THIS CHAPTER COMPRISES OF. Working knowledge of : AS 1, AS2, AS 3, AS 6, AS 7, AS 9, AS 10, AS 13, AS 14.

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1 Star Rating On the basis of Maximum marks from a chapter On the basis of Questions included every year from a chapter On the basis of Compulsory questions from a chapter CHAPTER 1 Accounting Standards THIS CHAPTER COMPRISES OF Working knowledge of : AS 1, AS2, AS 3, AS 6, AS 7, AS 9, AS 10, AS 13, AS 14. Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions SHORT NOTES Nov [6] (b) Write short notes on the following : (iv) Valuation of fixed assets in special cases. * Questions upto November are from PE-II Gr. I and from May onwards are from PCC Gr. I Q&A-1.13

2 Q&A-1.14 O Solved Scanner IPCE Gr. I Paper - 1 Valuation of fixed assets in special cases: According to the Accounting Standard 10, following are the provisions regarding the valuation of fixed assets in special cases: 1. When the fixed assets are acquired on hire purchase terms, although legal ownership does not vest in the enterprise, these assets are recorded at their cash value, which if not available easily, is calculated assuming an appropriate rate of interest. They are shown in the balance sheet with correct narration to indicate that the enterprise does not have full ownership thereof. 2. Where an enterprise owns fixed assets jointly with others (other than as a partner in a firm) the extent of its share in such assets and the proportion in the original cost, accumulated depreciation and written down value are stated in the balance sheet. Alternatively, the pre-rate cost of such jointly owned assets is grouped together with similar fully owned assets. Details of these assets are indicated separately. 3. Where several assets are purchased for a consolidated price, the consideration is apportioned to the various assets on a fair basis as determined by competent valuers. DESCRIPTIVE QUESTIONS May [6] (d) In the case of a manufacturing company : (i) List the items of "inflows" of cash receipts from operating activities; (ii) List the items of "outflows" of investing activities. (2 2 = 4 marks) (e) When can revenue be recognised in the case of a transaction of sale of goods? (2 marks) (d) (i) Inflows of cash receipts from operating activities [Para 12 of AS-3 (Revised)]: (a) Cash receipts from rendering of services. (b) Cash receipts from the sale of goods. (c) Refund of income-tax. (d) Royalties, fees, commission and other revenues. (ii) Outflows of investing activities [Para 15 of AS-3 (Revised)]: (a) Cash payment for acquiring fixed assets. (b) Cash advances and loans to third parties. (c) Cash payment for acquisition of shares, warrants or debt instruments of other enterprises and interest in joint ventures.

3 [Chapter 1] Accounting Standards O Q&A-1.15 (e) According to para 10 and 11 of AS-9, revenue from sales transactions will be recognised when the following requirements as to performances are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection: (i) The seller of goods has transferred to the buyer the property in the goods for a price alongwith the goods risks and rewards are also transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually related with ownership and, (ii) No uncertainty exists regarding the amount of the consideration that will be derived from the sale of goods Nov [1] Attempt the following : (b) What are the main features of the cash flow statement? Explain with special reference to AS 3? (5 marks) Main features of cash flow statements (As per AS-3) : 1. According to AS-3, cash flow statement deals with the provisions of information about the historical changes in cash and cash equivalents of an enterprise during the stated period from operating, investing and financing activities. 2. Cash flow from operating activities can be reported using either: (i) the direct method, in which mostly the classes of gross cash receipts and gross cash payments are disclosed. (ii) the indirect method, in this net profit or loss is adjusted for the purpose of transactions of non-cash nature. 3. According to para 42 of AS-3 (Revised), an enterprise must disclose the components of cash and cash equivalents and must present a reconciliation of amounts in its cash flow statement with the equivalent items reported in the balance sheet. 4. When the cash flow statement is used alongwith the other financial statements, it provides information that enables the user to evaluate the changes in net assets of an enterprise. This statement also enhances the comparability of the operating performances. 5. For companies listed on stock exchanges compliance of AS-3 is compulsory due to the listing agreement May [6] Attempt the following : (a) What are the conditions, which, according to Accounting Standard 14 on Accounting for Amalgamations, must be satisfied for an amalgamation in the nature of merger?

