CA-FINAL

FINANCIAL REPORTING
FULL TEST-1
Time Allowed-3 Hours Maximum Marks-100

Multiple choice questions:

Case study:1
On 7 January 2015, Hermione was informed that it was being sued by an
employee in respect of a workplace accident that took place in October 2014.
Legal advisors advise that Hermione is certain to lose the case. They have
provided the following information:
Estimated pay-out Probability of payment occurring
$1 million 30%
$2 million 60%
$3 million 10%
Hermione has sold 100,000 machines that are covered by a warranty agreement
as at the reporting date. If a machine develops a major fault then the average cost
to Hermione of repairing it is $100. If a machine develops a minor fault then the
average cost to Hermione of repairing it is $30. It is believed that 6% of the
machines under warranty will develop major faults and that 8% will develop
minor faults. The time value of money can be ignored.
On 15 December 2014, the directors of Hermione decided to restructure the
business and created a detailed and formal plan. On that date, an announcement
was made to the employees who were informed that they would be made
redundant in March 2015. The directors estimate that the restructuring exercise
will involve the following costs:
Type of cost $m
Redundancy payments 1.2
Staff relocation 0.8
Investment in new systems 2.0
1. Which of the following are outlined in IAS 37 Provisions, Contingent
Liabilities and Contingent Assets as criteria required for recognising a provision?
(i) An entity has a present obligation from a past event
(ii) It is possible that an outflow of resources will be required
2
(iii) A reliable estimate can be made of the amount of the obligation
(a) (i), (ii)and (iii)
(b) (i) and (ii) only
(c) (i) and (iii) only
(d) (ii) and (iii) only 1. (Ans. c)

2. What amount should be recognised as a provision in respect of the workplace

accident claim in the year ended 31 December 2014?
(a) Nil
(b) $1.8 million 2
(c) $2 million
(d) $3 million 2. (Ans. b)

3. What amount should be recognised as a restructuring provision in the year

ended 31 December 2014?
(a) $1.2 million
(b) $2.0 million 2
(c) $3.2 million
(d) $4.0 million 3. (Ans. a)
4. The following situations have arisen in the year ended 31 December 2014:
Situation 1: A law was introduced in November 2014 requiring Hermione to fit
new smoke filters in its factory by February 2015 at an estimated cost of
$500,000. By the reporting date, Hermione had not fitted the smoke filters.
Statement 2: The management accountant of Hermione has reliably forecast an
operating loss of $4 million for the year ended 31 December 2015.
Which, if any, of the situations require a provision to be recognised?
(a) Situation 1 only
(b) Situation 2 only 2
(c) Both situations

(d) Neither situation 4. (Ans. d)

(8 MARKS)

Case Study: 2
A Ltd. has 10,000 units of a raw material inventory on hand at 31 March 2018
with a carrying amount of INR 100 each. The current market value of that raw
material is INR 95 each. A Ltd. intends to use the raw material to manufacture a
component to be used by an automotive company. A Ltd. estimates costs to
completion and sale of INR 50 each and a selling price for the component is
estimated to be INR 160 each.
An item of equipment X was acquired by A Ltd. on 1 April 2016 for INR 100,000
having an estimated useful life of 10 years, with a residual value of zero. The
asset is depreciated on a straight line basis. The asset was revalued to INR
104,000 on 31 March 2018.
One of the plants of A Ltd. is situated in north-east India and the State
Government provides interest-free loans for 3 years to aid investment in the
region. On April 1, 2017, A Ltd. received an interest-free loan of INR 50 lacs for
the project. The fair value of the loan is INR 40 lacs.
On 1 July 2017, A Ltd. was engaged in the development of a property in
Rajasthan, which is expected to take five years to complete, at a cost of INR 600
lacs. For this purpose, a bank loan of INR 600 lacs with an effective interest rate
at 10% was taken out on 1 July 2017. The amount of loan was fully drawn from
the bank. However, during the year2017-18, the construction was not in full
swing. Therefore, A Ltd. invested its surplus fund from such loan for the time
being. Interest income earned on the unapplied funds during the period 2017-18
was INR 14,00,000.
A Ltd. acquired a customer portfolio from XYZ Ltd. at a price of INR 13 lacs.
There are no legal contracts with customers to protect the interest of A Ltd.
However, exchange transactions for similar non-contractual customer
relationships (other than as part of a business combination) exist in the market.
(Select the most appropriate answer from the options given for each
question.)
1. At what amount 10,000 units of raw material referred to in (d) above be carried
at on 31 March 2018?
(a) INR 9,50,000
(b) INR 11,00,000

(c) INR 10,00,000 2

(d) INR 16,00,000 1. (Ans. c)

