The Institute of Chartered Accountants of Nepal. Compiler of Suggested Answers. Advanced Accounting. CAP II Examination

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1 The Institute of Chartered Accountants of Nepal Compiler of Suggested s Advanced Accounting CAP II Examination

2 Chapter 1 Accounting

3 Question No 1 What is entity concept? (June 2011)(2 Marks ) Business consists of person and resources. Person representing the business is separate and distinct from the business enterprises. Accounting system deals with the economic activities of the business not of owner. In Entity Concept, preparation of Balance Sheet of the business does not consider the personal assets and liability of the owner of the business. Question No 2 Write short note on a. Going Concern (December 2011) ( 2.5 Marks) The financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed. b. Matching Concept (June 2012)(2.5 Marks) Matching concept requires periodic revenue should be matched with that period s expense. While reporting financial performance of the entity only that portion of expense should be recognized as expense which is attributable for earning revenue and remaining portion of the expenses should be carried forward for the next accounting period so as to derive actual performance of the entity during that period. That is the reason why prepaid expenses are not recognized in periodic performance though outflow is incurred during that particular period. Provisioning of the expense follow same rule. Depreciation is charged on the ground of same underlying principle. c. Contingency reserve (December 2012)( 2.5 Marks) The Contingency reserves are sum set aside to cover anticipated future liabilities or reduction in assets value. This reserve is required when the company believes the value of its assets likely decrease or it has incurred liabilities and it is able to reasonable estimate the amounts loss. Contingency reserves are net up by deducting the appropriate sum from income. Contingencies include: Potentially uncollectable money owed to company. Potential obligation under product warranties or related to products defects judgment for pending threaten litigation. Likely loss due to fire and other hazards. The Contingency reserve must be disclosed in financial statement when required and may be utilized for the following purposes: 1. Expenses or loss of profits arising out of accidents, strikes or circumstances which the management could not have prevented.

4 2. Expenses on replacement or removal of plant or works (other than normal maintenance or renewals). 3. Statutory obligation for payment of any compensation, if there is no special provision for such compensation. d. Materiality and prudence (December 2012)( 2.5 Marks) Materiality: Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. It depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Often separate line item or sub-item is decided bases on materiality. National level law may specify materiality limit for separate disclosure of an item. Prudence: Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in the making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. The exercise of prudence does not allow, for example, the creation of hidden reserves or excessive provisions. e. Accounting treatments leading to formation of secret reserve (June 2013)(3 Marks) : Following accounting treatment may result in formation of secret reserves within an organization: i) Writing off excessive depreciation; ii) Charging capital expenditures to profit & loss account; iii) Undervaluation of closing stocks; iv) Suppression of sales; v) Showing a contingent liability as an actual liability; vi) Showing an assets as contingent assets; vii) Crediting revenue receipt to an assets account f. Contingent asset (June 2013)(2 Marks) : NAS 12 on " Provisions, contingent liabilities and contingent assets" defines a contingent asset as a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; e.g. a claim that the entity is pursuing through legal processes, where the outcome is uncertain.

5 Contingent asset is not recognized in financial statements since this may result in the recognition of income that may never be realized. It is disclosed where an inflow of economic benefit is probable. g. Money Measurement Concept (December 2013)(2.5 Marks) The concept of Money measurement is an important aspect of accounting. It is an important convention in accounting which explains that any transaction or event that can be measured in terms of money can only be recorded in accounting. Accounting is disclosure of all the business activities in an organized way that includes the figures. Anything that cannot be measured in terms of money cannot be shown in accounts. E.g. even though human resources are an important asset to any entity, these cannot be recorded in the books of accounts as they cannot be reasonably measured in monetary terms. h. Qualitative characteristics of the financial statements (June 2014)(2.5 Marks) : The qualitative characteristics are attributes that improve the usefulness of information provided in financial statements. The framework suggests that the financial statements should observe and maintain the following four qualitative characteristics as far as possible within limits of reasonable cost/ benefit. 1. Understandability: The financial statements should present information in a manner as to be readily understandable by the users with reasonable knowledge of business and economic activities. It is not right to think that more disclosures are always better. A mass of irrelevant information creates confusion and can be even more harmful than nondisclosure. No relevant information can be however withheld on the grounds of complexity. 2. Relevance: The financial statements should contain relevant information only. Information, which is likely to influence the economic decisions by the users, is said to be relevant. Such information may help the users to evaluate past, present or future events or may help in confirming or correcting past evaluations. The relevance of a piece of information should be judged by its materiality. A piece of information is said to be material if its omission or misstatement can influence economic decisions of a user. 3. Reliability: To be useful, the information must be reliable; that is to say, they must be free from material error and bias. The information provided are not likely to be reliable unless: a. Transactions and events reported are faithfully represented. b. Transactions and events are reported in terms of their substance and economic reality not merely on the basis of their legal form. This principle is called the principle of substance over form'. c. The reporting of transactions and events are neutral, i.e. free from bias. d. Prudence is exercised in reporting uncertain outcome of transactions or events. 4. Comparability: Comparison of financial statements is one of the most frequently used and most effective tools of financial analysis. The financial statements should permit both interfirm and intra-firm comparison. One essential requirement of comparability is disclosure of financial effect of change in accounting policies. 5. True and Fair View: Financial statements are required to show a true and fair view of the performance, financial position and cash flows of an enterprise. The conceptual framework

