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ACCOUNTING STANDARDS BASICS 1
ACCOUNTING STANDARDS BASICS

Accounting Standards – Introduction
(FOR SELF READING)
QUESTION NO 1
What are Accounting Standards?
SOLUTION
Accounting Standards (AS) are written policy documents issued by an Expert Accounting
Body, or by Government, or by other Regulatory Body, covering the following aspects of
accounting transactions in Financial Statements –
1. Recognition of transactions and events in the Financial Statements.

2. Measurement of these transactions and events.
3. Presentation of these transactions and events in Financial Statements, in a meaningful
& understandable manner, &
4. Disclosure requirements in Financial Statements.
QUESTION NO 2
Outline the advantages and disadvantages of Accounting Standards.
SOLUTION
Objectives/Advantages Disadvantages
1. To promote the dissemination of timely and useful 1. In some cases, alternative
financial information to all Stakeholders and solutions to specific
Users. accounting problems may
2. To provide a set of standard accounting policies, have valid supportive
valuation norms and disclosure requirements. arguments. Choice of any
one solution becomes
3. To improve the quality of Financial Reporting,
difficult.
by promoting comparability, consistency and
transparency. 2. Standards may be applied
in a rigid and inflexible
4. To ensure disclosure of accounting principles and
manner, focusing ore on
treatments, where important information is not
form than substance.
otherwise statutorily required to be disclosed.
2 ADVANCED ACCOUNTING
5. To reduce (or eliminate if possible), accounting 3. Standards cannot

alternatives, thereby leading to better inter-Firm override the Statute, and
& Intra-Firm comparison of Financial Statements. should be framed within
6. To reduce scope for creative accounting i.e. the framework of the
twisting of accounting policies to produce Financial Law.
Statements favourable to a particular interest
group.
QUESTION NO 3
Explain the composition of the Accounting Standards Board (ASB) of ICAI.
SOLUTION
The Accounting Standards Board (ASB) was constituted on 21st April 1977 by the ICAI. Its
composition is as under:-
1. Elected Members: (a) Elected members of the Council of the ICAI nominated on
the ASB, (b) Chairman of the Research Committee and the Chairman of the Expert
Advisory Committee of the ICAI, if they are not otherwise members of the ASB.
2. Nominated Members: Central Government’s Nominee on the Council representing –(a)
Department of Company Affairs (DCA) (b) C & AG, and (c) Central Board of Direct
Taxes (CBDT).
3. Professional Institutions: Representative of – (a) Institute of Cost and Works
Accountants of India (ICWAI)and (b) Institute of Company Secretaries of India
(ICSA).
4. Academic Institutions: Representative from – (a) Universities & (b) Indian Institutes
of Management (IIM).
5. Government Representatives: Representative of – (a) Central Board of Excise and
Customs (CBEC), (b) Controller General of Accounts.
6. Institution Representatives: Representative of – (a) Reserve Bank of India (RBI), (b)
Securities and Exchange Board of India (SEBO) and (c) Financial Institutions.
7. Industry Associations: Representative from – (a) Associated Chambers of Commerce
and Industry (ASSOCHAM), (b) Confederation of Indian Industry (CII), and (c)
Federation of Indian Chambers of Commerce and Industry (FICCI).
8. Other Members: (a) Eminent Professionals co-opted by ICAI (either in practice or in
industry, government, education, etc.) and (b) Representative(s) of any other body, as
considered appropriate by the ICAI.
QUESTION NO 4
Outline the Objectives and Functions of the Accounting Standards Board (ASB) of ICAI.
SOLUTION
1. To conceive of and suggest areas in which Accounting Standards need to be developed.

2. To formulate Accounting Standards with a view to assisting the Council of the ICAI in
evolving and establishing Accounting Standards in India.
3. To examine how far the relevant International Accounting Standard/ International
Financial Reporting Standard can be adapted while formulating the Accounting
Standard and to adopt the same.
4. To review, at regular intervals, the Accounting Standards from the point of view of
acceptance or changed conditions, and, if necessary, revise the same.
5. To provide, from time to time, interpretations and guidance on Accounting Standards.
6. To carry out such other functions relating to Accounting Standards.
QUESTION NO 5
What factors are considered by ASB while formulate Accounting Standards?
SOLUTION
Accounting Standards are issued under the authority of the Council of the ICAI. While
formulating the Accounting Standards the ASB will take into consideration the following -
1. International Accounting Standards (IASs) issued by the International Accounting

Standards Committee (predecessor body to IASB) or International Financial Reporting
Standards (IFRSs) issued by the IASB.
2. Applicable Laws in India
3. Customs and Usages in India
4. Business Environment prevailing in India.
QUESTION NO 6
Describe the procedure in the issue of an Accounting Standard in India.

SOLUTION
For formulating accounting Standards, the following procedure is adopted –
Step Procedure
1. Determining Determination of – (a) the broad areas in which Accounting Standards
the need need to be formulated, and (b) the priority in regard to the selection
for AS thereof.
2. Constituting Constituting a Study Group consisting of Members of ICAI and
Study Group others, to consider specific projects and prepare Preliminary Drafts
of proposed Accounting Standards.
3. Drafting The Study Group makes a Draft of the proposed standard containing
the – (a) Objectives and Scope (b) Definitions of terms used, (c)
Standard Recognition and measurement principles, wherever applicable, and (d)
Presentation and disclosure requirements.
4. Analysing • ASB considers the Preliminary Draft prepared by the Study
the Draft Group.
• When any revision is required on the basis of deliberations the
ASB either – (a) makes the same, or (b) refers the same to the
study Group.
5. Circulating ASB circulates the AS Draft to the Council Members of the ICAI
the Draft and the following specified bodies for their comments:-
(a) The Institute of Cost and Works Accountants of India (ICWAI).

(b) The Institute of Company Secretaries of India (ICSI).
(c) Department of Company Affairs (DCA).
(d) Comptroller and Auditor General of India (C&AG).
(e) Central Board of Direct Taxes (CBDT).
(f) Standing Committee/Conference of Public Enterprises (SCOPE).
(g) Reserve Bank of India (RBI).
(h) Indian Banks’ Association (IBA).
(i) Securities and Exchange Board of India (SEBI).
(j) Associated Chambers of Commerce and Industry (ASSOCHAM),
Confederation of Indian Industry (CII) and Federation of Indian
Chambers of Commerce and Industry (FICCI).
(k) Any other body considered relevant by the ASB keeping in view
the nature of the Accounting Standard.
6. Holding (a) ASB holds a meeting with the representatives of Specified Bodies,
Discussion to ascertain their views on the Draft Accounting Standard.
and (b) Based on comments received and discussion with representatives
Finalising of specified bodies, ASB finalises the Exposure Draft of
Exposure proposed Accounting Standard.
Draft.
7. Circulating (a) The Exposure Draft of the Proposed Standard is issued for
the comments by the Members of ICAI and the public.
Exposure (b) The Exposure Draft will also be specifically sent to Specified
Draft. Bodies (as listed above), Stock Exchanges and other interest
groups, as considered appropriate.
8. Finalising Considering the comments received, the ASB finalises the draft of
the the Proposed Standard, and submits the same to the Council of the
Exposure ICAI.
Draft
9. Modifying The Council of the ICAI considers the finalized draft Standard, and
and if necessary, modifies the same in consultation with the ASB, and
issuing the then issues the Accounting Standard (after modification) on the
Accounting relevant subject.
Standard.
QUESTION NO 7
Outline the nature and scope of Accounting Standards in India.
SOLUTION
1. AS are intended to apply only to material items. Material items are those the
knowledge of which will have a significant effect on the decisions of Users of Financial
Statements.
2. AS’s are primarily intended to be broad principles not detailed rules.
3. AS by their nature cannot and do not override the Local Regulations which govern the
preparation and presentation of Financial Statements in the country.
4. If a particular AS is not in conformity with law, the provisions of law will prevail
and the Financial Statements should be prepared in conformity with such law. (In
the Financial Statements, there should be a description of the accounting treatment
made, along with the reason that it has been adopted because of Law/Court/Tribunal
Order description of the difference between the AS and the treatment given by the
Enterprise, and (c) financial impact, if any, arising due to the difference.
5. The prescribed disclosure (by way of appropriate notes explaining the treatment of
particular items) to be made in Financial Statements and the Auditor’s Report, are
intended only as a clarification, and need not be treated as adverse comments on the
Financial Statements.
6. ICAI specifies the date from which a particular standard will come into effect and the
class of enterprises to which it will apply. However, no standard will have retrospective
application, unless otherwise stated.
7. AS will be mandatory from respective date(s) mentioned in the Accounting Standard(s).
The Auditor is responsible for examining compliance with AS in the Financial Statements
and reporting deviations therefrom.
8. Treatment of a Revenue/Expense (or) Receipt/Payment under AS will not influence its
treatment under Tax Laws, governing allowability of expense, treatment of income/
receipt, etc. However, in case of audit u/s 44AB of the Income Tax Act, 1961, all
Financial Statements prepared under Mercantile System of Accounting should comply
with AS.
QUESTION 8
Write a short note on NACAS/NFRA
SOLUTION
National Advisory Committee on Accounting Standard (NACAS) – Under section 210A of
Companies Act, 1956, the Central Government by notification has constituted a committee
to advise the Central Government on the formulation and lying down on accounting policies
and accounting standards for adoption by companies or class of companies specified under
the Act, Based on the recommendations of NACAS, the Central Government has notified
AS-1 to AS-7 and AS-9 to AS-29 in December 2006 in the form of Companies (Accounting
Standards) Rules, 2006.
Under Section 132 of the Companies Act, 2013, National Financial Reporting Authority
(NFRA) has been constituted and Accounting Standards will be notified by the Central
Government in consultation with National Financial Reporting Authority in place of NACAS.
Status of the Accounting Standards issued by the Institute of Chartered Accountants of

India.
Number Title of the Accounting Date from Entity to which

of the Standard which mandatory applicable.
Accounting (accounting periods
Standard commencing on or
(AS) after)
AS-1 Disclosure of 1.4.1993 All
Accounting Policies
AS-2 Valuation of Inventories 1.4.1999 All
AS-3 Cash Flow Statement 1.4.2001 Level-1 and Non- SMC
AS-4 Contingenices and 1.4.1998 All
Events Occurring after
the Balance Sheet Date
AS-5 Net Profit or Loss for 1.4.1996 All
the Period. Prior Period
Items and Changes in
Accounting Policies
AS-6 Depreciation Accounting 1.4.1995 All
AS-7 (Revised) Construction Contracts 1.4.2002 All
AS-8 Withdrawn and included - -
in AS-26
AS-9 Revenue Recognition 1.4.1993 All
AS-10 Accounting for Fixed 1.4.1993 All
Assets
AS-11 (Revised The Effects of Changes 1.4.2003 All
2003) in Foreign Exchange
Rates
AS-12 Accounting for Govt. 1.4.1994 All
Grants
AS-13 Accounting for 14.1995 All
Investments
AS-14 Accounting for 1.4.1995 All
Amalgamations
AS-15 (Revised Employees benefit 1.4.2006 All
2005)
AS-16 Borrowing Costs 1.4.2000 All
AS-17 Segment Reporting 1.4.2001 Level-1 and Non-SMC

AS-18 Related Party Disclosure 1.4.2001 Level – I, II and all
companies
AS-19 Leases 1.4.2001 All
AS-20 Earning Per Shares 1.4.2001 All
AS-21 Consolidated Financial 1.4.2001 See Note-1
Statements
AS-22 Accounting for Taxes on 1.4.2001 For Listed Companies
Income
1.4.2002 Companies other
than listed
1.4.2006 All
AS-23 Accounting for 1.4.2002 See Note-I
Investment in
Associates in
Consolidated Financial
Statements
AS-24 Discontinuing operations 1.4.2004 Level-I, II, and all
companies.
AS-25 Interim Financial 1.4.2002 Note-2
Reporting
AS-26 Intangible Assets 1.4.2003 All
AS-27 Financial Reporting 1.4.2002 See Note-I
of Interests in Joint
Ventures
AS-28 Impairment of Assets 1.4.2004 Level-I )and all
1.4.2006 Level-II )companies
1.4.2006 Level-III
AS-29 Provisions, Contingent 1.4.2004 All
liabilities and Contingent
Assets
AS-30 Financial Instruments WITHDRAWN Non-SME
– Recognition and
Measurement
AS-31 Financial Instruments – WITHDRAWN Non-SME

Presentation
AS-32 Financial Instruments – WITHDRAWN Non-SME
Disclosures
Note 1: AS-21, AS-23 and AS-27 (relating to consolidated financial statements) are
required to be complied with by an entity if the entity, pursuant to the requirements of a
statute/regulator or voluntarily, prepares and presents consolidated financial statements.
Note 2: If an entity is required or elect to prepare and present an interim financial report,
it should comply with this standard.
NOTES
SCHEDULE III 11
SCHEDULE III TO THE DIVISION I

Financial Statements for a company who’s Financial Statements are required to
comply with the Companies (Accounting Standards) Rules, 2006
GENERAL INSTURCTION FOR PREPARATION OF BALANCE SHEET AND
STATEMENT OF
PROFIT AND LOSS OF A COMPANY
1. Where compliance with the requirements of the Act including Accounting Standards
as applicable to the companies require any change in treatment or disclosure including
addition, amendment, substitution or deletion in the head/sub-head or any changes
inter se, in the financial statements or statements forming part thereof, the same
shall be made and the requirements of this Schedule shall stand modified accordingly.
2. The disclosure requirements specified in this Schedule are in addition to and not in
substitution of the disclosure requirements specified in the Accounting Standards
prescribed under the Companies Act, 2013. Additional disclosures specified in the
Accounting Standards shall be made in the notes to accounts or by way of additional
statement unless required to be disclosed on the face of the Financial Statements.
Similarly, all other disclosures as required by the Companies Act shall be made in the
notes to accounts in addition to the requirements set out in this Schedule.
3. (i) Notes to accounts shall contain information in addition to that presented in the
Financial Statements and shall provide where required (a) narrative descriptions
or dis-aggregations of items recognized in those statements and (b) information
about items that do not qualify for recognition in those statements.
(ii) Each item on the face of the Balance Sheet and Statement of Profit and Loss
shall be cross-referenced to any related information in the notes to accounts.
In preparing the Financial Statements including the notes to accounts, a balance
shall be maintained between providing excessive detail that may not assist users
of financial statements and not providing important information as a result of too
much aggregation.
4. (i) Depending upon the turnover of the company, the figures appearing in the Financial
Statements may be rounded off as given below:
Turnover Rounding off

(a) Less than one hundred crore to the nearest hundreds, lakhs or
rupees millions, or decimals thereof
(b) One hundred crore rupees or to the nearest, lakhs, millions or
more crores, or decimals thereof.
(ii) Once a unit of measurement is used, it shall be used uniformly in the Financial
Statements.
5. Except in the case of the first Financial Statements laid before the Company (after
its incorporation) the corresponding amounts (comparatives) for the immediately
preceding reporting period for all items shown in the Financial Statements including
notes shall also be given.
6. For the purpose of this Schedule, the terms used herein shall be as per the applicable
Accounting Standards.
Note: This part of Schedule sets out the minimum requirements for disclosure on the
face of the Balance Sheet, and the Statement of Profit and Loss (hereinafter referred
to as “Financial Statements” for the purpose of this Schedule) and Notes. Line items, sub-
line items and sub -totals shall be presented as an addition or substitution on the face
of the Financial Statements when such presentation is relevant to an understanding of
the company’s financial position or performance or to cater to industry/sector-specific
disclosure requirements or when required for compliance with the amendments to the
Companies Act or under the Accounting Standards.
PART I – BALANCE SHEET

Name of the Company…………………….
Balance Sheet as at………………………
(Rupees in…………)
Particulars Note Figures as at the Figures as at the

No. end of current end of previous
reporting period reporting period
1 2 3 4
Equity and Liabilities
1. Shareholders’ funds
a Share capital
b Reserves and Surplus
c Money received against share
warrants
2. Share application money pending
allotment
SCHEDULE III 13
3. Non-current liabilities
a Long-term borrowings
b Deferred tax liabilities (Net )
c Other long term liabilities
d Long-term provisions
4. Current liabilities
a Short-term borrowing
b Trade Payables
(A) total outstanding dues of micro
enterprises and small enterprises;
and
(B) total outstanding dues of
creditors other than micro
enterprises and small enterprises .
c Other current liabilities
d Short-term provisions
Total
ASSETS
1 Non-current assets
a Fixed assets
i. Tangible assets
ii. Intangible assets
iii. Capital Work-in-progress
iv Intangible assets
b Non-current investments
c Deferred tax assets (Net)
d Long-term loans and advances
e Other non-current assets
2 Current assets
a Current investments
b Inventories
c Trade receivables
d Cash and cash equivalents

e Short-term loans and advances
f Other current assets
Total
See accompanying notes to Financial Statements.

Notes
GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET
1. An asset shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be realized in, or is intended for sale or consumption in, the
company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is expected to be realized within twelve months after the reporting date; or
(d) it is cash or cash equivalent unless it is restricted from being exchanged or used
to settle a liability for at least twelve months after the reporting date.
All other assets shall be classified as non-current.
2. An operating cycle is the time between the acquisition of assets for processing and
their realization in cash or cash equivalents. Where the normal operating cycle cannot
be identified, it is assumed to have a duration of 12 months.
3. A liability shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be settled in the company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is due to be settled within twelve months after the reporting date; or
(d) the company does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting date. Terms of a liability
that could, at the option of the counterparty, result in its settlement by the issue
of equity instruments do not affect its classification.
All other liabilities shall be classified as non-current.
4. A receivable shall be classified as a ‘trade receivable’ if it is in respect of the amount
due on account of goods sold or services rendered in the normal course of business.
5. A payable shall be classified as a ‘trade payable’ if it is in respect of the amount due
on account of goods purchased or services received in the normal course of business.
6. A company shall disclose the following in the notes to accounts:
SCHEDULE III 15
A. Share Capital
For each class of share capital (different classes of preference shares to be treated
separately):
(a) the number and amount of shares authorized;
(b) the number of shares issued, subscribed and fully paid, and subscribed but not fully
paid;
(c) par value per share;
(d) a reconciliation of the number of shares outstanding at the beginning and at the end
of the reporting period;
(e) the rights, preferences and restrictions attaching to each class of shares including
restrictions on the distribution of dividends and the repayment of capital;
(f) shares in respect of each class in the company held by its holding company or its
ultimate holding company including shares held by or by subsidiaries or associates
of the holding company or the ultimate holding company in aggregate;
(g) shares in the company held by each shareholder holding more than 5 percent shares
specifying the number of shares held;
(h) shares reserved for issue under options and contracts/commitments for the sale of
shares/disinvestment, including the terms and amounts;
(i) for the period of five years immediately preceding the date as at which the Balance
Sheet is prepared:
(A) Aggregate number and class of shares allotted as fully paid up pursuant to
contract(s) without payment being received in cash.
(B) Aggregate number and class of shares allotted as fully paid up by way of bonus
shares.
(C) Aggregate number and class of shares bought back.
(D) terms of any securities convertible into equity/preference shares issued along
with the earliest date of conversion in descending order starting from the
farthest such date.
(k) calls unpaid (showing aggregate value of calls unpaid by directors and officers)
(l) forfeited shares (amount originally paid up)
B. Reserves and Surplus

(i) Reserves and Surplus shall be classified as:
(a) Capital Reserves;
(b) Capital Redemption Reserve;
(c) Securities Premium Reserve;

(d) Debenture Redemption Reserve;
(e) Revaluation Reserve;
(f) Share Options Outstanding Account;
(g) Other Reserves – (specify the nature and purpose of each reserve and the
amount in respect thereof);
(h) Surplus i.e. balance in Statement of Profit & Loss disclosing allocations and
appropriations such as dividend, bonus shares and transfer to/from reserves
etc.
(Additions and deductions since last balance sheet to be shown under each of the
specified heads)
(ii) A reserve specifically represented by earmarked investments shall be termed as a
‘fund’.
(iii) Debit balance of statement of profit and loss shall be shown as a negative figure
under the head ‘Surplus’. Similarly, the balance of ‘Reserves and Surplus’, after
adjusting negative balance of surplus, if any, shall be shown under the head ‘Reserves
and Surplus’ even if the resulting figure is in the negative.
C. Long-Term Borrowings
(i) Long-term borrowings shall be classified as:
(a) Bonds/debentures.
(b) Term loans
(A) From banks.
(B) From other parties
(c) Deferred payment liabilities.
(d) Deposits.
(e) Loans and advances from related parties
(f) Long term maturities of finance lease obligations
(g) Other loans and advances (specify nature).
(ii) Borrowings shall further be sub-classified as secured and unsecured. Nature of
security shall be specified separately in each case.
(iii) Where loans have been guaranteed by directors or others, the aggregate amount of
such loans under each head shall be disclosed.
(iv) Bonds/debentures (along with the rate of interest and particulars of redemption or
conversion, as the case may be) shall be stated in descending order of maturity or
SCHEDULE III 17
conversion, starting from farthest redemption or conversion date, as the case may
be. Where bonds/debentures are redeemable by instalments, the date of maturity
for this purpose must be reckoned as the date on which the first instalment becomes
due.
(v) Particulars of any redeemed bonds/ debentures which the company has power to
reissue shall be disclosed.
(vi) Terms of repayment of term loans and other loans shall be stated.
(vii)Period and amount of continuing default as on the balance sheet date in repayment
of loans and interest, shall be specified separately in each case.
D. Other Long Term Liabilities
Other Long-term Liabilities shall be classified as:
(a) Trade payables
(b) Others
E. Long-term provisions
The amounts shall be classified as:
(a) Provision for employee benefits.
(b) Others (specify nature).
F. Short-term borrowings
(i) Short-term borrowings shall be classified as:
(a) Loans repayable on demand
(A) From banks
(B) From other parties
(b) Loans and advances from related parties.
(c) Deposits.
(d) Other loans and advances (specify nature).
(ii) Borrowings shall further be sub-classified as secured and unsecured. Nature of
(iii) Where loans have been guaranteed by directors or others, the aggregate amount of
such loans under each head shall be disclosed.
(iv) Period and amount of default as on the balance sheet date in repayment of loans and
interest shall be specified separately in each case.
FA. Trade Payables
The following details relating to Micro, Small and Medium Enterprises shall be disclosed
in the notes:
(a) the principal amount and the interest due thereon (to be shown separately) remaining
unpaid to any supplier at the end of each accounting year;
(b) the amount of interest paid by the buyer in terms of section 16 of the Micro,
Small and Medium Enterprises Development Act, 2006, along with the amount of
the payment made to the supplier beyond the appointed day during each accounting
year;
(c) the amount of interest due and payable for the period of delay in making payment
(which have been paid but beyond the appointed day during the year) but without
adding the interest specified under the Micro, Small and Medium Enterprises
Development Act, 2006;
(d) the amount of interest accrued and remaining unpaid at the end of each accounting
year; and
(e) the amount of further interest remaining due and payable even in the succeeding
years, until such date when the interest dues above are actually paid to the small
enterprise, for the purpose of disallowance of a deductible expenditure under
section 23 of the Micro, Small and Medium Enterprises Development Act, 2006.
Explanation The terms ‘appointed day’, ‘buyer’, ‘enterprise’, ‘micro enterprise’, ‘small
enterprise’ and ‘supplier’, shall have the same meaning assigned to those under clauses
(b), (d), (e), (h), (m) and (n) respectively of section 2 of the Micro, Small and Medium
Enterprises Development Act, 2006.
G. Other current liabilities
(a) Current maturities of long-term debt;
(b) Current maturities of finance lease obligations;
Interest accrued but not due on borrowings
(d) Interest accrued and due on borrowings;
(e) Income received in advance;
(f) Unpaid dividends
(g) Application money received for allotment of securities and due for refund and
interest accrued thereon. Share application money includes advances towards
allotment of share capital. The terms and conditions including the number of shares
proposed to be issued, the amount of premium, if any, and the period before which
shares shall be allotted shall be disclosed. It shall also be disclosed whether the
company has sufficient authorized capital to cover the share capital amount resulting
from allotment of shares out of such share application money. Further, the period
for which the share application money has been pending beyond the period for
allotment as mentioned in the document inviting application for shares along with
SCHEDULE III 19
the reason for such share application money being pending shall be disclosed. Share
application money not exceeding the issued capital and to the extent not refundable
shall be shown under the head Equity and share application money to the extent
refundable i.e., the amount in excess of subscription or in case the requirements of
minimum subscription are not met, shall be separately shown under ‘Other current
liabilities’
(h) Unpaid matured deposits and interest accrued thereon
(i) Unpaid matured debentures and interest accrued thereon
(j) Other payables (specify nature);
H. Short-term provisions
(a) Provision for employee benefits.
I. Tangible assets
(i) Classification shall be given as:
(a) Land.
(b) Buildings.
(c) Plant and Equipment.
(d) Furniture and Fixtures.
(e) Vehicles.
(f) Office equipment.
Others (specify nature)
(ii) Assets under lease shall be separately specified under each class of asset.
(iii) A reconciliation of the gross and net carrying amounts of each class of assets at the
beginning and end of the reporting period showing additions, disposals, acquisitions
through business combinations and other adjustments and the related depreciation and
impairment losses/reversals shall be disclosed separately.
(iv) Where sums have been written off on a reduction of capital or revaluation of assets or
where sums have been added on revaluation of assets, every balance sheet subsequent
to date of such write-off, or addition shall show the reduced or increased figures as
applicable and shall by way of a note also show the amount of the reduction or increase
as applicable together with the date thereof for the first five years subsequent to the
date of such reduction or increase.
J. Intangible assets
(a) Goodwill.
(b) Brands /trademarks.
(c) Computer software.
(d) Mastheads and publishing titles.
(e) Mining rights.
(f) Copyrights, and patents and other intellectual property rights, services and
operating rights.
(g) Recipes, formulae, models, designs and prototypes.
(h) Licenses and franchise.
(i) Others (specify nature).
(ii) A reconciliation of the gross and net carrying amounts of each class of assets at the
beginning and end of the reporting period showing additions, disposals, acquisitions
through business combinations and other adjustments and the related amortization and
impairment losses/reversals shall be disclosed separately.
Where sums have been written off on a reduction of capital or revaluation of assets or
where sums have been added on revaluation of assets, every balance sheet subsequent to
date of such write-off, or addition shall show the reduced or increased figures as applicable
and shall by way of a note also show the amount of the reduction or increase as applicable
together with the date thereof for the first five years subsequent to the date of such
reduction or increase
K. Non-current investments
(i) Non-current investments shall be classified as trade investments and other
investments and further classified as:
(a) Investment property;
(b) Investments in Equity Instruments;
(c) Investments in preference shares
(d) Investments in Government or trust securities;
(e) Investments in debentures or bonds;
(f) Investments in Mutual Funds;
(g) Investments in partnership firms
(h) Other non-current investments (specify nature)
SCHEDULE III 21
Under each classification, details shall be given of names of the bodies corporate [indicating
separately whether such bodies are (i) subsidiaries, (ii) associates, (iii) joint ventures, or
(iv) controlled special purpose entities] in whom investments have been made and the nature
and extent of the investment so made in each such body corporate (showing separately
investments which are partly-paid). In regard to investments in the capital of partnership
firms, the names of the firms (with the names of all their partners, total capital and the
shares of each partner) shall be given.
(ii) Investments carried at other than at cost should be separately stated specifying
the basis for valuation thereof.
(iii) The following shall also be disclosed:
(a) Aggregate amount of quoted investments and market value thereof;
(b) Aggregate amount of unquoted investments;
(c) Aggregate provision for diminution in value of investments.
L. Long-term loans and advances

(i) Long-term loans and advances shall be classified as:
(a) Capital Advances;
(b) Security Deposits;
(c) Loans and advances to related parties (giving details thereof);
(d) Other loans and advances (specify nature).
(ii) The above shall also be separately sub-classified as:
(a) Secured, considered good;
(b) Unsecured, considered good;
(c) Doubtful.
(iii) Allowance for bad and doubtful loans and advances shall be disclosed under the
relevant heads separately.
(iv) Loans and advances due by directors or other officers of the company or any of
them either severally or jointly with any other persons or amounts due by firms or
private companies respectively in which any director is a partner or a director or a
member should be separately stated.
M. Other non-current assets

Other non-current assets shall be classified as:
(i) Long Term Trade Receivables (including trade receivables on deferred credit
terms);
(ii) Others (specify nature)

(iii) Long term Trade Receivables, shall be sub-classified as:
(a) (A) Secured, considered good;
(B) Unsecured considered good;
(C) Doubtful
(b) Allowance for bad and doubtful debts shall be disclosed under the relevant
heads separately.
(c) Debts due by directors or other officers of the company or any of them either
severally or jointly with any other person or debts due by firms or private
companies respectively in which any director is a partner or a director or a
member should be separately stated.
N. Current Investments
(i) Current investments shall be classified as:
(a) Investments in Equity Instruments;
(b) Investment in Preference Shares
(c) Investments in government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;
(f) Investments in partnership firms
Other investments (specify nature
Under each classification, details shall be given of names of the bodies corporate [indicating
separately whether such bodies are (i) subsidiaries, (ii) associates, (iii) joint ventures, or
(iv) controlled special purpose entities] in whom investments have been made and the nature
and extent of the investment so made in each such body corporate (showing separately
investments which are partly-paid). In regard to investments in the capital of partnership
firms, the names of the firms (with the names of all their partners, total capital and the
shares of each partner) shall be given.
(ai) The following shall also be disclosed:
(a) The basis of valuation of individual investments
(b) Aggregate amount of quoted investments and market value thereof;
(c) Aggregate amount of unquoted investments;
(d) Aggregate provision made for diminution in value of investments.
SCHEDULE III 23
O. Inventories
(i) Inventories shall be classified as:
(a) Raw materials;
(b) Work-in-progress;
(c) Finished goods;
(d) Stock-in-trade (in respect of goods acquired for trading);
(e) Stores and spares;
(f) Loose tools;
(g) Others (specify nature).
(ii) Goods-in-transit shall be disclosed under the relevant sub-head of inventories.
(iii) Mode of valuation shall be stated.
P. Trade Receivables
(i) Aggregate amount of Trade Receivables outstanding for a period exceeding six
months from the Date they are due for payment should be separately stated.
(ii) Trade receivables shall be sub-classified as:
(b) Unsecured considered good;
(c) Doubtful.
(iii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads
separately.
(iv) Debts due by directors or other officers of the company or any of them either
severally or jointly with any other person or debts due by firms or private companies
respectively in which any director is a partner or a director or a member should be
separately stated.
Q. Cash and cash equivalents

(i) Cash and cash equivalents shall be classified as:
(a) Balances with banks;
(b) Cheques, drafts on hand;
(c) Cash on hand;
(d) Others (specify nature).
(ii) Earmarked balances with banks (for example, for unpaid dividend) shall be separately
stated.
(iii) Balances with banks to the extent held as margin money or security against the
borrowings, guarantees, other commitments shall be disclosed separately.
(iv) Repatriation restrictions, if any, in respect of cash and bank balances shall be
separately stated.
(v) Bank deposits with more than 12 months maturity shall be disclosed separately.
R. Short-term loans and advances

(i) Short-term loans and advances shall be classified as:
(a) Loans and advances to related parties (giving details thereof);
(ii) The above shall also be sub-classified as:
(b) Unsecured, considered good;
(c) Doubtful.
(iii) Allowance for bad and doubtful loans and advances shall be disclosed under the
relevant heads separately.
(iv) Loans and advances due by directors or other officers of the company or any of
them either severally or jointly with any other person or amounts due by firms or
private companies respectively in which any director is a partner or a director or a
member shall be separately stated.
S. Other current assets (specify nature).

This is an all-inclusive heading, which incorporates current assets that do not fit into any
other asset categories.
T. Contingent liabilities and commitments (to the extent not provided for)
(i) Contingent liabilities shall be classified as:
(a) Claims against the company not acknowledged as debt;
(b) Guarantees;
(c) Other money for which the company is contingently liable
SCHEDULE III 25
(ai) Commitments shall be classified as:

(a) Estimated amount of contracts remaining to be executed on capital account and
not provided for;
(b) Uncalled liability on shares and other investments partly paid
(c) Other commitments (specify nature).
U. The amount of dividends proposed to be distributed to equity and preference shareholders
for the period and the related amount per share shall be disclosed separately. Arrears
of fixed cumulative dividends on preference shares shall also be disclosed separately.
V. Where in respect of an issue of securities made for a specific purpose, the whole or
part of the amount has not been used for the specific purpose at the balance sheet
date, there shall be indicated by way of note how such unutilized amounts have been
used or invested.
W. If, in the opinion of the Board, any of the assets other than fixed assets and non-
current investments do not have a value on realization in the ordinary course of business
at least equal to the amount at which they are stated, the fact that the Board is of
that opinion, shall be stated.
PART II – STATEMENT OF PROFIT AND LOSS

Name of the Company…………………….
Profit and loss statement for the year ended ………………………
(Rupees in…………)
Particulars Note Figures for the Figures for the

No. current reporting Previous reporting
period period
1 2 3 4
i. Revenue from operations xxx xxx
ii. Other income xxx Xxx
iii. Total Revenue (I + II) xxx Xxx
iv. Expenses: Xxx Xxx
Cost of materials consumed Xxx Xxx
Purchases of Stock-in-Trade Xxx Xxx
Changes in inventories of finished goods Xxx Xxx
Particulars Note Figures for the Figures for the

No. current reporting Previous reporting
period period
work-in-progress
and Stock-in-Trade
Employee benefits expense
Finance costs
Depreciation and amortization expense
Other expenses
Total expenses
V. Profit before exceptional and extraordinary
items and tax (III-IV)
VI. Exceptional items
Profit before extraordinary items and tax (V-
VI)
VIII. Extraordinary Items
IX. Profit before tax (VII- VIII)
X Tax expense:
(1) Current tax xxx Xxx
(2) Deferred tax xxx xxx xxx xxx
XI Profit (Loss) for the period from continuing
operations (VII-VIII)
XII Profit/(loss) from discontinuing operations xxx Xxx
XIII Tax expense of discontinuing operations xxx Xxx
XIV Profit/(loss) from Discontinuing operations
(after tax) (XII-XIII)
XV Profit (Loss) for the period (XI + XIV)
XVI Earnings per equity share:
(1) Basic xxx xxx
(2) Diluted xxx xxx
See accompanying notes to the financial statements.

SCHEDULE III 27
GENERAL INSTRUCTIONS FOR PREPARATION

OF STATEMENT OF PROFIT AND LOSS
1. The provisions of this Part shall apply to the income and expenditure account referred
to in sub-clause (ii) of Clause (40) of Section 2 in like manner as they apply to a
statement of profit and loss.
2. (A) In respect of a company other than a finance company revenue from operations shall
disclose separately in the notes revenue from
(a) Sale of products;
(b) Sale of services;
(c) Other operating revenues; Less:
(d) Excise duty.
(A) In respect of a finance company, revenue from operations shall include revenue
from
(a) Interest; and
(b) Other financial services
Revenue under each of the above heads shall be disclosed separately by way of notes to
accounts to the extent applicable.
3. Finance Costs
Finance costs shall be classified as:
(a) Interest expense;
(b) Other borrowing costs;
(c) Applicable net gain/loss on foreign currency transactions and translation.
4. Other income
Other income shall be classified as:
(a) Interest Income (in case of a company other than a finance company);
(b) Dividend Income;
(c) Net gain/loss on sale of investments
(d) Other non-operating income (net of expenses directly attributable to such income).
5. Additional Information
A Company shall disclose by way of notes additional information regarding aggregate
expenditure and income on the following items:
(a) Employee Benefits Expense [showing separately (i) salaries and wages, (ii) contribution
to provident and other funds, (iii) expense on Employee Stock Option Scheme (ESOP)
and Employee Stock Purchase Plan (ESPP), (iv) staff welfare expenses]
(b) Depreciation and amortization expense;
(c) Any item of income or expenditure which exceeds one per cent of the revenue from
operations or ` 1,00,000, whichever is higher;
(d) Interest Income;
(e) Interest Expense;
(f) Dividend Income;
(g) Net gain/ loss on sale of investments;
(h) Adjustments to the carrying amount of investments;
(i) Net gain or loss on foreign currency transaction and translation (other than considered
as finance cost);
(j) Payments to the auditor as
(a) auditor,
(b) for taxation matters,
(c) for company law matters,
(d) for management services,
(e) for other services,
(f) for reimbursement of expenses;
(k) In case of companies covered u/s 135, amount of expenditure incurred on
corporate social responsibility activities.
(l) Details of items of exceptional and extraordinary nature;
(m) Prior period items;
(ai) (a) In the case of manufacturing companies,
(1) Raw materials under broad heads.
(2) goods purchased under broad heads.
(b) In the case of trading companies, purchases in respect of goods traded in by the
company under broad heads.
(c) In the case of companies rendering or supplying services, gross income derived
from services rendered or supplied under broad heads.
(d) In the case of a company, which falls under more than one of the categories
mentioned in (a), (b) and (c) above, it shall be sufficient compliance with the
requirements herein if purchases, sales and consumption of raw material and the
gross income from services rendered is shown under broad heads.
(e) In the case of other companies, gross income derived under broad heads.
SCHEDULE III 29
(iii) In the case of all concerns having works in progress, works-in-progress under broad
heads.
(iv) (a)
The aggregate, if material, of any amounts set aside or proposed to be set
aside, to reserve, but not including provisions made to meet any specific liability,
contingency or commitment known to exist at the date as to which the balance-
sheet is made up.
(b) The aggregate, if material, of any amounts withdrawn from such reserves.
(v) (a) The aggregate, if material, of the amounts set aside to provisions made for
meeting specific liabilities, contingencies or commitments.
(b) The aggregate, if material, of the amounts withdrawn from such provisions, as no
longer required.
(vi) Expenditure incurred on each of the following items, separately for each item:-
(a) Consumption of stores and spare parts.
(b) Power and fuel.
(c) Rent.
(d) Repairs to buildings.
(e) Repairs to machinery.
(f) Insurance.
(g) Rates and taxes, excluding, taxes on income.
(h) Miscellaneous expenses,
(vii) (a) Dividends from subsidiary companies.
(b) Provisions for losses of subsidiary companies.
(viii) The profit and loss account shall also contain by way of a note the following information,
namely:
(a) Value of imports calculated on C.I.F basis by the company during the financial
year in respect of –
I. Raw materials;
II. Components and spare parts;
III. Capital goods;
(b) Expenditure in foreign currency during the financial year on account of royalty,
know-how, professional and consultation fees, interest, and other matters;
(c) Total value if all imported raw materials, spare parts and components consumed
during the financial year and the total value of all indigenous raw materials, spare
parts and components similarly consumed and the percentage of each to the total
consumption;
(d) The amount remitted during the year in foreign currencies on account of dividends
with a specific mention of the total number of non-resident shareholders, the
total number of shares held by them on which the dividends were due and the
year to which the dividends related;
(e) Earnings in foreign exchange classified under the following heads, namely: I.
Export of goods calculated on F.O.B. basis;
II. Royalty, know-how, professional and consultation fees; III. Interest and dividend;
IV. Other income, indicating the nature thereof
Note: Broad heads shall be decided taking into account the concept of materiality and
presentation of true and fair view of financial statements.
GENERAL INSTRUCTIONS FOR THE PREPARATION

OF CONSOLIDATED FINANCIAL STATEMENTS
1. Where a company is required to prepare Consolidated Financial Statements, i.e.,

consolidated balance sheet and consolidated statement of profit and loss, the
company shall mutatis mutandis follow the requirements of this Schedule as applicable
to a company in the preparation of balance sheet and statement of profit and loss.
In addition, the consolidated financial statements shall disclose the information as
per the requirements specified in the applicable Accounting Standards including the
following:
(i) Profit or loss attributable to “minority interest” and to owners of the parent in
the statement of profit and loss shall be presented as allocation for the period.
(ii) “Minority interests” in the balance sheet within equity shall be presented
separately from the equity of the owners of the parent
2. In Consolidated Financial Statements, the following shall be disclosed by way of
additional information:
Name of the entity in the Net Assets, i.e., total Share in profit or loss
minus total liabilities AS % of consolidated
As % of consolidated profit or los Amount
net assets Amount
1 2 3 4 5
Parent Subsidiaries Indian
1.
2.
3.
SCHEDULE III 31
Foreign
1.
2.
3.
Minority Interests in all subsidiaries
Associates (Investment as per the
equity method)
Indian
1.
2.
3.
Foreign
1.
2.
3.
Joint Ventures (as per
proportionate consolidation/
investment as per the equity
method
Indian
1.
2.
3.
Foreign
1.
2.
3.
Total
3. All subsidiaries, associates and joint ventures (whether Indian or foreign) will be
covered under consolidated financial statements.
4. An entity shall disclose the list of subsidiaries or associates or joint ventures which
have not been consolidated in the consolidated financial statements along with the
reasons of not consolidating.
Division II
Financial Statements for a company whose financial statements are drawn up in
compliance of the Companies (Indian Accounting Standards) Rules, 2015.
GENERAL INSTRUCTIONS FOR PREPARATION OF

FINANCIAL STATMENT OF A COMPANY
REQUIRED TO COMPLY WITH Ind AS
1. Every company to which Indian Accounting Standards apply, shall prepare its financial
statements in accordance with this Schedule or with such modification as may be
required under certain circumstances.
2. Where compliance with the requirements of the Act including Indian Accounting
Standards (except the option of presenting assets and liabilities in the order of
liquidity as provided by the relevant Ind AS) as applicable to the companies require
any change in treatment or disclosure including addition, amendment substitution or
deletion in the head or sub-head or any changes inter se, in the financial statements or
statements forming part thereof, the same shall be made and the requirements under
this Schedule shall stand modified accordingly.
3. The disclosure requirements specified in this Schedule are in addition to and not
in substitution of the disclosure requirements specified in the Indian Accounting
Standards. Additional disclosures specified in the Indian Accounting Standards shall
be made in the Notes or by way of additional statement or statements unless required
to be disclosed on the face of the Financial Statements. Similarly, all other disclosures
as required by the Companies Act, 2013 shall be made in the Notes in addition to the
requirements set out in this Schedule.
4. (i) Notes shall contain information in addition to that presented in the Financial
Statements and shall provide where required-
(a) narrative description or disaggregation of items recognised in those statements;
and
(b) information about items that do not qualify for recognition in those statements.
Each item on the face of the Balance Sheet, Statement of Changes in Equity and
Statement of Profit and Loss shall be cross-referenced to any related information
in the Notes. In preparing the Financial Statements including the Notes, a balance
shall be maintained between providing excessive detail that may not assist users of
Financial Statements and not providing important information as a result of too much
aggregation.
SCHEDULE III 33
5. Depending upon the turnover of the company, the figures appearing in the Financial
Statements shall be rounded off as below:
Turnover Rounding off

(i) less than one hundred crore rupees To the nearest hundreds, thousands, lakhs
or millions, or decimals thereof
(ii) one hundred crore rupees or more To the nearest, lakhs, millions or crores, or
decimals thereof.
Once a unit of measurement is used, it should be used uniformly in the Financial

Statements.
6. Financial Statements shall contain the corresponding amounts (comparatives) for the
immediately preceding reporting period for all items shown in the Financial Statement
including Notes except in the case of first Financial Statements laid before the
company after incorporation.
7. Financial Statements shall disclose all ‘material’ items, i,e, the items if they could.
individually or collectively, influence the economic decisions that users make on the
basis of the financial statements. Materiality depends on the size or nature of the
item or a combination of both, to be judged in the particular circumstances.
8. For the purpose of this Schedule, the terms used herein shall have the same meanings
assigned to them in Indian Accounting Standards.
9. Where any Act or Regulation requires specific disclosure to be made in the standalone
financial statement of a company, the said disclosure shall be made in addition to those
required under this Schedule.
Note: This Schedule sets out the minimum requirements for disclosure on the face of the
Financial Statements, i.e, Balance Sheet, Statement of Changes in Equity for the period,
the Statement of profit and Loss for the period (The term ‘Statement of Profit and Loss’
has the same meaning as Profit and Loss Account) and Notes. Cash flow statement shall
be prepared, where applicable, in accordance with the requirement of the relevant Indian
Accounting Standard.
Line items, sub-line items and sub-totals shall be presented as an addition or substitution on
the face of the Financial Statements when such presentation is relevant to an understanding
of the company’s financial position or performance to cater to industry or sector-specific
Companies Act, 2013 or under the Indian Accounting Standards.
PART I -BALANCE SHEET

Name of the Company....................
Balance Sheet as at ......................
(Rupees in.........)
Particular Note Figures as Figures as at

No. at the end the end of
of current the previous
reporting period reporting period
1 2 3 4
(1) ASSETS
Non-current assets
(a) Property, Plant and Equipment
(b) Capital work-in-progress
(c) lnvestment Property
(d) Goodwill
(e) Other Intangible assets
(f) Intangible assets under
development
(g) Biological Assets other than bearer
plants
(h) Financial Assets
(i) Investments
(j) Trade receivables
(k) Loans
(a) Deferred tax assets (net)
(b) Other non-current assets
SCHEDULE III 35
(2) Current assets
(a) Inventories
(b) Financial Assets
(i) Investments
(ii) Trade receivables
(iii) Cash and cash equivalents
(iv) Bank balances other than (iii)
above
(v) Loans
(vi) Others (to be specified)
(c) Current Tax Assets (Net)
(d) Other current assets
Total Assets
Equity and liabilities
Equity
(a) Equity Share capital
(b) Other Equity
(1) Liabilities
Non-current liabilities
(a) Financial Liabilities

(i) Borrowings
(ii) Trade payables
(iii) Other financial liabilities
(other than those specified in
item (b), to be specified)
(b) Provision
(c) Deferred tax liabilities (Net)
(d) Other non-current liabilities
(2) Current liabilities

(a) Financial Liabilities
(a) Borrowigns
(b) Trade payables
(c) Other findnical liabilities (other
than those specified in item (C)
(b) Other current liabilities
(c) Provision
(d) Current Tax Liabilities (Net)
Total Equity and Liabilities
see accompanying notes to the financial statements
STATEMENT OF CHANGES IN EQUITY

Name of the Company..............
Statement of Changes in Equity for the period ended ............
A. Equity Share Capital
Balance at the beginning of the Changes in equity share capital Balance at the end of the
reporting period during the year reporting period
B. Other Equity
Reserve and Surplus Debt

instru-
Share Equity Capital Secu- Other Re- ment Equity In- Effec- Reval- Exchange Other Money Total
applica- compo- Re- rities Reserve tained through strument tive uation differ- items of re-
tion on nent of serve Pre- (Specify Earn- other through por- Sur- ence on other com- ceived
money compound mium nature) ing compre- other tion of plus translat- prehensive against
pending financial Re- hensive compre- cash ing the income share
SCHEDULE III
allot- instru- serve income hensive flow financial (Specify capital

ment ment income hedges statement nature )
Balance
at the
beginning
of the
reporting
period
Changes
in ac-
counting
policy
or prior
period
errors
Restated
balance
at the
beginning
of the
reporting
period
Total
compre-
hensive
Income
for the
year
Divi-
dends
37
Trans-
38
fer to
retained
earnings
Any
other
change
(to be
speci-
fied)
Bal-
ance at
the end
of the
reporting
period
Note: Re-measurement of defined benefit plans and fair value changes relating to own credit risk of financial liabilities
designated at fair value through profit or loss shall be recognised as a part of retained earning with separate disclosure of
such items alongwith the relevant amounts in the Notes.
ADVANCED ACCOUNTING
SCHEDULE III 39
GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET
1. An entity shall classify an asset as current when-

(a) it expects to realise the asset, or intends to sell or consume it, in its normal
operating cycle;
(b) it holds the asset primarily for the purpose of trading;
(c) it expects to realise the asset within twelve months after the reporting period;
or
(d) the asset is cash or a cash equivalent unless the asset is restricted from being
exchanged or used to settle a liability for at least twelve months after the
reporting period.
An entity shall classify all other assets as non-current.
2. The operating cycle of an entity is the time between the acquisition of assets for
processing and their realisation in cash or cash equivalents, when the entity’s normal
operating cycle is not clearly identifiable, it is assumed to be twelve months.
3. An entity shall classify a liability as current when-
(a) it expects to settle the liability in its normal operating cycle;
(b) it holds the liability primarily for the purpose of trading;
(c) the liability is due to be settled within twelve months after the reporting period;
or
(d) it does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period. Terms of a liability that could,
at the option of the counterparty, result in it settlement by the issue of equity
instruments do not affect its classification.
An entity shall classify all other liabilities as non-current.
4. A receivable shall be classified as a ‘trade receivable’ if it is in respect of the amount
due on account of goods sold or services rendered in the normal course of business.
5. A payable shall be classified as a ‘trade payable’ if it is in respect of the amount due
on account of goods purchased or services received in the normal course of business.
6. A company shall disclose the following in the Notes:
A Non-Current Assets
l. Property. Plant and Equipment:
(a) Land
(b) Buildings
(c) Plant and Equipment

(d) Furniture and Fixtures
(e) Vehicles
(f) Office equipment
(g) Bearer Plants
(h) Others (specify nature)
(ii) Assets under lease shall be separately specified under each class of
assets
(iii) A reconciliation of the gross and net carrying amounts of each class
of assets at the beginning and end of the reporting period showing
additions, disposals, acquisitions through business combinations and
other adjustments and the related depreciation and impairment losses
or reversals shall be disclosed separately.
II. Investment Property:
A reconciliation of the gross and net carrying amounts of each class of property
at the beginning and end of the reporting period showing additions, disposals,
acquisitions through business combinations and other adjustments and the related
depreciation and impairment losses or reversals shall be disclosed separately.
III. Goodwill :
A reconciliation of the gross and net carrying amount of goodwill at the beginning
and end of the reporting period showing additions, impairments, disposals and other
adjustments.
IV. Other Intangible assets
(a) Brands or trademarks
(b) Computer software
(c) Mastheads and publishing titles
(d) Mining rights
(e) Copyright, patents, other intellectual property rights, services and operating
rights
(f) Recipes, formulae, models, designs and prototypes
(g) Licenses and franchises
(h) Others (specify nature)
SCHEDULE III 41
(ii) A reconciliation of the gross and net carrying amounts of each class of assets
at the beginning and end of the reporting period showing additions, disposals,
acquisitions through business combinations and other adjustments and the
related amortization and impairment losses or reversals shall be disclosed
separately.
V. Biological Assets other than bearer plants:
A reconciliation of the carrying amounts of each class of assets at the beginning
and end of the reporting period showing additions, disposals, acquisitions through
business combinations and other adjustments shall be disclosed separately.
VI. Investment
(i) Investments shall be classified as:
(a) Investments in Equity Instruments;
(b) Investments in Preference Shares;
(c) Investments in Government or trust securities;
(f) Investments in partnership firms; or
(g) Other investments (specify nature)
Under each classification, details shall be given of names of the bodies corporate that are-
(i) subsidiaries,
(ii) associates,
(iii) joint ventures, or
(iv) structured entities, in whom investments have been made and the nature and extent of
the investment so made in each such body corporate (showing separately investments
which are partly-paid). lnvestment in partnership firms alongwith names of the
firms, their partners, total capital and the shares of each partner shall be disclosed
separately.
(ai) The following shall also be disclosed:
(a) Aggregate amount of quoted investment and market value thereof:
(b) Aggregate amount of unquoted investment: and
Aggregate amount of impairment in value of investment
VII. Trade Receivables:
(i) Trade receivables shall be sub-classified as;

(b) Unsecured considered good; and
(c) Doubtful.
(ii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads
separately.
(iii) Debts due by directors or other officers of the company or any of them either
severally or jointly with any other person or debts due by firms or private companies
separately stated.
VIII. Loans;
(i) Loans shall be classified as-

(a) Security Deposits;
(b) Loans to related parties (giving details thereof); and
(c) Other loans (specify nature).
The above shall also be separately sub-classified as-
(b) Unsecured, considered good; and
(c) Doubtful. Allowance for bad and doubtful loans shall be disclosed under the relevant
heads separately.
(iv) Loans due by directors or other officers of the company or any of them either severally
or jointly with any other persons or amounts due by firms or private companies
separately stated.
IX. B
ank deposits with more than 12 months maturity shall be disclosed under ‘Other
financial assets’;
X. Other non-current asset: Other non-current assets shall be classified as-
(i) Capital Advances; and

(ii) Advances other than capital advances;
Advances other than capital advances shall be classified as
SCHEDULE III 43

(b) Advances to related parties (giving details thereof; and
(c) Other advances (specify nature).
(2) Advances to directors or other officers of the company or any of them either severally
or jointly with any other persons or advances to firms or private companies respectively
in which any director is a partner or a director or a member should be separately
stated, ln case advances are of the nature of a financial asset as per relevant Ind AS,
these are to be disclosed under other financial assets separately.
(bi) Others (specify nature).
B. Current Assets I. Inventories:
(i) Inventories shall be classified as-

(a) Raw materials;
(b) Work in-progress;
(c) Finished goods;
(d) Stock-in-trade (in respect of goods acquired for trading);
(e) stores and spares;
(f) Loose tools; and
(g) Others (specify nature).
(ii) Goods-in-transit shall be disclosed under the relevant sub-head of inventories.
(iii) Mode of valuation shall be stated.
II. Investment;
(i) Investments shall be classified as-

(a) Investments in Equity lnstruments;
(b) lnvestment in Preference Shares;
(c) lnvestment in government or trust securities;
(f) lnvestment in partnership firms; and
(g) Other investments (specify nature).
Under each classification, details shall be given of names of the bodies corporate that are-
(i) subsidiaries,
(ii) associates,
(iii) joint ventures, or
(iv) structured entities,
in whom investments have been made and the nature and extent of the investment so made
in each such body corporate (showing separately investments which are partly-paid)
(ai) The following shall also be disclosed

(a) Aggregate amount of quoted investments and market value thereof;
(b) Aggregate amount of unquoted investments;
(c) Aggregate amount of impairment in value of investments,
III. Trade Receivables
(i) Trade receivables shall be sub-classified as:

(b) Unsecured considered good; and
(c) Doubtful.:
(ii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads
separately.
(iii) Debts due by directors or other officers of the company or any of them either
severally or jointly with any other person or debts due by firms or. private companies
separately stated.
IV. Cash and cash equivalents:

Cash and cash equivalents shall be classified as-
a. Balances with Banks (of the nature of cash and cash equivalents);
b. Cheques, drafts on hand;
c. Cash on hand; and
d. Others (specify nature).
SCHEDULE III 45
V. Loans:
(i) Loans shall be classified as:

(a) Security deposits;
(b) Loans to related parties (giving details thereof); and
(c) others (specify nature).
(ii) The above shall also be sub-classified as-
(b) Unsecured, considered good; and
(c) Doubtful.
(iii) Allowance for bad and doubtful loans shall be disclosed under the relevant heads
separately.
(iv) Loans due by directors or other officers of the company or any of them either
severally or jointly with any other person or amounts due by firms or private companies
respectively in which any director is a partner or a director or a member shall be
separately stated.
VI. Other current assets (specify nature): This is an all-inclusive heading, which
incorporates current assets that do not fit into any other asset categories. Other
current assets shall be classified as-
(i) Advances other than capital advances

(1) Advances other than capital advances shall be classified as:
(b) Advances to related parties (giving details thereof);
(c) Other advances (specify nature)
(2) Advances to directors or other officers of the company or any of them either
severally or jointly with any other persons or advances to firms or private companies
separately stated.
(a) Earmarked balances with banks (for example. for unpaid dividend) shall be
separately stated.
(b) Balances with banks to the extent held as margin money or security against the
borrowings, guarantees, other commitments shall be disclosed separately.
D. Repatriation restrictions, if any, in respect of cash and bank balances shall be separately
stated Equity
I. Equity Share Capital: For each class of equity share capital:
(a) the number and amount of shares authorised;

(b) the number of shares issued, subscribed and fully paid, and subscribed but not fully
paid;
(c) par value per Share;
(d) a reconciliation of the number of shares outstanding at the beginning and at the end
of the period;
(e) the rights, preferences and restrictions attaching to each class of shares including
restrictions on the distribution of dividends and the repayment of capital;
(f) shares in respect of each class in the company held by its holding company or its
ultimate holding company including shares held by subsidiaries or associates of the
holding company or the ultimate holding company in aggregate;
(g) shares in the company held by each shareholder holding more than five per cent.
shares specifying the number of shares held;
(h) shares reserved for issue under options and contracts or commitments for the sale of
shares or disinvestment, including the terms and amounts;
(i) for the period of five years immediately preceding the date at which the Balance
Sheet is prepared aggregate number and class of shares allotted as fully paid up
pursuant to contract without payment being received in cash;
• aggregate number and class of shares allotted as fully paid up by way of bonus
shares; and
• aggregate number and class of shares bought back;
(j) terms of any securities convertible into equity shares issued along with the earliest
date of conversion in descending order starting from the farthest such date;
(k) calls unpaid (showing aggregate value of calls unpaid by directors and officers);
(l) forfeited shares (amount originally paid up).
AI. Other Equity:
(i) Other Reserves’ shall be classified in the notes as-

(a) Capital Redemption Reserve;
(b) Debenture Redemption Reserve;
(c) Share Options Outstanding Account; and
(d) others- (specify the nature and purpose of each reserve and the amount in respect
thereof);
SCHEDULE III 47
specified heads)
(ii) Retained Earnings represents surplus i.e. balance of the relevant column in the
Statement of Changes in Equity;
(iii) A reserve specifically represented by earmarked investments shall disclose the fact
that it is so represented;
(iv) Debit balance of Statement of Profit and Loss shall be shown as a negative figure
under the head ‘retained earnings’. Similarly, the balance of ‘Other Equity’, after
adjusting negative balance of retained earnings, if any, shall be shown under the head
‘Other Equity’ even if the resulting figure is in the negative; and
(v) Under the sub-head ‘Other Equity’, disclosure shall be made for the nature and amount
of each item.
E. Non-Current Liabilities
I. Borrowings:
(i) borrowings shall be classified as-

(a) Bonds or debentures
(b) Term loans
(I) from banks
(II) from other Parties
(c) Deferred payment liabilities
(d) Deposits.
(e) Loans from related parties
(f) Long term maturities of finance lease obligations
(g) Liability component of compound financial instruments
(h) Other loans (specify nature);
(ii) borrowings shall further be sub-classified as secured and unsecured. Nature of
(iii) where loans have been guaranteed by directors or others, the aggregate amount of
such loans under each head shall be disclosed;
(iv) bonds or debentures (along with the rate of interest, and particulars of redemption
or conversion, as the case may be) shall be stated in descending order of maturity or
conversion, starting from farthest redemption or conversion date, as the case may be,
where bonds/debentures are redeemable by installments, the date of maturity for
this purpose must be reckoned as the date on which the first installment becomes due;
(v) particulars of any redeemed bonds or debentures which the company has power to
reissue shall be disclosed;
(vi) terms of repayment of term loans and other loans shall be stated; and
(vii) period and amount of default as on the balance sheet date in repayment of borrowings
and interest shall be specified separately in each case.
BI. Provisions: The amounts shall be classified as-
(a) Provision for employee benefits; and

IV. Other non-current liabilities;
(a) Advances; and

F. Current Liabilities
I. Borrowings:
(i) Borrowings shall be classified as-

(a) Loans repayable on demand
(I) from banks
(II) from other parties
(b) Loans from related parties
(c) Deposits
(d) Other loans (specify nature);
(ii) borrowings shall further be sub-classified as secured and unsecured. Nature of
security shall be specified separately in each case;
(iii) where loans have been guaranteed by directors or others, the aggregate amount of
such loans under each head shall be disclosed; period and amount of default as on
the balance sheet date in repayment of borrowings and interest, shall be specified
separately in each case
AI. Other Financial Liabilities: Other Financial liabilities shall be classified as-
(a) Current maturities of long-term debt;

(b) Current maturities of finance lease obligations;
SCHEDULE III 49
(c) Interest accrued;

(d) Unpaid dividends;
(e) Application money received for allotment of securities to the extent refundable and
interest accrued thereon;
(f) Unpaid matured deposits and interest accrued thereon;
(g) Unpaid matured debentures and interest accrued thereon; and
(h) Others (specify nature).
‘Long term debt is a borrowing having a period of more than twelve months at the time
of origination
BI. Other current liabilities:

The amounts shall be classified as-
(a) revenue received in advance;

(b) other advances (specify nature); and
(c) others (specify nature);
IV. Provisions: The amounts shall be classified as-
(i) provision for employee benefits; and

(ii) others (specify nature)
G. The presentation of liabilities associated with group of assets classified as held for
sale and non-current assets classified as held for sale shall be in accordance with the
relevant Indian Accounting Standards (Ind ASs)
H. Contingent Liabilities and Commitments: (to the extent not provided for)
(i) Contingent Liabilities shall be classified as-

(a) claims against the company not acknowledged as debt;
(b) guarantees excluding financial guarantees; and
(c) other money for which the company is contingently liable.
Commitments shall be classified as
(a) estimated amount of contracts remaining to be executed on capital account and
not provided for;
(b) uncalled liability on shares and other investments partly paid; and
(c) other commitments (specify nature).
I. The amount of dividends proposed to be distributed to equity and preference

shareholders for the period and title related amount per share shall be disclosed
separately. Arrears of fixed cumulative dividends on irredeemable preference shares
shall also be disclosed separately.
J. Where in respect of an issue of securities made for a specific purpose the whole or
part of amount has not been used for the specific purpose at the Balance sheet date,
there shall be indicated by way of note how such unutilised amounts have been used or
invested.
7. When a company applies an accounting policy retrospectively or makes a restatement of
items in the financial statements or when it reclassifies items in its financial statements,
the company shall attach to the Balance Sheet, a “Balance Sheet” as at the beginning
of the earliest comparative period presented.
8. Share application money pending allotment shall be classified into equity or liability in
accordance with relevant Indian Accounting Standards. share application money to the
extent not refundable shall be shown under the head Equity and share application money
to the extent refundable shall be separately shown under ‘Other financial liabilities’.
9. Preference shares including premium received on issue, shall be classified and presented
as ‘Equity’ or ‘Liability’ in accordance with the requirements of the relevant Indian
Accounting Standards. Accordingly, the disclosure and presentation requirements in
that regard applicable to the relevant class of equity or liability shall be applicable
mutatis mutandis to the preference shares. For instance, redeemable preference
shares shall be classified and presented under ‘non-current liabilities’ as ‘borrowings’
and the disclosure requirements in this regard applicable to such borrowings shall be
applicable mutatis mutandis to redeemable preference shares.
10. Compound financial instruments such as convertible debentures, where split into equity
and liability components, as per the requirements of the relevant Indian Accounting
Standards, shall be classified and presented under the relevant heads in ‘Equity’ and
‘Liabilities’
11. Regulatory Deferral Account Balances shall be presented in the Balance Sheet in
accordance with the relevant Indian Accounting Standards.
SCHEDULE III 51
PART II - STATEMENT OF PROFIT AND LOSS

Name of the Company.........................
Statement of Profit and Loss for the period ended................
Particulars Note Figures as at the Figures for the

No. end of current Previous reporting
reporting period Period
I Revenue from operations
II Other Income
III Total Income (l + Il)
IV EXPENSES
Cost of materials consumed
Purchases of Stock-in-Trade
Changes in inventories of finished
goods, Stock-in -Trade and work-
in-progress
Employee benefits expense
Finance costs
Depreciation And amortization
expenses
Other expenses
Total expenses (lV)
V Profit/(loss) before exceptional
items and tax (I-IV)
VI Exceptional Items
VII Profit/ (loss) before exceptions
items and tax (V-VI)
VIII Tax expense:
(1) Current tax
(2) Deferred tax
IX Profit (Loss) for the period
from continuing operations (VlI
- VlII)
X Profit/(loss) from discontinued

operations
XI Tax expenses of discontinued
operations
XII Profit /(loss) from Discontinued
operations (after tax) (X-XI)
XIII Profit (loss) for the period
(IX-XII)
XIV Other Comprehensive Income
A. (i) Items that will
not be reclassified
to profit or loss
(ii) Income tax relating
to items that will
not be reclassified
to profit or loss
B (i) (item that will be
reclassified to
profit or loss
(ii) lncome tax relating
to items that will
be reclassified to
profit or loss
XV Total Comprehensive Income

for the period (XIII+XIV)
Comprising Profit (Loss) and
other comprehensive Income
for the period )
XVI Earnings per equity share (for
continuing operation):
(1) Basic
(2) Diluted
XVII Earnings per equity share (for
discontinued operation)
(1) Basic
SCHEDULE III 53
(2) Diluted
XVIII Earning per equity share for
discontinued & continuing
operation)
(1) Basic
(2) Diluted
GENERAL INSTRUCTIONS FOR PREPARING OF

STATEMENT OF PROFIT AND LOSS
1. The provisions of this Part shall apply to the income and expenditure account, in like
manner as they apply to a Statement of Profit and Loss,
2. The Statement of Profit and Loss shall include:
(1) Profit of loss for the Period;
(2) Other Comprehensive Income for the period
The sum of (1) and (2) above is “Total Comprehensive Income”
3. Revenue from operations shall disclose separately in the notes
(a) sale of products (including Excise Duty);
(b) sale of services; and
(c) other operating revenues.
4. Finance Costs: Finance costs shall be classified as-
(a) interest;
(b) dividend on redeemable preference shares;
(c) exchange differences regarded as an adjustment to borrowing costs; and
(d) other borrowing costs (specify nature).
5. Other income: other income shall be classified as-
(a) interest Income;
(b) dividend Income; and
(c) other non-operating income (net of expenses directly attributable to such income)
6. Other Comprehensive Income shall be classified into-
(A) Items that will not be reclassified to profit or loss
(i) Changes in revaluation surplus;
(ii) Re-measurements of the defined benefit plans;
(iii) Equity Instruments through Other Comprehensive Income;

(iv) Fair value changes relating to own credit risk of financial liabilities designated at
fair value through profit or loss;
(v) Share of Other Comprehensive Income in Associates and Joint Ventures, to the
extent not to be classified into profit or loss; and
(v) Share of Other Comprehensive Income in Associates and Joint Ventures, to the
extent not to be classified into profit or loss; and
(vi) Others (specify nature).
(B) Items that will be reclassified to profit or loss;
(i) Exchange differences in translating the financial statements of a foreign
operation;
(ii) Debt instruments through Other Comprehensive Income;
(iii) The effective portion of gains and loss on hedging instruments in a cash flow
hedge;
(iv) Share of other comprehensive income in Associates and Joint Ventures, to the
extent to be classified into profit or loss; and
(v) Others (specify nature)
7. Additional Information: A Company shall disclose by way of notes, additional
information regarding aggregate expenditure and income on the following items:
(a) employee Benefits expense (showing separately (i) salaries and wages, (ii)
contribution to provident and other funds, (iii) share based payments to employees,
(iv) staff welfare expenses).
(b) depreciation and amortisation expense;
(c) any item of income or expenditure which exceeds one per cent of the revenue from
operations or ` 10,00,000, whichever is higher, in addition to the consideration of
‘materiality ‘as specified in clause 7 of the General Instructions for Preparation
of Financial Statements of a Company;
(d) interest Income;
(e) interest Expense
(f) dividend income;
(g) net gain or loss on sale of investments;
(h) net gain or loss on foreign currency transaction and translation (other than
considered as finance cost);
(i) payments to the auditor as (a) auditor, (b) for taxation matters, (c) for company
law matters, (d) for other services, (e) for reimbursement of expenses;
SCHEDULE III 55
(j) in case of companies covered under section 135, amount of expenditure incurred
on corporate social responsibility activities; and
(k) details of items of exceptional nature;
8. Changes in Regulatory Deferral Account Balances shall be presented in the Statement
of Profit and Loss in accordance with the relevant Indian Accounting Standards
PART III - GENERAL INSRUCTIONS FOR

THE PREPARATION OF CONSOLIDATED
FINANCIAL STATEMENTS
1. Where a company is required to prepare Consolidated Financial Statements, i.e,,
consolidated balance sheet, consolidated statement of changes in equity and
consolidated statement of profit and loss, the company shall mutatis mutandis follow
the requirements of this Schedule as applicable to a company in the preparation of
balance sheet, statement of changes in equity and statement of profit and loss .ln
addition, the consolidated financial statements shall disclose the information as per
the requirements specified in the applicable Indian Accounting Standards notified
under the Companies (lndian Accounting Standards) Rules 2015, including the following,
namely:
(i) Profit or loss attributable to ‘non-controlling interest ‘and to ‘owners of the
parent’ in the statement of profit and loss shall be presented as allocation for
the period Further, ‘total comprehensive income for the period attributable
to ‘non-controlling interest’ and to ‘owners of the parent shall be presented in
the statement of profit and loss as allocation for the period. The aforesaid
disclosures for ‘total comprehensive income shall also be made in the statement
of changes in equity. In addition to the disclosure requirements in the Indian
Accounting Standards, the aforesaid disclosures shall also be made in respect of
‘other comprehensive Income
(ii) ‘Non-controlling interests’ in the Balance Sheet and in the Statement of Changes
in Equity, within equity, shall be presented separately from the equity of the
‘owners of the parent’.
(iii) Investments accounted for using the equity method.
2. In Consolidated Financial Statement, the following shall be disclosed by the way of
additional information
Name of the Net Asset i.e. total Share in profit or Share in other Share in total
56
entity in the assets minus total loss comprehensive income comprehensive

Group liabilities income
As % of Amount As % of Amount As % of Amount As % Amount
consolidated consolidated consolidated of total
net assets profit or other compre-
loss comprehensive hensive
income income
Parent subsidiaries
Indian
1.
2.
3.
Foreign
1.
2.
3.
Non-Controlling
Interest in
alls ubsidiaries
Associates
(Investmentas
per the equity
method) Indian
ADVANCED ACCOUNTING
Name of the Net Asset i.e. total Share in profit or Share in other Share in total
entity in the assets minus total loss comprehensive income comprehensive
Group liabilities income
Indian
1.
SCHEDULE III
2.
3.
Foreign
1.
2.
3.
Joint Venture
(Investment as
per the equity
method)
Indian
1.
2.
3.
Foreign
1.
2.
3.
57
Total
3. All subsidiaries, associates and joint venture (whether Indian or Foreign) will be
covered under consolidated financial statement.
4. An entity shall disclose the list of subsidiaries or associates or joint venture which
have been consolidated in the consolidated financial statement along with the reason
of not consolidating.]
QUESTIONS ON SCHEDULE 3 (SELF READING) 59
QUESTIONS ON SCHEDULE 3 (SELF READING)

QUESTION 1
What happens when requirements of schedule 3 contradicts with the Provisions of

Accounting Standards?
SOLUTION
Where compliance with the requirements of the Act including Accounting Standards
as applicable to the companies require any change in treatment or disclosure including
addition, amendment, substitution or deletion in the head or sub-head or any changes,
in the financial statements or statements forming part thereof, the same shall be made
and the requirements of this Schedule shall stand modified accordingly. The disclosure
requirements specified in this Schedule are in addition to and not in substitution of the
disclosure requirements specified in the Accounting Standards prescribed under the
Companies Act, 2013. Additional disclosures specified in the Accounting Standards shall
be made in the notes to accounts or by way of additional statement unless required to be
disclosed on the face of the Financial Statements.
NOTE: This part of Schedule sets out the minimum requirements for on the face of
the Balance Sheet, and the Statement of Profit and Loss (hereinafter referred to as
—Financial Statements || for the purpose of this Schedule) and Notes. Line items, sub-
line items and sub-totals shall be presented as an addition or substitution on the face
of the Financial Statements when such presentation is relevant to an understanding of
the company’s financial position or performance or to cater to industry/sector-specific
Companies Act or under the Accounting Standards.
QUESTION 2
How can an asset be classified as a current assets?
SOLUTION
(a) it is expected to be realized, or is intended for sale or consumption, in the company’s

normal operating cycle; or
(b) it is held primarily for the purpose of being traded; or
(c) it is expected to be realized within twelve months after the reporting date; or
(d) it is cash or cash equivalent unless it is restricted from being exchanged or used to
settle a liability for at least twelve months after the reporting date.
QUESTION 3
How can an asset be classified as a non-current asset?
SOLUTION
The Asset other than Current Asset shall be classified as non current assets.
QUESTION 4
What is the meaning of an operating cycle?
SOLUTION
Time between the acquisition of assets for processing and Their realization in cash or cash
equivalents.
Where the normal operating cycle cannot be identified: It is assumed to have duration of
12 months.
QUESTION 5
ICAI Ltd provides you the following information :
1. Raw material stock holding period : 3 months

2. Work –in-progress holding perios : 1 month
3. Finished goods holding period : 4 monjths
4. Debtors collection period : 6 months
You are required to compute the operating cycle.
SOLUTION
According to Schedule III “an operating cycle is the time between the acquisition of assets
for processing and their realization in cash or cash equivalents”.
Operating Cycle = Raw material stock holding period+work-in-progress holding period +
Finished goods holding period+Debtors Collection period = 3+1+4+6=14 months.
QUESTION 6
State giving reason whether the Trade Receivables are Current Assets or Non-Current
Assets as per Schedule III in the following cases.
Case Operating Cycle Period Expected Realization period

1 11 months 10 months
2. 11 months 12 months
SOLUTION
Case Current Assets or Reason

Non-Current Assets
1 Current Assets Expected Realization period

- Is less than the Operating Cycle period and
- Is within 12 months
2. Current Assets Expected Realization Period within 12 months although

it is more than the Operating Cycle period
3. Non-Current Assets Expected Realization period is more than the Operating

Cycle Period and 12 months Period.
4. Current Assets Expected Realization period is less than the Opeating

Cycle period although it is more than the 12 months
period.
5. Non-Current Assets Expected Realization period is more than the operating

cycle period and the 12 months period.
QUESTION 7
State giving reason whether the Trade payables are Current Liabilities or Non-Current
Liabilities as per schedule III in the following cases:
Case Operating Cycle Period Expected Payment Period
SOLUTION:
Case Operating Cycle Expected Payment Period

Period
1 Current Liabilities Expected Payment Period

- Is less than the Operating Cycle period and
- Is within 12 months
2. Current Liabilities Expected Payment period is within 12 months although

it in more than the Operating Cycle period.
3. Non-Current Liabilities Expected Payment period is more than the operating

Cycle period and 12 months period.
4. Non-Current Liabilities Expected Payment period is more than the Operating

Cycle Period and the 12 months period.
QUESTION 8 (MAY 14) (8 MARKS)
ICAI Ltd. Is in the process of finalizing its accounts for year ended 31st March, 2015 and
furnishes the following information:
(i) Finished goods normally are held for 1 month before sale.
(ii) Sales realization from Debtors usually takes 2 months from date of credit invoice.
(iii) Raw materials are held in stock to cover 1 month’s production requirements.
(iv) Packing materials, being specifically made for the company and having lead time of 3
months is held in stock for 3 months.
(v) Being a monopoly KAY Ltd. Enjoys a credit period of 12.5 months from its suppliers
who sometimes at the end of their credit opt for conversion of their dues into long
term debt of KAY Ltd.
You are required to compute the operating cycle of ICAI Ltd. As per Schedule III of The
Companies Act, 2013. As the suppliers of the company are paid off after a credit period of
12.5 months should this be part of Current Liability ? Would your answer be the same if the
creditors are settled in 330 days ?
SOLUTION:
Operating Cycle: 1+1+3+1+2=8 months
(Credit Period given by Suppliers should not be deducted while computing operating cycle
as per Schedule 3)
Classification of Liability to suppliers : Schedule III provides that :

“A liability shall be classified as current when it satisfies any of the following criteria:
(i) It is expected to be settled in the company’s normal operating cycle ;

(ii) It is held primarily for the purpose of being traded;
(iii) It is due to be settled within 12 months after the reporting date; or
(iv) The company does not have an unconditional right to defer settlement of the liability
for at least 12 months after the reporting date. Terms of a liability that could, at the
option of the counterparty, result in its settlement by the issue of equity instruments
and do not affect its classification”.
(a) When Credit period is 12.5 months : It will be treated as non-current liability
since it is not due to be settled within 12 months after the reporting date.
(b) When credit period is 330 days (i.e. 11 months approx.) : It will be treated as
current liability since it is due to be settled within 12 months after the reporting
date.
QUESTION 9
X Ltd. Provides you the following Information.
1. Raw material stock holding period : 4 months.