4 Q&A-1.16 O Solved Scanner IPCE Gr. I Paper - 1 (d) Define briefly the classification of activities, as suggested in Accounting Standard 3, to be used for preparing a cash flow statement. Give two examples of each such class of activities. (a) According to AS-14 on Accounting for Amalgamation, the following conditions must be satisfied for an amalgamation in the nature of merger: (i) After amalgamation, all the assets and liabilities of the transferor company becomes the assets and liabilities of the transferee company. (ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor company becomes the equity shareholders of the transferee company by virtue of amalgamation. (iii) The business of the transferor company is intended to be carried on after the amalgamation by the transferee company. (iv) The consideration for the amalgamation receivable by those equity shareholders of the transferor company who decides to become the equity shareholder of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares. (v) All reserves and surplus shall be reserved. (vi) No adjustments are required to be made in the book values of the assets and liabilities of the transferor company, when they are incorported in the financial statements of the transferee company. If any one of the condition is not satisfied in a process of amalgamation, it will not be considered as amalgamation in the nature of merger. (d) According to AS-3 (Revised) (i.e. Cash Flow Statement). The cash flow statement must report cash flows by operating, investing and financing activities: (i) Operating Activities: These are the principal revenue producing activities of the enterprise. This activity does not include in it the investing and financing activities. Examples of operating activities are, cash receipt from the sale of goods and cash payment to the supplier of goods. (ii) Investing Activities: These activities include the acquisition and disposal of long-term assets and other investments which are not included in cash equivalents. Example of investing activities are payment made on acquiring building for business or cash received from the sale of furniture. (iii) Financing Activities: Those activities that results in changes in the size and composition of the owner's capital and borrowing of the enterprise. Example of the financing activities are cash proceed from issue of shares and cash paid to redeem debentures.

5 [Chapter 1] Accounting Standards O Q&A Nov [6] Attempt the following : (a) Describe, with reference to Accounting Standard 7 on Accounting for construction contracts, the methods which may be used for recognising revenue on construction contracts. Accounting for Construction Contract is based on AS-7. Two methods of accounting are generally followed by the contractors for recognising revenue on construction contracts. The two methods are: 1. Percentage of completion method. 2. The completed contract method. 1. Percentage of Completion Method: In this method, revenue is recognised as the contract activity progresses or is based on the stage of completion reached. The cost actually incurred in reaching the stage of completion are compared with this revenue, resulting in the reporting of results which can be attributed to the proportion of work completed. In reality revenue is recognised only when it is realised, but under this method, the revenue is recognised as the work progress even though in certain cases it may not be realised. 2. Completed Contract Method: In this method, revenue is recognised only when the work is completed or substantially completed. During the course of the contract, costs and progress payments received are accumulated but revenue will not be recognised until the contract activity is substantially completed. In both the methods, provisions are made for losses for the stage of completion reached on the contract and provisions are also made for losses on the remainder of the contract. For the purpose of accounting, it is important to combine the contract made with single customers or with several customers. If the contract covers a number of projects and if the costs and revenues of such individual projects can be known within the terms of the overall contract each such project may be treated as equivalent to a separate contract Nov [6] Attempt the following questions : (f) Explain percentage of completion method in respect of Construction Contracts as per Accounting Standard 7. Accounting for Construction Contract is based on AS-7. Two methods of accounting are generally followed by the contractors for recognising revenue on construction contracts. The two methods are: 1. Percentage of completion method. 2. The completed contract method.

6 Q&A-1.18 O Solved Scanner IPCE Gr. I Paper Percentage of Completion Method: In this method, revenue is recognised as the contract activity progresses or is based on the stage of completion reached. The cost actually incurred in reaching the stage of completion are compared with this revenue, resulting in the reporting of results which can be attributed to the proportion of work completed. In reality revenue is recognised only when it is realised, but under this method, the revenue is recognised as the work progress even though in certain cases it may not be realised. 2. Completed Contract Method: In this method, revenue is recognised only when the work is completed or substantially completed. During the course of the contract, costs and progress payments received are accumulated but revenue will not be recognised until the contract activity is substantially completed. In both the methods, provisions are made for losses for the stage of completion reached on the contract and provisions are also made for losses on the remainder of the contract. For the purpose of accounting, it is important to combine the contract made with single customers or with several customers. If the contract covers a number of projects and if the costs and revenues of such individual projects can be known within the terms of the overall contract each such project may be treated as equivalent to a separate contract May [6] Attempt the following questions : (a) X Co. Ltd. charged depreciation on its asset on SLM basis. For the year ended it changed to WDV basis. The impact of the change when computed from the date of the asset coming to use amounts to 20 lakhs being additional charge. Decide how it must be disclosed in Profit and Loss Account. Also, discuss, when such changes in method of depreciation can be adopted by an enterprise as per AS-6. (e) Briefly describe the disclosure requirements for Amalgamation including additional disclosure, if any, for different methods of amalgamation as per AS-14. (4 marks each) (a) If in any accounting year company decides to change its method of depreciation, it can do so by giving a disclosure. The impact of depreciation charge due to change in method must be quantified and reported by the enterprise. Following facts must be considered in this regard as per AS-6 on Depreciation Accounting : (i) The depreciation method selected should be applied consistently from period to period.

