Financial Reporting

Full course Test 1

Time allowed: 3 Hours Maximum Marks: 100

1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions (MCQs).
Each MCQ is of 2 Marks.
3. Part II comprises questions which require descriptive type answers.

QUESTION PAPER
PART I – Case Scenario based MCQs (30 Marks)
All MCQs are compulsory.

Case Scenario 1

Joy Ltd. wishes to calculate tax base of its assets and defer tax as on 31st March
20X5. The balance sheet has been adjusted by current tax expense. The extracts of
the Assets part of the Balance Sheet as on 31st March 20X5 is as follows:

ASSETS ₹
Non-current Assets
Property, Plant and Equipment 12,00,000
Intangible Assets:
Product Development Costs 60,000
Investment In Subsidiary - Pall Ltd. 4,40,000
Current Assets

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 Trade Investments 2,08,000
Trade Receivables 6,26,000
Inventories 3,04,000
Cash and Cash Equivalents 1,80,000

TOTAL ASSETS 30,18,000

Notes:
(a) Bad debt provision amounts to ₹ 1,30,000 and relates to 2 debtors:
Debtor A ₹ 80,000 (receivable originated in 20X2-20X3 and 100%
provision was recognized in 20X3-20X4) and
Debtor B - ₹ 50,000 (receivable originated in 20X3-20X4 and 100% provision
was recognized in 20X4-20X5).
Tax law allows deduction of 20% of provision for debtors overdue for
more than 1 year, another 30% for debtors overdue for more than 2
years and remaining 50% for debtors overdue for more than 3 years.

(b) Joy Ltd accounts for inventory obsolescence provision. The new provision
created in 20X4-20X5 was ₹ 10,800 (total provision: ₹ 18,000). This provision
is not tax deductible, as it is a general provision.
Assume the tax rate of 32% for the year 20X4-20X5.

Multiple Choice Question

1. With respect to point (a), determine the tax base of Trade Receivables for the
year 20X4-20X5.
(a) ₹ 7,16,000
(b) ₹ 7,46,000
(c) ₹ 7,56,000
(d) ₹ 7,06,000
2. With respect to point (a), determine defer tax on Trade Receivables for
the year 20X4-20X5.
(a) DTA ₹ 28,800

(b) DTA ₹ 41,600

(c) DTA ₹ 25,600

(d) DTA ₹ 41,600

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 3. With respect to point (b), determine the tax base of Inventories for the
year 20X4-20X5.
(a) ₹ 3,04,000
(b) ₹ 3,22,000
(c) ₹ 3,14,800
(d) Nil
4. With respect to point (b), determine defer tax on Inventories for the year
20X4-20X5.
(a) DTA ₹ 5,760
(b) DTA ₹ 3,456
(c) Nil
(d) DTA ₹ 18,000
(4 x 2 = 8 Marks)
Case Scenario II
HIJ Ltd. is a globally diversified business conglomerate with operations spanning
multiple business segments across various regions worldwide. For maintaining
its financial records, the company follows Indian Accounting Standards. As the
finance team diligently finalizes the books of accounts and prepares the financial
statements for the financial year ending on 31st March 20X2, it requires
insights and accounting suggestions on the following transactions:

(i) On 1st October 20X1, HIJ Ltd. subscribed for 40 million ₹ 1 loan notes in Z
Ltd. The loan notes were issued at 90 paise and were redeemable at
₹ 1.20 on 30th September 20X6. Interest is payable on 30th September in
arrears at 4% of par value. This represents an effective annual rate of
return for HIJ Ltd. of 9.9%. HIJ Ltd.’s intention is to hold the loan notes until
redemption.

(ii) On 1st April 20X1, HIJ Ltd. commenced joint construction of a property
with G Ltd. For this purpose, an agreement has been entered into that
provides for joint operation and ownership of the property. All the ongoing
expenditure, comprising maintenance plus borrowing costs, is to be shared
equally. The construction was completed on 30th September 20X1
and utilization of the property started on 1st January, 20X2 at which
time the estimated useful life of the same was estimated to be 20 years.

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 Total cost of the construction of the property was ₹ 40 crores. Besides

internal accruals, the cost was partly funded by way of loan of ₹ 10 crores
taken on 1st January, 20X1. The loan carries interest at an annual rate of
10% with interest payable at the end of year on 31st December each year.
The company has spent ₹ 4,00,000 on the maintenance of such property.

The company has recorded the entire amount paid as investment in Joint
Venture in the books of accounts. Suggest the suitable accounting
treatment of the above transaction as per applicable Ind AS.

