details : Month Plan Actual

April Rs. 2,00,000 Rs. 2,00,000 May Rs. 2,00,000 Rs. 3,00,000 June Rs. 10,00,000 – July Rs. 1,00,000 – August Rs. 2,00,000 Rs. 1,00,000 September Rs. 5,00,000 Rs. 7,00,000 The Company pays to its Bankers at the rate of 12% p.a. interest being debited on a monthly basis. During the half year, the Company had Rs. 10 lakhs Overdraft up to 31st July, surplus cash in August and again Overdraft of over Rs. 10 lakhs from 1st September. The Company had a strike during June and hence, could not continue the work during June . Work again commenced on 1st July and all the works were completed on 30th September . Assume that expenditure were incurred on 1st day of each month. Calculate the interest to be capitalized, giving reasons wherever necessary. You may assume that- Calculate the interest to be capitalised, giving reasons wherever necessary. You may assume that- a. Overdraft will be less, if there is no capital expenditure. b. The Board of Directors considering facts and circumstances, has decided that any capital

expenditure taking more than 3 months will be substantial period of time.

17. In February, a Company took a Bank Loan to be used specifically for the construction of a new Factory Building. The construction was completed in September and the building was put to its use immediately thereafter. Interest on the actual amount used for construction of the building till its completion was Rs.18 lakhs, whereas the total interest payable to the bank on the loan for the period till 31st December(end of accounting year) amounted to Rs. 25 lakhs. Can Rs. 25 lakhs be treated as part of the cost of Factory Building and thus be capitalized on the plea that the loan was specifically taken for the construction of factory building?



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18. A.S Ltd borrowed Rs.1500 lakhs at 12% interest for creation integrated additional plant facilities. The

expenditure was incurred in the phase manner, each resulting in specifically identifiable capital asset as under-

Particulars Phase I Phase II Phase III

Asset Created Machinery Purchased Cost of Buildings Other Utilities

Plant L Rs. 500 lakhs Rs. 150 lakhs Rs. 50 lakhs

Plant M Rs. 400 lakhs Rs. 100 lakhs Rs. 50 lakhs

Plant N Rs. 600 lakhs Rs. 150 lakhs Rs. 100 lakhs

Total Costs Rs. 700 lakhs Rs. 550 lakhs Rs. 850 lakhs

Note: A: Each of the above Plants is a continuous process whereby output of L is transferred to M for further processing and thereafter to N, before sale to customers. B: Plant N includes machinery on which a Capital Grant of Rs. 100 lakhs is received from the Government. Determine the amount to be capitalised in respect of each of the above Plants. You need not allocate the same between machinery, buildings and other utilities.

19. A.S. Ltd. purchased machinery from Kusuma Ltd. on 30-9-2006. The price was rs. 370.44 lakhs after

charging 8% Sales Tax and giving a trade discount of 2% on the quoted price. Transport charges were 0.25% on the quoted price and installation charges 1% on the quoted price.

A loan of Rs. 300 lakhs was taken on the trial from the bank on which interest at 15% per annum was to be paid. Expenditure incurred on the trial run was Materials Rs. 35,000, wages Rs. 25,000 and Overheads Rs. 15,000. The Machinery was ready for use on 1.12.2006, but it was actually put to use only on 1.5.2007. Find out the cost of the machine and suggest the accounting treatments for the expenses incurred in the interval between the dates 1.12.2006 to 1.5.2007. The entire loan amount remained unpaid on 1.5.2007.

20. Rainbow Limited borrowed an amount of Rs. 150 crores on 1.4.2008 for construction of boiler plant @ 11% p.a. The plant is expected to be completed in 4 years. Since the weighted average cost of capital is 13% p.a., the accountant of Rainbow Ltd. capitalized Rs.19.50 crores for the accounting period ending on 31.3.2009. Due to surplus fund, out of Rs. 150 crores, an income of Rs. 3.50 crores was earned and credited to profit and loss account. Comment on the above treatment of account with reference to relevant accounting standard.

21. An amount of Rs.20,00,000 was incurred for construction of a building and it was ready occupation on 31.12.2007. The construction expenditure was incurred out of working capital facilities availed from the Bank. Interest payable to it @ 15%p.a. The average working capital loan has never fallen below Rs. 25 lakhs during the construction period.

The details of expenditure incurred are as follows:

July, 2007 3,00,000

August, 2007 4,50,000

September, 2007 2,00,000

October, 2007 5,00,000



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November, 2007 3,00,000

December, 2007 2,50,000

20,00,000

Calculate the value of the qualifying asset.

22. A Firm produces its finished products in a peak season of five to six months in a year. No production takes place during the rest of the year. However sales takes place throughout the year and therefore large inventories need to be carried resulting in interest burden. Can this interest be included in the valuation of Finished Goods?

23. A.S. Ltd. dealing in timber finds it advantageous to store selected grades of timber for a prolonged period in order to improve their quality. It desires to include an actual interest cost of holding the timber as part of the value of unsold timber in inventory, and consults you in order to determine whether, in your opinion, such a method of valuation would be fair and reasonable and in accordance with generally accepted accounting principles. You are required to indicate your opinion with reasons. Would your answer be different if the Company did not actually incur any interest charges for holding the timber but desired to include notional interest charges which could be imputed to the Company’s own paid-Up Capital and Reserves which are invested in holding the timber for maturity?

24. X Ltd. began construction of a new building on 1st January, 2007. It obtained Rs.1 lakh special loan to finance the construction of the building on 1st January,2007 at an interest rate of 10% .The company’s other outstanding two non-specific loans were:

Amount Rate of Interest Rs. 5,00,000 11% Rs. 9,00,000 13% The expenditure that were made on the building project were as follows: Rs. January 2007 2,00,000 April 2007 2,50,000 July 2007 4,50,000 December 2007 1,20,000 Building was completed by 31st December, 2007. Following the principles prescribed in AS-16 ‘Borrowing Cost’, calculate the amount of interest to be capitalized and pass one Journal entry for capitalizing the cost and borrowing cost in respect of the building.

25. In May, 2004 Speed Ltd. took a bank loan to be used specifically for the construction of a new factory building. The construction was completed in January, 2005 and the building was put to its use immediately thereafter. Interest on the actual amount used for construction of the building till its completion was Rs. 18 lakhs, whereas the total interest payable to the bank on the loan for the period till 31st March, 2005 amounted to Rs. 25 lakhs

Can Rs. 25 lakhs be treated as part of the cost of factory building and thus be capitalized on the plea that the loan was specifically taken for the construction of factory building?

26. The borrowings profile of Santra Pharmaceuticals Ltd. set up for the manufacture of antibiotics at Navi Mumbai is as under:-

Date Nature of Borrowings Amount. Purpose of Incidental

borrowed Rs. Borrowings Expenses



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1st January, 2008 15% demand loan 60 lakhs Acquisition of fixed 8.33% 1st July, 2008 14.5% Term loan 40 lakhs Acquisition of plant & Machin. 5% 1st October, 2008 14% bonds 50 lakhs Acquisition of fixed assets 8% The incidental expenses consist of commission and service charges for arranging the loans and are paid after rounding off to the nearest lakh. Fixed assets considered as qualifying assets are as under Rs. Sterile Manufacturing shed 10,00,000 Plant and machinery (total) 90,00,000

Other fixed assets 10, 00,000 The project is completed on 1st January, 2009 and is ready for commercial production. Show the capitalization of the borrowings costs.

27. Sweet & co. Is a sugar company. Due to the regulation by Central Government, the Company cannot

decide, the quality to be sold in the markets. It is regulated on the basis of release orders issued by the Central Government and quantity to be sold is also notified by the Central Government on monthly basis. Because of the seasonal nature of production, the company has to carry large inventories throughout the year. The average holding period of the sugar stock is generally 12-15 months. In the years when there is surplus stock of sugar, the Government creates a buffer stock and reimburses the carrying charges to the sugar factories for the inventory to be carried by the sugar mill, which includes interest. Sweet & Co. Incurs high interest costs since borrowings are required to meet the large demand for the working capital and payment to sugarcane producers, Interest costs is the second largest item in the profit and loss account of the Company, next to raw materials consumed. Can interest be capitalised under AS 16 or AS 2 as cost of inventory?