2. Work-in-progress holding period : 2 months.
3. Finished goods holding period : 3 months.
4. Debtors collection period : 4 months
You are required to compute the operating Cycle.
SOLUTION
As per Schedule III “An operating Cycle is the time between the acquisition of Assets for
processing and their realization in cash or cash equivalents”.
Statement showing calculation of Operating Cycle
Raw material stock holding period = 4 months
+ work-in-progress holding period = 2 month
+ Finished goods holding period = 3months
+Debtors collection period = 4months
---------------
13 months
---------------
QUESTION 10
H Ltd. engaged in the business of manufacturing lotus wine. The process of manufacturing
this wine takes around 18 months. Due to this reason H Ltd. has prepared its financial
statements considering its operating cycle as 18 months and accordingly classified the raw
material purchased and held in stock for less than 18 months as current asset. Comment
on the accuracy of the decision and the treatment of asset by H Ltd. As per Schedule III.
SOLUTION
• As per Schedule III, one of the criteria for classification of an asset as a current
asset is that the asset is expected to be realised in the company’s operating cycle or
is intended for sale or consumption in the company’s normal operating cycle.
• Further, Schedule III defines that an operating cycle is the time between the
acquisition of assets for processing and their realization in cash or cash equivalents.
• However, when the normal operating cycle cannot be identified, it is assumed to
have duration of 12 months. As per the facts given in the question, the process of
manufacturing of lotus wine takes around 18 months; therefore, its realisation into
cash and cash equivalents will be done only when it is ready for sale i.e. after 18
months.
• This means that normal operating cycle of the product is 18 months. Therefore,
the contention of the company’s management that the operating cycle of the
product lotus wine is 18 months and not l2 months is correct. H. Ltd. will classify
the raw material purchased held in stock as current asset.
QUESTION 11
How can a liability be classified as a current liability?
SOLUTION
(a) It is expected to be settled in the company normal operating cycle; or

(b) It is held primarily for the purpose of being traded; or
(c) It is due to be settled within twelve months after the reporting date; or
(d) The company does not have an unconditional right to defer settlement of the liability
for least twelve months after the reporting cm Terms of a liability that could, at the
option the counterparty, result in its settlement by the issue of equity instruments do
not affect its classification.
QUESTION 12
How can a liability be classified as a non-current liability?
SOLUTION
The liability other than Current liability shall be classified as Non-Current.
QUESTION 13 (AUDIT-MAY-13)
The Balance Sheet of G Ltd as at 31st March 13 is as under. Comment on the presentation
in terms of revised Schedule III and Accounting Standards issued by NFRA.
Heading Note No. 31s‘ March, 13 31st March, 12

Equity & Liabilities
Share Capital 1 xxx xxx
Reserves & Surplus 2 0 0
Employee stock option outstanding 3 xxx xxx
Share application money 4 xxx xxx
Non-Current Liabilities 5 xxx xxx
Deferred tax liability (Arising from
Indian Income Tax)
Current Liabilities 6 xxx xxx
Trade Payables xxx xxx
Total xxxx xxxx
Assets
Non-Current Assets
Fixed Assets-Tangible 7 xxx xxx
CWIP (including capital advances) 8 xxx xxx
Trade Receivables 9 xxx xxx
Deferred Tax Asset((Arising from
10 xxx xxx
Indian Income Tax)
P&l Debit balance
Total xxxx xxxx
SOLUTION
Following Errors are noticed in presentation as per Schedule III:
(I) Share Capital & Reserve & Surplus are to be reflected under the heading Shareholders’
funds, which is not shown while preparing the balance sheet. Although it is a part
of Equity and Liabilities yet it must be shown under head Shareholders ‘funds. The
heading Shareholders ‘funds is given in the question missing in the balance sheet.
(ii) Reserve & Surplus is showing zero balance, which is not correct in the given case. Debit
balance of statement of profit & Loss should be shown as a negative figure under the
head Surplus’. The balance of Reserves and Surplus’, after adjusting negative balance
of surplus shall be shown under the head Reserves and Surplus ‘even if the resulting
figure in negative.
(iii) Schedule III requires that Employee Stock Option outstanding should be disclosed
under the heading Reserves and Surplus
(iv) Share application money refundable shall be shown under the sub-heading Other
Current Liabilities. As this is refundable and not pending for allotment, hence it is not
a part of equity.
(v) Deferred Tax Liability has been correctly shown under Non-Current Liabilities. But
Deferred tax assets and deferred tax liabilities, both, cannot be shown in balance
sheet because only the net Balance of Deferred Tax Liability or Asset is to be shown.
(vi) Under the main heading of Non-Current Assets, Fixed Assets are further classified
as under:
I. Tangible assets II. Intangible assets
III. Capital work in Progress IV. Intangible assets under development.
Keeping in view the above, the CWIP shall be shown under Fixed Assets as Capital Work
in Progress. The amount of Capital advances included in CWIP shall be disclosed under
the sub heading Long term loans and advances under the heading Non-CurrentAssets.
(vii) Deferred Tax Asset shall be shown under Non-Current Asset. It should be the net
balance of Deferred Tax Asset after adjusting the balance of deferred tax liability.
QUESTION 14
How will you disclose the following items while preparing the Balance Sheet of a company ?
1. Trade Receivables
2. Trade Payables
3. Current Maturities of Long-term debt.
SOLUTION:
1. Trade Receivables are to be classified as Current Assets if Expected Realization

period is either within the Operating Cycle Period of within the 12 months period.
2. Trade Payables are to be classified as Current Liabilities if expected payment period
is either within the 12 months period.
3. Current Maturities of Long-term Debt represents that portion of long-term borrowings
which is due within 12 months from the date of Balance Sheet or with in Operating
Cycle Period. It appears under the head ‘Current Liabilities and sub-head ‘Other
Current Liabilities’. For example 12% Debentures of Reliance Ltd. Rs. 100 lacs (20%
Redeemable within 1 year). Rs. 20 lacs will appear as Current maturity of Long-term
Debt under the head ‘Current Liabilities’ and sub-head ‘other Current Liabilities and
Rs. 80 lacs will appear under the head ‘Non-Current Liabilities’ and sub head ‘Long-
Term Borrowing’.
QUESTION 15
State under which head these accounts should be classified in balance Sheet, as per
Schedule III to The Companies Act 2013:
i) Shares application money received in excess of issued share capital.

ii) Share option outstanding account.
iii) Unpaid matured debenture and interest accrued thereon.
iv) Uncalled liability on shares and other partly paid investments.
v) Calls unpaid.
vi) Intangible Assets underdevelopment
vii) Money received against share warrant.
viii) Long term maturity of finance lease obligation.
SOLUTION:
Classification of following accounts for the presentation in
Schedule III to be Companies Act, 2013.
Accounts Head
i) Share application money received in excess of Other Current liabilities.
issue share capital
ii) Share option outstanding account Reserve & Surplus
iii) Unpaid matured debenture and interest accrued Other Current Liabilities.
thereon
iv) Uncalled liability on share and other partly paid Contingent Liabilities and
investment. commitments-Commitments to
the extend not provided for
v) Calls unpaid Share Capital
vi) Intangible Assets under development Fixed Assets
vii) Money received against share warrant Shareholder’s Fund
viii) Long term maturity of finance lease obligation Long term Borrowings.
QUESTION 16
The management of X Ltd. Contends that the work in process is not valued since it is
difficult to ascertain the same in view of the multiple processes involved. They opined that
the value of opening and closing work in process would be more or less the same. Accordingly,
the management had not separately disclosed work in process in its financial statements.
Comment in line with schedule III.
SOLUTION:
Schedule III to the Companies Act, 2013 requires the disclosure of opening and closing
WIP under broad heads by way of additional information (General Instruction 5 (iii)). In
addition, AS-2 also requires the valuation of WIP. Therefore, the non-disclosure in the
financial statements by the company amounts to violation of Schedule III.
QUESTION 17
Is non-disclosure of source from which Bonus shares have been issued, a violation of
Schedule III to the Companies Act, 2013?
SOLUTION
No, since Schedule III does not require such disclosure. Schedule III merely requires the
disclosure of aggregate number and class of shares allotted as fully paid up bonus shares for
a period of years immediately preceding the balance sheet date is the Notes to accounts.
QUESTION 18
Y Ltd. Paid Rs. 25 lakhs as advance to X Ltd. towards the purchase of printing machinery
on 15.01.2015 with delivery instruction to deliver the same in the last week of June, 2015.
Further on 15.02.2015. X Ltd. Purchased two diesel generator sets from Y Ltd. For Rs. 30
Lakhs on 90 days Credit term. In the accounts for 2014-15, X Ltd. Intends to adjust the
advance paid against Credit purchase and show the net amount of Rs. 5 lakhs as due from
them. As the Statutory Auditor, how would you deal with this?
SOLUTION:
Since X Ltd. Has paid advance amount to the supplier of machinery to be used in the project,
such advance amount should be grouped under the main heading ‘Non-Current Assets’ with
the sub-head as Fixed Assets with a sub-classification as ‘Capital work-in-Progress.’ This is
as per requirement of Schedule iii to the Companies Act, 2013 and the existing accounting
practice.
It the advance is for purchase of their machinery, it should be grouped under a separate
head-‘Long Term Loan and advance’ with a sub-classification as ‘Capital Advance’ under the
main heading ‘Non-current Assets’. In view of the above, the proposal of X Ltd. To show
the net balance in the personal accounts of Y Ltd. Is not correct. Such proposal will conceal
the two material items in the balance sheet-one, expenditure towards capital asset and the
other current liability for purchase of the generator set.
Hence, the auditor should advice X Ltd., to show these two items separately. If X Ltd., does
not accept the advice, the auditor should qualify his report with suitable quantification of
amount involved.
PROBLEM 19
ICAI Ltd. Issued Bonds to the tune of Rs. 100 lacs and provided security to the tune of Rs.
80 lacs for the same. It insists that it will disclose the Bonds as “Secured” in the balance
Sheet of the company. Comment.
SOLUTION:
Prima Facie, the Bonds Issued to the tune of Rs. 100 lacs are provided with security to the
tune of Rs. 80 lacs i.e. neither fully secured nor unsecured. Guidance Note on the ‘Terms
used in Financial Statements’ issue by ICAI, states “Secured Loans’ as loan secured wholly
or partly against tan assets. Hence the Bond should be classified under ‘Secured Loans’ for
the purpose of disclosure in the balance sheet. However the nature of security should be
clearly specified.
QUESTION 20
What are the mandatory disclosures to be made in notes to accounts under the heading of
share capital as per schedule 3?
SOLUTION
a. The number and amount of shares authorized.

b. The number of shares issued, subscribed and fully paid, and subscribed but not fully
paid.
c. Par value per share.
d. A reconciliation of the number of shares outstanding at the beginning and at the

end of the reporting period.
e. The rights, preferences and restrictions attaching to each class of shares including
restrictions on the distribution of dividends and the repayment of capital.
f. Shares in respect of each class in the company held by its holding company or its
ultimate holding company including shares held by or by subsidiaries or associates of
the holding company or the ultimate holding company in aggregate.
g. Shares in the company held by each shareholder holding more than 5 per cent,
shares specifying the number of shares held.
h. Shares reserved for issue under options and contracts/commitments for the sale of
shares/disinvestment, including the terms and amounts.
i. For the period of five years immediately preceding the date as at which the Balance
Sheet is prepared.
i. Aggregate number and class of shares allotted as fully paid-up pursuant to
contract(s) without payment being received in cash.
ii. Aggregate number and class of shares allotted as fully paid-up by way of bonus
shares.
iii. Aggregate number and class of shares bought back.
j. Terms of any securities convertible into equity/preference shares issued along with
the earliest date of conversion in descending order starting from the farthest such
date.
k. Calls unpaid (showing aggregate value of calls unpaid by directors and officers).
l. Forfeited shares (amount originally paid-up).
QUESTION 21
What are the mandatory disclosures to be made under the heading of Reserves & Surpluses?
SOLUTION
As per the provisions of schedule 3 of companies act 2013, the reserves of a company
should be classified as follows:
1) Capital Reserves;
2) Capital Redemption Reserve;
3) Securities Premium Reserve;
4) Debenture Redemption Reserve;
5) Revaluation Reserve;
6) Share Options Outstanding Account;

7) Other Reserves (specify the nature and purpose of each reserve and the amount in
respect thereof);
8) Surplus i.e., balance in Statement of Profit and Loss disclosing allocations and
appropriations such as dividend, bonus snares and transfer to/from reserves, etc.;
specified heads);
Reserve specifically represented by earmarked investments shall be termed as a

“fund”. Debit balance of statement of profit and loss Shall be shown as a negative figure
under the head “Surplus”. Similarly, the balance of “Reserves and Surplus”, after adjusting
negative balance of surplus, if any, shall be shown under the head “Reserves and Surplus”
even if the resulting figure is in the negative.
QUESTION 22
Explain the meaning of share warrants?
SOLUTION
Meaning: A share warrant is a bearer document of title to shares and can be issued only by
public limited companies and that to against fully paid up shares only.
A share warrant cannot be issued by a private company, because the share warrant states
that its bearer is entitled to a number of shares mentioned there in. It is a negotiable
document and is easily transferable by mere delivery to another person. The holder of the
share warrant is entitled to receive dividend as decided by the company.
A share warrant is accompanied by attached coupons for the payment of future dividends.
There are three parts of a share warrant:
(1) The counter foil.

(2) Share Warrant proper.
(3) The dividend coupons.
Conditions for the issue of a share warrant:
(1) Only public limited companies: Share warrant can be issued by the public limited
companies. It cannot be issued by private companies.
(2) Against share certificate of fully paid up shares: A share warrant is only issued
against share certificate of fully paid up shares.
(3) Provision in the Articles: There must be a provision in the Articles of Association
regarding the issue of share warrant. If there is a provision, the company can issue
a share warrant. If there is no provision in the Articles, the company cannot issue a
share warrant.
(4) Permission of the Central Government: Prior permission from the Central Government
is necessary for the issue of share warrant.
(5) Share warrant not issued originally: Share warrant are not issued originally at the
time of initial issue.
(6) At the request of the share holder: A share warrant is issued at the request of the
Shareholders / member and not by the company at its own initiative.
In simple terms, a warrant is like an option issued by a company that gives the holder the
right to buy stock from the company at a specified price within a certain designated time
period. Generally speaking, warrants are issued by the company whose stock underlies the
warrant and when an investor exercises a warrant, he or she buys stock from the company.
A stock warrant is a way for a company to raise money through equity (stocks). A stock
warrant is a smart way to own shares of a company because a warrant usually is offered at
a price lower than that of a stock option. ^1
Like an option, a warrant does not represent actual ownership in the stock of the company
and it is simply the right (but not the obligation) to buy shares at a certain price in the
future.
The main difference between warrants and call options is that warrants are issued and
guaranteed by the company, whereas options are exchange instruments and are not issued
by the company. Also, the lifetime of a warrant is often measured in years, while the
lifetime of a typical option is measured in months
1. A share warrant can be issued only when the shares are fully paid up whereas a share
certificate can be issued at any stage without the shares being fully paid up.
2. A share warrant is a negotiable instrument but a share certificate is not.
3. A share certificate is a document showing prima facie title to the shares represented
thereby but a share warrant is the share security itself capable of easy transfer.
4. A holder of a share certificate is a member of the company but the holder of a share
warrant is not, unless the articles otherwise provide.
5. A share certificate can be issued both by a public and a private company but a share
warrant is issued only by a public company.
QUESTION 23
How will you disclose the following items while preparing the Balance Sheet of a Company?
Item Major Head Sub-Head Sub-Sub-Head
Preference Share whose Shareholder’s Share Capital

redemption overdue Funds (As per
ICAI’s Guidance
Note)
Share Application money Shareholder’s Share Capital

pending Allotment-Not Fund
exceeding Issued Capital
and to the extend not
refundable
Share Application Money Current Liabilities Other Current

pending Allotment-to the Liabilities
extent refundable
Debit Balance of Prifit & Shareholder’s Reserves and

Loss A/c Funds Surplus (As a
Negative Figure)
Loans repayable after Non-Current Long-term

Operating Cycle liabilities Borrowings
Loans repayable within Current Liabilities Short-Term

Operating Cycle/12 Borrowing
months
Loans repayable on Current liabilities Short-Term

demand Borrowing
Trade Payables to be Current Liabilities Trade Payables

settled within Operating
Cycle /12 months
Interest accused and due Current Liabilities Other Current

on Long-Term Borrowings Liabilities
Outstanding Expenses Current Liabilities Other Current

Liabilities
Tax Payable Current Liabilities Other Current

Liabilities
Bank Overdraft Current Liabilities Other Current

liabilities
Unpaid/Unclaimed Dividend Current Liabilities Other Current

Liabilities
Matured Deposits Current Liabilities Other Current

Liabilities
Matured Debentures Current Liabilities Other Current Current

Liabilities Maturities of
Long-Term
Debt.
That portion of Long- Current Liabilities Other Current

Term Borrowings repayable Liabilities
within 12 months
Provision for tax Current Liabilities Other Current

Liabilities
Proposed Dividend Current Liabilities Short-Term It may be noted

>Note: This Provisions that revised
treatment is schedule VI
as per ICAI’s requires merely
Guidance Note the disclosure
and AS 4) in Note to
Accounts.
Provision for Employee Current Liabilities Other Current

Benefits to the settled Liabilities
with 12 months
Provision for Employee Non-Current Long-term

Provident Fund to be Liabilities Provisions
settled after 12 months
Provision for Employee Non-Current Long-term

Provident Fund to be Liabilities Provision
settled after 12 months
Live Stock Current Liabilities Fixed Assets Tangible Assets
Brands Current Liabilities Fixed Assets Intangible

Assets
Intellectual Property Current Liabilities Fixed Assets Intangible

Rights Assets
Licenses and Franchise Current Liabilities Fixed Assets Intangible

Assets
Building under construction Current Liabilities Fixed Assets Capital work-in-

Progress
Computer Software under Non-Current Fixed Assets Intangible

Development Assets Assets under
Development
Investment in Property Non-Current Non-Current

Assets Investments
Capital Advances Non-Current Long-Term Loans

Assets and Advances
Security Deposits Non-Current Long-Term Loans

Assets and Advances
Deposits with Custom Non-Current Long-Term Loans

Authorities Assets and Advances
Loans & Advances Non-Current Long-term loans

Receivable after 12 Assets and advances
months
Discount/Loss on issue of As per Para 56 of Other Non-

Debentures /Share Issued AS 26, Intangible Current Assets
Exp. To be w/o after 12
months
Preliminary Expenses
Preliminary Expenses As per Para

56 of AS 26,
intangible Assets’,
Preliminary
expenses are to
be recognized
as expenses as
and when they
are incurred.
Hence, Preliminary
Expenses are not
to appear in the
Balance Sheet.
Work-in-Progress Current Assets Inventories
Loose Tools Current Assets Inventories
Stores & Spares Current Assets Inventories
Trade Receivables to be Current Assets Trade Receivables

realized within 12 months/
Operating Cycle
Provision for Doubtful Current Assets Trade Receivables

Debts (Shown by way of
deduction).
Cheques/Drafts on hand Current Assets Cash and Cash

Equivalents
Bank Deposits with more Current Assets Cash and Cash

than 12 months maturity Equivalents
Loan & Advances Current Assets Short-term Loans

receivable within 12 and Advances
months
Prepaid Expenses Current Assets Other Current

Assets
Interest accrued on Current Assets Other Current

Investments Assets
Unpaid Amount on Shares Current Assets Other Current

subscribed by Subscribers (Note: Subscribed Assets
to Memorandum of and paid up share
Association capital will include
such unpaid
amount)
Calls Unpaid on Shares Notes to

other than those Accounts (Note
subscribed by Subscribers : Subscribed and
to Memorandum of paid up Share
Associations Capital will be net
of Calls unpaid).
Guarantees Notes to Accounts Contingent Contingent

Liabilities and Liabilities
Commitments
Bills Discounted but not Notes to accounts Contingent Contingent

yet matured Liabilities and liabilities.
Commitments
Uncalled Liabilities on Notes to Accounts Contingent Commitments

partly paid Shares held as Liabilities and
Investments Commitments
Uncalled liability on partly Notes to Accounts Contingent Commitments.

paid Debentures held as Liabilities and
investments. Commitments
Arrears of Fixed Notes to Accounts Contingent Commitments.

Cumulative Dividends on Liabilities and
Preference Shares Commitments
Allocations and Notes to Accounts Reserves and Surplus

Appropriations such as Surplus
Dividend, bonus Shares
and Transfer to/from
Reserves
NOTES
ACCOUNTING STANDARD 7: CONSTRUCTION CONTRACTS 79
ACCOUNTING STANDARD: 7
CONSTRUCTION CONTRACTS
QUESTION NO 1
Sambu Ltd. negotiates with Indian Oil, for construction of “Franchise Retail Petrol Outlet
Stations” Based on proposals submitted to different Zonal Offices of Indian Oil, the final
approval for one outlet each in Behapora Salem, Vadodara and Warrangal is awarded to
Sambu Ltd. Agreement (in single document) is entered into with Indian Oil for Rs. 25 Lakhs.
The agreement lays down values for each of the four outlets (Rs. 44 + 66 + 80 + 55 Lakhs)
in addition to individual completion time. Comment whether Sambhu Ltd. will treat it as a
single contract or four separate contracts.
SOLUTION
• Analysis: Here, each Outlet is submitted as a separate proposal to different Zonal
Office, separately negotiated, and costs and revenues thereof can be separately
identified. Hence, each Asset will be treated as a “Single contract” even if there is
only one document of contract.
• Conclusion: Four separate Contract Accounts have to be recorded and maintained in
the books of Sambu Ltd. for each contract, principles of revenue and cost recognition
have to be applied separately, and Net Income determined for each assets as per
AS-7.
QUESTION NO 2
Nandi, a Contractor, has just entered into a contract with a Local Municipal Body for
building a Flyover. As per the contract terms, Nandi was receive an additional Rs. 2 Crores,
if the construction of the Flyover were to be finished within a period of two years of the
commencement of the contract. Nandi wants to recognize this revenue since in the past he
has been able to meet similar targets very easily. Give your views on the above.
SOLUTION
1. Analysis: Incentive payments are included in Contract Revenue when the contract is
sufficiently advanced that it is probable that the specified performance standards
will be met and the amount of the incentive payment can be measured reliably.
2. Conclusion: In the above case the, the contract is not even begun. The Contractor
should not recognize Incentive Income.
QUESTION NO 3
Contractors Ltd. have recognized Contract Revenue on a contract awarded in the current
financial year. The target date of completion is 5 years. The Contractor provides for
Incentives for early completion of at the rate of Rs. 1000 per day, subject to a maximum
of Rs. 300,000. The company has included this amount in the Contract Revenue (in the first
year of contract) on the ground that based on the previous experience in similar contract,
it is confident of completing the contract in 4 years. The Company’s past track record
shows that the Company was able to complete such contacts well in time and earn incentives.
Comment on the Company’s accounting policy.
SOLUTION
1. Past Track Record is not a criteria for recognition of Incentive Payments Receivable
for early completion of contract.
2. In the above case, the contract is not sufficiently advanced, i.e. first year only and its
normal time of completion in 4-5 years. Hence, the recognition criteria of Incentive
Payments as per AS-7 and not satisfied. Inclusion of Incentive Payments Receivable in
the current year as part of Contract Revenue is not proper.
QUESTION NO 4
Viswakrma Ltd. undertook a Construction Contract for Rs. 50 Crores in April. The cost of
construction was initially estimated at Rs.35 Crores. The contract is to be completed in 3
years. While executing the contract, the Company estimated the cost of completion of the
contract at Rs. 53 Crores. Can the Company provide for the expected loss in the books of
accounts for the year ended 31st March?
SOLUTION
1. Provision: As per AS-7, an Expected Loss on Construction Contract should be
recognized as Expense immediately.
2. Conclusion: The Loss of Rs. 3 Crores (53 Crores – 50 Crores) should be recognized
immediately by Viswakarma Ltd. in the current Financial year.
QUESTION NO 5
Mayan Construction Company accounted for a Contract entered into with a Government
Department on Completed Contract Method and that with a Private Sector Company on
Percentage of Completion Method. Both the Contracts were for development of a Township
State your views on the above.
SOLUTION
1. Principles: Revenue & Costs associated with a Construction Contract should be
recognized as revenue and expenses respectively by reference to the stage of
completion of the Contract activity at the reporting date.
2. Analysis: In the given case, the Construction Company accounts for the Contract with
Government Department on Completed Contract Method and for the Contract with
Private Sector Company, on Percentage Completion Method.
3. Conclusion: In view of the requirements of AS-7, the Contractor should use only
Percentage of Completion Method for recognizing revenue and expenditure of both
the Construction Contracts. So use of Completed Contract Method for the Contract
with Government Department is not correct.
QUESTION NO 6
Compute the percentage of completion and the Contract Revenues and costs to be recognized
from the following data.
• Contract Price – Rs. 75 Lakhs
• Materials issued – Rs. 18 Lakhs of which Materials costing Rs. 3 Lakhs is still lying
unused at the end of the period.
• Labour paid for workers engaged at site Rs. 12 Lakhs (Rs 2 Lakhs is still payable)
• Specific Contract Costs – Rs. 6 Lakhs, Sub-Contract Costs for work executed – Rs. 5
Lakhs, Advances paid to Sub-Contractors – Rs. 3 Lakhs.
• Cost estimated to be incurred to complete the Contract – Rs. 30 Lakhs
SOLUTION
Here, the Proportionate Cost Method will provide a realistic estimate of stage of completion.
This is calculated as under:-
Particulars Computation Amount

Materials Cost incurred on the Contract (net of Rs. 18(-) Rs.3 15 Lakhs
Closing Stock)
Add: Labour Costs incurred on the Contract (Paid + Rs. 12 + Rs.2 14 Lakhs
Payable)
Specific Contract Costs Given 6 Lakhs
Sub-Contract Costs (advances should not be Given 5 Lakhs
considered)
Costs Incurred Till Date 40 Lakhs

Add: Further Costs to be incurred Given 30 Lakhs
Total Contract Costs 70 Lakhs
Hence, Percentage of Completion based on Cost
Cost incurred till date 40 57.14%
=
Estimated Total Costs 70
Contract Revenue to be recognized (as per Para 21) 57.14% x Rs.75 42.86 Lakhs
Less: Contract Costs to be recognized as per 40.00 Lakhs
(as per Para 21) computer
Therefore, Contract Profit 2.86 Lakhs
QUESTION NO 7
Write short notes on Recognition of Expected Losses (Para 35 and 36).
SOLUTION
1. When it is probable that Total Contract Costs will exceed Total Contract Revenue, the
Expected Loss should be recognized as an Expense immediately.
2. The amount of such a loss is determined irrespective of –
(a) Whether or not work has commenced on the Contract.
(b) The Stage of Completion of Contract activity, or
(c) The amount of profits expected to arise on other Contracts, which are not treated
as a single Construction Contract inaccordance with Para 8.
QUESTION NO 8
A Company took a Construction Contract for Rs. 100 Lakhs in January, it was found that
80% of the Contract was completed at a cost of Rs. 92 Lakhs on the closing date i.e. 31st
March. The Company estimates further expenditure of Rs. 23 Lakhs to completing the
Contract. The Expected Loss would be RS. 15 Lakhs. Can the Company recognize the loss in
the Financial Statements prepared for the year ended 31st March?
SOLUTION
The Company should recognize Rs. 15 Lakhs as an Expense immediately.
QUESTION NO 9
Unknown construction contractor has undertaken a bridge construction contract, in respect

of which details has been given below:
(i) Initial amount of revenue Rs. 9,000 lakhs
(ii) Initial estimate of contract costs Rs. 8,000 lakhs
(iii) Contract duration - 3 years
Amount in Rs. lakhs
Years
1st 2nd 3rd
Estimated contract costs 8,050
Increase in contract revenue 200
Estimated additional contract costs 150
Cost incurred upto the reporting date 2,093 6,168 8,200
At the end of year 2, costs incurred include Rs. 100 lakhs for standard materials stored
at the site to be used in year 3 to complete the project. You are required to calculate the
profit/loss to be recognised in the Profit and Loss Account at the end of the each of three
years.
QUESTION NO 10
Certain Ltd. has signed at 31st Dec. the Balance Sheet date, a contract where the Total
Revenue is estimated at Rs. 15 Crore and Total Cost is estimated at Rs. 20 Crores. No work
began on the contract is the Contractor required to give an accounting effect for the year
ended 31st December?
SOLUTION
There is an Expected Loss of Rs. 5 Crores (20 Crores – 15 Crores) Such loss should be
recognized in the Profit and Loss Statement as per AS-7, even though work has not
commenced.
QUESTION NO 11
A Contractor entered into a contract for building roads for Rs. 2 Crores. After completing
60% of the contract he came to know that the cost of completing the contract would be Rs.
2.40 Crores. The Accountant transferred Rs. 0.24 Crores. i.e. 60% of total Loss of 0.40
Crores to P&L Account in the current year. Give your views on the above.
SOLUTION
The Company should recognise Rs. 0.4 Crores as an Expense immediately, irrespective of
the percentage of completion.
QUESTION NO 12
An amount of Rs. 9,90,000 was incurred on a contract work upto 31st March. Certificates
have been received to date to the value of Rs. 12,00,000 against which Rs. 10,80,000 has
been received in cash. The cost of work done but not certified amounted to Rs.22,500.
It is estimated that by spending an additional amount of Rs. 60,000 (including Provision in
Contingencies) the work can be completed in all respects in another two months. The agreed
Contract Price of the work is Rs. 12,50,000. Compute a conservative estimate of the Profit
to be taken to the P&L A/c. as per AS-7.
SOLUTION
Particulars
Total Cost = Cost incurred till Date + Estimated Additional Cost = 9,90,000 10,50,000
+ 60,000
Cost incurred till date
% of completion based on Cost =
Estimated Total Costs
9,90,000
= 94.29%
10,50,000
Contract Revenue to be recognized (1250,000 x 94.29%) 11,78,625

Less: Contract Cost incurred till date 9,90,000
Contract Profit 1,88,625
QUESTION NO 13
A Company undertakes a number of Contracts. Following particulars are extracted in respect

of certain loss-making Contracts. Determine the amount of Expected Loss that should be
recognized in the accounts for the year.
Contract A B C D
Contract Price 15.00 12.50 87.50 10.00
Cost incurred till date 12.00 10.90 2.50 6.00
Costs expected to be incurred to complete the 4.00 3.60 88.00 4.00
Contract
SOLUTION
Computation of Expected Loss (Rs. in Lakhs)
Contract A B C D
1. Contract Price(given) 15.00 12.50 87.50 10.00
2. Cost incurred till date(given) 12.00 10.90 2.50 6.00
3. Further Costs to be incurred to 4.00 3.60 88.00 4.00

complete the Contract
4. Total contract Costs(2) + (3) 16.00 14.50 90.50 10.00
5. Expected Loss on Contract (1)-(4) 1.00 2.00 3.00 Nil
6. Percentage of Completion based on 75% 75.17% 2.76% 60%

costs =
7. Contract Revenue recognized (1)x(6) 11.25 9.40 2.42 6.00
8. Contract Costs recognized (as per 2) 1200 10.90 2.50 6.00
9. Contract Profit/(Loss) (7) - (8) (0.75) (1.50) (0.08) Nil
10. Expected Loss to be recognized 1.00 2.00 3.00 Nil

(as per 5)
11. Additional Provision required (9)-(10) 0.25 0.50 2.92 Nil
Note: The amount of such a loss is determined irrespective of- (a) Whether or not work
has commenced on the Contract. (b) The stage of completion of Contract activity, or (c)
The amount of profits expected to arise on other Contracts, which are not treated as a
single Construction Contract in accordance with Para 8.
QUESTION NO 14
On 31st October 20X1, Bharat Construction Co. Ltd. undertook a Contract to construct
a Flyover for Rs. 215 Crores. On 31st March 20X2, the Company found that the Work is
Certified for Rs. 100 Crores and work to be Certified is for Rs. 35 Crores. Prudent estimates
of additional cost for Completion was Rs.90 Crores. What amount should be charged to
Revenue in the Financial Accounts for the year ended 31st March 20X2 as per AS-7?
SOLUTION
Particulars Rs. in Crores

1. Contract Price (given) 215.00
2. Cost incurred till date (Work Certified +Work to be certified) 135.00
3. Further Costs to be incurred to complete the Contract 90.00
4. Total Contract Costs (2) + (3) 225.00
5. Expected Loss on Contract (1)-(4) (10.00)
6. Percentage of Completion based on Costs = 60%
7. Contract Revenue recognised (1) x (6) 129.00
8. Contract Costs recognised (as per 2) 135.00
9. Contract Profit/(Loss) (7) –(8) (6.00)
10.Expected Loss to be recognised (as per 5) 10.00
11.Additional Provision required (9)-(100 4.00
QUESTION NO 15
The following data is given for a financial period in respect of various contacts undertaken
by Daksha Ltd. (in Rs. Lakhs)
Contract A B C D E F
Costs incurred till date 40.00 10.00 6.00 75.00 40.00 120.00
Recognised Profits 6.00 Nil Nil Nil 8.00 11.00
Recognised Losses Nil 2.00 1.00 13.00 Nil Nil
Progress Billings 36.00 5.00 7.00 70.00 30.00 114.00
Determine the amount to be shown in the Balance Sheet for the above.
SOLUTION
Amount due from/to customer=Contract Costs+Recognised Profits-Recognised Losses-
Progress Billings.
• If the above amount is positive, it will be shown as an Amount due from Customers
i.e. an Asset.
• If the above amount is negative, it will be shown as an Amount due to Customers i.e.
a Liability.
Contract A B C D E F
1. Costs incurred till date 40.00 10.00 6.00 75.00 40.00 120.00
2. Recognised Profits 6.00 Nil Nil Nil 8.00 11.00
3. Recognised Losses Nil 2.00 1.00 13.00 Nil Nil
4. Progress Billings 36.00 5.00 7.00 70.00 30.00 114.00
5. Net Amount (1+2-3-4) 10.00 3.00 (2.00) (8.00) 18.00 17.00
6. Nature Asset Asset Liability Liability Asset Asset
QUESTION NO 16
Sankar Ltd. undertook a Contract for building a Crane for Rs. 10 Lakhs. An on 31st March
of a financial year, it incurred a cost of Rs. 1.50 Lakhs and expects that Rs.9 Lakhs more
will be required for completing the crane. Discuss the treatment of the above under AS-7.
SOLUTION
Cost incurred till date Rs. 1.50
• Percentage of Completion = = = 14.29%
Estimated Total Costs Rs. 10.50
• Total Expected Loss to be provided for, as per Para 35 = Contract Price (-) Total Costs
= Rs . 0.50 Lakhs.
Contract Revenue as per Para 21= 14.29% of Rs.10 Lakhs = 1.43 Lakhs
Less: Contract Costs = 1.50 Lakhs
Loss on Contract = 0.07 Lakhs
Less: Further provision required in respect of Expected = 0.43 Lakhs
Loss (Bal. Figure)
Expected Loss recognised per Para 35 = 0.50 Lakhs
QUESTION NO 17
Pinaki & Co a Firm of Contractors obtained a Contract for Construction of bridges across
the river Revathi. The following details are available in the records kept for the year ending
31st March. (information in Rs. Lakhs)
Total Contract Price 1,000 Progress Payment Received 400

Costs incurred till date 605 Progress Payment to be 140
Estimated further cost to 495 Received
Completion
The Firm seeks your advice and assistance in the presentation of accounts keeping in view
the requirements of AS-7.
SOLUTION
Cost incurred till date Rs. 605
* Percentage of Completion = = = 55%
Estimated Total Costs Rs. 1100
* Total Expected Loss to be provided for, as per Para 35 = Contract Price (-)
Total Costs = Rs. 100 Lakhs
Contract Revenue as per Para 21 = 55% of Rs. 1000 Lakhs = 550 Lakhs
Less: Contract Costs as per Para 21 = 605 Lakhs
Loss on Contract = 55 Lakhs
Less: Further provision required in respect of Expected Loss = 45 Lakhs
(Bal. Figure)
Expected Loss recognised as per Para 35 = 100 Lakhs
Amount due from/to customers = Contract Costs + Recognized Profits (-)
Recognised Losses (-) Progress Billings =605+Nil (-) 100 (-) 540 = (35) Lakhs
Amount due to Customers.
This amount of Rs. 35 Lakhs will be shown in the Balance Sheet as a Liability.
Note: Progress Billings = Payments Received + Payments billed but not received.
The relevant disclosures under AS-7 are as follows -
Rs.in Lakhs
Particulars Computation Amount

(a) Contract Revenue 550
(b) Contract Expenses 605
(c) Expected Losses (as provided for above) 45
(d) Recognised Profits Less (Current Loss 55 + Expected Loss 45) (100)
Recognised Losses
(e) Progress Billings (400+140) 540

(f) Retentions (billed but not received from 140
Contractee)
(g) Gross Amount due to Customers (as calculated above) 35

QUESTION NO 18
Vishwakarma Ltd. undertook a contract to construct a building for Rs.85 Lakhs. At the
end of the financial year, the Company found that it had already spent Rs. 64,99,000 on
Construction. Prudent estimate of the additional cost for completion was Rs. 32,01,000.
What is the additional provision for foreseeable loss which must be made in the final
accounts for the year ended 31st March?
SOLUTION
• Estimated Total Contract Costs = Cost till date + Further Costs – Rs.64,99,000 + Rs.
3201,000 = Rs. 97,00,000
• Percentage of Completion = = = 67%
• Total Expected Loss to be provided for = Contract Price (-) Total Costs = Rs.85 (-)
Rs. 97 = Rs. 12,00,000
Contract Revenue as per Para 21 = 67% of Rs. 85 Lakhs = Rs. 56,95,000
Less: Contract Costs = Rs. 64,99,000
Loss on Contract = Rs 8,04,000
Less: Further provision required in respect of Expected Loss = Rs. 3,96,000
(Bal. Figure)
Expected Loss recognised as per Para 35 = Rs. 12,00,000
QUESTION NO 19
Nilakanta Construction Co. Ltd. undertook a contract on 1st January to construct a building
for Rs. 80 Lakhs. The Company found on 31st March that it had already spent Rs. 58,50,000
on the construction. Prudent estimate of additional cost for completion was Rs.31,50,000.
What amount should be charged to Revenue and what amount of Contractor Value to be
recognized as Turnover in the accounts for the year ended 31st March as per provisions of
AS-7?
SOLUTION
Estimated Total Contract Costs = Cost till date + Further Costs = Rs.58,50,000 + Rs.31,50,000
= Rs. 90,00,000
Percentage of Completion = = = 65%
Total Expected Loss to be provided for – Contract Price (-) Total Costs
= Rs. 80 (-) Rs. 90 = Rs. 10,00,000
Contract Revenue as per Para 21 = 60% of Rs. 80 Lakhs

= Rs. 52,00,000 (Contract Revenue to be recognized)
Less: Contract Costs as per Para 21 = Rs.58,50,000 (Contract Exp. to be recognized)
Loss on Contract = Rs. 6,50,000
Less: Further provision required in respect of expected Loss = Rs.350,000 (Bal.Fig.)
Expected Loss recognized as per Para 35 Rs. 10,00,000
(Loss on Contract to be recognized)
QUESTION NO 20
Pasupati Construction Company Limited undertook a contract a building for Rs.3 Crores on
1st September 2012. On 31st March 2013, the Company found that it had already spent Rs.
1 Crore 80 Lakhs on the construction. Prudent estimate of additional cost of completion
was Rs. 1 Crore 40 Lakhs. What amount should be charged to revenue in the final accounts
for the year ended on 31st March 2013, as per the provisions of AS-7?
SOLUTION
• Estimated Total Contract = Costs till date + Further Costs = 180+140= Rs.320 Lakhs.
Cost incurred till date Rs. 180
• Percentage of Completion = = = 56.25%
Estimated Total Costs Rs. 320
• Total Expected Loss to be provided for = Contract Price Less Estimated Total Costs
= 300 (-) 320 = Rs. 20 Lakhs.
Contract Revenue as per Para 21 = 56.25% of = Rs. 168.75 Lakhs
Rs. 300 Lakhs (Contract Revenue to be recognized)
Less: Contract Costs as per Para21 = Rs. 180.00 Lakhs
(Contract Exp. to be recognized)
Loss on Contract = Rs. 11.25 Lakhs
Less: Further provision required in respect of = Rs. 8.75 Lakhs (Bal. Figure)
Expected Loss
Expected Loss recognized as per Para 35 = Rs. 20.00 Lakhs
QUESTION NO 21
From the following data, show P&L A/c. (Extract) as would appear in the books of a Contractor
under AS-7.
Particulars Rs. in Lakhs

Contract Price (Fixed) 480.00
Cost Incurred to Date 300.00
Estimated Cost to Complete 200.00
SOLUTION
Cost incurred till date 300
* Percentage of Completion = = x 60%
Estimated Total Costs 300 + 200
• Total Expected Loss to be provided for, as per Para 35= Contract Price – Total Costs
= 480 – 500 = Rs. 20 Lakhs
Contract Revenue as per Para 21 = = 288 Lakhs
60% of Rs. 480 Lakhs (Contract Revenue tobe recognized)
Less: Contract Costs as per Para 21 = 300 Lakhs
(Contract Expenses to be recognized)
Loss on Contract = 12 Lakhs
Less: Further provision required in respect of expected Loss = 8 Lakhs (Bal. Figure)
Expected Loss recognised as per Para 35 = 20 Lakhs
(Loss on Contract to be recognized).
QUESTION NO 22
Hara Ltd. undertook a thee year Contract for a total price of Rs.57,50,000. The Contract
Costs are estimated to be Rs. 46,57,500. From the following information, you are required
to identify the revenues and costs in each of the three years.
Particulars Year 1 Year 2 Year 3

(Rs,) (Rs,) (Rs,)
Cumulative Contracts Costs incurred 17,25,000 41,40,000 46,57,500
to date
Estimated Cost yet to be incurred at 34,50,000 4,60,000 Nil
year end
SOLUTION
Basic Calculations: (Amount in Rs.)
Particulars As at As at As at
Year 1 Year 2 Year 3
(a) Contract Price/Contract Revenue 57,50,000 57,50,000 57,50,000
Cost till date 17,25,000 41,40,000 46,57,500
Estimated costs to complete 34,50,000 4,60,000 Nil
(b) Total Contract Costs 51,75,000 46,00,000 46,57,500
(c) Estimated Total Profit 5,75,000 11,50,000 10,92,000
(d) Percentage of Completion = 17,25,000 41,40,000
Cost till date 51,75,000 46,00,000 100%
Total Contract Costs = 33.33% = 90%
The Contract Revenues, Costs and Profits recognised in each of the three years are given
below:- (Rs.)
Year Particulars Upto reporting date Already Recognised

recognised in during current
previous years year
1. Contact Revenue 57,50,000x33.33%= Nil 19,16,667

19,16,667
Contract Costs Given 17,25,000 Nil 17,25,000
Contract Profits 1,91,667 Nil 1,91,667
2. Contract Revenue 57,50,000x90% = 19,16,667 32,58,333

51,75,000
Contract Costs 41,40,000 17,25,000 24,15,000
Contract Profits 10,35,000 1,91,667 8,43,333
3. Contact Revenue Full = 57,50,000 51,75,000 5,75,000

Contract Costs Full = 46,57,500 41,40,000 5,17,500
Contract Profits 10,92,500 10,35,000 57,500

QUESTION NO 23
M/s. Highway Constructions undertook the construction of a highway on 01.04.2013. The

contract was to be completed in years. The contract Price was estimated at Rs. 150 crores.
Upto 31.03.2014,the Company incurred Rs. 120 Crores on the construction.
The Engineers involved in the project estimated that a further Rs. 45 Crores would be
incurred to complete it. What amount should be charged to revenue for the year 2013-
2014 as per the provisions of Accounting Standard 7 “Construction Contracts”? Show the
extract of the Profit & Loss A/c in the books of M/s. Highway Constructions.
SOLUTION
Estimated Total Contract Costs = Cost till date + Further Costs
= Rs. 120.00 + Rs. 45.00 = Rs. 165.00 Crores.
Percentage of Completion = = = 72.73%
Total Expected Loss to be provided for = Contract Price (-) Total Costs
= Rs.150 (-) Rs. 165 = Rs. 15 Crores.
Contract Revenue as per Para 21 = 72.73% of Rs. 150 = Rs.109.10 Crores
(Contract Revenue to be recognized)
Less: Contract Costs as per Para 21 = Rs. 120.00 Crores
(Contract Expense to be recognized).
Loss on Contract = Rs. 10.10 Crores
Less: Further provision required in respect of expected Loss = Rs. 4.10 Crores (Bal Figure)
Expected Loss recognized as per Para 35 = Rs. 15.00 Crores
Profit & Loss A/c. (extract) for the year ended 31.03.2014
Particulars Rs. Crores Particulars Rs. Crores

To Contract Cost 120.00 By Contract Revenue 109.10
To Provision for Loss 4.10 By Net Loss 15.00
Total 124.10 Total 124.10
STUDY MATERIAL & PAST EXAMINATION QUESTIONS

(SELF READING)
QUESTION 1 (CA INTER MAY 2019)(5 MARKS)
(i) AP Ltd., a construction contractor, undertakes the construction of commercial complex

for Kay Ltd. AP Ltd. submitted separate proposals for each of 3 units of commercial
complex. A single agreement is entered into between the two parties. The agreement
lays down the value of each of the 3 units, i.e. ` 50 Lakh ` 60 Lakh and ` 75 Lakh
respectively. Agreement also lays down the completion time for each unit.
Comment, with reference to AS- 7, whether AP Ltd., should treat it as a single contract
or three separate contracts.
(ii) On 1st December, 2017, GR Construction Co. Ltd. undertook a contract to construct a
building for ` 45 lakhs. On 31st March, 2018, the company found that it had already
spent ` 32.50 lakhs on the construction. Additional cost of completion is estimated at
` 15.10 lakhs. What amount should be charged to revenue in the final accounts for the
year ended 31st March, 2018 as per provisions of AS-7?
SOLUTION:
(i) As per AS 7 ‘Construction Contracts’, when a contract covers a number of assets,

the construction of each asset should be treated as a separate construction contract
when:
(a) separate proposals have been submitted for each asset;
(b) each asset has been subject to separate negotiation and the contractor and
customer have been able to accept or reject that part of the contract relating to
each asset; and
(c) the costs and revenues of each asset can be identified.
Therefore, Mr. AP Ltd. is required to treat construction of each unit as a separate
construction contract as the above-mentioned conditions of AS 7 are fulfilled in
the given case.
(ii)
` in lakhs
Cost of construction incurred till date 32.50
Add: Estimated future cost 15.10
Total estimated cost of construction 47.60

Percentage of completion till date to total estimated cost of construction

= (32.50/47.60) ×100 = 68.28%
Proportion of total contract value recognised as revenue for the year ended 31st
March, 2018 per AS 7 (Revised)
= Contract price x percentage of completion
= ` 45 lakh x 68.28% = ` 30.73 lakhs.
(` in lakhs)
Total cost of construction 47.60
Less: Total contract price (45.00)
Total foreseeable loss to be recognized as expense 2.60
According to of AS 7, when it is probable that total contract costs will exceed total contract
revenue, the expected loss should be recognized as an expense immediately.
The amount of expected loss will be computed (2.60 x 31.72%).
QUESTION 2 (CA INTER NOV 2020)(5 MARKS)
Rajendra undertook a contract ` 20,00,000 on an arrangement that 80% of the value of

work done, as certified by the architect of the contractee should be paid immediately and
that the remaining 20% be retained until the Contract was completed.
In Year 1, the amounts expended were ` 8,60,000, the work was certified for ` 8,00,000
and 80% of this was paid as agreed. It was estimated that future expenditure to complete
the Contract would be ` 10,00,000.
In Year 2, the amounts expended were ` 4,75,000. Three-fourth of the work under contract
was certified as done by December 31st and 80% of this was received accordingly. It was
estimated that future expenditure to complete the Contract would be ` 4,00,000.
In Year 3, the amounts expended were ` 3,10,000 and on June 30th, the whole Contract
was completed.
Show how Contract revenue would be recognized in the P & L A/c of Mr. Rajendra each year.
SOLUTION:
Year 1 `
Actual expenditure 8,60,000
Future estimated expenditure 10,00,000
Total Expenditure 18,60,000

8,60,000
% of work completed × 100 = 46.24% (rounded off)
18,60,000
Revenue to be recognised = 20,00,000 × 46.24%
= ` 9,24,800
Year 2
Actual expenditure = 4,75,000
Future Expenditure = 4,00,000
Expenditure incurred in Year 1 = 8,60,000
17,35,000
4,75,000 + 8,60,000
% of work completed = 76.95% (rounded off)
17,35,000
Revenue to be recognized (cumulative) = 20,00,000 × 76.95%
= 15,39,000
Less : Revenue recognized in Year 1 = (9,24,800)
Revenue to be recognized in Year 2 = ` 6,14,200
Year 3
Whole contract got completed therefore total contract value less revenue recognized
up to year 2 will be amount of revenue to be recognized in year 3 i.e. 20,00,000 –
15,39,000 (9,24,800 + 6,14,200) = ` 4,61,000.
Note: Calendar year has been considered as accounting year.
QUESTION 3
A firm of contractors obtained a contract for construction of bridges across river Revathi.
The following details are available in the records kept for the year ended 31st March, 20X1.
(` in lakhs)
Total Contract Price 1,000
Work Certified for the cost incurred 500
Work yet not Certified for the cost incurred 105
Estimated further Cost to Completion 495
Progress Payment Received 400
To be Received 140
The firm seeks your advice and assistance in the presentation of accounts keeping in view
the requirements of AS 7 issued by your institute.
SOLUTION:
(a) Amount of foreseeable loss (` in lakhs)

Total cost of construction (500 + 105 + 495) 1,100
Less: Total contract price (1,000)
Total foreseeable loss to be recognized as expense 100
According AS 7, when it is probable that total contract costs will exceed total contract revenue, the
expected loss should be recognized as an expense immediately
(NOTE: WE HAVE CALCULATED TOTAL LOSS WITHOUT BREAKUP OF ACTUAL LOSS UNDER
PARA 22 & EXPECTED LOSS UNDER PARA. IF STUDENT CAN ALSO SHOW THE BREAK UP OF
PARA 22 AND PARA 35)
(b) Contract work-in-progress i.e. cost incurred to date are (` in lakhs)

` 605 lakhs
Work certified 500
Work not certified 105
605
This is 55% (605/1100 x 100) of total costs of construction.

(c) Proportion of total contract value recognised as revenue: 55% of ` 1,000 lakhs = ` 550
lakhs
(d) Amount due from/to customers = (Contract costs + Recognised profits –
Recognised Losses) – (Progress payments received
+ Progress payments to be received)
= (605 + Nil – 100) – (400 + 140) ` in lakhs
= [505 – 540] ` in lakhs
Amount due to customers = ` 35 lakhs
The amount of ` 35 lakhs will be shown in the balance sheet as liability.
(e) The relevant disclosures under AS 7 are given below:
` in lakhs
Contract revenue 550
Contract expenses 605
Recognised profits less recognised losses (100)
Progress billings ` (400 + 140) 540
Retentions (billed but not received from contractee) 140
Gross amount due to customers 35
QUESTION 4
On 1st December, 20X1, Vishwakarma Construction Co. Ltd. undertook a contract to

construct a building for ` 85 lakhs. On 31st March, 20X2, the company found that it had
already spent ` 64,99,000 on the construction. Prudent estimate of additional cost for
completion was ` 32,01,000. What amount should be recognized in the statement of profit
and loss for the year ended 31st March, 20X2 as per provisions of Accounting Standard 7
(Revised)?
SOLUTION:
`
Cost incurred till 31st March, 20X2 64,99,000
Prudent estimate of additional cost for completion 32,01,000
Total cost of construction 97,00,000
Less: Contract price (85,00,000)
Total foreseeable loss 12,00,000
According to AS 7, the amount of ` 12,00,000 is required to be recognised as an expense.

64,99,000 x 100
Contract work in progress = = 67%
97,00,000
Proportion of total contract value recognised as turnover:
= 67% of ` 85,00,000 = ` 56,95,000.
(NOTE: WE HAVE CALCULATED TOTAL LOSS WITHOUT BREAKUP OF ACTUAL LOSS
UNDER PARA 22 & EXPECTED LOSS UNDER PARA TO SAVE TIME IN EXAMS. STUDENT
CAN ALSO SHOW THE BREAK UP OF PARA 22 AND PARA 35 AS WE DID IN CLASS)
QUESTION 5 (STUDY MATERIAL) (PARA 22 & PARA 35)
Akar Ltd. Signed on 01/04/X1, a construction contract for ` 1,50,00,000. Following

particulars are extracted in respect of contract, for the year ended 31/03/X2.
- Materials used ` 71,00,000

- Labour charges paid ` 36,00,000
- Hire charges of plant ` 10,00,000
- Other contract cost incurred ` 15,00,000
- Labour charges of ` 2,00,000 are still outstanding on 31.3.X2.
- It is estimated that by spending further ` 33,50,000 the work can be completed in all
respect.
You are required to compute profit/loss for the year to be taken to Profit & Loss Account
and any provision for foreseeable loss to be recognized as per AS 7.
SOLUTION:
Statement showing the amount of profit/loss to be taken to Profit and Loss Account and
additional provision for the foreseeable loss as per AS 7
Cost of Construction ` `
Material used 71,00,000
Labour Charges paid 36,00,000
Add: Outstanding on 31.03.20X2 2,00,000 38,00,000
Hire Charges of Plant 10,00,000
Other Contract cost incurred 15,00,000
Cost incurred upto 31.03.20X2 1,34,00,000
Add: Estimated future cost 33,50,000
Total Estimated cost of construction 1,67,50,000
Degree of completion (1,34,00,000/1,67,50,000 x 100) 80%
Revenue recognized (80% of 1,50,00,000) 1,20,00,000
Total foreseeable loss (1,67,50,000 - 1,50,00,000) 17,50,000
Less: Loss for the current year (1,34,00,000 - 1,20,00,000) 14,00,000
Loss to be provided for 3,50,000
NOTES
ACCOUNTING STANDARD 9: REVENUE RECOGNITION 101
ACCOUNTING STANDARD 9: Revenue Recognition
QUESTION NO 1
Sale of goods costing Rs. 54,000 with a profit margin of 10% on selling price is included in
the inventory as delivery of goods was postponed at buyer’s request.
Advise the company on changes to be effected in the draft financial statements. Give
reasons in support of your advice. There is no necessity to discuss disclosure requirements in this
regard.
ANSWER:
AS-9 on “Revenue Recognition”, states when to recognize revenue from a transaction
involving the sale of goods is that the seller has transferred the property in the goods to
the buyer for a consideration”. The transfer of property in goods on buyer’s request is not in
accordance with AS-9. Thus, Rs. 54,000 should not be considered as a part of inventory and
it would be considered as sales. So the amount of Rs. 59,400 should be included in sales with
correspondence increase in Debtor’s balances.
QUESTION NO 2 (GOOD QUESTION)
The bank has recognized on accrual basis income from dividends on securities and Units of
Mutual Funds help by it as at the end of financial year. The dividends on securities and Units
of Mutual Funds were declared after the end of financial year.
ANSWER:
It is not a prudent practice to treat dividend on shares of corporate bodies and unites
of mutual funds as income unless these are actually received. Accordingly, income from
dividend on shares of corporate bodies and units of mutual funds should be booked on cash
basis.
In respect of income from Government securities and bonds and debentures of
corporate bodies, where interest rates on these instruments are pre-determined, income
could be booked on accrual basis, provided interest in serviced regularly and as such is not
in arrears.
Banks may book income from dividend on shares of corporate bodies on accrual basis, provided
dividend on the shares has been declared by the corporate bodies on annual general meeting
and the owner’s right to receive payment is established. This is also in accrual basis is not in
order.
QUESTION NO 3
When can revenue be recognized in case of a transaction of rendering of services?
ANSWER:
Revenue Recognition- Rendering of Services: Following conditions should be satisfied for
recognition of revenue from rendering of services;
(a) Revenue should be recognised either under the completed service contract method or
under the proportionate completion method whichever relates the service
(b) No significant uncertainty exists regarding the amount of the consideration that will
be derived from rendering the service.
(c) It is not unreasonable to expect ultimate collection.
Proportionate completion method- If performance consists of the execution of more than

one act, revenue is recognised proportionately by reference to the performance of each act
on the basis of proportionate completion method.
Completed service contract method- If performance consists of the execution of a
single act or consist of performance of more than a single act, and the services yet to be
performed are very significant in relation to the transaction taken as a whole, revenue is
recognised when the sole or final act takes place and the service becomes chargeable on the
basis of completed service contract method.
QUESTION NO 4
When can revenue from Interest, Royalties and Dividends be recognized?
ANSWER:
Revenue arising from the use by others of enterprise resources yielding interest, royalties
and dividends should only be recognised as follows provided no significant uncertainty as to
measurability or collectability exists.
Interest- on a time proportion basis taking into account the amount outstanding and rate
Royalties- on an accrual basis in accordance with the terms of the relevant agreement
Dividends- from investment in shares when the owner’s right to receive payment is established
QUESTION NO 5 (VERY GOOD QUESTION)
When do you recognize revenue from sale of goods in following cases?
• Delivery is delayed at buyer’s request and buyer takes title and accepts billing
• Delivered subject to conditions- (a) Installation and inspection, (b) On approval (c)
Guaranteed sales, (d) Consignment sales, (e) Cash on delivery sales
• Installment payments & delivery on final payment
• Special order and shipments
• Sale/repurchase agreements
• Sales to intermediate parties
• Subscriptions for publications
• Installment sales
• Trade discounts and volume rebates
Revenue Recognition
ANSWER:
Sale of Goods Delivery is delayed at buyer’s request and buyer takes title and accepts
billing
Revenue should be recognised notwithstanding that physical delivery has not been completed
so long as there is every expectation that delivery will be made. However, the item must
be on hand, identified and ready for deliver)- to the buyer at the time the sale is recognised
rather than there being simply an intention to acquire or manufacture the goods in time for
delivery.
Delivered subject to conditions:
(a) Installation and inspection i.e. goods are sold subject to installation, inspection etc.
Revenue should normally not be recognised until the customer accepts delivery and
installation and inspection are complete. In some cases, however, the installation
process may be so simple in nature that it may be appropriate to recognise the sale
notwithstanding that installation is not yet completed (e.g. installation of a factory-
tested television receiver normally only requires unpacking and connecting of power and
antennae).
(b) On approval
Revenue should not be recognised until the goods have been formally accepted by the
buyer or the buyer has done an act adopting the transaction or the time period for
rejection has elapsed or where no time has been fixed, a reasonable time has elapsed.
(c) Guaranteed sales i.e. delivery is made giving the buyer an unlimited right of return
Recognition of revenue in such circumstances will depend on the substance of the
agreement. In the case of retail sales offering a guarantee of “money back if not
completely satisfied” it may be appropriate to recognise the sale but to make a suitable
provision for returns based on previous experience. In other cases, the substance of
the agreement may amount to a sale on consignment, in which case it should be treated
as indicated below.
(d) Consignment sales i.e. a delivery is made whereby the recipient undertakes to sell the
goods on behalf of the consignor
Revenue should not be recognised until the goods are sold to a third party.
(e) Cash on delivery sales: Revenue should not be recognised until cash is received by
the seller or his agent.
Installment payments and delivery on final payment: Revenue from such sales should not
be recognised until goods are delivered. However, when experience indicates that most
such sales have been consummated, revenue may be recognised when a significant deposit
is received.
Special order and shipments i.e. where payment (or partial payment) is received for
goods not presently held in stock e.g. the stock is still to be manufactured or is to be
delivered directly to the customer from a third party: Revenue from such sales should not
be recognised until goods are manufactured, identified and ready for delivery to the buyer
by the third party.
Sale/repurchase agreements i.e. where seller concurrently agrees to repurchase the
same goods at a later date: For such transactions that are in substance a financing
agreement, the resulting cash inflow is not revenue as defined and should not be recognised
as revenue.
Sales to intermediate parties i.e. where goods are sold to distributors, dealers or others
for resale: Revenue from such sales can generally be recognised if significant risks of ownership
have passed; however in some situations the buyer may in substance be an agent and in such
cases the sale should be treated as a consignment sale.
Subscriptions for publications: Revenue received or billed should be deferred and
recognisedeither on a straight-line basis over time or, where the items delivered vary in
value from period to period, revenue should be based on the sales value of the item delivered
in relation to the total sales value of all items covered by the subscription.
Installment sales: When the consideration is receivable in instalments, revenue attributable
to the sales price exclusive of interest should be recognised at the date of sale. The interest
element should be recognised as revenue, proportionately to the unpaid balance due to the
seller.
Trade discounts and volume rebates: Trade discounts and volume rebates received are
not encompassed within the definition of revenue, since they represent a reduction of cost.
Trade discounts and volume rebates given should be deducted in determining revenue.
QUESTION NO 6 (VERY GOOD QUESTION)
When do you recognize revenue from rendering of services in following cases?
• Installation Fees
• Advertising and insurance agency commissions
• Financial service commissions
• Admission fees
• Tuition fees
• Entrance and membership fees
ANSWER:
Rendering of Services
Installation Fees: In cases where installation fees are other than incidental to the sale of
a product, they should be recognisedas revenue only when the equipment is installed and
accepted by the customer.
Advertising and insurance agency commissions: Revenue should be recognised when
the service is completed. For advertising agencies, media commissions will normally be
recognisedwhen the related advertisement or commercial appears before the public and
the necessary intimation is received by the agency, as opposed to production commission,
which will be recognised when the project is completed. Insurance agency commissions should
be recognised on the effective commencement or renewal dates of the related policies.
Financial service commissions: A financial service may be rendered as a single act or may be
provided over a period of time. Similarly, charges for such services may be made as a single
amount or in stages over the period of the service or the life of the transaction to which it
relate.
Admission fees: Revenue from artistic performances, banquets and other special events
should be recognised when the event takes place. When a subscription to a number of events
is sold, the fee should be allocated to each event on a systematic and rational basis.
Tuition fees: Revenue should be. recognised over the period of instruction.
Entrance and membership fees: Revenue recognition from these sources will depend on
the nature of the services being provided. Entrance fee received is generally capitalised.
If the membership fee permits only membership and all other services or products are paid
for separately, or if there is a separate annual subscription, the fee should be recognised
when received. If the membership fee entities the member to services or publications to be
provided during the year,_ it should be recognised on a systematic and rational basis having
regard to the timing and nature of all services provided.
QUESTION NO 7
When can revenue be recognized in case of a transaction of sale of goods?
ANSWER:
Revenue Recognition- Sale of Goods
Revenue from sales should be recognised when all the following conditions are satisfied:
(a) Seller of goods has transferred to the buyer the property in the goods for a price or
all significant risks and rewards of ownership have been transferred to the buyer or seller
retains no effective control of the goods transferred to a degree usually associated with
ownership;
be derived from the sale of the goods.
QUESTION NO 8
Define revenue and items of revenue, which are dealt with by the AS-9.
ANSWER:
Revenue is the gross inflow of cash, receivables or other consideration arising in the course
of the ordinary activities of an enterprise from the:
• Sale of goods,
• Rendering of services, and
• Use by others of enterprise resources yielding interest, royalties and dividends.
AS-9 deals with the bases for recognition of revenue in the profit and loss account and
concerned with the recognition of revenue arising in the course of the ordinary activities from:
• Sale of goods,
• Rendering of services, and
• Use by others of enterprise resources yielding interest, royalties and dividends.
AS-9 does not deal with the following revenue arising from:
• Construction contracts;
• Hire purchase, lease agreements;
• Government grants and other similar subsidies;
• Insurance companies arising from insurance contracts.
QUESTION NO 9
M/s Moon Ltd. Sold goods worth Rs 6,50,000 to Mr. star asked for a trade discount
amounting to Rs 53,000 and same was agreed to by M/s Moon Ltd. The sales was effected
and goods were dispatched. On receipt of goods, Mr. Star has found that goods worth Rs.
67,000 are defective. Mr. Star returned defective goods to M/s. Moon Ltd. And made
payment due amounting to Rs. 5,30,000. The accountant of M/s Moon ltd. Booked the sale
for Rs. 5,30,000. Discuss the connection of the accountant with reference to Accounting
Standard. (AS) 9
ANSWER
Assuming that the discount of Rs. 53000 is decided before or simultaneously at the time
when the sales is effected and goods are dIspatched, it is a trade discount. According to
appendix to AS-9“Revenue Recognition”, trade discounts do not form part of revenue.
Further, since defective goods Rs. 67000 were returned immediately, the sales is said to
be revoked with respect to that part and it becomes sales returns. This has to be reduced
from sales revenue.
Therefore, initially the REVENUE IS to be recognised at Rs. 597000. Subsequently, the
sales returns of Rs. 67000 has to be reduced from sales revenue. Therefore, revenue as
per AS-9 is only is 530000.
QUESTION NO 10
A Ltd. entered into a contract with B Ltd. to dispatch goods valuing Rs 25,000 every month
for 4 month upon receipt of entire payment B Ltd. accordingly made the payment of Rs
1,00,000 and A Ltd started dispatching the goods. In third month, due to a natural calamity,
B Ltd. requested A Ltd. not to dispatch goods unit further notice through A Ltd. is holding
the remaining goods worth Rs 50,000 ready for dispatch. A Ltd. accounted Rs 50,000 as
sales and transferred the balance to Advance Received against Sales. Comment upon the
treatment of balance amount with reference to the provisions of Accounting Standard 9.
ANSWER:
Revenue Recognition- Sale of Goods
Revenue from sales should be recognised when all the following conditions are stisfied:
(a) Seller of goods has transferred to the buyer the property in the goods for a price
or all significant risks and rewards of ownership have been transferred to the buyer
or seller retains no effective control of the goods transferred to a degree usually
associated with ownership;
be derived from the sale of the goods,
(d) Exception: Delivery of goods pending at buyer’ request
If any delivery of goods is pending at buyer’ request then it will be assumed that seller has
satisfied all the conditions and seller can recognize full revenue from sales
In the given case, Delivery of goods is pending at buyer’ request and there is no delay from
seller. So Seller can recognize Sales of 1,00,000 in full and There is no need to show any
advance.
QUESTION 11 (STUDY MATERIAL)
The Board of Directors decided on 31.3.20X2 to increase the sale price of certain items
retrospectively from 1st January, 20X2. In view of this price revision with effect from
1st January 20X2, the company has to receive ` 15 lakhs from its customers in respect of
sales made from 1st January, 20X2 to 31st March, 20X2. Accountant cannot make up his
mind whether to include ` 15 lakhs in the sales for 20X1-20X2.Advise.
SOLUTION:
Price revision was effected during the current accounting period 20X1-20X2. As a result,
the company stands to receive ` 15 lakhs from its customers in respect of sales made from
1st January, 20X2 to 31st March, 20X2. If the company is able to assess the ultimate
collection with reasonable certainty, then additional revenue arising out of the said price
revision may be recognized in 20X1-20X2.
QUESTION 12 (STUDY MATERIAL : HOMEWORK)
Y Ltd., used certain resources of X Ltd. In return X Ltd. received ` 10 lakhs and ` 15 lakhs
as interest and royalties respective from Y Ltd. during the year 20X1-X2. You are required
to state whether and on what basis these revenues can be recognized by X Ltd.
SOLUTION:
As per AS 9 on Revenue Recognition, revenue arising from the use by others of enterprise
resources yielding interest and royalties should only be recognized when no significant
uncertainty as to measurability or collectability exists. These revenues are recognized on
the following bases:
(i) Interest: on a time proportion basis taking into account the amount outstanding and
the rate applicable. Therefore X Ltd. should recognize interest revenue of ` 10 Lakhs
(ii) Royalties: on an accrual basis in accordance with the terms of the relevant agreement.
X Ltd. therefore should recognize royalty revenue of ` 15 Lakhs.
In the year 20X1-X2, XYZ supplied goods on Consignment basis to ABC – a retail outlet
worth ` 10,00,000. As per the terms, ABC will only pay XYZ for the goods which are sold by
them to the third party. Rest of the goods can be returned back to XYZ and ABC will not
have any further liability for these goods.
During the year 20X1-X2, ABC has sold goods worth ` 5,50,000 only and rest of the goods
are still lying in its store which may get sold by next year. Advise XYZ, how much revenue
it can recognize in its books for period 20X1-X2.
SOLUTION:
As per AS 9, For consignment risk and rewards are not transferred to the customer on
just delivery of the goods and no revenue should be recognized until the goods are sold to
a third party. Therefore, XYZ can recognize revenue of ` 5,50,000 only.
A Ltd. has sold its building for ` 50 lakhs to B Ltd. and has also given the possession to B
Ltd. The book value of the building is ` 30 lakhs. As on 31st March, 20X1, the documentation
and legal formalities are pending. The company has not recorded the sale and has shown the
amount received as advance. Do you agree with this treatment?
ANSWER:
A limited should not recognise it as sale because transfer of ownership is yet pending as
legal formalities are still pending.. The possession of building has been transferred but
ownership has still to be transferred which indicates that Conditions which are prescribed
in AS 9 are not fulfilled.
So the treatment which is done by A limited is correct.
The following information of Meghna Ltd. is provided:
(i) Goods of ` 60,000 were sold on 20-3-20X2 but at the request of the buyer these
were delivered on 10-4-20X2.
(ii) On 15-1-20X2 goods of ` 1,50,000 were sent on consignment basis of which 20% of the
goods unsold are lying with the consignee as on 31-3-20X2.
(iii) ` 1,20,000 worth of goods were sold on approval basis on 1-12-20X1. The period of
approval was 3 months after which they were considered sold. Buyer sent approval for
75% goods up to 31-1-20X2 and no approval or disapproval received for the remaining
goods till 31-3-20X2.
(iv) Apart from the above, the company has made cash sales of ` 7,80,000 (gross). Trade
discount of 5% was allowed on the cash sales.
You are required to advise the accountant of Meghna Ltd., with valid reasons, the amount
to be recognized as revenue in above cases in the context of AS 9.
ANSWER:
As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions are fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a
price or all significant risks and rewards of ownership have been transferred to the
buyer and the seller retains no effective control of the goods transferred to a degree
usually associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will
be derived from the sale of the goods.
Case (i) The sale is complete but delivery has been postponed at buyer’s request. The entity
should recognize the entire sale of ` 60,000 for the year ended 31st March, 20X2.
Case (ii) 20% goods lying unsold with consignee should be treated as closing inventory and
sales should be recognized for ` 1,20,000 (80% of ` 1,50,000). In case of consignment sale
revenue should not be recognized until the goods are sold to a third party.
Case (iii) In case of goods sold on approval basis, revenue should not be recognized until the
goods have been formally accepted by the buyer or the buyer has done an act adopting the
transaction or the time period for rejection has elapsed or where no time has been fixed,
a reasonable time has elapsed. Therefore, revenue should be recognized for the total sales
amounting ` 1,20,000 as the time period for rejecting the goods had expired.
Case (iv) Trade discounts given should be deducted in determining revenue. Thus ` 39,000
should be deducted from the amount of turnover of ` 7,80,000 for the purpose of recognition
of revenue. Thus, revenue should be ` 7,41,000.
QUESTION 16 (MAY 2019 5 MARKS)
Given below are the following informations of B.S. Ltd.
(i) Goods of ` 50,000 were sold on 18-03-2018 but at the request of the buyer these
were delivered on 15-04-2018.
(ii) On 13-01-2018 goods of ` 1,25,000 are sent on consignment basis of which 20% of the
goods unsold are lying with the consignee as on 31-03-2018.
(iii) ` 1,00,000 worth of goods were sold on approval basis on 01-12-2017. The period of
approval was 3 months after which they were considered sold. Buyer sent approval for
75% goods up to 31-01-2018 and no approval or disapproval received for the remaining
goods till 31-03-2018.
You are required to advise the accountant of B.S. Ltd., with valid reasons, the amount to be
recognized as revenue for the year ended 31st March, 2018 in above cases in the context
of AS-9.
SOLUTION:
Case (i)
The sale is complete but delivery has been postponed at buyer’s request. B.S. Ltd. should
recognize the entire sale of ` 50,000 for the year ended 31st March, 2018.
Case (ii)
In case of consignment sale revenue should not be recognized until the goods are sold to
a third party.20% goods lying unsold with consignee should be treated as closing inventory
and sales should be recognized for ` 1,00,000 (80% of ` 1,25,000).
Case (iii)
In case of goods sold on approval basis, revenue should not be recognized until the goods have
been formally accepted by the buyer or the buyer has done an act adopting the transaction
or the time period for rejection has elapsed or where no time has been fixed, a reasonable
time has elapsed. Therefore, revenue should be recognized for the total sales amounting `
1,00,000 as the time period for rejecting the goods had expired.
Thus total revenue amounting ` 2,50,000 (50,000 + 1,00,000+ 1,00,000) will be recognized
for the year ended 31st March, 2018 in the books of B.S. Ltd.
QUESTION 17 (NOV 2019 5 MARKS)
Indicate in each case whether revenue can be recognized and when it will be recognized as
per AS-9.
(1) Trade discount and volume rebate received.