2. What will be the annual depreciation charge on equipment X for years 3 to 10

and the amount of the revaluation surplus that can be transferred to retained
earnings annually? 2
(a) Annual depreciation charge will be INR 10,000 and an annual transfer of INR
3,000 can be made from revaluation surplus to retained earnings.
(b) Annual depreciation charge will be INR 10,000, however, annual transfer
from revaluation surplus to retained earnings is not permitted.
(c) Annual depreciation charge will be INR 13,000 and an annual transfer of INR
3,000 may be made from revaluation surplus to retained earnings.
(d) Annual depreciation charge will be INR 13,000, however, annual transfer
from revaluation surplus to retained earnings is not permitted.
2. (Ans. c)
3. What will be the fair value of the 6th floor investment property in a building in
New Delhi if A Ltd. wishes to compute the fair value using mid-value approach
within a bid-ask spread?
(a) INR 6,35,00,000 2
(b) INR 6,32,50,000
(c) INR 6,30,00,000
(d) INR 6,27,50,000 3. (Ans. a)

4. What would be the accounting for recognition of interest free loan of INR 50
lacs from State Government?
(a) Bank A/c Dr. INR 50 lacs
Loan A/c Cr. INR 50 lacs 2
(b) Bank A/c Dr. INR 40 lacs
Loan A/c Cr. INR 40 lacs
(c) Bank A/c Dr. INR 50 lacs
Loan A/c Cr. INR 40 lacs
Govt grant (deferred income) A/c Cr. INR 10 lacs
(d) Bank A/c Dr. INR 50 lacs
Loan A/c Cr. INR 40 lacs
Govt grant (income) A/c Cr. INR 10 lacs 4. (Ans. c)

5. What should be the amount of interest to be capitalised on the development of

property in Rajasthan for year ended 31 March 2018 under IFRS?
(a) INR 46 lacs
(b) INR 60 lacs 2
(c) INR 45 lacs

(d) INR 31 lacs 5. (Ans. d)

6. How should customer portfolio acquired by A Ltd. should be recognised in its

IFRS financial statements?
(a) A Ltd. should recognise it as an intangible asset.
2
(b) A Ltd. should recognise it as an expense.
(c) A Ltd. should recognise it as a goodwill.
(d) A Ltd. should recognise it as a separate tangible asset 6. (Ans. a)
(12 MARKS)

Case study: 3
S Limited is engaged in the manufacturing of customised heavy-duty equipment
and allied products. The Company is already listed on the London Stock
Exchange (LSE) and plans to expand into automotive industry, with a particular
focus on electric vehicles. To fund the expansion, the CFO and his team are
evaluating several financing options. After detailed discussions with the Board of
Directors, S Limited decides to issue bonds with a conversion option in order to
maintain its debt-equity ratio. Accordingly, on 1st April, 2020, the Company
issued 20,000 convertible bonds at par. The bonds are redeemable five years later
at a par value of Rs. 700 per bond, which is the nominal value. The bonds pay
interest annually in advance at an interest rate of 6%. At the option of the holder,
each bond can be converted at the maturity date into 40 shares of Rs. 1 each. The
market rate for five years bond with no right of conversion is 10%.
Out of above proceeds, on 1st April, 2020 the Company Rs. 15,00,000
acquired a land in Mewat, a backward area in the state of
Haryana, to set up a manufacturing plant for electric vehicles.
S Limited paid Rs. 50,00,000 for the land and Rs. 5,00,000 for
stamp duty and legal fees. The Architect fees and site
preparation fees were Rs. 3,50,000 and Rs. 2,00,000
respectively. On 1st June, 2020, Company started constructing
the plant and incurs the below mentioned costs for the year
ended 31st March, 2021. In the opinion of the management, the
construction will take at least 2 years to be completed Material
Direct Labour costs Rs. 5,00,000
General Overheads Rs. 2,00,000
In order to be environment friendly, the Company establishes solar panels worth
Rs.10,00,000 to supply solar electricity to its manufacturing plant. The solar
panels have a useful life of 10 years. The government promotes and encourages
industries to use sustainable and renewable energy by giving subsidies to such
companies. Accordingly, S Limited received a government subsidy of Rs.
4,00,000 upon installing the solar panels. S Limited has organized an
inauguration ceremony on the opening of its manufacturing plant. The Company
has invited various ministers, government officials and industrialists. The total
cost of Rs. 6,00,000 was incurred on inauguration ceremony.
Balance proceeds were used to acquire a building in Gurgaon for business
purposes, however it has been recently determined that the building could be
converted into a shopping mall. The building's market value would be higher if
converted into shopping mall.
As part of staff welfare measures, the Company has contracted to lend to its
employees sums of money at 6% per annum rate of interest. The loan amount is
to be repaid in five equal instalments along with interest. The Company had lent
Rs. 800,000 to its employees on 1st April, 2020. The market rate of interest is
10% per annum for comparable loans.
On 1st April, 2020, S Limited enters into a contract with Corp Limited to
construct heavy-duty equipment for a promised consideration of Rs. 20,00,000
with a bonus of Rs. 2,50,000 if the equipment is completed within 24 months. At
the inception of the contract, S Limited correctly accounts for the promised
bundle of goods and services as a single performance obligation in accordance
with IFRS 15. At the inception of the contract, the Company expects the costs to
be Rs. 11,00,000 and concludes that it is highly probable that a significant reversal
in the amount of cumulative revenue recognised will occur. Completion of the
heavy-duty equipment is highly susceptible to factors outside of the Company's
influence, mainly due to difficulties with the supply of components.
At 31st March, 2021, S Limited has satisfied 65% of its performance obligation
on the basis of costs incurred to date and concludes that the variable consideration
is still constrained in accordance with IFRS 15. However, on 4th June, 2021, the
contract is modified with the result that the fixed consideration and expected costs
increase by Rs. 1,50,000 and Rs. 80,000 respectively. The time allowable for
achieving the bonus is extended by six months with the result that S Limited
concludes that it is highly probable that the bonus will be achieved and that the
contract still remains a single performance obligation.
1. How should S Limited account for 20,000 convertible bonds issued at par as
on 1st April, 2020? 2
(Correct answer will be the value of liability portion of
convertible bonds as on 1st April, 2020 will be ` 1,21,95,960 and Equity portion
will be ` 18,04,040)

