Value Added Statement of Rukmi Ltd. For the year ended

Transcription

1 (1) Solution Sheet COURSE : CA-FINAL SUBJECT : FINANCIAL REPORTING Ans 1 (a) Value Added Statement of Rukmi Ltd For the year ended Particulars RS Sales/Turnover 40,57,000 Less: Bought in Materials Decrease in Stock [1 24,000 Purchases [1 20,20,000 Manufacturing and other expenses [1 2,30,000 (22,74,000) Value Added by Trading Activities [1 17,83,000 Add: Other Income[1 55,000 Gross Value Added 18,38,000 Applied as follows: To Pay Employees - Salaries, Wages, etc [1 10,00,000 To Pay Government as - Taxes, Duties etc (40,000+3,000) [1 43,000 To Pay Providers of capital - Interest on borrowings[05 4,69,000 - Dividends [05 35,000 5,04,000 4 To Pay for Maintenance and Expenses of the Company - Depreciation [05 2,44,000 - Debenture Redemption Reserve 10,000 [05 - General Reserve [05 10,000 - Retained Earnings [05 27,000 2,91,000 Total Application of Value Added 18,38,000 RS (b) [10 1 Each Financial Report, annual or interim, is evaluated on its own for conformity to Ind ASs[2 2 The fact that an Entity may not have provided Interim Financial Reports during a particular financial year or may have provided Interim Financial Reports that do not comply with Ind AS-34 does not prevent the Entity's Annual Financial Statements from conforming to Ind ASs if they otherwise do so [3

2 (2) (c) 1 Analysis: In the instant case, the main business of the Company is to buy large plots of virgin land, develop and cultivate them and sell them in small plots Land is being held by the Company for sale in the normal course of business and hence cannot be treated as an Investment Property[2 2 Treatment: In this case, Land constitutes an Inventory Item and, thus, should be classified under 'Current Assets' [2 3 Conclusion: The treatment adopted by the Company is not correct as per Ind AS-40[1 [5 Ans 2 (a) (i) For classification of assets As per Ind AS 16 Property, Plant and Equipment states that Property, plant and equipment are tangible items that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes As per Ind AS 40 Investment property, investment property is a property held to earn rentals or for capital appreciation or both, rather than for use in the production or supply of goods or services or for administrative purposes; or sale in the ordinary course of business According, to the facts given in the questions, since Property 1 and 2 are used as factory buildings, their classification as PPE is correct However, Property 3 is held to earn rentals; hence, it should be classified as Investment Property Thus, its classification as PPE is not correct Property 3 shall be presented as separate line item as Investment Property as per Ind AS 1 [2 (ii) For valuation of assets Ind AS 16 states that an entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an entire class of property, plant and equipment Also, Ind AS 16 states that If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs shall be revalued However, for investment property, Ind AS 40 states that an entity shall adopt as its accounting policy the cost model to all of its investment property Ind AS 40 also requires that an entity shall disclose the fair value of investment property Since property 1 and 2 is used as factory building, they should be classified under same category or class ie factory building Therefore, both the properties should be valued either at cost model or revaluation model Hence, the valuation model adopted by Stars Ltd is not consistent and correct as per Ind AS 16 In respect to property 3 being classified as Investment Property, there is no alternative of revaluation model ie only cost model is permitted for

3 (3) subsequent measurement However, Stars Ltd is required to disclose the fair value of the investment property in the Notes to Accounts [2 (iii) For changes in value on account of revaluation and treatment thereof Ind AS 16 states that if an asset s carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading revaluation surplus However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss Accordingly, the revaluation gain shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus [1 (iv) For treatment of depreciation Ind AS 16 states that depreciation is recognised even if the fair value of the asset exceeds its carrying amount, as long as the asset s residual value does not exceed its carrying amount Accordingly, Stars Ltd is required to depreciate these properties irrespective of that their fair value exceeds the carrying amount [1 (v) Rectified presentation in the balance sheet As per the provisions of Ind AS 1, Ind AS 16 and Ind AS 40, the presentation of these three properties in the balance sheet should be as follows: Case 1: If Stars Ltd has applied the Cost Model to an entire class of property, plant and equipment Balance Sheet extracts as at 31st March 2017 RS Assets Non-Current Assets Property, Plant and Equipment Property 1 (30,000-3,000) 27,000 [0] Property 2 (20,000 2,000) 18,000 [0] 45,000 Investment Property Property 3 (Fair value being RS 27,000) (Cost = 24,000-2,400) [1 21,600 Case 2: If Stars Ltd has applied the Revaluation Model to an entire class of property, plant and equipment Balance Sheet extracts as at 31st March 2017 RS Assets Non-Current Assets