(2) Where goods are sold to distributors or others for resale.
(3) Where seller concurrently agrees to repurchase the same goods at a later date.
(4) Insurance agency commission for rendering services.
(5) On 11-03-2019 cloths worth ` 50,000 were sold to X mart, but due to refurbishing of
their showroom being underway, on their request, clothes were delivered on 12-04-
2019.
SOLUTION:
(1) Trade discounts and volume rebates received are not encompassed within the definition
of revenue, since they represent a reduction of cost. Trade discounts and volume
rebates given should be deducted in determining revenue.
(2) When goods are sold to distributor or others, revenue from such sales can generally be
recognized if significant risks of ownership have passed; however, in some situations
the buyer may in substance be an agent and in such cases the sale should be treated
as a consignment sale.
(3) For transactions, where seller concurrently agrees to repurchase the same goods at a
later date that are in substance a financing agreement, the resulting cash inflow is not
revenue as defined and should not be recognized as revenue.
(4) Insurance agency commissions should be recognized on the effective commencement
or renewal dates of the related policies.
(5) On 11.03.2019, if X mart takes title and accepts billing for the goods then it is implied
that the sale is complete and all risk and reward on ownership has been transferred to
the buyers.
Revenue should be recognized for year ended 31st March, 2019 notwithstanding that
physical delivery has not been completed so long as there is every expectation that delivery
will be made and items were ready for delivery to the buyer at the time.
ACCOUNTING STANDARD 18: RELATED PARTY DISCLOSURES 113
ACCOUNTING STANDARD 18:

RELATED PARTY DISCLOSURES
Will transactions with Related Parties, for services provided/received free of cost, be
required to be disclosed?
Adhiram Ltd. has a Corporate Communications Department, which centralizes the Pubic
Relations functions for the whole group of Adhiram Ltd. and its Subsidiaries. No charges
are however, levied by Adhiram Ltd. on its Subsidiaries and accordingly, these transactions
are not given accounting recognition. Would these constitute Related Party Transactions
requiring disclosure under AS-18 in the Separate Financial Statements of Adhiram Ltd.?
SOLUTION
1. Principle: As per AS-18, a Related Party Transaction is ‘a transfer of resources or

obligations between related parties, regardless of whether or not a price is charged”.
2. Conclusion: In the given example, there is a transfer of resources from Adhiram Ltd.
to its Subsidiaries even though no price is charged for the same. These transactions
would require disclosure under AS-18 in the Separate Financial Statements of Adhiram
Ltd.
QUESTION NO 2
Bhima Ltd. sold to Arjun Ltd. goods having a Sale Value of rs. 25 Lakhs during a Financial
Year. Mr. Strength, the Managing Director and Chief Executive of Bhima Ltd. owns nearly
100% of the Capital of Arjun Ltd. The Sales were made to Arjun Ltd at the normal Selling
Price of Bhima Ltd. The Chie Accountant of Bhima Ltd. does not consider that these Sales
should be treated any differently from any other sale made by the Company despite being
made to a Controlled Company, because the sales were made at normal and, that too, at
arms length price. Comment.
SOLUTION
1. Principle – 1 : Related Party Relationship covers the following relationships -

(a) Enterprises that control the Reporting Enterprise.
(b) Enterprises that are controlled by the Reporting Enterprise, or
(c) Enterprises that are under common control with the Reporting Enterprise (this
includes Holding Companies, Subsidiaries and fellow Subsidiaries).
2. Principle -2: Further, S – 18 is applicable irrespective of whether or not the transactions

with related parties are made at arm’s length prices.
3. Analysis: Hence, in the given case, Bhima Ltd. has Related Party Relationship with
Arjun Ltd. since both the Companies under the common control of a single person (Mr.
Strength).
4. Conclusion: Hence, Bhima Ltd. should disclose the information required under AS-18 in
relation to as Sales to Arjun Ltd. during the entire Financial year.
QUESTION NO 3
A husband and wife are controlling 34% of voting power in Mathura Limited. They have
a separate Partnership Firm, which supplies the main Material to the Company. The
Management says that the above transaction need not be disclosed. How will you deal with
the above situation?
SOLUTION
1. Related Party Relationship: The definition of Related Party Relationship covers

“Enterprises owned by the Directors or Major Shareholders of the Reporting
Enterprise.”
2. Significant Influence: Significant Influence is presumed to exist, if an investing party
holds 20% or more of the voting power of the Enterprise (Such holding may be direct
or indirect through Intermediaries).
3. Disclosure: AS-18 requires disclosure if there have been transactions between Related
Parties, irrespective of whether or not the transaction have been entered into at
arm’s length prices.
4. Conclusion: In the instant case the individuals hold 34% of the voting power in the
Company, and hence have a significant influence. Disclosure is required as per AS-18.
QUESTION NO 4
Strong Ltd. holding 60% of the Equity Shares in Weak Ltd. purchased goods worth Rs. 60
Lakhs from Weak Ltd. during the Financial year. The Managing Director of Strong Ltd. is
of the opinion that it is normal business activity and there is no need to disclose the same
in the final accounts of the Company. Give your views of the above.
SOLUTION
1. Strong Ltd. is the Holding Company of Weak Ltd., as is holds more than 50% of the
voting power of Weak Ltd. and thus should be treated as Related Parties as per AS-18.
2. As per AS-18, in the case of Related Party Transactions following facts should be
disclosed -
(a) Related Party Relationship, Name and Nature of Relationship.
(b) If there is transaction between the Related Parties then a description of the
Nature of Transaction, Volume of the Transaction outstanding at the Balance
Sheet date etc.
3. In the instant case, since there is Related Party Transaction, the contention of the
Managing Director of Strong Ltd is not correct. The Auditor should insist to make
proper disclosure as required by AS-18 and if the Management refuses, the Auditor
should express a qualified opinion.
A Firm of a Father and Son received Rs. 2 Lakhs towards job work done for Rama Ltd.
during the year ended 31st March. The total Job Work Charges paid by Rama Ltd. during
the year are over Rs. 50 Lakhs. The father is a Managing Director of Rama Ltd. having
substantial holding. The Managing Director told the Auditor that since he is not involved in
the activities of the Firm, and since the amount paid to it is insignificant there is no need to
disclose the transaction He further contended that such a payment made in the last year
was not disclosed. Is the M.D. right in his approach?
SOLUTION
1. Principles:
(a) Parties are considered to be related if at any time during the reporting period, one
party has the ability to control the other party or exercise significant influence
over the other party in making decisions.
(b) As per AS – 18, Significant Influence is said to exist in case the investing party
has 20% or more voting power in the Enterprise.
2. Analysis and Conclusion: In the above case, the Managing Director of Rama Ltd. is a
Partner in the Firm with his son, and the Firm has been paid Rs. 2Lakhs as Job Work
Charges. The Managing Director has a substantial holding in the Firm. The Managing
Director is also a Key Management Personnel of Rama Ltd. Hence, there is a Related
Party relationship & transaction requiring disclosure under AS-18.
QUESTION NO 6\
Is a Non-Executive Director on the Board of Directors of a Company, a Key Management

Person?
Can a Non-Executive Director be considered as a Related Party, when he participates in the
financial and/or operating policy decisions of the Reporting Enterprise?
Vamana Ltd. has two Non-Executive Directors in its Board. State whether AS-18 is applicable
if – (1) A, a Non-Executive Director is in a position to exercise significant influence by virtue
of owning an interest in the voting power in the Company. (2) B, a Non-Executive Director
does not enjoy the authority and responsibility for planning, directing and controlling the
activities of the Company.
SOLUTION
1. Principles: AS-18 applies to Non-Executive Director as under:
AS-18 not applicable As-18 applicable

(a) A Non-Executive Director of a A Non-Executive Director would
Company should not be considered as be covered by AS-18 if he is a Key
Key Management Person under AS- Management Person when –
18 by virtue of his merely being a
(a) he has the authority and
Director, directing and controlling
responsibility for planning,
the activities of the Reporting
directing and controlling the
Enterprise.
activities of the Reporting
(b) AS-18 should not be applied in respect Enterprise, or
of a Non-Executive Director even if
(b) he is in a position to exercise or
be participates in the financial and/
significant influence by virtue of
or operating policy decision, of the
owning an interest in the voting
Enterprise (Note: Mere participation
power.
is different from authority to plan/
direct/control).
2. Conclusion for Vamana Ltd.’s case: Disclosure under AS-18 will be required only for
Director A, and not for Director B.
QUESTION NO 7
Is Remuneration paid to Key Management Personnel or Non-Executive Director on the Board

of Directors, a Related Party Transaction?
SOLUTION
1. As peraS-18, Key Management Personnel are “Related Parties”. Hence, remuneration

paid to Key Management Personnel will be a related Party transaction requiring
disclosure under AS-18.
2. Non-Executive Directors on th Bard of Directors of a Company are not “related
parties”. Hence, remuneration paid to Non-Executive Directors will not be considered
as a Related Party Transaction.
QUESTION NO 8
If a Parent owns along with its Subsidiary more than one-half of the voting power in an
Enterprise, whether that enterprise will be considered as a Related Party of the Parent?
P. Ltd. owns 60% of the voting power of Q Ltd. Q Ltd. in turn owns 70% of the voting
interest in R Ltd. Further, P. Ltd. also directly owns 15% of the voting interest in R. Ltd.
Would P Ltd. be deemed to have control over R.Ltd. or would it only be considered as
exercising significant influence?
SOLUTION
1. Principle:
(a) If a Parent owns along with its Subsidiary more than one half of the voting power
in an enterprise, that Enterprise will be considered as a Related Party of the
Parent, by virtue of the ability to control.
(b) As per AS-18, Control includes ownership, directly or indirectly, of more than one
half of the voting power of another enterprise.
2. Conclusion:
(a) In the given case, P Ltd. has the ability to control R Ltd. based on the holding of
more than one-half of the voting power
(b) Hence, P. Ltd has control over R Ltd.
Arun Ltd. owns 60% of the voting power of Baskar Ltd. which in turn owns 60% voting
interest in Chandru Ltd. Karuna Ltd. owns the remaining voting share in Chandru Ltd. and is
considered to exercise significant influence over Chandru Ltd. During the reporting period,
Karuna Ltd. enters into transactions in the ordinary course of business with Arun Ltd.
Would Karuna Ltd. be a Related Party of Arun Ltd.?
SOLUTION
1. Analysis: Karuna Ltd. is not related to Arun Ltd. as it – (a) neither controls nor is
controlled by Arun Ltd. (b) does not exercise significant influence over Arun Ltd. or is
not so influenced by it.
2. Conclusion: Hence, Arun Ltd. and Karuna Ltd. are not considered as related party for
the purpose of AS-18.
QUESTION NO 10
A Ltd. owns 30% of the Equity Capital of B Ltd. B Ltd. in turn owns 35% of the Equity
Capital of C Ltd. and 40% of Equity Capital in D Ltd. Answer the following questions -
(1) Is B Ltd. a Related Party to A Ltd.?

(2) Is C Ltd. a Related Party to A Ltd.?
(3) Are C Ltd. and D Ltd. are Related Parties?
SOLUTION
1. Associates and Joint Ventures of the Reporting Enterprise are Related Parties. Since
A Ltd. holds more than 20% of the voting power in B Ltd. by virtue of this, it has
substantial interest and significant influence in B Ltd. So B Ltd. is an Associate, and
hence is Related Party to A Ltd.
2. An Associate of an Associate is not a Related Party. Only in the case of a Holding
Company, a Subsidiary of a Subsidiary (Sub-Subsidiary) also becomes a Related Party.
(i) B Ltd. Is an associate of A Ltd. Due to which both are related parties.
(ii) C Limited is not a direct Associate of A limited due to which both are not related
parties.
(iii) C Ltd. and D Ltd. are Co-Associates, Co-Subsidiaries become Related Parties
because of common control. In the case of Co-Associates, this common control is
missing, and therefore, they are not Related Parties.
QUESTION NO 11
Two Companies A and B have a common Executive Chairman As per AS-18, would these
Companies be considered to be Related parties on this account?
SOLUTION
1. Role: The Executive Chairman is one of the Key Management Personnel of both the
Companies as he is one of “those persons who have the authority and the responsibility
for planning, directing and controlling the activities of the Reporting Enterprise”.
2. Requirement: In the context of significant influence, mere existence of relationship

is not sufficient to classify enterprises as Related Parties. The ability to exercise
significant influence should exist during the reporting period.
3. Conclusion: Just because two Companies have a common Executive Director, they shall
not be regarded as Related Parties. There must be exercise of significant influence of
one of the other.
QUESTION NO 12
Is an Associate of an Associate a Related Party?

Anand Ltd. owns 30% of Share Capital of Bhanu Ltd. while Bhanu Ltd. own 25% of Share
Capital of Chandni Ltd. Would Chandni Ltd. be considered a Related Party in the Financial
Statements of Anand Ltd.?
SOLUTION
1. Principle: Para 3(b) of AS-18 refers to “Associates and Joint Ventures of the Reporting
Enterprise and the investing party or Venturer of which the Reporting Enterprise is an
Associate or a Joint Ventrue” as a Related Party relationship.
2. Intermediaries: “Intermediaries” is confined to only Subsidiary Enterprises and not
associates.
3. Conclusion: In the above case, Chandni Ltd. is not a Related Party of Anand Ltd. An
Associate of an Associate cannot be regarded as a Related Party only by virtue of this
relationship.
QUESTION NO 13
Would Co-Associates be considered to be Related parties?

Asha Ltd. has two Associates Basu Ltd. and Charan Ltd. and owns 25% of the voting power
of Basu Ltd. and 30% of the voting power of Charan Ltd. Would Basu Ltd be considered a
Related Party in the Financial Statements of Charan Ltd.?
SOLUTION
1. Analysis: Both Basu Ltd. and Charan Ltd. are ‘Associates’ of Asha Ltd. However,
as Basu Ltd is not an associate of Charan Ltd. nor is it being controlled directly, by
Charan Ltd. or is not so controlling Charan Ltd. it is not a Related Party of C Limited
Para 3(a) or3(b) do not apply in this case.
2. Conclusion: Co-Associates cannot be regarded as Related Parties only by virtue of this
relationship.
If a majority of Directors of Lalitha Ltd. constitute the majority of the Board of another
Company Maha Ltd. in their individual capacity as Professionals (and not by virtue of their
being Directors in Lalitha Ltd.) can it be considered that the Companies are related?
SOLUTION
1. Analysis: Lalitha Ltd. cannot be said to control the composition of the Board of Directors
of Maha Ltd. as the Directors have been appointed in their individual capacity, and not
by virtue of their being Directors in Lalitha Ltd.
2. Conclusion: Thus, the two Companies are not related merely because the majority of
the Directors of one became the majority of the Directors of the second in their
individual capacity as professionals.
QUESTION NO 15
In respect of a Key Supplier who is dependent on the Company for its existence and the
Company enjoys influence over the prices of the Supplier (which may not be formally
demonstrable), can the Supplier and the Company be considered to be Related Parties?
SOLUTION
1. Principle: AS-18 states that “a single customer, Supplier, Franchiser, Distributor or

General Agent with whom an enterprise transacts or significant volume of business
merely by virtue of the resulting economic dependence” would not be deemed to be
Related Parties.
2. Conclusion: As the conditions for being classified as a Related Party are not satisfied
in the above case, the Supplier cannot be said to be related to the Company.
QUESTION NO 16
Give your observations under each of the following independent situations:
A. Bharat Ltd. sold goods to its Associate Company for the 1st Quarter ending 30th June.
After that the Related Party Relationship ceased to exist. However, goods were
supplied as was supplied to any other ordinary customer. Decide whether transaction
of the entire year has to be disclosed as Related Party Transaction.
B. A Holding Company entered into business transactions valuing Rs. 100 Crores with
its Subsidiary during a FY. The Holding Company divested its holding in Subsidiary
before 31st March & as such no Related Party Relationship existed at the end of year.
Should Holding Company disclose the relationship & related transactions in its annual
accounts?
C. Rajan is a Director of Aruna Ltd. and Bhanu Ltd. On 30th June Rajan resigned from
Directorship of Bhanu Ltd. Aruna Ltd sold goods to Bhanu Ltd. during the entire year
at the same price and conditions as to any other customer. Aruna Ltd. discloses
only the Sales for the first quarter ending 30th June as Related Party Transactions.
Comment.
SOLUTION
1. Principle:
(a) As per AS – 18 “Related Party Disclosures”, Parties are considered related if at
any time during the reporting period one party has the ability to control the other
party or exercise significant influence over the other party in making Financial
and/or Operating decisions.
(b) Hence, even if the Related Party Relationship existed at any point of time in the
relevant Financial Year, AS-18 will be applicable.
2. Disclosure Requirements:
• Control Relationship exists – Disclose the name of the Party and the nature of the
relationship.
• Other than Control Relationship – Disclose the details of transactions for the
period during which the Related Party relationship exists.
3. Conclusion:
Control Relationship Disclosure Requirements

A. Only an Associate Company. Bharat Ltd. needs to disclose only those
Hence, no Control Relationship transactions which happened during the
existence of relationship.
B. C
ontrol Relationship exists between The Holding Company is required to
Holding Company and Subsidiary disclose the details of Rs.100 Crores worth
Company. of business transactions and the nature
of relationship, in its Separate Financial
Statements. This is applicable even if the
Holding – Subsidiary Relationship does not
exist on the Balance Sheet date.
Control Relationship Disclosure Requirements

C. C
ase I: In respect of transactions with * Merely because two Companies have a
Aruna Ltd. Director in common, the two Companies
cannot be considered as related, unless
the Director is able to affect the
policies of both Companies in their
mutual dealings. Hence no disclosure is
necessary in respect of transactions
with Aruna Ltd.
* However, if Rajan is able to affect
the policies of both the Companies,
transactions for the entire year should
be disclosed, since Control Relationship
exists in such case.
C
ase II : In respect of transactions Aruna Ltd. has to disclose only those
with Rajan transactions with Rajan (i.e. Payment of
Remuneration, etc.) that happened when
Rajan was the Director of the Company.
Transactions after the cessation of
relationship need not be disclosed, since
there is no control relationship.
QUESTION NO 17(GOOD QUESTION)
Should Related Parties be identified as at the Reporting Date for the purposes of AS-18?
Ram Ltd. held 70% of Share Capital of Ayodha Ltd. During the year Ram Ltd. sold 60% of
the Shareholding in Ayodhya Ltd there were transactions between Ram Ltd. and Ayoudhya
Ltd. before and after the sale of holding by Ram Ltd. should all the transactions between
the parties be disclosed?
SOLUTION
1. Principle: Refer question above.

2. Conclusion: Ram Ltd. has to disclose the nature of relationship and also the details of
the transactions that happened during the existence of Related Party Relationship,
even if the relationship does not exist on the Balance Sheet date.
Rajkumar, a relative of Key Management Personnel, received remuneration of Rs. 2,50,000

for his services in the Company for the period from 1st January to 30th June. On 1st July,
he left the service. Should the relative be identified as at the closing date, i.e. on 31st
December for the purposes of AS-18?
SOLUTION
1. Principle: As per AS-18 “Related Party Disclosures”-

(a) Relative of the Key Management Personnel is considered as a Related Party
Relationship.
(b) Even if Related Party Relationship existed for one day during the Financial Year,
all the transactions that took place between the parties during the entire year
should be disclosed.
2. Conclusion: In the above case, Remuneration paid to Rajkumar should be disclosed
under AS-18, for the period for which he was the Director, even if the relationship
did not exist on the Balance Sheet date.
QUESTION NO 19
Rama Ltd. exercises significant influence in the operating decision of Lakshman Ltd. During
a certain financial year, there was no transaction between the Companies. The parties feel
that there is no need to give related party disclosure in the Financial Statements for the
year. Comment.
SOLUTION
1. Principle: AS-18 requires disclosure of name of the Related Party and nature of the
Related Party Relationship where control exists, irrespective of whether or not there
have been transactions between the related parties.
2. Analysis and Conclusion:
The above requirements are applicable to situations ‘where control exists” and does
not extend to cases of significant influence. Since there are no transactions at all
between the Related Parties, in the above case, the question of disclosure under AS-
18 does not arise. Hence, the Company’s viewpoint is correct.
QUESTION NO 20
Akash Ltd. (the Reporting Enterprise) is a wholly owned subsidiary of PQ Pic. UK, XYZ is
another wholly-owned subsidiary of PQ Pic. UK Would the relationship between Akash Ltd.
and XYZ Inc. be required to be disclosed in Akash’s Financial Statements, pursuant to Para
21, even if no transaction have been undertaken during the reporting period between these
enterprises?
SOLUTION
1. Principle: AS-18 requires disclosure of name of related party and nature of relationship
where control exists, irrespective of whether or not there have been transactions.
2. Existence of Control: The use of the words “where control exists” implies that
disclosure of relationship in the Financial Statements is required only if control exists.
While AS-18 includes Fellow Subsidiaries as a Related Party relationship, there is no
existence of control between them.
3. Conclusion: In the above case if none of the conditions of control is satisfied, the
relationship between Akash Ltd. and XYZ Inc. USA would not require disclosure in the
Financial Statements of Akash Ltd.
QUESTION NO 21
Is the basis of pricing required to be disclosed under AS-18?
SOLUTION
1. Principle: S-18 does not require a specific disclosure of the basis of pricing of all
transactions entered into with related parties.
2. Understanding: AS-18 states that “Any other elements of the Related Party
Transactions necessary for an understanding of the ‘Financial Statements” should be
disclosed.
3. Example: A Ltd. and B Ltd. are related parties as per AS-18. 60% of A Ltd.’s annual
sales are made to B Ltd., at a fixed price realizing a margin of 5% from such sales. The
Normal Gross Margin derived from the balance 40% sales made by A Ltd. to unrelated
parties is 45%. In this case, the disclosure in the Financial Statements may include a
reference that the transaction has been entered into “under terms of arrangement,
as a result of which prices are lower than those with unrelated parties”.

(SELF READING)
QUESTION 22 (CA INTER NOV 2018) (5MARKS)
Following transactions are disclosed as on 31st March, 2018:
(i) Mr. Sumit, a relative of Managing Director, received remuneration of ` 2,10,000 for
his services in the company for the period from 1st April, 2017 to 30th June, 2017. He
left the service on 1st July, 2017.
Should the relative be identified as a related party as on closing date i.e. on 31-3-2018
for the purpose of AS-18.
(ii) Goods sold amounting to ` 50 lakhs to associate company during the 1st quarter ended
on 30th June, 2017. After that related party relationship ceased to exist. However,
goods were supplied as was supplied to any other ordinary customer.
Decide whether transactions of the entire year have to be disclosed as related party
transactions.
SOLUTION:
(i) According to AS 18 ‘Related Party Disclosures’, parties are considered to be related if

at any time during the reporting period, one party has the ability to control the other
party or exercise significant influence over the other party in making financial and/or
operating decisions.
Hence, Mr. Sumit a relative of key management personnel should be identified as
related party as at the closing date i.e. on 31.3.2018 as he received remuneration
forhis services in the company from1st April,2017 to 30th June, 2017and this period
comes under the reporting period.
(ii) As per provision of AS 18, the transactions only for the period in which related party
relationships exist need to be reported.
Hence, transactions of the entity with its associate company for the first quarter
ending 30.06.2017 only are required to be disclosed as related party transactions.
Transactions of the entire year need not be disclosed as related party transactions
and transactions for the period (after 1st July) in which related party relationship did
not exist need not be reported.
Hence transaction of sale of goods with the associate company for first quarter ending 30th
June, 2017 for ` 50 Lakhs only are required to be disclosed as related party transaction on
31.3.18.
QUESTION 23 (CA INTER MAY 2019) (5MARKS)
Identify the related parties in the following cases as per AS-18
(i) Maya Ltd. holds 61 % shares of Sheetal Ltd.

Sheetal Ltd. holds 51 % shares of Fair Ltd.
Care Ltd. holds 49% shares of Fair Ltd.
(Give your answer - Reporting Entity wise for Maya Ltd., Sheetal Ltd., Care Ltd. and
Fair Ltd.)
(ii) Mr. Subhash Kumar is Managing Director of A Ltd. and also holds 72% capital of B Ltd.
SOLUTION:
(i) (a) Reporting entity- Maya Ltd.

• Sheetal Ltd. (subsidiary) is a related party
• Fair Ltd.(subsidiary) is a related party
(b) Reporting entity- Sheetal Ltd.
• Maya Ltd. (holding company) is a related party
• Fair Ltd. (subsidiary) is a related party
(c) Reporting entity- Fair Ltd.
• Maya Ltd. (holding company) is a related party
• Sheetal Ltd. (holding company) is a related party
• Care Ltd. (investor/ investing party) is a related party
(d) Reporting entity- Care Ltd.
• Fair Ltd. (associate) is a related party
(ii) Mr. Subhash Kumar is Key management personnel as he has the authority for planning,
directing and controlling the activities of A Ltd. He also holds substantial interest in
B Ltd. as he holds 72% capital of B Ltd. Thus, Mr. Subhash is related party for both A
Ltd. and B Ltd. Moreover, as per the definition of related party relationship described
in para 3 of AS 18, enterprises over which Subhash is able to exercise significant
influence are also related parties. Thus, a Ltd. and B Ltd. will also be construed as
related to each other.
QUESTION 24
Identify the related parties in the following cases as per AS 18 A Ltd. holds 51% of B Ltd.
B Ltd holds 51% of O Ltd. Z Ltd holds 49% of O Ltd.
SOLUTION:
Reporting entity- A Ltd.
• B Ltd. (subsidiary) is a related party

• O Ltd.(subsidiary) is a related par Reporting entity- B Ltd.
• A Ltd. (holding company) is a related party
• O Ltd. (subsidiary) is a related party Reporting entity- O Ltd.
• A Ltd. (holding company) is a related party
• B Ltd. (holding company) is a related party
• Z Ltd. (investor/ investing party) is a related party Reporting entity- Z Ltd.
• O Ltd. (associate) is a related party
QUESTION 25 (CA INTER JULY 21 PAPER) (5 MARKS)
(i) Khushi Limited enter into an agreement with Mr. Happy for running a business for
a fixed amount payable to the later every year. The contract states the day-today
management of the business will be handled by Mr. Happy, while all financial and
operating policy decisions are taken by the Board of Directors of the Company. Mr.
happy does not own any voting power in Khushi Limited.
(ii) Shri Bhanu a relative of key management personnel received remuneration of ` 3,50,000
for his services in the company for the period from 1st April. 2020 to 30th June. 2020
On 1st July. 2020, he left the service.
You are required to suggest how the above transactions will be treated as at the closing
date i.e. on 31st March, 2021 for the purposes of AS 18-Related party Disclosures.
SOLUTION:
(i) Mr. Happy is not a related party for the company because he does not power of Planning,
Directing & Controlling because he is managing the busiess in lieu of a fixed amount
but Policy making powers are lying with the directors of company which indicates that
Mr.Happy is just an employee for the company but not the key management.
(ii) As per the provisions of AS 18, Shri Bhanu was a KMP for 3 months in current year.
It indicates that he was in relation with company for the said period. So the company
should disclose the amount of paid remuneration as related party transaction in its
report till the period in which he was in relation with company. There is no need to
show any relationship with shree bhanu after 30.6.2020.
ACCOUNTING STANDARD-19: LEASE ACCOUNTING 129
ACCOUNTING STANDARD-19
LEASE ACCOUNTING (IAS-17 & IND AS- 17)
QUESTION NO 1
ABC Limited leased out a plant for a period of ten years, which covers substantial part
of its life. The lessee has agreed to pay lease rentals @ Rs.12 Lakhs p.a. for seven years.
And the party has option to continue the lease paying @ Rs.3 Lakhs p.a. for another three
years. The lessee does not give any guarantee for residual value, but a group company gives
guarantee for a residual amount at the end of 7 years and 10 years at Rs.6 Lakhs and Rs.1
Lakh respectively. Estimated residual value of similar assets is ascertained at Rs.6 Lakhs.
What should be taken as minimum lease payment from the standpoint of the lessor and the
lessee? Also advice the Gross investment in lease
QUESTION NO 2
ABC Limited leases out an equipment whose fair value as on 1.1.2001 is Rs.12 lakhs (at the
inception of lease). The agreed lease rental is Rs.4 lakhs per annum for a period of 4 years.
Expected unguaranteed residual value at the end of lease term is Rs.30,000. What is the
implicit rate of interest.
QUESTION NO 3 (AUDIT PAPER)
Y Limited 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 R Limited for a lease rental of Rs.2 lakhs per annum.
The finance director of Y Limited is not sure about the treatment of these lease rentals and
hence requests your assistance in proper disclosure of the same. For calculation purposes,
the implicit rate of interest may be taken at 15%. Discount factors: 0.87, 0.76, 0.66, 0.57,
and 0.50
QUESTION NO 4
H Limited which has its financial year ending on 30 September, is considering the replacement
of its outdated mainframe computer on 1st October 2002. the replacement computer has
a cost of Rs.21Lakhs and its useful economic life is estimated to be seven years. After
negotiations the directors of H Limited decide to enter into a four year lease with D
Limited for total lease payments of Rs.20Lakhs payable in four equal instalments- the first
instalment being due on day one of the leasing period. Under this arrangement, D Limited
would have responsibility for upkeep and maintenance, and has negotiated a guaranteed
repurchase by the manufacturer at the end of the lease term. The interest rate implicit
in the lease is 10%. Analyse whether this transaction should be treated a finance lease/
operating lease with reference to AS-19.
QUESTION NO 5
ABC Limited has taken an item of equipment on lease. The lease agreement is for a period of
ten years, which is approximately equal to the useful life of the equipment. The lessee enjoys
the option to buy the asset at the end of 10 years at Rs.25,000 whereas the estimated
residual value of the asset is Rs.20,000. should this lease be classified as finance lease.
QUESTION NO 6
From the information given below, determine whether the lease is a financial or an operating
lease.
Lessor’s cost of the leased asset Rs.80,000
Fair value of the leased asset on 1.1.2002 Rs.80,000
(inception of the lease)
The lease is for 4 years and the rentals, which have to be paid in advance at the beginning
of each year, are Rs.40,000, Rs.25,000 and Rs.15,000 and Rs.10,000 respectively. The
estimated residual value of the leased assets at the end of the lease term is 5% of the
cost of the asset to the Lessor. The Lessor expects a return of 18% on investment.
QUESTION NO 7
An enterprise acquires a machinery on lease from a leasing company (the lessor) on January
20X0. The lease term covers the entire economic life of the machinery. I.e., 3 years.
The fair value of the machinery on January 1, 20X0 is Rs.2,35,500. The lease agreement
requires the lessee to pay an amount ofRs.1,00,000 per year beginning December 31, 20X0.
The lessee has guaranteed a residual value of Rs.17,000 on December 31, 20X2 to the
lessor. The lessor, however, estimates that the machinery would have a salvage value of
only Rs.3500 on December 31, 20X2. The interest rate implicit in the lease is 16 per cent.
Please show at what amount there will be recognition of an asset and a liability in the books
of Lessee.
QUESTION NO 8
R Limited (The Lessee) acquired a machinery on lease from S Limited (the Lessor) on January
1, 2000. The lease term covers the entire economic life of the machinery i.e., 3 years.
The fair value of the machinery on January 1, 2000 is Rs.3,50,000. the lease agreement
requires the Lessee to pay an amount of Rs.1,50,000 per year beginning December 31,
2000. The Lessee has guaranteed a residual value of Rs.11,400 on December 31, 2002 to
the Lessor. The Lessor however estimates that the machinery will have a salvage value of
only Rs.10,000 on December 31, 2002. The implicit rate of interest is 15% p.a. Compute the
value of machinery to be recognized by the Lessee and also the finance charges every year
on the basis of AS 19.
QUESTION NO 9
requires the lessee to pay an amount of Rs.1,00,000 per year beginning December 31, 20X0.
The lessee has guaranteed a residual value of Rs.17,000 on December 31, 20X2 to the
lessor. The lessor, however, estimates that the machinery would have a salvage value of
only Rs.3500 on December 31, 20X2. The interest rate implicit in the lease is 16 per cent.
Please show a table of apportionment of lease payment into finance charge and outstanding
liability.
QUESTION NO 10
requires the lessee to pay an amount of Rs.1,00,000 per year beginning December 31,
20X0. The lessee has guaranteed a residual value of Rs.17,000 on December 31, 20X2 to
the lessor. The lessor, however, estimates that the machinery would have a salvage value of
only Rs.3500 on December 31, 20X2.
Please calculate the implicit rate of interest.
QUESTION NO 11
Indentify asset and liability to be recognized at the inception of lease in the books of
lessee :-
Fair value of the leases asset is Rs.16lacs
Lease term – 4years
Agreed Lease rental – Rs.5lacs per annum
Guaranteed residual value - Rs.1lac
Expected residual value- Rs.3lacs.
QUESTION NO 12
With the data of Question No 11, Please show a table of apportionment of lease payment
into finance charge and payment of liability.
And also show the lease rental and outstanding liability accounts in the books of lessee and
also give the extract the balance sheet and Profit and Loss account for lease periods.
QUESTION NO 13 (NOV.2001)
R Limited acquired a machinery on lease from S Limited on January 1, 2000. The lease term
covers the entire economic life of the machinery i.e., 3 years. The fair value of the machinery
on January 1, 2000 is Rs.3,50,000. The lease agreement requires the lessee to pay an amount
of Rs.1,50,000 per year beginning December 31, 2000. The lessee has guaranteed a residual
value of Rs.11,400 on December 31, 2002 to the lessor. The lessor however estimates that
the machinery will have a salvage value of only Rs.10,000 on December 31,2002. The implicit
rate of interest is 15% per annum. Compute the value of machinery to be recognized by the
lessee and also the finance charges every year on the basis of AS-19. P.V factor of 15% in
three year is 2.283.
QUESTION NO 14
Date of Lease 1st April, 2001. Accounting year is financial year. Cost of leased asset
Rs.60,000. Annual rent Rs.35,000, Rs.16,000, Rs.8000, Rs.4500 payable in the beginning
of the year. Interest rate implicit 14%. Residual value at the end of 4th year Rs.3000.
Statutory depreciation 40% WDV. Prepare the books of Lessee (assuming that this is the
lease in the nature of finance lease.)
QUESTION NO 15
X Limited is a dealer in cars. Capital Rs.12,00,000 during 2001-2002:

Purchased 30 cars for 45,00,000
Expenses during the year 3,69,000;
Outright sale 15 cars for 27,00,000
And leased out 12 cars.
Implicit rate 13%
Lease rent Rs.37,500 (payable in advance in beginning of year) per car per annum for six
year. Residual value at the end of the 6th year Rs.22,500 per car. Depreciation 40% WDV.
Prepare the books of Lessee.
QUESTION NO 16
Lease term 5 years

Useful life of equipment 8 years
Fair market value Rs.10,000
Lease rentals Rs.3000 payable at end of each
of the five years
Insurance Rs.500 to be paid annually by the

lessee to the lessor
Residual value (estimated) at the end of 5th year Rs.1000

Lessee guaranteed Residual value to lessor Rs.2000
Lessees incremental borrowing rate 20% (lessor’s IRR not known)
QUESTION NO 17
Using the data given below please prepare a table in the books of lesser for decomposition
between finance income and receivable under finance lease.
Fair value of the leases asset is Rs.16 lacs
Lease term – 4years
Agreed Lease rental – Rus.5 lacs per annum
Guaranteed residual value - Rs.1lac
Expected residual value- Rs.3 lacs.
Implicit rate: 14.97%
QUESTION NO 18
Date of Lease 1st April, 2001. Accounting year is financial year. Cost of leased asset
Rs. 60,000. Annual rent Rs.35,000, Rs.16,000, Rs.8000, Rs.4500 payable in the beginning of
the year. Interest rate implicit 14%. Residual value at the end of 4th year Rs.3000. Prepare
the books of Lesser assuming that this is the lease in the nature of finance lease
QUESTION NO 19
An asset is leased out for a period of 5 years out of its useful life of 10 years. The
lease arrangement has been classified as operating lease. The agreed annual lease rental is
Rs. 10 lacs. The fair value of the leased out asset at the inception of lease is Rs.50 lacs. The
lessor incurred Rs.1lac initial direct cost. The lessor follows straight-line depreciation and
assumes 14% incremental borrowing cost.
Annual straight-line depreciation charge Rs.5 lacs.
QUESTION NO 20
Ramesh takes on oil tanker on lease for a four year period for which period he heas secured
a contract with oil India to transport oil from Chennai to Neyveli. The contract was entered
into on 1.1.1999 and the rentals agreed are Rs.60000, Rs.50000, Rs.40000, and Rs.30000
respectively. His other expenses and income from operating the tanker are given below:
1999 2000 2001 2002

Diesel and oil 10,000 16,000 18,000 16,000
Driver’s salaries 20,000 21,000 21,000 22,000
Administrationover. 10,000 10,000 13,000 14,000
Hire paid by oil India 90,000 95,000 1,00,000 96,000
Show how Ramesh would treat this transaction in the financial statements prepared for the
year 2002.
QUESTION NO 21
AB Limited owns a machinery, original cost of which is Rs.100 lacs, useful life 10 years,
expected residual value Rs.10 lacs. The company charges depreciation using reducing balance
method. The company has decided to sale this machinery at the beginning of 6th year at
Rs.40 lacs to DQ Limited. The buyer leases the machine back to AB Limited for a lease term
of 5 years @ Rs.10 lacs lease rentals per annum and guaranteed residual value of Rs.1 lac at
the end of the lease term. Lessee’s incremental borrowing rate is 13.5% per annum.
QUESTION NO 22
X Limited is a dealer in cars. Capital Rs.12,00,000. during 2001-2002:

Purchased 30 cars for 45,00,000
Expenses during the year 3,69,000;
Outright sale 15 cars for 27,00,000
And leased out 12 cars.
Implicit rate 13%
Lease rent Rs.37,500 ( payable in advance in beginning of year) per car per annum for six
year. Residual value at the end of the 6th year Rs.22,500 per car.Depreciation 40% WDV.
Prepare the books of Lessor.
QUESTION NO 23
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 per
annum. 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 finance income? (Note: IRR is 15.24%)
QUESTION 24 (CA FINAL NOV 2004) (8MARKS)
A Ltd. leased a machinery to B Ltd. on following terms:

• Fair value of the machinery=20lakhs
• Lease term 5years
• Lease rental per annum 5lakhs
• Guaranteed residual value 1lakh
• Expected residual value 2 lakhs
• Internal rate of return 15%
Depreciation is provided on straight line method at 10% per annum. Ascertain unearned
finance income and necessary entries may be passed in the books of lessee in the first year.
QUESTION NO 25 (CA FINAL NOV 2009)
AS Ltd. Leased a machine to SB Ltd. on the following terms :
(Rs. in lakhs)
Fair value of the machine 4.00
Lease term 5 years
Lease Renal per annum 1.00
Guaranteed Residual value 0.20
Expected Residual value 0.40
Internal Rate of Return 15%
Depreciation is provided on straight line method at 10 per cent per annum. Ascertain
unearned Financial Income. Necessary Journal entries in the books of the Lessee in first
year may be shown.
QUESTION NO 26 (CA FINAL MAY 2006)
Global Ltd. has initiated a lease for three years in respect of an equipment costing Rs.
1,50,000 with expected useful life of 4 years. The asset would revert to Global Limited
under the lease agreement. The other information available in respect of lease agreement
is :
(i) The unguaranteed residual value of the equipment after the expiry of the lease term
is estimated at Rs. 20,000.
(ii) The implicit rate of interest is 10%.
(iii) The annual payments have been determined in such a way that the present value of the
lease payment plus the residual value is equal to the cost of asset.
Ascertain in the hands of Global Ltd.

(i) The annual lease payment
(ii) The unearned finance income
(iii) The segregation of finance income, and also
(iv) Show how necessary items will appear in its profit and loss account and balance sheet
for the vairous years.
SOLUTION
1. Computation of Annual Lease Payment: Let Annual Lease Payment/Rentals (ALR)

be “P”.
• PV of MLP + PV of URV = Cost of Asset = Rs. 1,50,000
• So (Rs. P x Annuity Factor for 3 years at 10%) + (Rs. 20,000 x PV Factor for 3rd
year at 10%) = Rs. 1,50,000.
• So, (2,487 x Rs. p) + (Rs. 20,000 x 0.7513) = Rs. 1,50,000
Rs. 1,50,000 – Rs. 15,026
• Therefore, P = = Rs. 54,272.
2,487
2. Computation of Unearned Finance Income
(a) MLP (Rs.54,272x3 years) + URV (rs.20,000) = Rs. 1,62,816 + Rs. 1,82,816
Rs.20,000 =
(b) PV of MLP & MURV = Cost/Fair Value of the Asset at the time Rs. 1,50,000
of inception of Lease
(c) Unearned Finance Income (a) – (b) Rs. 32,816
3. Recognition of Finance Income by Lessor
Year Net Investment in the Finance Total Lease Balance

Lease = Receivable Income at Payments Reduction in
10 on NI received Receivable
from Lessee (i.e.
Principal)
(1) (2) (3)=(2) x 10 (4) (5)=(4)-(3)
1 Rs.1,50,000 15,000 54,272 39,272
2. 1,50,000-39,272 = 1,10,728 11,073 54,272 43,199
3. 1,10,728-43,199= 67,529 6,753 54,272 47519
3(end) 67,529-47,519=20,010 Nil URV Rs. (difference
20,000 Rs.10 due to
R/Off) Nil
4. Gross Investment in Lease (or Lease Receivable) A/c.
Particulars Rs. Particulars Rs.

To Sale of Lease Asset 1,50,000 By Bank (Lease Rentals 54,272
To Unearned Finance 32,826 Received)
Income A/c. By Balance c/d (year 1 end) 1,28,554
Total 1,82,826 Total 1,82,826
To balance b/d (year 2 1,28,553 By Bank (Lease Rentals 54,272
beginning) Received)
By balance c/d (Year 2 end) 74,282
Total 1,28,554 Total 1,28,554
To balance b/d (Year 3 74,282 By Bank (Lease Rentals 54,272
beginning) Received)
By Bank (Residual Value 20,010
Received)
Total 74,282 Total 74,282
5. Unearned Finance Income A/c.
Particulars Rs. Particulars Rs.

To Profit & Loss A/c. (Income 15,000 By Gross Investment in 32,826
Transfer) Lese A/c.
To Balance c/d (Year 1 end) 17,826 1,28,554
To Profit & Loss A/c. (Income 11,073 By Balance b/d (Year 2 17,826
Transfer) beginning)
To Balance c/d (Year 2 end) 6,753
To Profit & Loss A/c. (Income By Balance b/d (Year 3 6,753
Transfer) 6,753 beginning)

6. Disclosure in Financial Statements of Global Ltd.

(a) Profit and Loss Account (Extract) – As per Sch VI (Revised)
Particulars Yr. 1 Yr. 2 Yr. 3

Other Income (Finance Income) 15,000 11,073 6,753
Sale Revenue =PV of MLP or Fair value, whichever is less Rs. 1,34,974
(Rs. 54,272 x 2,487) =
Less: Cost Recognition =Carrying Amount Less PV of URV =Rs. Rs. 1,34,974
1,50,000 Less Rs. 15,026 =
Profit on Finance Lease Arrangement (Not Recognised) = NIL
(b) Balance Sheet (Extract)
Description Yr. 1 Yr. 2 Yr. 3

Tangible Fixed Assets:
Gross Investment in Lease (WN 4) 1,28,551 74,282 NIL
Less: Unearned Finance Income (WN 5) 17,826 6,753 NIL
Net Investment in the Lease 1,10,725 67,529 NIL
QUESTION NO 27 (C A FINAL MAY 2005) (REFER Q.29)
An equipment is leased for 3 years and its useful life is 5 years. Both the cost and the fair
market value of the equipment are Rs. 3,00,000. The amount will be paid in 3 instalments
and at the termination of 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 annunity factors of Re. 1 due at the end of 3rd
year on 10% IRR is 2.4868. The Present Value of Re. 1 due at the end of 3rd year at 10%
rate of interest is 0.7513.
Calculate Unearned Finance Income.
QUESTION NO 28 (C A FINAL NOV 2007)
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, 0.756 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.
QUESTION NO 29 NOV.2014 5 MARKS
A Machine having expected useful life of 6 years, is leased for 4 years. Both the Cost and the
Fair Value of the Machinery are Rs. 7,00,000. The amount will be paid in 4 equal instalments
and at the termination of lease, Lessor will get back the Machinery. The Unguaranteed
Residual Value at the end of the 4th year is rs.70,000. The IRR of the investment is 10%.
The Present value of Annuity Factor of Rs. 1 due at the end of 4th IRR is 10% IRR is 3.169.
The Present Value of Rs. 1 due at the end of 4thyear at 10% Rate Interest is 0.683.
Compute the Unearned Finance Income.
SOLUTION
Computation of Unearned Finance Income
Particulars Rs.
PV of Lease Payments 2,05,803 p.a.
Annual Lease Payments =
Annuity Factor for 3 years at 10%
Rs. 6,52,190
=
3,169
Total Lease Rentals for the Lease Period = Rs.2,05,803 p.a. x 4 years = 8,23,212
MLP
Add: Residual Value 70,000
Gross Investment in the Lease 8,93,212

Less: Present Value of MLP & URV = (6,52,190 + 47,810) (See note) (7,00,000)
Unearned Finance Income 1,93,212
Note: PV of MLP & URV equals the Fair Value/Cost of Equipment at the inception of the
lease = Rs.7,00,000.
QUESTION NO 30 CA FINAL MAY 2015 5 MARKS
X Ltd. has leased an equipment over its useful life that costs Rs. 74655100 for a three year
lease period. After the lease term, the asset would revert to the Lessor. You are informed
that :-
(i) The estimated Unguaranteed Residual Value would be Rs. 1 Lakh only.
(ii) The Annual Lease Payments have been structured in such a way that the sum of their
Present Values together with that of the Residual Value of the asst will equal the cost
thereof.
(iii) Implicit Interest Rate is 10%.
You are required to ascertain the Annual Lease Payment and the Unearned Finance Income.
PV Factor @ 10% for year 1 to 3 are 0.909, 0.826 and 0.751 respectively.
SOLUTION
1. Computation of Annual Lease Payment: Let Annual Lease Payment/Rentals (ALR) be

“P”.
• PV of MLP + PV of URV = Cost of Asset = Rs. 7,46,55,100.
• So, (Rs. P x Annuity Factor for 3 years @ 10%) + (Rs.1,00,000 x PV Factor for 3rd
year at 10%) = Rs. 7,46,55,100.
• So, (2,487 x Rs. P) + (Rs.1,00,000 x 0.7513) = Rs.7,46,55,100.
• Therefore, P = s. 299,87,925.
2. Computation of Unearned Finance Income
(a) MLP (Rs.2,99,87,925x3 Years) + URV (Rs.1,00,000) + Rs.9,00,63,775

Rs.8,99,63,775 + Rs.1,00,000
(b) PV of MLP & URV = Cost/Fair Value of the Asset at the time Rs.7,46,55,100
of inception of lease.
(c) Unearned Finance Income (a) – (b) Rs.1,54,08,675
STUDY MATERIAL QUESTIONS

(SELF READING)
QUESTION 1
Classify the following into either operating or finance lease:
(i) Lessee has option to purchase the asset at lower than fair value, at the end of lease
term;
(ii) Economic life of the asset is 7 years, lease term is 6 years, but asset is not acquired
at the end of the lease term;
(iii) Economic life of the asset is 6 years, lease term is 2 years, but the asset is of special
nature and has been procured only for use of the lessee;
(iv) Present value (PV) of Minimum lease payment (MLP) = “X”. Fair value of the asset is “Y”.
SOLUTION:
(i) If it becomes certain at the inception of lease itself that the option will be exercised
by the lessee, it is a Finance Lease.
(ii) The lease will be classified as a finance lease, since a substantial portion of the life of
the asset is covered by the lease term.
(iii) Since the asset is procured only for the use of lessee, it is a finance lease.
(iv) The lease is a finance lease if X = Y, or where X substantially equals Y.
QUESTION 2
A machine was given on 3 years operating lease by a dealer of the machine for equal annual
lease rentals to yield 30% profit margin on cost ` 1,50,000. Economic life of the machine is
5 years and output from the machine are estimated as 40,000 units, 50,000 units, 60,000
units, 80,000 units and 70,000 units consecutively for 5 years. Straight line depreciation in
proportion of output is considered appropriate. Compute the following:
(i) Annual Lease Rent

(ii) Lease Rent income to be recognized in each operating year and
(iii) Depreciation for 3 years of lease.
SOLUTION:
(i) Annual lease rent

Total lease rent
output during lease period
= 130% of ` 1,50,000 x
Total output
= 130% of ` 1,50,000 x (40,000 +50,000+ 60,000)/(40,000 + 50,000 + 60,000 +
80,000 + 70,000)
= 1,95,000 x 1,50,000 units/3,00,000 units = ` 97,500
Annual lease rent = ` 97,500 / 3 = ` 32,500
(ii) Lease rent Income to be recognized in each operating year

Total lease rent should be recognised as income in proportion of output during lease
period, i.e. in the proportion of 40 : 50 : 60.
Hence income recognised in years 1, 2 and 3 will be as:
Year 1 ` 26,000,
Year 2 ` 32,500 and
Year 3 ` 39,000.
(iii) Depreciation for three years of lease

Since depreciation in proportion of output is considered appropriate, the depreciable
amount ` 1,50,000 should be allocated over useful life 5 years in proportion of output,
i.e. in proportion of 40 : 50 : 60 : 80 : 70 .
Depreciation for year 1 is ` 20,000, year 2 = 25,000 and year 3 = 30,000.
(NOTE: IN THIS QUESTION, WE HAVE NOT APPLIED SLM BECAUSE WE HAVE OTHER
INFORMATION AS A BASIS WHICH CAN BE USED AS SYSTEMATIC ALLOCATION)
QUESTION 3 (CA INTER MAY 19)(5MARKS)
Jaya Ltd. took a machine on lease from Deluxe Ltd., the fair value being ` 11,50,000.
Economic life of the machine as well as lease term is 4 years. At the end of each year,
lessee pays ` 3,50,000 to lessor. Jaya Ltd. has guaranteed a residual value of ` 70,000 on
expiry of the lease to Deluxe Ltd., however Deluxe Ltd. estimates that residual value will
be only ` 25,000. The implicit rate of return is 10% p.a. and present value factors at 10%
are : 0.909, 0.826, 0.751 and 0.683 at the end of 1st, 2nd, 3rd and 4th year respectively.
Calculate the value of machinery to be considered by Jaya Ltd. and the value of the lease
liability as per AS-19.
SOLUTION:
According to para 11 of AS 19 “Leases”, the lessee should recognise the lease as an asset
and a liability at an amount equal to the fair value of the leased asset at the inception of
the finance lease. However, if the fair value of the leased asset exceeds the present value
of the minimum lease payments from the standpoint of the lessee, the amount recorded as
an asset and a liability should be the present value of the minimum lease payments from the
standpoint of the lessee.
In calculating the present value of the minimum lease payments the discount rate is the
interest rate implicit in the lease. Present value of minimum lease payments will be calculated
as follows:
Year Minimum Lease Payment Internal rate of return Present value

` (Discount rate @10%) `
1 3,50,000 0.909 3,18,150
2 3,50,000 0.826 2,89,100
3 3,50,000 0.751 2,62,850
4 4,20,000* 0.683 2,86,860
Total 14,70,000 11,56,960
Present value of minimum lease payments ` 11,56,960 is more than fair value at the inception
of lease i.e. ` 11,50,000, therefore, the lease liability and machinery should be recognized
in the books at ` 11,50,000 as per AS 19.
QUESTION 4 (CA INTER NOV 19) (5 MARKS)
Classify the following into either operating lease or finance lease with reason:
(1) Economic life of asset is 10 years, lease term is 9 years, but asset is not acquired at
the end of lease term.
(2) Lessee has option to purchase the asset at lower than fair value at the end of lease
term.
(3) Lease payments should be recognized as an expense in the statement of Profit & Loss
of a lessee.
(4) Present Value (PV) of Minimum Lease Payment (MLP) = “X”. Fair value of the asset is
“Y”. And X = Y.
(5) Economic life of the asset is 5 years, lease term is 2 years, but the asset is of special
nature and has been procured only for use of the lessee.
SOLUTION:
(i) The lease will be classified as a finance lease, since a substantial portion of the life of
the asset is covered by the lease term.
(ii) If it becomes certain at the inception of lease itself that the option will be exercised
by the lessee, it is a Finance Lease.
(iii) It is an operating lease under which lease payments are recognized as expense in the
profit and loss account of lessee to have better matching between cost and revenue.
(iv) The lease is a finance lease if X = Y, or where X substantially equals Y.
(v) Since the asset is of special nature and has been procured only for the use of lessee,
it is a finance lease.
NOTES
ACCOUNTING STANDARD-20: EARNING PER SHARE 147
EARNING PER SHARE
UNIT I : BASIC EPS
CONCEPT 1: ADJUSTMENT OF NEW ISSUE & BUY BACK OF SHARES
QUESTION NO 1
Calculate the weighted average number of shares on the basis of following table:-
No of shares No of shares No of shares

issued bought back outstanding
1st January 99 Opening balance 1800 - 1800
31.5.99 Issue of shares 600 - 2400
for cash
1.11.99 Buy back of shares 300 2100
31.12.99 Balance at the end 2100

of year
QUESTION NO 2
Given below are the details of equity share capital of ABC Limited for the year 2001:
Particulars No of shares in Face value: amount

lacs (Rs. in lacs)
Balance if fully paid up equity as on 1.1.2001 100 1000
Convertible debentures converted into fully
paid up equity shares on 1.7.2001 50 500
Equity shares bought back on 1.11.2001 30 300
Net profit after tax Rs. 240 Lacs.

QUESTION NO 3 (HOMEWORK)
For the year 2013-2014 Tuts Limited earns Rs. 3 Lakhs before tax. Other details are as
follows:
Opening Equity Share Capital Rs. 500,000
5,000 Shares issued on 01.11.2013 (Rs. 10/-)
ON 1.3.2014 1,000 Shares were buy backed.
Corporate Tax 33.33% Compute Basic EPS.
SOLUTION:
Basic EPS = Net Profit/WANES = 2,00,000/52,000 = Rs. 3.85
Net Profit = 3,00,000 – 1,00,000 = Rs. 2,00,000
WANES = 50000 + 5000 x 5/12 -1000 x 1/12 = 50000 + 2083.33 - 83.33 = 52,000
CONCEPT 2: ADJUSTMENT OF DIFFERENT FACE VALUES
QUESTION NO 4 (EQUAL DIVIDEND RIGHTS)
No. of Shares
Of Rs.10 each fully paid up 2,00,00,000
Compute the EPS if PAT is 15,00,00,000.
QUESTION NO 5 (DIFFERENT DIVIDEND RIGHTS)
No. of outstanding shares

Of Rs.10 each fully paid up- Class A 2,00,00,000
Of Rs.25 each fully paid up- Class B 1,00,00,000
Of Rs.5 each fully paid up – Class C 6,00,00,000
Profit after tax (Rs. In lakhs) 15,00,00,000
Dividend %
-Class A Normal as declared
-Class B 1% above normal
-Class C 2% above normal
QUESTION NO 6
XYZ Limited has the following different classes of equity shares, outstanding as at March
31, 2002 having different face values as follows:
Number of shares Rights as to share in

net profit to the extent of capital
1,00,000 “A” class equity shares Proportionate to capital
30,000 “B” class equity shares In the proportion of 3:2 with respect to “A” class
shares
30,000 “C” class equity shares In the proportion of 5:2 with respect to “A” class
share.
40,000 “D.” class equity shares In the proportion of 3:1 with respect to “A” class
shares.
Profit for the year ended March 31, 2002 was Rs.8,00,000. AS paragraph 8 of the statement
requires an enterprise to present basic and diluted earnings per share on the face of the
statement of Profit and Loss account for each class of equity shares that has a different
right to share in the net profit for the period, the company calculates and discloses Basic
EPS as follows:
The company believes that net profits is to be shared in the ratio of 2:3:5:6 as derived
from their rights to share net profit.
Class Calculations Net profits No of shares Basic EPS

A Rs.8,00,000*2/16 100,000 100,000 1.00
B Rs.8,00,000*3/16 150,000 30,000 5.00
C Rs.8,00,000*5/16 250,000 30,000 8.33
D. Rs.8,00,000*6/16 300,000 40,000 7.50
Is the calculation of EPS by the company correct?

CONCEPT 3: ADJUSTMENT OF DIFFERENT PAID UP VALUES
QUESTION NO 7
Particulars No. Amount

Equity shares of Rs.10 each fully paid up on 1.4.2000 10,00,000 99,00,000
Calls in arrears on 1.4.2000 1,00,000
Calls in arrears received on 1.6.2000 50,000
New issue amount paid up on 1.10.2000 Rs.7.5 10,00,000 75,00,000
Calls in arrears received on 1.3.2001 50,000
PBIT before extraordinary items for the year ended on 31.3.200: Rs.2,62,00,000,
Extraordinary items(-) Rs.2,00,000, Tax provision: Rs.30,00,000. 10% preference share
capital issued on 1.7.2000: Rs.20,00,000.
QUESTION NO 8
No of Nominal value Amount

shares of shares paid
issued
1st January 2001 Balance at beginning of year 1800 Rs.10 Rs.10
31st October 2001 Issue of shares 600 Rs.10 Rs.5
QUESTION NO 9
CD Limited makes a public issue of equity shares during the year ended March 31,2002 of
1,00,000 shares of Rs.10 each. The issue was fully subscribed and the calls were made as
given below:
Rs.5 on application and allotment made on July 1, 2001
Rs.2 on first call made on September 30, 2001
Rs.3 on second and final call made on January 1, 2002
Partly paid shares are entitled to participate in the dividend to the extent of amount paid.
CD Limited had 5,00,000 shares outstanding at the beginning of the year and apart from
the public issue of shares made above, there were no other additions to or reductions from
share capital.
CONCEPT 4: ADJUSTMENT OF BONUS SHARES
QUESTION NO 10
Net profit for the year 2000 Rs.18,00,000

No of equity shares outstanding until 30.9.2001 20,00,000
Bonus issue 1.10.2001 2 equity shares for each equity share
outstanding at 30.9.2001
QUESTION NO 11
Given below equity shares capital details of XYZ Limited for the year 2000 and 2001:
Details No of shares Amount

Equity shares of Rs.10 each fully paid up on 1.6.2000 10,00,000 1,00,00,000
Bonus issue on 1.6.2001 10,00,000 1,00,00,000
Net profit 2000 - Rs. 45,00,000, Net profit 2001 - Rs. 60,00,000.
QUESTION NO 12
As a statutory auditor for the year ended 31.3.2002 how would you deal with the following:
As on 31.3.2001 the equity share capital of Q Ltd. is Rs.10crores divided into shares of
Rs.10 each. During the financial year 2001-2002, it has issued bonus shares in the ratio of
1:1. The net profit after tax for the years 31.3.2001 and 31.3.2002 is Rs.8.50crores and
Rs.11.50crores respectively. The EPS disclosed in the accounts for two years is Rs.8.50 and
5.75 respectively.
QUESTION NO 13 (HW)
Financial information of X Limited is extracted s follows:

Opening Equity Shares on 01.01.2006 1, 00,000
Shares issued as Bonus as on 01.05.2006 20,000
Profits for the year ended 31.12.2006 (Rs.) 40, 00,000
Profits for the year ended 31.12.2.005 (Rs.) 55, 00,000

Calculate Basic EPS for 2006 and adjusted EPS for 2005.
SOLUTION:
Basic EPS 2006 (Reported) = Net Profit/WANES = 40, 00,000/1, 20,000 = Rs. 33.33
Basic EPS 2005 (Reported) = 55, 00,000/1, 00,000 = Rs. 55
Basic EPS 2005 (Restated) = 55, 00,000/1, 20,000 = Rs.45.83
Assume Opening shares are numbers.
Note: One should compare Restated EPs with Reported EPS i.e. Rs.44.83 with Rs. 33.33
CONCEPT 5: ADJUSTMENT OF RIGHT SHARES
QUESTION NO 14
Accounting Year is Calendar year
Net profit Year 2000: Rs.11,00,000

Year 2001: Rs.15,00,000
No of shares outstanding prior to right issue 5,00,000 shares
Right issue One new share for each five
outstanding (i.e., 1,00,000
new shares)
Right issue price: Rs.15 last
date to exercise rights:
1st March 2001
Fair value of one equity share immediately prior to Rs.21

exercise of rights on 1st March 2001
QUESTION NO 15
Given below are the details of equity shares of MN Limited during 2000 and 2001:
Details No of shares Amount

(in lacs) (Rs. in lacs)
Equity shares fully paid up on 1.1.2000 1,000 10,000
Right issue on 1.7.2001 1,000 2,000
 Closing market price on 30.6.2001 : Rs. 35

 Price of right : Rs. 20
 Net profit after tax (Rs. in lacs) for the year ended 31.12.2000 :2200
 Reported basic EPS for the year ended 31.12.2000 : Rs. 2.20
 Net profit after tax (Rs.in lacs ) for the year ended 31.12.2001 :2400
QUESTION NO 16
X Ltd. supplied the following information. You are required to compute the Basic EPS.
(Accounting year 1.1.2002-31.12.2002)
Net profit for the accounting years 2002 and 2003: Rs. 20,00,000 and 30,00,000
No of shares outstanding prior to Right issue 10,00,000 shares
Right issue= one new share for each four shares outstanding (that is 2,50,000)
Term right issue Price = Rs. 20; last date for exercise of rights is 31.3.2003
Fair rate of one equity share immediately prior to exercise of right on 31.03.2003 Rs.25
QUESTION NO 17 (HW)
Platinum Ltd. had 1200,000 equity shares of Rs. 10 each fully paid up outstanding prior to
right issue. The details of rights issues are as follows:
(k) One new share for every two shares outstanding.
(l) Right issue price – Rs. 18
(m) Last date of exercise rights to 31st December, 2010
(n) Fair value of each equity share prior to exercise of rights – Rs. 24
The details of net profit earned by the company as follows:
Year ended 31.3.2010 Rs. 40,00,000
Year ended 31.3.2011 Rs. 54,00,000
Calculate EPS.
ANSWER: For 2011 – Rs. 3,77, EPS for 2010 – Rs. 3.33, adjusted EPS for 2010-
Rs. 3.05
QUESTION NO 18 (HW)
As on 01.01.2006 Pistons Limited had 5,00,000 shares. It issued 1 right share for every 5
shares held at Rs 15/- on 01.03.2006. Market price per share just before the right issue
is Rs. 21. Net profit for 2005 was Rs. 11,00,000 and for 2006 Rs. 15,00, 000.
Calculate EPS for 2006 and restated EPS for 2005.
SOLUTION:
OS x MP + RI x Subscription Price
Theoretical Ex-right MP =
Total Shares
5,00,000 x 21 + 1,00,000 x 15
= = Rs 20
6,00,000
Irrespective of any method Theoretical Ex-right MP is required to be calculated as a first

step.
Formula Method:
WANES = 5,00,000 +Right Shares x 9/12 x Adjusting Factor (A.F.)
= 5,00,000 + 1,00,000 x 10/12 x 1.05 = 500000+87500
Calculation of A.F.:
Adjusting Factor = MP before rights = 21/20 = 1.05
MP ex-right
Basic EPS 2006 (Reported) = Net Profit/WANES = 15,00,000/(5,00,000+87500) = Rs.2.55
Basic EPS 2005 (Reported) = 1100,000/5,00,000 = Rs. 2.20
Basic EPS 2005 (Restated) = 1100000/500000 x 1.05 = Rs. 2.10
QUESTION NO 19 (HW)
Calculate from the following information:

• Theoretical ex-right fair value.
• Right Factor:
— Number of equity shares outstanding 5 Lakhs.
— Right issue 2 shares for each 5 shares
— Fair value per share before right Rs. 34.00
— Right issue price Rs 20.00
Ans. Rs. 30; Rs. 1.13
CONCEPT 6: ADJUSTMENT OF SHARES ISSUED

IN AMALGAMATION OF COMPANIES
QUESTION NO 20
Given below information relating to equity shares of A Limited and B Limited. Two companies
amalgamated w.e.f. 1-10-2001. A Limited issued the required No. of shares on the basis of
the agreed valuation.
A Limited B Limited
No of outstanding equity shares as on 1.4.2001
(No. in lakhs) 500 200
Agreed value per share for acquisition 120 30
Date of acquisition 1-10-2001
Profit after tax (Rs. In lakhs) 1200 350
Profit after tax during 1-10-2001—31-3-2001 (Rs. In lakhs) 1500
QUESTION NO 21
On June 30, 2001, B Limited merged into A Limited. The Amalgamation was accounted for
in accordance with the pooling interest method described in Accounting Standard 14 on
“accounting for Amalgamation”.
The following is the relevant information for the year ended 31st March 2002:
Particulars A Limited B Limited

Net profit (Rs.)
Until merger 5,00,000 2,00,000
After merger to year end 8,00,000
(March 31, 2002)
Number of shares (Rs.10 each)
At the start of the year 6,000 4,000
On the date of merger 6,000 4,000
At year end (March 31, 2002) 10,000
Compute the E.P.S of A Limited at the year end, i.e., March 31, 2002
QUESTION 22 (HW)
Max Ltd. takes over Zee Ltd. as on 01.04.2005.
Max Ltd. Zee Ltd.