2. What is the interest expense to be booked by S Limited on convertible bonds

in year 4?
(a) Rs. 14,33,091 2
(b) Rs. 13,49,091
(c) Rs. 14,60,895
(d) Rs. 8,40,000.
No correct option (Correct answer will be ` 12,33,440)

3. What will be the carrying amount of the Mewat plant as on 31st March 2021?
(a) Rs. 80,50,000
(b) Rs. 92,72,448 2
(c) Rs. 94,72,488
(d) Rs. 92,72,488.

4. The Mewat plant could not have been set up without the support of the
ministers and government officials. The CFO of S Limited is of the view that cost
incurred for the inauguration of the plant should be capitalized as part of its cost.
What is your view?
(a) The CFO is incorrect, the cost incurred in inauguration of manufacturing plant 2
should be charged to Statement of Profit and Loss
(b) The CFO is correct, the cost incurred in inauguration of manufacturing plant
should be capitalised as cost of plant
(c) The CFO is correct, however the cost incurred in inauguration of
manufacturing plant should be accounted separately by setting up a deferred
expenditure account
(d) The CFO is incorrect, the cost of inauguration may be capitalised or charged
to Statement of Profit and Loss applied consistently an accounting policy choice.

5. How should S Limited account for the government subsidy received on

purchase of solar panels?
(a) By deducting from the cost of Solar panels; Cost of solar panels will be Rs.
6,00,000 and depreciation will be charged on Rs. 6,00,000 for 10 years
(b) By setting up a deferred income of Rs. 4,00,000; it will be amortized to P&L 2
over a period of 10 years
(c) By recognizing an income of Rs. 4,00,000 immediately on receipt of subsidy
(d) Either (A) or (B).
(10 MARKS)
 Descriptive Questions

Question 1 is compulsory,

Students are required to answer any 4 questions out of remaining 5

questions

Working note should form the part of respective answer

ANSWER : 1(A)
Consolidated Balance Sheet of the Group as on 31st March, 2018

.25

.25

.25
.25
 .25

.25

1
1
1
.5

.25

.25

Note to Account

1. Property Plant &

Equipment

Parent 160

Nisha Ltd. 180

Sandhya Ltd. 150 490 .25

2. Inventories

Parent 110

Nisha Ltd. (35 – 1) 34

Sandhay Ltd. 25 169 .25

3. Trade Receivables

Parent 130

Nisha Ltd. 50

Sandhya Ltd. 110 290 .25

4. Bills Receivable

Parent (36 – 35) 1

Sandhya Ltd. (15 – 15) = 1 .25

5. Cash & Cash

equivalents

Parent 114

Nisha Ltd. 20

Sandhya Ltd. 20 154 .25

6. Trade Payables

Parent 235

Nisha Ltd. 115

Sandhya Ltd. 90 440 .25

Working Notes:
1. Analysis of Reserves and Surplus

Sandhya Ltd.
Nisha Ltd.