7 [Chapter 1] Accounting Standards O Q&A-1.19 (e) (ii) A company can change over to a new method of depreciation only when it is required by the statute or for compliance with an accounting standard, if it is considered that the change would result in a more appropriate preparation or presentation of the financial statement of the enterprise. (iii) When such a change takes place, then the depreciation must be recalculated in reference with the new method from the date of the asset coming into use. If deficiency or surplus arises from re-computation of depreciation by new method then it must be adjusted in the accounts of the year in which the method is changed. (iv) In case the change in the method results in deficiency in depreciation of past years, it should be charged in the statement of profit and loss account. (v) In case there is surplus, it is credited to the statement of profit and loss. Such a change must be treated as a change in accounting policy and its effect must be quantified and disclosed. The disclosure requirements for Amalgamation including additional disclosure, if any, for different methods of amalgamation as per AS-14 are stated in para 43 to 46. For all amalgamations, following disclosures should be made : (i) Names and general nature of business of the amalgamating companies; (ii) The effective date of amalgamation for accounting purpose; (iii) The method of accounting used to reflect the amalgamation, and (iv) Particulars of the scheme sanctioned under a statute. When the amalgamation takes place under the pooling of interest method, the following additional disclosure should be made : 1. Description and number of shares issued, together with the percentage of each companies equity shares exchanged to effect the amalgamation; and. 2. The amount of any difference between the consideration and the value of net identifiable assets acquired and treatment thereof. When the amalgamation is accounted under the purchase method, the disclosures to be made are : (i) Consideration for the amalgamation and a description of the consideration paid or contingency payable on. (ii) The amount of any difference between the consideration and the value of net identifiable assets acquired and the treatment thereof including the period of amortisation of any goodwill arising on amalgamation.

8 Q&A-1.20 O Solved Scanner IPCE Gr. I Paper Nov [6] Attempt the following questions : (d) A Limited Company charged depreciation on its assets on the basis of W.D.V. method from the date of assets coming to use till date amounts to lakhs. Now the company decides to switch over to Straight Line method of providing for depreciation. The amount of depreciation computed on the basis of S.L.M. from the date of assets coming to use till the date of change of method amounts to 20 lakhs. Discuss as per AS-6, when such changes in method of can be adopted by the company and what would be the accounting treatment and disclosure requirement. (e) X Limited has recognized 10 lakhs on accrual basis income from dividend on units of mutual funds of the face value of 50 lakhs held by it as at the end of the financial year 31st March, The dividends on mutual funds were declared at the rate of 20% on 15th June, The dividend was proposed on 10th April, 2003 by the declaring company. Whether the treatment is as per the relevant Accounting Standard? You are asked to answer with reference to provisions of Accounting Standard. (d) In the given question, the surplus arising out of retrospective recomputation of depreciation as per the straight line method is lakhs ( lakhs - 20 lakhs). This should be written back to profit and loss account and should be disclosed accordingly. (e) Para 8.4 and 13 of AS-9 on Revenue Recognition states that dividend from investments in shares are not recognised in the statement of profit and loss until a right to receive payment is established. In the given case, the dividend is proposed on 10th April 2003, while it is declared on 15th June Hence, the right to receive payment is established on 15th June As per the above given paragraph, income from dividend on units of mutual funds should be recognised by X Ltd. in the financial year ended 31st March The recognition of 10 Lakhs on accural basis in the financial year is not as per AS-9 'Revenue Recognition' May [6] Answer the following : (e) What are the main principles of allocation between Capital and Revenue accounts on a Capital scheme? The following are the main principles governing the allocation of expenditure on a capital scheme between capital and revenue accounts :

9 [Chapter 1] Accounting Standards O Q&A-1.21 (i) (ii) (iii) (iv) (v) Capital account should bear all charges for the first construction and equipment of a project as well as charges for intermediate maintenance of the work which is not yet opened for service. It would also bear changes for such further additions and improvements as may be sanctioned under rules made by competent authority. Capital receipts in so far as they relate to expenditure previously debited to capital heads, accruing during the process of construction of a project, should be utilised in reduction of capital expenditure. Thereafter, their treatment in the accounts will depend on circumstances, but except under a special rule or order of Government, they should not be credited to the revenue account of the department or undertaking. In the case of works of renewal and replacement which partake both of a capital and revenue nature, the allocation of expenditure should be regulated by the broad principle that revenue should pay or provide a fund for the adequate replacement of all wastage or depreciation of property originally provided out of capital grants and that only the cost of genuine improvements, whether determined by prescribed rules or formulae or under special orders of Government, should be debited to capital account. Where under special orders of Government, a Depreciation or Renewals Reserve Fund is established for renewing assets of any commercial department or undertaking, the distribution of expenditure on renewals, and replacements between capital account and the fund should be so regulated as to guard against over-capitalisation on the one hand and excessive withdrawals from the fund on the other. Subject to above, revenue account should bear all subsequent changes for maintenance and all working expenses. These embrace all expenditure on the working and upkeep of the project and also on such renewals and replacements and such additions, improvements or extensions as prescribed by the Government. Expenditure on account of repair of damage caused by extraordinary calamities such as flood, fire, earthquake, enemy action, should be charged to capital account or to revenue account or divided between them in such a way as may be determined by Government according to the circumstance of each case May [6] Answer the following : (b) Explain the Accounting of Revaluation of Assets with reference to AS-10. Answer: Accounting of Revaluation of Assets: An enterprise may revalue any particular class of fixed assets. Such revaluation is made by making appraisal by competent valuers.

