CA Final FR A MTP 1 Nov 2024 Exam Castudynotes Com

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Mock Test Paper - Series I: September, 2024
Date of Paper: 9th September, 2024
Time of Paper: 2 P.M. to 5 P.M.
FINAL COURSE: GROUP – I

PAPER – 1: FINANCIAL REPORTING
ANSWER TO PART – I CASE SCENARIO BASED MCQS
1. Option (a) : ` 8,40,000

2. Option (b) : ` 42,000
3. Option (d) : ` 50,000
4. Option (c) : 11.4375%
5. Option (c) : ` 15,000
6. Option (a) : ` 22,875
7. Option (d) : Loss on initial recognition of biological asset ` 6,000
8. Option (a) : Gain on remeasurement of biological asset ` 9,800
9. Option (c) : Equity
10. Option (b) : Financial Liability
11. Option (b) : Z Ltd. is an associate of H Ltd.
12. Option (b) : G Ltd. is an associate of H Ltd.
13. Option (b) : Y Ltd. is an associate of H Ltd.
14. Option (d) : Do not disclose assumptions and bases, so that users are
not misled.
15. Option (a) : Ensure that all passwords are simple and are not changed
regularly.
ANSWERS OF PART – II DESCRIPTIVE QUESTIONS

1. Identifying the acquirer
As a result of Entity A issuing 150 ordinary shares, Entity B’s shareholders
own 60 per cent of the issued shares of the combined entity (i.e., 150 of
the 250 total issued shares). The remaining 40 per cent are owned by
Entity A’s shareholders. Thus, the transaction is determined to be a
reverse acquisition in which Entity B is identified as the accounting acquirer
while Entity A is the legal acquirer.
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Calculating the fair value of the consideration transferred
If the business combination had taken the form of Entity B issuing
additional ordinary shares to Entity A’s shareholders in exchange for their
ordinary shares in Entity A, Entity B would have had to issue 40 shares for
the ratio of ownership interest in the combined entity to be the same. Entity
B’s shareholders would then own 60 of the 100 issued shares of Entity B —
60 per cent of the combined entity. As a result, the fair value of the
consideration effectively transferred by Entity B and the group’s interest in
Entity A is ` 1,600 (40 shares with a fair value per share of ` 40).
The fair value of the consideration effectively transferred should be based
on the most reliable measure. Here, the quoted market price of Entity A’s
shares provides a more reliable basis for measuring the consideration
effectively transferred than the estimated fair value of the shares in Entity
B, and the consideration is measured using the market price of Entity A’s
100 shares with a fair value per share of ` 16.
Measuring goodwill
Goodwill is measured as the excess of the fair value of the consideration
effectively transferred (the group’s interest in Entity A) over the net amount
of Entity A’s recognised identifiable assets and liabilities, as follows:
` `
Consideration effectively transferred 1,600
Net recognised values of Entity A’s identifiable
assets and liabilities
Current assets 500
Non-current assets 1,500
Current liabilities (300)
Non-current liabilities (400) (1,300)
Goodwill 300
Consolidated balance sheet at 31 st December, 20X1

