MOCK TEST PAPER - 2 FINAL: GROUP I PAPER 1: FINANCIAL REPORTING SUGGESTED ANSWERS/HINTS

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1 MOCK TEST PAPER - 2 FINAL: GROUP I PAPER 1: FINANCIAL REPORTING SUGGESTED ANSWERS/HINTS Test Series: October, (a) Statement Showing Impairment Loss ( in crores) Carrying amount of the machine as on 1 st April Depreciation for 4 years i.e to crores 4years 7years (4.00) Carrying amount as on Add: Upward Revaluation (credited to Revaluation Reserve account) 2.10 Carrying amount of the machine as on 1 st April 2014 (revalued) 5.10 Less: Depreciation for 2 years i.e & crores 2 years 3 years (3.40) Carrying amount as on Less: Recoverable amount (0.79) Impairment loss 0.91 Less: Balance in revaluation reserve as on : Balance in revaluation reserve as on Less: Enhanced depreciation met from revaluation reserve & =[( ) x 2 years] (1.40) Impairment loss set off against revaluation reserve balance as per para 58 of AS 28 Impairment of Assets (0.70) Impairment Loss to be debited to profit and loss account 0.21 (b) The fair value of the Loan to Confectionary Ltd. is the present value of the interest it will receive over the next 5 years and the present value of repayment at the end of 5 th year. P.V. of interest 8% = [(20,00,00,000 5%) ] = 3,99,26,000 P.V. of principal amount = 20,00,00,000 8% = 20,00,00, =13,61,20,000 (B) Fair Value of Loan (A + B) i.e. 17,60,46,000 (i.e. approximately 17,60,00,000 which is loan amount net of origination fee) Therefore, Confectionary Ltd. will recognize the loan at crores only. Confectionary Ltd will recognize the interest using the effective interest rate method as worked out below: (A) 1

2 (c) (d) Year Amortised Cost (Opening Balance) Interest 8% to be recognised 2 Total Payment received Amortised Cost (Closing Balance) (1) (2) (3) (4) (5) = (3) (4) 1 17,60,00,000 1,40,80,000 19,00,80,000 1,00,00,000 18,00,80, ,00,80,000 1,44,06,400 19,44,86,400 1,00,00,000 18,44,86, ,44,86,400 1,47,58,912 19,92,45,312 1,00,00,000 18,92,45, ,92,45,312 1,51,39,625 20,43,84,937 1,00,00,000 19,43,84, ,43,84,937 1,56,15,063* 21,00,00,000 21,00,00,000 Nil *Note: The interest in the 5 th year, has been adjusted in accordance to the value received on closure. As per para 36 of AS 25 Interim Financial Reporting, seasonal or occasional revenue and cost within a financial year should not be deferred as of interim date untill it is appropriate to defer at the end of the enterprise s financial year. Therefore, dividend income, extraordinary gain, and gain on sale of investment received during 3 rd quarter should be recognised in the 3 rd quarter only. Similarly, sales promotion expenses incurred in the 3 rd quarter should also be charged in the 3 rd quarter only. Further, as per the standard, if there is change in the accounting policy within the current financial year, then such a change should be applied retrospectively by restating the financial statements of prior interim periods of the current financial y ear. The change in the method of depreciation or inventory valuation is a change in the accounting policy. Therefore, the prior interim periods financial statements should be restated by applying the change in the method of valuation retrospectively. Accordingly, the adjusted profit before tax for the 3 rd quarter will be as follows: Statement showing Adjusted Profit Before Tax for the third quarter ( in lakhs) Profit before tax (as reported) 4 Add: Dividend income (4-1) lakhs 3 Excess depreciation charged in the 3 rd quarter, due to change in the method, should be applied retrospectively (12-3) lakhs 9 Extra ordinary gain (2-1) lakhs 1 Cumulative loss due to change in the method of inventory valuation should be applied retrospectively (3-2) lakhs 1 Less: Sales promotion expenses (80% of 15 lakhs) (12) Gain on sale of investment (occasional gain should not be deferred) Adjusted Profit before tax for the third quarter 1 Net effect on the Statement of Profit and Loss in the year of sale in the books of Lessee (Sahil Ltd.) For calculation of net effect on the statement of profit and loss on sale of equipment, it has to be judged whether lease is an operating lease or finance lease. 18 (5)

