Download CA Final Financial Reporting Suggested Answers May 2015 2

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Gurukripas Guideline Answers for May 2015 CA Final Financial Reporting Exam

May 2015.1

Gurukripas Guideline Answers to May 2015 Exam QuestionsCA Final Financial Reporting

Question No.1 is compulsory (4 5 = 20 Marks).Answer any fivequestions from the remaining sixquestions (16 5 = 80 Marks). [Answer any 4 out of 5 in Q.7]

Working Notes should form part of the answers.

Question 1 (a): AS 2 5 MarksFrom the following information, value the Inventories as on 31stMarch, 2015:

Raw Material has been purchased at 125 per kg. Prices of Raw Material are on the decline. The Finished Goods beingmanufactured with the Raw Material is also being sold at below Cost. The Stock of Raw Material is of 15,000 kg and theReplacement Cost of Raw Material is 100 per kg.

Cost of Finished Goods per kg is as under:Particulars per kg

Material Cost 125Direct Labour Cost 20Direct Variable Production Overhead 10Fixed Production Overhead for the year for a normal capacity of 1,00,000 kgs of production is 10 Lakhs. At the year end, there

were 2,000 kgs of Finished Goods in stock. Net Realisable Value of Finished Goods is 140 per kg.Solution:

Similar to Page 2.4, Q.No.16, Page 2.15, Q.No.50 of Padhukas Students Referencer on A/cg Standards[N 00]

1. Conversion Cost per kg of Finished Product = Direct Labour + Direct Variable Production OH + Fixed Production OH

= ` 20 + ` 10 +KgsLakh1

Lakhs10`= ` 40 per kg.

2. Inventory Valuation is as under (A) For Finished Goods

(a) Cost per kg for Finished Product = Material + Conversion 125 + 40 = ` 165 per kg

(b) Net Realisable Value of Finished Product if sold after Conversion Given = ` 140 per kg

(c) Hence, Valuation Rate for Finished Goods = (a) or (b), whichever is lower. ` 140 per kg

(d)

Value of Inventory 2,000 kg of Finished Product 2,000 kgs ` 140 = 2,80,000

(B) For Raw Materials

(a) Cost of Raw Material Given = ` 125 per kg

(b) Replacement Cost of Material, i.e. Sale without Conversion Given = ` 100 per kg

(c) Valuation Rate for Raw Material (i.e. least of Cost or NRV, least of (a) and (b) ` 100 per kg

(d)

Value of Inventory 15,000 kg of Raw Material 15,000 kgs` 100= 15,00,000

Note: When the Finished Products in which the Raw Material is incorporated, are expected to be sold below Cost

(NRV ` 140 vs Cost ` 165), it is preferable to sell the product without Conversion. In such case, the RawMaterials will be valued below cost, i.e. at NRV, being the Replacement Cost.

Question 1 (b): AS 26 Impairment of Assets 5 Marks

SMC Limited is having a Plant (an Asset) whose Carrying Amount as on 01102012 is 38,000 Lakhs and the Plant washaving a useful life till 31032020. The estimated Residual Value is 900 Lakhs. The Selling Price on 31st March 2015 isexpected to be 20,000 Lakhs and the Cost of Disposal is expected to be 100 Lakhs.

The Expected Cash Flows from the Plant are as under

Financial Year 20152016 20162017 20172018 20182019 20192020

Cash Flow Lakhs 4,100 5,900 6,000 7,800 4,500

The Company expects the Discount Rate of 10%. Discount Factor at 10% for 1, 2, 3, 4 and 5 years are 0.909, 0.826, 0.751, 0.683and 0.621 respectively. The Company provides depreciation on SLM basis. You are required to determine as at 31stMarch 2015:

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May 2015.2

(i) Value in Use of the Plant

(ii) Impairment Loss, if any, to be recognized for the year.

(iii)

Revised Carrying Amount for the Financial Year ending 31stMarch 2015.

Solution: Similar to Page 28.15, Q.No.31 of Padhukas Students Referencer on Accounting Standards [RTP]

1. Computation of Value in Use

Fin. Year Cash Flow Discount Rate at 10% Discounted Cash Flow

20152016 ` 4,100 Lakhs 0.909 ` 3,726.90 Lakhs

20162017 ` 5,900 Lakhs 0.826 ` 4,873.40 Lakhs

20172018 ` 6,000 Lakhs 0.751 ` 4,506.00 Lakhs

20182019 ` 7,800 Lakhs 0.683 ` 5,327.40 Lakhs

20192020 ` 4,500 + ` 900 = ` 5,400 Lakhs 0.621 ` 3,353.40 Lakhs

Value in Use 21,787.10 Lakhs

2. Computation of Other Particulars

Particulars Lakhs

1. Original Cost 38,000.00

2. Depreciation for Fin.Years 20122013, 20132014 and 20142015 (See Note below) (8,656.67)

3. Carrying Amount on 31.03.2015 before Impairment (1 2) 29,343.33

4. Recoverable Amount (Net Selling Price 19,900 [or] Value in Use 21,787.10, whichever is higher) 21,787.10

5. Impairment Loss = Carrying Amount LessRecoverable Amount (3 4) 7,556.23

6. Revised Carrying Amount = Old Carrying Amount LessImpairment Loss (3 5) 21,787.10

7. Depreciation Charge from 20152016 onwards (21,787.10 900) 5 Years 4,177.42

Note:

Depreciation as per Initial Cost, etc. = Depreciable Value (38,000 900) = `37,100 Lakhs divided by 7.5 years (i.e.

from 01.10.2012 to 31.03.2020) =` 4,946.67 Lakhs for each of the full financial years (20132014 onwards), and X

` 4,946.67 Lakhs = ` 2,473.33 Lakhs for the period 01.10.2012 to 31.03.2013 (6 months).

Total Depreciation upto 31.03.2015 = 2,473.33 + 4,946.67 + 4,946.67 =` 8,656.67 Lakhs.

Question 1 (c): AS9 5 Marks

A Company sells the goods with right the return. The following pattern has been observed:Timeframe of Return from date of purchase % of Cumulative Sales

Within 10 days 5%

Between 11 days and 20 days 7%



The Company has made Sales of 30 Lakhs in the month of February 2015 and of 36 Lakhs in the month of March 2015. TheTotal Sales for the Financial Year have been 450 Lakhs and the Cost of Sales was 360 Lakhs. Determine the amount ofProvision to be made and Revenue to be recognized in accordance with AS9. A year may be considered of 360 days.

Solution: See Principles in EAC Opinion on Provisioning towards Sales Returns

Similar to Page 9.11, Q.No.32 of Padhukas Students Referencer on Accounting Standards [M 12 (Aud)]

1.

Principle: Delivery made, giving the Buyer an unlimited right of return: [Mar 2012 CA Journal Page 1355]:(a) A Provision should be created on the B/S date, for Sales Returns after the Balance Sheet date, at the best estimate

of the loss expected, along with any estimated incremental cost that would be necessary to resell the goodsexpected to be returned.