10 Q&A-1.22 O Solved Scanner IPCE Gr. I Paper - 1 The revalued amounts of fixed assets are presented in financial statements, either by restating both the gross book value and accumulated depreciation so that net book value equal to net revalued amount or by restating the net book value by adding therein the net increase on account of revaluation. Profit on revaluation of fixed assets is credited to Revaluation Reserve Account and Loss on revaluation is charged to Profit and Loss A/c. If increase in the book value of asset is the reversal of previously recorded decrease, which was charged to P&L A/c, such increase to the extent of previous decrease should be credited to Profit and Loss A/c. If decrease in book value of asset is related to previous increase, such decrease, to the extent of previous increase, will be adjusted against Revaluation Reserve Nov [6] Answer the following: (a) Mention six areas in which different accounting policies are followed by Companies. (e) List the criteria to be applied for rating an enterprise as Level-I enterprise for the purpose of Compliance of Accounting Standards in India. (a) Area in which different accounting policy can be adopted (i) Method of depreciation, depletion and amortisation. (ii) Valuation of investment (iii) Valuation of fixed asset (iv) Treatment of goodwill (v) Treatment of retirement benefit (vi) Conversion of foreign currency. (e) Enterprise which fall any one or more of following categories are classified as level I Enterprise 1. Enterprise whose equity or debt are listed or in the process are listing (in India or outside India) 2. Bank including co-operative banks 3. Financial institution 4. Enterprise carrying on insurance business. 5. All commercial or business enterprise whose turnover exceed 50 crore immediately financial year. 6. All commercial, business enterprise having borrowing including public deposit exceeding 10 crore at any time during the accounting period. 7. Holding or subsidiary at any one of the above at any time during the accounting period.

11 [Chapter 1] Accounting Standards O Q&A May [6] Answer the following : (f) What are the items that are to be excluded in determination of the cost of inventories as per AS-2? Para 13 of AS-2 lists down the specific costs which are to be excluded from cost of inventories The list is as follows : (i) Abnormal amounts of wasted materials, labour or other production cost. (ii) Storage costs, unless those costs are necessary in the production process prior to a further production stage. (iii) Administrative overheads that do not contribute to bringing the inventories to their present location and condition; and (iv) Selling and distribution costs. As per Para 12, Interest and other borrowing costs are usually considered as not related to bringing the inventories to their present location and condition and are therefore usually not included in the cost of inventory Nov [5] Answer the following : (ii) Mention four Assets, where AS 6 (revised) is not applicable. (iv) Mention two categories of investments defined by As 13 and also State their valuation principles. (2 marks each) (ii) AS-6 deals with Depreciation Accounting of fixed assets. The AS is applicable to all assets except: (a) Forests, Plantations (b) Wasting Assets, Minerals and Natural Gas (c) Goodwill (d) Live stock (iv) As per AS 13 'Accounting for Investments', there are two categories of investments, viz. Current Investments and Long Term Investments. According to Para 14 of the standard, the carrying amount for Current Investments is the lower of cost and fair value whereas Long Terms Investments are valued at cost less permanent diminutions in value of investment. For current investments. According to this standard any reduction to fair value and any reversals of such reductions are included in the profit and loss statement Nov [1] (viii) Explain contract costs as per Accounting Standard-7 related to Construction Contracts. (2 marks)

12 Q&A-1.24 O Solved Scanner IPCE Gr. I Paper - 1 As per para 15 of AS 7 Construction Contracts (revised 2002), contract cost should comprise: (i) Such costs that relate directly to the specific contract; (ii) Such costs that are attributable to contract activity in general and can be allocated to the contract; (iii) Such other costs as are specifically chargeable to the customer under the terms of the contract May [1] (viii) According to Accounting Standard-9, when revenue from sales should be recognised? (2 marks) According to AS 9 Revenue Recognition, revenue from sales should be recognised only when requirements as to performance are satisfied provided that at the time of performance it is not unreasonable to expect ultimate collection. These requirements can be given as follows: (i) The seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and (ii) No significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods Nov [7] Answer the following: (e) M/s. Son Ltd. charged depreciation on its assets on SLM basis. In the year ended 31 st March, 2011 it changed to WDV basis. The impact of the change when computed from the date of the assets putting into use amounts to 18 lakhs being additional depreciation. Discuss, when should an enterprise change method of charging depreciation and how it should be dealt with in Profit and Loss A/c As per para 21 of AS 6 'Depreciation Accounting', an enterprise can change one method of change depreciation to another method only if the adoption of the new method is required by statue or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise. When such a change in the method of depreciation is made, depreciation should be recalculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method should be adjusted in the accounts through