3 The lease term is for 10 years which covers the entire economic life of the equipment. At the inception of the lease, the present value of the minimum lease payments (MLP) is 6,14,400 [ 1,00,000 x (Annuity factor of for 10 years)] and amounts to at least substantially all of the fair value (sale price i.e. 6,14,460) of the leased equipment. Thus lease is a finance lease. As per para 48 of AS 19 Leases, if a sale and leaseback transaction results in a finance lease, profit of 5,14,460 (Sale value 6,14,460 less carrying amount 1,00,000) will not be recognized as income in the year of sale in the books of lessee i.e. Sahil Ltd. It should be deferred and amortised over the lease term in proportion to the depreciation of the leased asset. Therefore, assuming that depreciation is charged on straight line basis, Sahil Ltd. will recognize depreciation of 61,446 per annum for 10 years (6,14,460/ 10) and amortise profit of 5,14,460 over the lease term of 10 years, i.e. 51,446 p.a. The net effect is a debit of ( 61,446-51,446) 10,000 p.a. to the Statement of profit and loss, for 10 years as covered under the lease term. Note: Had there been no sale and lease back transaction, the Statement of Profit and Loss for each year (covered in the lease term) would have been charged by ( 1,00,000/10) 10,000, towards depreciation. Thus, the sale and lease back transaction will have no impact on profit or loss account to be reported by the lessee (vendor in the sales transaction) over the lease period. 2. Note: It is assumed that the preference shares given in the question are non -convertible in the nature. Consolidated Balance Sheet of Surabhi Ltd. & its subsidiaries as on Particulars Note No. () I. Equity and Liabilities II. (1) Shareholder's Funds (a) Share Capital 1 5,00,000 (b) Reserves and Surplus 2 37,250 (2) Minority Interest 61,750 (3) Current Liabilities Assets (a) Trade Payables 19,600 (b) Short term provision (preference dividend) 1,600 (1) Non-current assets Fixed assets 3 Total 6,20,200 (a) Tangibles assets 3 1,94,000 (b) Intangible assets 4 19,000 (2) Current assets (a) Inventories (W.N 5) 61,900 (b) Trade receivables 28,200 (c) Cash and cash equivalents 5 3,17,100 Total 6,20,200

4 Notes to Accounts 1. Share Capital Authorised, Issued, Subscribed & Paid up 50,000 Ordinary shares of 10 each 5,00, Reserves and Surplus Capital Reserve 17,950 Profit & Loss Account (W.N. 6) 19,300 37, Tangible Assets Freehold lands (W.N. 5) 1,25,000 Plant & Machinery (W.N 5) 69,000 1,94, Intangible assets Goodwill (4,000+15,000) 19, Cash and cash equivalents Bank Balances (W.N. 5) 3,14,900 Cash in transit (W.N 7) 2,200 3,17,100 Working Notes: 1. Analysis of profits Taan Ltd. Capital Revenue Reserves as on 1 st April, ,000 Profit and Loss account as on 1 st April, 2016 net of dividend Current year profits after interim dividend of 3,200 6,000 Appreciation in inventory value 2, ,000 8,000 Less: Minority interest (1/4) (750) (2,000) Share of Surabhi Ltd. (3/4) 2,250 6,000 Sen Ltd. Capital Revenue Loss on date of acquisition (12,000) Current year loss after additional depreciation of 3,000 = (18, ,000-12,000) (9,000) (12,000) (9,000) Less: Minority interest (1/6) (2,000) (1,500) Share of Surabhi Ltd. (5/6) (10,000) (7,500) Geet Ltd. Capital Revenue Reserves as on 1st April, ,500 Profit & Loss as on 1 st April, 2016 net of dividend 0 Current year profits after interim dividend of 10,000 15,000 Appreciation in freehold property value as on ,000