6 does not deal directly with this concept of true and fair view, yet the application of the principal qualitative characteristics and of appropriate accounting standards normally results in financial statements portraying true and fair view of information about an enterprise. i. Off balance sheet item (December 2014)(2.5 Marks) An asset or debt that does not appear on a company s balance sheet. Items that are considered off balance sheet are generally ones in which the company does not have legal claim or responsibility. For example, loans issued by a bank are typically kept on the bank's books. If those loans are securitized and sold off as investments, however, the securitized debt is not kept on the bank's books. One of the most common off-balance sheet items is an operating lease. j. Realization concept. (December 2015)(2.5 Marks). Realization concept in accounting, also known as revenue recognition principle, refers to the application of accruals concept towards the recognition of revenue (income). Under this principle, revenue is recognized by the seller when it is earned irrespective of whether cash from the transaction has been received or not. In case of sale of goods, revenue must be recognized when the seller transfers the risks and rewards associated with the ownership of the goods to the buyer. This is generally deemed to occur when the goods are actually transferred to the buyer. Where goods are sold on credit terms, revenue is recognized along with a corresponding receivable which is subsequently settled upon the receipt of the due amount from the customer. In case of the rendering of services, revenue is recognized on the basis of stage of completion of the services specified in the contract. Any receipts from the customer in excess or short of the revenue recognized in accordance with the stage of completion are accounted for as prepaid income or accrued income as appropriate. Question No 3: Mention any four areas in which different accounting policies may be adopted by different enterprises. (December 2012)( 2.5 Marks) Major areas in which different accounting policies may be adopted by different enterprise includes: a) Methods of depreciation, depletion and amortization, e.g., WDV method, SLM method b) Treatment of expenditure during construction, e.g. capitalization, written off, deferment c) Conversion or translation of foreign currency items, e.g. average rate, TT buying rate d) Valuation of inventories, e.g., FIFO, Weighted average method e) Treatment of goodwill, e.g., capitalization method, super profit method f) Valuation of Investments, e.g. lower of cost and fair value Question No 4 Describe the term Capital Account in the context of accounting system. (December 2015)(3 Marks)

7 . Capital account is a general ledger account which shows owners investment plus net income from the firms operations, less net losses (if any) from operations less withdrawals of funds by the owners for personal use. The components of the capital account vary as per the types of the business entity. The component of capital account in case of proprietorship and partnership entity, are same as defined above. However in case of company, the component of capital account includes: Funds contributed by shareholders Retained earnings Reserves representing appropriation of retained earnings. The balance of capital accounts has generally a credit balance and is reported in the balance sheet as an owner s equity.

8 Chapter 2 Financial Reporting Standards

9 Question No 1 Write short note on a. Events after Balance Sheet date (June 2010) (Marks 2.5) All financial events up to the balance sheet date should be taken in to consideration in preparation of financial statement or for an accounting period. Certain important events may occur after balance sheet date, the knowledge of which is important for making an assessment of performance and making projection for the future. Nepal Accounting Standard defines the events after balance sheet data as: Events after the balance sheet date are those events, favorable and unfavorable, that occur between the balance sheet date and the date when the financial statements are authorized for issue. There are two types of events. b. Accounting estimate. (June 2011)(Marks 3) As a result of the uncertainties in business activities, many financial statement items cannot be measured with precision but can only be estimated. These are called accounting estimates. Therefore, the management makes various estimates and assumptions of assets, liabilities, incomes and expenses as on the date of preparation of financial statements. This process of estimation involves judgements based on the latest information available. Examples of estimation in some fields are: (i) Estimation of useful life of depreciable assets. (ii) Estimation of provision to be made for bad and doubtful debts. c. Component of Financial Statement as per NAS (June 2012)(2.5 Marks) A complete set of financial statement includes the following components: a) A Balance Sheet: Statement showing financial position of entity as on date. b) An income statement: Account showing performance of the entity during the period. c) A Statement of changes in equity showing either: a. All changes in equity, or b. Changes in equity other than those arising from transactions with equity holders acting in their capacity as equity holder d) A cash flow statement: Summary of cash inflow and outflow from operating, financing and investing activities. e) Notes, comprising a summary of significant accounting policies and other explanatory notes. d. Conditions to be satisfied to capitalize the borrowing costs (December 2012)( 2.5 Marks) The following conditions should be satisfied for capitalization of borrowing costs: 1. Those borrowing costs, which are directly attributable to the acquisition, construction or production of qualifying asset, are eligible for capitalization. Directly attributable costs are