4 (4) Property, Plant and Equipment Property 1 32,000 Property 2 22,000 Investment Property Property 3 (Fair value being 27,000) (Cost = 24,000-2,400) [05 54,000 21,600 Equity and Liabilities Other Equity Revaluation Reserve * [5 Property 1 (32,000 27,000) 5,000 [5 Property 2 (22,000 18,000) 4,000 9,000 * Revaluation reserve should be routed through Other Comprehensive Income (OCI) (subsequently not reclassified to Profit and Loss) in the Statement of Profit and Loss and shown as a separate column in the Statement of Changes in Equity [05 [10 (b) Cost to Company in employing Mr X Salary before tax RS 4,00,000 x 12 = [05 48,00, Add: Employee s PF contribution (50,000 x 12)[05 Add: Employer s PF contribution (50,000 x 12)[05 RS 64,00,000 6,00,000 70,00,000 6,00,000 76,00,000 Capital base RS Equity Share Capital paid up (5,00,000 shares of RS 75 3,75,00,000 each)[05 Less: Calls in arrears[05 1,00,000 3,74,00,000 General Reserve[05 10,00,000 Profit & Loss A/c (balance) at the beginning of the (25,00,000) year[05

5 (5) Loss for the year[05 (1,80,000) 8% Debentures[05 80,00,000 Capital base[05 4,37,20,000 Target Profit 125% of capital base (4,37,20,000) 54,65,000 [1 Profits achieved due to Mr X 54,65, % 60,11,500 (54,65,000) [2 Maximum emoluments that can be paid to Mr X = 60,11,500 [1 Thus, the company is advised not to hire him as his CTC RS 76,00,000 is more than RS 60,11,500 [1 Ans 3 (a) A As per section 135 of the Companies Act 2013 Every company having either net worth of RS 500 crore or more, or [05 [10 turnover of RS 1,000 crore or more or [05 a net profit of RS 5 crore or more [05 during any financial year shall constitute a Corporate Social Responsibility (CSR) Committee of the Board consisting of three or more directors (including at least one independent director)[05 B Role of Corporate Social Responsibility (CSR) Committee The CSR Committee shall (a) formulate and recommend to Board- a a CSR Policy indicating the activities to be undertaken by the company as specified in Schedule VII; [05 b the amount of expenditure to be incurred on the above activities and (b) monitor the CSR Policy of the company from time to time C Role of Board Board shall disclose- (a) The composition of CSR Committee in its report [05 (b) Approve the recommended CSR Policy for the company [05 (c) Disclose the contents of such Policy in its report and place it on the company's website [05 (d) Ensure that the activities included in CSR Policy of the company are duly executed by the company [05 (e) Ensure that the company spends, in every financial year, at least two percent of the average net profits of the company made during the three immediately preceding financial years by giving preference to the local area and areas around it where it operates [05 (f) In case the company fails to spend such amount, the Board shall specify the reasons for not spending the amount [05 D In the given scenario