5 Arrears of Preference Dividend of Minority s Preference Shares (as per para 27 of AS 21) (2,000) (2,000) 5 20,500 13,000 Less: Minority Interest (1/5) (4,100) (2,600) Share of Surabhi Ltd. (4/5) 16,400 10, Cost of control/capital reserve Cost of Investment in Taan Ltd. 35,000 Less: Pre-acquisition Dividend = ¾ x 2,000 (1,500) 33,500 Cost of Investment in Sen Ltd. 72,000 Cost of Equity Investment in Geet Ltd. 92,000 Less: Pre-acquisition Dividend = 4/5 x 4,000 (3,200) 88,800 Cost of Investment in Cum-Preference shares in Geet Ltd. 28,000 Less: Pre-acquisition preference dividend = 4/5 x 2,000 (1,600) 26,400 Less: Paid up Value of Equity Shares in Taan Ltd. 30,000 Paid up Value of Equity Shares in Sen Ltd. 1,00,000 Paid up Value of Equity Shares in Geet Ltd. 80,000 2,20,700 Paid up Value of Preference Shares in Geet Ltd 20,000 (2,30,000) Less: Capital Profits in Taan Ltd 2,250 Capital Profits in Sen Ltd. (10,000) (9,300) Capital Profits in Geet Ltd 16,400 (8,650) Capital Reserve 17, Minority Interest Taan Ltd () Sen Ltd. () Geet Ltd. () Equity Share Capital 10,000 20,000 20,000 Preference Share Capital 5,000 Arrears of Preference Dividend 800 Capital Profits 750 (2,000) 4,100 Revenue Profits 2,000 (1,500) 2, Bank Account of Surabhi Ltd. 12,750 16,500 32,500 To Share Capital 5,00,000 By investments in Taan Ltd. 35,000 To Investment in Taan Ltd. (Preacquisition Dividend) To Investment in Geet Ltd. (Pre-acquisition Dividend) 1,500 By Investments in Sen Ltd. 72,000 3,200 By Investments in Geet Ltd. (92, ,000) 1,20,000 To Dividend Received By Sen Ltd (Owings) 8,200

6 Taan Ltd. 2,400 By Balance c/d 2,90,400 Geet Ltd. 8,000 To Taan Ltd. (Owings) 10, Statement showing consolidated balances 5,25,600 5,25,600 Land Plant Inventory Trade receivables Bank Trade payables Surabhi Ltd. 8,200 2,90,400 10,500 Taan Ltd. 8,000 16,000 10,900 4,000 11,000 2,900 Sen Ltd. 52,000 16,000 25,000 12,000 2,000 8,000 Geet Ltd. 65,000 37,000 26,000 15,500 11,500 7,500 1,25,000 69,000 61,900 39,700 3,14,900 28,900 Less: Mutual Owings (11,500) (9,300) * Consolidated Balances 6. Consolidated Revenue Profits 1,25,000 69,000 61,900 28,200 3,14,900 19,600 Taan Ltd. 6,000 Sen Ltd. (7,500) Geet Ltd. 10,400 8,900 Add : Interim Dividend received (2, ,000) 10,400 Consolidated Profit and Loss A/c 19, Cash-in-Transit Amount due from Sen Ltd. ( 8, ,000) 10,200 Less: Balance of Trade payables of Sen Ltd. as on (as per separate balance sheet) ( 8,000) Cash in transit 2,200 Note: As per the Companies Act 2013, Preference shareholders have preferential right for the receipt of dividend before equity dividend. However as per the information given in the question, preference dividend is in arrears for last 2 years and equity dividend (interim) is paid during the year In this regard, it may be noted the workings have been done solely on the basis of the information as given in the question. According to the additional information given in the question, balance of trade receivables A/c of Taan Ltd. should be 10,500 or more. However, Balance Sheet of Taan Ltd. showed trade receivables of 4,000 only which is very low in comparison to 10,500. Therefore, it is presumed that the entry of 10,500 has been omitted in the books of Taan Ltd. Hence, no elimination of mutual owing in respect of 10,500 has been made while preparing the consolidated balance sheet. 6

7 3. Calculation of intrinsic value of equity shares of Neha Ltd. 1. Calculation of Goodwill (i) Capital employed Fixed Assets Building 24,00,000 Machinery ( 22,00, ,45,800) 23,45,800 Furniture 10,00,000 Vehicles 18,00,000 75,45,800 Add: 30% increase 22,63,740 98,09,540 Trade investments ( 16,00,000 10% 90%) 1,44,000 Trade Receivables ( 18,00,000 20,000) 17,80,000 Inventory ( 11,00,000 1,00,000) 10,00,000 Bank balance 3,20,000 1,30,53,540 Less: Outside liabilities Bank Loan 12,00,000 Trade Payables 37,00,000 (49,00,000) Capital employed 81,53,540 (ii) Future maintainable profit Calculation of average profit Profit given 16,00,000 18,00,000 21,00,000 22,00,000 Add: Capital expenditure of machinery charged to revenue 2,00,000 Loss on sale of furniture 40,000 16,00,000 20,00,000 21,40,000 22,00,000 Less: Depreciation on machinery (20,000) (18,000) (16,200) Income from non-trade investments (1,08,000) (2,16,000) (2,16,000) Reduction in value of inventory (1,00,000) Bad debts (20,000) Adjusted profit 16,00,000 18,72,000 19,06,000 18,47,800 Total adjusted profit for four years ( to ) 72,25,800 Average profit ( 72,25,800/4) 18,06,450 7