28. The company pays delayed cotton clearing charges, over the negotiated price, for taking delivery from supplier’s godown. The charge is in the nature of interest and is determined at 7% per annum. The company wants to include such charge in valuation of inventory since it is incurred in bringing the inventory to its present location and condition.

29. How would you, as a statutory auditor, deal with the following situation? The company deals in purchase and sale of timber and has included notional interest charges (calculated on. The paid-up share capital and free reserves) in the value of stock of timber as at the Balance Sheet date as part of cost of holding the timber.

30. R Ltd. has borrowed Rs 25 crores from financial institution during the financial year 2001-02 These borrowings are used to invest in shares ofPPA Ltd.. a subsidiary company, which is implementing a new project estimated to cost 50 crores. As on 31st March, 2002 since the said project was not yet complete, the Directors of R Ltd. resolved to capitalise the interest on the borrowing amounting to Rs.3 crores and add it to the cost of investment. As a statutory auditor, please comment.

31. A company has been consistently valuing its short-term inventory of finished goods by considering interest as an element of cost. The opening stock includes interest costs. It argues that on the principles of consistency it should be allowed to include interest cost in inventory valuation. It also argues that because interest cost is included in opening and closing inventory, the net impact is not significant. As an auditor how would you deal with this situation?

32. A company imports heavy machinery, which took significant amount of time in the voyage and was held up at the customs due to certain legal formalities. Can under these circumstances borrowing cost incurred in the intervening period be eligible for capitalization?

33. Capitalisation of borrowing cost on part ceases on completion of the parts (e.g. each building is distinct from other buildings in a business park). The question could arise if an entire building itself is



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not complete, yet individual floors are complete and ready for use (for example, a high-rise office building). In that circumstance, when should capitalization of borrowing costs cease?

34. On 20.4.2003 JLC Ltd. obtained a loan the bank for Rs. 50 lakhs to be utilized as under. Rs. Lakhs Construction of a shed 20 Purchase of machinery 15 Working capital 10 Advance for purchase of truck 5 In March, 2004 construction of shed was completed and machinery installed. Delivery of truck was not received. Total interest charged by the bank for the year ending 31.3.2004 was Rs.9 lakhs. Show the treatment of interest under AS 16.

35. A company obtained term loan during the year ended 31st March, 2002 to the extent of Rs.650 lakhs for modernisation and development of its factory. Building worth Rs. 120 lakh were completed and Plant and Machinery worth Rs.350 lakhs were installed by 31st March, 2002. A sum of Rs.70 lakhs has been advanced for assets, the installation of which is expected in the following year. RS.110 lakhs has been utilised for Working Capital requirements. Interest paid on the loan of Rs. 650 lakhs during the year 2001-2002 amounted to Rs.58.50 lakhs. How should the interest amount be treated in the Accounts of the Company? Q. No. Answer Hints

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AS 19: Accounting for Leases

Objective – To give guidelines for accounting of operating leases and finance lease.


Q. 1 – Mr. Ajay took an asset costing Rs.50 lakhs for 4 years at lease rent Rs. 3 lakhs p.a. is it

operating lease or finance lease?

Ans – Provision of AS19: The lease which is for short term and which do not cover he whole cost of asset is

called as operating lease and lease contract for long period which covers almost the entire cost of

asset is called as finance lease. In case of finance lease, the user of asset may become the owner

by paying the nominal amount at the end of lease period.

Application of AS 19:- Here only 12 lakhs are recovered from cost of asset in particular lease in

particular lease period which is hardly 24% of asset thus it is an operating lease.

Q. 2 – Mr. Anil took one machine of finance lease and one mixer on operating lese. He wishes to

claim depreciation for both. Comment.

Ans – Provision of AS19 – In case of finance lease, user (lessee) can claim depreciation while in case of

operating lease, less or can claim depreciation.

Application of AS19 – Anil is lessee for both the asset. Thus he can claim depreciation only on

machine which is taken on finance lease.

Q. 3 – What is accounting treatment for lease rent paid?

Ans –

1) Operating Lease – a. Lessee – He should be debited to P&L A/c as revenue expense. b. Lessor – He should credit it to P&L A/c as revenue income.

2) Finance lease – here lease rent will be divided into two parts a. Principle proportion will be recorded at asset side or reduced from amount payable to lessor.

(Capital Expenses) b. Interest provision will be debited to P&L A/c Lessor –

a. Principle amount received will be reduced form amount receivable form lessee. b. Interest received is credited to P&L A/c.



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1. X and Co. is in the business of providing cars to corporate on yearly contract basis. The life of a car is estimated at 10 years. Lease rental for a lease of one year is Rs. 1,50,000. After 1 year, the lease agreement may be renewed. In case, the specific car creates problem, it is to be replaced by X & Co. by another similar car. Examine the type of lease.

2. X Ltd. lease out an asset to Y Ltd. on the following terms and conditions: a. Cost of the asset : Rs. 20 lacs b. Lease period : 5 years c. Annual lease rental : Rs. 5,96,650 d. Life of the asset : 5 years

The implicit rate of interest is 15% i.e. the present value of lease is almost equal to Rs. 20 lacs. Other terms are :

a. Annual repairs and maintenance to be provided by lessor. b. One operator to be provided by the lessor on a regular basis, throughout the lease period. c. The lessee not to make any alteration in the asset during the lease period. d. The lessee to take insurance for the asset.

X Ltd. has classified this lease as an operating lease on the ground that repairs and maintenance to be provided by it as well as one operator to be deputed at the lessee’s premises throughout the lease period. Critically comment.

3. Following information is available in respect of a lease : a. Cost of the Asset Rs. 2,50,000 b. Monthly lease rental Rs. 7,000 c. Term (equal to estimated life) 40 months d. Monthly payment for other services Rs. 2,000 e. Total monthly payment Rs. 9,000 f. Residual value losses to be borne by the lessee. Examine the above as a finance lease from the point of view of the lessee given that his incremental borrowing rate is 12% p.a.

4. On 31.3.04, X Ltd. sold a machine which has a carrying amount of Rs. 2,50,000, at a sale price of Rs. 4,00,000 to Y Ltd. The machine was immediately leased back to X Ltd. for the remaining useful life i.e. 12 years. How much amount should be treated as deferred gain by X Ltd.?

5. X Ltd. took a machine on a 10 year finance lease. It is required to pay a lease rental of Rs. 60,000 p.a. together with Rs. 5,000 for other services. The implicit rate of interest of X Ltd. is 10%. The present value factor @ 10% for a period of 10 years is 6.145. Find out the amount of lease liability at the inception of the lease. Also, give the treatment of Rs. 5,000 payable by X Ltd. for other services.

6. X Ltd. took a 7 year finance lease under which the annual lease rental has been fixed at Rs. 1,20,000. The implicit rate of interest has been estimated at 11%. Find out the finance charge for different years.

7. X Ltd. sold one of its plant (estimated remaining life 5 years) and immediately lease it back for a period of % years. The relevant information is : Carrying Amount Rs. 4,90,000 Selling Price 4,60,000 Present value of lease payments Rs. 5,20,000 Find out the amount of deferred loss to X Ltd.



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8. X Ltd. took a machine on lease from Y Ltd. on the following terms : Annual lease rental Rs. 50,000 Useful life 15 years Lease term 13 years Implicit rate of Interest 15%

9. At the end of the lease period, the expected fair value of the assert is Rs. 75,000 and X Ltd. has an option to buy the asset at this price. You are required to find out the amount at which the finance lease be recognized in the book by X Ltd.

10. Following information is available in respect of a lease agreement : Lease Term 4 years Annual lease rental Rs. 150,000 Guaranteed Residual Value RS. 30,000 Estimated residual value for lessor Rs. 18,000 Implicit Interest rate 16% Find out the amount at which lease should be recognized by the lessee. Also find out the finance charge for different years.

11. X Ltd. ha initiated a lease for a period of three years in respect of machine costing Rs. 150,000 with an expected useful life of 4 years. Under the lease agreement, the asset would revert back to X Ltd. at the end of lease period. The unguaranteed residual value of asset after the lease term is estimated at Rs. 20,000. The implicit rate of interest is 10% and the annual lease payments have been determined in such a way that the present value of lease payment plus residual value is equal to the fair value (cost) of the asset. Find out the amount of annual lease payment, gross investment in the asset, net investment in the asset and unearned finance income from the point of view of X Ltd., the lessor.