6 (6) The MCA has clarified that any financial year referred to under sub-section (1) of section 135 of the Act read with Rule 3(2) of Companies CSR Rule, 2014, implies any of the three preceding financial years A company which meets the net worth, turnover or net profits criteria in any of the preceding three financial years, but which does not meet the criteria in the relevant financial year, is still required to constitute a CSR Committee and comply with provisions of sections 135 of the Companies Act, 2013 [05 As per the criteria to constitute CSR committee - 1) Net worth greater than or equal to RS 500 Crore: This criterion is not satisfied [05 2) Sales greater than or equal to RS 1000 Crore: This criterion is not satisfied[05 3) Net Profit greater than or equal to RS 5 Crore: This criterion is satisfied in financial year ended March 31, 2017 when the net profit was RS 8 crore[05 Hence, the XYZ Ltd is required to form a CSR committee [05 [8 (b) INR INR Inter-state Purchases by Vendor [1 Purchases A/c Dr 1,00,000 IGST Receivable A/c Dr 18,000 To H 1,118,000 Inter-state Sales by Vendor [1 P Dr 1,77,000 To Sales A/c 1,50,000 To IGST Payable A/c 27,000 For commission to e-commerce operator [1 Commission A/c Dr 3,000 Input IGST A/c Dr 540 To B 3,540 For receipt of payment from e-commerce operator [1 Bank A/c (balancing figure) Dr 1,73,460 B Dr 3,540 To P 1,77,000

7 (7) For depositing GST to Government [1 Cash IGST ledger A/c (27,000-18, ) Dr 8,460 To Bank A/c 8,460 For set-off [1 IGST Payable A/c Dr 27,000 To IGST Receivable A/c (18, ) 18,540 To Cash IGST ledger A/c 8,460 In the books of E-Commerce Operator INR INR For amount due [05 P Dr 1,77,000 To S 1,77,000 For Commission [05 S Dr 3540 To IGST Payable A/c 540 To Commission A/c 3,000 For payment received and remitted [0] Bank A/c Dr 1,77,000 To P 1,77,000 S (1,77,000 8,460) Dr 1,68,540 To Bank 1,68,540 Cash Payment to the Government [05 Cash IGST Ledger A/c Dr 540 To Bank A/c 540 For set-off IGST Payable A/c Dr 540 To Cash IGST Ledger A/c 540 [8

8 (8) (c) Journal Entries for recognition of CERs [1 (1) During the year when CERs are granted USD USD Inventory (for CERs) Dr 200,000 To Bank / Payable A/c 200,000 (2) For year-end financial statements The company shall carry out a NRV assessment by comparing the realisable value of CERs with cost of USD 200,000 Since NRV of USD 216,000 (180,000 CERs x USD 12) is higher than cost of USD 200,000, the company shall continue to disclose the inventory at cost without any NRV mark-down Therefore, no journal entry will be passed at the year-end for change in value However, the company have to provide appropriate disclosure per AS 2 [1 (3) On sale of CERs in the financial year USD USD Bank A/c [1 Dr 216,000 To Sale of CERs A/c 216,000 Profit and Loss A/c (Consumption) [05 Dr 200,000 To Inventory 200,000 Sale of CERs A/c To Profit and Loss A/c [05 Dr 200, ,000 [4 Ans 4 (a) The fair value of the loan is calculated at RS 74,76,656 Year Opening Balance Interest calculated Interest 5% Closing 12% on RS 1,00,00,000 + principal paid (a) (b) (c) = (b) x 12% (d) (e) =(b) + (c) (d)