(b) Necessary adjustments to the provision should be made for actual sales return after Balance Sheet date up to thedate of approval of Financial Statements.

2.

Analysis and Conclusion:

Month Feb 2015 March 2015

Revenue (i.e. Sales) to be recognised `30 Lakhs `36 Lakhs

Relevant Percentage of Sales Returns based on B/s Date 31stMarch 9% 8% = 1% 9%



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May 2015.3

Month Feb 2015 March 2015

Amount of Sales Returns expected `30,000 `3,24,000

Cost of Above Sales Returns (360 450 = 80% on Sales Value) `24,000 `2,59,200

Provision for Loss due to Sales Returns = 100% 80% = 20% of Returns `6,000 `64,800

Question 1 (d): AS25 5 Marks

Saurav Limited reported a Profit before Tax of 8.00 Lakhs for the 2ndquarter ending on 30thSeptember 2014. On enquiry,following issues were noticed:

(i) Property Tax of 60,000 paid during the quarter for the full year has been recognized in full.

(ii) 1/5th of 15 Lakhs being Marketing Promotional Expenses incurred on 23rdSeptember, 2014 has been recognized basedon past experience of higher sales in the last quarter of the year.

(iii) 50% of the Loss of 2 Lakhs incurred on disposal of a Business Segment has been allocated to this quarter.

(iv) Cumulative Loss of 3 Lakhs resulting from the change in the method of Valuation of Inventory was recognised in the 2ndquarter, which included 2 Lakhs related to earlier quarters.

(v) Gain of 15 Lakhs from Sale of Investments sold in the 1stquarter was apportioned equally over the full year.

You are required to give proper treatment as required by AS25 on Interim Financial Reporting and to recast the adjustedProfit before Tax for the 2ndquarter.

Solution: Similar to Page No.25.12, Q.No.33 [N 08, M 12], and Page No.25.10 Q.No.29 [M 12] of Padhukas

Students Referencer on Accounting Standards

Item Treatment

Property Taxes Property Taxes of `60,000 relatable to the entire calendar year should be apportioned

on time basis, i.e. 3 months period expense `15,000 will be reported as Expense.

Marketing PromotionalExpenses

Costs should be anticipated or deferred only when

It is appropriate to anticipate that type of cost at the end of the fin.year, and

Costs are incurred unevenly during the fin.year of an Enterprise. [Para 38]

In this case, recognition of 1/5thof Expense is not proper.

Loss on Disposal of

Business Segment

Net Loss on Disposal of Business Segment `2,00,000 should be reported in full, since

the loss was incurred during the Interim Period.Loss due to change inmethod of Valuation

The amount relating to earlier quarters to be taken and adjusted against those respectiveperiods.

Gain on Invts Sale Apportioned Gain on Sale of Investments in first quarter to be reversed.

Particulars Lakhs

PBT as reported 8.00

Add: Property Taxes to be recognised on time basis (0.60 0.15 to be recognised)

Loss on change in method of Inventory Valuation relating to previous quarters

0.45

2.00

Less: Sales Promotion Expenses relating to this Quarter (4/5thi.e. 80% 15.00)

Loss on Disposal of Business Segment to be reported in full (balance 50% of 2.00)

Apportioned Gain on Sale of Investments in first quarter to be reversed (15.00 4)

(12.00)

(1.00)

(3.75)

Adjusted PBT for the Second Quarter (6.30)

Note:The Company should also restate the results of the previous quarters based on the above adjustments.

Question 2: Corporate Restructuring Amalgamation 16 MarksXY Limited has been incorporated with an Authorized Capital of 70 Lakhs Equity Shares of 10 each and 4 Lakhs PreferenceShares of 100 each. The Subscribers to the Memorandum of Association have subscribed and paid for 1 Lakh Equity Shares.The expenses of incorporation incurred amounted to 8.09 Lakhs.

XY Limited desires to amalgamate X Limited and Y Limited as at 1stApril, 2015. Following information is available.



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May 2015.4

Balance Sheet as on 31stMarch 2015 (Amounts in Lakhs)

Liabilities X Limited Y Limited

Share Capital: Equity Shares (FV 100) 750 725

10% Preference Shares (FV 100) 420 180

Reserves and Surplus: Revaluation Reserve 125 75

Capital Reserve 270 190

Statutory Reserves 60 40

Profit and Loss Account 35 12

Loans Funds: Secured Loans: 12.5% Debentures (FV 100) 50 28

Unsecured Loans 25 0

Current Liabilities: Trade Payables 165 75

Total 1,900 1,325

Assets

Fixed Assets: Land and Building 470 290

Plant and Machinery 310 210

Investments 75 50

Current Assets: Trade Receivables 345 270

Inventories 345 254Cash and Cash Equivalents 355 251

Total 1,900 1,325

Before amalgamation, X Ltd and Y Ltd will make the following adjustments in their BalanceSheets:

(i)

Pay off the Unsecured Loans.

(ii) X Limited will revalue its Land and Building by enhancing the Book Value by 10% and Y Limited will revalue the Land andBuilding at 330 Lakhs.

(iii)Y Limited will revalue its Plant and Machinery at 220 Lakhs.

(iv) Investments will be disposed off. X Limited sold its Investments for 67 Lakhs and Y Limited disposed the same for 52 Lakhs.

(v) Debentureholders of X Limited and Y Limited will be discharged by XY Limited by issued of 15% Debentures of 100 eachfor such an amount which will not put any additional burden of interest outgo on XY Limited than presently payable by XLimited and Y Limited.

(vi)

Preference Shareholders of X Limited and Y Limited will be issued 15% Preference Shares in XY Limited in the ratio 2:3,i.e. 2 Shares will be issued for every 3 Shares held at a premium of 25.

(vii)

Equity Shares in XY Limited will be issued as under:

(a) Shareholders of X Limited in the ratio of 4:1 at 35 per Share, and

(b) Shareholders of Y Limited in the ratio of 3:1 at 32 per Share.

(viii)Statutory Reserves having met its purpose will be merged with Capital Reserves.

Prepare the amalgamated Balance Sheet of XY Limited as on 31stMarch 2015 as per Schedule III to the Companies Act, 2013with Notes to Accounts.