12. For the problem above, apportion the finance income in the books of the lessor and show necessary items in the Profit and Loss Account and Balance Sheet of the lessor for different years.

13. A manufacturer offers outright sale as well as lease arrangement. Normal selling price of a machine along with normal trade credit of three months is Rs. 20 lacs. The lease term covers substantially the whole useful life of the machine at an uniform lease rental of Rs. 6 lacs p.a. The useful life of the machine is estimated at 5 years. Normal cost of sale is Rs. 16 lacs. Residual value is assumed to be negligible. How should the total profit be distinguished between normal profit and income? Note :IRR is 15.24%.

14. A Ltd. Leased a machinery to PPF Ltd. On the following terms : (Rs. In lakhs) Fair value of the machinery 20.00 Lease term 5 years Lease Rental per annum 5.00 Guaranteed Residual value 1.00 Expected Residual value 2.00 Internal Rate of Return 15% Depreciation is provided on straight line method @ 10% per annum. Ascertain unearned financial income and necessary entries may be passed in the books of the Lessee in the First year.

15. An equipment is leased for 3 years and its useful life is 5 years. Both the cost and the fair value of the equipment are Rs. 3,00,000. The amount will be paid in 3 installments and at the termination of



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lease lessor will get back the equipment. The unguaranteed residual value at the end of 3 years is Rs. 40,000. The (internal rate of return) IRR of the investment is 10%. The present value of annuity factor of Re. 1 due at the end of 3rd year at 10% IRR is 2.4868. The present value of Re. 1 due at the end of 3 rd year at 10% rate of interest is 0.7513. a. State with reason whether the lease constitutes finance lease. b. Calculate unearned finance income.

16. Kim Ltd. wishes to obtain a machine tool costing Rs. 20 lakhs by way of lease. The effective life of the machine tool is 12 years but the Company requires it only for the first five years. It enters into an agreement with Rim Ltd. for a lease rental of Rs. 2 lakhs p.a. The company is not sure about the treatment of these lease rentals and hence requests your assistance in proper disclosure of the same. For calculation purposes, take the implicit rate of interest at 15%. PV factors are : 0.87, 0.76, 0.66, 0.57, and 0.50.

17. L Ltd. has taken an asset on lease from V Ltd. for a period of 3 years. Annual lease rentals are Rs. 6 lakhs payable at the end of every year. The Residual Value guaranteed by is Rs. 2 lakhs whereas V expects the estimated salvage value to be Rs. 5 lakhs at the end of the lease term. If the Fair Value of the asset at the lease inception is Rs. 15 lakhs and the interest rate implicit in the lease is 12% then compute the Net Investment in the Lease from the viewpoint of V Ltd.

18. Compute the MLP in the following independent situation where Anand and Balu are the Lessor and Lessee respectively- 1. Monthly Lease Rent = Rs. 25,000, Lease Term = 32 months, Chandru, a third party, provides a

guarantee to Anand, that Rs. 55,000 will be paid as Residual Value. 2. Monthly Lease Rent = Rs.15,000 for 48 months, together with 2.5% of the Sales Revenue per

annum, Balu guarantees to pay Anand Rs. 10,000 as Residual Value of the asset. 3. Monthly Lease Rent = Rs. 90,000 for 18 months, Balu has the option to purchase the asset at a

certain date for Rs. 2,00,000. The Fair Value of the asset on that date is Rs. 4,20,000.

19. A Lease Agreement of 10 years allows the Lessee to cancel the agreement after 5 years by payment of an additional amount equivalent to 2 years’ lease rental. Is it a non-cancelable lease of ten years?

20. Chandrika Ltd. (Lessee) acquired a machinery on lease from Shiva Ltd. (Lessor) on 1st Jan 2007. The lease term covers the entire economic life of the machinery, i.e. 3 years. The Fair Value of the machinery on 1st January 2007 is Rs. 3,50,000. The lease agreement requires the Lessee to pay an amount of Rs. 1,50,000 per year beginning 31st December 2007. The lessee has guaranteed a Residual Value of Rs. 11,400 on 31st December 2009 to the Lessor. The Lessor however estimates that the machinery will have a salvage value of only Rs. 10,000 on 31st December 2009. The Implicit Rate of Interest is 15% p.a. Computer the value of machinery to be recognized by the Lessee and also the Finance Charges every year on the basis of AS-19. PV Factor of 15% in three years is 2.283.

21. Atri Ltd. Has taken a Machinery costing Rs. 150 lakhs on lease for 8 years, the effective life of the plant 20 years. Annual Lease Rental payable are Rs. 18 lakhs each. If implicit rate of interest is 14%, how should the lease be accounted for in the books of Atri Ltd?

22. You are given the following information in respect of a Manufacturer Lessor. Explain how will you treat this under AS-19. (a) Fair Value of the asset at the inception of lease= Rs. 5,60,000, (b) Present Value of MLP accruing to the Lessor, discounted at commercial rate of interest= Rs. 5,00,000, (c) Cost of Leased Asset at the commencement of lease= Rs. 4,16,000, (d) Present Value of URV = Rs. 12,000, (e) Initial Direct Costs (Sales Commission) = Rs. 18,000, (f) Gross Investment in the Lease= Rs. 5,96,000, (g) Lease Term = 36 months.



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23. Vashishta Ltd. sold a machinery to Viswamitra Ltd. on 31st December and simultaneously lease back the asset for 4 years. The Sale Price was Rs. 8 lakhs whereas the Fair Value is Rs. 6 lakhs. The estimated remaining useful life of the machinery is 10 years. The Carrying Amount of the asset on that was Rs 7.50 lakhs. Explain the accounting treatment.

24. Lessee Ltd. has an asset of Rs. 1 lakh, which it depreciates at 10% on SLM method. At the end of the 5th year, it sells the asset at Rs. 60,000 (Fair Value) and leases it back for the remaining useful life of 5 years. Lessee Ltd. agrees to pay at the end of each of the 5 years a lease rental of Rs. 15,000 and guarantees a residual value of Rs. 6,000 at the end of the lease term. Lessees incremental borrowing rate is 10%. The PV of Re. 1 at 10% at the end of 5th year is 0.62 and annuity is 3.79. Advice on accounting in the books of both the Lessor and Lessee Ltd.

25. Due to liquidity crisis,Unique Ltd. sold and leased back the same vehicles from leasing Companies. In the Notes to Accounts, Unique Ltd. stated Vehicles were taken on Lease repayable in 46 installments of Rs. 26,650 each. Comment.

26. Lessee Ltd. took a machine on lease from Lessor Ltd., the fair value being Rs.7,00,000. The economic life of the machine as well as the lease term is 3 years. At the end of each year Lessee Ltd. pays Rs.3,00,000. Guaranteed Residual Value (GRV) is Rs.22,000 on expiry of the lease. Implicit Rate of Return (IRR) is 15% p.a. and present value factors at 15% are 0.869, and 0.657 at the end of first, second and third years respectively. Calculate the value of machine to be considered by Lessee Ltd. and the interest (Finance charges) in each year.

27. Suraj Limited wishes to obtain a machine costing Rs.30 lakhs by way of lease. The effective life of the machine is 14 years, but the company requires it only for the first 5 years. It enters into an agreement with Ashok Ltd., for a lease rental for Rs.3 lakhs p.a. payable in arrears and the implicit rate of interest is 15%. The chief accountant of Suraj Limited is not sure about the treatment of these lease rental and seeks your advise. Q. No. Answer Hints

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AS-20: EARNINGS PER SHARE


1. ABC Ltd. has 10,000 equity shares outstanding on 1-1-04. Find out the weighted average number of equity hares for the year 2004, for the purpose of calculation of Basic EPS in each of the following cases:

a. The company issued 2,000 equity shares for cash on 1-1-04. b. The company issued 2,000 equity shares for cash on 1-4-04. c. The company issued 2,000 equity shares for cash on 1-10-04. d. The company issued 2,000 equity shares for cash,50% paid up, on 1-10-04. e. The company issued 2,000 equity shares as Bonus shares on 1-4-04. f. The company issued 2,000 equity shares for cash on 1-7-04 and 3,000 Bonus shares on 1-10-

04. 2. Find out the Basic ESP for the year 2004 from the following particulars:

Shares outstanding on 1-1-04 5,00,000 Issue of shares for cash on 1-7-04, fully paid up 7,00,000 Bonus shares on 1-4-04 in the ratio 1:2 Profit for the year Rs. 15,00,000

3. PQR Ltd. has 5,00,000 shares outstanding in the beginning of the year. The fair value of the share

was Rs. 45. It issued Right shares in the ratio of 2:5 @ Rs. 36 per shares midway during the year. Find out the basic EPS for the year given that the company earned a net profit of Rs.25,00,000 for the year.