13 [Chapter 1] Accounting Standards O Q&A-1.25 statement of profit and loss in the year in which the method of depreciation is changed. In case the change in the method result in deficiency in depreciation in respect of past years, the deficiency should be changed in the statement of profit and loss Nov - [7] Answer the following: (d) In determining the cost of inventories, it is appropriate to exclude certain costs and recognize them as expenses in the period in which they are incurred. Provide example of such costs as per AS-2: Valuation of Inventories. Answer: As per As 2 Valuation of Inventories, certain costs are excluded from the cost of the inventories and are recognised as expenses in the period in which incurred. These are as follows:- (i) Selling and distribution costs. (ii) Administrative overheads that do not contribute to bringing the inventories to their present location and condition; and (iii) Abnormal amount of wasted materials, labour, or other production costs. (iv) Storage costs, unless those costs are necessary in the production process prior to a further production stage May [7] Answer the following: (b) What are the three fundamental accounting assumptions recognised by Accounting Standard (AS) 1? Briefly describe each one of them. (e) What are the issues, with which Accounting Standards deal? PRACTICAL QUESTIONS May [6] Attempt the following : (b) The company deals in three products, A, B and C, which are neither similar nor interchangeable. At the time of closing of its account for the year The Historical Cost and net realisable value of the items of closing stock are determined as follows : Items Historical Cost Net Realisable Value ( in lakhs) ( in lakhs) A B C What will be the value of Closing Stock? (c) During the current year , X Limited made the following expenditure relating to its plant building :

14 Q&A-1.26 O Solved Scanner IPCE Gr. I Paper - 1 in lakhs Routine Repairs 4 Repairing 1 Partial replacement of roof tiles 0.5 Substantial improvements to the electrical wiring system which will increase efficiency 10 What amount should be capitalised? (d) A plant was depreciated under two different methods as under : Year SLM W.D.V. ( in lakh) ( in lakh) What should be the amount of resultant surplus/deficiency, if the company decides to switch over from W.D.V. method to SLM method for first four years? Also state, how will you treat the same in Accounts. (b) According to AS-2, Valuation of inventories, inventories should be value at cost of acquisition or net realisable value whichever is lower. On this basis closing stock of the said problem is valued at Items Historical Cost ( in Lakhs) Net realisable Value ( in Lakhs) Valuation of Closing stock ( in Lakhs) A. B. C (c) Therefore, the valuation of closing stock is made at 76 Lakhs. According to AS-10 i.e. Accounting for Fixed Assets, expenditure which enhances the future benefit of the existing asset such as its earning capacity, its life, its physical capacity, its efficiency etc., should be capitalised on the other hand, the expenditures which maintains the existing status of the asset should be treated as revenue expenditures.

15 [Chapter 1] Accounting Standards O Q&A-1.27 Hence, on the basis of above provision: (i) Routine repairs 4 Lakhs, repairing 1 Lakh, and partial replacement of roof tiles 0.5 Lakh should be treated as revenue expenditure and charged to Profit and Loss statement. (ii) Expenditure on electrical wiring system worth 10 lakh which will increases the efficiency should be capitalised. (d) According to AS-6 i.e. Depreciation Accounting, the method of depreciation is applied consistently, to provide comparability of the results of the operations of the enterprise from period to period. A change from one method of charging depreciation to another is made only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statement of the enterprise. When such a change in the method of depreciation is made, depreciation is recalculated in reference with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective recomputation of dep. in accordance with the new method is adjusted in the accounts in the year in which the method of depreciation is changed. (i) In case the change in the method results in deficiency in depreciation in respect of past years the deficiency is charged in the statement of profit and loss. (ii) In case the change in the method result in surplus, the surplus is credited to the statement of profit and loss. The above change is treated as a change in accounting policy and its effect is quantified as per AS-6 and disclosed as per AS Nov [6] Answer the following: (e) Ram Co. (P) Ltd. furnishes you the following information for the year ended : Depreciation for the year ended lakhs (under straight line method) Depreciation for the year ended lakhs (under written down value method) Depreciation for the earlier years combined in written down value method and its excess to straight line method 500 lakhs The Company wants to change its method of claiming depreciation from straight line method to written down value method. Decide, how the depreciation should be disclosed in the Financial Statement

16 Q&A-1.28 O Solved Scanner IPCE Gr. I Paper - 1 for the year ended As per AS-6 (Revised) Depreciation Accounting, if there is any change in the method of depreciation, then it should be applied with retrospective effect. As per AS-6 (Revised) when the change is applied with retrospective effect, there will be a difference in amount. In such circumstances, the deficiency or surplus, as the case may be, should be charged in P & L A/c of the year in which such change is adopted. In the said problem company wants to change its method from SLM to WDV. On the basis of above provision of AS-6 (Revised), additional amount of 500 lakhs should be charged in the P & L A/c. for the year ended The current depreciation charge of 200 lakhs determined according to the WDV method should be debited to P&L A/c. The change in the method of depreciation should be treated as a change in the accounting policy and appropriately disclosed along with the effect in the financial statement May [6] Answer the following : (a) X Co. Limited purchased goods at the cost of 40 lakhs in October Till March, % of the stocks were sold. The company wants to disclose closing stock at 10 lakhs. The expected sale value is 11 lakhs and a commission at 10% on sale is payable to the agent. Advise, what is the correct closing stock to be disclosed as at (d) Arjun Ltd. sold farm equipments through its dealers. One of the conditions at the time of sale is, payment of consideration in 14 days and in the event of delay interest 15% per annum. The Company has not realised interest from the dealers in the past. However, for the year ended , it wants to recognise interest due on the balances due from dealers. The amount is ascertained at 9 lakhs. Decide whether the income by way of interest from dealers is eligible for recognition as per AS-9. (a) As per AS-2 that is Valuation of Inventories, inventories are valued at cost or net realisable value whichever is lower. Cost of inventories comprises cost of purchase, cost of conversion and other costs incurred in bringing the inventories to their present position and location. NRV is the estimated selling price in ordinary course of business less estimated cost of completion and cost necessary to make the sale. In the instance case, cost of closing stock that forms 25% of 40 lakhs is 10 lakhs and NRV is 9.9 lakhs (i.e. 11 lakhs - 10% of commission on sale)