Solution: 1.Basic Information

Selling Co: X Ltd, Y Ltd Date of B/S : 31.03.2015 Nature of Amalgamation:

Purchase (since all Assets are not taken over at Book Value)Buying Co:XY Ltd Date of Amg:31.03.2015

2. Computation of Purchase Consideration:

Particulars X Ltd Y Ltd TotalNumber of Equity Shares

1

4

100

750 = 30 Lakh Equity Shares

1

3

100

725 =21.75 Lakh Equity Shares 51.75

Number of Preference Shares

3

2

100

420 = 2.8 Lakh Pref. Shares

3

2

100

180 = 1.2 Lakh Pref. Shares 4.20

Purchase Consideration in Lakhs `in Lakhs Total

Equity Share Capital (` 10) 3010 = 300.00 21.75 10 = 217.50 517.50

Premium on ESC at `25 & `22 30 25 = 750.00 21.75 22 = 478.50 1,228.50

(A) 1,050.00 696.00 1,746.00



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May 2015.5

Particulars X Ltd Y Ltd Total

Preference Share Capital (` 100) 2.8 100 = 280.00 1.2 100 = 120.00 400.00

Premium on PSC at `25 Per Share 2.8 25 = 70.00 1.2 25 = 30.00 100.00

(B) 350.00 150.00 500.00

Total of A + B 1,400.00 846.00 2,246.00

2. Computation of Debentures to be issued

Total Debentures of X Ltd & Y Ltd (50 Lakhs + 28 Lakhs) = `78 Lakhs. Interest @ 12.5% thereon = `9.75 Lakhs

Number of 15% Debentures to be issued at `100 each =15%

Lakhs9.75

100

1= 0.65 Lakhs

Thus, Total Value of 15% Debentures issued = 0.65 Lakhs 100 = `65 Lakhs (X: Y as 50:28, i.e. `41.67 & `23.30 Lakhs)

3. Balance Sheet of X Ltd and Y Ltd as on 31.03.2015 (before absorption) in Lakhs

Particulars as at 31stMarch Note X Ltd Y Ltd

I EQUITY AND LIABILITIES

(1) Shareholders Funds:

(a) Share Capital Equity Shares of `100 each 750 725

Preference Shares of `100 each 420 180

(b) Reserves & Surplus: (Note 1) 529 369

(2) Non Current Liabilities: Secured Loan 12.5% Debentures 50 28(3) Current Liabilities: Trade Payables (Creditors) 165 75

Total 1,914 1,377

II ASSETS

(1) NonCurrent Assets: Fixed Assets Land & Building 470 + 47 = 517 Given = 330

Plant & Machinery 310 220

(2) Current Assets

(a)

Inventories 345 254

(b)

Trade Receivables Debtors 345 270

(c) Cash and Cash Equivalents (Note 2) 397 303

Total 1,914 1,377

Note 1:Reserves & Surplus (

Lakhs)Particulars X Ltd Y Ltd

Revaluation Reserves: Given Balance + Revaluation of L&B & P&M 125+10% of 470= 172 75+40+10 = 125

Capital Reserve (after Transfer of Statutory Reserves) 270 + 60 = 330 190+40 = 230

P&L A/C (Net of Loss/ Gain on Sale of Investments) 35 8 = 27 12 + 2 = 14

Total 529 369

Note 2: Cash & Cash Equivalents ( Lakhs)

Particulars X Ltd Y Ltd

Given Balance 355 251

Less: Repayment of Unsecured Loan (25)

Add: Sale of Investments 67 52

Revised Balance 397 303

4. Computation of Goodwill / Capital Reserve on 31.03.2015 in Lakhs


A) Assets taken over

(a) Land & Building 517 330 847

(b) Plant & Machinery 310 220 530

(c) Trade Receivables 345 270 615

(d) Inventories 345 254 599

(e) Cash & Cash Equivalents 397 303 700

Total [A] 1,914 1,377 3,291



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Less: Liabilities taken over

(a)

Trade Payables 165 75 240

(b) Debentures issued 41.67 23.30 65

Total [B] 206.67 98.30 305

Net Worth [AB] 2,986

Less: Purchase Consideration 2,246

Capital Reserve 740

6. Other Adjustments

(a) Subscribers to the Memorandum (Promoters) subscribed 1 Lakh Equity Shares at `10 each = `10 Lakhs.

(b) Preliminary Expenses incurred = ` 8.09 Lakhs. Hence, Balance Cash in Hand = 10 8.09 = `1.91 Lakhs.

7. Balance Sheet of XY Ltd as on 31.03.2015 in Lakhs

Particulars as at 31stMarch Note This Year Prev. Yr



(a)

Share Capital 1 927.50

(b) Reserves & Surplus 2 2,068.50

(2) NonCurrent Liabilities:Long Term Borrowings Secured Loan 15% Debentures 65.00

(3) Current Liabilities: Trade Payables (Creditors) 240.00

Total 3,301.00

II ASSETS

(1) NonCurrent Assets

(a)

Fixed Assets: (517 + 330 + 310 + 220) 1,377.00

(2) Current Assets

(a) Inventories 599.00

(b) Trade Receivables 615.00

(c)

Cash & Cash Equivalents (1.91 + 397 + 303) 701.91

(d)

Preliminary Expenses (See Note below) 8.09

Total 3,301.00Note: It is assumed that the Preliminary Expenses shall be written off in the short term against Profits. Alternatively, theCompany may resolve to write off Preliminary Expenses against Capital Reserve arising on Amalgamation.

Notes to the Balance Sheet

Note 1: Share Capital in Lakhs

Particulars This Year Prev. Year

Authorised: 70 LakhsEquity Shares of `10 each 700.00

4 Lakhs Preference Shares of `100 each 400.00

Issued, Subscribed & Paid up: 52.75 Lakhs Equity Shares of `10 each 527.50

4 Lakhs Preference Shares of `100 each 400.00

(Of the above, 51.75 Lakhs Equity Shares and 4 Lakhs Preference Shares are issued for NonCash Consideration pursuant to a scheme of amalgamation, Order No. .. dated //)

Total 927.50

Shares Reconciliation Statement:

Particulars Equity Preference

Lakh Shares Lakhs Lakh Shares Lakhs

Opening Balance 1 10

Add: Issued on Amalgamation 51.75 517.50 4 400

Closing Balance 52.75 527.50 4 400



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May 2015.7

Note 2: Reserves and Surplus

Particulars Capital Reserve Share Premium Total

Opening Balance

Add: Acquired on Amalgamation 740 1,328.50 2,068.50

Closing Balance 740 1,328.50 2,068.50

Question 3: Consolidation of Financial Statements 16 MarksDraw the Consolidated BalanceSheet as on 31stMarch 2015 as per ScheduleIII with Notes to Accounts (following IndirectMethod) based on the following information:

Balance Sheet as on 31stMarch 2015 (

in Lakhs)Liabilities P Q R

Share Capital: Equity Share Capital (FV 100) 600 400 100Reserves and Surplus: Reserves 40 10 20

Surplus in Profit and Loss Account 60 40 30Current Liabilities: Trade Payables 30 10 35

Other Payables: Q Limited 15R Limited 50

Total 780 460 200Assets P Q R

Fixed Assets (Net of Depreciation) 230 150 100Investments: Q Limited 320R Limited 40 100

Current Assets: Inventories 50 30 40Trade Receivables 60 50 20Other Receivables: R Limited 40

P Limited 30Bank Balance 80 90 10

Total 780 460 200Additional Information:

(a)

P Limited acquired 1,50,000 (cum Bonus) Shares of Q Limited and 30,000 Shares or R Limited and Q Limited acquired50,000 Shares of R Limited on 29 thMarch 2014.

(b)

Q Limited fixed 1stApril 2014 as Record Date for allotment of Bonus Shares in the ratio of 1:1 and the same were duly allotted.