4. RST Ltd. has 100,000 equity shares outstanding in the beginning of the year. After 3 months, it issued Right shares in the ratio of 1:5 @ Rs. 20 per share. The fair value of shares before Right issue was Rs. 30 per share. Net profit for the current year is RS. 18,00,000 and for the previous year was Rs. 14,00,000. Find out the basic EPS for the current year and restate Basic EPS for the previous year.

5. Calculate Basic EPS for the year from the following information: No. Of Equity Share capital in the beginning 6,00,000 12% Preference share capital in the beginning 15,00,000 10% Debentures 20,00,000 Fresh Issue of shares at the end of 3rd month 1,20,000 Profit for the year (after Tax) 21,00,000

6. Calculate Basic EPS from the following:

Net Profit before tax for the year Rs.15,00,000 Number of shares outstanding on Jan.1 1,00,000 10% Preference Share Capital 5,00,000 Issue of Bonus Shares to equity Shareholders on (Oct.1 ) 50,000 Fresh issue of equity shares fully paid on Nov.1 60,000 Buy-back of Equity shares on Dec.1 (Number) 12,000 Tax rate 30% Note: Calendar year has been adopted as financial year by the company.

7. Classic Toys Ltd. has given option to its employees to subscribe 1,00,000 equity Shares @ RS.15

within a period of one year. At present, the fair value of the share is Rs.25. The company has 5,00,000 Equity Shares outstanding and the net profit for the current year is Rs.16,00,000. Find out the basic EPS and the Diluted EPS for the year.



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8. FOREX Ltd. provides the following information for the year:

No. Of shares outstanding 5,00,000 Net Profit for the year (after tax) 11,00,000 The company had 1,00,000 15% Debentures of Rs. 100 each. These debentures are compulsorily convertible into 4 equity shares per debenture. Find out the Basic EPS and Diluted EPS given that the tax rate is 35%.

9. XYZ Ltd. has 10,00,000 Equity Shares outstanding and the net profit attributable to these shares is

Rs. 35,00,000. The average fair value of the share during the year is Rs. 75. The company had issued the following potential equity shares:

a. 1,00,000 10% Preference shares of Rs. 100 each to be converted into 2 Equity shares. b. Options to subscribe 2,50,000 Equity shares at Rs.60 each c. 2,00,000 12% Convertible Debentures of Rs.100 each to be converted into 3 shares.

Find out the Basic EPS and Diluted EPS given that the Corporate Dividend Tax is 10% and the income tax application to the company is 30%.

10. From the Books of PPA Ltd.., following information are available as on 1,4,2001 and 1,4,2002:

1. Equity shares of Rs.10 each outstanding 1,00,000 2. Partly paid Equity shares of Rs.10 each Rs.5 paid 1,00,000 3. Options outstanding at an exercise price of Rs.60 or one equity share Rs.10 each. Average fair value of Equity share during both years Rs.75. 10,000 4. 10% convertible preference shares of Rs.100 each Conversion ratio 2 Equity shares for each preference share 80,000 5. 12% convertible debentures of Rs.100 conversion ratio 4 equity share For each debenture 10,000 6. 10% dividend tax is payable the years ending 31.3.2003 and years ending 31.3.2002 . 7. On 1.10.2002 the party paid shares were fully paid up. 8. On 1.1.2003 the company issued 1 bonus share held on that date. Net profit attributable to the equity shareholders for the year ending 31/3/2003 and 31/3/2002 were Rs. 10,00,000. Calculate: a. Earnings per share years 31.3.2003 and 31.3.2002. b. Diluted earnings per share years ending 31/3/2003 and 31/3/2002. c. Adjusted earnings per share and diluted EPS for the year ending 31/3/2002, assuming the

same information for previous year, also assume that partly paid shares are eligible for proportionate dividend only.

11. Compute EPS from the given information relating to equity shares of PPA Ltd.. and PPF Ltd. Two

companies amalgamated w.e.f. 1.10.2003. PPA Ltd.. issued the required no. Of shares on the basic of the agreed valuation.

PPA Ltd PPF Ltd No. Of Outstanding equity Shares As On 1.4.2003(No. In Lakhs) 500 200 Agreed value per share for acquisition 120 30 Date of acquisition 1.10.2003 Profit after tax (Rs. In lakhs) of which 1200 350 Profit after tax of PPF Ltd. during 1.10.2003-31.3.2004(Rs. In lakhs) 200

12. A.S. Ltd. supplied the following information. you are required to compute the basic earnings per

share: (Accounting year 1.1.2005-31-12-2005)



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Net Profit : Year 2005: Rs.20, 00,000 : Year 2006: Rs.30, 00,000 No. Of shares outstanding prior to right issue : 10, 00,000 shares Right Issue : One new share for each 4 outstanding i.e., : 2,00,000 shares. Right Issue Price- Rs.20 : last date of exercise rights 31.3.2006. Fair rate of one Equity share immediately prior To exercise of rights on 31.3.2006 : Rs.25

13. Given below is the capital structure of S Ltd. as on 31st arch, 2004.

Particulars (Rs. In thousands) Equity shares capital (Shares of Rs.10 each) 40,000 Share premium 30,000 General reserve 40,000 Revaluation reserve 40,000 14% fully convertible debentures 40,000 14% convertible debentures are of Rs.100 each and as per agreement those debentures will be converted into 5 equity shares (for each debenture). The company earned profit after tax amounting (‘000’) Rs.20,000 during 2003-2004. You are required to calculate EPS of the company as well as the fully diluted EPS.

14. Net Profit for the current year Rs.1,00,00,000

No. Of equity shares outstanding 50,00,000 Interest expenses for the current year 12,00,000 Rate of income tax 30% No. Of 12% debentures of Rs.100 each 1,00,000 Each debentures is convertible into 10 equity shares Calculate Basic EPS and Diluted EPS.

15. On 01.01.2004 Induga Ltd. has 5, 00,000 shares outstanding on 01.03.2004. It issued one new

share for each five shares outstanding at Rs.15 Fair value of one equity share immediately before the right issue was Rs.21. Net profit for the year 2003 was Rs.11, 00,000 and for 2004 Rs.15, 00,000. Calculate the basic EPS for 2004 and restated EPS for 2003.

16. The Net profit Before Tax of Unique Ltd. was Rs. 100 lakhs and the income Tax Rate was 37%. The Company’s Preference Share Capital has the following classes-

12% Non Cumulative Preference Share Capital Rs.100 lakhs 10% Cumulative Preference Share Capital Rs. 150 lakhs In its accounts, Unique Ltd. has provided/paid following dividends on Preference Capital: On Non Cumulative Preference Shares- fully provided for the current year. On Cumulative Preference Shares- fully provided for the past three years. The Company also provided for Dividend Distribution Tax at 12.75% and transferred Rs.5 lakhs to General Reserve. You are required to calculate the Net Profit for the period. attributable to Equity Shareholders.

17. A.S. Ltd. has the following different classes of Equity Shares of Rs.10 each, outstanding as at 31st

march, having disproportionate rights with respect to voting and dividends- Number of Shares Right as to Share in Net profit to the extent of

capital 100,000”A” Class Equity Shares Proportionate to Capital 30,000”B” Class Equity Shares In the proportionate of 3:2 with respect to “A”

Class Shares



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30,000”C” Class Equity Shares In the proportionate of 5:2 with respect to “A” Class Shares

40,000”D” Class Equity Shares In the proportionate of 3:1 with respect to “A” Class Shares

Profit for the year ended 31st March was Rs.8,00,000 The company believes that Net Profit is to be allocated to the Shares in the ratio 2:3:5:6 as derived from their rights to Share Net Profit. The company has calculated the basic EPS in the following manner. You are required to confirm whether this calculation is correct.