17 [Chapter 1] Accounting Standards O Q&A-1.29 (d) X Co. Ltd. should disclose closing stock at 9.9 lakhs which is lower of cost of 10 lakhs. Commission of 10% is to be deducted as it is estimated cost necessary to make sale. AS- 9, Revenue recognition deals with the timing of Revenue Recognition in the Profit and Loss A/c of the enterprises. Revenue is the gross inflow of cash receivables or other consideration arising in the course of the ordinary activities of the enterprise from the sale of goods, from the rendering of services & use by others of enterprises resources yielding interest, royalties and dividends. Revenue is measured by the charges made to customers or clients for goods supplied or services rendered and by charges and rewards arising from use of resources by them. In view of this, the amount of 9 lakhs by way of interest is not a revenue arising from sale of goods. It is not the amount i.e. charged from customers by sale of farm equipment. The amount of interest is charged from dealers on delay in payment of consideration in 14 days. So such amount is not income to be recognised as per AS-9. Such amount is to be disclosed as per AS May [5] Answer the following : (ii) A machinery costing 10 lakhs has useful life of 5 years. After the end of 5 years, its scrap value would be 1 lakh. How much depreciation is to be charged in the books of the company as per Accounting Standard-6? (2 marks) (ix) ABC Ltd. gave 50,000 equity shares of 10 each (fully paid up) in consideration for supply of certain machinery by X & Co. The shares exchanged for machinery are quoted on Bombay Stock Exchange (BSE) at 15 per share, at the time of transaction. In the absence of fair market value of the machinery acquired, how the value of machinery would be recorded in the books of the company? (2 marks) (x) A company took a construction contract for 100 lakhs in January, It was found that 80% of the contract was completed at a cost of 92 lakhs on the closing date i.e. on The company estimates further expenditure of 23 lakhs for completing the contract. The expected loss would be 15 lakhs. Can the company recognise the loss in the financial statements prepared for the year ended ? (2 marks) (ii) As per AS - 6 'Depreciation Accounting' the depreciable amount of a depreciable asset should be allocated on a systematic basis to each accounting period during the useful life of the asset. In this problem, the depreciation amount can be determined as follows:-

18 Q&A-1.30 O Solved Scanner IPCE Gr. I Paper - 1 Cost of machinery 10,00,000 Less: Scrap value at the end 1,00,000 Value to be written off 9,00,000 Depreciation per year = = = 1,80,000 (ix) According to AS - 10 'Accounting for Fixed Assets', when fixed assets are acquired in exchange of share or other securities, it should be recorded at its fair market value or the fair market value of the securities issued, whichever is more clearly evident. In this problem, the market value of the securities exchanged for the asset is more clearly evident, the company should record the asset is more clearly evident. The company should record the value of machinery at 7,50,000 (50, i.e. market price of the share) (x) According to AS - 7, 'Accounting for construction contract' an expected loss on the construction contract should be recognised as an expense immediately irrespective of :- (i) The amount of profit expected to arise in other contracts; or (ii) Whether or not the work has commenced on the contract; or (iii) The stage of completion of the contract May [5] Answer the following : (v) What is the accounting entry to be passed as per AS-10 for the following situations : (a) Increase in value of fixed asset by 50,00,000 on account of revaluation. (b) Decrease in the value of fixed asset by 30,00,000 on account of revaluation. (2 marks) Particular s L/ F Dr. () Cr. () a. Fixed Asset A/c. Dr. To Revaluation Reserve A/c (Being the increase in value of fixed asset due to upward revaluation) 50,00,000 50,00,000 b. Profit and Loss A/c. Dr. To Fixed Asset A/c (Being the decrease is not book value of fixed asset due to downward revaluation 30,00,000 30,00,000