(c)

P Limited proposed Dividend at 7.50% for the year ended on 31stMarch 2015.(d) In December 2014, Q Limited invoiced goods to P Limited for 30 Lakhs on a load of 25% on cost. 1/3rdof such goods are

in Stock with P Limited as at the end of the year.

(e) R Limited sold to Q Limited on 1stJanuary 2015, as asset costing 20 Lakhs and made a profit of 20% on Invoice Value. Qhas provided depreciation at 10% per annum on such assets.

(f) As on 31stMarch 2014, the balances in Reserves and Profit & Loss Account of Q Limited were 5 Lakhs and 15 Lakhsrespectively.

(g)

R Limited made a Profit of 12.40 Lakhs during the current year. During the year, 0.55 Lakhs was received fromInsurance Company against Loss of Stock due to flood which occurred on 31stJanuary 2014 in which goods worth 0.75Lakhs were damaged and were part of Rs Stock as on 31stMarch 2014.

(h)

R Limited transferred, at the yearend on 31stMarch 2015, an amount from Profit and Loss Account to Reserves whichequals to 20% of the reported aggregate figures of Reserves and Profit and Loss Account in the Balance Sheet.

Solution:

Refer Page No. 3.108, Q.No 42 of Padhukas Students Guide on Financial Reporting [M 98, N 08, M 11]

1.Basic Information

Company Status Dates Holding Status

Holding Company = P

Subsidiary = Q

SubSubsidiary = R

Acquisition: 29.03.2014

Consolidation: 31.03.2015 (a) Holding Co.

(b) Minority Int.

Q

(P) 75%

25%

R

(P) 30%

(Q) 50%

20%



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May 2015.8

Note: Shareholding Pattern is as under

Company Held by P Held by Q Total Holdings Minority Interest Total No. of Shares

Q 300 (75%) N.A. 300 (75%) 100 (25%) 400 (100%)

R 30 (30%) 50 (50 %) 80 (80%) 20 (20%) 100 (100%)

2.Analysis of Reserves and Surplus of Subsidiary Companies

(a) General Reserve (

in Lakhs)

Q R

On B/s date `10 On B/s date `20

31.3.14

Less:

`5

Bonus issue (2)

DoA to DoC `7 31.3.14 `10 (Bal. fig) Transfer ( 50 20%)

`10

Pre Acquisition `3 Post Acquisition Pre Acquisition Post Acquisition

(b) Profit & Loss Account (

in Lakhs)

Q R (See Note)

On B/s date `40 On B/s date `30

31.3.14 `15 DoA to DoC `25 31.3.14

Less: Adjustment`17.60

(0.20)

DoA to DoC

Add: Adjustment`12.40

0.20

Pre Acquisition Post Acquisition Pre Acquisition 17.40 Post Acquisition 12.60

Note: Since loss on damaged goods (`0.75 0.55 = `0.20) relates to last year, it is added to Current year Profit anddeducted from last year Profit i.e. Pre acquisition reserve.

3. Consolidation of Balances (

in Lakhs)

Particulars Total MinorityInterest

PreAcqn. Post Acquisition

R Ltd (Holding 80%, Minority 20%) Reserves P&L A/c

Equity Capital 100 20 80

Reserves 20 48

(10 80%)

8

(10 80%)

P&L A/c 30 613.92

(17.40 80%)

10.08

(12.60 80%)

Unrealized Profit on Sale of Asset (4.875) (0.975) 4.87580%=(3.9)

SubTotal 29.025 101.92 8 6.18

Q Ltd (Holding 75%, Minority 25%)Equity Capital 400 100 300

Reserves 10 2.52.25

(375%)

5.25

(775%)

P&L A/c 40 10 (1575%)=11.25 (2575%)=18.75

Stock Reserve [Upstream] (2) (0.5) (1.5)

Share in Pre Acquisition Reserves of R Ltd

[(13.92+8) Qs Share80%

50% 25%)] 3.425 (3.425)

Minoritys Share in Post Acqn. Res. of R Ltd:

Gen. Res. (8 Qs Share80%

50% 25%) 1.25 (1.25)

P&L A/c (6.18 Qs Share 80%

50%

25%) 0.966 (0.966)

Sub Total 117.641 310.075 4 16.284

Total [Cr]

Cost of Investment [Dr.] [320 + 40 + 100] (460)

Parents Balances in Reserves 40 60

Proposed Dividend (7.5% `600) (45)

For Consolidated B/s 146.666 48.005 52 37.464

Goodwill or Cost

of Control



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May 2015.9

Notes:

Sale by Q Ltd to P Ltd: Q Ltd has sold goods at `30 Lakhs at Cost Plus 25%. Therefore, the unrealized profit on

Upstream Transaction is `6 Lakhs [`30125

25]. Since only 1/3rdof such goods are in Stock, Proportionate unrealized

gain is `2 Lakhs [6 1/3]. The unrealized profits should be adjusted against Group Reserves and Minority Interest.

Sale of Fixed Assets by R Ltd to Q Ltd: ( in Lakhs)

Profit on Sale [`20 80

20] 5

Less: Proportionate Depreciation [`25 10% 12

3

35

5] (0.125)

Unrealized Profit 4.875

The above Unrealized Profit is in the nature of Upstream Transaction, and hence should be adjusted against GroupReserves and Minority Interest.

4. Consolidated Balance Sheet of P and its Subsidiaries Q and R as at 31.03.2015 (

in Lakhs)

Particulars as at 31stMarch WN This Year Prev. Yr



(a)

Share Capital: 6,00,000 Equity Shares of `100 each 600(b) Reserves & Surplus 1 89.464

(2) Minority Interest 146.666

(3) Current Liabilities

(a) Trade Payables Creditors (30 + 10 + 35) 75

(b) Short Term Provisions Proposed Dividend 45

Total 956.13

II ASSETS

(1) NonCurrent Assets

Intangible Assets (Good Will or Cost of Control) 48.005

Fixed Assets Tangible Assets (230 + 150+ 100 4.875) 475.125

(2) Current Assets(a) Inventories = 50 + 30 + 40 2 118

(b)

Trade Receivables Debtors (60 + 50 + 20) 130

(c)

Cash and Cash Equivalents 2 185

Total 956.13

Note:Inter Company Owings have been eliminated in full. Detailed Notes under Schedule III Requirements have not beenprovided for the above items.

Computational Notes for items in CBS: Note 1: Reserves and Surplus

Particulars Lakhs

(a) Reserves 52.000

(b)

Surplus (Balance in P & L A/c) 37.464Total 89.464

Note 2: Cash and Cash Equivalents

Particulars Lakhs

(a) Cheque in Transit = 40 + 30 15 50 5

(b) Bank Balance = 80 + 90 + 10 180

Total 185



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May 2015.10

Question 4 (a): Financial Institutions 8 MarksTeam Ltd is a NonBanking Finance Company. It accepts Public Deposits and also deals in Hire Purchase business. It providesyou with the following information regarding major hire purchase deals as on 31032013.