10 those costs that would have been avoided if the expenditure on the qualifying asset had not been made. 2. Qualifying assets will give future economic benefit to the enterprise and the cost can be measured reliably e. Related party transaction (December 2014)(2.5 Marks) A business deal or arrangement between two parties who are joined by a special relationship prior to the deal. For example, a business transaction between a major shareholder and the corporation would be deemed a related-party transaction. As per the Provision of Nepal Accounting Standards, any such transaction should be properly disclosed in the Financial Statement of the Organization. Question No 2 NAS 18 "Impairment of Assets" requires an entity to write down the value of its assets, or group of assets, whenever the recoverable amount of an asset is less than its carrying value. Define recoverable amount and state why an asset should be written down to this value if it is below its carrying value. (June 2010) (Marks 5) NAS 18 Impairment of Assets defines recoverable amount as the higher of an asset s fair value less costs to sell and its value in use. It further defines the fair value less costs to sell as the amount obtainable from the sale of an asset (in an arm s length transaction between knowledgeable, willing parties) less costs of disposal. Also, it defines the value in use as the present value of the future cash flows expected to be derived from an asset (or cash-generating unit). The recoverable amount of an asset represents the amount of economic benefits that the asset will generate for an entity. If the carrying value of an asset exceeds its recoverable amount this means that the asset will not generate sufficient economic benefits to meet its carrying value, the asset should therefore be written down to the value that is recoverable by either continuing to use the asset or by selling it. Question No 3 Brindawan Ltd. has an item of plant that is carried in the balance sheet at a revalued amount of 16,200,000. The plant manufactures a product which, until recently, was the only product of its type in the market place. A competitor is now manufacturing a similar product, and Brindawan Ltd. s market share has consequently fallen. Brindawan Ltd. has re-assessed the expected cash flows, to be generated from using the plant over the remaining four years of its life, to be as follows: 2067/68 7,000, /69 4,000, /70 3,500, /71 2,000,000 Brindawan Ltd. has been offered 15,000,000 for the plant by an overseas company.

11 Brindawan Ltd. would be responsible for any shipping and conversion costs that are estimated to be 1,000,000. The depreciated historic cost of the asset is Rs 15,200,000. Brindawan Ltd. s cost of capital is 8%. The present value of Re 1 receivable at the end of each year, based on discount rates of 8% can be taken as: End of year Required: Calculate the impairment loss in respect of the plant and state how the loss should be accounted for in Brindawan Ltd. s financial statements for the year ended 31 st Ashadh, (June 2010) (Marks 6) Calculation of impairment loss Fair value less costs to sell Rs Selling price 15,000,000 Shipping and conversion costs -1,000,000 Net proceeds 14,000,000 Year Cash flow DF Rs 2067/68 7,000, ,510, /69 4,000, ,440, /70 3,500, ,800, /71 2,000, ,480,000 14,230,000 Impairment Loss ( Rs) = Carrying Amount Value in Use = 16,200,000 14,230,000 = 1,970,000 The recoverable amount of the asset is the greater amount, i.e. its value in use of Rs 1,4230,000. The asset is carried at a revalued amount in the balance sheet of Rs 16,200,000, this means that an impairment loss of Rs 1,970,000 has occurred and must be written off the carrying value of the asset. As the asset is carried at a revalued amount and the depreciated historic cost of the asset is Rs 15,200,000 there will be a revaluation surplus of Rs 970,000 (15,2500,000 14,230,000) in respect of the asset, this surplus would initially be utilised for the write down.

12 The remaining impairment loss of 1,000,000 will be charged to the profit and loss account for the period. Question No 4 NAS 9 Income Taxes uses the concept of temporary differences. Temporary differences are the difference between the carrying value of an asset and its tax base. The standard distinguishes between taxable temporary differences and deductible temporary differences. Required: Explain the distinction between taxable and deductible temporary differences. (June 2010) (Marks 4) Temporary differences are differences between the carrying amount of an asset or liability in the balance sheet and its tax base. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. Temporary differences may be either taxable temporary differences or deductible temporary differences. Taxable temporary differences are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. For instance if a tax authority taxes interest income on a cash basis then any income accrued at the balance sheet date will not be included in the current tax charge but will be taxed in the future when the cash is received. Deductible temporary differences are the temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. For instance, if a tax authority taxes interest expense on a cash basis then any expense accrued at the balance sheet date will not be included in the current tax charge but will be deductible in the future when it is paid. Question No 5 X, a construction contractor, undertakes the construction of an industrial complex. He has separate proposals raised for each unit to be constructed in the industrial complex. Since each unit was subject to separate negotiation, he was able to identify the costs and revenues attributable to each unit. Should X treat construction of each unit as a separate construction contract? (December 2010) (Marks 5) The provision of Nepal Accounting Standard 13 on Construction Contracts Para 8 and 9 explains the situations where accounting segmentation and combination of construction contracts can be applied. As per para 8 of the standard, when separate proposals have been submitted, and separate negotiations have been concluded, costs and revenues identified separately, the contract for construction of a number of assets shall be treated as separate construction contracts. Therefore, X has to treat construction of each unit as a separate construction contract. Question No 6: X Ltd. received a grant of 2 crores from the Government for the purpose of installation of special machinery during F/Y 2062/063. The cost of Machinery was 20 crores and it had a useful life of 9 years. During F/Y 2066/067, the grant has become refundable due to nonfulfillment of certain conditions attached to it. Assuming the entire grant was deducted from