9 (9) 1 74,76,656[0 8,97,200[05 5,00,000 78,73,856[0 M 2 78,73,856[0 9,44,862[05 5,00,000 83,18,718[0 M 3 83,18,718[0 9,98,246[05 5,00,000 88,16,964[0 M 4 88,16,964[0 10,58,036[0 5,00,000 93,75,000[0 5 93,75,000[0 11,25,000[0 1,05,00,000 Nil Karna Limited will recognise RS 25,23,344 (RS 1,00,00,000 RS 74,76,656) as the government grant and will make the following entry on receipt of loan: Bank Account Dr 1,00,00,000 To Deferred Income 25,23,344 To Loan Account[2 74,76,656 RS 25,23,344 is to be recognised in profit or loss on a systematic basis over the periods in which A Limited recognised as expenses the related costs for which the grant is intended to compensate RS 25,23,344 is to be recognised in profit or loss on a systematic basis over the periods in which A Limited recognised as expenses the related costs for which the grant is intended to compensate If the loan is to finance a depreciable asset RS 25,23,344 will be recognised in profit or loss on the same basis as depreciation[1 [10 (b) MLP is calculated in each of the above Independent situations as under 1 2 Computation Total Lease Rent Payable = (Rs 25, months) = Rs 8,00,000[0 Residual Value guaranteed by an Independent Third Party (Chanakya) = Rs 55,000 Total Lease Rent Payable = (Rs 15,000 x 48 months) = Rs 7,20,000[02 Residual Value guaranteed by Lessee himself ( Bheem) = Rs 10,000 Note: Contingent Rent of 25% of Sales Revenue is ignored MLP For Lessor = Rs 8,55,000 [1] For Lessee = Rs 8,00,000 [1] For Lessor = Rs 7,30,000 [1] For Lessee = Rs 7,30,000 [1]

10 (10) 3 Total Lease Rent Payable = (Rs 90,000 x 18 months) = Rs 16,20,000[02 Purchase Option Price or Fair Value at the date of exercise of option, whichever is less, ie Rs 2,00,000 or Rs 4,20,000 = Rs 2,00,000 [Option will be exercised in this case] For Lessor= Rs 18,20,000 [1] For Lessee=Rs 18,20,000 [1] Ans 5 (a) [10 The following should be disclosed ind as -34 If an estimate of an amount reported in an interim period is changed significantly during the final interim period of the financial year but a separate financial report is not published for that final interim period, the nature and amount of that change in estimate shall be disclosed in a note to the annual financial statements for that financial year[15 An entity is not required to include additional interim period financial information in its annual financial statements[15 The following should be disclosed ind as -20 (a) the accounting policy adopted for government grants;[1 (b) the methods of presentation adopted for government grants in the financial statements;[1 (c) the nature and extent of government grants recognised in the financial statements;[1 (d) an indication of other forms of government assistance from which the entity has directly benefited At times, the significance of the benefit of government assistance may be such that disclosure of the nature, extent and duration of the assistance is necessary in order that the financial statements may not be misleading; and[1 (e) unfulfilled conditions and other contingencies attaching to government assistance that has been recognised[1 [8 (b) (i) The Lessee company should record the asset as a finance lease since the risk and reward is transferred Lessee has guaranteed to the lessor, the residual value of RS 20,000, in spite of the fact that the estimated residual value of the asset will be RS 2,000 Further the lease payments substantially cover the fair value of leased asset as per calculation given below [05

11 (11) Calculation of Present value of Minimum Lease Payments (MLP) at implicit rate of 10% Year Annual Lease Rentals Discount Factor Minimum Lease payments (see note below) Present Value of MLP 31st March, ,00,000 90,900 [0] 31st March, ,00,000 82,600 [0] 31st March, ,00,000 75,100 [0] Guaranteed Residual Value 31st March, ,000 15,020 [0] Total 2,63,620 Note: The contingent rent, taxes, insurance, maintenance expenses etc if paid by the lessee to the lessor, then it does not form part of the minimum lease payments and will be expensed when incurred Insurance expense is a kind of reimbursement from lessee to lessor Hence in the above case, for calculation of present value of minimum lease payments only lease rental of RS 1,00,000 has been considered [05 At the time of initial recognition, the lessee will recognise the leasehold asset at lower of below: Present value of MLP 2,63,620 Fair value of leased asset 2,64,000 Hence, leasehold asset will be recognised at 2,63,620 Accounting entry for initial recognition would be : [15 Leasehold equipment Dr 2,63,620 To Leasehold obligation 2,63,620 (ii) Lease rentals should split between principal portion of leasehold obligation and finance costs as follows: Year Opening balance Payments Finance 10% Reducti on in liability Closing obligatio n (a) (b) (a) x 10% = (c) (b)- (c)=(d) (a)-(d) = (e) 1st April, ,63,620