Reserves as on 31.3.2017 10 40 10 30
Increase during the year 2017-2018

Increase for the half year till 5 5

30.9.2017

Balance as on 30.9.2017 (A) 45 35

Total balance as on 31.3.2018 50 0.5 40 0.5

Post-acquisition balance 5 .5 5 .5

Nisha Ltd. Sandhya Ltd.

Retained Earnings as on 31.3.2017 15 10 15 15

Increase during the year 2017-2018

Increase for the half year till 30.9.2017 7.5 7.5

Balance as on 30.9.2017 (B) 17.5 22.5

Total balance as on 31.3.2018 25 30

Post-acquisition balance 7.5 7.5

Less: Unrealised gain on inventories (5 x 25%) - (1)

Post-acquisition balance for CFS 7.5 .5 6.5 .5

Total balance on the acquisition date 62.5 57.5

ie.30.9.2017 (A+B) .5 .5

2. Calculation of Effective Interest of Parent company i.e. Usha Ltd. in

Sandhya Ltd.
Acquisition by Usha Ltd. in Nisha Ltd. = 80%
Acquisition by Nisha Ltd. in Sandhya Ltd. = 75%
Acquisition by Group in Sandhya Ltd. (80% 75%) = 60%
Non – controlling Interest = 40%
3. Calculation of Goodwill / Capital Reserve on the acquisition date

Nisha Ltd. Sandhya Ltd.

Investment or consideration 170 (140 ×

80%)112
Add: NCI at Fair value
(200 x 20%) 40
(160 x 40%) 64
Less: Identifiable net assets 210 176
(Share
capital + Increase in the Reserves
and
Surplus till acquisition date) (200+62.5) (160+57.5)
(262. 5) (217.5)
Capital Reserve 52.5 .5 41.5 .5

Total Capital Reserve (52.5 + 41.5) 94

4. Calculation of Non Controlling Interest

Nisha Ltd. Sandhya Ltd.

At Fair Value (See Note 3) 40 64

Add: Post Acquisition Reserves (5× 20%) 1 (5 × 40%) 2

(See Note 1)

Add: Post Acquisition Retained (7.5 × 20%) (6.5 × 40%)

Earnings (See Note 1) 1.5 2.6
Less: NCI share of investment in Sandhya Ltd.* (140x20%)
(28)*

14.5 .5 68.6 .5

Total (14.5 + 68.6) 83.1

*Note: The Non-controlling interest in Nisha Ltd. will take its proportion in
Sandhya Ltd. So they have to bear their proportion in the investment made by
Nisha Ltd. (as a whole) in Sandhya Ltd.

5. Calculation of Consolidated Other Equity

Reserves Retained
Earnings

Usha Ltd. 90 80

Add: Share in Nisha Ltd. (5 x 80%) 4 (7.5 × 80%) 6

Add: Share in Sandhya Ltd. (5 ×60%) 3 (6.5 ×60%) 3.9

97 89.9 1

Note: In the above solution, it is assumed date the sale of goods by Sandhya
Ltd. is done after acquisition of shares by Nisha Ltd. Alternatively, one may
assume that the sale has either been done before acquisition of shares by
Nisha Ltd. in Sandhya Ltd. or sale has been throughout the year. Accordingly,
there treatment for unrealized gain may vary.
(14 MARKS)

ANSWER : 2(A)
 The preference shares provide the holder with the right to receive a
predetermined amount of annual dividend out of profits of the company,
together with a fixed amount on redemption.
1
Whilst the legal form is equity, the shares are in substance debt. The fixed level
of dividend is interest and the redemption amount is equivalent to the
repayment of a loan.
Under Ind AS 32 ‘Financial Instruments: Presentation’ these instruments should
be classified as financial liabilities because there is a contractual obligation to
deliver cash. The preference shares should be accounted for at amortised cost
using the effective interest rate of 18%.

Year 1 April, Interest @18% Paid at 4% 31 March, 20X6

20X5 Rs. Rs. Rs.
1
Rs.

20X5-20X6 480,000 86,400 (19,200) 547,200

Accordingly, the closing balance of Preference shares at year end i.e. 31st
March, 20X6 would be Rs. 5,47,200.
Accountant has inadvertently debited interest of Rs. 19,200 in the profit and
loss. However, the interest of Rs. 86,400 should have been debited to profit
and loss as finance charge.

Similarly, amount of Rs. 5,47,200 should be included in borrowings (non-

1
current liabilities) and consequently, Equity should be reduced by Rs. 480,000
proceeds of issue and Rs. 67,200 (86,400 – 19,200) i.e. total by 5,47,200.
Necessary adjusting journal entry to rectify the books of accounts will be:
2
Rs. Rs.