13 the cost of machinery in the year of acquisition, state with reasons, the accounting treatment to be followed in the year 2066/067. (December 2010) (Marks 5) As per para 32 of NAS 10 Accounting for Government Grants, the amount refundable in respect of a government grant related to a specific fixed assets is recorded by increasing the book value of the asset. Depreciation on the revised book value provided prospectively over the residual useful life of the asset. In the given case book value of machinery will be increased by 2 crores in the year 2066/67. The computation for the depreciation on machinery can be given as : Cost of Machinery 20 crores Less: Grant Received 2 crores Cost of Machinery 18 crores Useful life of Machinery 9 Years Depreciation per year as per straight line method (assuming residual value to be zero) 18 crores/9 2 crores. Total depreciation for 4 years (2062/063 to 2065/066) 8 crores. Book Value in year 2065/066 (18 8) Crores 10 crores. Add: Grant refunded 2 crores Revised Book Value 12 crores Remaining useful life 5 Years Revised Annual Depreciation ( 12 Crores/5) 2.4 crores. Thus, book value of machinery will be 12 crores in the year2066/067 and the depreciation amounting 2.4 crores will be charged on machinery. Annual depreciation of 2.4 crores will be charged in the next four years. Question No 6: Indicate any three areas in respect of which different accounting policies may be adopted by different enterprises. Also indicate the requirements with regard to disclosure of accounting policies as per the relevant NAS. (December 2010) (5 Marks) Areas in which different accounting policies may be adopted: The following are three areas in which different accounting policies may be adopted by different enterprises: (i) Methods of depreciation, depletion and amortization. (ii) Valuation of inventories. (iii) Valuation of Fixed Assets. (The above three areas are not exhaustive. There are other areas also) Disclosure requirements of accounting policies :The disclosure requirements as prescribed in Accounting Standard 1 (NAS 1) Disclosure of Accounting Policies are as follows :

14 (i) All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed at one place and they should form part of the financial statements. (ii) Any change in the accounting policies which has a material effect in the current period should be disclosed along with the amount, to the extent ascertainable, by which any item in the financial statement is affected. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. However, if a change in accounting policies is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is made. (iii) If the fundamental accounting assumptions viz.going concern, Consistency and Accrual are followed in the preparation of financial statements, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact should be disclosed. Question No 7 What is the Conditions to be satisfied to capitalize the borrowing costs (December 2010) (2 Marks) Capitalization of borrowing costs as part of the cost of a qualifying asset should commence only when all the following conditions are satisfied: 1. The expenditure is being incurred for the Acquisition, construction or production of a qualifying asset; 2. Borrowing costs are being incurred; and 3. Activities that are necessary to prepare the asset for its intended use or sale, (including any technical or administrative work prior to the commencement of physical construction but excluding such activities during which no production or development take place) are in progress. Question No 8 Media Pvt. Ltd. obtained advertisement rights for One Day World Cup Cricket Tournament to be held in March/April, 2011 for 50,00,000. By 31 st January, 2011 they have paid 30,00,000 to secure these advertisement rights. The balance 20,00,000 was paid in February, By 31 st January, 2011 they procured advertisement for 70% of the available time for 70,00,000. The advertisers paid 60% of the amount by that date. The balance 40% was received in February, Advertisements for the balance 30% time were procured in February, 2011 for 30,00,000. The advertisers paid the full amount while booking the advertisement. 75% of the advertisement time is expected to be available in March, 2011 and the balance 25% in April, You are asked to: Pass journal entries in relation to the above. Show in columnar from as to how the items will appear in the monthly financial statements for January, February, March and April Give reasons for your treatment.

15 (June 2011)(Marks 10) 2011 In the books of Media Pvt. Ltd. Journal Entries Dr. in lakhs Jan Advance for advertisement rights (purchase) A/c Dr Cr. in lakhs To Bank A/c (Being advance paid for obtaining advertisement rights) Bank A/c Dr To Advance for advertisement time (sale) A/c (Being advance received from advertisers amounting to 60% of 70 lakhs for booking 70% advertisement time) Feb Advance for advertisement rights (purchase) A/c Dr To Bank A/c (Being balance advance i.e., 50 lakhs less 30 lakhs paid) Bank A/c Dr To Advance for advertisement time (sale) A/c (Being balance advance i.e., 70 lakhs less 42 lakhs received from advertisers) Bank A/c Dr To Advance for advertisement time (sale) A/c (Being advance received from advertisers in respect of booking of balance 30% time) March Advertisement rights (purchase) A/c Dr To Advance for advertisement rights (purchase) A/c (Being cost of advertisement rights used in March i.e., 75% of 50 lakhs, adjusted against advance paid) Advance for advertisement time (sale) A/c Dr To Advertisement time (sale) A/c 75.00