Class Apportionment of Net Profit No. of Shares Basic EPS

Class A Class B Class C Class D

Rs.8,00,000*2/16=Rs.1,00,000 Rs.8,00,000*3/16=Rs.1,50,000 Rs.8,00,000*5/16=Rs.2,50,000 Rs.8,00,000*6/16=Rs.3,00,000

1,00,000 30,000 30,000 40,000

Rs.1.00 Rs.5.00 Rs.8.33 Rs.7.50

18. A.S. Ltd. follows the calendar year for reporting purposes. During a year, it issued Rs.80 lakhs Equity

Shares at per on 15th September. It had also bought back Rs. 20 lakhs Equity Capital (at par) on 1st December. The Equity Capital was Rs.150 lakhs at the end of the year. Calculated the Weighted Average Number of Equity Shares outstanding during the period, if the price of each share is Rs.100. also calculate basic EPS if the Net Profit attributable to Equity Shareholders is Rs.10 lakhs.

19. Calculated Basic EPS for financial year ending 31st March from the following data:

1st April 1st June 1st July 1st Nov

Equity Shares outstanding –Face value Rs.100 fully paid(opening Balance) Issue of shares- Face value Rs.100, paid up amount Rs.70 Buy-back of shares(fully paid) Issue of Shares-Face Value Rs.100 fully paid Net Profit before Tax for the year (Tax Rate=35%) Preference Dividend (Dividend Distribution Tax=12.5%)

10,000 10,000 4,000 6,000 Rs.12 lakhs Rs. 5 lakhs

20. At the beginning of a financial year, a company issued 1,20,000 Equity Shares of Rs.100 each,

Rs.50 per share was called up on that date which was paid by all Shareholders. The remaining Rs. 50 was called up on 1st September. All Shareholders paid the sum in September, except one Shareholder having 24,000 shares. The Net Profit for the relevant financial year is Rs.2,64,000 after dividend on Preference Shares and dividend Distribution Tax of Rs.64,000. Compute basic EPS for the year as per AS-20.

21. Would completely vested options to purchase Shares of a Company be included in the computation of Basic EPS?

A.S. Ltd. has formulated a scheme for Employee Stock Options for its employees. During the year ended December 21,2002, the Company has granted options to purchase 36,000 Shares to its employees, out of which, option to purchase 15,000 Shares have vested by December 31, 2002. However, no options have been exercised by December 31,2002. Would these 15,000 Shares that have vested, be included in the computation of Basic EPS for the year ended December 31,2002?

22. During the year ended March 31,2008, Unique Ltd. makes a public issue of 100,000 Equity Shares

of Rs.10 each. The Issue was fully subscribed and the calls were made as-



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• Rs.5 on application and allotment made on July 1,2007 • Rs.2 on first call made on September 30,2007 • Rs.3 on second and final call made on January 1,2008

Partly paid shares are entitled to particular in the dividend to the extent of amount paid. The company had 5,00,000 shares outstanding at the year and, apart from the public issue of shares made above, there were no other additions to or reductions from Share Capital. Calculate the Weighted Average Number of Equity Shares for computation of Basic EPS.

23. A.S. Ltd. issued 8,00,000 Equity Shares of Rs. 100 each on 15th July. During the reporting period

(calendar year), the company purchased an asset on 1st September for Rs.25 lakhs and issued 1,00,000 Equity Shares treated as Rs.25 paid up. At the beginning of the year(1st January), A.S.’s Equity Capital was 5 lakhs shares of Rs.100 each. Calculate Weighted Average Number of Equity Share & Basic EPs Net Profit for the period for the period is Rs.37.50 lakhs.

24. A.S. Ltd. provides the following information. Compute Basic EPS as per AS-20. Number of Equity Shares outstanding as at beginning of the period =5,00,000. Bonus Issue on 1st July of current year=3 Shares for every 1 share held. Net Profit for current year and previous reporting period= Rs.160 lakhs and Rs.50 lakhs.

25. As on 31-3-2007, the Equity share Capital of Unique Ltd. is Rs.10 Crores divided into Shares of Rs.

10 each. During financial year 2007-08, it has issued Bonus Shares in the ratio of 1:1. The Net Profit after Tax for the years 31-3-2007 and 31-3-2008 are Rs.8.50 and Rs.5.75 respectively. Comment on the above.

26. During the current year, Unique Ltd. issued one new Equity Share (by way of rights Issue) for each two shares held in the company. The number of Equity Shares outstanding prior to Rights Issue was 4,00,000. The last date for exercise of rights offers was 1st May. The Rights Issue Price was Rs.18 per Share whereas the Fair Value on the last date of exercise of Rights was Rs.20 per Share. Compute the Basic EPS under AS-20 if the Net Profits for the current year and previous year were Rs.8,07,000 and Rs.5,17,500 respectively. Assume that the Company follows the calendar year for reporting purposes.

27. In a reporting period (calendar year), Unique Ltd. , a listed Company, announced a scheme to buyback a maximum of 5% of its Equity Shares (of Rs.10 each) at a price of Rs.25 per Share. The market price of the Shares immediately prior to the buyback is Rs.22. The following

additional information is given. Compute the basic EPS.

Particulars This Year Last Year

Net Profit Numbers of Shares on January 1 Brought-back and cancelled on September 30 Number of Shares at December 31

Rs.8,00,000 1,00,000 (4,000) 96,000

Rs.6,00,000 1,00,000 1,00,000

28. Compute Diluted Earnings Per Share with the following information of Unique Ltd. Net Profit for the

period attributable to Equity Shareholders=Rs.50 lakhs. Number of Equity Shares outstanding= 10 lakhs. Number of 12% Convertible Preference Shares of Rs.100 each =50,000 (each Preferences share is convertible into 8 Equity Shares). Corporate Income-Tax Rate is 30% while Dividend Distribution Tax Rate is 12.5%.



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29. Compute the Diluted Earnings Per share with the following information of Unique Ltd. Net Profit (after Tax expenses) for the period =Rs.50 lakhs. Number of Equity Shares outstanding =10 lakhs Number of 15% Convertible debentures of Rs.100 each=50,000 (Each Debenture is convertible into 5 Equity Shares). Corporate Tax Rate=30%.

30. A.S. Ltd. has Equity Capital of Rs.40,00,000 consisting of fully paid Equity shares of Rs.10 each .

The Net Profit for the year ended 2004-2005 was Rs.60,00,000. It has also issued 36,000, 10% Convertible Debentures of Rs.50 Each. Each Debenture is convertible into five Equity Shares. Tax rate applicable is 30% Compute diluted EPS.

31. Calculate Basic and Diluted EPS of Marthanda Ltd., if- Equity Shares (Rs.10 each) as at the beginning of the financial year-50,00,000 Shares, Net Profit for the year- Rs.2,00,00,000, Issue of Shares for cash on 1st July -10,00,000 Shares (Rs. 10 each) Issue of Bonus Shares on 1st Oct=1:5 as at the beginning of year, i.e. 10,00,000 Shares, Convertible Debentures outstanding at beginning of the year=10% Debentures for Rs.1,00,000. Company’s Tax Rate is 40%.

32. From the following information of Beta Ltd. calculate Earnings per share (EPS) in accordance with AS-20: (Rs.) Year Year 31.3.08 31.3.07 1. Net Profit before tax 3,00,000 1,00,000 2. Current tax 40,000 30,000 Tax relating to earlier years 24,000 (13,000) Deferred tax 30,000 10,000 3. Profit after tax ------------------------------- 2,06,000 73,000 -------------------------------- 4. Other information:

a. Profit include compensation from Central Government towards loss on account of earthquake in 2005 (non-taxable) 1,00,000 NILL

b. Outstanding convertible 6% Preference shares 1,000 issued and paid on 30.9.2006. Face value Rs.100, Conversion ratio 15 equity shares for every preference share.

c. 15% convertible debentures of Rs.1,000 each total face value Rs.1,00,000 to be converted into 10 Equity shares per debenture issued and paid on 30,6,2006.

d. Total no. Of equity shares outstanding as on 31.3.2008, 20,000 including 10,000 bonus shares issued on 1.1.08, face value Rs.100.

33. Should appropriation to mandatory reserves be excluded from net profit attributable to equity shareholders?

Kashyap Ltd. is engaged in manufacturing industrial packaging equipment. As per the terms of an agreement entered into with its debentureholders, the company is required to appropriate adequate portion of its profits to a specific reserve over the period of maturity of the debentures such that, at the redemption date, the Reserve constitutes at least half the value of such debentures. As such, appropriations are not available for distribution to the equity shareholders. Kashyap Ltd. has excluded this from the numerator in the computation of basic EPS. Is this treatment correct?