Preference share capital (equity) (Balance sheet) Dr. 4,80,000

 Finance costs (Profit and loss) Dr. 86,400

To Equity – Retained earnings (Balance sheet) 19,200

To Preference shares (Long-term Borrowings) (Balance 5,47,200

sheet)

(5 MARKS)

ANSWER : 2(B)
Statement showing computation of inventory cost

Particulars Amount Remarks

(Rs.)
Costs of purchase 5,00,000 Purchase price of raw material
[purchase price (Rs. 5,50,000) less
. .25 refundable purchase .25
taxes (Rs. 50,000)]
Loan-raising fee .25
– Included in the measurement of
the liability .25

Costs of purchase .2555,000 Purchase price of consumable stores .25

Costs of conversion .2565,000 Direct costs—labour .25

Production overheads .2515,000 Fixed costs—depreciation .25

Production overheads 10,000 Product design costs and labour cost
for
.25 .25
specific customer
Other costs 37,000 Refer working note
Borrowing costs – Recognised as an expense in profit or
.25 loss .25
 Total cost of 6,82,000
inventories

Working Note:

Costs of testing product designed for specific customer:

1
Rs. 21,000 material (ie net of the Rs. 3,000 recovered from the sale of the
scrapped output) +Rs.11,000 labour + Rs.5,000 depreciation.

(4 MARKS)

ANSWER : 2(C)

As per para 30(c) of Ind AS 34 ‘Interim Financial Reporting’, income tax

expense is recognized in each interim period based on the best estimate of
the weighted average annual income tax rate expected for the full financial
year. 1

If different income tax rates apply to different categories of income (such as

capital gains or income earned in particulars industries) to the extent
practicable, a separate rate is applied to each individual category of interim
period pre – tax income.

Rs.
Estimated annual income exclusive of estimated capital gain
(33,00,000 – 8,00,000) (A 25,00,000
.5
)
Tax expenses on other income :
30% on Rs. 5,00,000 1,50,000
40% on remaining Rs. 20,00,000 8,00,000
(B) 9,50,000 .5
𝐵 9,50,0
 00

Weighted average annual income tax rate = = = 1

𝐴 25,00,000
38%
Tax expense to be recognised in each of the quarterly reports

Rs.

Quarter I – Rs. 7,00,000 2,66,000

.5
38%

Quarter II – Rs. 8,00,000 3,04,000

.5
38%

Quarter III – Rs. (12,00,000 – 1,52,000

.5
8,00,000) 38%

Rs. 8,00,000 12% 96,000 2,48,000

Quarter IV – Rs. 6,00,000 2,28,000

38% .5

10,46,000

ANSWER : 3(A)
Carrying amount of asset on 31st March 20X6 = Rs. 6,60,000
Calculation of Value in Use:

Year ended Cash flow Discount Amount

Rs. factor @ Rs.
 9%

31st March, 2,76,000 0.9174 2,53,202

.5
20X7

31st March, 1,92,000 0.8417 1,61,606 .5

20X8

31st March, 1,20,000 0.7722 92,664 .5

20X9

31st March, 1,14,000 0.7084 80,758 .5

20Y0

Total (Value in Use) 5,88,230

1

Calculation of Recoverable amount:

Particulars Amount
(Rs.)

Value in use 5,88,230

Fair value less costs of disposal (6,00,000 – 5,04,000

96,000)

Recoverable amount 5,88,230

(Higher of value in use and fair value less costs of
disposal) 1

Calculation of Impairment loss:

Particulars Amount (Rs.)

 Carrying amount 6,60,000

Less: Recoverable amount (5,88,230)

Impairment loss 71,770 1

Calculation of Revised carrying amount:

Particulars Amount (Rs.)

Carrying amount 6,60,000

Less: Impairment loss (71,770)

Revised carrying amount 5,88,230 1

Calculation of Revised Depreciation:

Revised carrying amount – Residual value
Remaining life = (5,88,230 - 0) / 4 = Rs. 1,47,058 per annum 1
Set off of Impairment loss:
The impairment loss of Rs. 71,770 must first be set off against any revaluation
surplus in relation to the same asset. Therefore, the revaluation surplus of Rs.
36,000 is eliminated against impairment loss, and the remainder of the .5

impairment loss Rs. 35,770 (Rs. 71,770 – Rs. 36,000) is charged to profit and
loss.
Treatment of Government compensation:
Any compensation by government would be accounted for as such when it
becomes receivable. At this time, the government has only stated that it may
.5
reimburse the company and therefore credit should not be taken for any
potential government receipt.