Original Shares 200,000 1,00,000
Face Value 100 100
Share Value for P.C. 210 105
Profits (01.01.2005 – 31.03.2005) 1,00,000 70,000
Profits (01.04.2005 – 31.12.2005) 4,30,000 --
Compute EPS assuming:

(a) Amalgamation in the nature of Purchase
(b) Amalgamation in the nature of Merger
SOLUTION:
Calculation of PC = 100000 x 105 = 1,05,00,000
Number of shares issued = 10500000/210 = 50,000
Amalgamation in the Amalgamation in the

nature of Purchase nature of Merger
Net Profit = 530000 Net Profit = 600000
WANES = 237500 (200000 + 50000x9/12) WANES=250000 (2000000+50000)
Basic EPS = Rs. 2.23 Basic EPS= Rs. 2.40
UNIT II : DILUTED EPS
CONCEPT 1 : ADJUSTMENT OF SINGLE POTENTIAL SHARE
QUESTION NO 23
Net profit for the year Rs.1,00,00,000

No. of equity shares outstanding 50,00,000
Basic earnings per share Rs.2.00
No. of 12% convertible debentures of Rs.100 each 1,00,000
Each debenture is convertible in to 10 equity shares
Interest expense for the current year Rs.12,00,000
Tax relating to the interest expense 3,60,000
QUESTION NO 24

Weighted average number of equity shares outstanding during the 2001 5,00,000
Average fair value of one equity share during the year 2001 Rs.20
Weighted average number of shares under option during the year 2001 1,00,000
Exercise price for shares under option during the year 2001 Rs.15
QUESTION 25 (C.A.FINAL NOV. 2006)
(Similar Problem Nov. 2009) (NS)

Mohur Limited has equity capital of Rs. 40,00,000 consisting of fully paid up shares of Rs.
10 each. Net Profit after tax for 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 5 equity
shares. Tax rate 30%. Compute diluted EPS.
SOLUTIONS:
PAT 6000000
1. Basic EPS = = x 15
No. of Share 400000
PAT 6126000
2. Diluted EPS = = x 10.56
New No. of Share 580000
Note – Adjust PAT

Net Profit before conv. debenture in to share = 60,00,000
Interest saving on debenture
(36000*50*10%*70%(100-30) = 1,26,000
Adj. PAT 61,26,000
New No. share for dilution:
Old Shares = 4,00,000
Convertible debentures (36000*5) = 1,80,000
5,80,000
CONCEPT 2 : ADJUSTMENT OF MULTIPLE POTENTIAL SHARES
QUESTION NO 26
Net profits attributable to equity shareholders Rs.1,00,00,000

No of equity shares outstanding 20,00,000
Average fair value of the one equity share during the year Rs.75
Potential equity shares:

Options 1,00,000 with exercise
price of 60
Convertible preference shares 8,00,000 shares entitled

to a cumulative dividend
of Rs. 8 per share, each
preference share is
convertible into 2 equity
shares.
12% convertible debentures of Rs.100 each Nominal amount
Rs. 10,00,00,00. each
debenture is convertible
into 4 equity shares.
tax rate 30%.
QUESTION NO 27
Particulars No. in lacs Amount in lacs.

Equity shares outstanding on 1.1.2001 1,000 10,000
10% convertible each to converted into 8 equity shares 200 20,000
Net profits after tax 1,000
Basic EPS(Rs.) =1000/1000 1
Assume tax rate is 38.5%.

UNIT 3 : MISC. CONCEPTS
QUESTION NO 28 (DILUTED EPS FOR LOSS MAKING COMPANY)
How would Diluted EPS be calculated for a loss making enterprise? To illustrate, at
December 31, 20X2, a company has 2,000 shares of face value of Rs.10 each. The stock
options outstanding at December 31,20X2 were for 400 shares of face value Rs.10 each.
The net loss for the year 20X2 was Rs.1,200,000. The fair value of the shares on the date
of grant and the exercise price were Rs.100 and Rs.60 per share, respectively.
QUESTION NO 29 (SHARE SPLIT/SHARE CONSOLIDATION)
COSY COMFORTS Limited earns a Net Profit for the year 2006-2007 Rs. 20, 00,000 after
tax. The corresponding figure for the last year was Rs. 16,00,000. Its Capital Structure
contains 80,000 Shares of Rs. 10 each. On 07.11.2006 it has decided to consolidate the
shares from Rs. 10 each to Rs. 100 each. Calculate Basic EPS and Restated EPS.
SOLUTION:
Basic EPS 2006-07 (Reported) = Net Profit/WANES = 20,00,000/8,000 = Rs.250
Basic EPS 2005-06 (Reported) = 1600000/80000 = Rs. 20
Basic EPS 2005-06 (Restated) = 1600000/8000 = Rs. 200
QUESTION NO 30 (DISCONTINUED OPERATIONS)
Undivided Ltd. having a net profit of Rs.40,000 from continuing operations and net loss of
Rs. 30,000 from discontinuing operations. The company has 20,000 equity shares and 500
Potential equity shares.
Compute Basic EPS & Dilutive EPS of Undivided Ltd.
SOLUTION:
Profit/Loss position is as follows:
Net Profit from continuing operations 40,000
Net Loss from discontinuing operations (30,000)
Net Profit to the company as a whole 10,000
Retail Potential Equity Shares are considered dilutive only when their conversion would lead
to decrease in net profit per share from ‘continuing operations’.
For checking purpose whether the PES are dilutive/anti-dilutive consider results of
continuing operations only. In other words results from dis-continuing operations is to be
ignored.
But for the final reporting purpose consider both Continuing as well as Discontinuing
operations for computing Basic as well as Dilutive EPS.
Therefore, for dilutive EPS profits of Rs. 40,000 is the control figure which is from
continuing operations.
Accordingly 500 Potential equity shares are dilutive as it decreases the net profit per
share from ‘continuing ordinary operations’ from Rs. 2.00 to Rs. 1.95.
Reporting and Disclosures:

Basic EPS = (10,000/20,000) = 0.50
Dilutive EPS = (10,000/20,500) = 0.49
UNIT 4: PAST EXAMINATION QUESTIONS
QUESTION 31 (NOV 2019:5 MARKS)
Following information is supplied by K Ltd.:

Number of shares outstanding prior to right issue - 2,50,000 shares.
Right issue - two new share for each 5 outstanding shares (i.e. 1,00,000 new shares) Right
issue price - ` 98
Last date of exercising rights - 30-06-2018.
Fair value of one equity share immediately prior to exercise of right on 30-06-2018 is
` 102.
Net Profit to equity shareholders:
2017-2018 - ` 50,00,000
2018-2019 - ` 75,00,000
You are required to calculate the basic earnings per share as per AS-20 Earnings per
Share.
SOLUTION:
Fair value of shares immediately prior to exercise of rights
+ Total amount received from exercise
Number of shares outstanding prior to exercise
+ Number of shares issued in the exercise
102 x 2,50,000 Shares + ` 98 x 1,00,000 shares

=
3,50,000 shares
Theoretical ex-rights fair value per share = ` 100.86

Computation of adjustment factor:
Fair value per share prior to exercise of rights 102
= = 1.01
Theoretical ex - rights value per share 100.86
Computation of earnings per share:
EPS for the year 2017-18 as originally reported: ` 50,00,000/2,50,000 shares = ` 20
EPS for the year 2017-18 restated for rights issue:
=
` 50,00,000/ (2,50,000 shares x 1.01)
=
` 19.80
EPS for the year 2018-19 including effects of rights issue:

EPS = 75,00,000/3,25,625* = ` 23.03
*[(2,50,000 x 1.01 x 3/12) + (3,50,000 x 9/12)] =63,125 + 2,62,500 = 3,25,625 shares
Note: Financial year (ended 31st March) is considered as accounting year while giving the
above answer.
QUESTION 32 (NOV 2018 :5 MARKS)
From the following information given by Sampark Ltd., Calculate Basis EPS and Diluted EPS
as per AS 20 :
`
Net Profit for the current year 2,50,00,000
No. of Equity Shares Outstanding 50,00,000
No. of 12% convertible debentures of `100 each 50,000
Each debenture is convertible into 8 Equity Shares
Interest expense for the current year 6,00,000
Tax saving relating to interest expense (30%) 1,80,000
SOLUTION
Calculation of Basic Earning Per Share
Net Profit for the current year
Basic EPS =
No. of Equity Shares
2,50,00,000
=
50,00,000
Basic EPS =`5
Calculation of Diluted Earning Per Share
Adjusted net profit for the current year
Diluted EPS =
Weighted average no. of Equity Shares
`
Adjusted net profit for the current year 2,50,00,000
Net profit for the current year 6,00,000
Add: Interest expenses for the current year (1,80,000)

Less: Tax saving relating to Tax Expenses 2,54,20,000
No. of equity shares resulting from conversion of debentures: 4,00,000 Shares

Weighted average no. of equity shares used to compute diluted EPS:
(50,00,000 + 4,00,000) = 54,00,000 Equity Shares
Diluted earnings per share: (2,54,20,000/54,00,000) = ` 4.71 (Approx.)
ACCOUNTING STANDARD 24: DISCONTINUING OPERATION 165
ACCOUNTING STANDARD 24:

DISCONTINUING OPERATION
QUESTION NO 1
A healthcare goods producer has changed the product line as follows:
Washing soap Bathing soap

January 2004- September, 2004 per month 2,00,000 2,00,000
October 2004- December, 2004 per month 1,00,000 3,00,000
January 2005- March, 2005 per month 0 4,00,000
The company has enforced a gradual enforcement of change in product line on the basis
of an overall plan. The Board of Directors of the Company has passed a resolution to this
effect. The company follows calendar year as its accounting year. Should it be treated as
discontinuing operation?
ANSWER
Business enterprises frequently close facilities, abandon products, or even product lines, and
cane the size of their work force in response to market forces. These kinds of terminations,
generally, are not in themselves discontinuing operations unless they satisfy the definition
criteria. By gradually reducing the size of operations in the product line of Washing Soap,
the company has increased its scale of operations in Bathing Soap. Such a change is a
gradual or evolutionary, phasing out of a product line or class of services and does not
meet definition criteria in paragraph 3(a) of AS 24 — namely, disposing of substantially in
its entirety, a component of the enterprise. Hence, this change over is not a discontinuing
operation.
QUESTION NO 2
A company has two divisions -, cement and steel. It has started negotiating for disposal
of the steel division informally since May 2001, discussion has been held with the possible
buyers, the labour union has demonstrated against this secret deal, the company has given
a statement that there is no move to sell the steel division. The significant reduction in
the production has taken place because of decline in the market demand for the company’s
product not as Planned strategy to dose down operation. During November 2001 the Board
of Directors has announced that they are considering disposal of the steel division because
of continuing loss suffered by that division. But no formal resolution was passed. Necessary
formalities for disposal of a division were fulfilled only during January 2002 and the steel
division was disposed of in the last week of January 2002. The company follows calendar
year as accounting year. Does this event require disclosure?
ANSWER
Initial Disclosure event has not yet taken place in 2001, hence no disclosure required.
QUESTION NO 3
Changeover Ltd. is in the business of making cell phones. During the year ended 31.3.2002,
it made 1,00,000 units of GSM phones and 50,000 units of CDMA phones. In the current
year, the company has gradually cut down the production of GSM phones and is utilizing the
spare, capacity released for manufacturing CDMA phones. During the last quarter of 2002-
03, not even a single unit of GSM phones has been produced whereas 60,000 unit of CDM.A
phones were manufactured in the same period. Should it be treated as a discontinuing
operation.
Hint :No
QUESTION NO 4
A division of Trousers Ltd. has been classified as a discontinuing operation for the current
year. Should the accounts of the enterprise as a whole be prepared assuming that the
entire enterprise is no longer a going concern?
Hint: No
QUESTION NO 5
Goodwork Ltd. is engaged in the business of marketing shoes for Liberty Footwear. It has
four different divisions - one each for Northern, Southern, Western and Eastern Region,
which function independently. Revenue from each division lies between 15%-35% of the
total revenue.
Goodwork Ltd. has decided to dispose of its Eastern Division pursuant to single plan. However,
the assets will be sold in piecemeal manner and the liability will be settled individually. The
entire process is likely to be completed in two years. Can the closure of this division be
treated as a discontinuing operation?
Hint: Yes
QUESTION NO 6
Radhika Ltd. is a company engaged in the business of manufacturing liquor. It has 70% stake
in Chetanaye Ltd. During the current year ending 31-3-2003, it sold its entire stake to
Pankaj Ltd. Can it be treated as a discontinuing operation for Radhika Ltd.?
QUESTION NO 7
What are the initial disclosure requirements for discontinuing operations? (Advanced
Auditing)
QUESTION NO 8
A Company belonging to the process industry carries out three consecutive processes. The
output of the first process is taken as input of the second process, and the output of the
second process is taken as input of the third process. The final product emerges out of the
third process. It is also possible to outsource the intermediate products. It has been found
that over a period a time cost of production process is 10% higher than the market price of
the intermediate product available freely in the market. The company has decided to close
down the first process as a measure of cost saving (vertical spin off) and outsource. Should
this event be treated as discontinuing operation?
ANSWER
The change made by the company is focused on outsourcing of services, in respect of one
single process - in a sequence of processes. The net effect of this change is closure of one
facility relating to a process. This has been done by the company with a view to achieving
productivity improvements and savings in costs.
Such a change does not meet definition criteria in paragraph 3(a) of AS 24 — namely,
disposing of substantially in its entirety, such as by selling a component of the enterprise in
a single ,transaction. The change is merely a cost-saving endeavor. Hence, this change over
is not a discontinuing operation.
QUESTION NO 9
A Cosmetic articles producing company provides the following information:
Cold Cream Vanishing Cream

January, 2006- September, 2006 per month 2,00,000 2,00,000
October, 2006- December, 2006 per month 1,00,000 3,00,000
January,2007- September, 2007 per month 0 4,00,000
The company has enforced a gradual change in product-line on the basis of an overall plan.
The Board of Directors of the company has passed a resolution to this effect. The company
follows calendar year as its accounting year. Should this be treated as a discontinuing
operation?
Give reasons in support of your answers.
ANSWER
In response to the market forces, business enterprises often abandon products or even
product lines and reduce the size of their work-force. These actions are not in themselves
discontinuing operations unless they satisfy the definition criteria.
In the instant case the company has been gradually reducing operation in the product line
of cold creams, simultaneously increasing operation in the product line of vanishing creams.
The company was not disposing of any of its components. Phasing out a product line as
undertaken by the company does not meet. definition criteria in paragraph 3 of AS 24,
namely, disposing of substantially in its entreaty a component of the enterprise. Therefore,
this change over is not a discontinuing operation
What are the initial disclosure requirements of AS 24 for discontinuing operations?
SOLUTION:
An enterprise should include the following information relating to a discontinuing operation
in its financial statements beginning with the financial statements for the period in which
the initial disclosure event occurs:
A. A description of the discontinuing operation(s)

B. The business or geographical segment(s) in which it is reported as per AS 17
C. The date and nature of the initial disclosure event.
D. The date or period in which the discontinuance is expected to be completed if known
or determinable
E. The carrying amounts, as of the balance sheet date, of the total assets to be disposed
of and the total liabilities to be settled
F. The amounts of revenue and expenses in respect of the ordinary activities attributable
to the discontinuing operation during the current financial reporting period
G. The amount of pre-tax profit or loss from ordinary activities attributable to the
discontinuing operation during the current financial reporting period, and the income
tax expense related thereto
H. The amounts of net cash flows attributable to the operating, investing, and financing
activities of the discontinuing operation during the current financial reporting period
QUESTION 11 (CA INTER JULY 21 EXAM) (5MARKS)
Rohini Limited is in the business of manufacture of passenger cars and commercial vehicles.
The Company is working on a strategic plan to close the production of passenger cars and to
produce only commercial vehicles over the coming 5 years. However no specific plans have
been drawn up for sale of neither the division nor its assets. As part of its prospective plan
it will reduce the production of passenger cars by 20% annually. It also plans to establish
another new factory for the manufacture of commercial vehicles and transfer surplus
employees in a phased manner. You are required to comment:
(i) If mere gradual phasing out in itself can be considered as a discounting operation’
operation within the meaning of AS-24
(ii) If the Company passes a resolution to sell some of the assets in the passenger car
division and also to transfer few other assets of the passenger can division to the new
factory, does this trigger the application of AS-24?
(iii) Would your answer to the above be different if the Company resolves to sell the
assets of the passenger car division in a phases but time bound manner?
SOLUTION:
(i) In response to the market forces, business enterprises often abandon products or
even product lines and reduce the size of their work-force. These actions are not in
themselves discontinuing operations unless they satisfy the definition criteria.
In the instant case the company has been gradually reducing operation in the product
line of passenger vehicles, simultaneously increasing operation in the product line of
commercial vehicles. The company was not disposing of any of its components. Phasing
out a product line as undertaken by the company does not meet definition criteria in
paragraph 3 of AS 24, namely, disposing of substantially in its entreaty a component
of the enterprise. Therefore, this change over is not a discontinuing operation
(ii) The company is not selling its division in its entirety due to which it can not be
considered as a discontinuing operation as per AS 24.
(iii) In this case, it can be considered as discontinuing operating because company is selling
all assets of division. As per provision of AS 24, its not mandatory to sell all the assets
at once but assets can also be sold on piecemeal basis.
ACCOUNTING STANDARD-26: INTANGIBLE ASSETS 171
ACCOUNTING STANDARD-26
INTANGIBLE ASSETS
(IAS 38 & IND AS 38)
QUESTION NO 1
A Ltd. is developing a new production process. It has incurred the following expenditure.
Find out value of Intangible Assets.
Date Particulars Amount

(Rs. in lacs)
Upto 31March Research expenditure when intention to 20
2001 commercialise was not establish
2001-02 Development expenses
Salaries and wages 30
Overheads 12
Staff Training 10
Apportioned Administrative Expenses 10
2002-03 Salary and wages 40
Recoverable Amount (AS-28) 70
QUESTION NO 2
A Limited has an intangible asset on 1.4.2003 where cost was Rs. 10 lakhs when it was
acquired on 1.4.1991. How should this amount be treated if?
A Ltd. has never amortized this asset.
A Ltd. amortizes it on straight-line basis over a period of 20 years?
QUESTION NO 3
An enterprise is developing a new production process. During the year 2001, expenditure
incurred was Rs. 10 lakhs, of which Rs. 9 lakhs was incurred before 1 December 2001 and
1 lakh was incurred between 1 December 2001 and 31 December 2001. The enterprise is
able to demonstrate that, at 1 December 2001, the production process met the criteria for
recognition as an intangible asset.
ANSWER
At the end of 2001, the production process is recognized as an intangible asset at a cost
of Rs. 1 lakh (expenditure incurred since the date when the recognition criteria were met,
that is, 1 December 2001). The Rs. 9 lakhs expenditure incurred before 1 December 2001
is recognized as an expense because the recognition criteria were not met until 1 December
2001.
QUESTION NO 4
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.
ANSWER
In the given case, the pharma company should not capitalize Rs. 33 lakhs since capitalization
conditions as per AS-26 are not fulfilled. The same should charged to the P&L account.
A company with a turnover of Rs. 250 crores and an annual advertising budget of Rs. 2 crore
had taken up the marketing of a new product. It was estimated that the company would
have a turnover of Rs. 25 crores from the new product. The company had debited to its
Profit and Loss Account the total expenditure of Rs. 2 crore incurred on extensive special
initial advertisement campaign for the new product.
Is the procedure adopted by the company correct ?
ANSWER
With the introduction of AS - 26 - “Intangible Assets’, the concept of deferred revenue
expenditure no longer prevails except in respect of a very few items, such as ancillary
costs on borrowings, share issue expenses, etc. AS-26 does not permit the capitalization of
expenses incurred on advertising or brand promotion, etc. Thus the accounting treatment
by the company of debiting the entire advertising expenditure of Rs. 50 lakhs to the profit
and loss account of the year is correct.
QUESTION NO 6
During 2003, an enterprise incurred costs to develop and produce a routing, low risk
computer software product, as follows :
Amount / Rs.
Completion of detailed programme and design 25,000
Coding and testing 20,000
Other coding costs 42,000
Testing costs 12,000
Product masters for training materials 13,000
What should be capitalised as software costs in the books of the company, on B/S date ?
ANSWER
As per Para 44 of AS - 26, cost incurred in creating a computer software producer should be
charged to research and development expense when incurred until technological feasibility
/ asset recognition criteria has been established for the product. Technological feasibility /
asset recognition criteria has been established upon completion of detailed program design
or working model. In this case, Rs. 45,000 would be recorded as expenses (Rs. 25,000 for
completion of detailed program design and Rs. 20,000 for coding and testing to establish
technological feasibility / asset recognition criteria). Cost incurred from the point of
technological feasibility / asset recognition criteria until the time when the products costs
are incurred are capitalised as software cost (Rs. 42,000 + Rs. 12,000 + Rs. 13,000 = Rs.
67,000).
QUESTION NO 7
Himalaya Ltd. in the past three years spent Rs. 75,00,000 to develop a Drug to treat
Cancer, which was charged to Profit and Loss Account since they did not meet AS-26
criteria for capitalization. In the current year approval of the concerned Govt. Authority
has been received, The Company wishes to capitalize Rs. 75,00,000 and disclose it as a prior
period item. Is It correct ?
Give reason for your views.
QUESTION NO 8 (RTP MAY 2006)
An Enterprise has incurred expense for purchase of 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 Fees as per AS-26.
(b) Whether this amortisation should be directly charged as an expense or should form
part of Production Cost of the Mopdes.
ANSWER
Based on the revised estimate, total sales is 2,05,000 the first year charge should be a
proportion of 25,000 / 2,05,000 on Rs. 5 crores, second year will be 35,000 / 2,05,000,
and so on unless the estimates are again revised. If these estimates cannot be determined
reliably it would be preferable to charge them off on a straight line basis, otherwise, as
can be seen from the above example, significant amortisation amount is inappropriately
postponed to later years. As already mentioned above, there will rarely, if ever, be persuasive
evidence to support an amortisation method for intangible assets that results in a lower
amount of accumulated amortisation than under the straight-line method. In the given case,
amortisation expense will be included as cost of inventory.
QUESTION NO 9 (C A FINAL AUDITING)
As a statutory Auditor, how would you deal with the following ? A Pvt. Ltd. started stock
broking activities in 2005. For this purpose it acquired membership of a Stock Exchange
for Rs. 100 lacs. While finalizing the accounts, the company disclosed the above amount
under the Fixed Assets schedule as “Stock Exchange Membership Rights”. The company
also does not write off any amount since the rights would enable the company to perpetually
carry on its business.
SOLUTION:
No, treatment of company is not correct because the licence fee which is paid by
company for stock exchange membership should be disclosed as an intangible asset. If
its life is not measurable then we should show it at cost. But impairment test should be
conducted every year.
QUESTION NO 10(C A FINAL)
Swift Ltd. acquired a Patent at a cost of Rs. 80,00,000 for a period of 8 years and the
product life-cycle is also 8 years. The company capitalized the cost and started amortizing
the asset at Rs. 10,00,000 per annum. After two years it was found that the product life-
cycle may continue for another 5 years from then. The net cash flows from the product
during these 5 years were expected to be Rs. 36,00,000; Rs. 46,00,000; Rs. 44,00,000; Rs.
40,00,000 and Rs. 34,00,000. Find out the amortization cost of the patent for each of the
years
Hint: Ratio of cash inflow should be used to write off the intangible asset of 60,00,000
(36:46:44:40:34).
SOLUTION:
As per AS-26 “Intangible Assets”, the amortization method used should reflect the pattern
in which the asset’s economic benefits are consumed by the enterprise, if that pattern
cannot be determined reliably, the straight-line method should be used.
In the instant case, pattern of economic benefit in the form of net cash flows is determined
reliably after two years. In the initial two years the pattern of economic benefits could
not have been reliably estimated therefore amaoritzation was done at straight-line method
i.e. Rs. 10 Lakhs per annum. However, after two years pattern of economic benefits for
next five years in the form net cash flows is reliably estimated as under and therefore
amortization will also be done as per the pattern of cash in flows:-
Cash in flows (Rs.) Amt. of amortization in next 5 years (Rs.) Balance WDV
36,00,000 10,80,000 (60,00,000 x 36,00,000/200,00,000)
46,00,000 13,80,000 (60,00,000 x 46,00,000/200,00,000)
44,00,000 13,20,000 (60,00,000 x 44,00,000/200,00,000)
40,00,000 12,00,000 (60,00,000 x 40,00,000/200,00,000)
34,00,000 10,20,000 (60,00,000 x 34,00,000/200,00,000)
200,00,000 60,00,000
QUESTION NO 11 (C A FINAL MAY 1999)
Note No. 6 of Published Accounts of V Ltd. reads as follows -

“The Company being a manufacturer of pollution control equipment, has entered into
collaboration agreements with foreign manufacturers for technical know-how comprising
the supply of drawings 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 instalments. The Company has amortised the entire cost of technical
know-how as a depreciable assets and has shown the same in the schedule of Fixed Assets”.
As an Auditor state your views.
ANSWER:
Amounts of 100 lakh should be recognised as Intangible assets.
QUESTION NO 12
While executing a new project, the company had to pay Rs. 50 lakhs to the State Government
as part of the cost of roads built by the State Government in the vicinity of the project
for the purpose of carrying machinery and materials to the project site. The road so built
is the property of the State Government.
Advice the company about the accounting treatment.
Hint: Refer class notes on toll road licence accounting as per schedule ii.
QUESTION NO 13
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. From 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 amortisation amount ?
ANSWER
Research Expenditure:- As per Para 41 of AS - 26, the expenditure on research Rs.
265.37 lakhs should be expensed in the year in which it is incurred. It is presumed that
the entire expenditure Rs. 265.37 lakhs is incurred in financial year 2002-2003. Hence, it
should be written off as an expense in that year itself.
Discounting Future Cash Flows :- As per Para 30 of AS-26, fair value of an intangible asset
can be estimated by discounting estimated future net cash flows. Even if this paragraph is
primarily related to estimation of fair value of an intangible asset acquired in the course
of amalgamation in the nature of purchase, the concept can be extended for internally
generated intangible asset also.
Cost savings from the new process design for five years = Rs. 40 lakhs per annum
Company’s Cost of Capital = 10%
Annuity Factor at 10% for five years = 3.7908
(from the annuity tables)
Present value of future cash flows = Rs. 40 x 3.7908 = Rs. 151.63 lakhs.
Carrying Amount of the Asset :- Since the Present Value of Future Cash Flows is only Rs.
151.63 lakhs, (which is lower than the cost of Rs. 180 lakhs), it is prudent to recognize an
impairment loss of Rs. 180.00 lakhs - Rs. 151.63 lakhs = Rs. 28.37 lakhs in the financial year
2003-2004.
Amortisation Period and Amount :- The Company can amortise Rs. 151.63 lakhs over a
five year period by charging Rs. 30.33 lakhs per annum for the financial year 2004-2005
onwards.
QUESTION NO 14 (SIMILAR QUESTION IN CA FINAL)
Ganguly International Ltd. is developing a new production process. During the financial
year ended 31st March 2004, the total expenditure incurred on this process was Rs. 50
lakhs. The production process met the criteria for recognition as an intangible asset on 1st
December 2003. Expenditure incurred till this date was Rs. 22 lakhs.
Further expenditure incurred on the process for the financial year ending 31st March
2005 was Rs. 80 lakhs. As at 31st March 2005, the recoverable amount of the know-how
embodied in the process is estimated to be Rs. 72 lakhs. This includes estimates of future
cash outflow as well as inflows :
You are required to work out :
What is the expenditure to be charged to the P &L Account for the financial year ended
31st March 2004 ? (Ignore depreciation for this purpose)
(i) What is the carrying amount of the intangible asset as at 31st March 2004 ?
(ii) What is the expenditure to be charged to the P &L Account for the financial year
2005 (Ignore depreciation for this purpose)
(iii) What is the carrying amount of the intangible asset as at 31st March 2005 ?
SOLUTION:
(a) Expenditure incurred up to 1.12.2009 will be taken up to profit and loss account for
the financial year ended 31.3.2010 = Rs. 22 Lakhs.
(b) Carrying amount as on 31.3.2010 will be the expenditure incurred after 1.12.2009 = Rs.
28 Lakhs.
(c) Book cost of intangible asst as on 31.3.2011 is worked out as:
Carrying amount as on 31.3.2010 - Rs. 28 Lakhs
Expenditure during 2010-11 - Rs. 80 Lakhs
Total Book Cost - Rs. 108 Lakhs
Recoverable amount, as estimated - Rs. 72 Lakhs
Difference to be charged to Profit and loss account as impairment.
(d) Carrying amount as on 31.3.2011 will be (cost less Impairment loss) Rs. 72 Lakhs
QUESTION NO 15
A company is showing an Intangible Asset at Rs.88 Lakhs as on 0104.2013. This asset was
acquired for Rs. 120 Lakhs on 01.04.2009 and the same was available for use from that
date. The Company has been following the policy of amortization of the Intangible Assets
over a period of 15 years on Straight line basis. Comment on the accounting treatment of
the above with reference to the relevant Accounting Standard.
SOLUTION:
1. Rebuttable Presumption : AS – 26 assumes that the useful life of an Intangible Asset

will not exceed a period of 10 years, but this presumption is rebuttable.
2. Amortisation Amount as per Company Policy:

(a) Amoritsation Amount Rs. 120 Lakhs ÷ 15 years = Rs. 8 Lakhs p.a.
(b) Accumulated Amoritsation upto 31st March 2014
(for four years) = Rs. 8 Lakhs x 4 = Rs. 32 Lakhs
(c) Carrying Amount = Rs. 120 Lakhs – Rs.32 Lakhs = Rs. 88 Lakhs
= as per books
3. Future Amortisation: The balance Carrying Amount of Rs.88 Lakhs should be amortised
over the balance. Useful Life (11 Years) at Rs. 8 Lakhs per annum.
QUESTIO NO 16
Sunny Limited is developing a now production process. During the financial year ended 31st
March 2013, the Company has incurred total expenditure of Rs. 40 Lakhs on the process.
On 1st December 2012, the process has met the norms to be recognized as “Intangible
Assets” and the expenditure incurred till that date is Rs. 16 Lakhs. During the financial year
ending on 31st March 2014, the Company has further incurred Rs. 70 Lakhs.T he Recoverable
Amount as on 31st March 2014 of the process is estimated to be Rs. 62 Lakhs. You are
required to work out:
(i) Expenditure to be charged to Profit and Loss Account for the financial year ending on
31st March 2013and31st March 2014 (ignore Depreciation).
(ii) Carrying Amount of the Intangible Assets as at 31st March 2013 and 31st March 2014.
SOLUTION:
1. Expenditure charged to P&L for 2012-2013: Rs. 16 Lakhs will be recognized as an

Expense because the recognition criteria were not met until1st December 2012. The
expenditure will not form part of the cost of the Production Process recognized in the
Balance Sheet.
2. Carrying Amount of Intangible Asset as on 31.03.2013: The Production Process will be

recognized (i.e. Carrying Amount), as an Intangible Asset at a cost of Rs. 24 Lakhs (i.e.
expenditure incurred till the date in which recognition criteria were met, i.e. Total
during FY 2012-2013 Rs. 40 Lakhs less Expenses upto 1st Dec. 2012 Rs. 16 Lakhs).
3. Expenditure charged to P&L A/c. for 2013-2014:
Particulars Rs. Lakhs

Book Value on 31.3.2014 = Carrying Amt. on 31.3.2013 + 94
Expenditure in 2013-2014 = 24 ÷ 70
Less: Recoverable Amount 62
Impairment Loss to be charged to P&L A/c. 32
4. Carrying Amount of Intangible Asset as on 31.03.2014: The Production Process will

be shown at Book value Rs. 94 Lakhs, or Recoverable Amount Rs. 62 Lakhs, whichever
is less, hence at Rs. 62 Lakhs as above.
QUESTION NO 17 CA FINAL NOV 2015 8MARKS
During the Financial year 2014-2015, Power Ltd. had the following transactions.
(i) ON 01.04.2014 Power Ltd. purchased a new Asset of Dark Ltd. for Rs. 11,40,000. The
fair Value of Dark Ltd.’s identifiable Net Assets was Rs. 8,50,000. Power Ltd. is of the
view that due to popularity of Dark Ltd.’s product the life of Goodwill is 10 years.
(ii) On 01.05.2014 Power Ltd. purchased a franchise to operate Transport Service from
the Government for Rs. 12,00,000 and at a Annual Fee of 4% of Transport Revenues.
The Franchise expires after 5 years. Transport Revenue were Rs.1,20,000 for Financial
year 2014-2015. Power Ltd. projects future Revenue of Rs. 2,40,000 in 2015-2016
and Rs. 3,50,000 p.a. for 3 years thereafter.
(iii) On 5.07.2014, Power Ltd. was granted a Patent that had been applied for by Dark
Ltd. During 2014-2015, Power Ltd. incurred Legal Cost of Rs. 1,10,000 to register the
Patent and an additional Rs.3,00,000 to successfully prosecute a Patent infringement
suit against a Computer. Power Ltd. expects the Patent’s economic lie to be 10 years.
Power Ltd. follows an Accounting Policy to amortize all Intangibles on SLM basis over
a maximum period permitted by Accounting Standard, taking a full year amortization
in the year of acquisition.
SOLUTION:
1. Treatment under AS-26
Point Principle and Treatment (amounts in Rs.000s)

(i) * T
he excess of consideration paid over the Fair value of identifiable Net Asset
is recognized as Goodwill, Hence, Goodwill= 1140-850=290.
* A
S-26 assumes that the useful life does not exceed 10 years. So, the
amortization over 10 years is proper.
290
Amortisation p.a. = = 29
10
(ii) • Lumpsum franchise fee 1200 would be recognized as Intangibel Asset.
• The Depreciation Amount should be allocated over the assets useful i.e,
on a systematic basis, (e.g. SLM, or Radio of Revenues to be earned, etc.)
• In this case Total Revenues to be earned in 5 years are –
Year 1 2 3 4 5 Total
Revenue 120 240 350 350 350 1410
Amortisation
Apportioned 102 204 298 298 298 1200
• Alternatively, Amortisation p.a. under SLM = 1200 / 5 = 240

• Revenue in each year and 4% Annual Fee should be recognized as Income/
Expenses in P&L of each year.
Note: Impairment Testing nor considered in this cases.
(iii) • Cost of Patent = Registration + Directly attributable Cost = 110+300=410
• Amortisation p.a. = 410 /10 years = 41
• Note: Assumed that 410 represents cost relating to right to use, and
hence capitalized under AS-26.
QUESTION NO 18
During the current year, Mathangi 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 off over
their legally valid period, which is twelve years. Decide as per AS-26.
CONCLUSION:
In the given case, the costs incurred in developing the Patents should be capitalised and
written off over their legal term of validity or over their working life, whichever is shorter.
Therefore, the amount of Rs. 12 Lakhs should be written off over their legal term of
validity, i.e. 12 years.
QUESTION NO 19
Srimathi Ltd. acquired patent right for Rs. 400 Lakhs. The product life cycle has been
estimated to be 5 yeas and the amortization was decided in the ratio of estimated future
cash flows which are as under:-
Year 1 2 3 4 5
Estimated Future Cash Flows 200 200 200 100 100
(Rs. in Lakhs)
After the 3rd year, it was ascertained that the Patent would have an estimated balance
future life of 3 years and the Estimated Cash Flow after 5thyear is expected to be Rs. 50
Lakhs each year. Determine the amortization under AS-26.
SOLUTION
1. Initial Estimate of Total Cash Inflow = 200+200+200+100+100= Rs. 800 Lakhs.

2. So, as per initial estimate, the cost of Patent should be written off in the ratio 2:2:2:1:1
i.e. (Rs. Lakhs) 100, 100, 100, 50 and 50 respectively, for the five years.
3. Unamortised Amount (WDV) of Patent at the end of 3rd year = 400 – (100+100+100) =
Rs. 100 Lakhs.
4. Revised Estimate of Useful Life at the end of 3rd year = 3 future years, with estimated
Cash Inflows being as under – Year 4 Rs. 100 Lakhs Year 5 Rs. 100 Lakhs, year 6: Rs.
50 Lakhs.
5. Hence, the unamortized Carrying Amount should be written off over the next 3 years,
in the ratio of 100:100:50, i.e. Rs. 40 Lakhs, Rs. 40 Lakhs and Rs. 20 Lakhs respectively
for years 4,5 and 6.
Hence, If it is assumed that the Patent Right is not renewable, the present unamortized
amount of Rs. 100 Lakhs may be written off in years 4 and 5, as per initial estimate, at Rs.
50 Lakhs p.a.
QUESTION NO 20
Preetha Ltd. got a license to manufacture certain medicines for 10 years at a License Fee of
Rs. 200 Lakhs. Given below is the pattern of expected production and expected Operating
Cash Inflow:
Year Production in Bottles Net Operating Cash Flow

(in Lakhs) (Rs. in Lakhs)
1 300 900
2 600 1800
3 650 2300
4 to 10 800 p.a. 3200 p.a.
Net Operating Cash Flow has increased for third year because of better Inventory
management and handling method. Suggest the amortization method.
SOLUTION
As per AS-26, Amortisation Method should be based on the expected pattern of
consumption of economic benefits. Hence, the ratio of Net Operating Cash Flow can be used
for amortization purposes.
Year Net Operating Amortisation Amt. (Rs. in Lakhs)

Cash Flow (in above ratio)
1 900 6
2 1,800 12
3 2,300 16
4 3,200 24
5 3,200 24
6 3,200 24
7 3,200 24
8 3,200 24
9 3,200 24
10 3,200 22 (bal. fig)
Total 27,400 200
QUESTION NO 21
A Company has deferred R&D 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 R&D Cost should be charged to Profit & Loss Account.
SOLUTION
1. The Deferred Research and Development costs is to be charged to P&L A/c. on the
basis of Expected Sales as follows:-
Year Sales Percentage of R&D Costs to Amount charged to P&L

(Rs. Lakhs) be amortized in each year Account (Rs. Lakhs)
(on the basis of Sales)
I 400 40% 150x40% = 60

II 300 30% 150x30% = 45
III 200 20% 150x20% = 30
IV 100 10% 150x10% = 15
2. Requirements under AS-26:

(a) Para 78-80: The period of Amortization should be reviewed periodically to
determine proper method of amortization.
(b) Change of Amortization period: If the expected benefit from the asset is
significantly different from the previous estimates, the amortization period
should be changed accordingly.
Refiners and Projects Limited is a Company in the Oil and Gas Sector. It undertakes
extensive Research and Development work as part of its operations. It has till the end of
the Financial Year 31.03.2012, spent rs. 592.23 Crores on research expenses.
The development of a new process was completed in the Accounting year 2012-2013 after
incurring an expenditure of Rs 322.26 Crores. In the Accounting year 2013-2014, the
Company implemented the new process resulting in a post tax saving of Rs. 100 Crores in
the first year of operation and savings of Rs.80 Crores per annum thereafter for the next
four years. Cost of Capital to the Company is 12%.
Kindly indicate how you will proceed to record the transactions in the books of accounts of
the Company.
You are informed that the Research Expenses shown above do not include any General or
selling and Administrative Expenses. Present Value of a Rupee discounted at 12% can be
taken at 0.893, 0.797, 0712, 0.636 & 0.567.
SOLUTION
1. Initial Recognition:
Fin. Year Amount Spent Nature Accounting Treatment
2011-12 Rs. 592.23 Crores Research Expensed off by debiting

Expenses Profit and Loss Account as
per Para 41.
2012-13 Rs. 322.26 Crores Development Capitalized as it fulfills
Expenses conditions in Para 44.
2. Testing for Impairment: Value in Use of the development Expenses (as at 31.03.2013)
(assuming the future post tax benefits can be estimated on 31.03.2013 itself).
Year Cash Flow Discount Factor at 12% Discounted Cash Flow

1 100.00 0.893 89.30
2-5 80.00 2.712 216.96
Value in Use 306.26
Impairment Loss to be recognized = Carrying Amt. Rs. 322.26 Crores Less Value in Use
Rs.306.26 Crores =Rs. 16 Crores
3. Amortisation: The revised Carrying Amount (after recognizing Impairment Loss), Rs.
306.26 Crores should be amortised over the useful life of 5 years, in the ratio of
expected economic benefits, i.e. Post Tax Savings ratio 100:80:80:80:80.
QUESTION NO 23
Priya Ltd. purchased a Trademark for Rs. 45 Lakhs. The legal validity/useful life of the
Trademark is 15years. At the end of each of the first six years, the recoverable amount of
the Trademark was (in Rs. Lakhs) 45.50, 40.00, 35.50, 34.00, 29.00 and 25.00 respectively.
Determine the amount of Impairment Loss to be recognized, if any.
(NOTE : PLEASE IGNORE QUESTION 23, IT IS GIVEN IN CA INTER BOOK BY
MISTAKE BECAUSE ITS RELATED WITH AS 28 IMPAIRMENT)
QUESTION NO 24
State how you will deal with the following matter in the accounts of U Ltd. for the year
ended 31st March 2010 with reference to Accounting Standard.
“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 2009-2010, but proved to be
a failure”.
SOLUTION:
As per AS-26 “Intangible Assets” research cost is to be expensed when incurred.
Further no intangible assets is created on account of publicity cost incurred on product
provided to be a failure, therefore publicity expenses also to be expensed.
Rs.45 Lakhs spent on publicity and research to be expensed in the year 2009-2010.

(SELF READING)
QUESTION 1
ABC Ltd. developed know-how by incurring expenditure of `20 lakhs, The know-how was
used by the company from 1.4.20X1. The useful life of the asset is 10 years from the year
of commencement of its use. The company has not Amortised the asset till 31.3.20X8. Pass
Journal entry to give effect to the value of know-how as per Accounting Standard-26 for the
year ended 31.3.20X8.
SOLUTION:
JOURNAL ENTRY
` `
Profit and Loss A/c (Prior period item) Dr. 12,00,000
Amortization A/c Dr. 2,00,000

To Know-how A/c 14,00,000
[Being amortization of 7 years (out of which amortization
of 6 years charged as prior period item)]
QUESTION 2
The company had spent ` 45 lakhs for publicity and research expenses on one of its new
consumer product, which was marketed in the accounting year 20X1-20X2, but proved to be
a failure. State, how you will deal with the following matters in the accounts of U Ltd. for
the year ended 31st March, 20X2.
SOLUTION:
In the given case, the company spent ` 45 lakhs for publicity and research of a new product
which was marketed but proved to be a failure. It is clear that in future there will be no
related further revenue/benefit because of the failure of the product. Thus according to
AS 26 ‘Intangible Assets’, the company should charge the total amount of ` 45 lakhs as an
expense in the profit and loss account.
QUESTION 3
AB Ltd. launched a project for producing product X in October, 20X1. The Company incurred
` 20 lakhs towards Research. Due to prevailing market conditions, the Management came to
conclusion that the product cannot be manufactured and sold in the market for the next 10
years. The Management hence wants to defer the expenditure write off to future years.
Advise the Company as per the applicable Accounting Standard.
SOLUTION:
As per para 41 of AS 26 “Intangible Assets”, expenditure on research should be recognised
as an expense when it is incurred. Hence, the expenses amounting ` 20 lakhs incurred on the
research has to be charged to the statement of profit and loss in the current year ending
31st March, 20X2.
QUESTION 4
During 20X1-X2, an enterprise incurred costs to develop and produce a routine low risk
computer software product, as follows:
Particular `
Completion of detailed program and design (Phase 1) 50,000
Coding and Testing (Phase 2) 40,000
Other coding costs (Phase 3 & 4) 63,000
Testing costs (Phase 3 & 4) 18,000
Product masters for training materials (Phase 5) 19,500
Packing the products (1,500 units) (Phase 6) 16,500
After completion of phase 2, it was established that the product is technically feasible for
the market.
You are required to state how the above referred cost to be recognized in the books of
accounts.
SOLUTION:
As per AS 26, costs incurred in creating a computer software product should be charged
to research and development expense when incurred until technological feasibility/asset
recognition criteria has been established for the product. Technological feasibility/asset
recognition criteria have been established upon completion of detailed program design,
coding and testing. In this case, ` 90,000 would be recorded as an expense (` 50,000 for
completion of detailed program design and ` 40,000 for coding and testing to establish
technological feasibility/asset recognition criteria). Cost incurred from the point of
technological feasibility/asset recognition criteria until the time when products costs are
incurred are capitalized as software cost (63,000+ 18,000+ 19,500) = `1,00,500. Packing
cost ` 16,500 should be recognized as expenses and charged to P & L A/c.
QUESTION 5 (CA INTER NOV 2019)(5 MARKS)
As per provisions of AS-26, how would you deal to the following situations:
(1) ` 23,00,000 paid by a manufacturing company to the legal advisor for defending the
patent of a product is treated as a capital expenditure.
(2) During the year 2018-19, a company spent ` 7,00,000 for publicity and research expenses
on one of its new consumer product which was marketed in the same accounting year
but proved to be a failure.
(3) A company spent ` 25,00,000 in the past three years to develop a product, these
expenses were charged to profit and loss account since they did not meet AS-26
criteria for capitalization. In the current year approval of the concerned authority
has been received. The company wishes to capitalize ` 25,00,000 by disclosing it as a
prior period item.
(4) A company with a turnover of ` 200 crores and an annual advertising budget of `
50,00,000 had taken up for the marketing of a new product by a company. It was
estimated that the company would have a turnover of ` 20 crore from the new product.
The company had debited to its Profit & Loss Account the total expenditure of ` 50,00,000
incurred on extensive special initial advertisement campaign for the new product.
SOLUTION:
As per AS 26 “Intangible Assets”, subsequent expenditure on an intangible asset after its
purchase or its completion should be recognized as an expense when it is incurred unless
(a) it is probable that the expenditure will enable the asset to generate future economic
benefits in excess of its originally assessed standard of performance; and (b) expenditure
can be measured and attributed to the asset reliably. If these conditions are met, the
subsequent expenditure should be added to the cost of the intangible asset.
(i) In the given case, the legal expenses to defend the patent of a product amounting
` 23,00,000 should not be capitalized and be charged to Profit and Loss Statement.
(ii) The company is required to expense the entire amount of ` 7,00,000 in the Profit and
Loss account for the year ended 31st March, 2019 because no benefit will arise in the
future.
(iii) As per AS 26, expenditure on an intangible item that was initially recognized as an
expense by a reporting enterprise in previous annual financial statements should not
be recognized as part of the cost of an intangible asset at a later date. Thus the
company cannot capitalize the amount of ` 25,00,000 and it should be recognized as
expense
(iv) Expenditure of ` 50,00,000 on advertising and promotional activities should always
be charged to Profit and Loss Statement. Hence, the company has done the correct
treatment by debiting the sum of 50 lakhs to Profit and Loss Account.
Swift Limited acquired patent rights to manufacture Solar Roof Top Panels at a cost of
` 600 lacs. The product life cycle has been estimated to be 5 years and the amortization
was decided in the ratio of future cash flows which are estimated as under:
Year 1 2 3 4 5
Cash Flows (` in lacs) 300 300 300 150 150
After 3rd year, it was estimated that the patents would have an estimated balance future
life of 3 years and Swift Ltd. expected the estimated cash flow after 5th year to be ` 75
Lacs. Determine the amortization cost of the patent for each of the above years as per
Accounting Standard 26.
SOLUTION:
AMORTIZATION OF COST OF PATENT AS PER AS 26
Year Estimated future cash flow Amortization Ratio Amortized Amount

(` in lakhs) (` in lakhs)
1 300 .25 150

2 300 .25 150
3 300 .25 150
4 150 .10 60
5 150 .10 60
6 75 .05 30
1.00 600
In the first three years, the patent cost will be amortized in the ratio of estimated future
cash flows i.e. (300: 300: 300: 150: 150).The unamortized amount of the patent after third
year will be ` 150 lakh (600-450) which will be amortized in the ratio of revised estimated
future cash flows (150:150:75 or 2:2:1) in the fourth, fifth and sixth year.
QUESTION 7 (CA INTER NOV 2020 EXAMS)
M/s. Pasa Ltd. is developing a new production process. During the financial year ended 31st
March, 2019, the total expenditure incurred on the process was ` 80 lakhs. The production
process met the criteria for recognition as an intangible asset on 1st November, 2018.
Expenditure incurred till this date was ` 42 lakhs.
Further expenditure incurred on the process for the financial year ending 31st March,
2020 was ` 90 lakhs. As on 31.03.2020, the recoverable amount of know how embodied in
the process is estimated to be ` 82 lakhs. This includes estimates of future cash outflows
and inflows.
You are required to work out :
(1) What is the expenditure to be charged to Profit and Loss Account for the year ended
31st March, 2019 ?
(2) What is the carrying amount of the intangible asset as on 31st March, 2019?
(3) What amount of expenditure to be charged to Profit and Loss Account for the year
ended 31st March, 2020?
What is the carrying amount of the intangible asset as on 31st March, 2020?
SOLUTION:
As per AS 26 ‘Intangible Assets’
(i) Expenditure to be charged to Profit and Loss account for the year ending 31.03.2019
` 42 lakhs is recognized as an expense because the recognition criteria were not
met until 1st November, 2018. This expenditure will not form part of the cost of the
production process recognized as an intangible asset in the balance sheet.
(ii) Carrying value of intangible asset as on 31.03.2019
At the end of financial year, on 31st March 2019, the production process will be
recognized (i.e. carrying amount) as an intangible asset at a cost of ` 38 (80-42) lakhs
(expenditure incurred since the date the recognition criteria were met, i.e., from 1st
November 2018)
(iii) Expenditure to be charged to Profit and Loss account for the year ended 31.03.2020
(` in lacs)
Carrying Amount as on 31.03.2019 38
Expenditure during 2019 – 2020 90
Book Value 128
Recoverable Amount (82)
Impairment loss to be charged to Profit and loss account 46
` 46 lakhs to be charged to Profit and loss account for the year ending 31.03.2020.
(iv) Carrying value of intangible asset as on 31.03.2020
(` in lacs)
Book Value 128

Less: Impairment loss (46)
Carrying amount as on 31.03.2020 82
QUESTION 8(CA INTER JAN 21 EXAMS)
(a) A Company acquired for its internal use a software on 01.03.2020 from U.K. for £
1,50,000. The exchange rate on the date was as ` 100 per £. The seller allowed trade
discount @ 2.5%. The other expenditures were:
(i) Import Duty 10%
(ii) Additional Import Duty 5%
(iii) Entry Tax 2% (Recoverable later from tax department).
(iv) Installation expenses ` 1,50,000.
(v) Professional fees for clearance from customs ` 50,000.
Compute the cost of software to be Capitalized as per relevant AS.
SOLUTION:
(a) Calculation of cost of software (intangible asset) acquired for internal use
Purchase cost of the software £ 1,50,000

Less: Trade discount @ 2.5% £ ( 3,750)
£1,46,250
Cost in ` (UK £1,46,250 x ` 100) 146,25,000
Add: Import duty on cost @ 10% 14,62,500
160,87,500
Add: Additional import duty @ 5% 8,04,375
168,91,875
Add: Installation expenses 1,50,000
Add: Professional fee for clearance from customs (`) 50,000
Cost of the software to be capitalized (`) 170,91,875
Note: Since entry tax has been mentioned as a recoverable / refundable tax, it is not
included as part of the cost of the asset.
ACCOUNTING STANDARD-29: PROVISIONS 193
PROVISIONS,CONTINGENT LIABILITIES & CONTINGENT ASSETS
QUESTION NO 1 (STUDY MATERIAL)
At the end of the financial year ending on 31st December, 2003, a company finds that there
are twenty law suits outstanding which have not been settled till the date of approval of
accounts by the Board of Directors. The possible outcome as estimated by the Board is as
follows :

Particulars Probability Loss (Rs.)
In respect of five cases (Win) 100% ---
Next ten cases (Win) 60% ---
Loss (Low damages) 30% 1,20,000
Loss (High damages) 10% 2,00,000
Remaining five cases
Win 50% ---
Loss (Low damages) 30% 1,00,000
Loss (High damages) 20% 2,10,000
Outcome of each case is to be taken as a separate entity. Ascertain the amount of contingent
loss and the accounting treatment in respect thereof.
An enterprise operates an offshore oilfield where its licensing agreement requires it to

remove the oilrig at the end of production and restore the seabed. Ninety per cent of the
eventual costs relate to the removal of the oil rig and restoration of damage caused by
building it, and ten per cent arise through the extraction of oil. At the balance sheet date,
the rig has been constructed but no oil has been extracted. Analyse under AS - 29.
QUESTION NO 3
A reail store has a policy of refunding purchases by dissatisfied customers even though it
is under no legal obligation to do so. Its policy of making refunds is generally know. Analyse
as per AS - 29.
QUESTION NO 4
Under new legislation, an enterprise is required to fit smoke filters to its factories by 30
September 2005. The enterprise has not fitted the smoke filters. Analyse under AS - 29.
Case I : At the balance sheet date of 31 March, 2005
Case II : At the balance sheet date of 31 March 2006.
QUESTION NO 5
The government introduces a number of changes to the income tax system. As a result of
these changes, an enterprise in the financial services sector will need to retrain a large
proportion of its administrative and sales workforce in order to ensure continued compliance
with financial services regulation. At the balance sheet date, retraining of staff has taken
with financial services regulation. At the balance sheet date, no retaining of staff has taken
place. Analyse as per AS - 29.
QUESTION NO 6
During 2004-05, Enterprise A gives a guarantee of certain borrowing of enterprise B,

whose financial condition at that time is sound. During 2005-06, the financial condition of
Enterprise B deteriorates and at 30 September 2005 Enterprise B goes into liquidation.
Analyse as per AS-29.
Case I : At 31 March 2005
Case II : AS 31st March 2006
QUESTION NO 7
After a wedding in 2004-05, ten people died, possibly as a result of food poisoning from
products sold by the enterprise. Legal proceedings are started seeking damages from the
enterprise but it disputes liability. Up to the data of approval of the financial statements
for the year 31st March 2005, the enterprise’s lawyers advise that it is probable that the
enterprise will not be found liable. However, when the enterprise prepares the financial
statements for the year 31 March 2006, its lawyers advise that, owning to development in
the case, it is probable that the enterprise will be found liable.
(a) At 31 March 2005
(b) At 31 March 2006
ANSWER:
As per AS 29 “Provision, Contingent Assets and Contingent Liabilities” Provision should be
made if
 An enterprise has present obligation as a result of pas events.
 An outflow of resources embodying economic benefits in settlement is probable.
 a reliable estimates can be made.
Case 1 :- An outflow of resources embodying economic benefits is not probable hence no
provision is required to be made at 31.3.2005. A note can be given on contingent
liabilities.
Case 2 :- An outflow resources embodying economic benefit is now probable and hence
provision is required to made at 31.3.06.
QUESTION NO 8
Rajeev Ltd. was under audit for the year -ended 31st March. An appeal filed by Rajeev Ltd.
against the demand of GST 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 assesse, which is in favor of the Department
of GST. The Auditor insisted that provisions be made of Rs. 26 crores in the financial
statements. 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 ?
ANSWER:
As per AS 29 “Provision, Contingent Assets and Contingent Liabilities” Provision should be
made if
 An enterprise has present obligation as a result of pas events.
 An outflow of resources embodying economic benefits in settlement is probable.
 a reliable estimates can be made.
In the given situation

 Obligation event is excise duty demand is already made on the Company. Hence present
obligation exists at the Balance Sheet date.
 Outflow of resources to settle the obligation is probable - Additional evidence arising

arising after Balance Sheet date lead to the conclusion that the outflow is probable i.e.
more likely than not.
 Reliable estimate of the amount - Rs. 26 crores is the amount of the liability (Given).
Hence the condition for recognition of a provision are satisfied, the provision should be
recognized for the year ending 31st March. If the amount is material, separate disclosure
is also required. The Management’s contention is not tenable.
QUESTION NO 9
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
buildings. 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 accounts for the
year ending 31.3.2008. Mini Ltd. seeks your advice.
QUESTION NO 10
WZW Ltd. is in dispute involving allegation of infringement of patents by a Competitor

Company who is seeking damages of a huge sum of Rs. 1000 Lakhs. The Directors are of the
opinion that the claim can be successfully resisted by the Company. How would you deal the
same in the Annual Accounts of the company?
SOLUTION:
Conditions as to recognition of Provision are not satisfied.
Only a Disclosure Note of Contingent Liability is required.
QUESTION NO 11 (CA FINAL)
Big and Small Ltd. received a show cause notice in December 2014 from the Central Excise
department intending to levy a sum of Rs. 25 Lakhs. The Company replied to the above
Notice in January 2015 contending that it is not liable for the proposed levy. No further
action was initiated by the Central Excise Department up to the finalization of the audit
for the year ended on 31st March 2015. As the Auditor of the Company, how would you deal
with this matter in your Report?
SOLUTION:
Hint: Conditions relating to recognition of Provision under AS-29 are not satisfied.
Hence no need to report the same.
QUESTION NO 12
Lucky P Limited has been assessed to Income Tax in which a demand of Rs. 10 Lakhs has
been made. The Company has gone in appeal. The Company has deposited Rs. 6.00 Lakhs
against the demand, on being pursued by the Department. The Company has been advised
by its Counsel that there is 80% chance of losing in respect of one of the ground which may
end up confirming the demand of 4.00 Lakhs, while on other ground, there is fair chance
of winning the appeal. How the Company should treat the same while preparing the Final
Accounts for the year ending 31st March 2015?
SOLUTION:
1. Recognition: As per AS-29 a Provision should be recognized if the following conditions
are satisfied-
Condition (1) Condition (2) Condition (3)

Present obligation as a Outflow of Resources to Reliable estimate of the
result of past event settle the obligation is amount.
probable.
Liability for Income There will be an outflow Tax Liability is ascertained
Tax existed on the B/S of resources to settle the at an amount of Rs.10
date, as per the Demand obligation, if the Company Lakhs, as per the Demand
Notice. There is a present does not win the case in Notice.
obligation. appeal.
Note: Merely because an appeal has been made, the character of the obligation is not lost.
2. Provision and Contingent Liability:

(a) Since all the conditions for recognition of a Provision are satisfied, a Provision for
Tax Liability Rs.4 Lakhs should be recognized for 2014-2015 since the probability
of confirmation of demand for this amount is very high 80%. This will be disclosed
as “Short Term Provisions” under Current Liabilities.
(b) For the balance portion of Rs. 6 Lakhs, where there is a fair chance of winning
the appeal, the Company should disclose a Contingent Liability, in the Notes to
Accounts.
(c) The amount paid as Deposit Rs. 6 Lakhs should be shown as “Other Non-Current
Assets” in the Financial Statements, along with a clear description of the nature
of item.
EXOX limited is in the process of finalizing its accounts for the year ended 31.3.20x2. The
company seeks your advice on the following:
(a) The company’s sale tax assessment for the assessment year 20X1-X2 has been
completed by 14.2.20X4 with a demand of 2.76 crore. The company paid the entire due
under protest without prejudice to its right to appeal. The company files its appeal
before the appellate authority wherein the grounds of appeal cover tax on additions
made in the assessment order for a sum of 2.10 crore.
(b) The company has entered into a wage agreement in March 20X2 whereby the labour
union has accepted a revision in wage from June 20X1. The agreement provided that
the hike till March 20X2 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 20x2.
A Ltd. provides after sales warranty for two years to its customers. Based on past
experience, the company has the following policy for making provision for warranties on the
invoice amount, on the remaining balance warranty period.
Less than 1 year: 3% provision
More than 1 year: 2% provision
The company has raised invoices as under :
Invoice Date Amount (`)

11th Feb, 2017 60,000
25th Dec, 2017 40,000
04th Oct, 2018 1,35,000
Calculate the provision to be made for warranty under AS-29 as at 31st March, 2018 and
31st March, 2019. Also compute amount to be debited to P & L account for the year ended
31st March, 2019.
SOLUTION:
Provision to be made for warranty under AS 29 ‘Provisions, Contingent Liabilities and
Contingent Assets’
As at 31st March, 2018 = ` 60,000 x .02 + ` 40,000 x .03
=
` 1,200 + ` 1,200 = ` 2,400
As at 31st March, 2019 = ` 40,000 x .02 + ` 1,35,000 x .03
=
` 800 + ` 4,050 = ` 4,850
Amount debited to Profit and Loss Account for year ended 31st March, 2019
`
Balance of provision required as on 31.03.2019 4,850
Less: Opening Balance as on 1.4.2018 (2,400)
Amount debited to profit and loss account 2,450
Note: No provision will be made on 31st March, 2019 in respect of sales amounting ` 60,000
made on 11th February, 2017 as the warranty period of 2 years has already expired.
With reference to AS 29, how would you deal with the following in the Annual Accounts of
the company at the Balance Sheet date:
(i) The company operates an offshore oilfield where its licensing agreement requires it
to remove the oil rig at the end of production and restore the seabed. Eighty five
percent of the eventual costs relate to the removal of the oil rig and restoration of
damage caused by building it, and fifteen percent arise through the extraction of oil.
At the balance sheet date, rig has been constructed but no oil has been extracted.
(ii) The Government introduces a number of changes to the taxation laws. As a result of
these changes, the company will need to train a large proportion of its accounting and
legal workforce in order to ensure continued compliances with tax law regulations. At
the balance sheet date, no retraining of staff has taken place.
SOLUTION:
(i) The construction of the oil rig creates an obligation under the terms of the license to
remove the rig and restore the seabed and is thus an obligating event. At the balance
sheet date, however, there is no obligation to rectify the damage that will be caused
by extraction of the oil. An outflow of resources embodying economic benefits in
settlement is probable. Thus, a provision is recognized for the best estimate of 85%
of the eventual costs that relate to the removal of the oil rig and restoration of
damage caused by building it. These costs are included as part of the cost of the oil
rig.
However, there is no obligation to rectify the damage that will be caused by extraction
of oil, as no oil has been extracted at the balance sheet date. So, no provision is
required for the cost of extraction of oil at balance sheet date. 15% of costs that arise
through the extraction of oil are recognized as a liability when the oil is extracted.
(ii) As per AS 29, a provision for restructuring costs is recognized only when the recognition
criteria for provisions are met. A restructuring provision does not include costs as of
retraining or relocating continuing staff.
The expenditures of training the staff related to the future conduct of the business
and are not liabilities for restructuring at the balance sheet date. Such expenditures
are recognized on the same basis as if they arose independently of a restructuring. At
the balance sheet date, no such expenditure has been incurred hence no provision is
required.
QUESTION 16 (JULY 21 5 MARKS)
A limited sells goods with unlimited right of return to its customers. The following pattern
has been observed in the return of sales:
Time frame of Return from date of purchase % of cumulative sale

Between 0-1 months 6%
The company has made a sale of 36 lacs in the month of January, 48 lacs in the month of
February and 60 lacs in the month of March. The total sales for the financial year have been
400 lacs and cost of sale was 320 lacs. You are required to compute Amount of Provision
required and Revenue to be recognised.
ACCOUNTING STANDARD 21: CONSOLIDATION OF ACCOUNTS 201
CONSOLIDATION OF ACCOUNTS
HOLDING COMPANY IS HAVING ONE SUBSIDIARY
QUESTION NO 1 (SIMPLE CONSOLIDATION)
H Ltd. acquires all the shares of S Ltd. on 1.1.98. From the Balance Sheet given below
prepare a consolidated Balance Sheet:
Liabilities H Ltd. S Ltd. Assets A Limited B Limited

Share capital : Land and building 4,00,000 2,70,000
Shares of Rs.10 each 8,00,000 3,00,000 Plant and machinery 2,00,000 1,00,000
Creditors 3,50,000 1,60,000 Furniture and fixtures 50,000 20,000
Bills payable 40,000 20,000 Investment in shares 5,00,000
Reserve on 1.4.97 2,10,000 40,000 Of S Ltd.
Profit and loss account` 50,000 30,000 Stock 1,50,000 80,000
Debtors 1,00,000 60,000
Bank balance 50,000 20,000
14,50,000 5,50,000 14,50,000 5,50,000
The profit and loss account of S Ltd. had a credit balance of Rs.6,000 on 1.4.97.
QUESTION NO 2 (TIME RATIO CONSOLIDATION)
On 31.3.1996 the Balance Sheets of H Ltd. and its subsidiary S Ltd. stood as follows:
Liabilities H Limited S Limited Assets H Limited S Limited
Share capital 8,00,000 2,00,000 Fixed assets 5,50,000 1,00,000
General Reserve 1,50,000 70,000 Investments in S 2,80,000
Profit and Loss 90,000 55,000 Ltd. (75%)
Creditors 1,20,000 80,000 Stock 1,05,000 1,77,000
O. current Assets 2,25,000 1,28,000
11,60,000 4,05,000 11,60,000 4,05,000

Draw a consolidated Balance Sheet as at 31.3.1996 after taking into consideration the
following information:
(a) H Ltd. acquires the shares on 31st July 1995.
(b) S Ltd. earned a profit of Rs.45000 for the year ended 31.3.1996.
QUESTION NO 3 (SIMPLE CONSOLIDATION) (HOME WORK)
H Ltd. acquired 80,000 shares of Rs10 each in S Ltd. on 1st October, 1995. The summarized
Balance Sheet of H Ltd. and S Ltd. on 31.3.1996 were:

Share capital (10) 20,00,000 10,00,000 Goodwill 1,00,000 -
General Reserve 1,00,000 1,50,000 Machinery 5,00,000 4,50,000
Profit and Loss 50,000 45,000 Furniture 20,000 40,000
9% debentures - 2,00,000 Investments in S Ltd. 8,80,000 -
Creditors 4,00,000 2,00,000 9% debentures in S Ltd. 80,000 -
Bills payable 20,000 10,000 Stock 5,20,000 6,50,000
Debtors 1,80,000 2,70,000
Bills receivable 10,000 15,000
Cash 2,80,000 1,80,000
25,70,000 16,05,000 25,70,000 16,05,000
Bills receivable of S Ltd. include bills for Rs.8000 accepted by H Ltd. and creditors of S
Ltd. include Rs.20,000 due to H Ltd. and amount of Rs.30,000 was transferred by S Ltd.
from the current year’s profit’s to reserves.
You are required to prepare the consolidated Balance Sheet as on 31.3.1996 showing there
in how your figures are made up.
ANSWER:
PRE ACQUISTION PROFITS: 157500, POST ACQ.: GR 15,000, PL 22,500,
MINORITY INTEREST 2,39,000, COC: CAPITAL RES. 46000, B/S TOTAL 31,87,000
(Hint: In the given question, there is no information about PL balance. So we have assumed
that entire PL balance has been generated in current year.)
QUESTION NO 4 (INTER COMPANY BALANCES & UNREALISED PROFITS)
From the Balance Sheet and information given below, prepare consolidated Balance Sheet:

Share capital 10) 5,00,000 1,00,000 Fixed assets 4,00,000 60,000
Profit and Loss 2,00,000 60,000 Stock 3,00,000 1,20,000
Reserves 60,000 30,000 Debtors 75,000 85,000
Bills payable - 15,000 Bills receivable 20,000 -
Creditors 1,10,000 60,000 Shares in S Ltd. 75,000 -

(7500 at cost)
8,70,000 2,65,000 8,70,000 2,65,000
Additional information:
(a) The bills accepted by S Ltd. are in favour of H Ltd.
(b) The stock of H Ltd. includes Rs.25,000 bought from S Ltd. at a profit to later of 20%
of sales
(c) All the profits of S Ltd. has been earned since the shares were acquired by H Ltd. but
there was already the reserve of Rs.30,000 at that date.
QUESTION NO 5 (SIMPLE CASE OF BONUS) (HOME WORK)
H Ltd. acquired 20,000 (4/5th) equity shares of S Ltd. of Rs.100 each on 31.3.1995. The
summarized Balance Sheet of H Ltd. and S Ltd. at 31.3.1996 were as follows:

(100) Current assets 40,00,000 20,00,000
General Reserve 30,00,000 5,00,000 20,000 shares 30,00,000 -
Profit and Loss 10,00,000 10,00,000 in S Ltd.
Creditors 20,00,000 5,00,000

1,40,00,000 45,00,000 1,40,00,000 45,00,000
S Ltd. had the credit balance of Rs. 5,00,000 in the reserves and Rs. 2,00,000 in the profit
and loss account when H Ltd. acquired the shares in S Ltd. S Ltd. issued bonus shares @ 1
for 5 shares held out of pre acquisition profits. This is not shown in above Balance Sheet of
S Ltd. prepare consolidated Balance Sheet.
ANSWER:
PRE ACQ. PROFITS: 2,00,000, POST ACQ.(PL) 8,00,000, MINORITY:8,00,000, COC:
GOODWILL 4,40,000, CONSOLIDATED PL: 16,40,000, B/S TOTAL: 1,59,40,000
(Hint: Bonus has been assumed out of accumulated general reserve)
QUESTION NO 6 (SIMPLE CASES)
From the following data, determine in each case:

(a) Cost of Control
(b) Minority interest at the date of acquisition of shares and consolidation
(c) Amount of holding company’s profit in the consolidated Balance Sheet assuming holding
company’s own profit and loss account to be Rs.2,00,000 in each case.
Cases Company % of Cost Date of acquisition Profit and

shares 1.1.1999 Loss Account
acquired (31.12.1999)
Share Profit and

Capital Loss a/c
1 A 90% 1,40,000 1,00,000 50,000 70,000

2 B 85% 1,04,000 1,00,000 30,000 20,000
3 C 80% 56,000 50,000 20,000 20,000
4 D 100% 1,00,000 50,000 40,000 55,000
QUESTION NO 7 (HOME WORK)
(SEE DOUBT SESSION VIDEO FOR HINT)

XYZ Ltd. purchased 80% shares of ABC Ltd. on 1st January, 1999 for Rs.1,40,000. The
issued capital of ABC Ltd. on 1st January 1999 was Rs.1,00,000 and the balance in Profit and
Loss Account was Rs.60,000.
For the year ending on 31st December 1999 ABC Ltd. has earned a profit of Rs.20,000 and
at the same time, declared and paid a dividend of Rs.30,000.
Show by an entry how the dividend should be recorded in the books of XYZ Ltd.
What is the amount of minority interest as on 1st January 1999 and 31st December 1999.
QUESTION 8 (HOME WORK) (SEE DOUBT SESSION VIDEO FOR HINT)
H Ltd. acquired 3,000 shares in S Ltd., at a cost of ` 4,80,000 on 1.7.2016 the capital of
S Ltd. consisted of 5,000 shares of ` 100 each paid. The Profit & Loss Account of this
company for 2016 showed on opening balance of ` 1,25,000 and profit for the year was `
3,00,000. At the end of the year, it declared a dividend of 40% Record the entry in the
books of H Ltd. in respect of the dividend.
Assume calendar year as financial year.
SOLUTION
The profits of S Ltd. have to dividend between capital and revenue profits from the point
of view of the holding company:
Capital Revenue
Profit ` Profit `
Balance on 1.1. 2016 1,25,000 __
Profit for 2016 (3,00,000 x 7/12) 1,75,000 (3,00,000 x 5/12) 1,25,000
Total 3,00,000 1,25,000
Proportionate share of H Ltd. (3/5) 1,80,000 75,000
Total dividend declared = ` 5,00,000 X 40% = ` 2,00,000

H Ltd’s share in the dividend = ` 2,00,000 X 3/5 = 1,20,000
(Hint: Dividend has been paid at the end of year. So it has been assumed that it is
paid for current year. We can not assume it for previous year)
The Profit for 2016 alone had been utilise to pay the dividend, and no part of the profit
brought forward had been utilised for the purpose. The share of H Ltd. in profit of the
first seven month of S Ltd. is ` 1,05,000 i.e. ` 1,75,000 x 3/5 and that the profit for the
remaining five months is ` 75,000 i.e. ` 1,25,000 x 3/5. The dividend of ` 1,20,000 will be
adjusted in this ratio:
` 70,000 out of profits up to 1.7.2016 and ` 50,000 out of profits after that date. The
dividend out of profits subsequent to 1.7. 2016 will be revenue income and that out of
earlier profits will be capital receipt. Hence the entry will be:
` `
Bank Dr. 1,20,000
To Investment Account (Pre 7 months) 70,000
To Profit and Loss Account (Post 5 months) 50,000
QUESTION NO 9 (CONCEPT OF PREFERENCE DIVIDEND)
The Balance Sheet of A Limited and its subsidiary B Limited as on 31st March, 1999 are
given below:
Liabilities A Limited B Limited Assets A Limited B Limited

Equity shares of 6,00,000 2,00,000 Sundry Assets 6,87,000 6,70,000
Rs. 10 each Investments
7% Preference ----- 1,60,000 16000 equity
Shares of Rs. 10 Shares in B
each Limited. 3,30,000
General Reserve 1,00,000 80,000 12000 Preference
Profit and Loss 2,57,000 1,20,000 Shares in B
Liabilities 1,80,000 1,10,000 Limited. 1,20,000
11,37,000 6,70,000 11,37,000 6,70,000
A Limited acquired the shares in B Limited on 31st March, 1998. The balance of Profit and
Loss A/c of B Limited on 1.4.98 was Rs.77200 out of which equity dividend (at the rate of
5%) and preference dividend were paid for 1997-98. Prepare consolidated Balance Sheet
as on 31.3.99.
QUESTION NO 10 (SIMPLE CONSOLIDATION) (HOME WORK)
X Limited acquired 80% shares of Rs.10 each in Y Limited on 1.1.99. The summarized Balance
sheet of X Limited and Y Limited on 30.6.99 are as follows:
Liabilities X Limited. Y Limited. Assets X Limited Y Limited

Share Capital 3,00,000 2,00,000 Sundry Assets 2,20,000 2,79,000
Reserves 12,000 30,000 Investment 1,80,000
Profit & loss (Shares in Y
A/c 8,000 9,000 Limited)
Liabilities 80,000 40,000
4,00,000 2,79,000 4,00,000 2,79,000

The balance in the Profit and Loss of Y Limited was Rs.3,000 on 1.7.98. An amount of
Rs. 10,000 was transferred by Y Limited to reserves during the year. Prepare consolidated
Balance Sheet.
ANSWER:
PRE ACQ. PROFITS: 31,000, POST ACQ. PROFITS: PL 3,000, RES. 5,000, MINORITY
47,800, COC (CAP. RES 4800), B/S TOTAL 4,99,000
QUESTION NO 11 (INTER COMPANY BALANCES)
Anthony and co. Ltd. acquired 8000 shares of Canning and co. on 1st January, 1989 .The
following are the balance Sheets of the companies as at 31st December, 1989.
Liabilities Anthony & Canning Co. Assets Anthony Co. Canning Co.
Co. Ltd. Ltd. Ltd. Ltd.
Equity shares of
Rs. 100 each 20,00,000 10,00,000 Land & Building 5,00,000 3,00,000
General Reserve Plant &
1 January, 1989 4,00,000 2,00,000 Machinery 5,00,000 6,00,000
Profit & Loss a/c Stock 1,50,000 1,00,000
1 January, 1989 1,00,000 60,000 Sundry Debtors 1,00,000 1,20,000
Sundry Creditors 1,00,000 1,00,000 Shares of Canning 10,00,000 ------
Ltd.
Profit for the year 2,00,000 80,000 Bills receivable 80,000 10,000
1989
Bills payable 30,000 10,000 Cash and Bank 5,00,000 3,20,000
Balances
28,30,000 14,50,000 28,30,000 14,50,000
1. Bills Receivable of Anthony and co. Ltd. include R.10000 accepted by canning and co.
Ltd.
2. Sundry debtors of Anthony and Co. Ltd. include Rs.50000 due from Canning and Co.
Limited.
3. Stock of Canning and Co. Ltd. includes goods purchased from Anthony and co. Ltd. for
Rs.60000which were invoiced by Anthony and co. Ltd. at a profit of 25% on cost.
Prepare a consolidated Balance sheet of Anthony and co. Ltd. and subsidiary canning and co.
Ltd.
QUESTION NO 12 (CONCEPT OF REVALUATION)
The Summarized Balance Sheets of A Ltd. and B Ltd. as on 31st December, 1996 are as
follows:
Liabilities A Ltd. B Ltd Assets A Ltd. B Ltd.