Few Machines were sold on Hire Purchase basis. The Hire Purchase Price was set at 100 Lakhs as against the Cash Price of80 Lakhs. 20 Lakhs were payable as Down Payment and the balance was payable in 5 equal installments. The Hire Vendor

collected the first installment as on 31032014, but could not collect the second installment which was due on 31032015.The Company was finalizing accounts for the year ended on 31032015. Till 15042015, the date on which the Board of

Directors signed the accounts, the second installment was not collected. Presume IRR to be 10.42%.

Required:

(i) What should be the Principal Outstanding on 01042014? Should the Company recognize Finance Charge for the year20142015 as Income?

(ii)

What should be the Net Book Value of Assets as on 31032015 as per NBFC Prudential Norms Requirement forprovisioning?

(iii)

What should be the amount of Provision to be made as per Prudential Norms of NBFC laid down by the RBI?

Solution: Same as Page No. 6.27, Q.No.5 of Padhukas Students Guide on Financial Reporting [N 12]

1. Basic Computations

Particulars in Lakhs

(a)

HP Price 100

(b) Down Payment 20

(c) Balance amount payable (a) (b) 80

(d)

Amount payable in each instalment (80 Lakhs 5 instalments) 16

(e)

Annuity Factor at 10.42% for 5 Years 3.7505

(f) PV of the instalments (d) (e) 60

(g) Interest Component (c) (f) 20

2. Loan Repayment Schedule

Year Opening Principal Instalment Amt Interest Principal Repaid Closing Principal

(1) (2) (3) (4)=(2)10.42% (5) = (3) (4) (6) = (2) (5)

20132014 60.000 16 6.252 9.748 50.252

20142015 50.252 16 5.236 10.764 39.488

20152016 39.488 16 4.115 11.885 27.603

20162017 27.603 16 2.876 13.124 14.479

20172018 14.479 16 1.521 14.479 Nil

Total 80 20 60

Principal Outstanding as on 01.04.2014 = `50.252 Lakhs. Finance Charges for the year 20142015 can be recognized as

Income, since the instalments are overdue for a period less than 12 months.

3.Computation of Net Book Value Assets


(a) Aggregate of Overdue and Future Instalments Receivable (`16 Lakhs 4) 64.000

(b)

Balance of Unmatured Finance Charges (4.115 + 2.876 + 1.521) 8.512

(c)

Provision for NonPerforming Assets (Note) 7.488(d) Net Book Value of the Asset 48.000

Note:


(a) Aggregate of Overdue and Future Instalments Receivable 64.000

(b)

Balance of Unmatured Finance Charges 8.512

(c)

Depreciated Value of the Asset [`80 Lakhs (80 Lakhs 20% 2 years)] 48.000

(d)

Provision to be created (a) (b) (c) 7.488



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May 2015.11

Question 4 (b): AS31 8 MarksLovely Limited has advanced Staff Loan of 50 Lakhs to its Employees on 1stJuly 2014 at a concessional rate of 6% perannum, to be repaid in 5 semiannual installments along with interest thereon. The prevailing rate is 8% per annum.

Find out the value at which the Loan should initially be recognsied and its amortization till closure thereof. Also give necessaryjournal entries with appropriate narration for financial year 20142015. The Discounted Values at 8% and 4% are as under:

Period 1 2 3 4 5

8% 0.9259 0.8573 0.7938 0.7350 0.6806

4% 0.9615 0.9246 0.8890 0.8548 0.8219

Solution: Similar to Page 32.14, Q.No.21 of Padhukas Students Referencer on Accounting Standards [M 10]

1. Computation of Initial Recognition Amount of Loan to Employees (Amount in )

Cash Inflow Total PVF at 4% Present Value

Period Principal Interest at 6%

Jul to Dec 2014 10,00,000 50,00,000 6% yr = 1,50,000 11,50,000 0.9615 11,05,725

Jan to Jun 2015 10,00,000 40,00,000 6% yr = 1,20,000 11,20,000 0.9246 10,35,552

Jul to Dec 2015 10,00,000 30,00,000 6% yr = 90,000 10,90,000 0.8890 9,69,010

Jan to Jun 2016 10,00,000 20,00,000 6% yr = 60,000 10,60,000 0.8548 9,06,088

Jul to Dec 2016 10,00,000 10,00,000 6% yr = 30,000 10,30,000 0.8219 8,46,557

Present Value or Fair Value at Initial Recognition 48,62,932

Note: Discounting is at 8% p.a (or) 4% for the 6 Months Period.

2. Computation of Amortised Cost of Loan to Employees (Amount in )

Period Amortised Cost(Opening Balance)

Interest to berecognized at 8%

Repayment(including interest)

Amortised Cost(Closing Balance)

(1) (2) (3) (4) = (1) + (2) (3)

Jul to Dec 2014 48,62,932 1,94,517 11,50,000 39,07,449

Jan to Jun 2015 39,07,449 1,56,298 11,20,000 29,43,747

Jul to Dec 2015 29,43,747 1,17,750 10,90,000 19,71,497

Jan to Jun 2016 19,71,497 78,860 10,60,000 9,90,357

Jul to Dec 2016 9,90,357 (bal. fig.) 39,643 10,30,000 Nil

3. Journal Entries for first half year (regarding Loan to Employees)

S.No. Particulars Dr.() Cr.()

1 Staff Loan A/c Dr. 50,00,000

To Bank A/c 10,00,000

(Being the disbursement of Loans to Staff)

2 Staff Cost A/c (WN 2) (50,00,000 48,62,932) Dr. 1,37,068

To Staff Loan A/c 1,37,068

(Being write off of excess of Loan Balance over present value thereof, in order to

reflect the Loan at its Present Value of `48,62,932) [W.N. 1]

3 Profit and Loss A/c Dr. 1,37,068

To Staff Cost A/c 1,37,068

(Being transfer of balance in the Staff Cost A/c to P&L A/c)

4 Staff Loan A/c Dr. 1,94,517To Interest on Staff Loan A/c 1,94,517

(Being Interest charged at market rate of 8% on the Loan, for first 6 months period)

5 Bank A/c Dr. 11,50,000

To Staff Loan A/c 11,50,000

(Being amount received on repayment)

6 Interest on Staff Loan A/c Dr. 1,94,517

To Profit & Loss A/c 1,94,517

(Being transfer of bal. in Staff Loan Int. A/c to P&L)



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May 2015.12

Question 5 (a): Valuation of Business 8 MarksThe summarized Balance Sheets of Rose Ltd for 3 years ended on 31stMarch are as follows: ( in Thousands)

Particulars as on 31stMarch 2013 31stMarch 2014 31stMarch 2015

Liabilities: 6,40,000 Equity Shares of 10 each fully paid up 6,400 6,400 6,400

General Reserves 4,800 5,600 6,400

Profit and Loss Account 560 640 960

Trade Payables 2,400 3,200 4,000

Total Liabilities 14,160 15,840 17,760

Assets: Goodwill 4,000 3,200 2,400

Tangible Assets (Net) 5,600 6,400 6,400

Inventories 4,000 4,800 5,600

Trade Receivables 80 640 1,760

Cash and Cash Equivalents 480 800 1,600

Total Assets 14,160 15,840 17,760

Additional Information:

(i)

Actual Valuation were as under:

Tangible Assets 7,200 8,000 8,800

Inventories 4,800 5,600 6,400

Net Profit (including Opening Balance after writing off Depreciation,Goodwill, Tax Provision and Transfer to General Reserves)

1,680 2,480 3,280

(ii) Capital Employed in the business at Market Value at the beginning of 20122013 was 1,46,40,000 which included Cost ofGoodwill. The Normal Annual Return on Average Capital Employed in the line of business in which Rose Limited isengaged is 12.50%

(iii) The balance in General Reserve as on 1stApril 2012 was 40 Lakhs.