8 Less: Depreciation at 10% on additional value of machinery (22,00, ,45,800) 30/100 i.e. 7,03,740 (70,374) Adjusted average profit 17,36,076 (iii) Normal Profit: 20% on capital employed i.e. 20% on 81,53,540 = 16,30,708 (iv) Super profit: Expected profit normal profit (v) 17,36,076 16,30,708 = 1,05,368 Goodwill: 2 years purchase of super profit 1,05,368 2 = 2,10, Net assets available to equity shareholders Goodwill as calculated in 1(v) above 2,10,736 Sundry fixed assets 98,09,540 Trade and Non-trade investments 15,84,000 Trade Receivables 17,80,000 Inventory 10,00,000 Bank balance 3,20,000 Less: Outside liabilities Bank loan 12,00,000 Trade Payables 37,00,000 1,47,04,276 (49,00,000) Preference share capital (20,00,000) Net assets for equity shareholders 78,04, Valuation of equity shares Value of equity share = Net assets available to equity shareholders Number of equity shares = 78,04,276 4,00,000 = Note: 1. Depreciation on the overall increased value of assets (worth 30% more than book value) has not been considered. Depreciation on the additional value of only plant and machinery has been considered taking depreciation at 10% on reducing value method while calculating average adjusted profit. 2. Loss on sale of furniture has been taken as non-recurring or extraordinary item. 3. It has been assumed that preference dividend has been paid till date. 8

9 4. (a) Journal Entries in the books of ABC Ltd. Date Particulars Dr. () Cr. () Employees compensation expenses account Dr. 48,000 To Employees stock option outstanding 48,000 account (Being compensation expenses recognized in respect of the employees stock option i.e. 1,000 options granted to employees at a discount of 120 each, amortised on straight line basis over 2.5 years) Profit and loss account Dr. 48,000 To Employees compensation expenses 48,000 account (Being expenses transferred to profit and loss account at the end of the year) Employees compensation expenses account Dr. 48,000 To Employees stock option outstanding 48,000 account (Being compensation expenses recognized in respect of the employee stock option i.e. 1,000 options granted to employees at a discount of 120 each, amortised on straight line basis over 2.5 years) Profit and loss account Dr. 48,000 To Employees compensation expenses 48,000 account (Being expenses transferred to profit and loss account at the end of the year) Employees stock option outstanding account (W.N.1) Dr. 12,000 To General Reserve account (W.N.1) 12,000 (Being excess of employees compensation expenses transferred to general reserve account) Bank A/c (600 x 40) Dr. 24,000 Employee stock option outstanding account (600 x 120) Dr. 72,000 To Equity share capital account (600x 10) 6,000 To Securities premium account (600x150) 90,000 (Being 600 employees stock option exercised at an exercise price of 40 each) Employee stock option outstanding account Dr. 12,000 To General reserve account 12,000 (Being Employees stock option outstanding A/c transferred to General Reserve A/c, on lapse of 100 options at the end of exercise of option period) 9

10 Working Note: On , ABC Ltd. will examine its actual forfeitures and make necessary adjustments, if any to reflect expenses for the number of options that have actually vested. 700 employees stock options have completed 2.5 years vesting period, the expense to be recognized during the year is in negative i.e. No. of options actually vested (700 x 120) 84,000 Less: Expenses recognized (48, ,000) (96,000) Excess expenses transferred to general reserve (12,000) (b) Accounting Entries in the books of fund Investment in X Ltd. s shares A/c (5,000 x 40) Dr. 2,00,000 Investment in Y Ltd. s shares A/c (4,000 x 60) Dr. 2,40,000 To Bank A/c 4,40,000 (Being investment made in X Ltd. and Y Ltd.) Revenue A/c [5,000 x (40-38)] Dr. 10,000 To Provision for Depreciation A/c 10,000 (Being provision created for the reduction in the value of X Ltd. s shares) Investment in Y Ltd. s shares A/c [4,000 x (64-60)] Dr. 16,000 To Unrealised Appreciation Reserve A/c 16,000 (Being appreciation in the market value of Y Ltd. s shares transferred to Unrealised Appreciation Reserve A/c) Unrealised Appreciation Reserve A/c Dr. 16,000 To Investment in Y Ltd. s shares A/c 16,000 (Being last year s unrealised appreciation reserve balance reversed at the beginning of the current year) Bank A/c (5,000 x 37) Dr. 1,85,000 Loss on disposal of Investment A/c Dr. 15,000 To Investment in X Ltd. s shares A/c (5,000 x 40) 2,00,000 (Being shares of X Ltd. disposed off at a loss of 15,000) Provision for Depreciation A/c Dr. 10,000 Revenue A/c Dr. 5,000 To Loss on disposal of Investment A/c 15,000 (Being net loss on disposal of X Ltd. s shares charged to revenue account) 10