The consolidated balance sheet immediately after the business
combination is:
`
Non-current assets [3,000 + 1,500] 4,500
Goodwill 300
Current assets [700 + 500] 1,200
Total assets 6,000
Shareholders’ equity
Issued equity 250 ordinary shares [600 + 1,600] 2,200
Retained earnings 1,400
2
Total shareholders’ equity 3,600
Non-current liabilities [1,100 + 400] 1,500
Current liabilities [600 + 300] 900
Total liabilities 2,400
Total liabilities and shareholders’ equity 6,000
The amount recognised as issued equity interests in the consolidated
financial statements (` 2,200) is determined by adding the issued equity of
the legal subsidiary immediately before the business combination (600)
and the fair value of the consideration effectively transferred (` 1,600).
However, the equity structure appearing in the consolidated financial
statements (i.e., the number and type of equity interests issued) must
reflect the equity structure of the legal parent, including the equity interests
issued by the legal parent to affect the combination.
2. (a) Ind AS 109 requires that financial assets and liabilities are recognized
on initial recognition at its fair value, as adjusted for the transaction
cost. In accordance with Ind AS 113 Fair Value Measurement, the fair
value of a financial liability with a demand feature (e.g., a demand
deposit) is not less than the amount payable on demand, discounted
from the first date that the amount could be required to be paid.
Both parent and subsidiary recognize financial asset and liability,
respectively, at fair value on initial recognition. The difference
between the loan amount and its fair value is treated as an equity
contribution to the subsidiary. This represents a further investment by
the parent in the subsidiary.
Accounting in the books of XYZ Ltd (Parent)
Particulars Amount Amount
On the date of loan
Loan to ABC Ltd (Subsidiary) Dr. 7,51,315
Deemed Investment (Capital Contribution)
in ABC Ltd. Dr. 2,48,685
To Bank 10,00,000
(Being the loan is given to ABC Ltd and
recognised at fair value)
Accrual of Interest income
Loan to ABC Ltd Dr. 75,131
To Interest income 75,131
(Being interest income accrued) – Year 1
3
On repayment of loan
Bank Dr. 10,00,000
To Loan to ABC Ltd (Subsidiary) 10,00,000
Accounting in the books of ABC Ltd (Subsidiary)
Particulars Amount Amount
On the date of loan
Bank Dr. 10,00,000
To Loan from XYZ Ltd (Payable) 751,315
To Equity (Deemed Capital
Contribution from XYZ Ltd) 2,48,685
(Being the loan taken from XYZ Ltd.
and recognised at Fair value)
Accrual of Interest
Interest expense Dr. 75,131
(Being interest expense recognised)–Year 1
On repayment of loan
Loan from XYZ Ltd (Payable) Dr. 10,00,000
To Bank 10,00,000
Working Notes:
1 Computation of Present value of loan
Rate 10%
Amount of Loan 10,00,000
Year 3
Present Value 7,51,315
2 Computation of interest for Year I
4
Present Value 7,51,315
Rate 10%
Period of interest - for 1 year 1
Closing value at the end of year 1 8,26,446
Interest for 1 st year 75,131
3 Computation of interest for Year 2

Value of loan as at the beginning of Year 2 8,26,446
Rate 10%
Period of interest - for 2 nd year 1
Interest for 2 nd year 82,645
4 Computation of interest for Year 3

Value of loan as at the beginning of Year 3 9,09,091
Rate 10%
Period of interest - for 3 rd year 1
Interest for 3 rd year 90,909
(b) Either
In accordance with Ind AS 24 ‘Related Party Disclosures’, effective
1st January 20X3, Candour Ltd. would be regarded as a related party
of Buildwell Ltd. This is because Candour Ltd. is controlled by the
close family member of one of Buildwell Ltd.’s key management
personnel. This means that from 1 st January 20X3, the purchases
from Candour Ltd. would be regarded as related party transactions.
As per the provisions of para 18 of Ind AS 24, transactions with
related parties need to be disclosed in the notes to the financial
statements, together with the nature of the relationship. It is irrelevant
whether or not these transactions are at normal market rates. As per
para 23 of the standard, disclosures that related party transactions
were made on terms equivalent to those that prevail in arm’s length
transactions are made only if such terms can be substantiated.
The disclosure is required to state that Candour Ltd., controlled by the
spouse of a director, supplied goods to the value of ` 4·5 million
(3 x ` 1·5 million) in the current accounting period.
Or
The entity should use First-in-first-out (FIFO) method for its
Ind AS 108 disclosures, even though it uses the weighted average
5
cost formula for measuring inventories for inclusion in its financial
statements. Where chief operating decision maker uses only one
measure of segment asset, same measure should be used to report
segment information. Accordingly, in the given case, the method
used in preparing the financial information for the chief operating
decision maker should be used for reporting under Ind AS 108.
However, reconciliation between the segment results and results as
per financial statements needs to be given by the entity in its segment
report.
3. (a) Statement of Cash Flows for the year ended 31 st March 20X3
(Indirect method)
Particulars ` `
Cash flow from operating activities:
Net Profit before taxes and
extraordinary items (7,20,000+8,80,000) 16,00,000
Add: Depreciation 6,00,000
Operating profit before working capital