(iv)

The Goodwill shown as on 31stMarch 2013 was purchased on 1stApril 2012 for 40 Lakhs and the balance in Profit andLoss Account as on 1stApril 2012 was 4,80,000.

(v) Goodwill is to be valued at 5 years purchase of Super Profit by using Simple Average Method.

Find out the Average Capital Employed in each year and Total Value of Business as on 31stMarch 2015.

Solution: Refer Page No. 4.103, Q.No.1 of Padhukas Students Guide on Financial Reporting [N 03, M 09]

1. Computation of Average Maintainable Profit

Year ending 31stMarch 2013 2014 2015

Net Profit as given 16,80,000 24,80,000 32,80,000

Less: Opening Balance (4,80,000) (5,60,000) (6,40,000)

Less: Undervaluation of Opening Stock (8,00,000) (8,00,000)

Add: Undervaluation of Closing Stock 8,00,000 8,00,000 8,00,000

Add: Goodwill written off (Diff. between Closing & Opening Balance.) 8,00,000 8,00,000

Add: Transfer to Reserves (Diff. between Closing & Opening Balance.) 8,00,000 8,00,000 8,00,000

Adjusted Net Profit 28,00,000 35,20,000 42,40,000

2. Computation of Average Capital Employed

Particulars As at 31.3.2013 As at 31.3.2014 As at 31.3.2015

Tangible Assets (Actual Amount) 72,00,000 80,00,000 88,00,000 Inventories (Actual Amount) 48,00,000 56,00,000 64,00,000

Trade Receivables 80,000 6,40,000 17,60,000

Cash and Cash equivalents 4,80,000 8,00,000 16,00,000

Less: Trade Payables (24,00,000) (32,00,000) (40,00,000)

A. Closing Capital Employed 1,01,60,000 1,18,40,000 1,45,60,000

B. Opening Capital Employed (Excluding G/w) 1,06,40,000 1,01,60,000 1,18,40,000

Total of above 2,08,00,000 2,20,00,000 2,64,00,000

C. Average Capital Employed = (A + B) 2 1,04,00,000 1,10,00,000 1,32,00,000



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May 2015.13

3. Computation of Super Profits

Year ending 31stMarch 2013 2014 2015

Adjusted Net Profit (WN 1) 28,00,000 35,20,000 42,40,000

Less: Normal Return at 12% ofAverage Capital Employed

1,04,00,000 12%= 13,00,000

1,10,00,000 12%= 13,75,000

1,32,00,000 12%= 16,50,000

Super Profits 15,00,000 21,45,000 25,90,000

Average Super Profits (15,00,000 + 21,45,000 + 25,90,000) 3 = 20,78,333

4. Valuation of Goodwill

Goodwill = Amount of Super Profits No. of. Years of Purchase of Super Profits agreed upon

= `20,78,333 5 = 1,03,91,667

5. Valuation of Business

Closing Capital Employed as at 31.3.2015 `1,45,60,000

Add: Goodwill as per WN 4 above `1,03,91,667

Value of Business 2,49,51,667

Question 5 (b): Valuation of Brand 8 MarksAgile Limited is a ManufacturercumDealer of R Tuff Brand of Trousers. With passage of time, its Brand has been well

accepted in the market, the Company has been approached by a Foreign Company engaged in the same trade to enter asPartner in its business. Agile, in order to negotiate the deal, wants to get its Brand valued. The following information based onMarket Research is available:

(i)

Garment Industry of which Agile is a constituent, is expected to grow by 9% annum during the next five years. The presentMarket Size of the Industry is 7,500 Crores.

(ii) There are other brands both National and International in the market. The existence of Duplicate Brands is unavoidable. TheShare of such players is estimated to be 63% of the Total Industry Market. The Market Share of other National Brands willincrease @ 0.25% yearonyear basis in the next 5 years. The share of International Brands is expected to grow 1.5 times ofNational Brands. But the existence of Duplicate Brands is to fall by 2.5% over the period of next 5 years, spread equally.

(iii)

The expected Foreign Partner needs the production line of the company to be reengineered which will lead to an increasein the yield of the Company by 3% after one year over the present yield of 10%, followed thereafter by further increase of5% year on year.

Following the MarketOriented Approach, determine the Brand Value to be used for negotiation with the Foreign Company,considering the Discount Factor for 1st five years as 0.909, 0.826, 0.751, 0.683 and 0.621 (Monetary value in Crores to berounded off to nearest 2 decimal places).

Solution: Refer Page No. 4.8, Q.No.1 of Padhukas Students Guide on Financial Reporting

1. Market Share of Agile Ltd

(a)

Current Market Share= 100% (National + International + Duplicate Brands) = 100% 63% = 37%

(b) Increase or Decrease in Market Share: National Brands 0.25% + International Brands 0.375% Fall in DuplicateBrands 0.5% = 0.125% increase other products market share. Hence, Agiles Market Share is expected to fall by0.125% every year, from current 37%. Therefore, next year it will be 36.875%, the year after 36.75%, etc.

2. Brand Valuation under Market Approach (

Crores)

Year Market Size (%) Market Share(%)

Market Share(Amt)

Expected Profit DiscountFactor at 15%

PV of Profit

1 7,500.00 + 9% = 8,175.00 36.875% 3,014.53 @ 13% = 391.88 0.909 356.22

2 8,175.00 + 9% = 8,910.75 36.75% 3,274.70 @ 18% = 589.45 0.826 486.88

3 8,910.75 + 9% = 9,712.72 36.625% 3,557.28 @ 23% = 818.17 0.751 614.45

4 9,712.72 + 9% = 10,586.86 36.50% 3,864.20 @ 28% = 1081.98 0.683 738.99

5 10,586.86+ 9% = 11,539.67 36.375% 4,197.55 @ 33% = 1385.19 0.621 860.20

Brand Value 3,056.74

Brand Value of Agile Ltd under Market Oriented Approach is 3,056.74 Crores



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May 2015.14

Question 6 (a): Value Added Statement 8 MarksFamous Corporation has been preparing Value Added Statement for the past five years. The Human Resource Manager of theCompany has suggested introducing a Value Added Incentive Scheme to motivate the Employees for their better performance.To introduce the Scheme, it is proposed that the Best Index Performance (favourable to Employer), i.e. Employee Costs toAdded Value for the last five years, will be used as the Target Index for future calculations of the bonus to be paid

After the Target Index is determined, any actual improvement in the Index will be rewarded. The Employer & the Employee will besharing any such improvement in the ratio 1:2. The bonus is given at the end of the year, after the profit for the year is determined.