16 (Being sale price of advertisement time in March i.e., 75% of 100 lakhs adjusted, against advance received from advertisers) Profit and Loss A/c Dr To Advertisement rights (purchase) A/c (Being cost of advertisement rights debited to Profit and Loss Account in March) Advertisement time (sale) A/c Dr To Profit and Loss A/c (Being revenue recognized in Profit and Loss Account in March) April Advertisement rights (purchase) A/c Dr To Advance for advertisement rights (purchase) A/c (Being cost of advertisement rights used in April, i.e., 25% of 50 lakhs, adjusted against advance paid) Advance for advertisement time (sale) A/c Dr To Advertisement time (sale) A/c (Being sale price of advertisement time availed in April i.e., 25% of 100 lakhs, adjusted against advance received from advertisers) Profit and Loss A/c Dr To Advertisement rights (purchase) A/c (Being cost of advertisement rights used in Apri, debited to Profit and Loss Account in April) Advertisement time (sale) A/c Dr To Profit and Loss Account (Being revenue recognized in April) Monthly financial statements (1) Revenue statement ( in lakhs) Jan Feb March April Sale of advertisement time

17 Less: Purchase of advertisement rights Net profit (2) Balance sheet as at Sources of funds: Net profit Application of funds: Current assets, loans and advances: Advance for advertisement rights Bank Balance Less: Current liabilities Advance for advertisement time (received from advertisers) Net current assets As per NAS 7 on Revenue Recognition, under proportionate completion method, revenue from service transactions is recognized proportionately by reference to the performance of each act where performance consists of the execution of more than one act. Therefore, income from advertisement is recognized in March, 2011 (75%) and April, 2011 (25%) in the proportion of availability of the advertisement time. Question No 9: Following are data of Robinson Market Value of Stock as on Shrawan 01, 2066: 300,000 (Market Price being cost plus 20% thereof). Purchases for the year: 1,450,000 (Out of which goods worth 150,000 was delivered on Shrawan 08, 2067) Sales for the year: 1,480,000. Goods costing 20,000 was taken by the proprietor for personal use. Goods costing 10,000 was used for firm s office stationery. Normally, the firm sells goods on cost plus 40% Determine the value of stock to be taken for Balance Sheet purpose of Robinson as on Ashadh end, 2067 (June 2011)(Marks 8) Robinson Statement showing Value of Stock as on Ashadh end, 2067 Opening Stock ( as on Shrawan 01, 2066) 250,000 Add: Purchases during the Year 1,450,000 Less: Goods in Transit (150,000) Less: Goods taken by proprietor for personal use (20,000) Less: Goods used for office's stationery (10,000) 1,270,000 Less:

18 Cost of Goods Sold: Sales for the Year 1,480,000 Less: Profit on Sales (422,857) 1,057,143 Stock in Hand (as on Ashadh end, 2067) 462,857 Add: Goods in Transit 150, ,000 Value of Stock to be shown in Balance Sheet (as on Ashadh end, 2067) 612,857 Working Notes: 1. Calculation of Opening Stock: Market Value of Stock: 300,000 Profit Margin (on Cost) 20% Cost Price of Opening Stock: =300,000 = 250,000 (100+20) 2. Calculation of Profit on Sales: Sales 1,480,000 Profit Margin (on Cost) 40% Profit Amount =1,480,000 X 40 = 422,857 1,057,143 (100+40) Question No 10 Palpa Power company decided to replace some parts of its plant by an improved plant. The plant to be replaced was built in 2065 for 70,00,000. It is estimated that it would cost 130,00,000 to build a new plant of the same size and capacity. The cost of the new plant as per the improved design was 2,10,00,000 and in addition, material belonging to the old plant valued at 7,60,000 was used in the construction of the new plant. The balance of the plant was sold for 6, 00,000.Compute the amount to be written off to revenue and the amount to be capitalized. Also prepare Plant account and Replacement account. (June 2011)(Marks 5) (i) Calculation of amount chargeable to revenue Estimated current cost of replacing old plant 130,00,000 Less: Realization from sale of remaining of the old plant 6,00,000 Value of materials belonging to the old Plant used in the construction of new plant 7,60,000 13,60,000 Total 116,40,000 (ii) Calculation of amount to be capitalized Cost of building new plant (cash) 2,10,00,000 Add: Value of materials belonging to the old