34. A Ltd. had 6,00,000 equity shares on April 1,2007. The company earned a profit of Rs.15,00,000

during the year 2007-08. The average fair value per share during 2007-08 was Rs.25. The company



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has given share option to its employees of 1,00,000 equity shares at option price of Rs.15. Calculate basic EPS and diluted EPS. Q. No. Answer Hints

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AS-26: INTANGIBLE ASSETS

Objective – To give for valuation and accounting of intangible assets


Q. 1 – Your accountant Mr. Hari is confused between fictitious assets and intangible assets. Explain.

Ans – Provision of AS 26: Intangible asset is an asset which has no physical existence but which can

generate revenue for business for e.g. Patent Rights.

Fictitious Assets also not having any physical existence but these can not generate any future

revenue for e.g. preliminary expense.

Q. 2 – Mr. Anil wish to show Goodwill in his Balance Sheet. Comment.

Ans – provision of AS26 – The goodwill is of two types

a) Self generated goodwill – It cannot be recorded in the books. b) Purchased goodwill – It is amount paid to organization which is acquired against their reputation.

Generally it is extra purchase consideration paid as compare to net assets taken. It can be recorded in books at actual amount paid.

Q. 3 – Mr. Akshay made R and D and created a new product and got its patent rights. At what amount

can it be recorded?

Ans – Provision of AS26 – such kind of intangible asset is called as self generated intangible asset and it

should be recorded at expense paid up to receipt of patent right.

Application of AS 26 – Akshay should calculate all R and D as well as registration expense at which

assets should be recorded.

Q. 4 – Can the intangible asset be impaired? Or Mr. Sunil has recorded patent rights of Rs. 50 lakhs

but its recoverable amount is now only 48 lakhs. Comment.

Ans – Provision of AS26 – If book value of intangible asset is more than recoverable amount then it is an

impairment of asset and it should be reduced.

Application of AS26 – Here book value is 50 lakhs while recoverable amount is only 48 lakhs. Thus

there is impairment if patent rights by Rs. 2 lakhs.

Journal Entry

Revaluation Reserve / P&L A/c ................ Dr. 200,000

To Patent Rights 200,000



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1. A patent was purchased for a total payments of Rs. 40 lacs as per deferred credit term as explained

below. The normal deferred credit allowed by the seller is a 20% down payment 25% and balance in five equal annual installments. The normal deferred credit allowed by the company does not include any interest, whereas in the special credit period it has charged 6% interest p.a. Advise the cost of Intangible asset.

2. An enterprise is developing a new material handling system. Given below cost incurred at different points of time:

Year Phase Expenditure Incurred

(Rs.in lacs) 1998 1999 2000 2001 2002 2003

Research Research Research Development Development Development

5 6 4 15 18 20

As on 31st March 2003 the enterprise has identified the level of cost savings (Rs. 8 lacs p.a.) expected to be achieved by the new system over a period of next five years. In addition, the enterprise has an intention to carry out consultancy in the application of the new system from which it can earn a net cash flow of Rs. 5 lacs p.a.

Year Cost saving

(Rs. In lacs) Consultancy (Rs. In lacs)

Total cash (Rs. In lacs)

Discount factor @ 18% p.a.

Discounted cash flow (Rs. In lacs)

2004 2005 2006 2007 2008 Value in Use

8 8 8 8 8

5 5 5 5 5

13 13 13 13 13

0.8475 0.7182 0.6086 0.5158 0.4371

11.02 9.34 7.91 6.71 5.68 40.65

Assuming no active market exists to determine selling price, advise the cost at which IA will be initially recognized, and the amount to be expensed.

3. An enterprise acquired a patent right for Rs. 100 lacs. The product life cycle has been initially estimated to be 5 years. The estimated cash flow over the useful life of patent are (Rs. In lacs) Year 1 : 150; Year-2: 150, Year-3 : 150, Year-4 : 100, Year-5 : 100. Initially a five year amortization period has been decided and amortization was decided in the ratio of estimated further cash flow. The amortization is decided as follows: Year Net Operating Cash Flow

(Rs. In lacs) Amortised Amount (Rs. In lacs)

1 2 3 4 5 Total

150 150 150 100 100 650

23.08 23.08 23.08 15.38 15.38 100.00



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After third year, it was ascertained that the patent will continue to maintain the market shares for another six years but the estimated cash flow after fifth year is expected to be Rs. 75 lacs. What would be the change in amortization?

4. a. ABC Ltd., had purchased on 1st April 2003, net assets of YES & NO Ltd. for Rs. 4,80,000/-. Net

asset value was Rs. 3,80,000/-, resulting in a goodwill of Rs. 1 lac. b. The company also purchased a franchising permit for Rs. 120,000 at an annual fee of 1% of

revenues. The franchise expires after 5 years. Revenues were Rs. 200,000 during 2002-03. The Company estimates that the future revenues would be Rs. 4 lac, Rs. 3 lacs, Rs. 2 lacs and Rs. 1 lacs in the coming four years.

c. During the year, the company also obtained a patent for Rs. 29,000 and legal costs of Rs. 71,000 to register the patent and an additional Rs. 35,000 to successfully prosecute a patent infringement suit against a competitor. Patent’s economic life is estimated to be 11 years.

The accounting policy of ABC is to amortise all intangibles on straight line basis over the maximum period permitted by generally accepted accounting principles, taking a full year’s amortization in the year of acquisition. Required : Provide the accounting treatment for the intangible assets emerging from these transactions.

5. As an Auditor, state your opinion on the following situation : Note No. 6 of Published Accounts of Kambakadi Ltd. reads as follows : “The Company being a manufacturer of pollution control equipments entered into collaboration agreements with foreign manufacturers for technical know-how comprising the supply of drawings and designs and training of personnel for manufacture of different types of pollution control equipments. These agreements were concluded after the commencement of production at the beginning of the year. The collaboration amount of Rs. 100 lakhs is payable in five annual installments. The Company has amortised the entire cost of technical know-how as a depreciable asset and has shown the same in the schedule of fixed assets.”

6. The company spent Rs. 50,00,000 on a new project to develop a drug to treat AIDS. It is expected that it will take at least 3 years to establish whether the drug is likely to be effective. The company wants to capitalize the expenditure.

7. The company in the past 3 years Rs. 50,00,000 on a new project to develop a drug to treat AIDS which was charged to the P & L account since they did not meet AS-26 criteria for capitalization. In the current year, FDA approval was received. The company wants to now capitalize Rs. 50,00,000 and agrees to disclose it as a prior period item.

8. A pharma company spent Rs. 33 lakhs during the year to develop a drug on AIDS. It will take four years to establish whether the drug will be successful. The company wants to treat the expenditure as deferred revenue expenditure.

9. Whether marketing and franchisee rights are intangible assets?

10. Whether right of ‘use of land’ is an intangible asset?

11. Whether internally generated brand is an intangible asset?

12. During 2003, an enterprise incurred costs to develop and produce a routine, low risk computer

software product, as follows :



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Amount/Rs Completion of detailed programme and design Coding and testing Other coding costs Testing costs Product masters for training materials Duplication of computer software and training materials, from product masters (2000 units) Packing the product (1000 units)

25,000 20,000 42,000 12,000 13,000 40,000 11,000

a. What should be capitalized as software costs in the books of the company, on B/S. date? b. Should there be a stock of inventory, what is its valuation?

13. State, how you will deal with the following matters in the accounts of U Ltd. For the year ended 31st March, 2003 with reference to Accounting Standards : a. The company had spent Rs. 45 lakhs for publicity and research expenses on one of its new

consumer product, which was marketed in the accounting year 2002-2003, but proved to be a failure.

14. What components of cost should be included, or excluded in recognizing internally generated

intangible assets?

15. Vishnu Ltd. Is engaged in research on a new process design for its product. It had incurred an expenditure of Rs. 265.37 lakhs on research upto 31st March,2003. The development of the process began on 1st April,2003 and the Development Phase Expenditure was Rs. 180 lakhs upto 31st March,2004.Form 1st April,2004 the Company will implement the new process design which will result in a after-tax cost saving of Rs.40 lakhs per annum for the next five years. The Company’s Cost of Capital is 10% At what cost should the asset be recorded and what is its amortization amount?