Equity shares of 100
Each 1800000 900000 Goodwill at cost 375000 112500
Share premium a/c 270000 ---- Plant less Depreciation 1080000 675000
Capital reserve Furniture less Depre. 195000 85500
(opening) 120000 90000 Stock at cost 270000 180000
General Reserve (1.1.96) 225000 150000 Trade investments ------ 37500
Profit and loss a/c 1.1.96 600000 120000 7200 shares in sub. 810000 -----
Profit for the year 1996 240000 75000 Balance at Bank 150000 45000
Creditors 525000 165000 A Ltd. 48000
B Ltd. 40500 Debtors 940500 316500
3820500 1500000 3820500 1500000
You are required to prepare the consolidated balance sheet of A Ltd. and its subsidiary
B Ltd. as on 31st December, 1996, together with the working notes after giving effect to
the following relevant information:
(i) Plant of B Ltd. was to be revalued on 1st January, 1996 at Rs.810000, Fixtures at
Rs.75000 and Trade investments were deemed to be valueless. There were no
transactions of purchase or sale of these assets during the year 1996. The directors
wish to give effect to the above revaluation in the consolidated accounts.
(ii) Depreciation has been provided for the year 1996 on plant 10 percent and on fixtures
at 5 percent.
(iii) The stock of B Ltd. included Rs.60000 goods purchased from A Ltd. who have invoiced
these goods at cost plus 25 per cent.
(iv) A cheque of Rs.7500 from A Ltd. to B Ltd. was in transit as on 31st December 1996.
(v) A Ltd. acquired the shares in B Ltd. on 1st January, 1996.
QUESTION NO 13 (CONCEPT OF BONUS ISSUE & RECTIFICATION)
A Ltd. acquired 8000 shares of Rs.10 each in Omega Ltd. on 31st December, 1994. The
summarized Balance Sheet of the two companies as on that date were as follows:
A Ltd. Omega Ltd.

Rs. Rs.
Share Capital:
30,000 Shares of Rs.10 each 3,00,000 -----
10,000 Shares of Rs.10 each ----- 1,00,000
Capital Reserve ----- 52,000
General Reserve 25,000 5,000
Profit & Loss Account 38,200 18,000
Loan from Omega Ltd. 2,100 -----
Bills Payable (including Rs.500 to A Ltd.) ------ 1,700
Creditors 17,900 5,000
Note on the Balance Sheet of A Ltd.:
There is a contingent liability for bills
discounted of Rs.1,000 ------------------ -------------------
3,83,200 1,81,700
------------------ -------------------
Fixed Assets 1,50,000 1,44,700
Investments in Omega Ltd. at cost 1,70,000 ------
Stock-in-hand 40,000 20,000
Loan to A Ltd. ------ 2,000
Bills Receivable (including Rs.200
from Omega ltd) 1,200 ------
Debtors 20,000 10,000
Bank 2,000 5,000
------------------- --------------------
3,83,200 1,81,700
------------------- --------------------
You are given the following information:
(a) Omega Ltd. made a bonus issue on 31st December, 1994 of one share for every two
shares held, reducing the capital reserve equivalently, but the transaction is not shown
in the above Balance Sheets.
(b) Interest receivable (Rs.100) in respect of the loan due by A Ltd. to Omega Ltd. has
not been credited in the account of Omega Ltd.
(c) The directors decided that the fixed assets of Omega Ltd. were over valued and
should be written down by Rs.5,000.
Prepare the Consolidated Balance Sheet as at 31st December, 1994, showing your workings.
QUESTION NO 14 (CONCEPT OF DIVIDEND PAID)
On 1st January, 1987, A Ltd. acquired 8000 shares of Rs.10 each of B Ltd. at Rs.90,000.
The respective balance sheets on 31st December, 1989 are given below:-
Liabilities A Limited B Limited Assets A Limited B Limited
Share capital Fixed assets 60,000 1,10,000
(Rs.10 each) 1,00,000 1,00,000 Investments 1,00,000 15,000
Reserve 40,000 26,000 Debtors 25,000 20,000
Profit and Loss 36,000 35,000 Stock 30,000 40,000
Creditors 71,000 48,000 Bank 32,000 24,000
2,47,000 2,09,000 2,47,000 2,09,000
Addition Information:-
(a) At the time of acquiring shares B Ltd. had Rs.24,000 in Reserve and Rs.15,000 in P &
L A/c.
(b) B Ltd. paid 10% dividends in 1987, 12% in 1988, 15% in 1989 for 1986, 1987 and 1988
respectively. All dividends received have been credited to the P & L A/c of A Ltd.
(c) Proposed dividends of both the companies for 1989 is 10%.
(d) One bonus share for 5 fully paid shares held has been declared by B Ltd. out of pre-
acquisition reserve on 31st December,1989. No effect has been given to that in the
above accounts.
(e) On 1st January 1987 Building of B Limited., which stood in the books at Rs.50,000 was
revalued at Rs.60,000 but no adjustment has been made in the books. Depreciation has
been charged @ 10% p.a. on reducing balance method.
(f) In 1989 A Ltd. purchased from B Ltd. goods for Rs.10,000 on which B Ltd. made a
profit of 20% on sales, 25% of such goods are lying unsold on 31st December 1989.
Prepare the consolidated balance sheet as at 31st December, 1989.
QUESTION NO 15 (CONCEPT OF DIVIDEND PAID & PROPOSED DIVIDEND)
Liabilities Singhal Liverpool Assets Singhal Liverpool

Limited Limited Limited Limited
Equity share (Rs.10 each) 7,00,000 2,00,000 Fixed Assets 3,85,000 3,25,000
7% Preference Shares 15000 Equity shares in
(Rs.10 each) 1,60,000 Liverpool Limited
General Reserve 2,97,000 80,000 12000 pref. Shares in 3,30,000
Profit and Loss 88,800 Liverpool Limited
6% Debentures 40,000 Rs. 20000 Debentures in 1,20,000
Proposed Dividend: Liverpool Limited
(i) Preference 11,200 Current Assets 3,48,200

20,000
(ii) Equity 60,000 20,000
3,82,000
Debentures interest
Accrued (6 months) 1,200
Creditors 1,80,000 72,000

12,37,000 6,73,200
12,37,000 6,73,200
Summarised Balance Sheet of Singhal Ltd. and its subsidiary company Liverpool Ltd. as on
31st March, 1977, are given below:
Relevant information:
(a) Singhal Ltd. acquired the shares in Liverpool Ltd. on 31st March, 1976.
(b) The general reserve if Liverpool Ltd. as on 31st, March, 1976 was the same as on 31st
March, 1977.
(c) The balance in the profit & loss account of Liverpool Ltd. is made up as follows:
Rs.
Balance as on 31st March, 1976 56,000
Profit for the year ended 31st March 1977 64,000
------------
1,20,000
Less: Proposed Dividends 31,200
------------
88,800
(d) The stock of Liverpool Ltd. as on 31st March, 1977 includes Rs.36,000 in respect of
goods purchased from Singhal Ltd. on which the later company made a profit of 20 %
above cost.
(e) The balance in the P&L account of Liverpool Ltd. as on 31st March, 1976 is after
providing for the preference dividend of Rs.11,200 and a proposed equity dividend of
Rs.15,000 both of which were subsequently paid but the proportionate amount due to
Singhal Ltd. was inadvertently credited by it to its P&L account.
(f) No entries had been made in the books of Singhal Ltd. in respect of the debenture
interest and the proposed dividends due from Liverpool Ltd. for the year ended 31st
March, 1977.
(g) On 31st March, 1977 Liverpool Ltd. made an issue of bonus shares for Rs.80,000 by
capitalizing the general reserve and issued pro-rata. The transaction had not yet been
shown in the books of Liverpool Ltd.
Prepare a consolidated balance sheet of Singhal Ltd. and its subsidiary Liverpool Ltd. as on
31st March, 1977.
QUESTION NO 16 (CONCEPT BUILDING QUESTION)
In preparing the consolidated Balance Sheet of L Ltd. As at 31st December 1989. You are
required to show clearly what amounts, if any, you would include in respect of Winding up
Ltd. With regard to:
(d) Cost of Control
(e) Minority interest
(f) Profit or loss i.e., holding company’s share in post acquisition profit of subsidiary
company.
Under each of the following the assumptions:
(a) 48,000 of the shares then in issue of Q Ltd. Were acquired at a cost of $ 95000 on
1st March 1987, L Ltd. Did not participate in the proposed dividend of $ 8000.
(b) 40,000 of the shares then in issue of Q Ltd. Were acquired at a cost of $ 90,000 on
31st December 1987. L Ltd. Participated in the bonus issue but not in proposed dividend
of $ 9000.
(c) 60,000 of the shares then in issue of Q Ltd. Were acquired at a cost of $80,000 on
1st July, 1989; L Ltd. Participated in the proposed dividend of $ 6,000.
The Balance Sheet of Q Ltd. As at 31st December 1989 showed:

Ordinary share of $ 1 each, fully paid $ 80,000
Undistributed profits $ 20,000
The profits appropriation account, for the years ended 31st December was as follows:
1986 1987 1988 1989

$ $ $ $
Balance at the beginning of year 16,000 22,000 43,000 28,000
Bonus issue of one for four –
1st January 1988 16,000
27,000
14,000 30,000 7,000 (8000)
Profits for the year 30,000 52,000 34,000 20,000
Proposed dividend 8,000 9,000 6,000 Nil

Balance carried forward 22,000 43,000 28,000 20,000
The only increase in issued share capital during this period has been from the bonus issue
on 1st January 1988.
QUESTION NO 17 (CORRECT % OF HOLDING CALCULATION)
(Q.84 NOV 2016)

The following are the Balance Sheets of H Limited and S Limited as on 31st March, 1984:-
Liabilities H Limited S Limited

Share capital:
Equity shares of Rs.100 each 10,00,000 7,00,000
Reserve and surplus:
General reserve 2,00,000 3,00,000
Profit and Loss Account 3,00,000 3,00,000
Current liabilities 5,00,000 9,00,000
20,00,000 22,00,000
Assets:
Fixed assets 8,00,000 9,00,000
Investment in S Limited 5,00,000 __
Current Assets 7,00,000 13,00,000
20,00,000 22,00,000
The following further information is furnished:-

(1) H Limited acquired 3,000 shares in S Limited on 1.4.1983 when the Reserve and surplus
position of S Limited was as under:
(a) General reserve Rs.5,00,000
(b) Profit and Loss Account Rs.2,00,000
(credit balance)
(2) On 1.10.83 S Limited issued 2 shares for every 5 shares held, as bonus shares at a
face value of Rs.100 per share. No entry is made, in the books of H Limited for the
receipt of these bonus shares.
(3) On 30.6.83 S Limited declared a dividend , out of pre-acquisition profits 20% and H
Limited credited the receipt of dividend to its profit and loss account.
(4) S Limited owed H Limited Rs.1,20,000 for purchase of stock from H Limited. The
stock is held by S Limited on 31.3.84.
(5) H Limited transferred a machine to S Limited for Rs.1,00,000. The book value of the
machine to H Limited was Rs.75,000.
Prepare the consolidated Balance Sheet as at 31st March 1984.
The following are the Balance Sheets of H Limited and S Limited as on 31st March, 1989:-

Share capital:

18,00,000 15,00,000
Assets:
Fixed assets 5,00,000 4,00,000
Current Assets 8,00,000 11,00,000
18,00,000 15,00,000

(credit balance)
(2) On 1.10.88 S Limited issued 3 shares for every 5 shares held, as bonus shares at a face
value of Rs.100 per share. No entry is made, in the books of H Limited for the receipt
of these bonus shares.
(3) On 30.6.88 S Limited declared a dividend, out of pre-acquisition profits 20% and H
(4) S Limited owed H Limited on 31.3.1989 Rs.1,00,000 for purchase of stock from H
Limited. The entire stock is held by S Limited on 31.3.89 H Limited made profit of
25% on cost.
(5) H Limited transferred a machine to S Limited for Rs.80,000. The book value of the
Prepare the consolidated Balance Sheet as at 31st March 1989.
ANSWER:
PERCENTAGE OF HOLDING 60%, PRE ACQ. PROFITS: 3,00,000, POST ACQ. 2,00,000,
MINORITY 5,20,000, COC (CAPITAL RES. 2,20,000), CONS. PL 4,20,000, B/S 26,60,000
The following are the Balance Sheets of H Limited and S Limited as on 31st December 1981:-

Share capital:
17,00,000 10,00,000
Assets:
Fixed assets 4,80,000 2,50,000
Current Assets 7,20,000 7,50,000
17,00,000 10,00,000

(credit balance)
(2) On 1.7.81 S Limited issued 1 share for every 4 shares held, as bonus shares at a face
value of Rs.100 per share. No entry is made, in the books of H Limited for the receipt
of these bonus shares.
(3) On 30.6.81 S Limited declared a dividend, out of pre-acquisition profits 25% and H
(4) S Limited owed H Limited Rs.50,000 for purchase of stock from H Limited. The entire
stock is held by S Limited on 31.12.81 H Limited made profit of 25% on cost.
(5) H Limited transferred a machine to S Limited for Rs.1,00,000. The book value of the
Prepare the consolidated Balance Sheet as at 31st December , 1989.
ANSWER:
% OF HOLDING 75%, PRE ACQ. PROFITS 1,70,000, POST ACQ. PROFITS 1,30,000,
MINORITY 2,00,000, COC (CAPITAL RES.77,500), CONS. PL 1,52,500, B/S TOTAL
21,20,000
QUESTION NO 20 (CONCEPT OF PREFERENCE SHARE CAPITAL)
The following are the Balance Sheets of H Limited and S Limited as on 30th September,
1985:-

Share capital:
12% Preference share capital 1,00,000 50,000
General reserve 1,00,000 60,000
Profit and Loss Account 1,50,000 90,000
Current liabilities and provisions:
Creditors 60,000 70,000
Income tax 70,000 60,000
9,80,000 5,30,000
Assets:
Fixed assets: 60,000 40,000
Goodwill 1,00,000
Machinery 1,80,000 60,000
Vehicles 50,000 70,000
Furniture 3,80,000 30,000
Investment in S Limited __
Current Assets: 70,000

Stock 1,00,000 1,40,000
Debtors 40,000 1,65,000
Bank balance 25,000
9,80,000 5,30,000

(1) H Limited acquired 1,200 equity shares and 400 preference shares in S Limited on
1.10.1984 at a cost of Rs.2,80,000 and Rs.1,00,000 respectively.
(2) The profit and loss account of S Limited had a credit balance of Rs.30,000 as on
1.10.84 and that of general reserve on that date was Rs.50,000.
(3) On 31st December 1984 S Limited declared out of its pre acquisition profit, of 12%
on its share capital; H Limited credited the receipt of dividend to its Profit and Loss
account.
(4) On 1.4.85 S Limited issued 1 equity share for every 3 shares held, as bonus shares at
a face value of Rs.100 per share out of its general reserve. No entry has been made on
the books of H Limited for receipt of these bonus shares.
(5) S Limited owed H Limited Rs.20,000 for purchase of stock from H Limited. The entire
stock is held by S Limited on 31.9.85. H Limited made a profit of 25% on cost.
Prepare the consolidated balance sheet as at 30th September, 1985
QUESTION 21 (HOME WORK)
From the following summarised balance sheets of H Ltd. and its subsidiary S Ltd. drawn up
at 31st March, 2017, prepare a consolidated balance sheet as at that date, having regard to
the following:
(i) Reserves and profit and Loss Account of S Ltd. stood at ` 25,000 and ` 15,000
respectively on the date of acquisition of its 80% shares by H Ltd. on 1st April, 2016.
(ii) Machinery (Book-value ` 1,00,000) and Furniture (Book value ` 20,0000) of S Ltd.
were revalued at ` 1,50,000 and ` 15,000 respectively on April, 2016 for the purpose
of fixing the price of its shares. [ Rates of depreciation computed on the basis of
useful lives: Machinery 10% furniture 15%]
Summarised Balance Sheet of H Ltd. as on 31st March, 2017
H Ltd. S. Ltd. Assets H Ltd. S Ltd.
` ` ` `
Equity and liabilities
Shareholders’ funds share Fixed assets

capital Machinery 3,00,000 90,000
Shares of ` 100 each 6,00,000 1,00,000 Furniture 1,50,000 17,000

Reserves 2,00,000 75,000 Other non-current 4,40,000 1,50,000
assets
Profit and loss Non- current

Investments
Account 1,00,000 25,000 Shares in Ltd.:
Trade payables 1,50,000 57,000 800 shares at ` 200 1,60,000 _

each
10,50,000 2,57,000 10,50,000 2,57,000
SOLUTION:
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
As at 31st March, 2017
Particulars Note No. (`)
I. Equity and Liabilities

(1) Shareholder’s Funds
(a) Share Capital 1 6,00,000
(b) Reserves and Surplus 3,44,600
(2) Minority Interest (W.N.5) 48,150
(3) Current Liabilities 2
(a) Trade payables 2,07,000
Total 11,99,750
II. Assets
(1) Non- current assets
(a) Fixed assets 3 5,97,750
(i) Tangible assets 4 12,000
(ii) Intangible assets 5 5,90,000
(b) Other non-current assets
Total 11,99,750
Notes to Accounts
`
1. Reserves and Surplus
Reserves 2,00,000
Add: 4/5th share of S Ltd.’ s Post- acquisition 40,000 2,40,000
reserves (W.N.3)
Profit and Loss Account 1,00,000
Add: 4/5 share of S Ltd.’ s post- acquisition 4,600 1,04,600
profits (W.N.4)
3,44,600
2. Trade payables
H Ltd. 1,50,000
S Ltd. 57,000 2,07,000
3. Tangible Assets
Machinery
H. Ltd. 3,00,000
S Ltd. 1,00,000
Add. Appreciation 50,000
1,50,000
Less: Depreciation (15,000) 1,35,000
Furniture
H. Ltd. 1,50,000
S Ltd. 20,000
Less. Decrease in value (5,000)
15,000
Less: Depreciation (2,250) 12,750 5,97,750
4. Intangible assets 12,000

Goodwill [ WN 6]
5. Other non-current assets 4,40,000

H Ltd. 1,50,000 5,90,000
S Ltd.
Working Notes:
1. Pre- acquisition profits and reserves of S Ltd. `

Reserves 25,000
Profit and Loss Account 15,000
40,000
H Ltd. s 4/5 x 40,000 32,000
Minority Interest = 1/5 x 40,000 8,000
2. Profit on revaluation of assets of s Ltd.
Profit on Machinery ` (1,50,000 – 1,00,000) 50,000
Less: Loss on Furniture ` (20,000 – 15,000) 5,000
Net Profit on revaluation 45,000
H Ltd.’ s share 4/5 x 45,000 36,000
Minority interest 1/5 x 45,000 9,000
3. Post- acquisition reserves of S Ltd.
Post- acquisition reserves ( total reserves less pre-acquisition 50,000
reserves = ` 75,000 – 25,000)
H Ltd.’ s share 4/5 x 50,000 40,000
Minority interest 1.5 x 50,000 10,000
4. Post- acquisition profits of S Ltd.
Post-acquisition profits (Profit & Loss account balance less 10,000
Post- acquisition profits = ` 25,000 -15,000)
Add: Excess depreciation charged on furniture @ 15%
On ` 5,000 i.e. (20,000 – 15,000) 750
10,750
Less: Under depreciation on machinery @ 10%
On ` 50,000 i.e. (1,50,000 – 1,00,000) (5,000)
Adjusted post- acquisition profits 5,750
H Ltd.’ share 4/5 x 5,750 4,600
Minority Interest 1/5 x 5,750 1,150
5. Minority Interest
Paid – up value of (1,000 – 800) = 200 shares
Held by outsiders i.e. 200 x ` 100 20,000
Add: 1/5th share of pre-acquisition profits and reserves 8,000
1/5th share of profit on revaluation 9,000
1/5th share of post-acquisition reserves 10,000
1/5th share of post-acquisition profit 1,150
48,150
6. Cost of Control of Goodwill
Paid- up value of 800 share held by H Ltd. i.e. 800 X ` 100 80,000
Add: 4/5th share of pre-acquisition profits and reserves 32,000
4/5th share of profit on the revaluation 36,000
Intrinsic value of shares on the date of acquisition 1,48,000
Price paid by H Ltd., for 800 shares 1,60,000
---------
Cost of control of Goodwill 12,000
A Ltd. acquired 1,600 ordinary shares of ` 1000 each of B Ltd on 1st July, 2016. On 31st
December, 2016 the summarised balance sheet of the two companies were as given below:
Liabilities A Ltd. B Ltd. Assets A.Ltd. B Ltd
` ` ` `
Capital (Shares Of 5,00,000 2,00,000 Land & Buildings 1,50,000 1,80,000
` 100 each Fully paid) Plant & Machinery 2,40,000 1,35,000
Reserves 2,40,000 1,00,000 Investment in
Profit & Loss A/c 57,200 82,000 B Ltd. at cost 3,40,000 __
Bank Overdraft 80,000 — Inventory 1,20,000 36,400
Trade payable 47,100 17400 Trade 59,800 40,000
Receivable Cash 14,500 8,000
9 24,300 3,99,400 9,24,300 3,99,400

The Profit & Loss Account of B Ltd. Showed a credit balance of ` 30,000 on 1st January,
2016 out of which a dividend or 10% was paid on 1st August, 2016; A Ltd. credited the
dividend received to its Profit & Loss Account. The Plant & Machinery which stood at `
1,50,000 on 1st January, 2016 was considered as worth ` 1,80,000 on 1st July, 2016; this
figure is to be considered while consolidating the Balance Sheets. Rate of depreciation on
plant & machinery is 10% (computed on the basis of useful lives).
Prepare consolidated Balance Sheet as on 31st December, 2016.
ANSWER
Consolidated Balance Sheet of A Ltd. And its subsidiary, B Ltd.
as on 31st December, 2016

1. Equity and Liabilities
(b) Reserves and Surplus 2 3,08,800
(2) Minority Interest (W.N 5) 83,600
(3) Current Liabilities
(a) Trade payables 3 64,500
(b) Short terms borrowings 4 80,000
Total 10,36,900
2. Assets
(1) Non- current assets
Fixed assets
(a) Tangible assets 5 7,41,000
(b) Intangible assets 6 17,200
(2) Current assets
(a) Inventories 7 1,56,400
(b) Trade receivables 8 99,800
(c) Cash & Cash equivalents (Cash) 9 22,500
Total 10,36,900
Note to Account
`
1. Share Capital
5,000 shares of ` 100 each 5,00,000
Reserves 2,40,000
Profit & loss ( W.N. 8) 68,800 3,08,800
3. Trade Payables
A Ltd. 47,100
B Ltd. 17,400 64,500
4. Short term borrowings

Bank overdraft 80,000
5. Tangible Assets
Land and building (1,50,000 + 1,80,000) 3,30,000
Plant & Machinery (W.N.7) 4,11,000 7,41,000
6. Intangible assets
Goodwill (W.N.6) 17,200
7. Inventories
A Ltd. 1,20,000
B Ltd. 36,400 1,56,400
A Ltd. 59,800
A Ltd. 40,000 99,800
9. Cash & Cash equivalents

Cash
A Ltd. 14,500
B Ltd. 8,000 22,500
Share holding pattern

Total Shares of B Ltd 2,000 shares
Shares held by A Ltd 1,600 shares i.e. 80%
Minority share holding 400 shares i.e. 20%
Working Notes:
1. The dividend @ 10% on 1,600 shares – ` 16,000 received by a Ltd. should have been
credited to the investment A/c being out of per- acquisition profits. A Ltd. must pass
a rectification entry
2. The plant & Machinery of B Ltd. would stand in the books at ` 1,42,500 on 1st July,
2016, considering only six months’ depreciation on ` 1,50,000 total depreciation being
` 15,000. The value put the assets being ` 1,80,000 there is an appreciation to the
extent of ` 37,500.
3. Capital profit of B Ltd.
` `
Reserve on 1st January, 2016 1,00,000
Profit & Loss Account Balance on 1st January, 2016 30,000
Less: Dividend paid (20,000) 10,000
Profit for 2016: Total ` 82,000 less ` 10,000
i.e. ` 72,000; upto 1st July, 2016 36,000
Appreciation in value of Plant & Machinery 37,500
1,83,500
Less: 20% due to outsiders (36,700)
Holding company’s share 1,46,800
4. Revenue profit of B Ltd.
Profit after 1st July, 2016 [ 82,000 – 10,000] x 36,000

Less: 10% depreciation on ` 1,80,000 for 6 months less
depreciation already Charged for 2nd half year on 1,50,000
(9000-7,500) (1,500)
34,500
Less: 1/5 due to outsiders (6,900)
Share of A Ltd. 27,600
5. Minority interest:
Par value of 400 shares 40,000

Add: 1/5 Capital profits [WN 3] 36,700
1/5 Revenue Profits [WN 4] 6,900
83,600
6. Cost of Control:
Amount paid for 1,600 shares 3,40,000

Less: Dividend out of pre- acquisition profits (16,000) 3,24,000
Par value of shares 1,60,000
Capital profits – share of A Ltd. [ WN 3] 1,46,800 (3,06,800)
Cost of Control or Goodwill 17,200
7. Value of plant & Machinery:
A Ltd. 2,40,000
B Ltd. 1,35,000
Add: Appreciation on 1st July, 2016 37,500
[ 1,80,000-(1,50,000 – 7,500)]
1,72,500
Add: Deprecation for 2nd half changes on 7,500
pre- revalued value
Less: Depreciation on ` 1,80,000 for 6 months (9,000) 1,71,000
4,11,000
8. Profit & Loss Account (Consolidated):
A Ltd. as given 57,200

Less: Dividend transferred to Investment A/c (16,000) 41,200
Share of A Ltd. in revenue profits of B Ltd. (W.N. 4) 27,600
68,800
A Limited acquired 8000 shares of Rs.100 each in B Limited on 30th September 1991. The
summarized Balance Sheet of the two companies as on 31.3.1992 were as follows:
A Limited B Limited
Share capital: 30,000 shares of Rs.100 each 30,00,000
10,000 shares of Rs.100 each 10,00,000
Capital reserve 5,50,000
Profit and Loss account 3,82,000 1,80,000
Loan from B Limited 21,000
Bills payable (including Rs.5000 to A Limited) 17,000
Creditors 1,79,000 70,000
Note: on the Balance Sheet of A Limited there is a
contingent liability for bills discounted of Rs.6,000
38,82,000 18,67,000
Fixed assets 15,00,000 14,47,000
Investment in B Limited at cost 17,00,000
Stock in hand 4,00,000 2,00,000
Loan to A Limited 20,000
Bills receivable (including Rs.5000 from B Limited) 12,000
Debtors 2,50,000 1,80,000
Cash and bank balance 20,000 20,000
38,82,000 18,67,000
You are given the following information:

(1) B Limited made a bonus issue on 31.3.1992 of one share for every two shares held
reducing the capital reserve equivalently but the accounting effect to this has not
been given in the above Balance Sheet.
(2) Interest receivable for the year (Rs.1,000) in respect of the loan due by A Limited to
B Limited has not been credited in the books of B Limited.
(3) The credit balance in Profit and Loss account of B Limited as on 1.4.1991 was Rs.21,000.
(4) The directors decided on the date of the acquisition that the fixed assets of B Limited
were over valued and should be written down by Rs.50,000. Consequential adjustments
on depreciation is to be ignored.
Prepare the consolidated Balance Sheet as at 31st March 1992 showing your workings.
ANSWER:
PRE ACQ. PROFITS:1,51,000, POST ACQ. PROFITS 80,000, MINORITY 3,46,200, COC
GW:3,79,200, B/S TOTAL 43,53,200, CONSOLIDATED PL 4,46,000
(Hint: PL balance in B Ltd. After rectification of interest will be 1,81,000)
Exe Ltd. acquires 70% of equity shares of Zed Ltd. as on 31st March, 2017 at a cost of ` 70
lakhs. The following information is available from the balance sheet of Zed Ltd. as on 31st
March, 2017:
` in lakhs
Fixed Assets 120
Investments 55
Current Assets 70
Loans & Advances 15
15% Debentures 90
Current Liabilities 50
The following revaluations have agreed upon (not included in the above figures):
Fixed Assets Up by 20%
Investments Down by 10%
Zed Ltd. declared and paid dividend @ 20% on its equity shares as on 31st March, 2017, Exe
Ltd. purchased the shares of Zed Ltd. @ ` 20 per share.
Calculate the amount of goodwill/ capital reserve on acquisition of shares of Zed Ltd.
SOLUTION:
Revalued net assets of Zed Ltd. as on 31st March, 2017
` in lakhs ` in lakhs
Fixed Assets [ 120 X 120%] 144.0

Investments [ 55 X 90%] 49.5
Current Assets 70.0
Loans and Advances 15.0
Total Assets after revaluation 278.5
Less: 15% Debentures 90.0
Current Liabilities 50.0 (140.0)
Equity/ Net Worth 138.5
Exe Ltd.’ s shares of net assets (70% of 138.5) 96.95
Exe Ltd.’ cost of acquisition of shares of Zed Ltd.
(` 70 lakhs – ` 7 lakhs*) 63.00
Capital reserve 33.95
*total Cost of 70% Equity of Zed Ltd. ` 70 lakhs

Purchase price of each share ` 20
Number of shares purchased [70 lakhs/ ` 20] 3.5 lakhs
Dividend @ 20% on 10 i.e. ` 2 per share ` 7 lakhs
Since dividend received is for per-acquisition period, it has reduced from the cost of
investment in the subsidiary company.
(Assumption: Face Value per share 10)
QUESTION NO 25 (CONCEPT OF INTERIM DIVIDEND)
On April 1,1980 A Limited paid Rs.1,10,000 for 90% of the issued capital of B Limited. The
assets and liabilities of the two companies as at March 31,1981 were as follows:
A Limited B Limited
Fixed assets 94,000 96,000
Current assets 30,000 18,000
Investment at cost 1,56,000
Goodwill 20,000 6,000
3,00,000 1,20,000
Issued share capital (Rs.1 each fully paid) 1,80,000 60,000

General reserve (April 1,1980) 45,000 20,000
Profit and Loss account (March 31,1981) 36,000 20,500
Current liabilities 39,000 9,500
6% Debentures held by A Limited 10,000
3,00,000 1,20,000
On April 1,1980 the opening credit balance of A Limited’s Profit and Loss account was
Rs.26,000. Out of this balance a 10% dividend was paid subsequently.
(2) The Profit and Loss account B Limited showed the following:
Rs.
Balance b/f on April 1,1980 22,000
Net profit for the year ended March 31,1981 12,000
---------
34,000
Less- Dividend paid –
Final for the year ended March 31,1980 9,000
Interim for the half year ended September 30,1980 4,500
-------- 13,500
---------
Balance c/f on March 31,1981 20,500
---------
(3) Included in the stock in trade of B Limited at valance date were goods purchased from
A Limited for Rs.6000 on which there was a profit of 50% on cost of A Limited.
(4) All dividends received by A Limited have been correctly recorded in the books of
account.
Prepare a consolidated Balance Sheet as at March 31,1981 and show your workings.
QUESTION 26
Minority of the subsidiary is entitled to

(a) Capital profits of the subsidiary company
(b) Revenue profits of the subsidiary company
(c) Both capital and revenue profit of the subsidiary company
ANSWER: {C}
QUESTION 27
In consolidation of accounts of holding and subsidiary company____ is eliminated in full.

(a) Current liabilities of subsidiary company
(b) Reserves and surplus of both holding and subsidiary company
(c) Mutual indebtedness.
ANSWER: {C}
QUESTION NO 28 (MIXED VARIOUS CONCEPTS)
The Balance Sheet of Sun Limited and Moon Limited as on 31-3-2000 are given below:
Liabilities Sun Moon Assets Sun Moon

Share capital (Rs.10) 1,20,000 1,00,000 Fixed assets 44,000 84,000
General Reserve 20,000 36,000 Investment in
Profit and Loss Moon Limited
Account 12,000 20,000 8,000 shares
Bills payable 2,000 5,000 @ Rs. 11 88,000
Sundry creditors 4,000 7,000 Sundry Debtors 6,000 15,000
Bills Receivable 4,000 16,000
Contingent liabilities Stock in trade 10,000 40,000
of Sun Limited: Bills Cash at bank 6,000 13,000
discounted not yet
matured Rs.2500
1,58,000 1,68,000 1,58,000 1,68,000
Shares were purchased on 1.4.1997. When the shares were purchased general reserve and
Profit and Loss account of Moon Limited stood at Rs. 30000 and Rs. 16000 respectively.
Dividends have been paid @ 10% every year after acquisition of shares, first dividend being
paid out of pre-acquisition profits. No dividend has been proposed for 1999-2000 as yet
and no 0provision need be made in consolidated Balance Sheet. Sun Limited has credited all
dividends received to Profit and Loss account.
On 31.3.2000, bonus shares has been declared by Moon Limited @ 1 fully paid share for 5
held, but no effect has been given to that in the above accounts. The bonus was declared
out of profits earned prior to 1.4.1997 from general reserve.
When the shares were purchased agreed evaluations of fixed assets of Moon Limited was
Rs.1,08,000 although no effect has been given thereto in the accounts.
Depreciation has been charged @ 10% p.a. on the book value as on 1.4.1997, (on straight line
method), the re being no addition or sale since then.
Out of current profits Rs.2000 has been transferred to general reserve every year.
Bills receivable of Sun Limited include Rs.2000 bills accepted by Moon Limited and bills
discounted by Sun Limited, but not yet matured include Rs.1500 accepted by Moon Limited.
Sundry creditors of Sun Limited include Rs.2000 due to Moon Limited whereas sundry
debtors of Moon Limited include Rs.4000 due from Sun Limited. It is found that Sun Limited
has remitted a cheque of Rs.2000 which has not yet been received by Moon Limited.
Prepare consolidated Balance Sheet as on 31.3.2000 of Sun Limited and its subsidiary.
QUESTION NO 29 (MISSING INFORMATION/UPDATION OF ACCOUNTS)
War Limited purchased on 31.3.1997, 48,000 shares in Peace Limited at 50 % premium over
face value by issue of 8 % debentures at 20 % premium. The Balance Sheet of War and
Peace Limited as on 31.3.1997 the date of purchase were as under:
Liabilities War Peace Assets War Peace

(Rs.10) Stock in trade 3,00,000 1,80,000
General reserve 1,20,000 40,000 Sundry debtors 3,20,000 2,00,000
Profit and Loss Cash in hand 60,000 30,000
account 80,000 Preliminary 20,000 10,000
Sundry creditors 1,00,000 60,000 expenses
Profit and Loss 80,000
account
13,50,000 7,00,000 13,50,000 7,00,000
Particulars of War Limited:

(i) Profit made:
1997-1998 1,60,000
1998-1999 2,00,000
(ii) The above profit was made after charging depreciation of Rs.60,000 and Rs.40,000
respectively.
(iii) Out of profit shown above every year Rs.20,000 had been transferred to general
reserve.
(iv) 10 % dividend had been paid in both the years.
(v) It has been decided to write down investment to face value of shares in 10 years and
to provide for share of loss to subsidiary.
Particulars of Peace Limited:
The company incurred losses of Rs.40,000 and Rs.60,000 in 1997-98 and 1998-99 after
charging depreciation of 10 % p.a. of the book value as on 1.4.1997.
Prepare consolidated Balance Sheet as at 31.3.1999, of War Limited, and its subsidiary.
QUESTION NO 30 (CONCEPT OF NEGATIVE MINORITY)
A Limited acquired 70% of equity shares of B Limited as on 1st January 1993 at a cost of
Rs.10,00,000 when B Limited had an equity capital of Rs.10,00,000 and reserves and surplus
of Rs.80,000. Both the companies follow calendar year as the accounting year. In the four
consecutive years B Limited fared badly and suffered losses of Rs.2,50,000, 4,00,000,
Rs.5,00,000 and Rs.1,20,000 respectively. Thereafter in 1997 B Limited experienced
turnaround and registered an annual profit of Rs.50,000. In the next two years i.e. 1998
and 1999 B Limited recorded annual profits of Rs.1,00,000 and Rs.1,50,000 respectively.
Show the minority interests and cost of control at the end of each year for the purpose of
consolidation.
QUESTION 31
In consolidated balance sheet, the share of the outsiders in the net assets of the subsidiary
must be shown as
(a) Minority interest
(b) Capital reserve
(c) Current liability
ANSWER: {A}
QUESTION NO 32 (DIFFERENT REPORTING PERIODS)
Able Limited made an offer to acquire all the shares of Baker Limited at a price of Rs.25
per share, to be satisfied by the allotment of five shares in Able Limited for every four
shares in Baker Limited.
By the date of expiration of the offer which was on 1st January 1999 share-holders owning
75% of the shares in Baker Limited accepted the offer and the acquisition was effective
from that date.
The accounting date of Baker Limited was on 31st March in each year, but to conform with
Able Limited accounts were prepared to 30th June 1999, covering the fifteen months to the
date.
The draft summarized accounts of the companies on 30th June 1999 which do not include
any entries regarding the acquisition of shares in Baker Limited were as follows:
Liabilities Able Limited Baker Limited

Rs. Rs. Rs. Rs.
Share capital:
Equity shares of Rs.10 each
Authorized: 3,00,000 75,000
Issued and fully paid: 1,50,000 60,000
Reserves and surplus:
General reserve 55,000
Profit and Loss account 62,000 1,17,000 20,000
Current liabilities 27,000 7,000
Provision for taxation 33,000 6,000
3,27,000 93,000
Assets
Freehold property at cost 2,00,000 38,000
Plant and machinery at cost 50,000 12,000
Less: depreciation 18,000 32,000 3,000 9,000
Quoted investment at cost 7,000
Stock at cost 32,000 21,000
Debtors 41,000 17,000
Balance at bank 15,000 8,000
3,27,000 93,000
Profit and Loss account for the period ended on 30th June 1999
Able Limited Baker Limited

One year 15 months
Rs. Rs.
Balance b/f 14,000 12,000
Profit for the period 80,000 18,000
94,000 30,000
Taxation for the period 32,000 6,000
Interim dividend paid 30th Nov. 1998 4,000
Balance carried forward 62,000 20,000
94,000 30,000
The Directors of Able Limited recommended a final dividend of 20% to the shareholders on
register as on 30th June 1999. The directors of Baker Limited proposed a final dividend of
12.5% payable on 30th September 1999.
You are required to prepare the consolidated Balance Sheet of Able Limited and Baker
Limited as on 30th June 1999.
QUESTION NO 33 (DISPOSAL OF INVESTMENTS)
From the following summarized Balance Sheets of A Limited and its subsidiary B Limited
prepare a consolidated Balance Sheet as on 31st December 1999:
Liabilities A B Assets A B
Rs. Rs. Rs.
Share capital Sundry assets 93,000 32,000
Equity shares of Rs.10 each 1,00,000 20,000 Shares in B
Profit on sale of shares 3,000 Limited 1200
shares at Rs.15
Profit and Loss account b/f 6,000 7,200 18,000
each
For the year 2,000 4,800
1,11,000 32,000 1,11,000 32,000
A Limited bought in earlier year 1600 equity shares in B Limited @ 15 when the Profit and
Loss account balance in B Limited was Rs.4,400. A sold 400 shares @ Rs.22.50, credited the
difference between the sale proceeds and cost to “Profit on sale of investment account” on
30th June 1999 and crediting the balance to the investment account. Profit during the year
accrued uniformly.
QUESTION NO 34 (DISPOSAL OF INVESTMENTS)
The summarized Balance Sheets of A Limited and B Limited are as follows:

Balance Sheet as at 31st December 2000
A Limited B Limited
Sources of Funds: Rs. Rs.
Share capital in equity shares of Rs.10 each 2,00,000 50,000
Reserves 20,000 5,000
Profit and Loss account as on 1st January 2000 30,000 10,000

Profit for the year 8,000 8,000
Add: Dividends from B Limited 4,000
Less: Dividends paid (5,000)
Creditors 30,000 20,000
Total 2,92,000 88,000
Application of funds:
Fixed assets 2,00,000 80,000
Current assets 32,000 8,000
Shares in B Limited at cost—3,000 shares 60,000
Total 2,92,000 88,000
A Limited had acquired 4,000 shares in B Limited at Rs.20 each on 1st January 2000 and sold
1,000 of them at the same price on 1st October 2000. The sale is cum dividend. An interim
dividend of 10% was paid by B Limited on 1st July 2000.
Draft the consolidated Balance Sheet as at 31st December 2000.
QUESTION 35
Taxation provision made by the subsidiary company will appear in the consolidated balance
sheet as an item of
(a) Current liability.
(b) Revenue profit.
(c) Capital profit.
ANSWER: {A)
QUESTION NO 36 (SAME ACCOUNTING POLICIES)
Alfa Limited has decided to acquire all the shares of Beta Limited and has made a successful
one for one offer to the equity shareholders of Beta Limited. The Balance Sheet of the two
companies are set out below:
Alfa Limited Beta Limited

Rs. (‘000) Rs. (‘000)
Fixed assets 4,800 3,400
Net current assets 2,000 1,200
6,800 4,600
Equity shares of Rs.10 each 5,000 3,000
Reserves and surplus 1,800 1,600
6,800 4,600
Alfa Limited followed straight-line method of depreciation whereas Beta Limited followed
W.D.V. method. Had Beta Limited followed Straight-Line Method of depreciation its
accumulated depreciation would have been less by Rs.250 (‘000).
Prepare the consolidated Balance Sheet of Alfa Limited and it’s subsidiary Beta Limited:
(a) Using the information given above
(b) Assuming that the offer had been 3 shares in Alfa Limited for every 2 shares in Beta
Limited
(c) Assuming that Alfa Limited had paid @ Rs.2.50 per share for Beta Limited over an
above giving one share exchange
CONSOLIDATED PROFIT AND LOSS ACCOUNT

QUESTION NO 37
Given below are the Profit & Loss Account of H Ltd. and its subsidiary Ltd. for the
year ended 31st March, 2015:
H Ltd. S Ltd.
(` in lacs) (` in lacs)
Incomes:
Sales and other income 5,000 1,000
Increase in Inventory 1,000 200
6,000 1,200
Expenses:
Raw material consumed 800 200
Wages and Salaries 800 150
Production expenses 200 100
Administrative Expenses 200 100
Selling and Distribution Expenses 200 50
Interest 100 50
Depreciation 100 50
2,400 700
Profit before tax 3,600 500
Provision for tax 1,200 200
Profit after tax 2,400 300
Proposed dividend 1,200 150
Balance of Profit 1,200 150
Other Information:
H Ltd. sold goods to S Ltd. of ` 120 lacs at cost plus 20%. Inventory of S Ltd. includes
such goods valuing ` 24 lacs. Administrative Expenses of S Ltd. include ` 5 lacs paid to
H Ltd. as consultancy fees. Selling and Distribution expenses of H Ltd. include ` 10 lacs
paid to S Ltd. as commission.
H Ltd. holds 80% of equity share capital of ` 1,000 lacs in S Ltd. H Ltd. took credit to
its Profit and Loss Account, the proportionate amount of dividend declared and paid by
S Ltd. for the year 2013-2014.
CONSOLIDATED CASH FLOW STATEMENT
A holding company has to prepare a consolidated cash flow statement if it is required to

prepare cash flow statement.
Same as Consolidated Profit and Loss account, the preparation of consolidated Cash
flow statement is also not difficult. All the items of Cash flow from operating activities,
investing activities and financing activities are to be added on line by line basis and from
the consolidated items, inter-company transactions should be eliminated.
Below given is the Consolidated Cash Flow Statement with hypothetical figures:
CONSOLIDATED CASH FLOW STATEMENT
(` in million)
A Company B Company Total
Cash Flow From Operating Activities
Change in Reserve 8 2 10
Change in P & L A/c 0 1 1
Proposed Dividend 22 22
Tax Provision 20 1 21
Depreciation 10 5 15
Interest -10 10 0
50 19 69
Less: Tax payment -20 -1 -21
30 18 48
Working Capital Adjustment -13 12 -1
(A) 17 30 47
Cash Flow from Investment Activities
Sale of fixed assets 30 0 30
Purchase of fixed assets -30 -20 -50
(B) 0 -20 -20
Cash Flow from Financing Activities (C) -22 -10 -32
Net cash flows (A+B+C) -5 0 -5
PAST EXAMINATION QUESTIONS
QUESTION 1 (CA INTER NOV 2018) (10MARKS) (CONSOLIDATED P&L)
The Profit and Loss Accounts of A Ltd. and its subsidiary B Ltd. for the year ended 31st
March, 2018 are given below :
` in Lakhs
Incomes A Ltd. B Ltd.

Sales and other income 7,500 1,500
Increase in Inventory 1,500 300
Total 9,000 1,800
Expenses
Raw material consumed 1,200 300
Wages and Salaries 1,200 225
Production expenses 300 150
Administrative expenses 300 150
Selling and distribution expenses 300 75
Interest 150 75
Depreciation 150 75
Total 3,600 1,050
Profit before tax 5,400 750
Provision for tax 1,800 300
Profit after tax 3,600 450
Dividend paid 1,800 225
Balance of Profit 1,800 225
The following information is also given:

(i) A Ltd sold goods of ` 180 Lakhs to B Ltd at cost plus 25%. (1/6 of such goods were still
in inventory of B Ltd at the end of the year)
(ii) Administrative expenses of B Ltd include ` 8 Lakhs paid to A Ltd as consultancy fees.
(iii) Selling and distribution expenses of A Ltd include `15 Lakhs paid to B Ltd as commission.
(iv) A Ltd holds 72% of the Equity Capital of B Ltd. The Equity Capital of B Ltd prior to
2016-17 is `1,500 Lakhs
Prepare a consolidated Profit and Loss Account for the year ended 31st March, 2018.
SOLUTION:
Consolidated Profit & Loss Account of A Ltd. and its subsidiary B Ltd.
for the year ended on 31st March, 2018
Particulars Note No. ` in Lacs
I. Revenue from operations 1 8,797

II. Total revenue 8,797
III. Expenses
Cost of Material purchased/Consumed 3 1,770
Changes of Inventories of finished goods 2 (1,794)
Employee benefit expense 4 1,425
Finance cost 6 225
Depreciation and amortization expense 7 225
Other expenses 5 802
Total expenses 2,653
IV. Profit before Tax(II-III) 6,144
V. Tax Expenses 8 2,100
VI. Profit After Tax 4,044
Notes to Accounts
` in Lacs ` in Lacs
1. Revenue from Operations
Sales and other income

A Ltd. 7,500
B Ltd. 1,500
9,000
Less: Inter-company Sales (180)
Consultancy fees received by A Ltd. from B Ltd. (8)
Commission received by B Ltd. from A Ltd. (15) 8,797
2. Increase in Inventory
A Ltd. 1,500
B Ltd. 300
1,800
Less: Unrealised profits ` 180×1/6 x 25/125 (6) 1,794
3. Cost of Material purchased/consumed
A Ltd. 1,200
B Ltd. 300
1,500
Less: Purchases by B Ltd. from A Ltd. (180) 1,320
Direct Expenses
A Ltd. 300
B Ltd. 150 450
4. Employee benefits and expenses 1,770
Wages and Salaries:
A Ltd. 1,200
B Ltd. 225 1,425
5. Other Expenses
Administrative Expenses
A Ltd. 300
B Ltd. 150
450
Less: Consultancy fees received by A Ltd. from BLtd. (8) 442
Selling and Distribution Expenses:
A Ltd. 300
B Ltd. 75
375
Less: Commission received from B Ltd. from A Ltd. (15) 360
6. Finance Cost 802

Interest:
A Ltd. 150
B Ltd. 75 225
7. Depreciation and Amortisation
Depreciation:
A Ltd. 150
B Ltd. 75 225
8. Provision for tax
A Ltd. 1800
B Ltd. 300 2100
Note: it is assumed that dividend adjustment has not be done in sales & other income of A
Ltd i.e. dividend received from B Ltd is not included in other income of A Ltd. Alternative
answer is possible considering is otherwise.
(NEGATIVE MINORITY INTEREST)

H Ltd. acquire 70% of equity share of S Ltd. as on 1st January, 2011 at a cost of ` 5,00,000
when S Ltd. had an equity share capital of ` 5,00,000 and reserves and surplus of ` 40,000.
Both the companies follow calendar year as the accounting year.
In the four consecutive years, S Ltd. performed badly and suffered losses of ` 1,25,000,
` 2,00,000, ` 2,50,000 and ` 60,000 respectively.
Thereafter in 2015, S Ltd. experienced turnaround and registered an annual profit of
` 25,000. In the next two years i.e. 2016 and 2017, S Ltd. recorded annual profits of
` 50,000 and ` 75,000 respectively.
Show the Minority Interests and Cost of Control at the end of each year for the purpose
of consolidation.
SOLUTION
The losses applicable to the minority in a consolidated subsidiary may exceed the minority
interest in the equity of the subsidiary. The excess, and any further losses applicable to
the minority, are adjusted against the majority interest except to the extent that the
minority has a binding obligation to, and is able to, make good the losses. If the subsidiary
subsequently reports profits, all such profits are allocated to the majority interest until
the minority’s share of losses previously absorbed by the majority has been recovered.
Accordingly,
Year Profit / Minority Additional Minority’s Share of losses Cost of

(Loss) Interest Consolidated borne by H Ltd. Control
(30%) P & L (Dr.)
or Cr.
` Balance
-
At the time of 1,62,000
acquisition on
1.1.2011 (W.N.)
2011 (1,25,000) (37,500) (87,500) 1,22,000
(W.N.)
Balance 1,24,500
2012 (2,00,000) (60,000) (1,40,000) 1,22,000
Balance 64,500
2013 (2,50,000) (75,000) (1,75,000) 1,22,000
(10,500)
Loss of 10,500 (10,500) 10,500 10,500
minority
borne by
Holding
Co.
Balance Nil (1,85,500)
2014 (60,000) (18,000) (42,000) 1,22,000
Loss of
minority 18,000 (18,000) 18,000 28,500
borne by
Holding
Co.
Balance Nil (60,000)
2015 25,000 7,500 17,500 1,22,000
Profit (7,500) 7,500 (7,500) 21,000
share of
minority
adjusted
against
losses of
minority
absorbed
by
Holding
Balance Co. Nil 25,000
2016 50,000 15,000 35,000 (15,000) 6,000 1,22,000
(15,000) 15,000
Balance Nil 50,000
2017 75,000 22,500 52,500 (6,000) Nil 1,22,000
(6,000) 6,000
Balance 16,500 58,500
Working Note:
Calculation of Minority interest and Cost of control on 1.1.2011
Share of Holding Co. Minority Interest
100% 70% 30%

(`) (`) (`)
Share Capital 5,00,000 3,50,000 1,50,000
Reserve 40,000 28,000 12,000
3,78,000 1,62,000
Less: Cost of investment (5,00,000)
Goodwill 1,22,000
(SAME ACCOUTING POLICIES)

(HINT: PLEASE WATCH ADDITIONAL VIDEO ON CONSOLIDATION BEFORE
ATTEMPTING THIS QUESTION)
Consider the following summarized Balance Sheets of subsidiary MNT Ltd.
Liabilities 2017-18 2018-19

Amount in Amount in
` `
Share Capital
Issued and subscribed 7500 Equity Shares of ` 100 each 7,50,000 7,50,000
Reserve and Surplus
Revenue Reserve 2,14,000 5,05,000
Securities Premium 72,000 2,07,000
Current Liabilities and Provisions
Trade Payables 2,90,000 2,46,000
Bank Overdraft - 1,70,000
Provision for Taxation 2,62,000 4,30,000
Assets 15,88,000 23,08,000
Fixed Assets (Cost) 9,20,000 9,20,000
Less: Accumulated Depreciation (1,70,000) (2,82,500)
7,50,000 6,37,500
Investment at Cost - 5,30,000
Current Assets
Inventory 4,12,300 6,90,000
Trade Receivable 2,95,000 3,43,000
Prepaid expenses 78,000 65,000
Cash at Bank 52,700
42,500
15,88,000 23,08,000
Other Information:
(1) MNT Ltd. is a subsidiary of LTC Ltd.
(2) LTC Ltd. values inventory on FIFO basis, while MNT Ltd. used LIFO basis. To bring
MNT Ltd.’s inventories values in line with those of LTC Ltd., its value of inventory is
required to be reduced by ` 5,000 at the end of 2017-2018 and increased by ` 12,000
at the end of 2018-2019. (Inventory of 2017-18 has been sold out during the year
2018-19)
(3) MNT Ltd. deducts 2% from Trade Receivables as a general provision against doubtful
debts.
(4) Prepaid expenses in MNT Ltd. include Sales Promotion expenditure carried forward
of ` 25 ,000 in 2017-18 and ` 12,500 in 2018-19 being part of initial Sales Promotion
expenditure of ` 37,500 in 2017-18, which is being written off over three years.
Similar nature of Sales Promotion expenditure of LTC Ltd. has been fully written off
in 2017-18.
Restate the balance sheet of MNT Ltd. as on 31st March, 2019 after considering the above
information for the purpose of consolidation. Such restatement is necessary to make the
accounting policies adopted by LTC Ltd. and MNT Ltd. uniform.
SOLUTION:
Restated Balance Sheet of MNT Ltd. as at 31st December, 2019

(a) Share Capital 7,50,000
(a) Short term borrowings 2 1,70,000
(b) Trade Payables 2,46,000
(c) Short-term provision 3 4,30,000
Total 23,14,500
II. Assets
(1) Non-current assets
(a) Property, Plant & Equipment 4 6,37,500
(b) Non-current Investment 5,30,000
(2) Current assets
(a) Inventories (6,90,000 +12,000) 5 7,02,000
3,43,000 3,50,000
(b) Trade Receivables ( × 100)
98
(c) Cash & Cash Equivalents 42,500

(d) Other current assets 6 52,500
Total 23,14,500
Notes to Accounts
`
Revenue Reserve (refer W.N.) 5,11,500
Securities Premium 2,07,000 7,18,500
2. Short term borrowings
Bank overdraft 1,70,000
3. Short-term provision
Provision for taxation 4,30,000
4. Property, Plant and Equipment
Cost 9,20,000
Less: Depreciation to date (2,82,500) 6,37,500
5. Inventories 6,90,000
Increase in value as per FIFO 12,000 7,02,000
6. Other current assets
Prepaid expenses (After adjusting sales 52,500
promotion expenses to be written off each
year) (65,000 -12,500)
Working Note:
Adjusted revenue reserves of MNT Ltd.:
` `
Revenue reserves as given 5,05,000
Add: Provision for doubtful debts [3,43,000 X 2/98) 7,000
Add: Increase in value of inventory 12,000 19,000
5,24,000
Less: Sales Promotion expenditure to be written off (12,500)
Adjusted revenue reserve 5,11,500

From the following data, determine Minority Interest on the date of acquisition and on the
date of consolidation in each case:
Case Subsidiary % of Cost Date of Acquisition Consolidation date

Company Share
Owned
01-01-2018 31-12-2018
Share Profit Share Profit

Capital and Loss Capital and Loss
A/c A/c
` ` ` `
Case-A X 90% 2,00,000 1,50,000 75,000 1,50,000 85,000
Case-B Y 75% 1,75,000 1,40,000 60,000 1,40,000 20,000
Case-C Z 70% 98,000 40,000 20,000 40,000 20,000
Case-D M 95% 75,000 60,000 35,000 60,000 55,000
Case-E N 100% 1,00,000 40,000 40,000 40,000 65,000
SOLUTION:
Minority Interest = Equity attributable to minorities
Equity is the residual interest in the assets of an enterprise after deducting all its liabilities
i.e. in this case, it should be equal to Share Capital + Profit & Loss A/c
A = Share capital on 1.1.2018
B = Profit & loss account balance on 1.1.2018
C = Share capital on 31.12.2018
D = Profit & loss account balance on 31.12.2018
Minority % Minority interest as at Minority interest as at

Shares Owned the date of acquisition the date of consolidation
[E] [E] x [A + B] ` [E] X [C + D] `
Case A [100-90] 10 % 22,500 23,500
Case B [100-75] 25 % 50,000 40,000

Case C [100-70] 30 % 18,000 18,000
Case D [100-95] 5% 4,750 5,750
Case E [100-100] NIL NIL NIL
H Limited acquired 64000 Equity Shares of ` 10 each in S Ltd. as on 1st October, 2019. The
Balance Sheets of the two companies as on 31st March, 2020 were as under:
Particulars H Ltd. (`) S Ltd. (`)

Equities and Liabilities:
Equity Share Capital: Shares of ` 10 each 20,00,000 8,00,000
General Reserve (1st April, 2019) 9,60,000 4,20,000
Profit & Loss Account 2,28,800 3,28,000
Preliminary Expenses (1st April, 2019) - (20,000)
Bank Overdraft 3,00,000 -
Bills Payable - 52,000
Trade Payables 1,66,400 80,000
Total 36,55,200 16,60,000
Assets:
Land and Building 7,20,000 7,60,000
Plant & Machinery 9,60,000 5,40,000
Investment in Equity Shares of S Ltd. 12,27,200 -
Inventories 4,56,000 1,68,000
Trade Receivables 1,76,000 1,60,000
Bills Receivable 59,200 -
Cash in Hand 56,800 32,000
Total 36,55,200 16,60,000
Additional Information:
(1) The Profit & Loss Account of S Ltd. showed credit balance of ` 1,20,000 on 1st April,
2019. S Ltd. paid a dividend of 10% out of the same on 1st November, 2019 for the
year 2018-19. The dividend was correctly accounted for by H Ltd.
(2) The Plant & Machinery of S Ltd. which stood at ` 6,00,000 on 1st April, 2019 was
considered worth ` 5,20,000 on the date of acquisition by H Ltd. S Ltd. charges
depreciation @ 10% per annum on Plant & Machinery.
Prepare consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as on 31st March,
2020 as per Schedule III of the Companies Act, 2013.
SOLUTION:
(HINT: STUDENTS SHOULD SOLVE THIS QUESTION ON THEIR OWN AS PER CLASS
PRESENTATION. IF THEY FIND ANY PROBLEM ONLY THEN THEY SHOUD REFER THE
GIVEN SOLUTION)
Consolidated Balance Sheet of H Ltd. and its subsidiary, S Ltd.
as at 31st March, 2020

(2) Minority Interest (W.N 4) 2,96,400
(a) Trade Payables 3 2,98,400
(b) Short term borrowings 3,00,000
Total 42,02,000
II. Assets
(i) Property, Plant and Equipment 4 29,34,000
(ii) Intangible assets (W.N.5) 1,60,000
(2) Current assets
(b) Trade receivables 6 3,95,200
(c) Cash & Cash equivalents (Cash) 7 88,800
Total 42,02,000
Notes to Accounts
` `
1. Share Capital
2,00,000 equity shares of ` 10 each 20,00,000
Reserves 9,60,000
Profit & loss
H Ltd. 2,28,800
S Ltd. (As per W.N. 3) 1,18,400 3,47,200 13,07,200
3. Trade Payables
H Ltd. 1,66,400
S Ltd. (80,000+52,000) 1,32,000 2,98,400
Land and building
H Ltd. 7,20,000
S Ltd. 7,60,000 14,80,000
Plant & Machinery
H Ltd. 9,60,000
S Ltd. (As per W.N. 7) 4,94,000 14,54,000 29,34,000
5. Inventories
H Ltd. 4,56,000
S Ltd. 1,68,000 6,24,000
H Ltd. 1,76,000
S Ltd. 1,60,000 3,36,000
Bills receivable: H Ltd. 59,200 3,95,200
Cash
H Ltd. 56,800
S Ltd. 32,000 88,800
Working Notes:
1. Share holding pattern
Total Shares of S Ltd 80,000 shares
Shares held by H Ltd 64,000 shares i.e. 80 %;
Minority Shareholding 16,000 shares i.e. 20 %
2. Capital profits of S Ltd.
` `
Reserve on 1st October, 2019 (Assumed there is no 4,20,000

movement in reserves during the year and hence balance
as on 1st October, 2019 is same as of 31st March 2020)
Profit & Loss Account Balance on 1st April, 2019 1,20,000
Less: Dividend paid (80,000) 40,000
Profit for year:
Total ` 3,28,000
Less: ` 40,000 (opening balance)
` 2,88,000
Proportionate up to 1st October, 2019 on time basis 1,44,000
(` 2,88,000/2)
Reduction in value of Plant & Machinery (WN 6) (50,000)
5,54,000
Less: Preliminary expenses written off (20,000)
Total Capital Profit 5,34,000
Holding company’s share (5,34,000 X 80%) 4,27,200
Minority Interest (5,34,000 X 20%) 1,06,800
Note: Preliminary expenses as on 1st April, 2019 amounting ` 20,000 have been
written off.
3. Revenue profits of S Ltd.
Profit after 1st October, 2019 (3,28,000 - 40,000)/2 1,44,000
Less 10% depreciation on `5,20,000 for 6 months

Add: Depreciation already charged for 2nd half year on (26,000)
6,00,000 30,000 4,000
1,48,000
Holding company’s share (1,48,000 X 80%) 1,18,400
Minority Interest (1,48,000 X 20%) 29,600
4. Minority interest
Par value of 16,000 shares (8,00,000 X 20%) 1,60,000

Add: 1/5 Capital Profits [WN 2] 1,06,800
1/5 Revenue Profits [WN 3] 29,600
2,96,400
5. Cost of Control
Amount paid for 64,000 shares 12,27,200

Less:
Par value of shares (8,00,000 X 80%) 6,40,000
Capital Profits – share of H Ltd. [WN 2] 4,27,200 (10,67,200)
Cost of Control or Goodwill 1,60,000
6. Calculation of revaluation loss on Plant and Machinery of S Ltd. on 1st October,

2019
`
Value of plant and machinery as on 1st April,2019 6,00,000
Less: Depreciation for the six months (30,000)
Value of plant and machinery as on 1st October, 2019 5,70,000
Less: Plant and machinery valued by H Ltd. on 1st October,2019 (5,20,000)
Revaluation Loss 50,000
7. Value of plant & Machinery of S Ltd. On 31st March,2020
Value of machinery on 1st October, 2019 5,20,000

Less: depreciation for next six month (26,000)
4,94,000
QUESTION 6 (CA INTER JAN 21 EXAM)
On 31st March, 2020 the summarised Balance Sheets of H Ltd. and its subsidiary S Ltd.
stood as follows:
H Ltd. S Ltd.
` `
Shareholders’ Fund
Issued and subscribed
Equity shares of ` 10 each 13,40,000 2,40,000
Reserves and Surplus 4,80,000 1,80,000
Profit & Loss Account 2,40,000 60,000
Secured Loans
12% Debentures 1,00,000 -
Current Liabilities
Bank Overdraft 1,00,000 -
Bills Payable 60,000 14,800
Total 25,20,000 6,16,800
Assets
Non-Current Assets •
(a) Property, Plant & Equipment .
Machinery 7,20,000 2,16,000
Furniture 3,60,000 40,800
(b) Investments
Investments in S Ltd. 3,84,000 -
(19,200 shares at ` 20 each)
Current Assets
Inventories 6,00,000 2,00,000
Trade Receivables 3,00,000 90,000
Bill Receivables 1,00,000 30,000
Cash at Bank 56,000 40,000
Total 25,20,000 6,16,800
The following information is also provided to you:

(a) H Ltd. purchased 19,200 shares of S Ltd. on 1st April, 2019, when the balances of
Reserves & Surplus and Profit & Loss Account of S Ltd. stood at ` 60,000 and
` 36,000 respectively.
(b) Machinery (Book value ` 2,40,000) and Furniture (Book value ` 48,000) of S Ltd were
revalued at ` 3,60,000 and ` 36,000 respectively on 1st April, 2019, for the purpose
of fixing the price of its shares. (Rates of depreciation computed on the basis of
useful lives: Machinery 10%, Furniture 15%).
(c) On 31st March, 2020, Bills payable of ` 12,000 shown in S Ltd.’s Balance Sheet had
been accepted in favour of H Ltd.
You are required to prepare Consolidated Balance Sheet of H Ltd. and its Subsidiary S
Ltd. as at 31st March, 2020.
SOLUTION:
Consolidated Balance Sheet of H Ltd.
and its Subsidiary S Ltd. as at 31st March, 2020

(2) Minority Interest 1,15,560
(3) Non- Current Liabilities
(a) 12% Debentures 1,00,000
(a) Trade Payables 3 3,84,800
(b) Short term Borrowings (Bank overdraft) 1,00,000
Total 28,67,400
II. Assets
(a)
(i) Property, Plant and Equipment 4 14,34,600
(ii) Intangible assets 5 28,800
(2) Current assets
(a) Inventory (6,00,000+2,00,000) 8,00,000

(b) Trade Receivables 6 5,08,000
(c) Cash and Cash equivalents 96,000
Total 28,67,400
Notes to Accounts
` ` `
1. Share Capital Equity
share capital 13,40,000
1,34,000 shares of ` 10 each fully paid up
Reserves 4,80,000
Add: 4/5th share of S Ltd.’s post- 96,000 5,76,000
acquisition reserves (W.N.3)
Profit and Loss Account 2,40,000
Add: 4/5th share of S Ltd.’s post- 11,040 2,51,040
acquisition profits (W.N.4)
8,27,040
3. Trade Payables
H Ltd. 2,00,000
S Ltd. 1,22,000 3,22,000
Bills Payables
H Ltd. 60,000
S Ltd. 14,800 74,800
3,96,800
Less: Mutual Owings (12,000) 3,84,800

4. Property Plant and Equipment Machinery
H Ltd. 7,20,000
S Ltd. 2,40,000
Add: Appreciation 1,20,000
3,60,000
Less: Depreciation (3,60,000 X 10%) (36,000) 3,24,000
Furniture
H Ltd. 3,60,000
S Ltd. 48,000
Less: Decrease in value (12,000)
36,000
Less: Depreciation (36,000 X 15%) 5,400 30,600 14,34,600
Goodwill [WN 6] 28,800
6. Trade receivables
H Ltd. 3,00,000
S Ltd. 90,000 3,90,000
Bills Receivables
H Ltd. 1,00,000
S Ltd. 30,000 1,30,000
Less: Mutual Owings 5,20,000
(12,000) 5,08,000
Working Notes:
1. Pre-acquisition profits and reserves of S Ltd. `

Reserves 60,000
Profit and Loss Account 36,000
96,000
H Ltd.’s = 4/5 (or 80%) × 96,000 76,800
Minority Interest= 1/5 (or 20%) × 96,000 19,200
2. Profit on revaluation of assets of S Ltd.