changes 22,00,000
Increase in inventories (1,80,000)
Decrease in trade receivables 16,80,000
Advances (12,000)
Decrease in trade payables (60,000)
Increase in outstanding expenses 2,40,000
Cash generated from operations 38,68,000
Less: Income tax paid (Refer W.N.4) (8,68,000)
Net cash from operations 30,00,000
Cash from investing activities:
Purchase of land (4,80,000)
Purchase of building & equipment
(Refer W.N.2) (28,80,000)
Sale of equipment (Refer W.N.3) 3,60,000
Net cash used for investment
activities (30,00,000)
Cash flows from financing activities:
Issue of share capital 8,40,000
Dividends paid (7,20,000)
Net cash from financing activities: 1,20,000
6
Net increase in cash and cash
equivalents 1,20,000
Cash and cash equivalents at the
beginning 6,00,000
Cash and cash equivalents at the end 7,20,000
Working Notes:
1. Building & Equipment Account
Particulars ` Particulars `
To Balance b/d 36,00,000 By Sale of
To Cash/bank assets 7,20,000
(purchases)(bal.fig) 28,80,000 By Balance c/d 57,60,000
64,80,000 64,80,000
2. Building & Equipment Accumulated Depreciation Account

To Sale of asset By Balance b/d 12,00,000
(acc. By Profit & Loss A/c
depreciation) 4,80,000 (provisional) 6,00,000
To Balance c/d 13,20,000
18,00,000 18,00,000
3. Computation of sale price of Equipment

Particulars `
Original cost 7,20,000
Less Accumulated Depreciation (4,80,000)
Net cost 2,40,000
Profit on sale of assets 1,20,000
Sale proceeds from sale of assets 3,60,000
4. Provision for tax Account
To Bank A/c 8,68,000 By Balance b/d 1,20,000
To Balance c/d 1,32,000 By Profit & Loss A/c
(provisional) 8,80,000
10,00,000 10,00,000
(b) As per Ind AS 19, net remeasurement of ` 900 would be recognized in
other comprehensive income.
7
Computation of Net remeasurement
= Remeasurement – Actuarial loss
= ` 1000 (Refer WN - 1) – ` 100 (Given in the question) = ` 900.
Computation of net interest expense
Particulars `
Defined benefit liability as at 1 st April 20X1 (A) (Given in
the question) 12,000
Fair value of plan asset as at 1 st April 20X1 (B) (Given
in the question) (10,000)
Net defined benefit liability (A - B) 2,000
Net interest expense (as it is net liability) (Refer note
given below) 200
Note: Net interest expense would be computed on net defined benefit

liability using discount rate of 10% given in the question-
= Net defined benefit liability x Discount rate
= 2,000 x 10%
= ` 200.
Working Note:
Computation of amount of remeasurement
Particulars `
Actual return on plan asset for the year ended
31st March 20X2 (Given in the question) (C) 2,000
Less: Interest income on ` 10,000 held for 12 months at
10% (D) (1,000)
Remeasurement (E = C - D) 1,000
4. (a) Impact on consolidated balance sheet of PQR Ltd. group at