16. AS Ltd. Entered into collaboration agreement with a US based Company to acquire Know-how for both manufacturing process and design, drawings of the Factory at a total cost of Rs. 10 crores. 75% of the Know-how Cost was for design and drawings. AS Ltd. Capitalized the cost of drawings, etc., with Factory Building and cost for manufacturing process with the cost of Machinery. Comment.

17. A Ltd. Paid Rs.250 lakhs as consideration to acquire the Net assets of S Ltd. As on the date of amalgamation, the consideration is allocated as- (a) Fair Values of the Net assets acquired by PPA Ltd. Is Rs.200 lakhs, (b) Exclusive licence held by S Ltd. for production of a specialized product is Rs. 50 lakhs. Explain the treatment for the consideration of Rs. 50 lakhs for the Intangible Asset in the situations given below-

a. Where there is an active market and a similar licence is available at a cost of Rs. 50 lakhs (Current Bid Price).

b. Where there is an active market and a similar licence is available at a cost of Rs. 40 lakhs (Current Bid Price).

c. Where there is an active market and a similar licence is available at a cost of Rs. 75 lakhs (Current Bid Price).

d. Where there is no active market but this licence can be purchased in a arm’s length transaction for Rs. 50 lakhs.

e. Where there is no active market but this licence can be purchased in a arm’s length transaction for Rs. 40 lakhs.



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f. Where the company cannot measure the Fair value of the licence by the market values or other techniques.

18. Due to the contribution of AS Ltd. To the Society, the State Government has given a product licence

at a normal consideration of Rs. 40 lakhs as expenditure in registration and initial operation of the licence. At what price should the licence be recorded?

19. As Ltd. Incurred an expenditure of Rs.25 lakhs during the year on research relating to improvement in the design of its products. The research is likely to substantially enhance the Company’s revenue in the coming years. The Company wants to defer the entire expenditure. Comment.

20. On a review of Financial Statement, it is noticed that Research and Development cost of Rs. 15 lakhs which was charged to Profit and Loss Account a few years before is written back to Profit & Loss Account of the current year. Advice.

21. AS Ltd. Has filed a petition in the High Court for adjustment of Product Development Expenses of Rs. 50 Crores, against the balance in Securities Premium Account. While finalizing the account, the Directors carried out the said adjustment since they were certain that the High Court approval would be received. The said petition has not come up for hearing till the date of signing of the account by the Auditor. How will you as an Auditor react to the above?

22. AS Ltd. Has spent a substantial amount on purchase of Goodwill, Trademarks and Copyrights of which 95% of the amount had been spent on the purchase of Trademarks and Copyrights. Schedule XIV of the Companies Act, 1995 does not give any rate of depreciation for these assets. The company is not willing to amortise these Intangible Asset in the financial records on the contention that these are permanent in nature and do not require any amortization. Comment.

23. An Intangible Asset appears in Balance Sheet of AS Ltd. At Rs. 16 lakhs as on 31st March 2007. The asset was acquired for Rs. 40 lakhs in April 1994. The Company has been amortising the asset value as on Straight Line basis. The policy is to amortise for 20 years. Do you advise the Company to amortise the entire asset value in the books of the Company as on 31st March 2007?

24. During the current year, AS Ltd. Incurred Rs. 12 lakhs as Direct Costs in developing the Patents having working life of fifteen years. The Accountant of the Company wants to write-off these costs over the period of fifteen years. Another view is to write of over their legally valid period, which is twelve years. Decide as per AS-26.

25. A company has deferred Development cost of Rs. 150 lakhs. Sales expected in the subsequent years are as under- Year I II III IV

Sales (Rs. In lakhs) 400 300 200 100

Suggest how Development Cost should be charged to Profit & Loss Account. Also, if at the end of the III year, it is felt that no further benefit will accrue in the IV year, how the unamortized expenditure would be dealt with in the account of the Company?

26. In the past year, AS Ltd. Had spent and carried forward in the books a total of Rs. 5,00,000 on developing a cure for cancer. During the current year, it is decided to terminate this product as test results in the current year have proved adverse. Comment on the accounting treatment.



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27. AS Ltd. Acquired Patents on 1st April 1985 for Rs.25 lakhs and has not amortised the same AS-26 is applicable to the Company for 1st April 2003 on which date the Patents appeared in the Balance Sheet at Rs. 25 lakhs. Give the accounting treatment.

28. As Ltd. Acquired a Trademark on 1st April 2000 for Rs. 15 lakhs and has not amortised the same. AS-26 is applicable to the Company from 1st April 2003. Give the accounting treatment for the above.

29. An Enterprise has incurred expenses for purchase Technical Know-how for manufacturing a Moped. The Enterprise has paid Rs.5 crores for the use of Know-how for a period of 4 years. The Enterprise estimates the production of mopeds as follows: Year No. of Mopeds

1. 25,000 2. 50,000 3. 75,000 4. 1,00,000

On going into production, at the end of the 1st year it achieved its targeted production, but considered to revise the estimates for the next 3 years as follows: Year No. of Mopeds

1. 35,000 2. 65,000 3. 80,000

a. How will the Enterprise amortise the Technical Know-how Free as per AS-26. b. Whether this amortization should be directly charged as an expense or should form part of

Production Cost of the Mopeds.

30. As a Company Auditor how would you react to the following situations? Rs. 5 lakhs paid by a pharma company to the legal advisor defending the patent of a product treated as Capital Expenditure.

31. Explain in brief as to how you will deal with the following as the auditor of the company with the turnover of about Rs.100 crores and annual advertising budget of Rs.50 lakhs has taken up the marketing of a new product. It is estimated that the company will have a turnover of about Rs.10 Crores from the new product. The company has debited to its profit and loss account the total expenditure of Rs. 50 lakhs incurred on extensive special initial advertisement campaign for the said product.

32. Himalayas Ltd. Is showing an intangible Asset at Rs.72 lakhs as on 01.04.2007 and that item was required for Rs. 96 lakhs on 01.04.2004 and that item was available for use from that date. Himalayas Ltd. Has been following the policy of amortizing of the intangible asset over a period of 12 years on straight line basis. Comment on the accounting treatment of the above with reference to relevant accounting Standard.

33. U.K. International Ltd. Is developing a new production process. During the financial year ending 31st March,2007, the total expenditure incurred was Rs.50 lakhs. This process met the criteria for recognition as an intangible asset on 1st December,2006. Expenditure incurred till this date was Rs.22 lakhs. Further expenditure incurred on the process for the financial year ending 31st March,2008 was Rs.80 lakhs. As at 31st March,2008, the recoverable amount of Know-how embodied in the process is estimated to be Rs. 72 lakhs. This includes estimates of future cash outflows as well as inflows. You are required to calculate:



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a. Amount to be charged to Profit and Loss A/c for the year ending 31st March,2007 and carrying value of intangible as on that date.

b. Amount to be charged to Profit and Loss A/c and carrying value of intangible as on 31st March,2008. Ignore depreciation.

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AS-29: PROVISIONS, CONTINGENT LIABLITIES AND CONTINGENT ASSETS

Objective – Giving the guidelines for accounting of Contingent assets & liabilities.


Q. 1 – Mr. Ajay made a provision against legal case on is company. Comment. Ans – Provision of AS4, AS29. Any liability like above court case, which depends on future uncertain event,

is called as contingent liability and it is to be treated as follows a) Remote Liabilities – Ignore b) Probable Liabilities – Disclosure as footnote. c) Possible contingent liabilities – Create the provision.

Mr. Ajay should consider the status of contingent liability and then take further steps. Q. 2 – Ms. Geeta purchased lottery ticket, price Rs. 50 Cr. Can she record this income receivable? Ans – provision of AS4 and AS29 – Such uncertain future income is called as contingent asset and it must

not be recorded in books unless it become certain i.e. she (Geeta) has won lottery and it is confirmed by authority.