Profit on Machinery ` (3,60,000 – 2,40,000) 1,20,000
Less: Loss on Furniture `(48,000 –36,000) (12,000)
Net Profit on revaluation 1,08,000
H Ltd.’s share 4/5 × 1,08,000 86,400
Minority Interest 1/5 × 1,08,000 21,600
3. Post-acquisition reserves of S Ltd. 180,000
Total reserves (60,000)
Less: Pre- acquisition reserves 1,20,000
Post-acquisition reserves
H Ltd.’s share 4/5 × 1,20,000 96,000
Minority interest 1/5 × 1,20,000 24,000
4. Post -acquisition profits of S Ltd.

Post-acquisition profits (Profit & loss account balance less
pre-acquisition profits = ` 60,000 – 36,000) 24,000
Add: Excess depreciation charged on furniture @ 15% 1,800

25,800
on ` 12,000 i.e. (48,000 – 36,000)
(12,000)
Less: Under depreciation on machinery @ 10%
13,800)
on ` 1,20,000 i.e. (3,60,000 – 2,40,000)
Adjusted post-acquisition profits
11,040
H Ltd.’s share 4/5 × 13,800
2,760
Minority Interest 1/5 × 13,800
5. Minority Interest
Paid-up value of (24,000 – 19,200) = 4,800 shares 48,000
held by outsiders i.e. 2,40,000 X 20% 19,200
Add: 1/5th share of pre-acquisition profits and reserves 1/5th 21,600
share of profit on revaluation 24,000
1/5th share of post-acquisitionreserves 2,760
1/5th share of post-acquisition profit 1,15,560
6. Cost of Control or Goodwill 3,84,000

Price paid by H Ltd. for 19,200 shares (A)
Less: Intrinsic value of the shares 1,92,000
Paid-up value of shares held by H. Ltd. i.e. 2,40,000 X 80% 76,800
Add: 4/5th share of pre-acquisition profits and reserves
4/5th share of profit on the revaluation Intrinsic (B) 86,400
value of shares on the date of acquisition 3,55,200
Cost of control or Goodwill (A – B) 28,800
NOTES
ACCOUNTING STANDARD 5 263
NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD

ITEMS & CHANGES IN ACCOUNTING POLICIES.
(MUST DO QUESTIONS: 1,2,9,10,14,15,16,17,18,26,27,28,29)
QUESTION NO 1
Akara Ltd. has a vacant land measuring 10,000 sq. mts. which it had no intention to use
in the future. The Board of Directors decided to sell the land to tide over its liquidity
problems. The Company made a profit of Rs. 5 Lakhs by selling the said land. There was
a fire in the Factory and a part of the unused Factory Shed valued at Rs. 4 Lakhs was
destroyed. The Fire loss was set off against the Profit from Sale of Land and a Profit of
Rs. 1 Lakh was disclosed as Net Profit from sale of Assets. Do you agree with the treatment
and disclosure? If not, state your views.
SOLUTION:
1. Analysis: Selling of Land to tide over liquidation problems as well as fire in the Factory
does not constitute ordinary activities of the Company. These items are distinct from
the ordinary activities of the business and which are both material and expected not
to recur frequently or regularly. Thus, these are Extraordinary items.
2. Disclosure: Extraordinary items of the enterprise during the period should be
disclosed in the statement of Profit and Loss as a part of the Net Income. The nature
and amount of each such item should be separately disclosed, in a manner that their
relative significant an defect on the current operating results of the period can be
perceived.
3. Conclusion: Disclosing Net Profit by setting off Fire Losses against Profit from Sale
of Land is not correct. As per AS-5, Profit on Sale of Land, and Loss due to Fire should
be disclosed separately.
QUESTION NO 2
Aashsraya Limited had provided for Doubtful Debts to the extent of Rs. 23 Lakhs 3 years
back. This amount had since been collected in the current financial year. Another Debt
of Rs. 25 Lakhs had been identified to be doubtful during the current financial year. The
Company made an additional provision of Rs. 2 Lakhs during the year. The Profit and Loss
account for the current year disclosed in Debit side-Provision for Doubtful Debts Rs. 2
Lakhs. Give your views on whether the above treatment is proper.
SOLUTION:
1. Analysis: Recovery of Bad Debt and Provision for new Bad Debt are ordinary activities,
but reversals of provisions require separate disclosure under AS-5.
2. Conclusion: The Company’s treatment of netting-off the reversal Rs. 23 Lakhs and
current year additional provision Rs. 25 Lakhs, and showing the Net Debit of Rs. 2
Lakhs in P&L Account, is wrong and improper.
QUESTION NO 3
While finalizing an audit you have to decide whether it is necessary to disclose Receivables
written-off or Advance written back as a separate item in the Financial Statements. How
will you proceed?
SOLUTION:
1. Analysis: Receivables written-off and Advances written back, constitute separate
items of Expenditure and Income respectively and prima facie should not be netted
off.
2. Conclusion: Considering – Materiality aspect as per AS-1, netting off is not possible
and separate disclosure is required in the above case.
QUESTION NO 4
Insurance Claim of Rs. 2 Lakhs received, stands included under Miscellaneous Income.
Comment.
A sum of Rs. 10,00,000 is received from an Insurance Company in respect of a claim for loss
of goods in transit costing Rs. 8,00,000. The amount is credited to Purchases A/c. State
the duty of the Auditor in this regard.
SOLUTION:
1. Analysis: Money received from the Insurance Company is against a specific loss, and it
has to be adjusted only against that loss. It should not be included under Miscellaneous
Income (or netted off against Purchases).
2. Conclusion: The following matters should be reviewed by the Auditor in this regard –
Amount received from Insurance Company should be adjusted against the loss, and the
shortfall (Compensation less Value of Loss) should be charged off to P&L A/c.
QUESTION NO 5
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 Comment.
SOLUTION:
1. Analysis: Embezzlement of Cash during the course of business is a ‘Business Loss’. It
is a business hazard which can occur once in a while.
2. Treatment: Loss due to embezzlement of Cash cannot be merged with any other head.
Being a material item it should to be disclosed under a distinct head in the P&L A/c.
and certainly not under “Salary A/c.”
QUESTION NO 6
A Manufacturing Company has written down its inventories to NRV by Rs.7,00,000 during
the financial year. State whether separate disclosure is required under AS-5.
SOLUTION:
Hint: Refer examples of separate disclosure of Income/Loss from Ordinary Activities
given above.
Conclusion: Writing down of Inventories to NRV is a specific example under AS-5, for items
requiring separate disclosure. Hence, this should be disclosed separately under a distinct
head.
QUESTION NO 7
Agasthya Ltd. makes provision for expenses worth Rs. 7,00,000 for the year ending
31.03.20X1 but the actual expenses during the year ending 31.03.20X2 comes to Rs.9,00,000
against provision made during the last year. State with reasons, whether difference of Rs.
2,00,000 is to be treated as Prior Period Item as per AS-5.
SOLUTION:
• Only errors or omissions in the previous year are recognized in the current year as Prior
Period Items.
• Changes in Estimate is neither an error nor an omission, and hence do not qualify as a
Prior Period Item.
QUESTION NO 8
How will you distinguish a change in an Accounting Estimate from a change in the Accounting
Policy? Does the former need any disclosure?
Give two examples each of Change in Accounting Policy and Change in Accounting Estimate.
SOLUTION:
Particulars Accounting Estimate Accounting Policy

1. Meaning Accounting Estimates refer to A Policy refers to an accounting
Financial Statement items, which principle and the method of
cannot be measured with precision, applying that principle.
but can be estimated based on
informed judgements.
2. Examples (a) Change in the estimate of Provision (a) Change of Method of
for Doubtful Debts on Sundry Depreciation from WDV to SLM
Debtors. and vice-versa.
(b) Change in the estimate of Useful (b) Change in cost Formula
Life of Fixed Assets. in measuring the Cost of
Inventories.
3. Frequency Change in Accounting Estimate is a Change in Accounting Policy is
routine mater in accounting which is infrequent and amounts to almost
substantially based on estimates, e.g. a permanent change in the basis
estimate of Bad Debts is made on the of accounting in the concerned
basis of information at subsequent area. For example, the accounting
date, i.e. insolvency of a Debtor policy for valuation of stock may
known afterwards. be changed from fifo to weighted
average
4 Change A change in Accounting Estimate A change in Accounting Policy is
arises due to – possible only for –
* change in circumstances on which * ensuring statutory compliance,
the estimate was based, or or
* availability of new information, etc. * ensuring compliance with
another AS, or
* more appropriate presentation
of the Financial Statements.
5. Effect The accounting picture may not get A change in Accounting Policy,
substantially altered by the change in generally, has a far reaching,
the Accounting Estimate. material and long-term effect.
6. Disclosure The nature and amount of a change A change in Accounting Policy
in Accounting Estimate which has a which has a material effect
material effect in the current period should be disclosed, along with
or expected material effect in future the impact of and adjustments
should be disclosed in the Financial resulting from that change in
Statements. the current period Financial
Statements.
QUESTION NO 9
Akalya Ltd. provided Rs. 25 Lakhs for inventory obsolescence in the last year. In the
subsequent year, it was determined that some 50% of such stock was usable. The Company
wants to adjust the same through Prior Period Adjustment Account as the provisions was
made in the earlier year. State your views.
SOLUTION:
1. Prior Period Item: Write-back of provision made in respect of inventories in the
earlier year does not constitute Prior Period Adjustment since it is not an error or
omission relating to prior period Financial Statements. It merely involves making
estimate based on prevailing circumstances when these Financial Statements were
being prepared.
2. Revision of Estimate: An estimate may have to be revised – (a) if changes occur in the
circumstances on which the estimate was based (b) or as a result of new information,
more experience or subsequent developments. The revision of the estimate, by its
nature, does not bring the adjustment within the definitions of an Extra-Ordinary
Item or a Prior Period Item.
3. Analysis: In the given case, revision of the estimate of obsolescence does not make
the resulting amount of Rs. 125 Lakhs as a Prior Period Item or an Extra- Ordinary
item.
4. Conclusion: Since the amount involved is material it requires separate disclosure to
understand the financial position and performance of the enterprise.
QUESTION NO 10
Closing Stock for the year ending on 31.3.2014 is Rs. 1,50,000 which includes stock damaged
in a fir in 2012-13. On 31.3.2013, the estimated Net Realisable Value of the damaged stock
was rs. 12,000. The revised estimate of Net Revisable Value included in Closing Stock of
2013-14 is Rs. 4000. Find the value of Closing Stock to be shown in Profit and Loss Account
for the year 2013-14.
SOLUTION:
Assumption: It is assumed that the Closing Stock on 31.03.2014 Rs. 1,50,000 includes
damaged items valued at new NRV Rs. 4000 and such damaged items have already been
written down to their revised NRV Rs. 4000.
Treatment
Total value as given Rs. 50,000

Damaged Stock Rs. 4000 Other Stock Rs.146,000 (Bal. Fig.)
Value = Lower of earlier Carrying Amount Value=Rs.1,46,000 assuming NRV is
Rs. 12,000 or Revised NRV Rs.4,000 greater than the Carrying Amount
Rs. 4,000 Rs. 1,46,000
So, Value of Stock as at 31.03.2014 = Rs. 4,000 (damaged goods) + Rs.1,46,000 (other than
damaged goods) = Rs. 1,50,000
Disclosure: There is no error or omission in the Prior Period, in this case, it is a case
of change in accordance estimates relating to NRV of damaged item. Hence, Stock of
Damaged Item should be written down to its Revised NRV Rs. 4,000 and the difference
(loss) (Rs.12,000 less Rs. 4000) should be written off to P&L, as a separate item, by virtue
of Para 12, 13,1 4 of AS-5 read with valuation principles in AS-2.
QUESTION NO 11
Finished Goods costing worth Rs.10 Lakhs were damaged due to floods in July 2012. These
goods were included in the Closing Stock as on 31st March 2013, at an estimated Realizable
Value of Rs. 4 Lakhs. These goods, ultimately, could be sold for Rs. 3 Lakhs only in the
accounting year 2013-14. The difference of Rs. 1 Lakh is debited to Prior Period Expenditure
in the accounting year 2013-14. Is this treatment correct?
SOLUTION:
Hint: Refer meaning of Prior Period Items and Changes in Accounting Estimates as given
above.
1. Analysis: There is no error or omission in the Prior Period, in this case. It is a case of
change in accounting estimates as to the estimated NRV of damaged item which have
changed when the damaged goods have been finally sold.
2. Conclusion: The difference of Rs. 1 Lakh is not a Prior Period Item. Hence, debiting
it to Prior Period Expenditure in the accounting year 2013-14 is a wrong accounting
treatment.
QUESTION NO 12
Anila Ltd. had to pay delayed cotton clearing charges over and above the negotiated price
for taking delayed delivery of cotton from the Supplier’s Godown. Upto last year, the
Company has regularly included such charges in the valuation of Closing Stock. This charge,
being in the nature of interest, the Company has decided to exclude it from Closing Stock
valuation for the current year. This would result in decrease of profit by Rs. 7.60 Lakhs.
What is the treatment in the Final Statement of Accounts for the current year?
SOLUTION:
1. Principle: Exclusion of Interest in Stock Valuation is in line with AS-2 and would result
in more appropriate preparation of Financial Statements. Hence, this is a change in
accounting policy, and is permissible under AS-5.
2. Conclusion: As per AS-2, the accounting policy adopted for valuation of inventories
including the cost formulate used should be disclosed in the Financial Statements.
3. Draft Disclosure Note: Appropriate disclosure of the change and the amount by
which any item in the Financial Statements is affected by such change, is necessary
as per AS-1 AS-2, and AS-5. Therefore, the under-mentioned note should be given in
the Annual Accounts.
“In compliance with the Accounting Standards issued by the ICAI, delayed cotton charges
which are in the nature of interest have been excluded from the valuation of Closing Stock
unlike preceding years. Had the Company continued the accounting practice followed earlier,
the value of Closing Stock as well as Profit before Tax for the year would have been higher
by Rs. 7.60 Lakhs.”
QUESTION NO 13
Ambica Ltd. prior to receipt of their Management Consultants’ suggestions, has been valuing
its stock consistently by adding Factory Overheads to its Prime Cost. The Consultants had
recommended a better procedure, which would ensure a fair allocation of overheads. The
Company intends to adopt the new procedure but is unwilling to accept the fact that it is a
change in the basis of accounting. Comment.
SOLUTION:
Conclusion: it’s a prior period item because Prime cost never includes factory overheads
QUESTION NO 14
Aparajitha Ltd. was making provisions for Non-Moving Stocks based on no issues for the last
12 months upto the previous financial year. During the current year, based on a technical
evaluation the Company wants to make provisions during 2013 in the following manner -
(a) Total Value of Stock Rs. 3 Crores.
(b) Provision required based on 12 months Rs. 8 Lakhs
(c) Provision required based on technical evaluation Rs. 7.50 Lakhs
You are required to explain:- (1) Does this amount to change in accounting policy? (2) Can
the Company change the method of provision?
SOLUTION:
1. Analysis:
(a) Changes: The Company’s accounting policy requires that provision should be made
in respect of non-moving stocks. The method of estimating the provision can be
changed based on new developments, additional information etc. if a more prudent
estimate of the amount can be made.
(b) Nature: The decision to make provision for non-making stock on the basis of
technical evaluation is only a change in accounting estimate, and does not amount
to a change in accounting policy.
(c) Materiality: The change in the amount of required provision is Rs. 50,000 which
is only 0,2% of the total Stock Value, and is hence not material.
2. Conclusion:
(a) Provision of Rs. 8 Lakhs made by the Company was based on past average and
the Company has been consistently following this accounting policy. Provision
of Rs.7.50 Lakhs is based on a technical evaluation and is also not substantially
different from the past average method. The above change will not result in any
change in accounting policy as there will only be a change in accounting estimate.
(b) The Company should be able to demonstrate reasonably that provision made on
the basis of technical evaluation provides more satisfactory results than the
provision based on average of 12 months issue. In such case, then the Company
can change the method of provision.
QUESTION NO 15
During the financial year 20X1 – 20X2. Aparna Ltd. revised its wages with retrospective
effect from 1st Jan. 20X1. This would cost the Company an additional liability of Rs.
2,50,000 per annum. What is the treatment for the above in the accounts for the year
ending 31.3.20X2?
Discuss the nature of classification and disclosure requirement in the Statement of Profit
and Loss, when a Company pays arrears of bonus for the earlier year(s) as a result of
settlement with workers in the current year.
Arati Ltd. signed an agreement with its Employees Union for revision of wages in June
2013. The wage revision is with retrospective effect from 1.4.2010. The arrear wages
upto 31.3.2013 amounts to Rs. 80 Lakhs. Arrears of wages for the period from 1.4.2012
to 30.6.2012 (being the date of agreement) amounts to Rs. 7 Lakhs. Decide whether a
separate disclosure of arrear wages is required.
SOLUTION:
Analysis – Aparna Ltd.
1. Nature: Payment of Arrears of Bonus for earlier years as a result of settlement of
the dispute in the current year, is a event in the ordinary course and relates to normal
activities of business. Although abnormal in amount of infrequent in nature, it is not an
Extraordinary Item under AS-5.
2. Not a Prior Period Item: This amount is not a Prior Period Item, as it does not arise
out of errors or omission in the preparation of Financial Statements of one of more
prior periods.
3. Treatment: Additional Liability for wages of Rs. 3,12,550 (Rs. 2,50,000 x 15/12 months,
i.e. for fifteen months) should be included in current year’s wages for financial year
20X1-20X2.
4. Disclosure: As per AS-5, when items of income and expenses within profit/loss from
ordinary activities are of such size, the nature or incidence that their disclosure is
relevant to explain the performance of the enterprise for the period, they should be
disclosed separately. Separate disclosure of such expense is required since it may be
relevant to users of Financial Statements, in understanding the financial position and

performance of the enterprise.
Note: The answers to the other questions/parts can be given on similar lines.
QUESTION NO 16
Fuel Surcharge is billed by the State Electricity Board at provisional rates. Final Bill for
Fuel Surcharge of Rs.5.30 Lakhs for the period (Past Seven years) has been received and
paid in February of current financial year. How will you deal with the above in the accounts
for the year ended 31st March?
SOLUTION:
1. Accounting Year: The final bill having been paid in February, should be accounted for
in the Annual Accounts of the Company for the year ended 31st March.
2. Whether Extraordinary item? Power Charges/Fuel Surcharge is an expense arising
from ordinary course of business. Although abnormal in amount or infrequent in
occurrence, such expense does NOT qualify as an Extraordinary Item as per AS-5.
3. Whether Prior Period Item? From the facts given, it is observed that as a result of
error or omission relating to the preparation of the Financial Statements of prior
periods, this material change has arisen in the current period. Hence, it is a ‘Prior
Period Item”.
4. Disclosure:
(a) Under AS-5 this item should be separately disclosed in the current P&L Statement,
together with the nature and amount in a manner that its impact on current profit
or loss can be perceived.
(b) Under AS-1, the Company may disclose an accounting policy that the Power Bill
is accounted for at provisional rates billed by the State Electricity Board and
final bills are received and settled in subsequent years. This will promote better
understanding of Financial Statements.
QUESTION NO 17
Ananya Ltd. as part of overall cost cutting measure, announced a Voluntary Retirement
Scheme (VRS) to reduce its employee strength. During the first half year, the Company
paid a compensation of Rs. 72 Lakhs to those who availed the scheme. The Chief Accountant
has reflected this payment as part of regular Salaries and Wages paid by the Company. Is
this correct?
SOLUTION:
1. Analysis:
(a) VRS Payments as an overall cost cutting measure is covered by the meaning of
‘Ordinary activities” and not extraordinary activities.
(b) The nature and the amount involved make it a material item requiring separate
disclosure.
2. Conclusion:
(a) Disclosure: When items of income and expense within Profit or loss from ordinary
activities are of such size, nature or incidence that their disclosure is relevant to
explain the performance of the enterprise for the period, the nature and amount
of such items should be disclosed separately. Hence the VRS payment, should be
shown separately in the Profit & Loss Account so that its impact on the operating
results during the previous year can be perceived.
(b) Not Salaries and Wages: VRS payments should not be reflected as Salaries, and
Wages paid since they do not form part of regular Salaries and Wages given to
Employees. The treatment given by the Company is not proper.
QUESTION NO 18
Ashraya Ltd. has taken a Group Gratuity Policy from an insurance Company. During a certain
financial year, it received a communication from the said Insurance Company informing
that premium amount for the previous accounting year was less charged by Rs. 75 Lakhs on
account of arithmetical error on the part of Insurance Company. Ashraya Ltd. paid the sum
of Rs. 75 Lakhs during the current accounting year by debiting the same to Prior Expenses.
Explain
SOLUTION:
Prior Period Items: Prior Period Items are income or expenses which arise in the current
period as a result of errors or omission in the preparation of the Financial Statements of
one or more prior periods. In this case, there has been arithmetical mistake of Rs. 75
Lakhs in computing the amount of premium, for the previous accounting year.
Analysis: In this case, there was no error or omission on the part of the Ashraya Ltd. and
the error was on the part of the Insurance Company. But, it is the Management of the
Ashrya Ltd. which is responsible for preparation of Financial Statements.
Conclusion:
(a) The expenditure of Rs. 75 Lakhs is a Prior period Item and should be debited to
Prior Period Expense. Hence, the accounting treatment given by the Management is
appropriate.
(b) The Auditor should ensure that the nature of mistake, i.e. Insurance Premium as well
as amount of Rs. 75 Lakhs has been disclosed separately in such a manner that its
impact on the current Profit or Loss can be perceived.
A claim lodged with the Railways in March, 20X1 for loss of goods of ` 2,00,000 had been
passed for payment in March, 20X3 for ` 1,50,000. No entry was passed in the books of the
Company, when the claim was lodged. Advise P Co. Ltd. about the treatment of the following
in the Final Statement of Accounts for the year ended 31st March, 20X3.
SOLUTION:
In this case it may be assumed that collectability of claim was not certain in the earlier
periods. This is supposed from the fact that only ` 1,50,000 were collected against a claim
of ` 2,00,000. So this transaction can not be taken as a Prior Period Item.
In the light of AS 5, it will be treated as extraordinary item.
QUESTION NO 20
The accounts of a Company for a financial year ending 31st March were adopted by the Board
of Directors on 31st August. The Auditors had also audited the accounts and had signed the
accounts on 1st September. These audited accounts were adopted at the Shareholders
AGM on 30th September.
Later the Directors found that the position reflected in the annual accounts is not reflected
in the books of account and there is a variation in the figure of sales reported in annual
accounts and sales as recorded in books of account. The Directors have decided to rectify
this mistake. State, as an Auditor, whether the Company can re-open and revise the audited
and adopted accounts for the year.
SOLUTION:
1. Rectification after adoption at AGM: As per ICAI’S Guidance Note on Revision/
Rectification of Financial Statements”, the re-opening or rectification of accounts
after they have been adopted at the AGM should not be permitted under any
circumstances.
2. Prior Period Item: As per AS-5, “Prior Period Items are material charges or credits
which arise in the current period as a result of errors or omission in the preparation
of the Financial Statements of one or more periods.” The variation in the figure of
Sales as recorded in the books of account and that given in the Financial Statements
is an error and therefore, is a ‘Prior Period Item”.
3. Disclosure: Prior Period items should be separately disclosed in the current statement
of Profit and Loss together with their nature and amount in a manner that their impact
on the current profit or loss can be perceived.
4. Conclusion: The Company cannot re-open and revise the accounts once adopted at
its AGM. The amount of Sales incorrectly shown in the Financial Statements should
be treated as a Prior Period Item in the current period, and disclosed as per AS-5
requirements.
QUESTION NO 21
Shivani Ltd. purchased Plant and Machinery four years ago and a balance of Rs.6 Lakhs
is still payable to the Suppliers to the same. The Company intends to write back the
said amount in the accounts for the current year ending 31st March since, it has become
time-bared under the Limitation Act 1963. The Company seeks your opinion regarding the
disclosure requirement. Give your advice.
SOLUTION:
1. Time-barred Liability: Liability on account of purchase of Plant and Machinery has
become time-barred as per the provisions of the Limitation Act, 1963. It is not a
Prior Period Item, as it does not arise due to any error or omission in the Financial
Statements of any prior periods.
2. Extra-Ordinary Item: Extraordinary Items are ‘gains or losses which arise from
events or transactions that at distinct from the ordinary activities of the business and
which are both, material and expected not to recur frequently and regularly. These
would also include material adjustments necessitated by circumstances, which though
related to previous periods are determined in the current period. Thus the above item
meets the requirements of the definition of ‘Extra-Ordinary Items’, given in AS-5.
3. Disclosure: As per AS-5, Extra-Ordinary Items should be disclosed in the Statement
of Profit and Loss as a part of the Net Profit or Loss for the period. The nature
and the amount of each Extra-Ordinary Item should be separated disclosed in the
Statement of Profit or Loss in a manner that its impact on current profit or Loss can
be perceived.
4. Capital Nature: However, the gain on account of remission of liability on the purchase
of a Capital Asset is of capital nature, and is hence not considered in the Profit and
Loss Account. It shall be taken to Capital Reserve Account stating the nature of such
gain.
QUESTION NO 22
A suit for damages of Rs. 1 Lakh for breach of contact of sale (breach occurred 3 years
ago) was decreed in favour of Arogya Ltd. in March of the current year. The Company has
included the amount in its Turnover or the financial year ending 31st March Comment on
whether the accounting treatment is correct.
SOLUTION”
1. Whether Turnover? ‘Turnover’ generally includes amount in respect of sales effected
or services rendered by an enterprise. The amount received on account of breach of
contract of sales would not form part of the Turnover.
2. Whether Prior Period or Extraordinary Item? The amount received is not a ‘Prior
Period Item’ as the suit was decreed during the current financial year only. Also,
securing damages for breach of contract cannot be treated as an Extraordinary Item,
as it forms part of ordinary activities of the business.
3. Materiality: The sum received for the purpose of breach of contract of sale seems to
be material.
4. Disclosure: Having regard to the materiality of the amount received, the item may be
disclosed separately in the P&L A/c. A Disclosure may also be made in the Notes to the
accounts in the Financial Statements of the Company.
QUESTION NO 23
Ayushi Ltd. creates a provision for Doubtful Debts 2% of Debtors. However, in the current
financial year, the Company felt that since some Debtors are un-collectible, an additional
provision of Rs. 5 Lakhs should be made to the provision in respect of debts due in the
previous year. What disclosure is required under AS-5 ? Is this an Extraordinary item or
Prior Period Item? Would you answer be different if the provision were changed from 2%to
12% Instead of additional provision of Rs. 5 Lakhs?
SOLUTION:
1. Estimate: Creating a provision for Doubtful Debts at 2% on Debtors is an accounting
estimate. An Accounting Estimate may have to be revised – (a) if there are changes in
circumstances on which the estimate was based, or (b) as a result of new information,
more experience, or subsequent developments.
2. Disclosure of Change in Accounting Estimates: The effect of a change in an accounting
estimate should be included in the determination of Net Profit or Loss in –
(a) The period of the change, if the change affects the period only, e.g. Bad Debts.
(b) The period of the charge and future periods, if the change affects both, e.g.
Useful Life of assets.
3. Conclusion: The above disclosure is sufficient in both cases i.e. additional provision of
Rs.5,00,000 and change in provisioning from 2% to 12%. The change in provisioning is
neither an Extraordinary Item nor a Prior Period Item.
QUESTION NO 24
Last year, Apsara Ltd. has made a provision of 10% of the Contract Value on an ongoing
project. Actual loss on completion of the contract in the next year was 11%. The Company
adjusted the difference in the previous year’s account. Comment.
SOLUTION
1. Accounting Estimate: Provisioning at 10% on the Contract Value constitutes an
accounting estimate. The change in the amount of provision from 10% to 11% constitutes
a change in an accounting estimate under AS-5.
2. AS-5 requirements: Under AS-5, the effect of a change in an accounting estimate
should be included in the determination of Net Profit or Loss in the period of the
change, if the change affects that period only. Adjusting in the difference in the
previous years’ account is not proper.
3. Auditor’s Duty: The Auditor should qualify his report for non-compliance with AS-5
requirements.
QUESTION NO 25
Overseas Oil Corporation’s oil wells were damaged in a war in November. Claim was preferred
with the Insurance Companies for total loss. Pending settlement by the Insurance Companies
neither any provision nor any disclosure has been made by the Company in its accounts.
Comment.
SOLUTION:
1. Nature: In the given case the oil wells have been damaged and the amount of insurance
claim in respect thereof is not determinable till the end of the accounting year. The
resultant loss should be provided for in the accounts. The provision for loss should
be reduced by the probable recovery through insurance claim, provided the claim is
reasonably certain to be received.
2. Disclosure: Also, under AS-5, since the loss is not expected to recur frequently or
regularly, it should be disclosed as an Extraordinary Item.
QUESTION NO 26
During the course of the last 3 years a Company owning and operating Helicopters lost 4
Helicopters. The Company Accountant felt that after the crash, the maintenance provision
created in respect of the respective helicopters was no longer required, and proposed to
write back to P&L A/c. as Prior Period Item. Is he correct in his proposal?
SOLUTION:
1. As per AS-5, Prior Period Items as those material charges or credits which arise in
the current period as a result of errors or omissions in the preparation of Financial
Statements of one or more periods.
2. The write back of the balance of Maintenance provision, no longer required due to
crash of the helicopters, is not a Prior Period Item as there was no effort in the
preparation of the previous periods Financial Statements.
3. The amount so written back should be disclosed as an EXCEPTIONAL Item as per
AS-5.
QUESTION NO 27
The company has to pay delayed cotton clearing charges over and above the negotiated
price for taking delayed delivery of cotton form the Supplier’s Godown Upto 2008-09, the
company has regularly included such charges in the valuation of closing stock. This being in
the nature of interest the company has decided to exclude it from closing stock valuation
for the year 2009-10. This would result into decrease in profit by Rs. 7.60 Lakhs. Comment.
SOLUTION:
AS-5 states that a change in an accounting policy should be made only if the adoption of
a different accounting policy is required by statute or for compliance with an accounting
standard of if it is considered that the change would result in a more appropriate preparation
or presentation of the financial statements of an enterprise. Therefore, the change in the
method of stock valuation is justified in view of the fact that the change is in line with the
recommendations of AS-2 and would result in more appropriate preparation of the financial
statements. As per AS-2 this accounting policy adopted for valuation of inventories including
the cost of formulae used should be disclosed in the financial statements.
Also, appropriate disclosure of the change and the amount by which any item in the
financial statements is affected by such change is necessary as per A”S”-1, AS-2 and AS-5.
Therefore, the under mentioned note should be given in the Annual Accounts.
“In compliance with, the Accounting Standard issued by the ICAI, delayed cotton clearing
charges which are in the nature of interest have been excluded from the valuation of
closing stock unlike preceding years. Had the company continued the accounting practice
followed earlier, the value of closing stock as well as profit before tax for the year would
have been higher by Rs. 7.60 Lakhs”.
QUESTION NO 28 NOV.2014 (4 MARKS)
Give two examples of each of the following items:
Question Example
(i) Change in • Change of Method of Depreciation from WDV to SLM or
Accounting Policy vice versa.
• Change in Cost Formula in measuring the cost of Inventories.
(ii) Change in • Change in the estimate of Provision for Doubtful Debts on
Accounting sundry Debtors.
Estimate • Change in the estimate of useful Life of Fixed Assets
(iii) Extra Ordinary • Attachment of Property of the Enterprise.
Items • An Earthquake etc.
(iv) Prior Period Items • Omission of Income or Expenditure of prior periods
rectified now.
• Incorrect Rate of Depreciation in prior period, rectified
now.
QUESTION NO 29 MAY 2015 4 MARKS
A Company desires to make provision in respect of its non-moving or slow moving items of
stock. The following information is available (amounts Rs. in Lakhs).0
Particulars Current Year Previous Year

Value of Closing Stock 169 105
Provision based on No of Issues during the year 4.50 4.00
Provision based on products technically 5.50 4.25
The Company has been making provision based on number of issued. However, from this
year, the Management has decided to make provision based on technical evaluation.
Explain whether such change will amount to change in ‘Accounting Policy’. Also draw a suitable
Note, if in your view the proposed change requires the same to be given in the Financial
Statement of the Current year.
SOLUTION”
1. Analysis:
(a) Changes: The Company’s accounting policy requires that provision should be made
in respect of non-moving stocks. The method of estimating the provision can be
changed based on new developments, additional information, etc. if a more prudent
estimate of the amount can be made.
(b) Nature: The decision to make provision for non-moving stock on the basis of
technical evaluation is only a change in accounting estimate, and does not amount
to a change in accounting policy.
(c) Materiality: The change in the amount of required provision is Rs. 1,00,000 which
is only 0.59% of the Total Stock Value, and is hence not material.
2. Conclusion:
(a) Change in Provision from Number of issues to technical evaluation will not result
in any change in accounting policy, as there will only be a change in accounting
estimate.
(b) The Company should be able to demonstrate reasonably that provision made on
the basis of technical evaluation provides more satisfactory results than the
provision based on Number of Issues. In such case, the Company can change the
method of provision.

(SELF READING)
QUESTION 1
Fuel surcharge is billed by the State Electricity Board at provisional rates. Final bill for
fuel surcharge of ` 5.30 lakhs for the period October, 20X1 to September, 20X7 has
been received and paid in February, 20X8. However, the same was accounted in the year
20X8-X9. Comment on the accounting treatment done in the said case.
SOLUTION:
The final bill having been paid in February, 20X8 should have been accounted for in the
annual accounts of the company for the year ended 31st March, 20 X8. However, it seems
that as a result of error or omission in the preparation of the financial statements of
prior period i.e., for the year ended 31st March 20 X8, this material charge has arisen in
the current period i.e., year ended 31st March, 20X9. Therefore it should be treated as
‘Prior period item’ as per AS 5. As per AS 5, prior period items are normally included in the
determination of net profit or loss for the current period.
It may be mentioned that it is an expense arising from the ordinary course of business.
Although abnormal in amount or infrequent in occurrence, such an expense does not qualify
an extraordinary item as per AS 5.
QUESTION 2
(i) During the year 20X1-20X2, a medium size manufacturing company wrote down its
inventories to net realisable value by ` 5,00,000. Is a separate disclosure necessary?
(ii) A company signed an agreement with the Employees Union on 1.9.20X2 for revision
of wages with retrospective effect from 30.9.20X1. This would cost the company an
additional liability of ` 5,00,000 per annum. Is a disclosure necessary for the amount
paid in 20X2-X3?
SOLUTION
(I) “When items of income and expense within profit or loss from ordinary activities
are of such size, nature or incidence that their disclosure is relevant to explain the
performance of the enterprise for the period, the nature and amount of such items
should be disclosed separately.”
Circumstances which may require separate disclosure of items of income and expense
in accordance with AS 5 include the write-down of inventories to net realisable value.
(II) It is given that revision of wages took place on 1st September, 20X2 with retrospective
effect from 30.9.20X1. Therefore wages payable for the half year from 1.10.20X2
to 31.3.20X3 cannot be taken as an error or omission in the preparation of financial
statements and hence this expenditure cannot be taken as a prior period item.
Additional wages liability of ` 7,50,000 (for 1½ years @ ` 5,00,000 per annum) should
be included in current year’s wages.
It may be mentioned that additional wages is an expense arising from the ordinary activities
of the company. Such an expense does not qualify as an extraordinary item. However, as per
AS 5, when items of income and expense within profit or loss from ordinary activities are of
such size, nature or incidence that their disclosure is relevant to explain the performance
of the enterprise for the period, the nature and amount of such items should be disclosed
separately.
QUESTION 3
The company finds that the inventory sheets of 31.3.20X1 did not include two pages
containing details of inventory worth ` 14.5 lakhs. State, how you will deal with the following
matters in the accounts of Omega Ltd. for the year ended 31st March, 20X2.
SOLUTION:
AS 5 on ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies’, defines Prior Period items as “income or expenses which arise in the current period
as a result of errors or omissions in the preparation of the financial statements of one or
more prior periods”.
Rectification of error in inventory valuation is a prior period item vide AS 5. Separate
disclosure of this item as a prior period item is required as per AS 5.
QUESTION 4
Explain whether the following will constitute a change in accounting policy or not as per
AS 5.
(i) Introduction of a formal retirement gratuity scheme by an employer in place of ad
hoc ex-gratia payments to employees on retirement.
(ii) Management decided to pay pension to those employees who have retired after
completing 5 years of service in the organisation. Such employees will get pension of
` 20,000 per month. Earlier there was no such scheme of pension in the organisation.
SOLUTION:
As per AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies’, the adoption of an accounting policy for events or transactions that differ in
substance from previously occurring events or transactions, will not be considered as a
change in accounting policy.
(i) Accordingly, introduction of a formal retirement gratuity scheme by an employer in
place of ad hoc ex-gratia payments to employees on retirement is not a change in an
accounting policy.
(ii) Similarly, the adoption of a new accounting policy for events or transactions which
did not occur previously or that were immaterial will not be treated as a change in an
accounting policy.
QUESTION 5 (JAN 2021 5 MARKS)
State whether the following items are examples of change in Accounting Policy / Change
in Accounting Estimates / Extraordinary items / Prior period items / Ordinary Activity :
(i) Actual bad debts turning out to be more than provisions.
(ii) Change from Cost model to Revaluation model for measurement of carrying amount
of PPE.
(iii) Government grant receivable as compensation for expenses incurred in previous
accounting period.
(iv) Treating operating lease as finance lease.
(v) Capitalisation of borrowing cost on working capital.
(vi) Legislative changes having long term retrospective application.
(vii) Change in the method of depreciation from straight line to WDV.
(viii) Government grant becoming refundable.
(ix) Applying 10% depreciation instead of 15% on furniture.
(x) Change in useful life of fixed assets.
SOLUTION:
CLASSIFICATION OF GIVEN ITEMS
Sr. No. Particulars Remarks

(i) Actual bad debts turning out to be Change in Accounting Estimates
more than provisions
(ii) Change from Cost model to Change in Accounting Policy

Revaluation model for measurement
of carrying amount of PPE
(iii) Government grant receivable Extra -ordinary Items
as compensation for expenses
incurred in previous accounting
period
(iv) Treating operating lease as finance Prior- period Items
lease.
(v) Capitalization of borrowing cost on Prior-period Items (as interest on
working capital working capital loans is not eligible
for capitalization)
(vi) Legislative changes having long term Ordinary Activity
retrospective application
(vii) Change in the method of depreciation Change in Accounting Estimates
from straight line to WDV
(viii) Government grant becoming Extra -ordinary Items
refundable
(ix) Applying 10% depreciation instead Prior- period Items
of 15% on furniture
(x) Change in useful life of fixed assets Change in Accounting Estimates
ACCOUNTING STANDARD 17: SEGMENT REPORTING 285
SEGMENT REPORTING
SCOPE AND OBJECTIVE
Nowadays a company cannot survive running with single product. Diversification is a necessity
in today’s market, to secure itself from the attacks and counter attacks of the competitors
on any product. Specially in a multi product company or a company operating in different
geographical areas traditional method of financial disclosures to the shareholders could not
depict the complete picture regarding the risk and returns. Hence, there arises a need for
segmental reporting.
The significance of Segment Reporting is as under:
• Evaluation and understanding of the overall performance of the Company.
• Identification of loss making and profit making units.
• How various products/various areas are exposed to various risk and returns.
• To effectively assess the underlying risks and returns of an enterprises and make more
informed decisions relating to the enterprise.
• To know the return on Capital employed for a segment.
• The shareholders can make correct decisions based on the segmental performance
reported to them.
Types of segments
i) Business Segment:
If a company is dealing in various products/services having different risk-return
profile then we say that the enterprise is having Business segments. A BS is a
distinguishable component of an enterprise that is engaged in providing an individual
product or service or a group of related products or services and that is subjected
to risks and returns that are different from those of other business segments. A
coaching classes is running 3 divisions Commerce, Science and School. Risk and returns
of individual division might be different. This is an example of Business Segment.
Factors to be considered for BS:
i) Nature of product ii) Different process involved iii) Type or class of customers,
iv) Methods of distribution, v) Nature of regularity environment (laws, regulations).
Meaning of Risks and rewards:

If a segment includes two products having different risks and rewards factors then
they are two different segments. For Example: Risk and rewards profile of doing
Broking business is different compared to trading on one’s own account; therefore
they fail under two different segments.
The two factors are very important in the context of interpreting ‘risks and rewards’
under AS-17 for defining BS. The word significant which is added before the term risks
and rewards is very important. The risk and reward of doing business in jeans would
not be significantly different compared to doing business in shirts. Also manufacturing
chairs and tables carry similar risks and returns. If we take the example of hair oil
and cooking oil, they would fall under two different segments, because their nature is
different, the production process is different, the customers are different, channels
are different.
ii) Geographical Segment:

If a Company is providing products/services catering geographically exposed to
different risk and returns then it is a Geographical segment. Again Geographical
Segment is divided as per Location of Assets and Location of Customers.
Geographical Segment can be within a region or within a city, within a country or
scattered in different countries.
Factors to be considered for GS:
(i) Economic and political conditions, (ii) Proximity between operations (iii) Special
risks involved. (iv) Currency risks (v) Exchange control risks.
Advantage of having geographical segment:
Shehnaaz Global products has been in the business of beauty products. The products
were sold in Asia, London and France. Previously the business was doing well. However,
in the last three years there has been a decline in the profitability of the company.
The Company is not able to know the exact reason for the decline in the profitability
because the company use to prepare a consolidate income statement (combining all the
locations). After preparing segment wise profit and loss statement, the company came
to know that the sales in France was declining in the last few years. Now the company
can take corrective actions based on this information.
SOME DEFINITIONS
i) Reportable Segment: An enterprise may be engaged in ‘n’ number of products/areas.
But only some of the segments need to be compulsorily disclosed in the financial
statements. Such mandatory disclosed segments are known as Reportable Segment.
ii) Segment Revenues: If represents revenue of a particular segment.

Segment Revenue = (Direct revenues from outside customers + Inter segment sales +
Allocated income). As segment revenue includes allocable income the basis for sharing
common income between the segments can be agreed between the segments, internal
MIS, transfer-pricing policy.
What about other income: Other income should be included as a part of segment
revenue if they do not fall under the exclusion definition (discussed below) and if it is
essentially operating in nature. For Example: Export incentives are price subsidies for
achieving exports which is indirectly a component of export turnover and should be
included in segment revenue. Some times segment assets are idle, and these may be
used to earn rentals. Such income would be operating income and consequently form
part of segment revenue.
Exclusions: (i) Income like interest, dividend earned unless the operations of the
segment are primarily of a financial nature; (ii) Gains on sale of investments; (iii)
Extraordinary items.
iii) Enterprise Revenues:

Enterprise Revenue = Revenues from eternal customers only as reported in profit and
loss account.
iv) Segment Expenses: It represents expenses of a particular segment.

Segment Expenditure =(Direct expenses related to the unit + Expenses incurred on
dealing with other department +Allocated expenses). It excludes (i) interest expense,
(ii) Capital loss on Sale of Investments, (iii) Corporate expenses like selling and
distribution expenses, office expenses (iv) Tax expenses (v) Extraordinary items.
Why interest is not included in segment expenses: As per ASI-22, interest expense
relating to overdrafts/other borrowings identified to a particular segment should not
be included as a part of segment expense unless the operations of the segment is of
financial nature or unless interest is included as a part of cost of inventories as per
AS-16. Segment results are net of operating results rather than net of financing.
v) Segment Result: (Segment Revenue – Segment Expenses)
vi) Segment Assets: Segment’s own assets used for its operating activities + Allocable
assets including allocable Goodwill. For Example: Milk powder purchased to make
chocolates is a segment asset if not consumed before the reporting period for the
Dairy product segment. Segment revenue generally includes debtors, inventories,
advances, fixed assets.
If item of expense (say depreciation) is included in P&L A/c. for a particular segment,
then the corresponding asset will also go to that segment assets head.
vii) Segment Liabilities: Segment’s own operating liabilities + Share of Common liabilities.
It excludes; (i) Provision for Taxes (ii) Liabilities incurred at Head Office level for
general purpose.
vii) Segment Accounting Policies: AS-1 prescribes accounting policies at the total company
level as a whole. But segment accounting policies are specific accounting policies for
the concerned segment to be reported. Even accounting policies at the enterprise
level may be passed on (allocated to) the segment. For ex. If all the segments use one
particular Asset commonly then, depreciation charged on the enterprise level will be
allocated to different segments.
Examples of segment policies:
Policies relating to (i) Basis of allocation of revenues/expenses between segments, (ii)
Transfer pricing policies.
Identification of Segments:
Identification of Segments mostly depends upon the Organizational and Management
structure. The internal financial reporting to the BOD and CEO provides the best evidence
for the basis of identification of segments.
Deciding between Primary or Secondary Segments

If an enterprise has both business as well as geographical segment then the question arises
as to which is primary and which is secondary segment. This is because the intensity of
disclosures being low for secondary segments and high in the case of primary segments.
Following points are worth noting for such differentiation:
1) Largely it depends upon the information provided by the internal financial reporting to
the BOD and CEO.
2) The important factor for differentiation is “dominant source and nature of risks and
return”.
3) If risks and returns of enterprises are largely affected by the products and services
then business segment will be the primary reporting segment. Here business segment
is the dominant factor.
4) If risks and returns of an enterprise are largely affected by the operations in
different areas then geographical segment will be the primary reporting segment
Here geographical segment is the dominant factor.
5) If suppose the risks and returns of both the business as well as geographical segment
is equally dominant then business segment will be primary segment.
However, if confusion arises as to differentiation between primary and secondary segment,
one has to undertake the facts and circumstances of the case. Ultimately the financial
disclosure should depict true and fair view.
Segment in CFS
There is no such rule that a subsidiary company would constitute a reportable segment.
Segments reportable in the stand-alone financial statements may not be reported at the
CFS level. If there are similar segments in parent and subsidiary then they are treated as
one segment for CFS purpose. Example: If HO and Subsidiary have a common segment say
FMCG, then they are merged of the CFS level.
Reportable Segments
An enterprise may be engaged in ‘n’ number of products/areas. But only some of the
segments need to be compulsorily disclosed in the financial statements. Such mandatory
disclosed segments are known as Reportable Segment.
However following are the tests applied to decide the Reportable Segment:
Test 1: REVENUE TEST
As per Revenue test Reportable Segment is :

Segment Revenue > 10% (Total Revenue of all segments)
Test 2 : RESULT TEST

Segment Result > 10% of Higher of (Total Results of profitable segments OR Total Results
of loss making segments) Loss making segments will be considered in absolute terms.
Test 3: ASSETS TEST

Segment Assets > 10% (Total Segment Assets)
ADDITIONAL CONDITIONS TO BE CONSIDERED
(1) 75% TEST

As per 75% test Reportable Segment is :
If External Revenue of Reportable Segments < 75% (Enterprise Revenue), then
Add more and more segments such that:
External Revenue of Reportable Segments > 75% (Enterprise Revenue)
(2) MANAGEMENTS CHOICE:

As per Management Test Reportable Segment is :
If any of the above tests are not satisfied then management at its discretion choose
Reportable Segment.
(3) If ‘X’ is a Reportable Segment last year, then ‘X’ will continue to be a Reportable
Segment every year irrespective of the above tests gets satisfied or not.
What about Non-Reportable Segments?

Non-Reportable Segments are not reported as such but they are shown as reconciling
segments.
• Disclosure Requirements
Two styles of formats are required for reporting purposes:
Primary Reporting Format

Every enterprises has to report the following as Primary Reporting:
1) Revenue items:
a) Revenues from external customers b) Inter-segment Revenues. c) Depreciation/
impairments/amortizations d) Non-cash expenses other than ‘c’ above e) Segment
Results.
2) Balance Sheet Items:
a) Total Carrying amounts of Segment assets b) Total amounts of Segment Liabilities
c) Tangible and Intangible assets acquired.
3) Other Items:
a) Reconciliation between (Different Segments Vs. Whole Enterprise’s) of Segment
Revenues/Results/Assets/Liabilities.
Secondary Reporting Format

(i) If Business Segment is Primary Segment: Then Geographical segment will be Secondary.
Following is to be reported by the Secondary Segments:
• Segment Revenues form external customers of geographical segment of only
those segments who’s External Revenues is 10% > Total Enterprises Revenues.
• Carrying amount of segment assets, of those segment assets whose assets > total
assets of geographical segments.
• Tangible and intangible assets acquired.
(ii) If Geographical Segment is Primary Segment: Then Business will be Secondary.

Following is to be reported by the Secondary Segments.
• Segment Revenues from external customers of business segment of only those
segments whose External Revenue is 10% > Total Enterprises Revenues.
• Carrying amount of segment assets, of those segment assets whose assets is 10 >
total assets of business segments.
• Tangible and Intangible assets acquired.
(iii) If Geographical Segment based on location of assets is Primary Segment: Then

Geographical Segment based on location of customers will be Secondary.
• Segment Revenues from external customers of business segment of only those
segments who’s External Revenues is 10% > Total Enterprises Revenues.
(iv) If Geographical Segment based on location of customers is Primary Segment: Then

Geographical Segment based on location of assets will be Secondary.
• Carrying amount of segment assets, of those segment assets whose assets is 10%
> total assets of business segments.
• Tangible and Intangible assets acquired.
Other Optional Disclosures
1. Transfer pricing basis.
2. Changes in segment accounting policies.
3. For Business Segments types of products and services.
4. Composition of each Geographical Segment.
Additional disclosures required in respect of secondary segments.

In addition to reporting the aforementioned segment information in respect of primary
segments, enterprises are required to make additional disclosures in respect of secondary
segments. The disclosure required depends on type of primary segment. The principal
disclosure requirements are as below:
Where primary segments are business segments (Para 48)

a) segments revenue from external customers by geographical area based on the
geographical location of its customers, for each geographical segment whose revenue
from sales to external customers is 10% or more of enterprise revenue;
b) the total carrying amount of segment assets by geographical location of assets, for
each geographical segment whose segment assts are 10% or more of the total assets
of all geographical segment; and
c) the total cost incurred during the period to acquire segment assets that are expected
to be used during more than one period (tangible and intangible fixed assets) by
geographic allocation of assets, for each geographical segment whose segment assets
are 0% or more of the total assets of all geographical segments.
Where Primary segments are geographical segments (Para 49).

Where primary segment is geographical segment (whether based on location of assets or
location of customers), the following segment information should be disclosed for each
business segment whose revenue from sales to external customers is 10% or more of the
total assets of all business segments:
a) segment revenue from external customers;
b) the total carrying amount of segment assets; and
the total cost incurred during the period to acquire segment assets that are expected
to be used during more than one period (tangible and intangible fixed assets).
Where Primary segments are geographical segments based on location of assets (Para
50).
If locations of customers are different from location of assets, in addition to disclosures
required pursuant to paragraph 49 above, an enterprise is required to report revenue from
sales to external customers for each customer-based geographical segment whose revenue
from sales to external customers is 10% more of enterprise revenue.
Where Primary segments are geographical segments based on location of customers

(Para 51).
If location of assets are different from location of customers, in addition to disclosures
required pursuant to paragraph 49 above, an enterprise is required to report the following
segment information for each asset based geographical segment whose revenue from sales
to external customers is 10% or more of enterprise revenue or whose segment assets is
10% or more of total enterprise assets.
a) the total carrying amount of segment assets by geographical location of the assets,
and
b) The total cost incurred during the period to acquire segment assets that are expected
to be used during more than one period (tangible and intangible fixed assets) by location
of the assets.
Some Examples of Segmental Disclosure (For Your Knowledge)
Name of the Co. Industry Segments

Dabur India Ltd. Pharma FMCG
Ayurvedic products
Others
SAIL Steel Geographical segment
Bhilai Steel Plant
Durgapur Steel Plant
Rourkela Steel Plant
Bokaro Steel Plant
IISCO Steel Plant
Alloy Steel Plant
Salem Steel Plant
Visvesaraya Steel Plant
Others
Indian Hotels Ltd. Hotel Hotel Services
Air Catering
Lifetree IT Primary reporting

Convergence Ltd. Business segment Software products,
Software development products,
Software maintenance
Secondary reporting
Geographical segment
India
Europe
South Asia
Other part of the world
Tata Chemical Ltd. Fertilizers and Inorganic Chemical
Chemical Fertilizers
Barclays PLC Banking UK Banking
Barklay Card
Barklays Capital
Barclays Wealth
Retail and Commercial Banking
Insurance activities
HO and other operations
Axis Bank Banking Treasury
Corporate Banking
Retail Banking
Others
Tech Mahindra IT and technical Telecom Service provider
services Telecom equipment manufacturer
BPO
Others
Sonata Software IT Geographical Segment
Domestic Services (Sales and Services)
International Services (Sales and
Services)
Religare Ltd. Financial Services Investments and Finance

Financial Advisory Services
Broking
Support Services Fees
Custodian Fees
Life Insurance
ITC Conglomerate Tobacco
Hotels
Agri products
Toilet products
QUESTION NO 1
Rajesh Ltd. has ten segments. The share of revenue, profit/loss and assets of each of these
ten segments is given below. The company has identified segments H,I and J for reporting.
Comment the adequacy of reporting, assuming there are no inter segment revenues.
Segments Revenues Profit (Loss) Assets

A,B,C,D,E,F,G, 5% each=35% 5% each=35% 8%each=56%
H,I, 20% each=40% 25% each=50% 20% each=40%
J 25% 15% 4%
QUESTION NO 2
Information relating to five segments of Sharma Ltd. is as under: (Rs. in lakhs)
Segment A B C D E Total
Segment revenue 150 200 200 50 300 900
Segment results 50 (70) 80 10 (25) 45
Segment assets 40 65 140 20 35 200
The company wishes to know which of the segments need to be reported. Advise.
QUESTION NO 3
ICS Ltd. has the following business / geographical segments. Examine which of these are
reportable Segments under AS-17. (information in Rs.’000)
Segments Revenue Profit and loss Assets

A 9,600 1,750 4,100
B 300 180 450
C 100 70 450
QUESTION NO 4
Larson Ltd. has eight Segments A,B,C,D,E,F,G and H. The following information is available
in relation to these Segments. (information in Rs. lakhs)
Particulars A B C D E F G H Total
Segment Revenue:
External Nil 510 30 20 30 100 40 70 800
Internal 200 120 60 10 nil nil 10 nil 400
Total revenue 200 630 90 30 30 100 50 70 1200
Segment result:
profit(Loss) 10 (180) 30 (10) 16 (10) 10 14 (120)
Segment Assets 45 141 15 33 9 15 15 27 300
Identify which of the above constitute reportable Segment if you were informed that
A,B,C and E were the reported Segments in the last financial year.
QUESTION NO 5
Following is the data regarding six Segments of Garg Ltd. (Rs in lakhs)
Segment A B C D E Total
Segment revenue 150 310 40 30 40 30
Segment results 25 (95) 5 5 (5) 15
Segment assets 20 40 15 10 10 5
The finance director is of the view that it is sufficient that Segments A and B alone are
reported. Advice.
QUESTION NO 6
From the following information of Kristen Ltd. having two primary Segments, prepare a
statement classifying the same under appropriate heads: (Rs. in lakhs)
Particulars Segment Alpha Segment Beta Others

Segment revenue 27,100 3,280
(See note)
Segment profit 4,640 (197)
Capital expenditure 1,300 16
Non cash expense excluding 114 16
depreciation
Liabilities 3,430 770 2,200
Assets 19,450 2,700 6,550
Depreciation 110 15
Dividend income 285

Interest expenses 35
Tax provision 1675
Note: Segment revenue for Alpha includes inter Segment revenue of 50.
QUESTION NO 7
V Ltd. group has three divisions A,B and C. Details of their turnover, results and net assets
are given below (in Rs.’000) prepare a Segmental report.
Division A:
(a) Sales to division B Rs.3050
(b) Local sales Rs.60
(c) Export sales Rs.4090
Division B:
(a) sales to division C Rs.30
(b) export sales to Europe Rs.200
Division C:
(a) Export sales to USA Rs.180
Other information:
Particulars Head office A B C

Profit or loss before tax 160 20 (8)
Re allocated cost from 48 24 24
Head office
Interest costs 4 5 1
Fixed assets 50 200 40 120
Net current assets 48 120 40 90
Long term liabilities 38 20 10 120
QUESTION NO 8
Prepare a Segmental report for publication in Diversifiers Ltd. fro the following details of
the company’ Segment three divisions and he head office.
Rs.’000
Forging shop division
Sales to Bright Bar division 4,575
Other domestic sales 90
Export sales 6,135
10,800
Bright Bar division:
Sales to fitting division 45
Export sales to Rwanda 300
345
Fitting division:
Export sales to Maldives 270
Particulars Head Forging Bright bar Fitting

office shop division division
division Rs.’000 Rs.’000
Rs.’000
Pre tax operating results 240 30 (12)
Head office cost reallocated 72 36 36
Interest costs 6 8 2
Net current assets 72 180 60 135
QUESTION NO 9
Following details are given for Cheer Ltd. for the year ended 31.3.2003:
Rs.‘000 Rs. ‘000

Sales:
Food products 5650
Plastic and packaging 625
Health and scientific 345
Others 162 6782
Expenses:
Food products 3335
Others 200 4182
General corporate expenses 562
Income from investments 132
Interest expenses 65
Identifiable Assets:
Food products 7320
Others 665 10355
General corporate Assets 722
Other information:
(a) Inter Segment sales are as below:
a. Food products 55000
b. Plastic and packaging 72000
c. Health and scientific 21000
d. Others 7000
(b) Operating profit included Rs.33000 on inter Segment sales.
(c) Information about inter Segment expenses are not available.
You are required to prepare a statement showing financial information about Cheer Ltd.
operations in different industry segments.
QUESTION NO 10
Microtech Ltd. produces batteries for scooters, cars, trucks and specialized batteries for
invertors and UPS. Are these products different business segments or a part of the same
business segment.
SOLUTION:
As per AS-17 segments are identified based on different risk/rewards factors. The
company is basically producing batteries. But the batteries are further meant for (i) auto/
vehicle and (ii) invertors/ UPS mostly useful for household purposes i.e. indoors. The risk
and rewards in auto and invertors are significantly different. Auto batteries are affected
by governed policy, road conditions, number of accidents etc. and batteries for invertors/
UPS depends upon number of power suppliers, standard of living corporate use or household
use etc. Hence there are two business segments for Microtech Ltd. ‘Auto batteries’ and
‘batteries for invertors/UPS’.
QUESTION NO 11
If by applying the 10% thresholds, one reportable segment is identified but there are
5 other business/geographical segments which do not meet individually any of the 10%
thresholds what should the enterprise do in this case.
SOLUTION:
In such case the decision regarding reportable segment lies with the management. As per
TEST 5 (Management Choice) if any of the previous tests are not satisfied then management
as its discretion choose reportable segment. Such segments are disclosed under unallocated
column.
QUESTION NO 12
M Ltd. Group has three divisions A, B and C. Details of their turnover, results and net
assets are given below:
Rs. (‘000)
Division A
Sales to B 3050
Other Sales (Home) 60
Export Sales 4090
7200
Division B
Sales to C 30
Export Sales to Europe 200
230
Division C
Export Sales to America 180
Head Division
Office
A B C
Rs. (‘000) Rs.(‘000) Rs. (‘000) Rs. (‘000)
Operating Profit or Loss before Tax 160 20 (8)
Re-allocated cost from Head Office 48 24 24
Interest Costs 4 6 1
Fixed Assets 59 200 40 120
Net Current assets 48 120 40 90
* Long term liabilities does not include interest bearing liabilities.