(8 MARKS)
ANSWER : 3(B)
As per para 13 of Ind AS 103 ‘Business Combination’, the acquirer's application
of the recognition principle and conditions may result in recognising some
assets and liabilities that the acquire had not previously recognised as assets
and liabilities in its financial statements. This may be the case when the asset is
1
developed by the entity internally and charged the related costs to expense.
Based on the above, the company can recognise following Intangible assets
while determining Goodwill / Bargain Purchase for the transaction:
i Patent owned by ABR Ltd.: The patent owned will be recognised at fair
value by KK Ltd. even though it was not recognised by ABR Ltd. in its financial
statements. The patent will be amortised over the remaining useful life of the
asset i.e. 8 years. Since the company is awaiting the outcome of the trials, the 1

value of the patent cannot be estimated at Rs. 15 crore and the extra Rs. 5
crore should only be disclosed as a Contingent Asset and not recognised.

ii Patent internally developed by ABR Ltd.: As per para 18 of Ind AS 103

‘Business Combination’, the acquirer shall measure the identifiable assets
acquired and the liabilities assumed at their acquisition date fair values. Since
the patent developed has been approved for clinical use, it is an identifiable 1
asset, hence the same will be measured at fair value ie Rs. 20 crores on the
acquisition date.

iii Grant of License to ABR Ltd. by the Government: As regards to the five-
year license, applying para 18 of Ind AS 103, grant asset will be recognised at
fair value on the acquisition date by KK Ltd. On acquisition date, the fair value
of the license is Rs. 10 crore. However, since the question does not mention
1
about the fair value of the identifiable liability with respect to grant of license
for the acquirer, it is assumed that no conditions with respect to compliance of
grant (if any) have been passed to the acquirer. Hence, the fair value of the
liability with respect to grant, for acquirer would be nil. Only, the grant asset
(license) would be recognised at Rs. 10 crore in the books of acquirer KK Ltd.
Hence the revised working would be as follows:
Rs.
Fair value of net assets of ABR Ltd. 15 crore
Add: Patent (10 + 20) 30 crore
Add: License 10 crore
Less: Grant for License (Nil)
55 crores 1

Purchase Consideration (35 crores)

Bargain purchase 20 crore 1

ANSWER : 4(A)
Translation of the financial statements

USD Rate/Euro Euro

a b a/b

Property, plant and equipment 60,000 1.15 52,174

Receivables 9,00,000 1.15 7,82,609

Total assets 9,60,000 8,34,783 1

Issued capital 40,000 25,000

Opening retained earnings 25,000 15,000

Profit for the year 22,000 1.20 18,333 .25

Accounts payable 8,15,000 1.15 7,08,696 .25

Accrued liabilities 58,000 1.15 50,435 .25

Total equity and liabilities 9,60,000 8,17,464

Foreign Currency Translation Reserve (FCTR) 17,319 .25

(Refer the below working)

Total equity and liabilities 8,34,783 1

Working of the cumulative balance of the FCTR

Particulars Actual Amount Difference translated

translated at closingrate of
amount in Euro XUSD 1.15 /
EURO

a b b-a

Issued capital 25,000 34,783* 9,783 .5

Opening retained 15,000 21,739** 6,739 .5
earnings
Profit for the year 18,333 19,130** 797 1
*
58,333 … 75,652 17,319 1

* 40,000/1.15 = 34,783 ** 25,000/1.15=21,739 *** 22,000/1.15 = 19,130

ANSWER : 4(B)

Particulars Amount
(Rs.)
Fair value as at 1st April, 20X1 13,750
Increase due to price change (250  {60 – 1,250
1
(13,750/250)}]
 Increase due to Physical change [250  {75 – 60}] 3,750 1

Fair value as at 31st March, 20X2 18,750 1

ANSWER : 4(C)

Ongoing through the queries raised by the Managing Director Mr. Y, the
financial controller Mr. X explained the notes and reasons for their .5

disclosures as follows:

Related parties are generally characterised by the presence of control or .5

influence between the two parties.

Ind AS 24 ‘Related Party Disclosures’ identifies related parties as, inter alia,
1
key management personnel and companies controlled by key management
personnel. On this basis, PQR Ltd. is a related party of ABC Ltd.

The transaction is required to be disclosed in the financial statements of

ABC Ltd. since Mr. Y isKey Management personnel of ABC Ltd. Also at the 1
same time, it owns 100% shares of PQR Ltd.
i.e. he controls PQR Ltd. This implies that PQR Ltd. is a related party of ABC Ltd.

Where transactions occur with related parties, Ind AS 24 requires that details
1
of the transactions are disclosed in Notes to the financial statements. This is
required even if the transactions are carried out on an arm’s length basis.

Transactions with related parties are material by their nature, so the fact
1
that the transaction may be numerically insignificant to ABC Ltd. does not
affect the need for disclosure.