31st March, 20X2
i. The tax loss creates a potential deferred tax asset for the PQR
Ltd. group since its carrying value is nil and its tax base is
` 30,00,000. However, no deferred tax asset can be recognised
because there is no prospect of being able to reduce tax liabilities
in the foreseeable future as no taxable profits are anticipated.
ii. The development costs have a carrying value of ` 15,20,000
(` 16,00,000 – (` 16,00,000 x 1/5 x 3/12)). The tax base of the
development costs is nil since the relevant tax deduction has
already been claimed. The deferred tax liability will be ` 4,56,000
(` 15,20,000 x 30%). All deferred tax liabilities are shown as non-
current.
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iii The carrying value of the loan at 31st March, 20X2 is
` 1,07,80,000 (` 1,00,00,000 – ` 200,000 + (` 98,00,000 x 10%)).
The tax base of the loan is 1,00,00,000. This creates a deductible
temporary difference of ` 7,80,000 and a potential deferred tax
asset of ` 2,34,000 (` 7,80,000 x 30%).
(b) In the facts provided above, the entity has made sale of two goods –
machine and space parts, whose control is transferred at a point in
time. Additionally, company agrees to hold the spare parts for the
customer for a period of 2-4 years, which is a separate performance
obligation. Therefore, total transaction price shall be divided amongst
3 performance obligations –
(i) Sale of machinery
(ii) Sale of spare parts
(iii) Custodial services for storing spare parts.
Recognition of revenue for each of the three performance obligations
shall occur as follows:
- Sale of machinery: Machine has been sold to the customer and
physical possession as well as legal title passed to the customer
on 31 st March, 20X3. Accordingly, revenue for sale of machinery
shall be recognized on 31 st March, 20X3.
- Sale of spare parts: The customer has made payment for the
spare parts and legal title has been passed to specifically
identified goods, but such spares continue to be physically held
by the entity. In this regard, the company shall evaluate if
revenue can be recognized on bill-and-hold basis if all below
criteria are met:
(a) the reason for the bill- The customer has specifically
and-hold arrangement must requested for entity to store
be substantive (for example, goods in their warehouse,
the customer has requested owing to close proximity to
the arrangement); customer’s factory.
(b) the product must be The spare parts have been
identified separately as specifically identified and
belonging to the customer; inspected by the customer.
(c) the product currently The spares are identified and
must be ready for physical segregated, therefore, ready
transfer to the customer; and for delivery.
(d) the entity cannot have Spares have been segregated
the ability to use the product and cannot be redirected to
or to direct it to another any other customer.
customer
Therefore, all conditions of bill-and-hold are met and hence,