Prepare a Segmental Report for publication in M Ltd. Group.
SOLUTION:
M Ltd.
Segmental Report
Division Inter- Consolidated

Segment
A B C Eliminations Total
Segment Revenue
Sales:
Domestic 60 - - - 60
Export 4,090 200 180 - 4,470
External Sales 4,150 200 180 - 4,530

Inter-Segment Sales 3,050 30 - (3,080) --
Total Revenue 7,200 230 180 (3,080) 4,530
Segment result (given) 160 20 (8) 172

Head Office expenses (96)
Operating Profit 76
Interest expenses (10)
Net Profit 66
Other Information
120 40 90 250
Segment Assets 320 80 210 610
Unallocated corporate
Assts 98
Segment liabilities 20 10 120 150
Sales Revenue by Geographical Market
Home Sales Export Sales Export to Export to Consolidated

Europe America Total
60 4090 200 180 4,530
QUESTION NO 13
The management of Airways Ltd. provides you the information related to one of its segment.
You are required to calculate Segment assets from the given information Plant, Property,
equipments = Rs. 24,00,000, investments = Rs. 7,00,000, Loans to employees = Rs. 4,00,000.
Accounts receivable =Rs. 5,00,000. DTA = Rs. 45000
SOLUTION:
Segment assets = 24,00,000 + 5,00,000 = 29,00,000
Segment assets includes the operating assets employed for the operations of the segments.
Any loan even to employees also should not be considered segment assets. Investments and
DTA are also not considerable.
QUESTION NO 14
From the following information of a Company having two primary segments, prepare a
statement classifying the same under appropriate heads.
Particulars A (Rs. in B (Rs. in Particulars (Rs. in

Lakhs) Lakhs) Lakhs)
Segment Revenue 27,050 3,280 Dividend Income 285

Inter Segment Revenue 50 - Interest Expenses 35
Segment Profit 4,640 Loss 107 Tax Provision 1,675
Capital Expenditure 1,300 16
Non-Cash Exp. (excl. Dep.) 114 16
Segment Liabilities 3,430 770 Other Liabilities 2,200
Segment Assets 19,450 2,700 Other Assets 6,550
Depreciation on Assets 110 15
SOLUTION
Particulars A B Total
(Rs. in Lakhs) (Rs. in Lakhs) (Rs. in Lakhs)
I. Segment Revenue 27,050 3,280 30,330
Inter Segment Revenue 50 - 50
Sub Total 27,100 3,280 30,380
Less: Inter Segment Revenue (50)
Total 30,330
II. Segment Result 4,640 (197) 4,443
Interest Expenses (35)
Dividend Income 285
Tax Provision (1,675)
Profit after Tax 3,018
III. Other Information
(a) Segment Assets 19,450 2,700 22,150
Unallocated Assets 6,550
(b) Segment Liabilities 3,430 770 5,200
Unallocated Liabilities 6,400
(c) Capital Expenditure 1,300 16 1,316
(d) Depreciation 110 75 185
Non Cash Expenses 114 16 130

(SELF READING)
The accountant of Parag Limited has furnished you with the following data related to its
Business Divisions:
(` in Lacs)
Division A B C D Total
Segment Revenue 100 300 200 400 1,000
Segment Result 45 -70 80 -10 45
Segment Assets 39 51 48 12 150
You are requested to identify the reportable segments in accordance with the criteria laid
down in AS 17.
SOLUTION
As per AS 17 ‘Segment Reporting’, a business segment or geographical segment should be
identified as a reportable segment if:
Its revenue from sales to external customers and from other transactions with other
segments is 10% or more of the total revenue- external and internal of all segments; or
Its segment result whether profit or loss is 10% or more of:
• The combined result of all segments in profit; or
• The combined result of all segments in loss,
Whichever is greater in absolute amount; or
Its segment assets are 10% or more of the total assets of all segments.
On the basis of revenue criteria, segments A, B, C and D - all are reportable segments.
On the basis of the result criteria, segments A, B and C are reportable segments (since
their results in absolute amount is 10% or more of 125 Lakhs).
On the basis of asset criteria, all segments except D are reportable segments.
Since all the segments are covered in at least one of the above criteria, all segments have
to be reported upon in accordance with Accounting Standard (AS) 17.
QUESTION 16
M/s XYZ Ltd. has three segments namely X, Y, Z. The total Assets of the Company are `
10.00 crores. Segment X has ` 2.00 crores, segment Y has ` 3.00 crores and segment Z has
` 5.00 crores. Deferred tax assets included in the assets of each segments are X- ` 0.50
crores, Y— ` 0.40 crores and Z— ` 0.30 crores. The accountant contends that all the three
segments are reportable segments. Comment.
SOLUTION:
According to AS 17 “Segment Reporting”, segment assets do not include income tax assets.
Therefore, the revised total assets are ` 8.8 crores [` 10 crores – (` 0.5 + ` 0.4 + ` 0.3)].
Segment X holds total assets of ` 1.5 crores (` 2 crores – ` 0.5 crores);
Segment Y holds ` 2.6 crores (` 3 crores – ` 0.4 crores); and Segment Z holds ` 4.7 crores (` 5
crores – ` 0.3 crores). Thus all the three segments hold more than 10% of the total assets, all
segments are reportable segments.
QUESTION 17
Microtech Ltd. produces batteries for scooters, cars, trucks, and specialised batteries for
invertors and UPS. How many segments should it have and why?
SOLUTION
In case of Microtech Ltd., the basic product is the batteries, but the risks and returns of
the batteries for automobiles (scooters, cars and trucks) and batteries for invertors and
UPS are affected by different set of factors. In case of automobile batteries, the risks
and returns are affected by the Government policy, road conditions, quality of automobiles,
etc. whereas in case of batteries for invertors and UPS, the risks and returns are affected
by power condition, standard of living, etc. Therefore, it can be said that Microtech Ltd.
has two business segments viz- ‘Automobile batteries’ and ‘batteries for Invertors and
UPS’.
QUESTION 18 (CA INTER JAN 21) (5 MARKS)
The Senior Accountant of AMF Ltd. gives the following data regarding its five segments:
(` in lakhs)
Particulars P Q R S T Total
Segment Assets 80 30 20 20 10 160
Segment Results (190) 10 10 (10) 30 (150)
Segment Revenue 620 80 60 80 60 900
The Senior Accountant is of the opinion that segment “P” alone should be reported. Is
he justified in his view? Examine his opinion in the light of provision of AS-17 ‘Segment
Reporting’.
SOLUTION:
As per AS 17 ‘Segment Reporting’, a business segment or geographical segment should be
identified as a reportable segment if:
(i) Its revenue from sales to external customers and from other transactions with other
segments is 10% or more of the total revenue- external and internal of all segments;
or
(ii) Its segment result whether profit or loss is 10% or more of:
(1) The combined result of all segments in profit; or
(2) The combined result of all segments in loss, whichever is greater in absolute
amount; or
(iii) Its segment assets are 10% or more of the total assets of all segments. Accordingly,
(a) On the basis of revenue from sales criteria, segment P is a reportable segment.
(b) On the basis of the result criteria, segments P & T are reportable segments
(since their results in absolute amount is 10% or more of ` 200 Lakhs).
(c) On the basis of asset criteria, all segments except T are reportable segments.
Since all the segments are covered in at least one of the above criteria, all segments have
to be reported upon in accordance with AS 17. Hence, the opinion of chief accountant that
only segment ‘P’ is reportable is wrong.
NOTES
ACCOUNTING FOR TAXES FOR INCOME
QUESTION NO 1
A company ABC Limited prepares its accounts annually on 31st March. On 1ST April 2001 it
purchases a machine at a cost of Rs.1,50,000. The machine has a useful life of three years
and an expected scrap value of Zero. Although it is eligible for a 100% first year depreciation
allowance for the tax purposes, the straight line method is considered appropriate for
accounting purposes. ABC Limited has profits before depreciation and taxes of Rs.2,00,000
each year and the corporate tax rate is 40per cent each year.
QUESTION NO 2
In above illustration, the corporate tax rate has been assumed to be same in each of the
three years. If the rate of tax is assumed 40%, 35% and 38% respectively, compute the
amount of deferred tax liability?
QUESTION NO 3
A company ABC Limited prepares its accounts annually on 31st March. The company has
incurred a loss of Rs.1,00,000 in the year 2001 and made profits of Rs.50,000 and 60,000 in
year 2002 and 2003 respectively. It is assumed that under the tax laws, loss can be carried
forward for 8 years and tax rate is 40% and at the end of year 2001. It was virtually
certain, supported by convincing evidence, that the company would have sufficient taxable
income in the future years against which unabsorbed depreciation and carry forward of
losses can be set off. It is also assumed that there is no difference between taxable
income and accounting income except that set off of loss is allowed in years 2002 and 2003
for tax purpose.
QUESTION NO 4
Jaishree chemicals Limited showed the accounting income Rs.8,00,000 for the year ended
on 31.03.2002. in computation of accounting income the following data were considered:-
Gain on revaluation of Asset Rs.3,50,000
(Cr. To Profit and Loss account)
Depreciation deducted for accounting

purpose in excess of depreciation deducted
for income tax purpose. Rs.50,000
income tax rate 35%.
Compute the provision for income tax and deferred tax liability or asset.
QUESTION NO 5
Liverpool Limited reported income of Rs.90,000 for the financial year 2001-02. compute
the provision for income tax and deferred tax asset/liability. The following information are
also as follows:-
Rent received in advance Rs.16,000
Income from exempted Govt. Bonds Rs.20,000
Depreciation deducted for income tax purpose
In excess of depreciation reported for accounting income. Rs.10,000
Income tax rate 35%.
QUESTION NO 6
Infosys India Limited prepared the following reconciliation of its pre tax financial statement
income to taxable income for the financial year 2001-2002. reconciliation is given below:-
Pre tax financial income Rs.1,60,000
Non taxable interest received on Govt. Bonds. Rs.(5,000)
Long term loss accrual in excess of deductible amount Rs.10,000
Depreciation in excess of financial statement account Rs.(25,000)
------------
Taxable income Rs.1,40,000
Tax rate is 35%.
Compute current tax and deferred tax asset /liability.
QUESTION NO 7
Liverpool Limited has three financial statement elements for year ended 31.03.2001, the
book value and tax basis value is given below:-
Book value tax value
Equipment 2,00,000 1,20,000
Prepaid insurance 75,000 Nil
Warranty liability 50,000 Nil
Calculate the deferred tax asset/liability. Tax rate is 40%.
QUESTION NO 8
The following particulars are stated in the Balance Sheet of Exe Ltd. as on 31.03.2003:
Rs. in lacs
Deferred tax liability 20.00
Deferred tax assets 10.00
The following transactions are reported during the year 2003-04:

(i) Tax rate 50%
(ii) Repairs to plant and machinery Rs.100.00lakhs was spread over the period 2003-04
and 2004-05 equally in the books. However, the entire expenditure was allowed for
income tax purpose.
(iii) Share issued expenses allowed under section 35D of the income tax act 1961, for the
2003-04 (1/10th of the Rs.50.00lakhs incurred in 1999-2000)
(iv) Donations to private trusts made in 2003-04 Rs. 10.00lakhs
(v) Interest to financial institutions to be accounted in the books on accrual basis, but
actual payment was made on 31-10-2004 Rs. 20 lakhs
(vi) Items disallowed in 2002-03 and allowed for tax purpose in 2003-04 Rs. 10.00
(vii) Depreciation as per book 50 lakhs
(viii) Depreciation for tax purpose Rs. 30lakhs
Indicate clearly the impact of above items in terms of Deferred tax liability /Deferred tax
assets and the balances of Deferred tax liability/Deferred tax assets as on 31.03.2004.
QUESTION NO 9
The income before depreciation and tax of an enterprise for 15 years is Rs 1000 Lakhs per
year, both as per the books of accounts: and for income Tax purposes. The enterprise is
subject to 100 % tax holiday for the first 10 years under section 801A. Tax rate is assumed
to be 30%. At the beginning of the year 1 the enterprises has purchased one machine for
Rs 1500 Lakhs. Residual value is nil. For the accounting purposes, the enterprise follows an
accounting policy to provide depreciation on the machine over ‘15 years on SLM basis. For
the tax purpose, the depreciation rate relevant to the machine is 25°fo on WDV bases.
Ignore the provisions of section 11 5JB(MAT) in this regard. Calculate Deferred Tax Asset
or Liability.
ASI on Accounting Standard issued & ICAI
QUESTION NO 10
As a statutory auditor for the year ended 31st March 2002, how would you deal with the
following: S Ltd., a listed company, was incurring heavy losses since the last several years
and the industry in which it was functioning was not expected to perform better in the next
few years? While finalising the accounts for the year ended 3jst March 2002, the CFO of
the company decided to create a deferred tax asset for the tax benefits that would arise
in future years from the earlier years losses that had remained- unabsorbed in Income Tax.
Auditing Nov 2002
ANSWER
In the absence of virtual certainty, the creation of deferred tax asset would be incorrect
and would therefore require qualification by the auditor or an adverse opinion as appropriate
in respect of the true and fair view. Also the auditor will have to qualify compliance with
mandatory accounting standards, namely AS-22 ‘
QUESTION NO 11
Your client is a full tax free enterprise for the first 10 years and is in the second year of
operations. Depreciation timing difference resulting in a deferred tax liability in year I &
2 is Rs. 100 million and Rs. 200 million respectively. From the 3rd year and onwards it is
expected that the timing difference would reverse each year by Rs. 5 million. Determine
deferred tax liability at the end of 2nd year and the charge to the P&L a/c if any. Assume
tax rate @35%.
RTP Nov 2002
ANSWER
In case of tax free companies, o deferred tax liability is recognised in respect of timing
differences that originate and reverse in the tax holiday period. Deferred tax liability (or
asset) is created in respect of timing difference that originates in a tax holiday period but
are expected to reverse after the tax holiday period. For this purpose, adjustments are
done in accordance with the FIFO method. Of the Rs. 100 million, Rs 10 million will reverse
in the tax holiday period. Therefore, deferred tax liability will be created on P.s. 60 million
at the tax rate of 35%, i.e., Rs. 20 million. In the second year, the entire Rs. 200 million will
reverse only after the tax holiday period therefore, deferred tax charge in the profit and
loss account will be Rs. 70 million (200*35%) and deferred tax liability in the balance sheet
will be P.s. 91 million (70 +21).
QUESTION NO 12
From the following details of ABC Ltd. for the year ending 31.3.2003, calculate the deferred
tax asset/liability and tax expense for the year having regard to the requirements of
AS-22:
Book Profit as per MAT Rs. ‘000

Accounting Profit 700
Taxable Profit 800
Tax Rate 100
MAT Rate 35%
MAT Rate 10%
QUESTION NO 13
Trimurthy Pan Masala was incurring heavy losses in the last several years since it could not
withstand the competition in the market. The state in which the Company had its Registered
Office and also its major sales, had moved a bill in the State Assembly to ban manufacture
and sale of all kinds of Pan Masalas in the State. While finalizing the accounts for the year
ended 31 .3.2004, the CFO of the Company created a Deferred Tax Assets for the tax
benefits that vouid arise in future year from the earlier years losses that had remained
unabsorbed in Income-Tax. Comment.
(Nov 2004 - Final -Audi ting-4 Marks)
ANSWER
As per Para 17 of AS 22, where an enterprise has unabsorbed depreciation or carry forward
of losses under tax laws, DTA should be recognized only to the extent that there is virtual
certainty supported by convincing evidence that sufficient future taxable income will be
available against which such DTA can be realized. In this case, the Company may not be in
a position to carry out its activities on account of the possible banning of its Pan Masala
Sales, by the State’s legislation. Since the Virtual Certainty condition of Para 1 7 and ASI
-9 is not satisfied. The Company should not recognize any D’I’A on the unabsorbed losses.
Hence the Company’s accounting treatment is improper.
QUESTION NO 14
Company A has a block of assets with a written down value of Rs. 100,000 on April 1, 20X I
for tax purposes. The book value of the assets for accounting purposes is also Rs. 100,000:
The assets are depreciated on written down value basis at 25 per cent per annum for both
accounting and tax purposes. Of the entire block, assets costing Rs. 5,000 on April 1, 20X1,
were sold for P.s. 10,000 on March 31, 20X3. Compute the deferred tax asset/liability
assuming tax rate of 40 per cent.
QUESTION NO 15
Million Ltd. is a full tax free enterprises for the first 10 year of its existence and
is in the second year of its operations. Depreciation timing difference resulting
in a deferred tax Liability in years I and 2 is Rs.200 lakhs and 400 lakhs
respectively. From the 3rd year onwards, it is expected that the timing difference would
reverse each year by Rs.10 lakhs .Assuming tax rate 35% find out the deferred tax liability
at the end of the second year and any charge to the profit and loss account.
May - 2006, Marks 4
QUESTION NO 16
Classify the following as “Timing Difference” and “Permanent Difference”

(i) Interest on loans payable to Scheduled Banks not paid during current
year but accounted as an expenditure in the books.
(ii) Difference in Depreciation rates as per Income Tax and as per Books.
(iii) Unabsorbed losses.
(iv) Revaluation Reserve. RTP Nov.-2006,
ANSWER
Classification of the items into timing and permanent differences is as under
(i) Interest paid to bank is a tithing difference.
(ii) Difference in depreciation rates is a timing difference.
(iii) Unabsorbed losses is a timing difference.
(iv) Revaluation Reserve is a permanent difference.
QUESTION 17
From the given information, you are required to compute the Deferred Tax Assts and
Deferred Tax Liability for Ramanujam Limited as on 31st March 2014. The tax rate applicable
is 35%.
(i) The Company has charged Depreciation of Rs. 742,900 in its Books of Accounts while
as per Income Tax computation, the Depreciation available to the Company is Rs.
8,65,400.
(ii) The Company has made provision for doubtful Debts for Rs. 54,300 during the year.
(iii) The Company has debited Share issue Expenses of Rs. 6,23,500 which will be available
for deduction under the Income Tax Act from the next year.
(iv) The expenses of Rs. 7,84,500 has been charged to Profit and Loss Account which are
disallowed under the Income Tax Act.
(v) The Company has made Donation of Rs. 2,00,000 which has been debited to Profit and
Loss account and only 50% thereof will be allowed as deduction as per Income Tax Law.
SOLUTION
Computation of DTA/DTL (Rs.)
Description Adj. Net Amt. Nature of Treatment DTA/DTL

Diff. at 35%
Profit before Tax XXX
as per Books
Add: Dep. as per 7,42,900 Difference (42,875)
Books originating in
the current
year, So
Less: Dep. as per (8,05,400) (1,22,500) Timing Crete DTL
IT
Add: Provision (54,300) Timing Create DTA 19,005

disallowed in IT
Add: Share Issue
Exp. Disallowed 6,23,500 Timing Difference 2,18,225
U/s 35D originating in
the current
year, so
Create DTA
Add: Expense 7,84,500 Permanent Ignored NA

Disallowed under
IT (assumed to be
permanent diff)
Add: Donation 1,00,000 Permanent Ignored NA
(50%of 2 Lakh)
Total Income XXX
QUESTION NO 18(CA FINAL NOV.2016) (SAME AS Q.12)
From the following details of ABC Ltd. for the year ending 31.3.2003, calculate the deferred
tax asset/liability and tax expense for the year having regard to the requirements of AS-
22:
Book Profit as per MAT Rs. ‘000
Accounting Profit 700
Taxable Profit 800
Tax Rate 100
MAT Rate 35%
MAT Rate 10%

QUESTION 19 (CA INTER NOV 20)(5MARKS)
From the following details of Aditya Limited for accounting year ended on 31st March,
2020:
Particulars `
Accounting profit 15,00,000
Book profit as per MAT 7,50,000
Profit as per Income tax Act 2,50,000
Tax Rate 20%
MAT Rate 7.5%
Calculate the deferred tax asset/liability as per AS 22 and amount of tax to be debited to
the profit and loss account for the year.
SOLUTION
Tax as per accounting profit 15,00,000x20% = ` 3,00,000
Tax as per Income-tax Profit 2,50,000x20% = ` 50,000
Tax as per MAT 7,50,000x7.50% = ` 56,250
Tax expense= Current Tax + Deferred Tax
` 3,00,000 = ` 50,000+ Deferred tax
Therefore, Deferred Tax liability as on 31-03-2020
= ` 3,00,000 – ` 50,000 = ` 2,50,000
Amount of tax to be debited in Profit and Loss account for the year 31-03-2020 Current
Tax + Deferred Tax liability + Excess of MAT over current tax
= ` 50,000 + ` 2,50,000 + ` 6,250 (56,250 – 50,000) = ` 3,06,250
Omega Limited is working on different projects which are likely to be completed within
3 years period. It recognises revenue from these contracts on percentage of completion
method for financial statements during 20X0-20X1, 20X1-20X2 and 20X2-20X3 for
` 11,00,000, ` 16,00,000 and ` 21,00,000 respectively. However, for Income-tax purpose,
it has adopted the completed contract method under which it has recognised revenue of
` 7,00,000, ` 18,00,000 and ` 23,00,000 for the years 20X0-20X1, 20X1-20X2 and 20X2-
20X3 respectively. Income-tax rate is 35%. Compute the amount of deferred tax asset/
liability for the years 20X0-20X1, 20X1- 20X2 and 20X2-20X3.
SOLUTION
Omega Limited.
Calculation of Deferred Tax Asset/Liability
Year Accounting Taxable T i m i n g Deferred

Income Income Difference Tax Liability
(balance) (balance)
20X0-20X1 11,00,000 7,00,000 4,00,000 1,40,000

20X1-20X2 16,00,000 18,00,000 2,00,000 70,000
20X2-20X3 21,00,000 23,00,000 NIL NIL
48,00,000 48,00,000
QUESTION 21 (CA INTER JAN 21 EXAM) (5 MARKS)
(SIMILAR TO QUESTION 8)
The following particulars are stated in the Balance Sheet of HS Ltd. as on 31 -3-2019 :
Particulars (` in lakhs)
Deferred Tax Liability (Cr.) 60.00
Deferred Tax Assets (Dr.) 30.00
The following transactions were reported during the year 2019-20 :
Depreciation as per accounting records 160.00
Depreciation as per income tax records 140.00
Items disallowed for tax purposes in 2018-19 but allowed in 2019-20 20.00
Donation to Private Trust 20.00
Tax rate 30%
There were no additions to fixed assets during the year. You are required to show the
impact of various items on Deferred Tax Assets and Deferred Tax Liability as on 31-3-
2020 as per AS-22.
SOLUTION
D. Impact of various items in terms of AS 22 deferred tax liability/deferred tax asset
(1) Difference in Depreciation- Generally, written down value method of depreciation
is adopted under income Tax Act which leads to higher depreciation in earlier years
of useful life of the asset in comparison to later years. It is timing difference for
which reversal of Deferred tax liability is required.
Reversal of DTL= ` (160 – 140) Lakhs X 30% = ` 6 Lakhs
(2) Disallowances, as per IT Act of earlier years- Due to disallowance tax payable for
the earlier years was higher on this account. It is responding timing difference which
required Reversal of Deferred tax assets.
Reversal of Deferred tax assets = ` 20 Lakhs X 30% = ` 6 Lakhs
(3) Donations to private trusts is not an allowable expenditure under IT Act. It is
permanent difference. Hence, no reversal of tax is required.
Ultra Ltd. has provided the following information:

Depreciation as per accounting records =` 4,00,000
Depreciation as per tax records =` 10,00,000
Unamortized preliminary expenses as per tax record = ` 30,000
There is adequate evidence of future profit sufficiency. How much deferred tax asset/
liability should be recognized as transition adjustment when the tax rate is 50%?
SOLUTION
Calculation of difference between taxable income and accounting income
Particulars Amount (`)
Excess depreciation as per tax ` (10,00,000 – 4,00,000) 6,00,000
Less: Expenses unamortized in tax records (30,000)
Timing difference 5,70,000
Tax expense is more than the current tax due to timing difference.
Therefore deferred tax liability = 50% x 5,70,000 = ` 2,85,000
QUESTION 23 (CA INTER JULY 21) 5 MARKS
(SIMILAR TO QUESTION 8)
The following particulars are stated in the Balance sheet of Depp Limited as on 31st March,
2020:
(` In lakhs)
Deferred Tax Liability (Cr.) 28.00
Deferred Tax Assets (Dr.) 14.00
The following transactions were reported during the year 2020-2021:

(i) Depreciation as per books was ` 70 Lakhs whereas Depreciation for Tax purposes was
` 42 Lakhs, There were no additions to Fixed Assets during the year.
(ii) Expenses disallowed in 2019-20 and allowed for tax purposes in 2020-21 were ` 14
Lakhs.
(iii) Share issue expenses allowed under section 35 (D) of the Income Tax Act, 1961 for
the year 2020-21 (1/10th of 70.00 lakhs incurred in 2019-20)
(iv) Repairs to Plant and Machinery were made during the year for ` 140.00 Lakhs and was
spread over the period 2020-21 and 2021-22 equally in the books, However, the entire
expenditure was allowed for income-tax purposes in the year 2020-21
Tax Rate to be taken at 40%
You are required to show the impact of above items on Deferred Tax Assets and Deferred
Tax Liability as on 31st March, 2021,
ACCOUNTING STANDARD 4: EVENTS AFTER BALANCE SHEET 321
EVENTS AFTER BALANCE SHEET
QUESTION NO 1 (NOV 2009)
In preparing the Financial Statements of Santhanam Ltd. for the year ended 31st March,
2009, you come across the following features. State with reasons, how you would deal with
them in the Financial Statements -
The Company invested Rs. 560 lakhs in April, 2009 in the acquisition of another Company
doing similar business, the negotiations for which had started during the current Financial
Year.
ANSWER
The acquisition of the other company is a transaction which consummated only in April 2009
and hence it will not appear in the balance sheet as on 31.3.09. However, as per para 15 of
AS - 4, disclosures should be made in the report of Board of Directors.
QUESTION NO 2 (JUNE 2009)
While preparing its final accounts for the year ended 31st March 2009, a company made a
provision for bad debts @ 5% of its total debtors. In the last week of February 2009, a
debtor for 2 lakhs had suffered heavy loss due to earthquake. The loss was not covered by
any insurance policy. In April 2009, the debtor became bankrupt. Can the cokmpany provide
for full loss arising out o finsolvency of debtor in teh final accounts for year ended 31st
March, 2009 ?
ANSWER
According to AS-4 “ contingencies and Events occurring after the Balance Sheet date”,
assets and liabilities should be adjusted for events occurring after the balance sheet date,
that provide additiional evidence to assist the estimation of amounts relating to conditions
existing at the balance sheet date.
In the given case, the earthquake had occurred before 31.3.09 and the loss was confirmed
by bankruptcy after 31.3.2009, So, full provision for insolvency loss should be made in final
accounts for year ended 31.3.09.
QUESTION NO 3 (FINAL NOV 2003)
While preparing its final accounts for the year ended 31st March 2003, a company made
a provision for the 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 a earthquake; the loss was
not covere by any insurance policy. In April 2003, the debtor became bankrupt. Can the
company provide for the full loss arising out
ANSWER
As per the AS - 4, adjustments of assets and liabilities is to be made for events occuring
after Balance Sheet date that provide some additional evidence that assist in estimation of
amounts relating to conditions existing on Balance Sheet date.
QUESTION NO 4 (FINAL MAY 1995)
State your view on the following :
After the close of the accounting year of XYZ Co. Ltd., there was a severe earthquake. As
a result of which, a portion of the building and the rolling mill was destroyed. The extent
of the damage was beyond repair. The company’s resources were inadequate to fund the
replacement of the assets so destroyed.
ANSWER
The auditor should assess whether the ‘going concern’ assumption still holds valid. If it
is valid then it is non-adjusting event. AS-4, requires disclosures of nature of event, an
estimate of financial impact or statement that such an estimate cannot be made in the
report of approving authority.
QUESTION NO 5 (AUDITING MAY 2000)
As an auditor state your views on the following situations :

VV Ltd. had announced a voluntary retirement plan for its employees on January 2000. The
Scheme is scheduled to close on June 30, 2000. The Scheme envisaged an initial lumpsum
payment of a maximum of Rs. 2 lacs, 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. Total lump-sum payment, for these employees, would be Rs. 250 lacs,
and the aggregate of future payments, to them would amount to Rs. 1,500 lacs. However,
payment had not been made to the employees under the Scheme, up to March 31, 2000,
nor the company made any provision in its accounts, towards any liability under the Scheme.
Comment.
ANSWER
AS 4 will apply. Adjusting event. Appropriate provision to be made.
QUESTION NO 6 (AUDITING)
The account of ABC Ltd., for the year ended 31st March, 2001, was approved by the BOD
of the Co. 19th May 2001. The Director recommenced a dividend @ 10%. However, the
Directors feel that this need not be disclosed in the accounts of the Co. for the year
ended 31st March 2001 since it does not provide any additional information to the condition
prevailing on the date BalanceSheet i.e. on 31st March 2001. Do you agree with the BOD of
ABC Ltd. ?
ANSWER
If an item is statutorily required to be shown in the financial statements, assets and
liabilities are adjusted for such events occurring after the balance sheet date. But as per
recent amendment proposed dividend is now not a liability but it should be disclosed in
notes to accounts only.
QUESTION NO 7 (FINAL NOV 2005)
ABC Ltd. could not recover Rs. 10 lakhs from a debtor. The company is aware that the
debtor is in great financial difficulty. The accounts of the company were finalised for the
year ended 31.3.2005 by making a provision @ 20% of the amount due from the said debtor.
The debtor became bankrupt in April, 2005 and nothing is recoverable from him.
Do you advise the company to provide for the entire loss of Rs. 10 lakhs in the books of
account for the year ended 31st March, 2005
ANSWER
As per AS 4 ‘Contingencies and Events occurring after the Balance Sheet Date’, adjustments
to assets and liabilities are required for events occurring after the balance sheet date
that provide additional information materially affecting the determination of the amounts
relating to conditions existing at the balance sheet date.
In the given case, bankruptcy of the debtor in April, 2005 and consequent non-recovery
of debt is an event occurring after the balance sheet date which materially affects the
determination of profits for the year ended 31.3.2005. Therefore, the company should be
advised to provide for the entire amount of Rs. 10 lakhs according to para 8 of AS 4.
QUESTION NO 8
A limited company closes its accounting year on 30th June 1998. Accounts for that period
were considered and approved by BOD on 20th August 1998. The company was engaged in
laying pipeline for an oil company, deep beneath the earth. While doing the boring work,
on 1.9.1998, it had met a rocky surface for which it was estimated that there would be
an extra cost to the tune of Rs. 80 lacs. Explain how the item will be dealth with for the
accounting year ended 30th June 1998.
ANSWER
In this case the incidence, which was expected to push up cost, became evident after
the date of approval of the balance sheet. So that was not any ‘event occurring after the
balance sheet date’. If the cost-push up is believed to be material, this may be mentioned
in the Directors’ Repot. (Even if the contract is profitable after taking into account the
additional cost, it woule be prudent to disclose the fact of increase in the cost of the
contract in the directors’ report).
QUESTION NO 9
In preparing the financial statement 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.
The company invested Rs. 100 lakhs in April, 1998 in the acquisition of another company
doing similar business, the negotiations for which had started during the financial year.
ANSWER
Non-adjusting event. Disclosure needed
STUDY MATERIAL QUESTIONS
QUESTION 1
In X Co. Ltd., theft of cash of ` 5 lakhs by the cashier in January, 20X1 was detected
only in May, 20X1. The accounts of the company were not yet approved by the Board of
Directors of the company.
Whether the theft of cash has to be adjusted in the accounts of the company for the year
ended 31.3.20X1. Decide.
SOLUTION:
As per AS 4 (Revised) ‘Contingencies and Events occurring after the Balance Sheet Date’, an
event occurring after the balance sheet date may require adjustment to the reported values
of assets, liabilities, expenses or incomes.
If a fraud of the accounting period is detected after the balance sheet date but before
approval of the financial statements, it is necessary to recognise the loss amounting
` 5,00,000 and adjust the accounts of the company for the year ended 31st March, 20X1.
QUESTION 2
An earthquake destroyed a major warehouse of ACO Ltd. on 20.5.20X2. The accounting

year of the company ended on 31.3.20X2. The accounts were approved on 30.6.20X2. The
loss from earthquake is estimated at ` 30 lakhs. State with reasons, whether the loss due
to earthquake is an adjusting or non-adjusting event and how the fact of loss is to be
disclosed by the company.
SOLUTION
AS 4 (Revised) “Contingencies and Events Occurring after the Balance Sheet Date”, states
that adjustments to assets and liabilities are not appropriate for events occurring after
the balance sheet date, if such events do not relate to conditions existing at the balance
sheet date. The destruction of warehouse due to earthquake did not exist on the balance sheet
date i.e. 31.3.20X2. Therefore, loss occurred due to earthquake is not to be recognised in the
financial year 20X1-20X2.
The fact of earthquake together with an estimated loss of ` 30 lakhs should be disclosed
in the report of the approving authority for financial year20X1-X2 to enable users of
financial statements to make proper evaluations and decisions.
QUESTION 3
A company has filed a legal suit against the debtor from whom ` 15 lakh is recoverable as
on 31.3.20X1. The chances of recovery by way of legal suit are not good as per legal opinion
given by the counsel in April, 20X1. Can the company provide for full amount of ` 15 lakhs
as provision for doubtful debts? Discuss.
SOLUTION
As per AS 4 (Revised) “Contingencies and Events Occurring After the Balance Sheet Date”,
assets and liabilities should be adjusted for events occurring after the balance sheet date
that provide additional evidence to assist the estimation of amounts relating to conditions
existing at the balance sheet date.
In the given case, company should make the provision for doubtful debts, as legal suit has been
filed on 31st March, 20X1 and the chances of recovery from the suit are not good. Though, the
actual result of legal suit will be known in future yet situation of non-recovery from the
debtors exists before finalisation of financial statements. Therefore, provision for doubtful
debts should be made for the year ended on 31st March, 20X1.
QUESTION 4
In preparing the financial statements of R Ltd. for the year ended 31st March, 20X1, you
come across the following information. State with reasons, how you would deal with this in
the financial statements:
The company invested 100 lakhs in April, 20X1 before approval of Financial Statements by
the Board of directors in the acquisition of another company doing similar business, the
negotiations for which had started during the year.
SOLUTION
AS 4 (Revised) defines “Events Occurring after the Balance Sheet Date” as those significant
events, both favourable and unfavourable, that occur between the balance sheet date and
the date on which the financial statements are approved by the Approving Authority in the
case of a company. Accordingly, the acquisition of another company is an event occurring
after the balance sheet date.
However, no adjustment to assets and liabilities is required as the event does not affect the
determination and the condition of the amounts stated in the financial statements for the
year ended 31st March, 20X1. The disclosure should be made in the report of the approving
authority of those events occurring after the balance sheet date that represent material
changes and commitments affecting the financial position of the enterprise, the investment
of ` 100 lakhs in April, 20X1 for the acquisition of another company should be disclosed
in the report of the Approving Authority to enable users of financial statements to make
proper evaluations and decisions.
QUESTION 5
A Limited Company closed its accounting year on 30.6.20X1 and the accounts for that
period were considered and approved by the board of directors on 20th August, 20X1. The
company was engaged in laying pipeline for an oil company deep beneath the earth. While
doing the boring work on 1.9.20X1 it had met a rocky surface for which it was estimated
that there would be an extra cost to the tune of ` 80 lakhs. You are required to state with
reasons, how the event would be dealt with in the financial statements for the year ended
30.6.20X1.
SOLUTION
AS 4 (Revised) on Contingencies and Events Occurring after the Balance Sheet Date defines
‘events occurring after the balance sheet date’ as ‘significant events, both favourable and
unfavourable, that occur between the balance sheet date and the date on which financial
statements are approved by the Board of Directors in the case of a company’. The given case
is discussed in the light of the above-mentioned definition and requirements given in AS 4
(Revised). In this case the incidence, which was expected to push up cost, became evident
after the date of approval of the accounts. So it is not an ‘event occurring after the balance
sheet date’.
QUESTION 6
While preparing its final accounts for the year ended 31st March, 20X1 a company made a
provision for bad debts @ 5% of its total trade receivables. In the last week of February,
20X1 a trade receivable for ` 2 lakhs had suffered heavy loss due to an earthquake; the
loss was not covered by any insurance policy. In April, 20X1 the trade receivable became a
bankrupt. Can the company provide for the full loss arising out of insolvency of the trade
receivable in the final accounts for the year ended 31st March, 20X1?
SOLUTION
As per Accounting Standard 4, Assets and Liabilities should be adjusted for events occurring
after the balance sheet date that provide additional evidence to assist estimation of
amounts relating to conditions existing at the balance sheet date.
So full provision for bad debt amounting to ` 2 lakhs should be made to cover the loss arising
due to the insolvency in the Final Accounts for the year ended 31st March, 20X1. It is because
earthquake took place before the balance sheet date.
Had the earthquake taken place after 31st March, 20X1, then this would have been treated
as non-adjusting event and only disclosure required as per AS 4 (Revised), would have been
sufficient.
QUESTION 7
During the year 20X1-20X2, Raj Ltd. was sued by a competitor for ` 15 lakhs for
infringement of a trademark. Based on the advice of the company’s legal counsel, Raj Ltd.
provided for a sum of ` 10 lakhs in its financial statements for the year ended 31st March,
20X2. On 18th May, 20X2, the Court decided in favour of the party alleging infringement of
the trademark and ordered Raj Ltd. to pay the aggrieved party a sum of ` 14 lakhs. The
financial statements were prepared by the company’s management on 30th April, 20X2, and
approved by the board on 30th May, 20X2.
SOLUTION
As per AS 4 (Revised), adjustments to assets and liabilities are required for events occurring
after the balance sheet date that provide additional information materially affecting the
determination of the amounts relating to conditions existing at the balance sheet date.
In the given case, since Raj Ltd. was sued by a competitor for infringement of a trademark
during the year 20X1-X2 for which the provision was also made by it, the decision of the Court
on 18th May, 20X2, for payment of the penalty will constitute as
An adjusting event because it is an event occurred before approval of the financial statements.
Therefore, Raj Ltd. should adjust the provision upward by ` 4 lakhs to reflect the award
decreed by the Court to be paid by them to its competitor.
Had the judgment of the Court been delivered on 1st June, 20X2, it would be considered
as an event occurring after the approval of the financial statements which is not covered
by AS 4 (Revised). In that case, no adjustment in the financial statements of 20X1-X2 would
have been required.
QUESTION 8
The financial statements of Alpha Ltd. for the year 20X1-20X2 were approved by the
Board of Directors on 15th July, 20X2. The following information was provided:
(i) A suit against the company’s advertisement was filed by a party on 20th April,20X2
claiming damages of ` 25 lakhs.
(ii) The terms and conditions for acquisition of business of another company had been
decided by March, 20X2. But the financial resources were arranged in April, 20X2
and amount invested was ` 50 lakhs.
(iii) Theft of cash of ` 5 lakhs by the cashier on 31st March, 20X2, was detected on 16th July,
20X2.
With reference to AS 4, state whether the above mentioned events will be treated as
contingencies, adjusting events or non-adjusting events occurring after the balance
sheet date.
ANSWER
(i) Non-adjusting event: Suit filed against the company is a contingent liability but it
was not existing as on date of balance sheet date as the suit was filed on 20th April
after the balance sheet date. As per AS 4, ‘Contingencies’ is restricted to conditions or
situations at the balance sheet date, the financial effect of which is to be determined
by future events which may or may not occur. Hence, it will have no effect on financial
statement and will be a non- adjusting event.
(ii) Adjusting event: In the given case, terms and conditions for acquisition of business
were finalized before the balance sheet date and carried out before the closure of the
books of accounts but transaction for payment of financial resources was effected in
April, 20X2. Hence, necessary adjustment to assets and liabilities for acquisition of
business is necessary in the financial statements for the year ended 31st March 20X2.
(iii) Non-adjusting event: Only those events which occur between the balance sheet date
and the date on which the financial statements are approved, may indicate the need
for adjustments to assets and liabilities as at the balance sheet date or may require
disclosure. In the given case, as the theft of cash was detected on 16th July, 20X2 ie
after approval of financial statements, no adjustment is required.
QUESTION 9 (JULY 21 5 MARKS)
Surya Limited follows the financial year from April to March It has provided the following
information.
(i) A suit against the Company’s Advertisement was filed by a party on 5th April, 2021,
claiming damages of ` 5 lakhs,
(ii) Company sends a proposal to sell an immovable property for ` 45 lakhs in March 2021,
The book value of the property ` 30 lakhs as on year end date, However, the deed was
registered on 15th April.2021
(iii) The terms and conditions for acquisition of business of another company have been
decided by the end of March 2021, but the financial resources were arranged in April
2021, The amount invested was ` 50 Lakhs,
(iv) Theft of cash amounting to ` 4 lakhs was done by the Cashier in the month of March
2021 but was detected on the next day after the Financial Statements have been
approved by the Directors.
Keeping in view the provisions of AS-4, you are required to state with reasons whether the
above events are to be treated as Contingencies, Adjusting Events or Non-Adjusting Events
occurring after Balance sheet date.
BUSINESS COMBINATION (ACCOUNTING STANDARD 14) 331
BUSINESS COMBINATION
(ACCOUNTING STANDARD 14)
(Dear Student, this topic does not include internal reconstruction as we have covered it
separately
QUESTION NO 1(AS-14)
What are the conditions, which, according to Accounting Standard 14, must be satisfied
for ‘Amalgamation in the nature of Merger’ and ‘Amalgamation in the nature of Purchase’?
OR
What are the conditions, which, according to Accounting Standard 14, must be satisfied for
‘Amalgamation in the nature of Merger’?
OR
Distinguish between amalgamation by merger and by purchase as per AS 14.
ANSWER:
Amalgamation in the Nature of Merger: An amalgamation in the nature of merger should
satisfy all the following conditions:
All the assets and liabilities of the transferor company become the assets and liabilities of
the transferee company.
Shareholders holding at least 90% of the face value of the equity shares of the transferor
company become equity shareholders of the transferee company (shares already held by
the transferee company or its subsidiaries or their nominees are not to be considered for
the purpose of 90%).
Purchase consideration is discharged wholly by the issue of equity shares in the transferee
company; however, cash may be paid in respect of any fractional shares.
The business of the transferor company is intended to be carried on, after the amalgamation,
by the transferee company.
No adjustment is intended to be made to the book values of the assets and liabilities of
the transferor company when they are incorporated in the financial statements of the
transferee company except to ensure uniformity of accounting policies.
Amalgamation in the Nature of Purchase: An amalgamation should be considered to be an
amalgamation in the nature of purchase, when any one or more of the conditions specified
above is not satisfied.
What are the methods of accounting for amalgamation? In what circumstances which
method should be applied?
ANSWER:
Methods of Accounting for Amalgamations: There are two main methods of accounting for
amalgamations.
Pooling of interests method: An amalgamation in the nature of merger should be accounted
for-under the pooling of interests method.
Purchase method: An amalgamation in the nature of purchase should be accounted for under
the purchase method.
Explain pooling of interest method of amalgamation.
ANSWER:
The Pooling of Interests Method: It requires that-
• Assets and liabilities of the transferor-company should be recorded at their existing

carrying amounts, i.e., they are to be taken at their book values.
• Reserves (whether capital or revenue or arising on revaluation) of the transferor
company should be recorded at their existing carrying amounts and in the same form,
i.e., balance of general reserve should be carried as revaluation reserve, balance of
revaluation reserve is carried as revaluation reserve etc.
• Difference of the share capital issued and other consideration paid to the transferor
company over and above its own share capital should be adjusted in reserves.
• Balance of the Profit and Loss Account of the transferor company should be aggregated
with that of the transferee company or transferred to the General Reserve.
• If transferor and transferee companies have conflicting accounting policies, a uniform
set of accounting policies should be adopted, the effects on the financial statements
of any changes in accounting policies should be reported in accordance with AS 5.
QUESTION NO 4 (AS-14)
Explain purchase method of amalgamation.

ANSWER:
The Purchase Method:
It requires that-
• Assets and liabilities of the transferor company should be either incorporated at their
existing carrying amounts or consideration should be allocated to individual identifiable
assets and liabilities on the basis of their fair values at the date of amalgamation.
• Reserves (whether capital or revenue or arising on revaluation) of the transferor
company, other than the statutory reserves, should not be included in the financial
statements of the transferee company.
• Any excess of the consideration over the value of the net assets should be recognised
as goodwill arising on amalgamation. If the consideration is lower than the value of the
net assets acquired, the difference should be treated as Capital Reserve.
• Goodwill arising on amalgamation should be amortised to income on a systematic basis
not exceeding five years unless a somewhat longer period can be justified.
• Identity of statutory reserve should be maintained, if required, by an equal charge
to the Amalgamation Adjustment Account, which is presented under the head
“Miscellaneous expenditure’ and is adjusted against the balance of statutory reserves
when their separate identities are no longer required.
What are the discloser requirements prescribed under AS-14?

OR
Briefly describe the discloser requirements for amalgamation including additional discloser,
if any, for different methods of amalgamation as per AS-14?
ANSWER
Discloser Requirements: AS-14 requires following disclosers:
Common discloser: For all amalgamations, the following disclosures should be made:
Names and general nature of business of the amalgamating companies;
Effective date of amalgamation for accounting purposes;
Method of accounting used to reflect the amalgamation; and
Particulars of the scheme sanctioned under a statute.
Additional Discloser: In addition to above following should also be disclosed where-
1. Pooling of interest method is followed,

• Description and number of shares issued, together with % of each company’s

equity shares exchanged to effect the amalgamation;
• Amount of any difference between the consideration and the value of net
identifiable assets acquired, and the treatment thereof
2. Purchase method is followed,
Consideration for the amalgamation and a description of the consideration paid or
contingently payable; and
Amount of any difference between the consideration and the value of net identifiable
assets acquired, and the treatment thereof including the period of amortisation of
any goodwill arising on amalgamation.
Briefly describe the disclosure requirements for Amalgamation including additional

disclosure, if any, for different methods of amalgamation as per AS-14.
ANSWER
The disclosure requirements for amalgamations have been prescribed in paragraphs 43 to
46 of AS 14 on Accounting for Amalgamation.
For all amalgamations, the following disclosures should be made in the first financial
statements following the amalgamation:
• names and general nature of business of the amalgamating companies;

• the effective date of amalgamation for accounting purpose;
• the method of accounting used to reflect the amalgamation; and
• particulars of the scheme sanctioned under a statute.
For amalgamations accounted under the pooling of interests method, the following, additional
disclosures should be made in the first financial statements following the amalgamation:
(i) Description and number of shares issued, together with the percentage of each
company’s equity shares exchanged to effect the amalgamation; and
(ii) the amount of any difference between the consideration and the value of net identifiable
assets acquired, and the treatment thereof. For amalgamations, accounted under the
purchase method, the following additional disclosures should be made in the first
financial statements following the amalgamation;
(i) Consideration for the amalgamation and a description of the consideration paid or
contingently payable; and
(ii) the amount of any difference between the consideration and the value of net
identifiable assets acquired, and the treatment thereof including the period of
amortisation of any goodwill arising on amalgamation.
QUESTION NO 7
Briefly explain the methods of accounting for amalgamation as per Accounting Standard-14.
ANSWER
As per AS 14 on ‘Accounting for Amalgamations’, there are two main methods of accounting
for amalgamations:
(i) The Pooling of interest Method

Under this method, the assets, liabilities and reserves of the transferor company are
recorded by the transferee company at their existing carrying amounts (after making
the necessary adjustments).
If at the time of amalgamation, the transferor and the transferee companies have
conflicting accounting policies, a uniform set of accounting policies is adopted following
the amalgamation. The effects on the financial statements of any changes in accounting
policies are reported in accordance with AS 5 on ‘Net Profit or Loss for the Period,
Prior Period items and Changes in Accounting Policies’.
(ii) The Purchase Method
Under the purchase method, the transferee company accounts for the amalgamation
either by incorporating the assets and liabilities at their existing carrying amounts or
by allocating the consideration to individual identifiable assets and liabilities of the
transferor company on the basis of their fair values at the date of amalgamation. The
identifiable assets and. liabilities may include assets and liabilities not recorded in the
financial statements of the transferor company.
Where assets and liabilities are restated on the basis of their fair values, the
determination of fair values may be influenced by the intentions of the transferee
company, amalgamation.
BASIC QUESTIONS FROM THE POINT OF VIEW ACCOUNTING
QUESTION NO 8 (NET ASSET METHOD)
The financial position of two companies Hari Limited and Vayu Limited as on 31st March
2002 was as under:
Hari Limited Vayu Limited

Rs. Rs.
Assets:
Goodwill 50,000 25,000
Building 3,00,000 1,00,000
Machinery 5,00,000 1,50,000
Stock 2,50,000 1,75,000
Debtors 2,00,000 1,00,000
Cash at bank 50,000 20,000
Preliminary expenses 30,000 10,000
13,80,000 5,80,000
Liabilities:
Share capital:
9% preference shares of Rs.100 each 1,00,000
10% preference shares of Rs.100 each 1,00,000
Retirement Gratuity fund 50,000 20,000
Sundry creditors 1,30,000 80,000
13,80,000 5,80,000
Hari Limited absorbs Vayu Limited on the following terms:
1. 10% Preference shareholders are to be paid by issue of 9% preference shares of Hari

Limited.
2. Goodwill of Vayu Limited is valued at Rs.50,000, Buildings are valued at Rs.1,50,000
and the machinery at Rs.1,60,000.
3. Stock to be taken over at 10% less value and reserve on bad and doubtful debts to be
created @ 7.5%.
4. Equity shareholders of Vayu Limited will be issued equity shares @ 5% premium.
Prepare necessary ledger accounts to close the books of Vayu Limited and show the acquisition
entries in the books of Hari Limited. Also draft the Balance Sheet after absorption as at
31st March 2002.
QUESTION NO 9 (NET PAYMENT METHOD)
Wye Ltd acquires the business of Z Limited. Whose Balance Sheet on 31stDecember, 1996
is as follows:
Liabilities Amount Assets Amount

Share capital divided into shares Goodwill 2,00,000
of Rs.100 each:- Land and building 4,00,000
6% preference shares capital 4,00,000 Plant and machinery 6,00,000
Equity share capital Patents 50,000
Capital reserve 8,00,000 Stock 1,50,000
Profit and Loss account 1,00,000 Book debts 1,80,000
6% debentures 50,000 Cash at bank 70,000
Interest outstanding on above 2,00,000 Underwriting commission 40,000
Workmen’s compensation reserve 12,000
- expected Liability Rs.5000 8,000
Trade creditors 1,20,000
16,90,000 16,90,000
Wye Limited was to take over all assets (except cash) and Liabilities (except doe interest
due on debentures) and to pay following amounts:
(a) Rs.2,00,000 7% debentures (Rs.100 each) in Wye Limited for the existing debentures
in Z Limited; for the purpose, each debenture of Wye Limited is to be treated as
worth Rs.105
(b) For each preference shares in Z Limited Rs.10 in cash and one 9% preference shares
of Rs.100 each in Wye Limited
(c) For each equity share in Z Limited Rs.20 in cash and one equity share in Wye Limited
of Rs.100 each having market value of Rs.140.
(d) Expenses of Liquidation of Z Limited are to be reimbursed by Wye Limited to the
extent of Rs.10,000. Actual expenses amounted to Rs.12,500.
Wye Limited valued land and building at Rs.5,50,000, plant and machinery at Rs.6,50,000
and patents at Rs.20,000.
QUESTION NO 10 (NET ASSET METHOD)
The Indo-Gulf Company Limited sells its business to the Continental Company Limited as on
December 31,1984 on which date its Balance Sheet was as under:
Liabilities Rs. Assets Rs.

Paid up capital: Freehold property 1,50,000
2,000 shares of Rs.100 each 2,00,000 Goodwill 50,000
Debentures 1,00,000 Plant and tools 83,000
Trade creditors 30,000 Stock 35,000
Reserve fund 50,000 Bills receivable 4,500
Profit and Loss account 20,000 Sundry debtors 27,500
Cash at bank 50,000
4,00,000 4,00,000
The Continental Company Limited agreed to take over the assets (exclusive of cash at bank
and goodwill) at 10 percent less than the book value, to pay Rs.75,000 for goodwill and to
take over the Debentures.
The purchase consideration was to be discharged by the allotment to the Indo-Gulf Company
Limited of 1,500 shares of Rs.100 each at a premium of Rs.10 per share and the balance in
cash.
The cost of the liquidation amounted to Rs.3,000. Show the necessary accounts in the
books of the Indo-Gulf Company Limited and show the necessary journal entries recording
the transactions in the books of the Continental Company Limited.
QUESTION NO 11 (NET PAYMENT METHOD)
X Limited agreed to acquire the business of Y Limited as on December 31 1995. The

summarized Balance Sheet of Y Limited on that date was as follows:

Share capital in fully paid up Goodwill 1,00,000
shares of Rs.10 each 6,00,000 Land and Building and Plant 6,40,000
General Reserve 1,70,000 Stock in trade 1,68,000
Profit and Loss a/c 1,10,000 Debtors 36,000
6% Debentures 1,00,000 Cash 56,000
Creditors 20,000
10,00,000 10,00,000
The amount payable by X Limited was agreed as follows:
1. A Cash payment equivalent to Rs.2.50 for every Rs.10 share in Y Limited.

2. The issue of such an amount of fully paid 5 per cent Debentures of X Limited at 96 per
cent as is sufficient to discharge the 6 per cent Debentures of Y Limited at a premium
of 20 per cent.
3. The issue of 90,000 Rs.10 shares fully paid in X Limited having an agree value of Rs.15
per share.
When computing the agreed consideration, the directors of X Limited valued the land,
building and plant at Rs.12,00,000, the stock in trade at Rs.1,42,000 and debtors at their
face value subject to an allowance of 5 per cent to cover doubtful debts. The cost of
liquidation (met by X) of Y Limited comes to Rs.5000. Close the books of Y Limited and pass
the journal entries required in the books of X Limited.
QUESTION NO 12 (C.A.FINAL NOV 1995) (16 MARKS)
(NET PAYMENT METHOD)

With a view to reducing establishment expenses and generally to effect economy on working;
Divya Limited agreed to take over the Pranav Limited as a going concern both companies
engaged in the same trade.
Divya Limited was to pay the Debentures and liabilities of Pranav Limited and take over the
assets the consideration being the issue by Divya Limited of 4,00,000 fully paid shares of
Rs.10 each and the payment of Rs.3,00,000 in cash to the Pranav Limited. Divya Limited was
to pay the liquidation expenses, which amounted to Rs.1,40,000.
The balances in the books of the respective companies as on the date of absorption are
given hereunder:
Divya Pranav Divya Pranav

(Rs.) (Rs.) (Rs.) (Rs.)
Authorized capital:
Divya Limited 20,00,000
shares of Rs.10 each
Pranav Limited 7,50,000
shares of Rs.10 each
Issued capital 1,50,00,000 50,00,000
Unpaid calls 50,000 10,000
10% Debentures 50,00,000 10,00,000
Land and building 1,03,33,000 35,68,200
Goodwill 30,00,000 5,00,000
Sundry debtors & creditors 7,24,000 3,98,400 8,34,200 4,36,200
Bank balances 16,84,200 2,00,000
Stock 17,92,600 7,85,200
Plant & machinery 38,76,800 16,43,900
Bills receivable 3,62,100
Profit and Loss a/c 9,88,500 2,69,500
2,18,22,700 69,05,700 2,18,22,700 69,05,700
Assume that the absorption was duly effected but that the unpaid calls and a book debt of
Rs.40,000 due to the Pranav Limited proved irrecoverable.
Prepare the Realisation account and Members account in the books of Pranav Limited and
the Balance Sheet of Divya Limited after the absorption.
CALCULATION OF PURCHASE CONSIDERATION
QUESTION NO 13 (FRACTIONAL SHARES) STUDY MATERIAL
A Limited agreed to absorb B Limited on 31st March 1999, whose balance sheet stood as
follows:
Liabilities Rs. Assets Rs.

Share capital Fixed assets 7,00,000
80,000 shares of Rs.10 each fully paid 8,00,000 Investments
Reserve and surplus Current assets
General reserve 1,00,000 Loans and advances
Secured loan Stock in trade 1,00,000
Unsecured loan Sundry debtors 2,00,000
Current liabilities & Provisions
Sundry creditors
1,00,000
10,00,000 10,00,000
The consideration was agreed to be paid as follows:
(a) A payment in cash of Rs.5 per share in B Limited and

(b) The issue of shares of Rs.10 each in A Limited on the basis of 2 equity shares (valued
at Rs.15) and one 10% cum, preference share (valued at Rs.10) for every five shares
held in B Limited.
The whole of the share capital consists of shareholdings in exact multiple of five except
the following holding.
Chopra 116
Karki 76
Amar singh 72
Malhotra 28
Other individuals 8 (eight members holding one share each)
--------
300
--------
It was agreed that A Limited will pay in cash for fractional shares equivalent at agreed
value of shares in B Limited i.e. Rs.65 for five shares of Rs.50 paid. Prepare a statement
showing the purchase consideration receivable in shares and cash.
QUESTION NO 14 (16 MARKS)
The summarized Balance Sheets of R Limited and P Limited for the year ending on 31.3.2000
are as under:
R Limited P Limited R Limited P Limited

Rs. Rs. Rs. Rs.
Equity share Fixed 55,00,000 27,00,000
capital (in shares of assets
Rs.10 each) 24,00,000 12,00,0000 Current 25,00,000 23,00,000
8% pref. Share assets
capital (in shares of
8,00,000
Rs.10 each)
10% pref. Share
capital (in shares of 4,00,000
Rs.10 each)
Reserves 30,00,000 24,00,000
80,00,000 50,00,000 80,00,000 50,00,000
The following information is provided:

(i)
R Limited P Limited
Rs. Rs.
Profit before tax 10,64,000 4,80,000
Taxation 4,00,000 2,00,000
Preference dividend 64,000 40,000
Equity dividend 2,88,000 1,92,000
(ii) The equity shares of both companies are quoted in the market. Both the companies are
carrying on similar manufacturing operations.
(iii) R Limited proposes to absorb P Limited as on 31.3.2000. The terms of absorption are
as under:
(a) Preference shareholders of P Limited will receive 8% preference shares of R Limited
sufficient to increase the income of preference shareholders of P Limited by 10%.
(b) The equity shareholders of P Limited will receive equity shares of R Limited on the
following basis:
(i) The equity shares of P Limited will be valued by applying to the earnings per share
of P Limited.75% of price earnings ratio of R Limited based on the results of 199-
2000 of both the companies.
(ii) The market price of equity shares of R Limited is Rs.40 per share.
(iii) The number of shares to be issued to the equity shareholders of P Limited will be
based on the above market value.
(iv) In addition to equity shares, 8% preference shares of R Limited will be issued
to the equity shareholders of P Limited to make up for the loss in income arising
from the above exchange of shares based on the dividends for the year 19999-
2000.
(v) The assets and liabilities of P Limited as on 31.3.2000 are revalued by professional
valuer as under:
Increased by Decreased by
Rs. Rs.
Fixed assets 1,00,000
Current assets 2,00,000
Current assets 40,000
For the next two years no increase in the ratio of equity dividend is expected.
You are required to;
Set out in detail the purchase consideration
QUESTION NO 15
Channai Limited and Kolkata Limited have agreed that Chennai Limited will take over the
business of Kolkata Limited with effect from 31st December 2001 it is agreed that:
(i) 10,00,000 shareholders of Kolkata Limited will receive shares of Chennai Limited.
The swap ratio is determined on the basis of 26 weeks average market prices of
shares of both the companies. Average prices have been worked out at Rs.50 and
Rs.25 for the shares of Chennai Limited and Kolkata Limited respectively.
(ii) In addition to (i) above shareholders of Kolkata Limited will be paid cash based on
the projected synergy that will arise on the absorption of the business of Kolkata
Limited by Chennai Limited. 50% of the projected benefits will be paid to the
shareholders of Kolkata Limited.
The projection has been agreed upon by the management of both the companies:
Year 2002 2003 2004 2005 2006

Benefit 50 75 90 100 105
(in Rs. Lakhs)
The benefit is estimated to grow at the rate of 2% from 2007 onwards.

It has been further agreed that a discount rate of 20% should be used to calculate the
cash that the holder of each share of Kolkata Limited will receive:
(i) Calculate the cash that holder of each share of Kolkata Limited will receive.
(ii) Calculate the total purchase consideration.
QUESTION NO 16
The Massive Company Ltd. was incorporated on 1st July 2014 for the purpose of acquiring
North Ltd. South Ltd. and West Ltd.
The summarized balance sheets of these North Ltd. South Ltd. West Ltd.
companies as on 30th June 2014 are as
Assets
Tangible fixed assets – at cost less 5,00,000 4,00,000 3,00,000
Goodwill Nil 60,000 Nil
Other assets 2,00,000 2,80,000 85,000
7,00,000 7,40,000 3,85,000
North Ltd. South Ltd. West Ltd.

Liabilities
Issued ordinary share capital shares of Rs.10 4,00,000 5,00,000 2,50,000
P&L A/c. 1,50,000 1,10,000 60,000
10% Debentures 70,000 Nil 40,000
Trade Payables 80,000 1,30,000 35,000
7,00,000 7,40,000 3,85,000
Average annual profits before

Debentures interest (July 2013 to June 2014 90,000 1,20,000 50,000
inclusive)
Professional valuation of tangible assets on 6,20,000 4,80,000 3,60,000
30th June 2014
(1) The directors in their negotiations agreed that (i) the recorded goodwill of South
Ltd. is valueless (ii) the ‘other assets’ of North Ltd. are worth Rs. 30,000 (iii) the
valuation of 30th June 2014 in respect of tangible fixed assets should be accepted, (iv)
these adjustments are to be made by the individual company before the completion of
the acquisition.
(2) The acquisition agreement provides for the issue of 12 per cent unsecured Debentures
to the value of the net assets of companies North Ltd., South Ltd., and West Ltd. and
for the issuance of 10 nominal value ordinary shares for the capitalized average profit
of each acquired company in excess of net assets contributed. The capitalisation rate
is established at 10 per cent.
You are required to calculate purchase consideration and show the purchase consideration
as discharged.
Distinguish between Amalgamation, Absorption and External Reconstruction of Company.
Basis Amalgamation Absorption External

Reconstruction
Meaning Two or more In this case, an In this case, a newly
companies are existing company formed company
wound up and a new takes over the takes over the
company is formed business of one business of an
to take over their or more existing existing company.
business. companies.
Minimum number of At least three At least two Only two companies

Companies involved companies are companies are are involved.
involved. involved.
Number of new Only one resultant No new resultant Only one resultant
resultant companies company is formed. company is formed. company is formed.
Two companies are Under this case
wound up to form a newly formed
a single resultant company takes over
company. the business of an
existing company.
Objective Amalgamation Absorption is done External

is done to cut to cut competition reconstruction is
competition and and reap the done to reorganise
reap the economies economies in large the financial
in large scale. scale. structure of the
company.
Example A Ltd. and B Ltd. A Ltd. takes over B Ltd. is formed

amalgamate to form the business of to take over the
C Ltd. another existing business of an
company B Ltd. existing company A
Ltd.
QUESTION 18 (C A FINAL NOV 2008 16 MARKS)
System Ltd. and HRD Ltd. decided to amalgamate as on 01.04.2008. Their Balance Sheets
as on 31.03.2008 were as follows:
(in ‘000)
Particulars System Ltd. HRD Ltd.

Source of Funds:
Equity share capital (Rs.10 each) 150 140
9% preference share capital (Rs. 100 each) 30 20
Investment allowance reserve 5 2
Profit and Loss Account 10 6
10% Debentures 50 30
Sundry Creditors 25 15
Tax provision 7 4
Equity Dividend Proposed 30 28
Total 307 245
Application of Funds: 50 50
Building 80 70
Plant and Machinery 40 25
Investments 45 35
Sundry Debtors 36 40
Stock 40 25
Cash and Bank 6 --
Preliminary Expenses 307 245
Total
From the following information, you are to prepare the draft Balance Sheet as on 01.04.2008
of a new company, intranet Ltd. which was formed to take over the business of both the
companies and took over all the assets and liabilities:
(i) 50% Debentures are to be converted into Equity Shares of the New Company.
(ii) Out of the investments, 20% are non-trade investments.
(iii) Fixed Assets or systems Ltd. were valued at 10% above cost and that or HD Ltd. at
5% above cost.
(iv) 10% of sundry Debtors were doubtful for both the companies. Stocks to be carried
at cost.
(v) Preference shareholders were discharged by issuing equal number of 9% preference
shares at par.
(vi) Equity shareholders of both the transfer or companies are to be discharged by issuing
Equity shares of Rs.10 each of the new company at a premium of Rs. 5 per share.
Amalgamation is in the nature of purchase.
ANSWER:
M/s. Intranet Ltd.
Draft Balance Sheet as at 1.4.2008
Particulars Note No. Rs

(2) Non-Current Liabilities 3 40,000

Long term borrowings

(a) Trade Payables 40,000
(b) Short Term provisions 4 11,000
Total 5,64,985
II. Assets
(a) Fixed Assets
Tangible Assets 5 2,80,00
(b) Non-current investments 6 65,000
(c) Other non-current assets 7 7,000
(2) Current assets

(a) Inventories 76,000
(b) Trade receivables 8 72,000
(c) Cash and cash equivalents 9 64,985
Total 5,64,985
Notes to Accounts
1. Share Capital
Equity share capital (W.N.2) 2,77,990
27,799 Equity shares of Rs.10 each, fully paid up
(25,133+2,666)
9% Preference share capital (W.N.2) 50,000 3,27,990
Shares of Rs.100 each
2. Reserve and Surplus
Securities premium (1,25,665+13,330) (W.N.2) 1,38,995
Investment allowance reserve (Rs.5,000+2,000) 7,000 1,45,995
3. Long Term Borrowings
Secured
10% Debentures (50% of Rs.80,000) 40,000 40,000
4. Short term Provisions
Tax Provision (Rs.7,000 + Rs.4,000) 11,000
5. Tangible Assets
Building (Rs.66,000 + Rs.52,000) 1,18,500
Plant and machinery (Rs.88,000 + Rs.73,500) 1,61,500 2,80,000
6. Non-current investments
Trade investments (80%) 48,750
Non-Trade investments (20%) 16,250 65,000
7. Other non-current assets 7,000
Amalgamation adjustment account
Sundry debtors (Rs.45,000 + Rs.35,000) 80,000
Less: Provision for doubtful debts @ 10% (8,000) 72,000
Cash and Bank (Rs. 40,000 + Rs.25,000 – Rs.15) 64,985
Working Notes:
1. Calculation of value of equity shares issued to transferor companies.
System Ltd. HRD Ltd.

Assets taken over:
Building 66,000 52,500
Plant and Machinery 88,000 73,500
Investments (trade and non- trade) 40,000 25,000
Stock 36,000 40,000
Sundry Debtors 40,500 31,500
Cash & Bank 40,000 25,000
3,10,500 2,47,500
Less: Liabilities
10% Debentures 50,000 30,000
Sundry Creditors 25,000 15,000
Tax Provision 7,000 (82,000) 4,000 (49,000)
2,28,500 1,98,500
(30,000) (20,000)
Less: Preference Share Capital 1,98,500 1,78,500
2. Number of shares issued to equity shareholders, debentures holders and preference

shareholders.
System Ltd. HRD Ltd. Total

Equity shares issued @ Rs.15 per share
(including Rs.5 Premium)
1,98,500 divided by 15 13,233
Shares
1,78,500 divided by 15 11,900 shares 25,133 shares
Equity Share capital @ Rs.10 1,32,330 1,19,000 2,51,330
Securities premium @ Rs. 5 66,165 59,500 1,25,665
1,98,495 1,78,500 3,76,995
50% of Debentures are converted into equity shares @ Rs. 15 per share
25,000 divided by 15 1,666 Shares
15,000 divided by 15 1,000 shares 2,666 Shares
Equity share capital @ Rs.10 16,660 10,000 26,660
Security premium @ Rs.5 8,330 5,000 13,330
24,990 15,000 39,990
9% Preference share capital issued 30,000 20,000 50,000
QUESTION 19 (CA FINAL MAY 2013 16 MARKS)
Sun Limited agreed to absorb Moon Limited on 31st March 2012 whose Summarized Balance
Sheet stood as follows:
Equity and Liabilities Assets

Share capital Fixed Assets 10,50,000
1,20,000 shares of Rs.10 each 12,00,000 Investments
Reserves & Surplus
General reserve 1,50,000 Current Assets,
Secured Loan - Loans and Advances
Unsecured Loan - Stock in Trade 1,50,000
Current Liabilities & Sundry Debtors 3,00,000
Provisions
Sundry Creditors 1,50,000
15,00,000 15,00,000
The consideration was agreed to be paid as follows:
(a) A payment in cash of Rs. 5 per share in Moon Ltd. and

(b) The issue of shares of Rs. 10 each in Sun Ltd. on the basis of two equity shares (valued
at Rs.15) and one 10% cumulative preference share (valued at rs.10) for every five
shares held in Moon Ltd.
The whole of the share capital consist of shareholdings in exact multiple of five except the
following holding.
P 174
Q 114
R 108
S 42
Other individuals 12 (Twelve members holding one share each)
It was agreed that Sun Ltd. will pay in cash for fractional shares equivalent at agreed value
of shares in Moon Ltd. i.e. 65 for five shares of Rs. 50 paid.
Prepare a statement showing the purchase consideration receivables in shares and cash.
ANSWER:
(a) Schedule showing determination of fractional shares
Holding Exchangeable Exchange Exchange in Non-

of in nearest in equity Preference exchangeable
Shares multiple of shares shares shares (E) =
(A) live (B) (C) = (B)/5x2 (D) = (B)/5x1 (A)-(B)
P 174 170 68 34 4
Q 114 110 44 22 4
R 108 105 42 21 3
S 42 40 16 8 2
Other 12 - - - 12
Individuals
450 425 170 85 25
(B) (i) Shares Exchangeable in Equity Shares of Sun Ltd.
No. of Shares No. of Shares

1,20,00-450 (Total A above) 1,19,550 2/5 there of 47,820
450-25 (Total E Above) 425 2/5 thereof 170
1,19,975 47,990
(ii) Shares Exchangeable in 10% Cumulative Preference Shares of Sun Ltd.
No. of Shares No. of Shares

Shares held as in b (i) (above) 1,19,550 1/5 there of 23,910
Shares held as in b(i) above 425 1/5 thereof 85
1,19,975 23,995
(c) There are 25 shares in Moon Ltd. which are not capable of exchange into equity and
preference shares of Sun Ltd. They will be paid @ Rs.65 for five shares of Rs.50 Paid.
= 325
Statement showing calculation of Purchase Consideration.
47,990 Equity shares @ Rs. 15 each 7,19,850

23,995, 10% Cumulative Preference shares @ Rs.10 each 2,39,950
Cash on 1,19,975 shares @ Rs. 5 each 5,99,875
Add: Cash for 25 fractional shares. 325
15,60,000
UPDATION OF ACCOUNTS
QUESTION NO 20 (SIMILAR QUESTION IN JULY 21 CA INTER EXAM)
The Balance Sheets of Rama Limited and Krishan Limited as at 31st December 1980 were as
following:
Liabilities Rama Krishan Assets Rama Karishan

Share capital: Fixed assets (other
Divided into than goodwill) 5,00,000 3,50,000
equity shares of 6,00,000 4,00,000 Stock in trade 95,000 75,000
Rs.10 each Debtors 1,40,000 1,00,000
Reserves 1,50,000 1,00,000 Cash at bank 1,17,500 60,000
Profit and Loss Preliminary
account expenses
75,000 60,000 10,000 5,000
Sundry creditors
37,500 30,000
8,62,500 5,90,000 8,62,500 5,90,000
Rama Limited took over and absorbed Krishan Limited as on 1st July 1981. No Balance Sheet
of Krishan Limited was prepared on the date of take over. But the following information is
made available to you:
(a) In the six months ended 30th June, 1981 Krishan Limited made a net profit of Rs.60,000
after providing for depreciation at 10% per annum on fixed assets;
(b) Rama Limited during that period had made net profits of Rs.1,45,000 after providing
for depreciation at 10% per annum on the fixed assets;
(c) Both the companies had distributed dividends of 10% on 1st April 1981;
(d) Goodwill of Krishan Limited on the date of take over was estimated at Rs.25,000 and
it was agreed that the stock of Krishan Limited would be appreciated by Rs.15,000 on
the date of take over;
(e) Rama Limited to issue shares to shareholders of Krishan Limited on the basis of the
intrinsic value of shares on the date of take over.
Draft the Balance Sheet of Rama Limited after absorption.
QUESTION 21 (C A FINAL NOV.2007 16 MARKS)
The Balance sheets of Strong Ltd. and Weak Ltd. as on 31.03.2007 is as follows:
Balance Sheet as on 31.03.2007
Liabilities Strong Ltd. Weak Ltd. Assets Strong Ltd Weak Ltd.
Equity Share Fixed Assets
Capital (Rs.100 50,00,000 30,00,000 other than
each) Goodwill 30,00,000 20,00,000
Reserve Stock 8,00,000 6,00,000
4,00,000 2,00,000
P/L A/c. Debtors 14,00,000 9,00,000
6,00,000 4,00,000
Creditors Cash & Bank 12,00,000 3,50,000
5,00,000 3,00,000
Preliminary 1,00,000 50,000
Expenses
65,00,000 39,00,000 65,00,000 39,00,000
Strong Ltd. takes over Weak Ltd. on 01.07.07. No Balance Sheet of Weak Ltd. is available
as on that date. It is however estimated that Weak Ltd. earns estimated profit of Rs.
2,00,000 after charging proportionate depreciation @ 10% p.a. on fixed assets, during
April-June, 2007.
Estimated profit of Strong Ltd. during these a month is Rs. 4,00,000 after charging
proportionate depreciation @ 10% p.a. on fixed assets.
Both the companies have declared and paid 10% dividend within this 3 months period
Goodwill of Weak Ltd. is valued at Rs. 2,00,000 and Fixed Assets are valued at Rs. 1,00,000
above the estimated book value. Purchase consideration is to be satisfied by strong Ltd. by
shares at par, Ignore Income Tax.
You are required to calculate the following:
(i) No. of shares to be issued by Strong Ltd. to Weak Ltd. against purchase consideration.
(ii) Net Current Assts of Strong Ltd. and Weak Ltd. as on 01.07.2007.
(iii) P/L A/c. balance of the Strong Ltd. as on 01.07.2007.
(iv) Fixed Assets as on 01.07.2007;
(v) Balance Sheet of Strong Ltd. as on 01.07.2007 after takeover of Weak Ltd.
SOLUTION:
(i) Number of shares to be issued by Strong Ltd. to Weak Ltd. against purchase
consideration.
Weak Ltd.
Goodwill 2,00,000
Fixed Assets 20,00,000
Less: Depreciation 50,000
19,50,000
Add: Appreciation 1,00,000 20,50,000
Stock 6,00,000
Debtors 9,00,000
Cash and Bank Balances
Add: Profit after deprecation 2,00,000 3,50,000
Add: Depreciation (non-cash) 50,000 2,50,000
Less: Dividend (3,00,000) 3,00,000

40,50,000
Less: Creditors 3,00,000
Purchase Consideration 37,50,000
(ii) Calculation of Net Current Assets as on 01.07.2007
Strong Ltd. Weak Ltd.

Current Assets:
Stock 8,00,000 6,00,000
Debtors 14,00,000 9,00,000
Cash and Bank 12,00,000 3,50,000
Less: Dividend (5,00,000) (3,00,000)
Add: Profit before
depreciation 4,75,000 11,75,000 2,50,000 3,00,000
18,00,000
Less: Creditors 33,75,000 18,00,000

5,00,000 3,00,000
28,75,000 15,00,000
(iii) Profit and Loss Account balance of Strong Ltd. as on 1.07.2007
P&L A/c. balance as on 31.03.2007 6,00,000

Less: Dividend Paid 5,00,000
1,00,000
Add: Estimated profit for 3 months after charging depreciation 4,00,000
5,00,000
(iv) Fixed Assets as on 01.07.2007
Fixed Assets of Strong Ltd. as on 31.03.2007 30,00,000

Less: Depreciation for 3 months 75,000
29,25,000
Fixed assets taken over of Weak Ltd. as on 31.03.2007 20,00,000
Less: Proportionate depreciation for 3 months on fixed
assets 50,000
19,50,000
Add: Appreciation above the estimated book value 1,00,000 20,50,000
49,75,000
(v) Balance sheet of Strong Ltd. as on 01.07.2007 (after Take Over)
Particulars Note No. Rs.

(b) Reserve and Surplus 2 8,00,000
Trade Payables 3 8,00,000
Total 1,03,50,000
II. Assets
(1) Non-Current assets
(a) Fixed Assets
i. Tangible assets 4 49,75,000
ii. Intangible assets 5 2,00,000
(2) Current Assets

(a) Inventories (8,00,000+6,00,000) 14,00,000
(b)Tradereceivables (14,00,000+9,00,000) 23,00,000
(c) Cash and Cash equivalents (11,75,000 14,75,000
+ 3,00,000) – As per (Ii) above
Total 1,03,50,000
NOTES TO ACCOUNTS
1. Share Capital
87,500 (50,000+37,500) equity shares of 87,50,000
Rs. 100 each
2. Reserve and Surplus
Reserves Less Preliminary expenses
(4,00,000 – 1,00,000) 3,00,000
Profit and Loss Account (As computed (iii) 5,00,000 8,00,000
3. Trade Payables (5,00,000+3,00,000) 8,00,000
4. Tangible Assets
Fixed assets (as computed in (iv) 49,75,000
5. Intangible assets 2,00,000
INTRINSIC VALUE METHOD
QUESTION NO 22
The following are the Balance Sheets of Strong Limited and Small Limited as at 31st
December 1988:
Liabilities Strong Small Assets Strong Small

Share capital Fixed assets cost
Shares of the face Less depreciation 1,40,000 75,000
value of Rs.10 each 1,50,000 1,20,000 Current assets
Reserves 95,000 10,000 Stock 42,000 47,000
Secured loans Trade debtors 30,000 50,000
10% Debentures 20,000 Balance at bank 80,000 10,000
Current liabilities
Trade creditors 47,000 32,000
2,92,000 1,82,000 2,92,000 1,82,000
Strong Limited agreed to absorb Small Limited as on 31st December 1988 on the following
terms:
(a) Strong Limited agreed to repay 10% Debentures of Small Limited

(b) Strong Limited to revalue its fixed assets at Rs.1,95,000 to be incorporated in the
books.
(c) Shares of both the companies to be valued on net assets basis, after considering
Rs.50,000 towards value of goodwill of Small Limited
(d) The costs of absorption of Rs.3,000 are met by Strong Limited
You are required to:
(i) Calculate the ratio of exchange of shares.

(ii) Give journal entries in the books of Strong Limited
(iii) Construct the bank account to arrive at the balance on absorption.
QUESTION NO 23
B Co. Limited had the following Balance Sheet as on 31st March 1978.