The following information is available: Value Added Statement for 5 years ( in Thousands)

Particulars 2010 2011 2012 2013 2014

Sales 5.600 7,600 9,200 10,400 12,000

Less: Bought in Goods, Services 2,560 4,000 5,000 5,600 6,400

Added Value 3,040 3,600 4,200 4,800 5,600

Employee Costs 1,300 1,520 1,680 1,968 2,240

Dividend 200 300 400 480 600

Taxes 640 760 840 1.000 1,120

Depreciation 520 620 720 880 1,120

Debenture Interest 80 80 80 80 80

Retained Earning 300 320 480 392 440

Added Value 3,040 3,600 4,200 4,800 5,600

Summarized Profit and Loss Account for the year ended on 31stMarch 2015 (

in Thousands)

Particulars Amount

Income: Sales less Returns 13,600

Dividends and Interest 500

Miscellaneous Income 500 14,600

Expenditure:

Production and Operational Expenses: Cost of Materials 5,000

Wages & Salaries 1,800

Other Manufacturing Expenses 1,400 8,200

Administrative Expenses: Administration Salaries 600

Administration Expenses 600 1,200

Selling and Distribution Expenses: Selling and Distribution Salaries 120

Selling Expenses 400 520

Finance Expenses: Debenture Interest 80

Depreciation 1,520

Total Expenditure 11,520

Profit before Taxation 3,080

Less: Provision for Taxation 770

Profit after Taxation 2,310

From the above information, prepare Value Added Statement for the year 20142015 and determine the amount of BonusPayable to Employees, if any.

Solution: Refer Page No. 7.14, Q.No.5 of Padhukas Students Guide on Financial Reporting

1.Computation of Target Index

Year ending 31stMarch 2010 2011 2012 2013 2014

Employee Cost 1,300 1,520 1,680 1,968 2,240

Value Added 3,040 3,600 4,200 4,800 5,600

Ratio (Employee Cost Value Added) 42.76% 42.22% 40.00% 41.00% 40.00%

Target Index is taken as least of the above on conservative basis = 40% (Favorable to Employer)



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May 2015.15

2.Computation of Bonus for Year ending 31stMarch 2015

Particulars 000s 000s

Sales 13,600

Less: Bought in Goods & Services:

Cost of Materials 5,000

Production Expenses 1,400

Administration Office Expenses 600

Sales Office Expenses 400 7,400 Value Addedfrom Manufacturing and Trading Activities 6,200

Add: Other Income (500 + 500) 1,000

1. Net Value Added 7,200

2. Employees Cost, i.e. Wages & Salaries [Wages & Salaries `1,800 +

Administration Salaries `600 + Selling & Distribution Salaries `120]2,520

3.AddedValueNet

CostEmployeefor the Year

7,200

2,52035%

4. Improvement for the Year eligible for Bonus = Target 40% Ratio as above 35% 5%

5. Bonus Payable for the Year = Value Added ` 7,200 5% Employee Share 2/3rd 240

3. Statement of Application of Value Added

Particulars 000s 000s %

1. To Employees: As above 2,520 + Bonus 240 2,760 38.33%

2. To Government: Taxes 770 10.69%

3. To Providers of Capital: Interest on Debentures 80 1.11%

4. To Retained Profits, etc. (a) Depreciation 1,520

(b) Retained Profits (given 2,310 Incentive 240) 2,070 3,590 48.87%

Total 7,200 100.00%

Note: It is assumed that Taxation Expense is not affected by the above Bonus/ Incentive Payment.

Question 6 (b):IFRS vs AS 8 MarksGive major differences between IFRS and AS (applicable in India) with respect to Property, Plant and Equipment.

Solution: Refer Page No. 9.79, Para 9B.3.16 of Padhukas Students Guide on Financial Reporting

Particulars IFRS / IAS Indian A/cg Stds

HistoricalCost,Revaluation,Fair Value,etc.

Historical Cost or Revalued Amounts are used.

On opting for revaluation, regular valuations ofentire classes of assets are required.

Some Intangible Assets, Property, Plant andEquipment and also Investments may be revaluedto Fair Value.

IFRS / IAS requires revaluation of Derivatives,Biological Assets and certain securities at Fair Value.

Historical Cost is used.

Revaluations are permitted. But, frequencyof revaluation is not mentioned.

On revaluation, an entire class of assets isrevalued, or assets to be revalued areselected on systematic basis.

Certain Financial Instruments (AS 30, 31,32) are carried at Fair Value.

NonCurrent

Assets heldfor sale ordisposal

NonCurrent Asset is classified as held for sale, if itsCarrying Amount will be recovered through a saletransaction rather than through continuing use.

A NonCurrent Asset classified as held for sale ismeasured at the lower of its Carrying Amount andFair Value less costs to sell.

Comparative B/Sheet is not restated.

There is no specific requirement to classify andpresent an asset as held for sale on the face of

the Balance Sheet or in the Notes.

BiologicalAssets

Measured at Fair Value less estimated PointofSalecosts.

No specific guidance has been issued. HistoricalCost is used in general.



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May 2015.16

Question 7 (a): AS10, 11, 16 4 MarksAB Limited acquired at the start of the financial year, Fixed Assets from USA at a price of US$ 1,25,000 and made a downpayment of US$ 25,000. The Exchange Rate was 61.50 per Dollar at the date of transaction. The balance amount was payablein 4 equal halfyearly installments with interest @ 8% per annum. The Exchange Rate on the due dates of installment has been

61.60, 61.80, 61.90 and 62.10. The Asset was under construction during the period of six months from its acquisition.Ascertain the amount to be capitalized and the Gain or Loss to be recognised in each of the years.

Solution: Note: Borrowed Amount = Cost USD 1,25,000 () Down Payment USD 25,000 = 1,00,000 USD

1. Computation of Interest Costs & its treatment

Repayment Principal Interest (USD) Total (USD) INR to USD Interest Exp

6thMonth 25,000 10,00008% 6/12 = 4,000 29,000 61.60 2,46,400

12thMonth 25,000 75,000 8% 6/12 = 3,000 28,000 61.80 1,85,400

18thMonth 25,000 50,000 8% 6/12 = 2,000 27,000 61.90 1,23,800

24thMonth 25,000 25,000 8% 6/12 = 1,000 26,000 62.10 62,100

Note: The above Interest Cost will be expensed in the Statement of P&L under the head Finance Charges.The above asset is a Qualifying Asset for Capitalizing Interest Costs on the following grounds

(a)

Qualifying Asset is an asset that takes substantial period of time to get ready for its intended use. [Substantial Period ofTime = 12 months unless shorter time is justified]

(b)

It is given that the Asset was under construction for 6 months. So, it is assumed that the same is not a Qualifying Asset.(c) Even if it is assumed to be a Qualifying Asset, for capitalising the FOREX Costs as Borrowing Cost, the information on

prevailing interest rates in India is not available. Hence, no part of Interest Cost is capitalised.