company can recognize revenue for sale of spare parts on
31st March, 20X3.
9
- Custodial services: Such services shall be given for a period of 2
to 4 years from 31 st March, 20X3. Where services are given
uniformly and customer receives & consumes benefits
simultaneously, revenue for such service shall be recognized on a
straight-line basis over a period of time.
5. (a) Paragraph 2 of Ind AS 20, “Accounting for Government Grants and
Disclosure of Government Assistance” inter alia states that the
Standard does not deal with government participation in the ownership
of the entity.
Since ABC Ltd. is a Government company, it implies that government
has 100% shareholding in the entity. Accordingly, the entity needs to
determine whether the payment is provided as a shareholder
contribution or as a government. Equity contributions will be recorded
in equity while grants will be shown in the Statement of Profit and Loss.
Where it is concluded that the contributions are in the nature of
government grant, the entity shall apply the principles of Ind AS 20
retrospectively as specified in Ind AS 101 ‘First Time Adoption of
Ind AS’. Ind AS 20 requires all grants to be recognised as income on a
systematic basis over the periods in which the entity recognises as
expenses the related costs for which the grants are intended to
compensate. Unlike AS 12, Ind AS 20 requires the grant to be
classified as either a capital or an income grant and does not permit
recognition of government grants in the nature of promoter’s
contribution directly to shareholders’ funds.
Where it is concluded that the contributions are in the nature of
shareholder contributions and are recognised in capital reserve under
previous GAAP, the provisions of paragraph 10 of Ind AS 101 would be
applied which states that except in certain cases, an entity shall in its
opening Ind AS Balance Sheet:
(a) recognise all assets and liabilities whose recognition is required
by Ind AS;
(b) not recognise items as assets or liabilities if Ind AS do not permit
such recognition;
(c) reclassify items that it recognised in accordance with previous
GAAP as one type of asset, liability or component of equity, but
are a different type of asset, liability or component of equity in
accordance with Ind AS; and
(d) apply Ind AS in measuring all recognised assets and liabilities.
Accordingly, as per the above requirements of paragraph 10(c) in the
given case, contributions recognised in the Capital Reserve should be
transferred to appropriate category under ‘Other Equity’ at the date of
transition to Ind AS.
(b) Identification of the contract (by applying para 9 of Ind AS 116)
(a) Identified asset
Feel Fresh Ltd. (a customer company) enters into a long term
10
purchase contract with M/s Radhey (a manufacturer) to purchase
a particular type and quality of soaps for 10 year period.
Since for the purpose of the contract M/s Radhey has to buy a
customized machine as per the directions of Feel Fresh Ltd. and
also the machine cannot be used for any other type of soap, the
machine is an identified asset.
(b) Right to obtain substantially all of the economic benefits
from use of the asset throughout the period of use
Since the machine cannot be used for manufacture of soap for
any other buyer, Feel Fresh Ltd. will obtain substantially all the
economic benefits from the use of the asset throughout the period
of use.
(c) Right to direct the use
Feel Fresh Ltd. controls the use of machine and directs the terms
and conditions of the contract with respect to recovery of fixed
expenses related to machine.
Hence the contract contains a lease.
Lease term
The lease term shall be 10 years assuming reasonable certainty.
Though the lessee is not contractually bound till 10th year, i.e., the
lessee can refuse to make payment anytime without lessor’s
permission but, it is assumed that the lessee is reasonably certain that
it will not exercise this option to terminate.
Identification of lease payment
Lease payments are defined as payments made by a lessee to a lessor
relating to the right to use an underlying asset during the lease term,
comprising the following:
(a) fixed payments (including in-substance fixed payments), less any
lease incentives
(b) variable lease payments that depend on an index or a rate
(c) the exercise price of a purchase option if the lessee is reasonably
certain to exercise that option
(d) payments of penalties for terminating the lease, if the lease term
reflects the lessee exercising an option to terminate the lease
Here in-substance fixed payments in the given lease contract are
` 1,74,015 p.a. The present value of lease payment which would be
recovered in 8 years @ 8% would be ` 10,00,000 (approx.)
Variable lease payments that do not depend on an index or rate and
are not, in substance, fixed are not included as lease payments.
Instead, they are recognised in profit or loss in the period in which the
event that triggers the payment occurs (unless they are included in the
carrying amount of another asset in accordance with other Ind AS).
Hence, lease liability will be recognized by ` 10,00,000 in the books of
11
Feel Fresh Ltd. Since there are no payments made to lessor before
commencement date less lease incentives received from lessor or
initial direct costs incurred by lessee or estimate of costs for restoration
/ dismantling of underlying asset, the right of use asset is equal to
lease liability.
Journal Entries
On initial recognition
ROU Asset Dr. 10,00,000
To Lease Liability 10,00,000
To initially recognise the Lease Liability and the corresponding
ROU Asset
At the end of the first year
Interest Expense Dr. 80,000
To Lease Liability 80,000
To record interest expense and accrete the lease liability using
the effective interest method ( ` 10,00,000 x 8%)
Depreciation Expense (10,00,000 / 10 1,00,000
years) Dr.
To ROU Asset 1,00,000
To record depreciation on ROU using the straight-line method
(` 10,00,000 / 10 years)
Lease Liability Dr. 1,74,015
To Bank / M/s. Radhey 1,74,015
To record lease payment
Cost of soap Dr. 24,75,000
To Bank / M/s. Radhey {5,50,000 x 24,75,000
(4 + 0.5)}
To record variable expenses paid as cost of the goods purchased
6. (a) The above issue needs to be examined in the umbrella of the