19 (iii) (iv) plant used in the construction of the new plant 7,60, ,60,000 Less: Estimated current cost of replacing old plant 130,00,000 Total 87,60,000 Plant Account To Balance b/d 70,00,000 By Balanced c/d 157,60,000 To Cost of construction: Cash (210,00, ,00,000) 80,00,000 Cost of old material used 760, ,60, ,60,000 Replacement Account To Bank account (portion to By Bank account 6,00,000 be written off out of the By Plant account 760,000 replacement cost) 130,00,000 By Revenue account 116,40, ,00, ,00,000 Question No 11 The company deals in three products, A, B & C, which are neither similar nor interchangeable. At the time of closing of its account for the year 2066/067, the Historical and Net Realizable Value of the items of closing stock are determined as follows: Items Historical Cost Net Realizable Value ( in Lakhs) ( in Lakhs) A B C Compute the value of closing stock? (June 2011)(Marks 5) As per para 9 of NAS 4 on Inventories, inventory should be valued at the lower of cost and net realizable value. Inventories should be written down to net realizable value on an item-by-item basis in the given case: Items Historical Cost Net Realizable Value Valuation of Closing Stock ( in Lakhs) ( in Lakhs) ( in Lakhs) A B C Hence, closing stock will be valued at 76 lakhs

20 Question No 12 What are the conditions that have to be satisfied for recognition of revenue from sale of goods? (June 2011)(5 Marks) As per NAS 7, Revenue from Sale of goods shall be recognized when all the following conditions have been satisfied: a. The entity has transferred to the buyer the significant risks and rewards of ownership of goods; b. The entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; c. The amount of revenue can be measured reliably; d. It is probable that the economic benefits associated with the transaction will flow to the entity; and e. The cost incurred or to be incurred in respect of the transaction can be measured reliably. Question No 13 A Ltd. received a grant of Rs 2 crores from the Government for purchase of a special purpose machinery during The cost of machinery was Rs 38 crores and had a useful life of 9 years. During the current year the grant has become refundable due to non fulfillment of certain conditions attached to it. Assuming that the entire amount of grant was deducted from the cost of machinery in the year of acquisition, state with reasons, the accounting treatment to be followed in the rear (June 2011)(5 Marks) Value of asset (Without grant) = 38 crore Depreciation (Without Grant) = 38 crore/9years = 4.22 crore per year As per NAS, the additional depreciation needs to be charge of expenses. Hence, Already charge Depreciation Book value (before refund of grant) = Rs 20 crore (assuming SLM method and no residual value, annual depreciation will be (38-2)/9 = 4 crore, depreciation for 4 years will be 16 crore Additional Depreciation for 4 years = (4.22 4)-(4 4) (change as expenses for current year = =0.88 crore Revises book Value = =21.12 crore, Depreciation for next 5 year =4.22 Question No 14: Explain Recognition of Assets as per Framework for the Preparation and Presentation of Financial Statements under NAS. (December 2011)(5 Marks) An asset is recognized in the balance sheet when it is probable that the future economic benefits will flow to the enterprise and the asset has a cost or value that can be measured reliably.

21 An asset is not recognized in the balance sheet when expenditure has been incurred for which it is considered improbable that economic benefits will flow to the enterprise beyond the current accounting period. Instead such a transaction results in the recognition of an expense in the income statement. This treatment does not imply either that the intention of management in incurring expenditure was other than to generate future economic benefits for the enterprise or that management was misguided. The only implication is that the degree of certainty that economic benefits will flow to the enterprise beyond the current accounting period is insufficient to warrant the recognition of an asset. Question No 15: What are the items that are to be excluded in determination of the cost of inventories as per NAS-04? (December 2011)(5 Marks) Items that are to be excluded in determination of the cost of inventories as per NAS 4 on Valuation of Inventories are: 1. Abnormal amounts of wasted materials, labor or other production costs. 2. Storage costs unless those costs are necessary in the production process prior to a further production stage. 3. Administrative overheads that do not contribute to bringing the inventories to their present location and condition; and 4. Selling costs. Question No 16: X Limited has recognized 10 lakhs on accrual basis income from dividend on shares of the face value of 50 lakhs held by it as at the end of the financial year The dividends on shares were declared at the rate of 20% on The dividend was proposed on by the declaring company. Whether the treatment is as per the relevant Accounting Standard? with reference to provisions of NAS-07. (December 2011)( 5 Marks ) NAS 07 states that dividends from investments in shares are not recognized in the statement of profit and loss until a right to receive payment is established. In the given case, the dividend is proposed on , while it is declared on Hence, the right to receive payment is established only on As per NAS 07, income from dividend on shares should be recognized by X Ltd. in the financial year ended The recognition of 10 lakhs on accrual basis in the financial year is not as per NAS 07 'Revenue.' Question No 17 ABC Limited closed its accounting year on and the accounts for that period were considered and approved by the board of directors on 20 th August, The company was engaged in laying pipeline for an oil company, deep beneath the earth. While doing the boring work on it had met a rocky surface for which it was estimated that there would be extra cost to the tune of 100 lakhs. Further, the court had given its verdict against the company for the liability of 50 lakhs on shown as contingent liabilities on accounts. You are required to state with reasons, how it would be dealt with in the financial statements. (June 2012)(5 Marks)