(5 MARKS)
ANSWER : 5(A)

Zed Ltd. has sold two products viz Deluxe bike and the extended warranty.
Revenue earned on sale of each product should be recognised separately.

Calculation of Revenue attributable to both the components:

Total fair value of Deluxe bike and extended warranty Rs. 90,000
(80,000 +
.5
10,000)
Less: Sale price of the Deluxe bike with extended (Rs.
.25
warranty 87,300)
Discount Rs. 2700 .25

Discount and revenue attributable to each component

of the
transaction:
.25
Proportionate discount attributable to sale of Deluxe Rs. 2,400
bike
(2,700 x 80,000 / 90,000)
Revenue from sale of Deluxe bike (80,000 – 2,400) Rs. 77,600 .5

Proportionate discount attributable to extended Rs. 300

.25
warranty
(2,700 x 10,000 / 90,000)
Revenue from extended warranty (10,000 - 300) Rs. 9,700 1
Revenue in respect of sale of Deluxe bike of Rs. 77,600 should be recognised
1
immediately and revenue from warranty of Rs. 9,700 should be recognised
over the period of warranty i.e. 2 years.

(4 MARKS)
ANSWER : 5(A)

Paragraph 24 of Ind AS 16, inter alia, provides that when an item of

property, plant and equipment is acquired in exchange for a non-monetary
asset or assets, or a combination of monetary and non-monetary assets,
the cost of such an item of property, plant and equipment is measured at
fair value unless (a) the exchange transaction lacks commercial substance
1
or (b) the fair value of neither the asset received nor the asset given up is
reliably measurable. If the acquired item is not measured at fair value, its
cost is measured at the carrying amount of the asset given up.

Further as per paragraph 25 of Ind AS 16, an entity determines whether an

exchange transaction has commercial substance by considering the extent 1

to which its future cash flows are expected to change as a result of the
transaction. An exchange transaction has commercial substance if:

(a) the configuration (risk, timing and amount) of the cash

.5
flows of the asset received differs from the configuration
of the cash flows of the asset transferred; or

(b) the entity-specific value of the portion of the

.5
entity’s operations affected by the transaction changes as a
result of the exchange; and

(c) the difference in (a) or (b) is significant relative to the fair value .5
of the assets exchanged.

In the given case, the transaction lacks commercial substance as the

company’s cash flows are not expected to significantly change as a result of
.5
the exchange because the factories are located in the same vicinity i.e. it is
in the same position as it was before the transaction.

(4 MARKS)
ANSWER : 5(B)

(i) Journal Entries on 31st December 2019

Rs. Rs.

Depreciation expense A/c (W.N.1) Dr. 19,608

1
To Warehouse or Accumulated
19,608
depreciation A/c

(Being additional depreciation expense

recognised for the year ended 31st

December 2019 arising from the
reassessment of the useful life of the
warehouse)

Impairment loss A/c (W.N.2) Dr. 2,47,059

To Warehouse or Accumulated 1
2,47,059
depreciation A/c

(Being impairment loss recognised due

to discovery of structural fault
in the construction

of warehouse at 31st December 2019)

i (a) The damage to warehouse is an adjusting event (occurred after the

end of the year 2019) for the reporting period 2019, since it provides evidence
that the structural fault existed at the end of the reporting period. It is an
1
adjusting event, in spite of the fact that fault has been discovered after the
reporting date.
The effects of the damage to the warehouse are recognised in the year 2019
reporting period. Prior periods will not be adjusted because those financial
statements were prepared in good faith (eg regarding estimate of useful life,
assessment of impairment indicators etc) and had not affected the financials of
prior years.
(b) Damage of inventory due to seepage of rainwater Rs. 1,00,000 occurred
during the year 2020. It is a non-adjusting event after the end of the 2019
reporting period since the inventory was in good condition at 31st December
2019. Hence, no accounting has been done for it in the year 2019. 1
H Ltd. must disclose the nature of the event (i.e. rain-damage to inventories)
and an estimate of the financial effect (i.e. Rs. 1,00,000 loss) in the notes to its
31st December 2019 annual financial statements.
i If the damage to the warehouse had been caused by an event that
1
occurred after 31st December 2019 and was not due to structural fault, then it
would be considered as a non-adjusting event after the end of the reporting
period 2019 as the warehouse would have been in a good condition at 31st
December 2019.
Working Notes:
1. Calculation of additional depreciation to be charged in the year 2019

Original depreciation as per SLM already charged during the year 2019
= Rs. 10,00,000/ 30 years = Rs. 33,333.
Carrying value at the end of 2018 = 10,00,000 – (Rs. 33,333 x 3 years) = Rs.
9,00,000 1