provisions given in Ind AS 1 ‘Presentation of Financial Statements’,
Ind AS 16 ‘Property, Plant and Equipment’ in relation to property ‘1’
and ‘2’ and Ind AS 40 ‘Investment Property’ in relation to property ‘3’.
Venus Ltd. shall apply the same accounting policy (i.e. either
revaluation or cost model) to entire class of property being property ‘1’
and ‘2”. It also required to depreciate these properties irrespective of
that, their fair value exceeds the carrying amount. The revaluation gain
shall be recognised in other comprehensive income and accumulated
in equity under the heading of revaluation surplus.
There is no alternative of revaluation model in respect to property ‘3’
12
being classified as Investment Property and only cost model is
permitted for subsequent measurement. However, Venus ltd. is
required to disclose the fair value of the property in the Notes to
Accounts. Also the property ‘3’ shall be presented as separate line
item as Investment Property.
Therefore, as per the provisions of Ind AS 1, Ind AS 16 and Ind AS 40,
the presentation of these three properties in the balance sheet is as
follows:
Case 1: Venus Ltd. has applied the Cost Model to an entire class
of property, plant and equipment.
Balance Sheet (extracts) as at 31 st March, 20X2 `
Assets
Non-Current Assets
Property, Plant and Equipment
Property ‘1’ 13,500
Property ‘2’ 9,000 22,500
Investment Properties
Case 2: Venus Ltd. has applied the Revaluation Model to an
entire class of property, plant and equipment.
Balance Sheet (extracts) as at 31 st March, 20X2 `
Assets
Non-Current Assets
Property, Plant and Equipment
Property ‘2’ 11,000 27,000
Investment Properties
Equity and Liabilities
Other Equity
Revaluation Reserve
Property ‘1’ [16,000 – (15,000 – 1,500)] 2,500
Property ‘2’ [11,000 – (10,000 – 1,000)] 2,000 4,500
The revaluation reserve should be routed through Other
Comprehensive Income (subsequently not reclassified to Profit and
Loss) in Statement of Profit and Loss and shown in a separate column
under Statement of Changes in Equity.
(b) Ethical Considerations
Long-term success of any organization strongly depends on the fair
13
treatment of employees, which in turn is based on the ethical behaviour of
the management as well as how the same is perceived by the
stakeholders. In the given case, the CFO has suggested not paying the
discretionary bonus, which the directors are considering as it will enable
the company to record profits of ₹ 2 crores, thereby ensuring a bonus pay
out to the directors. This suggestion is not illegal at all as the bonus is
discretionary rather than statutory/contractual. In other words, the
company has no legal obligation to pay the bonus to the employees.
However, the reason behind non-payment of the bonus is what gives rise
to ethical considerations. The suggestion by the CFO will have the
aforesaid impact of reducing expenses and improving profits.
On a moral ground, the suggestion is likely to have negative
consequences for the company. The employees would be dissatisfied
that the bonus has been withdrawn, and further, when they would see the
directors withdrawing bonuses out of the profits arising on a saving
in bonus costs, it would have a negative impact on employee morale,
which would result in low employee satisfaction scores and poor
retention rates, which are reported as non-financial information in the
financial statements. Companies are also under increasing pressure
to reduce the wage gap between the management and its employees.
By not paying a bonus, this metric will be adversely affected.
The CFO’s statement that the above action will not negatively impact
the company as the non-financial reporting indicators are not widely
read by the users is misleading. The non-financial information is
becoming increasingly important to the users of financial statements as
they care about companies’ treatment of their employees and view it as
being important in the long-term success of the company.
A chartered accountant has a responsibility to exercise due diligence
and clearly consider both financial and non-financial information while
discharging his professional duty. It would be unethical for a
chartered accountant to guide the management on matters which may
result into any kind of disadvantage (it includes even non-financial
matters) to the stakeholders.
Further, a distinguishing mark of the accountancy profession is its
acceptance of the responsibility to act in the public interest. A
chartered accountant’s responsibility is not exclusively to satisfy the
needs of an individual client or employing organization. Therefore,
the Code contains requirements and application material to enable
chartered accountants to meet their responsibility to act in the public
interest. Hence, it is essential for a chartered accountant to uphold
the professional standards and act in accordance with the ethical
principles by ensuring transparency and accuracy in financial
reporting
14

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FINAL COURSE: GROUP – I

1. Option (a) : ` 8,40,000

ANSWERS OF PART – II DESCRIPTIVE QUESTIONS

Consolidated balance sheet at 31 st December, 20X1

3 Computation of interest for Year 2

4 Computation of interest for Year 3

Operating profit before working capital

2. Building & Equipment Accumulated Depreciation Account

3. Computation of sale price of Equipment

Note: Net interest expense would be computed on net defined benefit

4. (a) Impact on consolidated balance sheet of PQR Ltd. group at

Therefore, all conditions of bill-and-hold are met and hence,

6. (a) The above issue needs to be examined in the umbrella of the

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