1. A Company has at its financial year ended 31st March,2004 fifteen law suits outstanding, none of which has been settled by the time the accounts are approved by the directors. The directors have estimated that the possible out-comes are as below: Result Probability Amount of Loss For first ten cases: Rs. Win 0.6 -- Lose-low damages 0.3 90,000 Lose-high damages 0.1 1,60,000 For remaining five cases: Win 0.5 -- Lose-low damages 0.3 60,000 Lose-high damages 0.2 95,000 The directors believe that the outcome of each case is independent of the outcome of all the others. Estimate the amount of amount of contingent loss and state the accounting treatment of such contingent loss.

2. The sales tax authority ordered an additional demand on the company for under payment of sales tax on the basis of under-invoicing of good. The company contested the case. The lawyer advised the company as on 31-3-2004 that there would be no liability. As on 31-3-2005, the lawyer advised the company that on the basis of latest development in the case, a liability would arise. Advise disclosure.

3. Some companies are notified for air pollution in the vicinity of a historic building. It was certain that legislation will be brought shortly requiring close down of air polluting units. Courts proceeding shows evidence that the Supreme Court will direct such units to close down. Is there any contingency?



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4. A Company operates in an offshore oilfield. It is required to remove the oil rig at the end of production and restore the sea bed as per the licensing agreement. Is there any contingency requiring provisioning?

5. A Company offers product warranty. Past experience shows that the company had to expend 6% of sales value of the last accounting year during the current accounting period to fulfill the warranty obligation. Should the company recognize any provision for warranty against sales of the current accounting year?

6. A company follows a policy of refunding money to the dissatisfied customers if they claim within thirty days from the date of purchase and return the goods. It appears from the past experience that in a month only 0.25% of the customers claim refunds. The company sold goods amounting to Rs.10 lacs during the last month of the financial year. Is there any contingency?

7. Raghav Ltd. Had a major break down in its plant in the month of February. In the month of March it entered into an agreement with an Engineering Firm for the purpose of repairing its plant for a consideration of Rs. 180 lakhs. The Engineering Firm started the repairing work in the month of April and completed it in the same month. Raghav Ltd. Made the Provision for said expenditure on repairs in its books of account for the financial year ended 31st March on the plea that the event of break down leading to repair expenditure had taken place in that financial year, binding contract for repairs was entered into during the same financial year and repair work was also completed before the Financial Statements were approved by the Company’s Board of Directors. Comment.

8. Rajeev Ltd. Was under audit for the year-ended 31st March. An appeal filed by Rajeev Ltd. Against the demand of Excise Duty of Rs.26 crores was pending before the Supreme Court for which neither Provision was made nor was disclosed in the Notes to the financial statements. On 12th July (i.e. subsequent to the Balance Sheet date), the Auditor came to know through paper reports that the point involved in the appeal of Rajeev Ltd. Was adjudicated by the Supreme Court in the case of some other assessee, which is in favour of the Department of Excise Duty. The Auditor insisted that Provisions be made of Rs.26 Crores in the Financial Statement. The Management was of the view that since its own case is still pending, no Provision is called for. It was also of the view that the event does not have any effect on the financial position of the Company on the Balance sheet date. Is the Management’s view correct?

9. AS Ltd. Was involved in wage negotiations with trade unions of their organization as on 31st March 2007. Wage revision proposals could be finalized only after obtaining the final approval from the Head Office of the Company located at Mumbai. The final approval was granted on 9th April 2007 w.e.f. from 1st April 2005. The settlement covered period from 1.4.2005 to 31.3.2008. The liability upto 31st March 2007 was disclosed on account of the above settlement in the Notes forming part of the Accounts. As an Auditors, You may advise whether such disclosure is proper.

10. For Excise Duty on Finished Goods in Stock at the year-end, there is an option Available to provide for the same or to show the same as a Contingent Liability. Comment.

11. A claim for damages of Rs. 10 lakhs for breach of patents and copyrights had been served on AS Ltd. In January. The Directors sought competent legal advice on the eligibility of the claim and were advised that the claim was highly frivolous, without any basis and would not survive even in the first trial court. The Company, however, anticipates a long drawn legal battle and hugs legal costs. The Company’s accounts for the year ended 31st March were considered and approved by the Board of Directors on 15th May. How will you treat the above in the accounts for the year ended 31st March?

12. As on 31st March, there was a claim for damage from of the customers against the Company engaged in selling of accounting software for an alleged failure to provide satisfactory after-sales



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services in relation to the software purchased from it. Before finalization of the accounts for the year ended 31st March (the account were finalized on 14th June), the Company won the case and had no liability Whatsoever in this regard. The Company has made a Provision for this Contingent in its accounts for the years ended 31st March, which, it says, will be reversed in the next year. Comment.

13. Included under sundry creditors was a free payable to the legal counsel for suits filed against the company. The company in not aware of the status of the suits and hence did not want to provide for the same. Advice.

14. VV Ltd. Had announced a voluntary retirement plan for its employees on January 1,2000. The scheme is scheduled to close on June 30,2000. The scheme envisaged on initial lump sum payment of maximum of Rs.2 lakhs and monthly payments over the balance period of service of employees coming under the plan. 200 employees opted for the scheme as on March 31,2000. The total lump sum payment for these employees would be Rs.250 lakhs and the aggregate of future payments to them would amount to Rs. 1,500 lakhs. However no payment had been made to the employees under the scheme upto March 31,2000. Not the company made any provision in its account towards any liability under the scheme.

15. Based upon the legal opinion of a leading advocate, X Ltd. Made a provision of Rs.5 crores towards Income Tax liability whereas the assessing authority had worked out the liability at Rs. 15 crores. It is observed that the opinion of the advocate was inconsistent with legal position with regard to certain revenue items. Advise as auditor.

16. As an Auditor, state your views on the following situation: In the course of audit of manufacturing company, it comes to light that it has outstanding forward contacts for purpose of raw materials at a price, which is higher than the current market price. However, there is no mention of this in the financial statement of the year.

17. As an auditor, comment on the following situations/statements: Ganga-Kaveri Project Ltd. Was incorporated on 1.7.2002. During the year ended 31.3.2003 there was no manufacturing or trading activity except raising of share capital, purchase of land, acquisition of plant and machinery and construction of factory sheds. Therefore the Chief Accountant of the company contends that for the relevant year there was no need to prepare a statement of profit or loss or any other statement expect a Balance sheet as at 31.3.2003.

18. A company gives cash rebate to customers for prompt of bills. At the end year, sales are made in respect of which cash is expected to be recovered in the following month (next financial year), which will entitle the customers to a rebate. At the end of the year is the Company required to make a provision for expected liability on account of cash rebate. The company believes that from a matching concept expenditure on cash rebate should be matched with the sales revenue.

19. Mini Ltd. Took a factory premises on lease on 1.4.07 for Rs.2,00,000 per month. The lease is operating lease. During March, 2008, Mini Ltd. Relocates its operation to a new factory building. The lease on the old factory premises continues to be live upto 31.12.2010. The lease cannot be cancelled and cannot be sub-let to another user. The auditor insists that lease rent of balance 33 months upto 31.12.2010 should be provided in the account for the year ending 31.3.2008. Mini Ltd. Seeks your advice.

20. EXOX Ltd. Is the process of finalizing its accounts for the year ended 31st March, 2008. The company seeks your advice on the following:

a. The Company’s sales tax assessment for assessment years 2005-06 has been completed on 14th February, 2008 with a demand of Rs.2.76 core. The company paid the entire due under protest without prejudice to its right of appeal. The Company files its appeal before the



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appellate authority wherein the grounds of appeal cover tax n additions made in the assessment order for a sum of 2.10 core.

b. The Company has entered into a wage agreement in May,2008 whereby the labour union has accepted a revision in wage from June, 2007. The agreement provided that the hike till May, 2008 will not be paid to the employees but will be settled to them at the time of retirement. The company agrees to deposit the arrears in Government Bonds by September, 2008.

21. X Company has entered into a sale contract of Rs.10,00,000 with B Company during financial year

2006-07. The profit on this transaction is Rs.2,00,000. The delivery of the goods to be taken place during the first month of the financial year 2007-2008. In case of failure of X Company to deliver within the schedule, a compensation of Rs.3,00,000 is to be paid to B Company. X Company planned to manufacturer the goods during the last months of the financial year 2006-2007. As on the Balance Sheet date (i.e., 31-3-2007), goods were not manufactured and it was unlikely that X Company would be in position to meet the contractual obligation.

a. Should X Company provide for the contingency? b. Should X Company measure provision as the excess of compensation to be paid over the

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