19 [Chapter 1] Accounting Standards O Q&A-1.31 (Note: It has been assumed that both the above instances are independent of each other) and revaluation is done for first time Nov [5] Answer the following : (iii) Y Ltd. used certain resources of X Ltd. In return X Ltd. receives 10 lakhs and 15 lakhs as interest and royalties respectively, from Y Ltd. during the year State on what basis X Ltd. should recognize their revenue, as per AS9. (2 marks) According to As 9 on 'Revenue Recognition', interest of 10 lakhs received in the year should be recognized on the time proportion basis taking into account the amount outstanding and the rate applicable; whereas royalty of 15 lakhs received in the same year should be recognized on accrual basis as per the terms of relevant agreement May [6] Answer the following : (a) Sony Pharma ordered 12,000 kg. of certain material at 80 per unit. The purchase price includes excise duty 4 per kg in respect of which full CENVAT credit is admissible. Freight incurred amounted to 77,400. Normal transit loss is 3%. The company actually received 11,600 kg. and consumed 10,100 kg. of material. Compute cost of inventory under AS-2 and abnormal loss. Purchase price (12,000 kg 80) 9,60,000 Less: CENVAT credit (12,000 kg. 4) 48,000 9,12,000 Add: Freight 77,400 Total material cost 9,89,400 Number of units after normal loss = 97% of 12,000 kgs. 11,640 kgs. Normal cost per kg. = 85 Value of closing stock under AS 2 = (11,600 kgs. 10,100 kgs.) 85 = 1,27,500 Abnormal loss = (11,640 kgs. 11,600 kgs.) 85 = 3, Nov [1] (vii) From the following data, find out value of inventory as on using (a) LIFO method, and (b) FIFO method : (1) Purchased per unit (2) Sold 6 90 per unit (3) Purchased per unit (4) Sold per unit. (2 marks)

20 Q&A-1.32 O Solved Scanner IPCE Gr. I Paper - 1 (a) Statement showing valuation of closing inventory by LIFO method Date Receipts Issue Balance Unit Cost/unit Amount Unit Cost/unit Amount Unit Cost/unit Amount ,500 Value of closing inventory as per LIFO method: ,050 Unit Rate Total , Total 730 (b) Statement showing valuation of closing inventory by FIFO method Date Receipts Issue Balance Unit Cost/Unit Amount Unit Cost/Unit Amount Unit Cost/Unit Amount , Value of closing inventory as per FIFO method: Unit Rate Total , May [1] (v) A company acquired a machine on for 5,00,000. The company charged depreciation upto on straight line basis with estimated working life of 10 years and scrap value of 50,000. From , the company decided to change depreciation method at 20% on reducing balance method. Compute the amount of depreciation to be debited to Profits and Loss A/c for the year (2 marks)

21 [Chapter 1] Accounting Standards O Q&A-1.33 Annual depreciation charged by the company up to = = = 45,000 WDV of machine at the end of by Straight Line Method (SLM) = 5,00,000 ( 45,000 3) = 3,65,000 Depreciation by Reducing Balance Method (RBM) Year Cost/WDV at the beginning of the year 5,00,000 4,00,000 3,20,000 2,56,000 Depreciation to be charged in Depreciation 5,00,000 20%= 1,00,000 4,00,000 20%= 80,000 3,20,000 20%= 64,000 2,44,000 2,56,000 20% = 51,200 WDV at the end of the year 4,00,000 3,20,000 2,56,000 2,04,800 Book value of the machine as per SLM as on Less : Book value of the machine as per RBM as on Add : Depreciation for the year as per RBM Total depreciation debited to Profit and Loss Account in the year ,65,000 (2,56,000) 1,09,000 51,200 1,60, May [6] Answer the following : (a) Weak Ltd. acquired the fixed assets of 100 lakhs on which it received the grant of 10 lakhs. What will be the cost of the fixed assets as per AS-12 and how it will be disclosed in the financial statements. (b) During the current year M/s L & C Ltd. made the following expenditure relating to its plant and machinery : General repairs 4,00,000 Repairing of Electric Motors 1,00,000 Partial Replacement of parts of Machinery 50,000

22 Q&A-1.34 O Solved Scanner IPCE Gr. I Paper - 1 Substantial improvements to the electrical wiring system which will increase efficiency of the plant and machinery 10,00,000 What amount should be capitalised according to AS-10? (d) Raw materials inventory of a company includes certain material purchased at 100 per kg. The price of the material is on decline and replacement cost of the inventory at the year end is 75 per kg. It is possible to convert the material into finished product at conversion cost of 125. Decide whether to make the product or not to make the product, if selling price is (i) 175 and (ii) 225. Also find out the value of inventory in each case. (a) According to AS 12 Accounting for Government Grants deal with the presentation of Government grants related to specific fixed assets. According to this AS 12 two different methods for recognition of a Government grant. According to first method, Government grants related to specific fixed assets should be presented in the balance sheet by showing the grant as a deduction from the gross value of the assets concerned in arriving at their book value. Therefore, in the given case, fixed assets should be presented at 90 lakhs ( 100 lakhs less 10 lakhs) in the balance sheet of Weak Ltd. According to the second method, Government grants related to depreciable fixed assets may be treated as deferred income which should be recognised in the profit and loss statement on a systematic and rational basis over the useful life of the asset, i.e., such grants should be allocated to income over the periods and in the proportions in which depreciation on those assets is charged. In this case, fixed assets will be shown at 100 lakhs in the balance sheet of Weak Ltd. and the corresponding grant amounting 10 lakhs will be treated as deferred income to be recognized over useful life of the fixed asset. (b) According to AS 10 Accounting for Fixed Assets, expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is included in the gross book value, e.g., an increase in capacity. Therefore, in the given case, repairs amounting 5 lakhs and partial replacement of parts of machinery worth 50,000 should be charged to profit & loss account. 10 lakhs incurred for substantial improvement to the electrical wiring system which will increase efficiency should be capitalized. (d) According to AS 2 Valuation of Inventories, materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. But when there has been a decline in the price of materials and it is estimated