Share capital of 100 each 50,00,000 Fixed Assets 83,00,000
Capital reserve 10,00,000 Current Assets 69,00,000
General reserve 36,00,000 Investments 17,00,000
Unsecured loans 22,00,000 Goodwill 2,00,000
Sundry creditors 42,00,000
1,71,00,000 1,71,00,000
B Co. Limited is Amalgamated with Beeson Limited as on 31st March, 1978 on which date the
Balance Sheet of Beeson Limited as follows:

Share capital of 10 each 80,00,000 Fixed Assets 1,60,00,000
General Reserve 1,00,00,000 Current Assets 1,68,00,000
Secured Loans 40,00,000
Sundry Creditors 46,00,000
Proposed Dividend 10,00,000
3,28,00,000 3,28,00,000
For the purpose of the Amalgamation the goodwill of B Co. Limited was considered valueless.
There are also arrears of depreciation in B Co. Limited amounting to Rs.4,00,000. The
shareholders in B Co. Limited are allotted, in full satisfaction of their claims. Shares in
Beesons in the same proportion as the respective intrinsic values of shares of two companies
bear to one another. Pass journal entries in the books of both the companies to give effect
to
ENTRIES ARE TO BE MADE AT PAR
QUESTION NO 24
Exe Limited is absorbed by Wye Limited. Given below are the Balance Sheets of the two
companies prepared after revaluation of their assets on a uniform basis:
Balance Sheet of Exe Limited

Paid up capital: Sundry assets 16,85,000
9,000 equity shares of Rs.150 Cash in hand 3,500
each Rs.135 paid up 12,15,000
General reserve 4,03,500
Profit and Loss account 15,000
Sundry creditors 55,000
16,88,500 16,88,500
Balance Sheet of Wye Limited

Paid up capital: Sundry assets 43,57,500
40,000 equity shares of Cash in hand 27,500
Rs.75 paid up (fully paid) 30,00,000
General reserve 12,85,000
Sundry creditors 65,000
43,85,000 43,85,000
The holder of every three shares in Exe Limited was to receive five shares in the Wye
Limited plus as much cash as is necessary to adjust the rights of shareholders of both
the companies. In accordance with the intrinsic value of the share as per the respective
Balance Sheets.
Pass necessary journal entries in the books of Wye Limited and prepare the Balance Sheet
giving effect to the above scheme of absorption. Entries are to be made at par value only.
QUESTION NO 25 (IMPORTANT QUESTION FOR EXAMS 16 MARKS)
The following are the Balance Sheets of Big Limited and Small Limited for the year ending
on 31st March 1998.
(Figures in crores of rupees)
Big Limited Small Limited

Equity share capital in equity shares of Rs.10 each 50 40
Preference share capital in 10% preference shares of 60
Rs.100 each 200 150
Reserves and surplus 250 250
Loans secured 100 100
Total funds 350 350
Applied for: fixed assets at cost less depreciation 150 150
Current assets less current liabilities 200 200
350 350
The present worth of fixed assets of Big Limited is Rs.200 crores and that of Small Limited
is Rs.429 crores. Goodwill of Big Limited is Rs.40 crores and of Small Limited is 75 crores.
Small Limited absorbs Big Limited by issuing equity shares at par in such a way that intrinsic
net worth is maintained.
Goodwill account is not to appear in the books. Fixed assets are to appear at old figures.
(a) Show the Balance Sheet after absorption.

(b) Draft a statement of valuation of shares on intrinsic value basis and prove the accuracy
of your workings.
PURCHASE CONSIDERATION WITH

VALUATION OF GOODWILL
The following is the Balance Sheet of weak Limited as on June 30, 1976:

Share capital (2000 shares Goodwill 35,000
of Rs.100 each) 2,00,000 Land and Building 85,000
Reserve fund 20,000 Plant and Machinery 1,60,000
5% Debentures 1,00,000 Stock 55,000
Loan from A (a director) 40,000 Debtors 65,000
Sundry creditors 80,000 Cash at bank 34,000
Discount on Debentures 6,000
4,40,000 4,40,000
The business of the company is taken over by strong Limited as on the date on the following
terms:
(i) Strong Limited to take over all assets except cash, to value the assets at their book
value less 10 per cent except goodwill which was to be valued at 4 years purchase of
the excess of average (five years) profits over 8 per cent of the combined amount of
share capital and reserves.
(ii) Strong Limited to take over trade creditors, which were subject to a discount of five
per cent. Other outside liabilities were discharged by strong Limited at their book
values.
(iii) The purchase consideration was to discharged in cash to the extent of Rs.10,000 and
the balance in fully paid equity shares of Rs.10 each valued at Rs.12.50 per share.
(iv) The average of five years profits was Rs.30100. the expenses of liquidation amounted
to Rs.4000. weak Limited had sold prior to 30th June, 1976 goods costing Rs.30,000 to
strong Limited for Rs.40,000. Debtors include Rs.20,000 still due from strong Limited
on the date of absorption, Rs.25,000 worth of the goods were still in stocks of strong
Limited. Show the important ledger accounts in the books of weak Limited and journal
entries in the books of strong Limited.
QUESTION NO 27 (STUDY MATERIAL
Balance Sheets of Ax Ltd. and Tx Ltd. as on 31.12.1999. Tx Ltd. was merged with Ax Ltd.
with effect from 1.1.2000 and merger was in the nature of purchase:
BALANCE SHEET AS ON 31.12.1999
AX Ltd. TX Ltd. AX Ltd. TX Ltd.

(Rs.10each) Investments 2,00,000 50,000
General reserve 3,50,000 1,20,000 (non trade)
Profit and Loss stock 1,20,000 50,000
Account 2,10,000 65,000 Debtors 75,000 80,000
Export reserve 70,000 40,000 Advance tax 80,000 20,000
12% debentures 1,00,000 1,00,000 Cash and bank 2,75,000 1,30,000
Creditors 40,000 45,000 Preliminary exp. 10,000 -
Tax provision 1,00,000 60,000
Proposed dividend 1,40,000 50,000
17,10,000 7,30,000 17,10,000 7,30,000
Ax Ltd. would issue 12% debentures to discharge the claims of the debentures holders of
Tx Ltd. at par. Non trade investments of Ax Ltd. fetched @ 25% while those of Tx Ltd.
fetched @ 18% profit (pre tax) by Ax Ltd. and Tx Ltd. during 1997, 1998 and 1999 and were
as follows:
AX Ltd. TX Ltd.
1997 5,00,000 1,50,000
1998 6,50,000 2,10,000
1999 5,75,000 1,80,000
Goodwill may be calculated on the basis of capitalization method taking 20% as the pre
tax normal rate of return. Purchase consideration is discharged by Ax Ltd. on the basis of
intrinsic value per share. The company decided to cancel the proposed dividend. Prepare
Balance Sheet of Ax Ltd after taking over the business.
QUESTION NO. 28 (C A FINAL MAY 2008 16 MARKS)
T. Ltd. and V. Ltd. propose to amalgamate. Their balance sheets as at 31st March, 2008 were
as follows:
Liabilities T. Ltd. V. Ltd. Assets T. Ltd. V Ltd.

Share capital: Fixed Assets:
Equity shares of 15,00,000 6,00,000 Less: Dep. 12,00,000 3,00,000
10 each
Investment (face
General reserve 6,00,000 60,000 value of Rs.3 3,00,000
Profit & Loss A/c. Lakhs, 6% tax free
3,00,000 90,000
G.P. notes)
Creditors 3,00,000 1,50,000
6,00,000 3,90,000
Stock
5,10,000 1,80,000
Debtors
Cash and Bank
Balances 90,000 30,000
27,00,000 9,00,000 27,00,000 9,00,000
Their net profits (after taxation) were as follows:
Year T. Ltd. V. Ltd.

2005-06 3,90,000 1,35,000
2006-07 375,000 1,20,000
2007-08 4,50,000 1,68,000
Trading Profit may be considered as 15% on closing capital invested. Goodwill may be taken
as 4 years purchase of average super profits. The stock of T. Ltd. are to be taken at Rs.
6,12,000 and Rs. 4,26,000 respectively for the purpose of amalgamation. W. Ltd. is formed
for the purpose of amalgamation of two companies.
(a) Suggest a scheme of capitalization of W. Ltd. and ratio of exchange of shares; and
(b) Draft the opening balance sheet of W. Ltd.
ANSWER:
(a) Scheme of capitalization of W. Ltd. and radio of exchange of shares Computation

of Net Assets of amalgamating companies.
T. Ltd. V. Ltd.
Goodwill (W.N.2) 3,19,200 1,21,200
Fixed Assets 12,00,000 3,00,000
6% investments (Non-trade) 3,00,000
Stock 6,12,000 4,26,000
Debtors 5,10,000 1,80,000
Cash and Bank Balances 90,000 30,000
30,31,200 10,57,200
Less: Creditors 3,00,000 1,50,000
Net Assets 2731,200 9,07,200
1,50,000 60,000
No. of equity shares 18,208 15.12
Intrinsic Value of a share
No. of shares to be issued by W. Ltd. to 2,73,120
T. Ltd. 1,50,000 x 18,208/10 Shares
90,720
V. Ltd. 60,000 x 15.12/10 Shares
In total 2,73,120 + 90,720 i.e. 3,63,840 shares will be issued by W. Ltd. Ratio by exchange
of shares will be as follows:
1. Holders of 1,50,000 equity shares of T.Ltd. will get 2,73,120 shares in W. Ltd.
2. Similarly, holders, of 60,000 equity shares of V. Ltd. will get 90,720 shares in W.Ltd.
(b) Opening Balance Sheet of W. Ltd.
Particulars Note No. Rs.

Share Capital 1 36,38,400
Trade payable (3,00,000 + 1,50,000) 4,50,000
Total 40,88,400
II. Assets
(a) Fixed Assets
i. Tangible assets 2 15,00,000
ii. Intangible assets 3 4,40,000
(b) Non-current Investments 4 3,00,000
(b) Current Assets

(a) Inventories (6,12,000+4,26,000) 10,38,000
(b) Trade receivables (5,10,000+1,80,000) 6,90,000
(c) Cash and Cash equivalents 1,20,000
(90,000 + 30,000)
Total 40,88,400
Notes to Accounts
1. Share Capital
Equity share capital
3,63,840 Equity shares of Rs.10 each 36,38,400
(Issued for consideration other than cash, pursuant to scheme of
amalgamation)
2. Tangible Assets
Other Fixed Assets (Rs.12,00,000+Rs. 3,00,000) 15,00,000
Goodwill (W.N.2) (Rs.3,19200+Rs.1,21,200) 4,40,000
4. Non-current Investments
Investments in 6% Tax Free G.P. Notes 3,00,000
Working Notes:
1. Calculation of closing trading capital employed on the basis of net assets.
Particulars T Ltd. V. Ltd.

Fixed Assets 12,00,000 3,00,000
Stock 6,12,000 4,26,000
Debtors 5,10,000 1,80,000
Cash and Bank Balances 90,000 30,000
24,12,000 9,36,000
Less: Creditors 3,00,000 1,50,000
21,12,000 7,86,000
Net Assets
2. Calculation of Value of goodwill
(i) Average Trading Profit T Ltd. V Ltd.

2005-06 3,90,000 1,35,000
2006-07 3,75,000 1,20,000
2007-08 4,50,000 1,68,000
Profit after tax 12,15,000 4,23,000
Profit before tax (40%) 20,25,000 7,05,000
Add: Under Valuation of closing stock 12,000 36,000
20,37,000 7,41,000
Average of 3 Years Profit before tax 6,79,000 2,47,000

Less: Income from non-trade investments
(3,00,000 x 6%) 18,000 --
Average profit before tax 6,61,000 2,47,000

Less: 40% tax 2,64,400 98,800
Average profit after tax 3,96,600 1,48,200
(ii) Super Profits 3,96,600 1,48,200

Average trading profit
Less Normal Profit
T. Ltd. Rs 21,12,000 x 15% 3,16,800
V. Ltd. Rs. 7,86,000 x 15% 1,17,900
79,800 30,300
(iii) Value of goodwill at 4 years purchase of super Profits 3,19,200 1,21,200

DISSENTING SHAREHOLDERS
QUESTION NO 29 (DISSENTING SHAREHOLDERS)
Modern Ltd. agrees to acquire the business of the simple cotton Ltd. on the basis of the
following Balance Sheet:

10,000 shares of Rs.50, 30 Freehold property 1,25,000
paid up 3,00,000 Plant and machinery 25,000
Reserve fund 62,500 Stock 1,50,000
Profit and loss account 30,000 Investments 5,000
Creditors 37,500 Debtors 1,00,000
Bank 25,000
4,30,000 4,30,000
Modern Ltd. took over all the assets and liabilities of the vendor company. A sum of Rs.7,500
was retained by the vendor company for the payment of expenses of liquidation, income tax
liability and settlement for dissenting shareholders.
Vendor Company was allotted one share of Rs.100 each, Rs.50 paid up for two shares held by
its shareholders. Out of the amount of Rs.7500 retained by the liquidator of Simple Cotton
Ltd. payments were made as under:
Cost of liquidation Rs.1250, tax Rs.3750 and dissenting shareholders holding 50 shares @
Rs.32.50 per share i.e., Rs.1625. the market value of the share of the Modern textile Ltd.
was Rs.60 per share.
Prepare necessary books.
QUESTION NO. 30 (CA FINAL NOV.2013 16 MARKS)
Following is the Extract of Balance Sheet of M/s. Sunny Ltd. and Money as on 31.03.2013:
Balance Sheet Extract as on 31.03.2013
Sunny Ltd. Money Ltd.

Authorised Share Capital 15,00,000 5,00,000
Equity Share Capital of Rs.10 each fully paid 8,00,000.00 2,00,000.00
General Reserve 1,10,000.00 45,000.00
Profit & Loss Account 42,000.00 18,000.00

Statutory Fund 16,000.00 8,000.00
Trade Payable 45,000.00 24000.00
Provisions 95,000.00 12000.00
11,08,000.00 3,07,000.00
Goodwill 20,000.00 0.00

Machines & Plant 5,10,000.00 1,95,000.00
Other fixed Assets 90,000.00 15,000.00
Current Assets
Inventories 1,85,000.00 35,000.00
Debtors 1,00,500.00 35,000.00
Prepaid expenses 24,500.00 2,000.00
Cash in Hand & Bank 1,78,000.00 25,000.00
11,08,000.00 3,07,000.00
The two companies have entered into a scheme of Amalgamation and a new company Z Ltd.
is formed. The Amalgamation is to take place in the following manner:
(1) For the purpose of Amalgamation a new Company Z is to be formed with an authorized
Share Capital of 2,50,000 equity shares of s.10 each.
(2) Z Ltd. is issue fully paid shares to the shareholders of Sunny Ltd. and Money Ltd. at a
price of Rs. 5 and Rs. 3 above the intrinsic value of the shares respectively.
(3) The scheme or amalgamation was not supported by 100 shareholders of Sunny Ltd. and
had to be paid Rs. 10 per share above intrinsic value as consideration. The amount of
the dissenting shareholders was borne by Z Ltd.
(4) Fixed Assets of Sunny Ltd. were last revalued in the year 2009 after which there
has been an increase of 15% in the values, while assets of Money Ltd. have not shown
any change in prices. The current assets of Money Ltd. include Debtors of Rs.20,000
which are considered bad.
(5) Money Ltd.’s Stock-in-trade as on 31.03.2013 includes stock of s.25,000 purchased
from Sunny Ltd. at a profit of 25% on cost price.
(6) The Statutory Fund of the companies is to be maintained by Z Ltd. for a period of 3
years.
(7) Sunny Ltd. had declared dividend of 10% on 31.03.2013 which has still not been paid.
(8) Goodwill shown in books of Sunny Ltd. was considered to be worthless.

(9) All the assets of the companies are taken over by Z Ltd. at the revalued amounts,
Liabilities have to be paid in full.
Calculate the purchase consideration paid by Z to the shareholders of both the companies
and prepare the Balance Sheet of Z Ltd. as per revised Schedule VI after the Amalgamation
(Notes to Balance Sheet need not form part of the answer).
ANSWER
Calculation of Net Assets Sunny Ltd. Money Ltd.

Goodwill (given to be of nil value)
Machines and Plant 510,000 1,95,000
Other Fixed Assets 90,000 15,000 2,10,000
6,00,000
Add: 15% increase in price 90,000 6,90,000
Current Assets
Inventories 1,85,000 35,000 30,000
Less: Loading on Stock 5,000
(25,000x25/125)
Debtors 1,00,500 35,000
Less: Debtors considered bad 20,000 15,000
Prepaid expenses 1,78,000 24,500 2,000
Cash in Hand & Bank
Less: Payment of Dividend (80,000) 98,000 25,000
(10% of Rs. 8,00,000)
Value of Total Assets 10,98,000 2,82,000
Less: Liabilities
Trade Payables 45,000 24,000
Provisions 95,000 15,000 12,000
Less: Proposed dividend (80,000)
paid and adjusted in cash
(assumed that proposed dividend __________
was included in provisions) 10,38,000 2,46,000
WORKING NOTES:
1. Calculation of Intrinsic Value of Shares

Net Assets value as on 31.03.2013 10,38,000.00 2,46,000.00
No. of shares of the Company 80,000.00 20,000.00
Intrinsic Value of shares 12.975 12.30
2. Calculation of Purchase Consideration

Intrinsic Value of Shares 12.975 12.30
Premium to be paid by Z Ltd. 5.00 3.00
Amount to be paid per share 17,975 15.30
No. of shareholders agreeing to amalgamation 79,900 20,000
Total amount to be paid by Z Ltd. 14,36,202 3,06,000
No. of shares to be issued by Z Ltd. Rs.10 per share 1,43,620 30,600
(Rs. 2 paid in cash)
Total Number of equity shares 1,74,220
Payment to dissenting shareholders (100 shares x 2,298
22.98)
Total purchase consideration
14,38,500 3,06,000
Entries in Books of Z Ltd.
Business Purchase A/c. Dr. 1,744,500

To Liquidators of Sunny Ltd. 14,38,500
To Liquidators of Money Ltd. 3,06,000
(Being the purchase of Sunny Ltd. and Money Ltd.)
Fixed Assets Dr. 900,000

Inventories Dr. 2,15,000
Debtors Dr. 1,15,500

Prepaid Expenses Dr. 26,500
Cash & Bank Dr. 1,23,000
Goodwill (balancing figure) Dr. 4,60,000
To Trade Payables 69,000
To Provisions 27,000
To Business Purchase A/c. 17,44,500
(Being the assets and liabilities of the companies
taken over at revalued values)
Liquidators of Sunny Ltd. Dr. 14,38,500

Liquidators of Money Ltd. Dr. 3,06,000
To Equity Shares Capital A/c. 17,42,200
To Cash A/c. 2,300
Amalgamation Adjustment A/c. Dr. 24,000
To Statutory Funds 24,000
(Being the statutory reserves of Sunny and Money Ltd.)
Balance Sheet of Z Ltd. as on 31st March, 2013
Note No.
Shareholders’ Funds
(a) Share Capital 1742,200
(b) Reserves and surplus
Statutory Funds 24,000
Non-Current Liabilities -
Long term borrowings
Current Liabilities
(a) Trade Payables 69,000
(b) Other Current Liabilities
(c) Short term provisions 27,000
Total 18,62,200
Non-Current Assets
(a) Fixed Assets 9,00,000
(i) Tangible Assets 4,60,500
(Ii) Intangible Assets 24,000
Current Assets
(a) Inventories 2,15,000
(b) Trade Receivables 1,15,500
(c) Cash and Bank Balances 1,210,700
(d) Short-term loans and advances 26,500
Total 18,62,200
STATUTORY RESERVES IN BALANCE SHEET

OF VENDOR COMPANY
QUESTION NO 31 (CA FINAL MAY 1996)
A Limited and B Limited were amalgamated on and from 1st April 1995. A new company
C Limited was formed to take over the business of the existing companies. The Balance
Sheets of A Limited and B Limited as on 31st March 1995 are given below:
(Rs. In lakhs)
Liabilities A B Assets A B
Share capital Fixed Assets
Equity shares of 800 750 Land and Building 550 400
Rs.100 each Plant and Machinery 350 250
12% Preference 300 200 Investment 150 50
shares of Rs.100
Current assets,
Reserve and Surplus: Loans and Advances
Revaluation Reserve 150 100 Stock 350 250
General Reserve 170 150 Sundry Debtors 250 300
Investment Allowance Bills receivable 50 50
Reserve 50 50 Cash and bank 300 200
Profit and Loss a/c 50 30
Secured Loans:
(Rs.100 each)
Current Liabilities and
Provisions:
Bills Payable 150 70
2,000 1,500 2,000 1,500
(i) 10% Debenture-holders of A Limited and B Limited are discharged by C Limited issuing
such number of its 15% Debentures of Rs.100 each so as to maintain the same amount
of interest.
(ii) Preference shareholders of the two companies are issued equivalent number of 15%
preference shares of C Limited at a price of Rs.150 per share (face value Rs.100)
(iii) C Limited will issue 5 equity shares for each equity share of A Limited and 4 equity
shares for each equity shares of B Limited. The share are to be issued @ Rs.30 each,
having a face value of Rs.10 per share.
(iv) Investment allowance reserve is to be maintained for 4 more years
Prepare the Balance Sheet of C Limited as on 1st April 1995 after the amalgamation has
been carried out on the basis of amalgamation in the nature of purchase.
BUSINESS COMBINATION IN THE NATURE OF MERGER

(POOLING INTEREST METHOD)
QUESTION NO 32 (BASED ON MERGER)
A Limited and B Limited were amalgamated on and from 1st April, 1999. A new company AB
Limited was formed to take over the business of existing companies. The Balance Sheet of
A Limited and B Limited as on 31st March 1999 are given below:
A B A B
Equity shares of Rs.10 2,400 1,600 Fixed assets 4,800 3,200
each Less: Depreciation 800 600
12% Preference shares of 1,200 800 4,000 2,600
Rs.100 each
Investments 1,600 600
Capital reserve 800 600
Stock 1,200 600
General reserve 1,200 600
Debtors 1,600 800
Cash and bank 1,200 600
Secured loans 1,600 800
balance.
Trade creditors 1,200 400
Tax provision 800 200
9,600 5,200 9,600 5,200
Other information:
(i) Preference shareholders of the two companies are issued equivalent number of 15%
preference shares of AB Limited at an issue price of Rs.125 per share.
(ii) AB Limited will issue one equity share of Rs.10 each for every share of A Limited and
B Limited. The shares are issued at a premium of Rs.5 per share. Prepare the Balance
Sheet of AB Limited on the assumption that the Amalgamation is in the nature of
merger.
QUESTION NO 33 (C.A.FINAL MAY 2001)
Alpha Limited and Beta Limited were amalgamated on and from 1st April 2001. A new company
Gamma Limited was formed to takeover the business of the existing companies. The Balance
Sheets of Alpha Limited and Beta Limited as on 31st March 2001 are given below:
(Rs. In lakhs)
Liabilities Alpha Beta Assets Alpha Beta

Share capital Fixed Assets 1,200 1,000
Equity shares of Rs.100 1,000 800 Current Assets,
each Loans and Advances 880 565
15% Preference shares 400 300
of Rs.100 each
Reserve and Surplus:
Revaluation Reserve
General Reserve 100 80
Secured Loan 80 60
12% Debentures of
Rs.100 each 96 80
Current Liabilities and
Provisions
204 95
2,080 1,565
2,080 1,565
Other information:
(i) 12% Debenture holders of Alpha Limited and Beta Limited are discharged by Gamma
Limited by issuing adequate number of 16% Debentures of Rs.100 each to ensure that
they continue to receive the same amount of interest.
(ii) Preference shareholders of Alpha Limited and Beta Limited have received same number
of 15% preference shares of Rs.100 each of Gamma Limited
(iii) Gamma Limited has issued 1.5 equity shares of each equity share of Alpha Limited and
1 equity share for each equity share of Beta Limited. The face value of shares issued
by Gamma Limited is Rs.100 each.
Prepare the Balance Sheet of Gamma Limited as on 1st April 2001 after the amalgamation
has been carried out using the “pooling of interest method”.
PAST EXAMINATION QUESTIONS FOR SELF READING
QUESTION 34 (CA INTER MAY 2019) (10 MARKS)
The following are the summarized Balance Sheet of VT Ltd. and MG Ltd. as on 31st March,
2018:
Particulars VT Ltd. (`) MG Ltd. (`)

Equity Shares of ` 10 each 12,00,000 6,00,000
10% Pref. Shares of ` 100 each 4,00,000 2,00,000
Reserve and Surplus 6,00,000 4,00,000
12% Debentures 4,00,000 3,00,000
Total 31,00,000 18,00,000
Assets
Fixed Assets 14,00,000 5,00,000
Investment 1,60,000 1,60,000
Inventory 4,80,000 6,40,000
Cash at Bank 2,20,000 80,000
Total 31,00,000 18,00,000
Details of Trade receivables and trade payables are as under:
VT Ltd. (`) MG Ltd. (`)

Trade Receivable
Debtors 7,20,000 3,80,000
Bills Receivable 1,20,000 40,000
8,40,000 4,20,000
Trade Payables
Sundry Creditors 4,40,000 2,50,000
5,00,000 3,00,000
Fixed Assets of both the companies are to be revalued at 15% above book value. Inventory
in Trade and Debtors are taken over at 5% lesser than their book value.
Both the companies are to pay 10% equity dividend, Preference dividend having been already
paid.
After the above transactions are given effect to, VT Ltd. will absorb MG Ltd. on the
following terms:
(i) VT Ltd. will issue 16 Equity Shares of ` 10 each at par against 12 Shares of MG Ltd.
(ii) 10% Preference Shareholders of MG Ltd. will be paid at 10% discount by issue of 10%
Preference Shares of ` 100 each, at par, in VT. Ltd.
(iii) 12% Debenture holders of MG Ltd. are to be paid at 8% premium, by 12% Debentures
in VT Ltd., issued at a discount of 10%.
(iv) ` 60,000 is to be paid by VT Ltd. to MG Ltd. for Liquidation expenses.
(v) Sundry Debtors of MG Ltd. includes ` 20,000 due from VT Ltd.
You are required to prepare :
(1) Journal entries in the books of VT Ltd.
(2) Statement of consideration payable by VT Ltd.
SOLUTION”
(i) Journal Entries in the Books of VT Ltd.
Dr. Cr.
` `
Fixed Assets Dr. 2,10,000
To Revaluation Reserve 2,10,000
(Revaluation of fixed assets at 15% above book value)
Reserve and Surplus Dr. 1,20,000

To Equity Dividend 1,20,000
(Declaration of equity dividend @ 10%)
Equity Dividend Dr. 1,20,000

To Bank Account 1,20,000
(Payment of equity dividend)
Business Purchase Account Dr. 9,80,000

To Liquidator of MG Ltd. 9,80,000
(Consideration payable for the business taken over
from MG Ltd.)
Fixed Assets (115% of ` 5,00,000) Dr. 5,75,000

Inventory (95% of ` 6,40,000) Dr. 6,08,000
Debtors Dr. 3,80,000
Bills Receivable Dr. 40,000
Investment Dr. 1,60,000
Cash at Bank Dr. 20,000
(` 80,000 –` 60,000 dividend paid)
To Provision for Bad Debts (5% of ` 3,60,000) 18,000
To Sundry Creditors 2,50,000
To 12% Debentures in MG Ltd. 3,24,000
To Bills Payable 50,000
To Business Purchase Account 9,80,000
To Capital Reserve (Balancing figure) 1,61,000
(Incorporation of various assets and liabilities taken
over from MG Ltd. at agreed values and difference of
net assets and purchase consideration being credited
to capital reserve)
Liquidator of MG Ltd. Dr. 9,80,000

To Equity Share Capital 8,00,000
To 10% Preference Share Capital 1,80,000
(Discharge of consideration for MG Ltd.’s business)
12% Debentures in MG Ltd. (` 3,00,000 × 108%) Dr. 3,24,000

Discount on Issue of Debentures Dr. 36,000
To 12% Debentures 3,60,000
(Allotment of 12% Debentures to debenture holders
of MG Ltd. at a discount of 10%)
Sundry Creditors Dr. 20,000

To Sundry Debtors 20,000
(Cancellation of mutual owing)
Goodwill Dr. 60,000

To Bank 60,000
(Being liquidation expenses reimbursed to MG Ltd.)
Capital Reserve/P&L A/c Dr. 60,000

To Goodwill 60,000
(Being goodwill set off)
(ii) Statement of Consideration payable by VT Ltd. for 60,000 shares (payment method)
Shares to be allotted 60,000/12 ´ 16 = 80,000 shares of VT Ltd.
Issued 80,000 shares of ` 10 each i.e. ` 8,00,000 (i)

For 10% preference shares, to be paid at 10% discount
` 2,00,000x 90/100 ` 1,80,000 (ii)

Consideration amount [(i) + (ii)] ` 9,80,000
On 1st April, 2018, Tina Ltd. take over the business of Rina Ltd. and discharged purchase
consideration as follows:
(i) Issued 50,000 fully paid Equity shares of ` 10 each at a premium of ` 5 per share to
the equity shareholders of Rina Ltd.
(ii) Cash payment of ` 50,000 was made to equity shareholders of Rina Ltd.
(iii) Issued 2,000 fully paid 12% Preference shares of ` 100 each at par to discharge the
preference shareholders of Rina Ltd.
(iv) Debentures of Rina Ltd. (` 1,20,000) will be converted into equal number and amount
of 10% debentures of Tina Ltd.
Calculate the amount of Purchase consideration as per AS-14 and pass Journal Entry relating
to discharge of purchase consideration in the books of Tina Ltd.
SOLUTION:
Particulars `
Equity Shares (50,000 x 15) 7,50,000
Cash payment 50,000
12% Preference Share Capital 2,00,000
Purchase Consideration 10,00,000
As per AS 14, consideration for the amalgamation means the aggregate of the shares and
other securities issued and the payment made in the form of cash or other assets by the
transferee company to the shareholders of the transferor company. Thus, payment to
debenture holders are not covered by the term ‘consideration’.
Journal entry relating to discharge of consideration
in the books of Tina Ltd.
Liquidation of Rina Ltd.A/c 10,00,000
To Equity share capital A/c 5,00,000
To 12% Preference share capital A/c 2,00,000
To Securities premium A/c 2,50,000
To Bank/Cash A/c 50,000
(Discharge of purchase consideration)
High Ltd. and Low Ltd. were amalgamated on and from, 1st April, 2020. A new company
Little Ltd. was formed to take over the business of the existing Companies. The summarized
Balance sheets of High Ltd. and Low Ltd. as on 31st March, 2020 are as under:
(` in Lakhs)
Liabilities High Low Assets High Low

Ltd. Ltd. Ltd. Ltd.
Share Capital: Property, Plant and
Equipment:
Equity Shares of ` 100 1000 850 Land & Building 670 385
each
14% Pref Shares of 320 175 Plant & Machinery 475 355
` 100 each
Reserves & Surplus: Investments 95 80
Revaluation Reserve 225 110 Current Assets:
General Reserve 360 240 Stock 415 389
Investment Allowance 80 40 Sundry Debtors 322 213
Reserve
P & L Account 85 82 Bills Receivables 35 -
Non-Current Liabilities: Cash & Bank 303 166
Secured Loans:
(` 100 each)
Unsecured Loans (Public 50 -
Deposits)
Current Liabilities & -
Provisions:
Bills Payable 30 -
TOTAL 2315 1588 TOTAL 2315 1588
Other Information:
(1) 13% Debenture holders of High Ltd. & Low Ltd. are discharged by Little Ltd. by issuing
such number of its 15% Debentures of ` 100 each so as to maintain the same amount
of interest.
(2) Preference Shareholders of the two companies are issued equivalent number of 15%
Preference shares of Little Ltd. at a price of ` 125 per share (Face Value ` 100)
(3) Little Ltd. will issue 4 Equity Shares for each Equity Share of High Ltd. & 3 equity
shares for each Equity Share of Low Ltd. The shares are to be issued at ` 35 each
having a face value of ` 10 per share.
(4) Investment Allowance Reserve is to be maintained for two more years.
Prepare the Balance sheet of Little Ltd. as on 1st April, 2020 after the amalgamation has
been carried out in basis of in the nature of Purchase.
SOLUTION:
Balance Sheet of Little Ltd. as at 1st April, 2020
Particulars Note No. (` in lakhs)
(a) Share Capital 1 1,150.0
(b) Reserves and Surplus 2 2,437.8
(2) Non-Current Liabilities
Long-term borrowings 3 135.2
Other Borrowings- Unsecured Loans 50

Trade payables 4 130.0
Total 3,903
II. Assets
(a) Property, Plant and Equipment 5 1,885
(b) Non-current investment (95 + 80) 175
(2) Current assets
(a) Inventory (415+389) 804
(b) Trade receivables 6 570
(c) Cash and bank balances (303 + 166) 469
Total 3,903
Notes to Accounts
(` in lakhs) (` in lakhs)
1. Share Capital
Equity share capital (W.N.1)
65,50,0001 Equity shares of 10 each 655
4,95,0002 Preference shares of ` 100 each 495
(all the above shares are allotted as fully paid-
up pursuant to contracts without payment being 1,150
received in cash)
2. Reserves and surplus

Securities Premium Account (W.N.3) (1080+ 681.25) 1,761.25
Capital Reserve (W.N. 2)(283.33 + 393.22) 676.55
Investment Allowance Reserve (80 + 40) 120
Amalgamation Adjustment Reserve (80 + 40) (120) 2,437.8
3. Long-term borrowings
15% Debentures 135.2
4. Trade payables
Sundry Creditors: High Ltd. 65
Low Ltd. 35
Bills Payable: High Ltd. 30 130
Land and Building : High Ltd 670
Low Ltd 385 1055
Plant and Machinery: High Ltd. 475
Low Ltd. 355 830 1,885
Sundry Debtors: High Ltd. 322
Low Ltd. 213
Bills Receivables: High Ltd. 35 570
Working Notes:
(` in lakhs)
High Ltd. Low Ltd.

(1) Computation of Purchase consideration
(a) Preference shareholders
3,20,00,000 400
( i.e. 3,20,000 shares
100
× ` 125 each)
1,75,00,000 218.75
( i.e. 1,75,000 shares
100
× ` 125 each)
(b) Equity shareholders :
10,00,00,000 × 4 1,400
( i.e. 40,00,000 shares
100
× ` 35 each)
8,50,00,000 × 3
( i.e. 25,50,000 shares
100 892.50
× ` 35 each)
Amount of Purchase Consideration 1,800 1,111.25
Assets taken over
Land and Building 670 385
Plant and Machinery 475 355
Investments 95 80
Inventory 415 389
Trade receivables 322 213
Bills Receivables 35
Cash and bank 303 166
2,315 1,588
Less : Liabilities taken over
Debentures 86.67 48.53
Unsecured Loan 50
Creditors 65 35
Bills Payable 30
213.67 83.53
Net assets taken over 2083.33 1,504.47

Purchase consideration 1,800 1,111.25
Capital reserve 283.33 393.22
(3) Computation of securities premium

On preference share capital
High Ltd. – 3,20,000 x 25 80
Low Ltd. – 1,75,000 x 25 43.75
On equity share capital
High Ltd. – 40,000 x 25 1000
Low Ltd. – 25,50,000 x25 637.5
Total 1080 681.25
QUESTION 37 (CA INTER JAN 21 EXAM) (15 MARKS)
Galaxy Ltd. and Glory Ltd., are tow companies engaged in the some business of chemicals.
To mitigate competition, a new company Glorious Ltd, is to be formed to which the assets
and liabilities of the existing companies, with certain exception, are to be transferred,
The summarized Balance Sheet of Galaxy Ltd. And Glory Ltd. as at 31st March, 2020 are as
follows:
Galaxy Ltd. Glory Ltd.
` `
(I) Equity & Liabilities
(1) Shareholders’fund Share Capital

Equity shares of ` 10 each
8,40,000 4,55,000
Reserves & Surplus

General Reserve 4,48,000 40,000
Profit & Loss A/c 1,12,000 72,000
(2) Non-current Liabilities Secured Loan

6% Debentures
— 3,30,000

Total 18,20,000 10,80,000
(II) Assets
(1) Non-current assets Property, Plant &

Equipment
Freehold property, at cost 5,88,000 3,36,000
Plant & Machinery, at cost less 1,40,000 84,000

depreciation
Motor vehicles, at cost less depreciation 56,000 -
(2) Current Assets
Inventories 3,36,000 4,38,000
Cash at Bank 2,38,000 1,04,000
Total 18,20,000 10,80,000
Assets and Liabilities are to be taken at book value, with the following exceptions:
(i) The Debentures of Glory Ltd. are to be discharged, by the issue of 8% Debentures
of Glorious Ltd. at a premium of 10%.
(ii) Plant and Machinery of Galaxy Ltd. are to be valued at ` 2,52,000.
(iii) Goodwill is to be valued at : Galaxy Ltd. ` 4,48,000 Glory Ltd. ` 1,68,000
(iv) Liquidator of Glory Ltd. is appointed for collection from trade debtors and payment
to trade creditors. He retained the cash balance and collected ` 1,10,000 from
debtors and paid ` 1,80,000 to trade creditors. Liquidator is entitled to receive 5%
commission for collection and 2.5% for payments. The balance cash will be taken over
by new company.
You are required to :
(1) Compute the number of shares to be issued to the shareholders of Galaxy Ltd. and
Glory Ltd, assuming the nominal value of each share in Glorious Ltd. is ` 10.
(2) Prepare Balance Sheet of Glorious Ltd., as on 1st April, 2020 and also prepare notes
to the accounts as per Schedule III of the Companies Act, 2013.
ANSWER:
(i) Calculation of Purchase consideration (or basis for issue of shares of Glorious
Ltd.
Galaxy Ltd. Glory Ltd.

Purchase Consideration: ` `
Goodwill 4,48,000 1,68,000
Freehold property 5,88,000 3,36,000
Plant and Machinery 2,52,000 84,000
Motor vehicles 56,000 -
Inventory 3,36,000 4,38,000
Trade receivables 4,62,000 -
Cash at Bank 2,38,000 24,000
23,80,000 10,50,000
Less: Liabilities:
6% Debentures (3,00,000 x 110%) - (3,30,000)
Trade payables (4,20,000) 7,20,000
Net Assets taken over 19,60,000 72,000
To be satisfied by issue of shares of Glorious. 1,96,000
Ltd. @ ` 10 each
(ii) Balance Sheet of Glorious Ltd. as at 1st April, 2020
Particulars Note Amount

No
`
EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share capital 1 26,80,000
(b) Reserves and surplus 2 30,000
2 Non-current liabilities
(a) Long-term borrowings 3 3,00,000
3 Current liabilities
(a) Trade payables 4,20,000
Total 34,30,000
ASSETS
1 i Non-current assets
(a) Property, plant and equipment 4 13,16,000
Intangible assets 5 6,16,000

2 ii Current assets
(b) Trade receivables 4,62,000
(c) Cash and cash equivalents 7 2,62,000
Total 34,30,000
Notes to accounts:
` `
1. Share Capital Equity
share capital 2,68,000 shares of ` 10 each 26,80,000

(All the above shares are issued for consideration
other than cash)
2. Reserves and surplus
Securities Premium 30,000

(10% premium on debentures of `3,00,000) Long-term
borrowings
3. Secured 3,00,000
8% 3,000 Debentures of ` 100 each Property Plant and
Equipment
4. Freehold property
Galaxy Ltd. 5,88,000
Glory Ltd. 3,36,000 9,24,000

Plant and Machinery
Glory Ltd. 84,000 3,36,000
Motor vehicles - Galaxy Ltd. 56,000
13,16,000
5 Intangible assets Goodwill
Glory Ltd. 1,68,000 6,16,000
6 Inventories
Glory Ltd. 4,38,000 7,74,000
7 Cash and cash equivalents
Glory Ltd. (As per working note) 24,000 2,62,000
Working note:
Calculation of cash balance of Glory Limited to be taken over by Glorious Limited

`
Cash balance as at 31 March,2020

st
1,04,000
Add: Received from debtors 1,10,000
2,14,000
Less: paid to creditors (1,80,000)
34,000
Less: Commission to liquidators
On Debtors @ 5% 5,500
On Creditors @ 2.5% 4,500 (10,000)
24,000
Note:
1. It is assumed that the nominal value of debentures of Glory Ltd. is ` 100 each.
2. As per the information given in the question, debentures of Glory Ltd. are to be
discharged by the issue of debentures of Glorious Ltd. at premium of 10%. It is
assumed in the above solution that the debentures are issued at premium of ` 10
for discharge of debentures of ` 3,30,000. Alternative answer considering other
reasonable assumption is also possible.
JINDAL SIR MESSAGE

Dear students, I am still not satisfied with number of questions on amalgamation that we
have done in class so far but all concepts have been covered.
I want to provide you more classes on this topic. So refer Volumn II (Second Book) for
more practice.
EXTRA QUESTION ON AMLGAMATION OF COMPANIES 395
EXTRA QUESTION ON
AMLGAMATION OF COMPANIES
QUESTION NO 1
Following is the Balance Sheet of AB Ltd.:

Share capital 20,000 Goodwill 4,000
(2,000 shares of Rs.10 each) Fixed assets 16,500
Profit and loss account 7,000 Current assets 19,500
Debentures 10,000
Creditors 3,000
40,000 40,000
XY Ltd. agreed to take absorb the above company on following terms:
(1) To take over assets (excluding goodwill, a fixed asset of Rs.4,000 and cash Rs.1,000
included in current assets) at 10% less than book values.
(2) To take over trade liabilities and debentures
(3) To pay Rs.8000 for goodwill
(4) The purchase price was to be discharged by the issue of 1,000 shares of Rs.10 each at
a market value of Rs.15 per share and the balance in cash
(5) Liquidation expenses amounted to Rs.400. find out the amount of purchase consideration.
QUESTION NO 2
Following is the Balance Sheet of X Ltd.:

50,000 shares of Rs.10 each 5,00,000 Intangible assets 50,000
Debentures 1,00,000 Fixed assets 4,20,000
Creditors 50,000 Current assets 1,10,000
Profit and loss account 70,000
6,50,000 6,50,000
Ram Ltd. agreed to absorb the above company on the following terms:
(1) The assets of X Ltd. are be considered as worth Rs.5,00,000

(2) The purchase price is to be paid one quarter in cash and balance in shares which are
issued at market price.
(3) Ram Ltd. agreed to take over all assets and liabilities
(4) Liquidation expenses amounted to Rs.300 agreed to be paid by X Ltd.
(5) Market value of share of Rs.10 each of Ram Ltd. is Rs.12 per share
(6) Debentures of X Ltd. were paid
You are required to show:

1. Purchase consideration
2. Ledger accounts in the books of X Ltd.
3. Opening entries in the books of Ram Ltd.
QUESTION NO 3
S Limited is absorbed by P. Limited. The Balance Sheet of S Limited is as under:

Share capital: Sundry assets 13,00,000
2,000 7% preference shares
of Rs.100 each (fully paid up) 2,00,000
5,000 equity shares of
Rs.100 each (fully paid up) 5,00,000
Reserves 3,00,000
6% debentures 2,00,000
Trade creditors 1,00,000
13,00,000 13,00,000
P. Limited has agreed:-
(a) To issue 9% preference shares of Rs.100 each, in the ratio of 3 shares of P. Limited
for 4 preference shares in S Limited.
(b) To issue to the debenture holders in S Limited 8% mortgage debentures at Rs.96 in
lieu of 6% debentures in S Limited, which are to be redeemed at a premium of 20%.
(c) To pay Rs.20 per share in cash and to issue six equity shares of Rs.100 each (market
value Rs.125) in lieu of every five shares held in S Limited and
(d) To assume the liability to trade creditors.
Calculate the purchase consideration.
QUESTION NO 4
Y Limited decides to absorb X Limited. The Balance Sheet of X Limited is as follows:

3,000 equity shares of Sundry Net assets 2,90,000
Rs.100 each fully paid up 3,00,000 Profit and loss account 70,000
Preference shares 60,000
3,60,000 3,60,000
Y Limited agrees to take over the net assets of X Limited. An equity share in X Limited
for purpose of absorption, is valued @ Rs.70. Y Limited agrees to pay Rs.60,000 in cash
for payment to preference shares holders and the balance in the form of its equity shares
valued at Rs.120 each.
QUESTION NO 5
The Balance Sheet as on 31st March, 1993 of X Limited and Y Limited are as under:
X LIMITED

Authorized and subscribed capital: Fixed assets:
60,000 equity shares of Rs. 100 each Building 20,00,000
fully paid 60,00,000 Machinery 26,00,000
Reserve and surplus: Furniture 40,000
General reserve 8,00,000 Current assets:
Profit and Loss account 4,80,000 Stock 16,00,000
Current liabilities: Debtors 9,20,000
Creditors 9,60,000 Bank 2,80,000
Cash balance 8,00,000
82,40,000 82,40,000
Y LIMITED

Authorized and subscribed Goodwill 4,00,000
capital: Fixed assets:
20,000 equity shares of Rs. 100 Machinery 16,80,000
each fully paid 20,00,000 Furniture 20,000
Reserve and surplus: Current assets:
Capital reserve 2,00,000 Stock 7,20,000
General reserve 1,00,000 Debtors 7,20,000
Profit and Loss account 1,40,000 Bank 1,60,000
12% debentures 12,00,000 Cash balance 20,000
Current liabilities: Expenditure on new 3,00,000
Creditors 3,80,000 project
40,20,000 40,20,000
Y Limited was absorbed by X Limited on 1st April, 1993 on the following terms:-
(a) Fixed assets other than goodwill to be valued at Rs.20,00,000 including Rs.24,000 for
furniture.
(b) Stock to be reduced by Rs.80,000 and debtors by 5 per cent.
(c) X Limited to assume liabilities and to discharge the 12% debentures by issue of 11%
debentures of the same value and in addition a premium of 6% was paid in cash.
(d) The new project to be valued at Rs.3,80,000.
(e) The shareholders of Y Limited to receive cash payment of Rs.30 per share plus four
equity shares in X Limited for every five shares held in Y Limited.
(f) Both the companies to declare and pay dividend of 6% prior to absorption.
(g) Expenses of liquidation of Y Limited are to be reimbursed by X Limited to the extent
of Rs.20,000. The actual expenses amounted to Rs.24,000.
Draft journal entries recording the scheme in the books of Y Limited and prepare the
Balance Sheet of X Limited after absorption assuming that X Limited’s authorized capital
has been increased to Rs.80,00,000.
QUESTION NO 6
The following are the summarized Balance Sheet of X Limited and Y Limited:
X Limited Y Limited
Liabilities:
Share capital 1,00,000 50,000
Creditors 25,000 5,000
Loan X Limited 15,000
---------- --------
1,35,000 70,000
---------- -------
Assets:
Sundry assets 1,20,000 60,000
Loan Y Limited 15,000
---------- -------
1,35,000 70,000
---------- ---------
A new company XY Limited is formed to acquire the sundry assets and creditors of X
Limited and Y Limited and for this purpose, the sundry assets of X Limited are to revalued
at Rs.1,00,000. The debt due to X Limited is also to be discharged in shares of XY Limited.
Show the ledger accounts to close the books of X Limited.
QUESTION NO 7
Super express Limited and Fast express Limited were in company business. They decided
to form a new company named super fast express Limited. The Balance Sheets of both
companies were as under:
Super Express Limited

20,000 equity shares of Rs.100 each 20,00,000 Building 10,00,000
provident fund 1,00,000 Machinery 4,00,000
sundry creditors 60,000 Stock 3,00,000

Insurance reserve 1,00,000 Sundry debtors 2,40,000
Cash at bank 2,20,000
Cash in hand 1,00,000
22,60,000 22,60,000
Fast express Limited


10,000 equity shares of Rs.100 each 10,00,000 Goodwill 1,00,000
Employees profit sharing account 60,000 Building 6,00,000
Sundry creditors 40,000 Machinery 5,00,000
Reserve account 1,00,000 Stock 40,000
Surplus 1,00,000 Sundry debtors 40,000
Cash at bank 10,000
Cash in hand 10,000
13,00,000 13,00,000
The assets and liabilities of both the companies were taken over by the new company at
their book values. The companies were allotted equity shares of Rs.100 each in lieu of
purchase consideration.
Prepare opening balances sheet of super fast express Limited
QUESTION NO 8
The following are the Balance Sheets of Y. Limited and V Limited as at 31st March 2001:-
Y. Limited V Limited
(Rs. In lakhs) (Rs. In lakhs)
Liabilities:-
Equity share capital (fully paid shares of Rs.10) 15,000 6,000
Securities premium 3,000 ---

Foreign projects reserve --- 310
General reserve 9,500 3,200
Profit and Loss account 2,870 825
12% debentures -- 1,000
Bills payable 120 --
Sundry creditors 1,080 463
Sundry provisions 1,830 702
33,400 12,500
Assets:-
Land and building 6,000 --
Plant and machinery 14,000 5,000
Furniture, fixtures and fittings 2,304 1,700
Stock 7,862 4,041
Debtors 2,120 1,020
Cash at bank 1,114 609
Bills receivable --- 130
33,400 12,500
All the bills receivable held by V Limited were Y Limited acceptances.

On 1ST April, 2001 Y Limited took over V Limited in an Amalgamation in the nature of merger.
It was agreed that in discharge of consideration for the business. Y Limited would allot
three fully paid equity shares of Rs.10 each at par for every two shares held in V Limited. It
was also agreed that 12% debentures in V Limited would be converted into 13% debentures
in Y Limited of the same amount and denomination.
Expenses of Amalgamation amounting to Rs.1 lakh were borne by Y Limited.
You are required to :-
1. Pass journal entries in the books of Y Limited.

2. Prepare Y Limited Balance Sheet immediately after the merger.
QUESTION NO 9
Given below are the Balance Sheet of two companies as on 31st December, 2002
Anand Limited (Balance Sheet as at 31st December, 2000)
Liabilities Amount Asset Amount

Share capital of Rs.10 fully Goodwill 1,50,000
paid up 15,00,000 Freehold property 4,00,000
Share premium 4,500 Plant and machinery 3,50,000
General reserve 1,00,000 Stock 6,82,000
Profit and Loss account 1,65,650 Sundry debtors 2,58,500
8%Debentures 3,50,000 Bank 3,37,500
sundry creditors 57,850
21,78,000 21,78,000
Bhanu Limited (Balance Sheet as at 31stDecember, 2000)
Liabilities Amount Asset Amount

Share capital of Rs.10 fully Goodwill 50,000
paid up 3,90,000 Freehold property 1,80,000
8%Debentures 70,000 Plant and machinery 1,00,000
Bank overdraft 6,000 Stock 1,62,000
Sundry creditors 2,57,000 Sundry debtors 95,000
Profit and Loss account 1,36,000
7,23,000 7,23,000
The two companies decided to amalgamate, as on 31st December 2000, and a new company
called Anand Bhanu Limited was formed with an authorized capital of Rs.25,00,000 in shares
of Rs.10 each. The terms of Amalgamation were as follows:-
For Anand Limited :-
(a) 6 shares of Rs.10 each fully paid in the new company in exchange for every 5 shares in
Anand Limited and Rs.10,000 in cash;
(b) The debentures-holders were to be allotted such Debentures in the new company
bearing interest at 7% per annum as would bring the same amount of interest.
For Bhanu Limited :-
(a) 1 share of Rs.10 each fully paid in the new company in exchange for every 3 shares in
Bhanu Limited and 5000 in cash.
(b) Debentures –holders were to be allotted such Debentures in the new company bearing
interest at 7% per annum as would bring the same amount of interest.
The new company took over all the assets and liabilities of the two existing companies.
Show journal entries in the books of Anand Bhanu Limited, giving effect to the arrangement
and prepare its opening Balance Sheet.
QUESTION NO 10
Sagar Limited was formed on 1st January 1997 with an authorized share capital of 5,00,000
equity shares of Rs.10 each. 1,00,000 equity shares were issued for cash at a premium of
Rs.2.50 per share. No other transactions took place until 1st April 1997 when Sagar Limited
agreed to buy the assets, including goodwill and assume the liabilities of River Limited and
Canal Limited for a total of 4,00,000 of its shares.
For the purpose of determining the premium at which the shares of Sagar Limited were
to be issued, fixed assets, current assets and the liabilities are to be taken at their book
values: goodwill is to be determined on the basis of two and half times the average profit of
the past three years after deducting a standard profit of 10 per cent on capital employed
as on 31st March 1997. The summarized Balance Sheet of River Limited and Canal Limited
as on 31st March 1997 were as follows:
River Canal River Canal

Rs. Rs. Rs. Rs.
Issued equity Fixed assets 22,50,000 14,50,000
shares of Rs.10 Current 12,50,000 30,50,000
each 15,50,000 16,75,000 assets
Profit and Loss

account 9,50,000 75,000
Sundry creditors 10,00,000 27,50,000
35,00,000 45,00,000 35,00,000 45,00,000

Operating profits for the last three years:
River Limited (Rs.) Canal Limited (Rs.)

Year ended 31st March 1995 3,52,500 2,75,000
1996 4,40,000 3,20,000
1997 4,45,000 3,42,500
(a) Calculate the numbers of shares to be issued by Sagar Limited to the shareholders of
River Limited and Canal Limited respectively and;
(b) Prepare a Balance Sheet of Sagar Limited after completion of business purchased.
QUESTION NO 11
Star Limited and Moon Limited had been carrying on business independently. They agreed
to amalgamate and form a new company Neptune Limited with an authorized share capital
of Rs.2,00,000 divided into 40,000 equity shares of Rs.5 each.
On 31st March 1999 the respective Balance Sheets of Star Limited and Moon Limited were
as follows:
Star Limited Moon Limited

Rs. Rs.
Fixed assets 3,17,500 1,82,500
Current assets 1,63,500 83,875
4,81,000 2,66,375
Less: current liabilities 2,98,500 90,125
Representing capital 1,82,500 1,76,250
(a) Revalue figures of fixed and current assets were as follows:

Rs. Rs.
Fixed assets 3,55,000 1,95,000
Current assets 1,49,750 78,875
The debtors and creditors include Rs.21,675 owed by Star Limited to Moon Limited.
The purchase consideration is satisfied by issue of shares as follows:
30,000 equity shares of Neptune Limited to Star Limited and Moon Limited in the proportion
to the profitability of their business based on the average net profit during the last three
years were as follows:

Rs. Rs.
1994-95 Profit 2,24,788 1,36,950
1995-96 (Loss)/Profit (1,250) 1,71,050
1996-97 Profit 1,88,962 1,79,500
You are required to compute the amount of shares to be issued to Star Limited and Moon
Limited and a Balance Sheet of Neptune Limited showing the position immediately after
amalgamation.
QUESTION NO 12
Exe Ltd. was wound up on 31.3.2004 and its balance sheet as on that date was given below:
Balance sheet of Exe Ltd. as on 31.3.2004
Liabilities Rs Assets Rs Rs
Share capital Fixed assets 9,64,000
1,20,000 Equity shares of Current assets
Rs.10 each 12,00,000 Stock 7,75,000
Reserves and surplus Sundry Debtors
Profit prior to incorporation 42,000 1,60,000
Contingency reserve 2,70,000 Less provision for
Profit and loss a/c 2,52,000 doubtful debts
Current liabilities 8,000 1,52,000
Bills payable 40,000 Bills receivable 30,000
Sundry creditors 2,26,000 Cash at bank 3,29,000 12,86,000
Provisions:
Provisions for income tax 2,20,000
22,50,000 22,50,000
Wye Ltd. tookover the following assets at values shown as under;

Fixed assets Rs.12,80,000, stock Rs.7,70,000 and bills receivable Rs.30,000
Purchase consideration was settled by Wye Ltd. as under:
Rs.5,10,000 of the consideration was satisfied by the allotment of fully paid 10% Preference
shares of Rs.100 each. The balance was settled by issuing Equity shares of Rs.10 each at
Rs.8 per share paid up.
Sundry Debtors realized Rs.1,50,000. Bills payable was settled for Rs.38,000. Income tax
authorities fixed the taxation liability at Rs.2,22,000.
Creditors were finally settled with the cash remaining after meeting liquidation expenses
amounting to Rs.8,000.
1) Calculate the number of Equity shares and Preference shares to be allotted by Wye
Ltd. in discharge of purchase consideration.
2) Prepare the realization account, cash/bank account, Equity shareholders account and
Wye Ltd. account in the books of Exe Ltd.
3) Pass journal entries in the books of Wye Ltd.
QUESTION 13
Following are the summarised Balance Sheets of A Ltd. and B Ltd. as at 31.3.2012.
Particulars A Ltd. B. Ltd.

Share capital.’ Equity shares 10 each (fully paid up) 10,00,000 6,00,000
Securities premium 2,00,000 -
Profit and loss account 1,80,000 1,60,000
10% Debentures 5,00,000 -
Secured loan - 3,00,000
Trade payable 2,60,000 ,170,000
24,40,000 14,80,000
Land and building 9,00,000 4,50,000

Plant and machinery 5,00,000 3,80,000
Investment 80,000 -
Inventory 5,20,000 3,50,000
Trade receivables 4,10,000 2,60,000
Cash at bank 30,000 40,000
24,40,000 14,80,000
The companies agree on a scheme of amalgamation on the following terms:
(i) A new company is to be formed by name AB Ltd.

(ii) AB Ltd. to take over all the assets and liabilities of the existing companies.
(iii) For the purpose of amalgamation, the shares of the existing companies are to be
valued as under:
A Ltd. Rs l8 per share
B Ltd. Rs 20 per share
(iv) A contingent liability of A Ltd. of Rs 60,000 is to be treated as actual existing
liability.
(v) The shareholders of A Ltd. and B Ltd. are to be paid by issuing sufficient number of
shares of AB Ltd. at a premium of Rs 6 per share.
(vi) The face value of shares of AB Ltd. are to be of Rs 10 each.
(i) Calculate the purchase consideration (i.e., number of shares to be issued to A Ltd. and
B Ltd.).
(ii) Pass journal entries in the books of A Ltd. for the transfer of assets and liabilities.
(iii) Pass journal entries in the books of AB Ltd. for acquisition of A Ltd. and B Ltd.
(iv) Prepare the Balance Sheet of AB Ltd.
QUESTION 14
A Ltd. agreed to acquire the business of B Ltd. as on 31st December 2011 on that date
Balance Sheet of B Ltd. was summarized as follows:
Liabilities Rs Assets Rs
Shares Capital (Fully paid shares
of Rs 10 each) 3,00,000 Goodwill 50,000
General Reserves 85,000 Land, Building and plant 3,20,000
P&L A/c 55,000 Inventory - 84,000
6% Debentures 50,000 Trade receivables 18,000
Trade payables 10,000 Cash & Bank Balance 28,000
5,00,000 5,00,000
The. Debenture holders agreed to receive such 7% Debentures issued as 96 each

as would discharge the debentures in B Ltd. at a premium of 20%. The shareholders
in B Ltd. were to receive Rs 2.50 in cash per share and 3 shares in A Ltd. for every
two shares held the shares in A Ltd. being considered as worth Rs 12.50each. -
There were fractions equaling 50 shares for which each was paid. The directors of. A Ltd.
considered the various assets to be valued as follows:
Rs
Land 1,00,000
Buildings 2,50,000
Plant 3,50,000
Inventory 80,000
Trade receivables 18,000
The cost of liquidation of B Ltd. ultimately was Rs 5,000. Due to a technical hitch, the
transaction could be completed only on 1st July, 2011. Till date B Ltd. carried on trading
which resulted in a profit Rs 20,000 (subject to interest) after providing Rs 15,000 as
depreciation, On 30th June, 2011 Inventory was Rs 90,000. Trade receivables were Rs
25,000 and Trade payables were Rs 15,000. There was no addition to or deletion from the
fixed assets. It was agreed that the profit should belong to A Ltd.
You are required, as on July 1, 2012, to:
(i) Prepare Realisation Account and the Shareholders Account in the ledger of B Ltd., and
(ii) give journal entries in the books of A Ltd.
SOLUTION
Ledger of B Ltd.
Realisation Account
Rs Rs
To Sundry Assets, transfer : By Trade payables 15000
Goodwill 50,000 By 6% Debentures 50000
Land, Building, Plant 3,20,000 ByA Ltd.- purchase 6,37500
To Inventory 90,000 consideration (2)
To Trade receivable 25,000 By Provision for Depreciation 15000
To cash & bank Balance (1) 55,000 By A Ltd. [ for profit (3)] 20000
To Shareholders-profit 1,97,500
7,37,500 7,37,500
Shareholders Account
Rs. Rs
To cash 75625 By Share capital A/c- Transfer 3,00,000
To Shares in A Ltd. 561875 By General Reserve 85,000
By P&L A/c 55,000
By Realisation A/c 197,500
637500 637,500
Note : It is clear that the costs of liquidation will be payable by A Ltd since the amount
payable to the shareholders has been specified.
Rs Rs
(1) Cash and bank Balance as on Jan. 1,2012 28000
Add: Profit earned 20000
Depreciation provided ( no cash payment ) 15000
Increase in trade payables 5000
68000
Less: Increase in Inventory 6,000
Increase in Trade receivables 70,00 (13,000)

55,000
(2) Purchase consideration :
For Shareholder - Cash 30,000 x Rs 2.50 75,000
- Shares 30,000 x 3/2-50 = 44,950@ Rs 12.5 5,61,875
- Cash for fractions of shares 50 @ 12.5 625
(3) Since the transfer of assets is an on 30th June, 2012 the 6,37,500
profit of Rs 20,000 must be standing to the credit of A
Ltd.
Journal of A Ltd.
2011 Dr. (Rs) Cr. (Rs)

(1) Business Purchase Account Dr 637500
To Liquidator of B Ltd. 637500
(Purchase consideration settled as per agreement
dated.., for the business of B Ltd.)
(2) Land A/c Dr. 1,00,000

Buildings A/c Dr. 2,50,000
Plant A/c Dr. 3,50,000
Inventory A/c Dr. 86,000
Trade receivables A/c Dr. 25,000
Bank A/c... Dr. 55,000
To Provision for Depreciation A/c 15000
To Profit & Loss Suspense A/c 20000
To Trade payables A/c 15000
To Business Purchase A/c 637500
To Liability for Debentures in B Ltd 60000
To Capital Reserve A/c 115500
(Various assets and liabilities taken over from B Ltd.
-profit up to June 30, 2012 being credited to P & L
Suspense since it is to be adjusted for interest and
additional depreciation due to increase in values of
assets)
(3) Capital Reserve A/c Dr. 5000

To Cash A/c 5000
(Expenses of Liquidation paid by A Ltd.)
(4) Liquidator of B Ltd. Dr. 637500
To Cash A/c 75625
To Share Capital A/c 449500
To Securities Premium A/c 112375
(4) Liability for debenture’s in b Ltd A/c Dr. 60,000
Discount on issue of debenture A/c 2,500
To 7% debenture A/c 62500
(Discharge of Debenture holder of B Ltd. )
QUESTION 15
P and Q have been carrying on same business independently. Due to competition in the
market, they decided to amalgamate and form a new company called PQ Ltd. Following is the
summarized Balance Sheet of P and Q as at 31.3.2012:
Liabilities P Q Assets P Q
Rs Rs Rs Rs
Capital 7,75000 8,55,000 Plant & Machinery 4,85,000 6,14,000
Current 623500 5,57,600 Building 7,50,000 6,40,000
liabilities Current assets 1,63,500 1,58,600
13,98,500 14,12,600 13,98,500 14,12,600
Following are the additional Information:
(i) The authorised capital of the new company will be 25,00,000 divided into 1,00,000
equity shares of Rs 25 each.
(ii) Liabilities of P includes Rs 50,000 due to 0 for the purchases made. Q made a profit
of 20% on sale to P.
P has goods purchased from Q, cost to him rs 10,000. This is included in the Current asset
of P as at 31St March, 2012.
The assets of P and Q are to be revalued as under:
P Q
Rs Rs
Plant and machinery 525000 675000
Building 775000 648000
v) The purchase consideration is to be discharged as under:

(a) Issue 24,000 equity shares of Rs. 25 each fully paid up in the proportion of their
profitability in the preceding 2 years.
(b) Profits for the preceding 2 years are given below:
P Q
Rs Rs
1st year 2,62,800 2,75,125
IInd year 2,12,200 2,49,875
Total 4,75,000 525000
(c) Issue 12% preference shares of 10 each fully paid up at par to provide income
equivalent to 8% return on capital employed in the business as on 31.3.2012
revaluation of assets of P and Q respectively.
(i) Compute the amount of equity and preference shares issued to P and Q.
(ii) Prepare the Balance Sheet of P & Q Ltd. immediately after amalgamation.
QUESTION 16
X Ltd. And Y Ltd. were amalgamated on and from 1st April, 2012 and formed a new company
Z Ltd. to take over the business of X Ltd. and Y Ltd. The summarized Balance Sheets of X
Ltd. and Y Ltd., as on 31st March, 2012 are as follows:
(Rs in crores)
Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd.
Share capital : Land and Building 38 25
Equity share of Rs 10 each 50 45 Plant and Machinery 24 17
10% Preference Share of Investments 10 6

Rs 10 each 20 14 Inventory 22 15
Revaluation Reserve 10 6 Trade Receivable 30 24
General Reserve 12 8 Cash at Bank 16 13
Investment Allowance
Reserve 5 4
Profit & Loss Account 8 6
15% Debentures of Rs 100 4 5
each (Secured)
Trade payable 31 12
140 100 140 100
Additional Information:
(1) Z Ltd. will issue 6 equity shares for 10 equity shares of X Ltd. and 2 equity shares for
5 equity shares of B Ltd. The shares are issued @ Rs 30 each having a face value of Rs
10 shares.
(2) Preference shareholders of two companies are issued equivalent number of .15%
preference shares of Z Ltd. at a price of Rs 120 per share (face value 100).
(3) 15% Debenture holders of X Ltd. and Y Ltd are discharged by Z Ltd. issuing such
number of its 18% Debentures of Rs 100 each so as to maintain the same amount of
interest.
(4) Investment allowance reserve is to be maintained for 4 more years. Prepare the
Balance Sheet of Z Ltd. after amalgamation. the amalgamation took place in the nature
of purchase.
QUESTION 17
The summarized balance Sheet A Limited and B Limited as at 31st March, 2012 are as
follow:
Liabilities A Ltd. B. Ltd. Assets A Ltd. B. Ltd.

Equity share of 10 each 20,00,000 12,00,000 Sundry 30,00,000 18,00,000
General reserve 4,00,000 2,20,000 assets
Trade payables 6,00,000 3,80,000

30,00,000 18,00,000 30,00,000 18,00,000
Sundry assets of B Ltd. includes long term investment of 4,00,000, the market value of
which is now Rs 4,80,000. A Ltd. absorbed B Ltd. on the basis of intrinsic value of the
shares. The purchase consideration is to be discharged in fully paid-up equity shares. A sum
of Rs 1,00,000 is owed by A Ltd. to B Ltd., also included in the Inventory of A Ltd. is Rs
1,20,000 goods supplied by B Ltd. at cost plus 20%. Give Journal entries in the books of
both the companies, if entries are made at intrinsic value. Also prepare Balance Sheet of A
Ltd. after absorption.
QUESTION 18
The following are the summarized balance Sheet of A Ltd and B Ltd as on 31st December,
2011:
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.

Rs Rs Rs Rs
Share Capital Equity Fixed Assets 7,00,000 2,50,000
Equity Shares of Rs Current Assets:
10 each 6,00,000 3,00,000 Inventory 2,40,000 3,20,000
10% Pref. Shares of Trade
Rs 100 each 2,00,000 1,00,000 Receivable 5,00,000 2,90,000
Reserves and Surplus 3,00000 2,00,000 Cash at Bank 1,10,000 40,000
Secured Loans:
12% Debentures 2,00,000 1,50,000
Current Liabilities:
Trade payable 2,50,000 1,50,000 _______ ______
15,50,000 9,00,000 15,50,000 9,00,000
Details of Trade receivables and trade payable are as under:
Trade payables A Ltd. B.Ltd.

Sundry Creditors 2,20,000 1,25,000
2,50,000 1,50,000
Trade receivables
Debtors 3,60,000 1,90,000
Bills Receivable 1,40,000 1,00,000
5,00,000 2,90,000
Fixed Assets of both the companies are to be revalued at 15% above book value. Inventory
in Trade and Debtors are taken over at 5% lesser than their book value. Both the companies
are to pay Rs 10% Equity dividend, Preference dividend having been already paid.
After the above transactions are given effect to, A Ltd. will absorb B Ltd. on the following
terms:
(i) 8 Equity Shares of Rs 10 each will be issued by A Ltd. at par against 6 shares of B Ltd.
(ii) 10% Preference Shareholders of B Ltd. will be paid at 10% discount by issue of 10%
Preference Shares of Rs 100 each at par in A Ltd.
(iii) 12% Debenture holders of B Ltd. are to be paid at 8% premium by 12% Debentures in
A Ltd. issued discount of 10%.
(iv) Rs 30,000 by A Ltd to B Ltd. For liquidation expenses. Sundry Creditors of VB Ltd.
include 10,000 due to A Ltd.
Prepare:
(a) Absorption entries in the books of A Ltd.

(b) Statement of consideration payable by A lid.
NOTES

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ACCOUNTING STANDARDS BASICS

What are Accounting Standards?

1. Recognition of transactions and events in the Financial Statements.

Outline the advantages and disadvantages of Accounting Standards.

5. To reduce (or eliminate if possible), accounting 3. Standards cannot

Explain the composition of the Accounting Standards Board (ASB) of ICAI.

1. To conceive of and suggest areas in which Accounting Standards need to be developed.

What factors are considered by ASB while formulate Accounting Standards?

1. International Accounting Standards (IASs) issued by the International Accounting

Describe the procedure in the issue of an Accounting Standard in India.

(a) The Institute of Cost and Works Accountants of India (ICWAI).

Outline the nature and scope of Accounting Standards in India.

Write a short note on NACAS/NFRA

Status of the Accounting Standards issued by the Institute of Chartered Accountants of

Number Title of the Accounting Date from Entity to which

AS-17 Segment Reporting 1.4.2001 Level-1 and Non-SMC

AS-31 Financial Instruments – WITHDRAWN Non-SME

SCHEDULE III TO THE DIVISION I

Turnover Rounding off

PART I – BALANCE SHEET

Particulars Note Figures as at the Figures as at the

d Cash and cash equivalents

See accompanying notes to Financial Statements.

B. Reserves and Surplus

(c) Securities Premium Reserve;

L. Long-term loans and advances

M. Other non-current assets

(ii) Others (specify nature)

Q. Cash and cash equivalents

R. Short-term loans and advances

S. Other current assets (specify nature).

(ai) Commitments shall be classified as:

PART II – STATEMENT OF PROFIT AND LOSS

Particulars Note Figures for the Figures for the

Particulars Note Figures for the Figures for the

See accompanying notes to the financial statements.

GENERAL INSTRUCTIONS FOR PREPARATION

GENERAL INSTRUCTIONS FOR THE PREPARATION

1. Where a company is required to prepare Consolidated Financial Statements, i.e.,

GENERAL INSTRUCTIONS FOR PREPARATION OF

Turnover Rounding off

Once a unit of measurement is used, it should be used uniformly in the Financial

PART I -BALANCE SHEET

Particular Note Figures as Figures as at

(2) Current assets

(a) Financial Liabilities

(2) Current liabilities

see accompanying notes to the financial statements

STATEMENT OF CHANGES IN EQUITY

Reserve and Surplus Debt

allot- instru- serve income hensive flow financial (Specify capital

GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET

1. An entity shall classify an asset as current when-

(c) Plant and Equipment

VII. Trade Receivables:

(i) Trade receivables shall be sub-classified as;

(i) Loans shall be classified as-