22 Para 3 of NAS-5, on Events occurring after the Balance Sheet Date defines events occurring after the balance sheet date are those events, favorable and unfavorable, that occur between the balance sheet date and the date when the financial statements are authorized for issue. Two types of events can be identified: a. Those that provide evidence of conditions that existed at the balance sheet date (adjusting events after the balance sheet date); and b. Those that are indicative of conditions that arose after the balance sheet date (non-adjusting events after the balance sheet date). In the first case the incidence, which was expected to push cost became evident after the date of approval of the accounts. So it is only indicative of conditions that arose after the balance sheet date, which is non-adjusting event after the balance sheet date. However, this may be mentioned in the Director s Report. In the second case the incidence, the settlement after the balance sheet date of a court case that confirms that the entity had a present obligation on the balance sheet date. So it provides evidence of conditions that existed at the balance sheet date, adjusting events after the balance sheet date. Hence, new provision for the amount of 50 lakhs should be adjusted against the profit & loss account. Question No 18 Everest Ltd. incurred 20,00,000 as fixed production overhead per year. It normally produces 1,00,000 units in a year. In however its production has been only 40,000 units. At the year-end 16 th July 2011, the closing stock was 10,000 units. The cost of unit is below: Material = 500 per unit Labour = 250 per unit Fixed Production overhead = 20,00,000 per annum Fixed Administration = 10,00,000 per annum Calculate the value of closing stock. (June 2012)(5 Marks) In accordance with NAS 4 Inventories, the costs of conversion include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. The allocation of fixed production overheads for the purpose of their inclusion in the cost of conversion is based on the normal capacity of the production facilities. Thus, cost per unit of finished goods can be computed as follows: Particulars /unit Material cost 500 Labor cost 250 Fixed Production Overhead [ 2,000,000 / 100,000 units] 20 Total Cost of conversion 770 Thus, the value of 10,000 units of finished goods on stock at the year end will be 7,700,000 (10,000 units X 770 per unit). Question No 19 Define Borrowing cost & qualifying assets as per NAS 8? When borrowing cost is capitalized? (June 2012)(5 Marks)

23 Borrowing costs are interest and other cost incurred by an entity in connections with borrowing of funds. Qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Borrowing cost is capitalized if a. Expenditure for the asset are being incurred b. Borrowing costs are being incurred ;and c. Activities that are necessary to prepare the assets for its intended use or sale are in progress. Question No 20 GP Ltd. received a grant of 40 lakhs from the Government for the purpose of special machinery during fiscal year The cost of machinery was 400 lakhs and had a useful life of 10 years. During fiscal year , the grant has become refundable due to non-fulfillment of certain conditions attached to it. Assuming the entire grant was deducted from the cost of machinery in the year of acquisition; state with reason, the accounting treatment to be followed in the fiscal year (December 2012)( 5 Marks) As per para 32 of NAS 10 Accounting for Government Grants, in case of refund of government grant related to a specific fixed asset shall be recorded by increasing the carrying amount of the asset. The cumulative additional depreciation that would have been recognized to date as an expense in the absence of the grant shall be recognized immediately as an expense. The computation of depreciation and expense can be given as: Cost of Machinery 400 lacs Less: Grant Received 40 lacs Cost of Machinery 360 lacs Useful life of Machinery 10 years Depreciation per year as per straight line method (Assuming residual value to be zero 360 lacs/10 = 36 lacs Total depreciation for 4 years (2064/65 to 2067/68) = 36 4 = 144 lacs Cost of machinery without government grants 400 lacs Useful life of Machinery 10 years Depreciation that would have been recognized in absence of grant 400/10 = 40 Lacs Cumulative total depreciation that would have been recognized in absence of grant=40 4 =160 lacs Expenses to be recognized in FY 2068/069 = 160 lacs 144 lacs=16 lacs Depreciation to be charge for another 6 years = ( )/6 Amount of depreciation as an expense for 2068/069 = = 56 lacs Depreciation for remaining 5 years = 40 lacs per year Question No 21