Revised depreciation = 9,00,000 / 17 years = Rs. 52,941 1

Additional depreciation to be recognised in the books in the year 2019
= Rs. 52,941 – Rs. 33,333 = Rs. 19,608 1

2. Calculation of impairment loss in the year 2019

Carrying value after charging depreciation for the year 2019
= Rs. 9,00,000 – Rs. 52,941 = Rs. 8,47,059 1

Recoverable value of the warehouse = Rs. 6,00,000 Impairment loss = Carrying

value - Recoverable value
= Rs. 8,47,059 - Rs. 6,00,000 = Rs. 2,47,059 1

ANSWER : 6(A)
Threshold amount of 10% of total revenue is Rs. 1,28,000 (Rs. 12,80,000 ×
10%).
Segment A exceeds the quantitative threshold (Rs. 4,00,000 > Rs. 1,28,000) and
hence is a reportable segment.
Segment D exceeds the quantitative threshold (Rs. 6,90,000 > Rs. 1,28,000) and
hence is a reportable segment.
Segment B & C do not meet the quantitative threshold amount and may not be
classified as reportable segment.
However, the total external revenue generated by these two segments A & D
represent only 73.44% (Rs. 4,70,000 / 6,40,000 x 100) of the entity’s total
3
external revenue. If the total external revenue reported by operating segments
constitutes less than 75% of the entity’s total external revenue, additional
operating segments should be identified as reportable segments until at least
75% of the revenue is included in reportable segments.
In case of John Limited, it is given that Segment C is a high growing business
and management expects this segment to make a significant contribution to
external revenue in coming years. In accordance with the requirement of Ind
AS 108, John Limited may designate segment C as a reportable segment,
making the total external revenue attributable to reportable segments be
87.5% (Rs. 5,60,000/ 6,40,000 x 100) of total entity’s external revenue.
In this situation, Segments A, C and D will be reportable segments and
Segment B will be shown as other segment.
Alternatively, Segment B may be considered as a reportable segment instead
.5
of Segment C, based on the choice of John Ltd.‘s management, if it meets the
definition of operating segment.
If Segment B is considered as reportable segment, external revenue reported
will be Rs. 4,00,000 + Rs. 80,000 + Rs. 70,000 = Rs. 5,50,000
1
% of Total External Revenue = Rs. 5,50,000 / Rs. 6,40,000 = 85.94%

Segments A, B and D will be reportable segments and Segment C will be shown

as other segment. .5

(5 MARKS)

ANSWER : 6(B)
As per paragraph 5 of Ind AS 23, a qualifying asset is an asset that necessarily
takes a substantial period of time to get ready for its intended use or sale.
As per paragraph 17 of Ind AS 23, an entity shall begin capitalising borrowing 1
costs as part of the cost of a qualifying asset on the commencement date. The
commencement date for capitalisation is the date when the entity first meets
all of the following conditions:

It incurs expenditures for the asset.

It incurs borrowing costs.

1
It undertakes activities that are necessary to prepare the asset for its intended
use or sale.

The ship is a qualifying asset as it takes substantial period of time for its
construction. Thus the related borrowing costs should be capitalised.
Marine Transport Limited borrows funds and incurs expenditures in the form 1
of down payment on 1st April, 20X0. Thus condition (a) and (b) are met.
However, condition (c) is met only on 1st March, 20X2, and that too only with
1
respect to one ship. Thus there is no capitalisation of borrowing costs during
the financial year ended 31st March, 20X1. Even during the financial year
ended 31st March, 20X2, borrowing costs relating to the ‘one’ ship whose
construction had commenced from 1st March, 20X2 will be capitalised from 1
1st March, 20X2 to 31st March, 20X2. All other borrowing costs are expensed.
(5 MARKS)

ANSWER : 6(C)
Para 36 of Ind AS 7 inter alia states that when it is practicable to identify the
tax cash flow with an individual transaction that gives rise to cash flows that
are classified as investing or financing activities the tax cash flow is classified as
an investing or financing activity as appropriate. When tax cash flows are
allocated over more than one class of activity, the total amount of taxes paid is
disclosed.
Accordingly, the transactions are analysed as follows:

Particulars Amount (in crore) Activity

Sale Consideration 100 Investing Activity .25

.25
Capital Gain Tax (20) .25 Investing Activity .25
Business profits 30 .25 Operating Activity .25
Tax on Business (3) .25 Operating Activity
.25
profits

Dividend Payment (20) .25 Financing Activity .25

Dividend (2) .25 Financing Activity .25
Distribution Tax

Income Tax Refund 1.5 .25 Operating Activity .25

Total Cash flow 86.5

Activity wise Amount (in crore)

Operating Activity 28.5 .25

Investing Activity 80 .25
Financing Activity (22)

Total 86.5

(4 MARKS)