23 [Chapter 1] Accounting Standards O Q&A-1.35 that the cost of the finished products will exceed net realizable value, the materials are written down to net realisable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value. (i) When the selling price be 175 Incremental Profit= = 50 Current price of the material = 75 Therefore, it is better not to make the product. Raw material inventory would be valued at net realisable value i.e. 75 because the selling price of the finished product is less than 225 ( ) per kg. (ii) When the selling price be 225 Incremental Profit = = 100 Current price of the raw material = 75 Therefore, it is better to make the product. Raw material inventory would be valued at 100 per kg because the selling price of the finished product is not less than Nov [1] {C} (b) HP is a leading distributor of petrol. A detail inventory of petrol in hand is taken when the books are closed at the end of each month. At the end of month following information is available : Sales 47,25,000 General overheads cost 1,25,000 Inventory at beginning 1,00,000 15/- per litre Purchases June 1 two lakh June 30 one lakh Closing inventory 1.30 lakh litres Compute the following by the FIFO as per AS-2 : (i) Value of Inventory on June 30. (ii) Amount of cost of goods sold for June. (iii) Profit/Loss for the month of June. (5 marks) (i) Cost of closing inventory for 1,30,000 litres as on 30th June Particulars 1,00, , ,15,000 4,27,500 Total 19,42,500

24 Q&A-1.36 O Solved Scanner IPCE Gr. I Paper - 1 (ii) Computation of cost of goods sold Particulars Opening inventories (1,00,000 15) Purchases June-1 (2,00, ) 15,00,000 28,50,000 June-30 (1,00, ) 15,15,000 Less : Closing inventories 58,65,000 (19,42,500) Cost of goods sold 39,22,500 (iii) Computation of profit Particulars Sales (Given) (A) Cost of goods sold Add: General overheads Total cost (B) 47,25,000 39,22,500 1,25,000 40,47,500 Profit (A B) 6,77, Nov [7] Answer the following : (a) A company installed a plant at a cost of 20 lacs with estimated useful life of 10 years and decided to depreciate on straight line method. In the fifth year company decided to switch over from straight line method to written down value method. Compute the resultant surplus/deficiency if any, and state how will you treat the same in the accounts. (c) An amount of 9,90,000 was incurred on a contract work upto Certificates have been received to date to the value of 12,00,000 against which 10,80,000 has been received in cash. The cost of work done but not certified amounted to 22,500. It is estimated that by spending an additional amount of 60,000 (including provision for contingencies) the work can be completed in all respects in another two months. The agreed contract price of work is 12,50,000. Compute a conservative estimate of the profit to be taken to the Profit and Loss Account as per AS-7. (a) Table showing depreciation under Straight Line Method (SLM) and depreciation under Written Down Value Method (WDV)

25 [Chapter 1] Accounting Standards O Q&A-1.37 Depreciation in lacs Year SLM WDV I 2.00 (Note 1) 2.00 (Note 2) II III IV Total Resultant surplus on change in method of depreciation from SLM to WDV = ( ) 1.12 lakhs. According to AS 6 Depreciation Accounting, when a change in the method of depreciation is made, depreciation should be re-calculated in accordance with the new method from the date of the asset put to use. The deficiency or surplus arising from retrospective re-computation of depreciation in accordance with the new method should be adjusted in the accounts in the year in which the method of depreciation is changed. In the given question, surplus amounting 1.12 lakhs ( ) should be credited to profit and loss statement in the fifth year. Such a change should be treated as a change in accounting policy and its effect should be quantified and disclosed as per AS 5. Net Profit loss for the period, prior period items and changes in Accounting Policies. Note 1 : Depreciation as per SLM 20 lakhs/10years = 2 lakhs. Note 2 : Depreciation rate under SLM is 10% (2,00,000/20,00, ). It is assumed that depreciation rate will remain same under WDV method also. (c) Computation of estimate of profit as per AS 7 Particulars Expenditure incurred upto Estimated additional expenses (including provision for contingency) Estimated cost (A) Contract price (B) Total estimated profit [(B-A)] Percentage of completion (9,90,000/10,50,000) 100 9,90,000 60,000 10,50,000 12,50,000 2,00, % Computation of estimate of the profit to be taken to Profit and Loss Account : = Total estimated profit = 2,00,000 = 1,88,571