11 Bank A/c (4,000 x 67) Dr. 2,68,000 To Investment in Y Ltd. s shares A/c (4,000 x 60) 11 2,40,000 To Revenue A/c 28,000 (Being shares of Y Ltd. disposed off at a profit of 28,000) 5. B Enterprises Ltd. Profit and Loss Account for the year ending 31st March, 2017 Particulars Note No. ( '000) I. Revenue from operations (6, , ,500) 15,500 II. Total revenue 15,500 III. Expenses Cost of Sales (7,800) Distribution costs (1,500) Administration costs (2,000) Total expenses 11,300 IV. Profit before tax 4,200 V. Tax Expenses Current tax 1,239 Deferred tax 231 (1,470) VI. Profit or Loss for the period 2,730 B Enterprises Ltd. Balance Sheet as at 31st March, 2017 Particulars Note No. ( '000) I. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital 1 4, (b) Reserves and Surplus 2 1, (2) Non-Current Liabilities Deferred Tax Liability ( ) (3) Current Liabilities II. Assets Trade payables Other current liabilities Short term provisions 4 1, (1) Non-current assets Fixed assets Total 8, Tangible assets 5 7,500.00

12 (2) Current assets (a) Inventories (b) Trade receivables (c) Cash and cash equivalents Notes to Accounts: 1. Share Capital Authorised Share capital Total 8, ( '000) ( '000) 5,00,000 Equity shares of 10 each 5, Issued and subscribed 4,00,000 shares of 10 each, fully paid up 4, Reserves and surplus Retained profit brought forward (1, ) Profit after tax of the current year 2, Amount transferred to General Reserve (10% of 2,730) (273.00) Amount transferred to DDT [(17.304% of 941) ] or (357.67) Dividends (1, ) (2,000.00) Profit for the year Total Profit Reserves Other Current liabilities Dividend** Short term provisions 5. Tangible assets 1, Dividend Distribution Tax** Provision for tax 1, Fixed Assets Gross block 9, Less: Depreciation (1,500.00) 7, The dividend distributed by an Indian Company is exempt from income tax in the hands of shareholders. However, the Indian company is liable to pay Dividend Distribution Tax % to the Central Government within 14 days from the date of declaration (i.e. inclusive of surcharge and education cess on such dividend). It is assumed that the dividend has already been declared by the company. 12

13 Disclosures 1. Segmental Disclosures (Business Segments) ( in 000) Engineering Division 13 Chemical Division Ceramics division Total Sales 6,000 8,000 1,500 15,500 Cost of Sales 2,600 4, ,800 Administration Cost (5:3:2) 1, ,000 Distribution Cost (3:1:1) ,500 Profit/Loss 1,500 2,800 (100) 4,200 Original cost of Assets (Equal Capital Base) 6,000 8,000 1,500 15,500 3,000 3,000 3,000 9,000 10% p.a. For the year ended NIL 600 For the year ended Note: Ceramics division is a reportable segment as per assets criteria. 2. Deferred Tax liability (as per AS 22 on Accounting for Taxes on Income) in '000 Opening Timing Difference on WDV of fixed assets as per books 5,400 WDV of fixed assets as per Income Tax Act 4,800 Difference 600 Deferred Tax 35% on This has been adjusted against opening balance of retained profits. Current year (ended 31st March, 2017) ( in '000) Depreciation as per books 900 Depreciation as per Income Tax Act ( ) 1,560 Difference 660 Deferred Tax 35% on 660 (to be carried forward) Contingent Liabilities not provided: Company is contesting claim for damages for 7,50,000 and as such the same is not acknowledged as debts. 4. Related Party Disclosure: Para 3 of AS 18 lists out related party relationships. It includes individuals owning, directly or indirectly, an interest in voting power of reporting enterprise which gives them control or significant influence over the enterprises, and relatives of any such individual. In the instant case, Mr. G as a managing director controls operating and financial actions of B Enterprise Ltd. He is also owning 100% share capital of A Ltd. thereby exercising control over it. Hence, A Ltd. is a related party as per para 3 of AS 18. Disclosure to be made: Name of the related party Nature of relationship Nature of the transaction Volume of the transaction A Ltd. common director Sale of goods at normal commercial terms Sales to A Ltd. worth 2500 thousands