Hence, Asset will be capitalized initially at `61.50 USD 1,25,000 = `76,87,500

2.Computation of FOREX Loss on Settlement

As per AS 11, the Settlement Difference on account of FOREX Loan will be written off to the Statement of P&L.

Also, since the Forex Loan is a Monetary Item, the same has to be restated based on Closing Rate. The differencethereon is taken to the Statement of P&L.

The above loan is recognized initially @ `61.50 per USD. On repayment the Forex Loss /Gain is recognised.

Repayment Loss on Settlement () Balance Loan O/s (USD) Restatement Loss on o/s Bal.

6thMonth (61.6061.50) 25,000 = 2,500 75,000 No restatement

12th

Month (61.8061.50) 25,000 = 7,500 50,000 (61.8061.50) 50,000= 15,00018thMonth (61.9061.80) 25,000 = 2,500 25,000 No restatement

24thMonth (62.1061.80) 25,000 = 7,500 0 No restatement

3.Summary of Debit to P&L A/c:

Year Interest Cost Settlement Loss Restatement Loss

Year 1 2,46,400 + 1,85,400 = 4,31,800 2,500 + 7,500 = 10,000 15,000

Year 2 1,23,800 + 62,100 = 1,85,900 2,500 + 7,500 =10,000

Note: Option is available to Companies, to adjust the Exchange Differences relating to Foreign Currency Borrowings forDepreciable Fixed Assets, in the Cost of such Asset, as per MCA Notification.

Question 7 (b): Guidance Note in Excise Duty 4 Marks

HS Limited manufactures goods and caters to both national and international markets. As on 31 st March 2015, it has thefollowing Stocks in its Warehouse at Factory:

Goods meant for National Market Sale Value of 100 Lakhs

Goods meant for International Market Export Value of 50 Lakhs

The Company has a policy to mark up the products for national markets at onethird of cost while those for exports are markedup at 150% of its cost. Excise Duty on goods is payable @ 12.36%. The Management is of the opinion that Excise is payableonly on clearance of goods from Factory and as such the same should not be a part of Cost of Inventory.

You are required to guide the Company in the light of relevant Guidance Note.



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May 2015.17

Solution: Refer Page No. 8.14, Part 3 Illustration of Padhukas Students Guide on Financial Reporting

1.

Local Market:As per the ICAIs Guidance Note on Accounting Treatment for Excise Duty, Provision for the UnpaidLiability of Excise Duty should be made. Therefore, in the above case, Excise Duty on the goods meant for Local Sales

should be provided at the rate of 12.36% on the Selling Price, of ` 100 Lakhs for valuation of Stock.

2.

Export Goods: Assuming that all the conditions specified in the Central Excise Rules, regarding export of excisablegoods without payment of duty are fulfilled by the Company, Excise Duty may not be provided for the goods meant for

exports, even though the manufacture thereof is complete.

Question 7 (c): AS9 8 MarksKrishna sold goods to Madhav for 100 Crores against an export order of Madhav. Subsequent to the sale by Krishna, theexport order of Madhav was cancelled for unavoidable reasons. Madhav decided to sell the good in local market, provided aPrice Discount is allowed by Krishna. Krishna acceded to the request of Madhav. Advise how the discount given shall be dealtin the books of accounts of Krishna.

Solution: Similar to Page 9.8, Q.No.22 of Padhukas Students Referencer on A/cg Standards [M 06, M 00]

1. Krishna hassoldgoods for ` 100 Crores to Madhav. Hence, the sale is completein all respects. Madhavs decision tosell the same in the domestic market at a discount does not affect the amount recognised as Sales Income by Krishna.

2.

Price Discount offered by Krishna at the request of Madhav is notin the nature of discount given during the ordinarycourse of trade, since it would have been given at the time of sale itself.

3. As there appears to be an uncertainty relating to realisability of the Discount portion, which has arisen subsequent tothe time of sale, Krishna should make a separate provisionto reflect the uncertainty relating to collectibility, ratherthan to adjust the amount of Revenue originally recorded.

4. The Discount Allowedshould be shown as an Expense in the Statement of P & L of Krishna separately, and notshown as deduction from the Sales figure.

Question 7 (d): AS5 4 MarksA Company desires to make provision in respect of its nonmoving or slow moving items of stock. The following information isavailable: (amounts in Lakhs)

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 technicality 5.50 4.25

The Company has been making provision based on number of issues. However, from this year, the Management has decidedto 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 theproposed change requires the same to be given in the Financial Statement of the Current Year.

Solution:Refer Page No.5.9, Q.No.29 of Padhukas Students Referencer on Accounting Standards [M 03, N 08, M 12]

1.

Analysis:(a)

Changes: The Companys accounting policy requires that provision should be made in respect of nonmovingstocks. The method of estimating the provision can be changed based on new developments, additionalinformation, etc. if a more prudent estimate of the amount can be made.

(b) Nature: The decision to make provision for nonmoving stock on the basis of technical evaluation is only achange in accounting estimate, and does notamount to a change in accounting policy.

(c)

Materiality:The change in the amount of required provision is ` 1,00,000 which is only 0.59 % of the Total Stock

Value, and is hence not material.



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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 evaluationprovides more satisfactory results than the provision based on Number of Issues. In such case, the Company canchange the method of provision.

Question 7 (e): AS29 4 MarksLucky P Limited has been assessed to Income Tax, in which a demand of 10 lakhs has been made. The Company has gonein appeal. The Company has deposited 6.00 Lakhs against the demand, on being pursued by the Department. The Companyhas been advised by its Counsel that there is 80% chance of losing in respect of one of the ground which may end upconfirming the demand of 4.00 Lakhs, while on other ground, there is fair chance of winning the appeal. How the Companyshould treat the same while preparing the Final Accounts for the year ending 31stMarch 2015?

Solution: Refer Page No.29.13, Q.No.29 of Padhukas Students Referencer on Accounting Standards

1.

Recognition:As per AS 29 a Provision should be recognized if the following conditions are satisfied

Condition (1) Condition (2) Condition (3)

Presentobligation as a result of pastevent.

Outflow of Resources to settle theobligation is probable.

Reliable estimateof theamount.

Liability for Income Tax existed on theB/S date, as per the Demand Notice.There is a present obligation.

There will be an outflow of resourcesto settle the obligation, if the Company

does not win the case in appeal.

Tax Liability is ascertained at

an amount of ` 10 Lakhs, asper the Demand Notice.

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 ` 4 Lakhs should berecognized for 20142015, since the probability of confirmation of demand for this amount is very high 80%. Thiswill be disclosed as Short Term Provisions under Current Liabilities

(b)

For the balance portion of ` 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 ` 6 Lakhs should be shown as Other NonCurrent Assets in the Financial Statements,

along with a clear description of the nature of item.



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