12 (12) 31st March, ,63,620 1,00,000 26,362 [05 73,638 [05 1,89,982 31st March, ,89,982 1,00,000 18,998 [05 81,002 [05 1,08,980 31st March, ,08,980 1,00,000 18,998 [05 88,980 [05 20,000 * Difference is due to approximation In the books of Lessee Journal Entries (at the time of subsequent measurement) Date Particulars Dr Cr RS RS 31st March 2015 Insurance Expenses Dr 2,000 Leasehold obligation [1 M] Dr 73,638 Interest Expenses Dr 26,362 Depreciation Dr 87,207 To Cash [05 1,02,000 To Accumulated Depreciation 87,207 31st March 2016 Insurance Expenses 2,000 Leasehold obligation 73,638 Interest Expenses 26,362 Depreciation 87,207 To Cash 1,02,000 To Accumulated Depreciation 87,207 31st March 2017 Insurance Expenses Dr 2,000 Leasehold obligation Dr 73,638

13 (13) Interest Expenses Dr 26,362 Depreciation Dr 87,207 To Cash 1,02,000 To Accumulated Depreciation 87,207 (iii) Entries at the end of lease period [1 Leasehold Obligation Account Dr 20,000 Accumulated Depreciation Account Dr 2,61,620 To Cash Account 18,000 To Leasehold Equipment Account 2,63,620 (iv) The Current and Non-current Classification at the end of year 1 in the books of Lessee Balance Sheet (An extract) RS ASSETS Non-current Asset Leasehold Asset Gross Block 2,63,620 Accumulated Depreciation (87,207) LIABILITIES Non-current Liability Leasehold Obligation (payable after 12 months from the reporting date [1 1,08,980 Current Liability Leasehold Obligation (payable within 12 months from the reporting date) [1 81,002 [12

14 (14) Ans 6 (a) Particulars Rs Lakhs Original Cost of the Asset Less: Depreciation for 4 years (T 300 Lakhs x 10% x 4 years) (1200) [2 M] Book Value at the end of 4th year Add: Revaluation Surplus, so as to adjust / increase Book Value to Rs 270 Lakhs 9000 [1 M] Revalued Amount = Revised Depreciable Value for balance 6 years [1 M] Less: Depreciation for Year 5 (Rs 270 Lakhs 6 years) (4500) [2 M] Carrying Amount at the end of 5th year [1 M] Less: Depreciation for Year 5 (Rs 270 Lakhs 6 years) (4500) [2 M] Carrying Amount at the end of 6th year [1M] [10 (b) 1 Tax Expense for the year Particulars Rs Tax on Capital Gain portion of Annual Income : 10% of Rs 2,000 20,000 [1 Tax on Other Income: 30% of Rs 40, % of 28,000 remaining Rs 40,000 [2 Total 30,000 (a) On Capital Gain portion = 2 Weighted Average Annual Effective Tax Rate (b) On Other Income = 2,000 20, = 10% [1 28, = 35%[2 80,000 [6

15 (15) (c) In the given case, the e-commerce company does not seem to bear significant inventory risk, however, it may bear the following: 1 credit risk[05 2 is primarily responsible for providing the goods to the customer, ie, fulfilling the order[1 3 direct pricing discretion[05 4 discretion in selecting the supplier/ wholesaler[1 Therefore, in this case, the e-commerce company should reflect gross billing to its customers as its revenue[1 [4 or The fair value less cost to sell of sheep s on the date of purchase would be Rs 4,90,000 (5,00,000-10,000) Expense of Rs 10,000 would be recognised in profit and loss [1 On date of Purchase [1 Biological Asset Dr 4,90,000 Expense on Purchase Dr 10,000 To Bank 5,00,000 (Being biological asset purchased) On 31 March 2017 sheep s would be measured at RS 5,88,000 as Biological Asset (6,00,000-12,000) and gain of RS 98,000 (5,88,000-4,90,000) would be recognised in profit or loss [1 At the end of reporting period [1 Biological Asset Dr 98,000 To Gain Change in fair value 98,000 (Being change in fair value recognised at the end of reporting period)