14 Working Notes: 1. Tax computation ( in 000) Profit before tax for the year ended ,200 Add: Depreciation provided in the books ( ) 900 5,100 Less: Depreciation as per Income Tax Act ( ) (1,560) Taxable Income 3,540 Tax at 35% on 3,540 1, Calculation of grossing up of dividend in 000s Dividend 800 Add: Increase for the purpose of grossing up of dividend [{15/(100-15)} x 800] Dividend distribution % 941 x % = i.e. 163 (approx.) Calculation of Target index ( in thousands) Year Employees cost 1,300 1,520 1,680 1,968 2,240 Value added 3,040 3,600 4,200 4,800 5,600 Percentage of Employee cost to Value added 42.76% 42.22% 40% 41% 40% Target index percentage is taken as least of the above from the employer s viewpoint i.e. 40%. 2. Value Added Statement for the year ( in thousands) ( in thousands) Sales 13,600 Less: Cost of bought in goods & services Materials consumed 5,000 Other manufacturing expenses 1,400 Administrative expenses 600 Selling expenses 400 (7,400) 6,200 Add: Miscellaneous income 500 Dividends and interest 500 Value Added 7,200 14

15 3. Employee cost for ( in thousands) Wages and salaries 1,800 Administrative salaries 600 Selling and distribution salaries 120 2, Calculation of target employee cost = Target Index Percentage x Value added 5. Calculation of savings Target employee cost = 2,880 thousands Less: Actual Cost = ( 2,520 thousands) Saving = 360 thousands 6. Calculation of Bonus payable for the year : = 40% x 7,200 thousands = 2,880 thousands 2/3 of savings is Bonus Payable = 360 thousand x 2/3 = 240 thousand. 7. (a) Calculation of provision required on advances as on 31st March, 2017 as per the Non- Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 Amount in lakhs Percentage of provision Provision in lakhs Standard assets 16, Sub-standard assets 1, Secured portions of doubtful debts upto one year one year to three years more than three years Unsecured portions of doubtful debts Loss assets (b) Calculation of Economic Value Added Net Operating Profit After Tax 25,00,000 Less: Cost of capital employed (Refer W.N.) (6,00,000) Economic Value Added 19,00,000 Economic value added is greater than zero. Therefore, the company qualifies for the loan. Working Note: Calculation of Cost of Capital employed Average total assets 75,00,000 Less: Average current liabilities (15,00,000) Capital employed 60,00,000 15

16 (c) Cost of capital = Capital employed x Weighted average cost of capital 10 = 60,00,000 x = 6,00, As per para 4.1 of AS 9 Revenue Recognition, revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. In the given case, P Ltd. should record the sales at gross value of 50,000. Discount of 8,000 in price and goods returned worth 7,000 are to be adjusted by suitable provisions. P Ltd. might have sent the credit note of 15,000 to M/s Y & Co. to account for these adjustments. The contention of the accountant to book the sales for 35,000 is not correct. (d) Value of skilled employees: = (e) 50,000 (65-62) (1 0.15) 32, , , = 1,14, ,000 50,000 (65-63) (65-64) (1 0.15) (1 0.15) Total value of skilled employees is 1, 14, = 22,83,225. Value of unskilled employees 30,000 30,000 (1 0.15) (1 0.15) (62 60) (62 61) 30,000 30,000 2 = (1 0.15) (1 0.15) = 22, , = 48, Total value of the unskilled employees = 48, = 12,19,282 Total value of human resources (skilled and unskilled) = 22,83, ,19,282 = 35,02,507. According to para 14 of AS 7 (Revised) Construction Contracts, incentive payments are additional amounts payable to the contractor if specified performance standards are met or exceeded. For example, a contract may allow for an incentive payment to the contractor for early completion of the contract. Incentive payments are included in contract revenue when: (i) the contract is sufficiently advanced that it is probable that the specified performance standards will be met or exceeded; and (ii) the amount of the incentive payment can be measured reliably. In the given problem, the contract has not even begun and hence the contractor (Mr. X) should not recognize any revenue of this contract. 16