24 While preparing its final accounts for the year ended 31 st March, 2012 Sky Limited created a provision for bad and doubtful debts are 2% on trade debtors. A few weeks later the company found that payments from some of the major debtors were not forthcoming. Consequently the company decided to increase the provision by 10% on the debtors as on 31 st March, 2012 as the accounts were still open awaiting approval of the Board of Directors. Is this to be considered as an extraordinary item or prior period item? The company wants to treat the expenditure as deferred revenue expenditure. Give your comments for the financial year ending on in the context of relevant NAS. (December 2012)( 5 Marks) As per NAS 2, revision of an estimate does not bring the resulting amount within the definition either of prior item or of an extraordinary item. In the given case, Sky Limited created a provision for bad and doubtful debts at 2 % on trade debtors while preparing its final accounts for the year ended 31 st March, Subsequently, the company decided to increase the provision by 10%. As per NAS 2, this change in estimate is neither a prior period item nor an extraordinary item. However, as per NAS 2, a change in accounting estimate, which has a material effect in the current period, should be disclosed and quantified. Any change in an accounting estimate, which is expected to have a material effect in later periods should also be disclosed. The expenditure of revenue nature may be treated as deferred revenue expenditure if its benefit is likely to be derived over a number of years and alternatively, if there is a huge loss due to unforeseen circumstances. However, increase in provision after the balance sheet date in the given case being an accounting estimate cannot be treated as deferred revenue expenditure. Question No 22 A company obtained term loan during the year ended 31 st March, 2012 to an extent of 650 lakhs for modernization and development of its factory. Building worth 120 lakhs were completed and plant and machinery worth 350 lakhs were installed by 31 st March, A sum of 70 lakhs has been advanced for assets the installation of which is expected in the following year. 110 lakhs has been utilized for working capital requirements. Interest paid on the loan of 650 lakhs during the fiscal year amounted to lakhs. How should the interest amount be treated in the account of the company? Give your comments for the financial year ending on in the context of relevant NAS. (December 2012)( 5 Marks) According to NAS 8 ( Borrowing Cost ), interest on borrowed funds, which is directly related to the acquisition, construction or production of qualifying asset should be capitalized. As factory building, Plant and Machinery are qualifying asses as per NAS 8 interest paid on the loan being borrowing cost should be capitalized and included in the gross book value of these assets. The interest pertaining to the money spent on the working capital should be charged off to the Profit and Loss Account. In the given case, the interest amount of lakhs shall be treated as follows: Proportion In lakhs To be added to the cost of building To be added to the cost of Plant and Machinery

25 To be added to the cost of work in progress To be added to the cost of Profit and Loss A/c Total Question No 23 A pharma company spent 135 lakhs during the accounting year ended 31 st March, 2012 on a research project to develop a drug to treat AIDS. Experts are of the view that it may take four years to establish whether the drug will be effective or not and even if found effective it may take two to three more years to produce the medicine, which can be marketed. The company wants to treat the expenditure as deferred revenue expenditure. Give your comments for the fiscal year ending on in the context of relevant NAS. (December 2012)( 5 Marks) As per NAS 27 on intangible assets, the research cost be expenses as and when incurred, in other words the cost of research cannot be capitalized. The intangible asset arising from research should not be recorded as an asset and therefore the research cost of internal project shall be treated as an expense in financial statement. The development expenses, cost of internal project also to be expenses as incurred unless they meet asset recognition criteria, before recognizing these costs as assets the following points should be demonstrated: Technical feasibility of the product Availability of product for use or sale Identification of cost incurred Probability of external market or The realistic expectation that there will be sufficient revenues to cover cost. In the given case, the above conditions not having been fulfilled (Nothing is stated about future revenue or benefits), the sum of 135 lakhs should be charged to the profit and loss account as an expense in the accounting year ended 31 st March, Question No 24: Goverdhan Ltd. has equity capital of 2,000,000 consisting of fully paid equity shares of 10 each. The net profit for the year ended was 3,000,000. It has also issued 18,000, 10% convertible debentures of 50 each. Each debenture is convertible into 5 equity shares. The tax rate applicable is 30%. Compute the diluted earnings. (June 2013)(3 Marks) :

26 Particulars Amount Interest on for the year 90,000 (18,000 debentures x Rs50x10%) Less Tax on 30% -27,000 63,000 Add: Net Profit for the year ended ,00,000 Diluted Earning 30,63,000 Question No 25: A Ltd. Purchased fixed assets costing 850 Lakhs on This was financed by foreign currency loan (U.S. Dollars) payable in three equal instalments. Exchange rates were $1= 85 and 88 as on and First instalment was paid on You are required to state, how these financial transactions would be accounted for? (June 2013)(3 Marks) : As per NAS-11: The Effects to Changes in Foreign Exchange Rates, exchange differences arising on the settlement of monetary items or on reporting an enterprise monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial Statements, should be recognised as income or expense in the period they arise. Thus exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets are recognised as income or expense. Calculation of Exchange Difference: Foreign Exchange Loan = Rs 850 Lacs / Rs 85 = $10 Lacs Exchange Difference = $ 10 Lacs X (88-85) = Rs 30 Lacs Loss due to exchange difference amounting to Rs 30 Lacs should be charged to Profit & Loss Account for the year ended Question No 26: On 25 th Poush 2068, ABC Advertising P. Ltd. obtained advertising rights for ACC-Football Cup to be held in Baishakh and Jestha 2069 for 520 Lakhs. They furnish the following information: i) The company obtained the advertisements for 70% available time for 700 Lakhs by 25 th Falgun ii) For the balance time they got bookings in 20 th Chaitra 2068 for 240 Lakhs. iii) All the advertisers paid the full amount at the time of booking the advertisements. iv) 40% of the advertisements appeared before the public in Baishakh and balance 60% appeared in the month of Jestha. Calculate the amount of profit/loss to be recognised for the month Baishakh and Jestha, 2069 as per NAS-7. (June 2013)(5 Marks)