5. What would be the initial measurement of financial instruments as

subscription of loan notes in Z Ltd.?
(a) ₹ 40 million
(b) ₹ 37.782 million
(c) ₹ 38.4 million
(d) ₹ 36 million
6. What would be the closing balance of financial instruments (as
subscription of loan notes in Z Ltd.) as on 31st March 20X2?
(a) ₹ 37.6 million
(b) ₹ 34.218 million
(c) ₹ 37.782 million
(d) ₹ 36.182 million
7. With respect to point (ii), what is the nature of the agreement?
(a) Agreement is in the nature of Joint venture
(b) Agreement is in the nature of Joint Operations
(c) Agreement is in the nature of Holding subsidiary relationship
(d) Agreement is in the nature of Associates
8. What will the initial cost of PPE appearing in the books of HIJ Ltd.?

(a) ₹ 40,50,00,000
(b) ₹ 40,00,00,000
(c) ₹ 20,25,00,000
(d) ₹ 20,00,00,000

9. Calculate the depreciation charge for the year ended 31st March 20X2 to be
charged by G Ltd. in its books?

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 (a) ₹ 50,62,500
(b) ₹ 1,01,25,000
(c) ₹ 1,00,00,000
(d) ₹ 50,00,000
(5 x 2 = 10 Marks)
Case Scenario III
Mr. Deepak Goel, a chartered accountant with 10 years of experience was earlier
working with a big Indian practicing firm having clientele of IND AS and auditing
assurance. Recently he left his job and started his own consultancy firm. He has
received certain Ind AS based projects wherein his opinion and guidance on
applicability of Ind AS has been sought for on following issues:
1. Narayan Ltd. requires to calculate the tax expense for each quarter, assuming
that there is no difference between the estimated taxable income and the
estimated accounting income:

₹
Estimated Gross Annual Income 33,00,000
(inclusive of Estimated Capital Gains of ` 8,00,000)
Estimated Income of Quarter I 7,00,000
Quarter II 8,00,000
Quarter III 12,00,000
(including estimated Capital Gain
of
`8,00,000)
Quarter IV 6,00,000

Tax Rates:

On Capital Gains 12%

On Other Income: First ₹ 5,00,000 30%
Balance Income· 40%

2. C Ltd. is a construction company. It enters into a contract with Customer E

to build an asset. Depending on when the asset is completed, C will receive
either ₹ 1,10,000 or ₹ 1,30,000.

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 Outcome Consideration (`) Probability
Project completes on time 1,30,000 90%
Project is delayed 1,10,000 10%

3. In the financial year 20X1-20X2, X Ltd. incurred the following expenditure in

acquiring property consisting of 6 identical houses each with separate legal
title including the land on which it is built.
The expenditure incurred on various dates is given below:

On 1st April, 20X1 - Purchase cost of the property ₹ 1,80,00,000.

On 1st April, 20X1 – Non-refundable transfer taxes ₹ 20,00,000 (not

included in the purchase cost).

On 2nd April, 20X1- Legal cost related to property acquisition ₹ 5,00,000.

On 6th April, 20X1- Advertisement campaign to attract tenants ₹3,00,000.

On 8th April, 20X1 - Opening ceremony function for starting business

₹ 1,50,000.
Throughout 20X1-20X2, incurred ₹ 1,00,000 towards day-to-day repair
maintenance and other administrative expenses.
X Limited uses one of the six houses for office and accommodation of its few
staffs. The other five houses are rented to various independent third parties.
How X Limited will account for all the above-mentioned expenses in the
books of account?

Analyze the transactions mentioned above and choose the most appropriate option in the
below questions 10 to 15 in line with relevant Ind AS:
10. What will be the weighted average annual income tax rate for Narayan
Ltd.?
(a) 29%
(b) 38%
(c) 30%
(d) 40%
11. What will be the transaction price for C Ltd.?

(a)`1,10,000
(b) ` 1,20,000
(c) ` 1,17,000
(d) ` 1,30,000

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 12. What will be the cost of the owner-occupied property to be reflected in the
balance sheet of X Ltd.?
(a) ₹ 2,05,00,000
(b) ₹ 2,09,50,000
(c) ₹ 1,70,83,333
(d) ₹ 34,16,667
(3 x 2 = 6 Marks)
13. Quantum Solutions Ltd., a software developer, enters into a contract with Beta Inc.
on 1st April 20X2 to deliver the following:
1. A customized software platform – ₹ 70 lakhs
2. 2 years of technical support – ₹ 10 lakhs
3. Future upgrades, if any, over the next 2 years – consideration variable based on
Beta Inc.’s usage levels (estimated at ₹20 lakhs with high variability and no
history of reliable estimation)
Control of the software is transferred over 3 months, while support and
upgrades are to be delivered over 2 years post-deployment. As of 30th June
20X2, 100% of the platform is completed and accepted.
On 1st August 20X2, the contract is modified to include on-site support
personnel for the next 18 months at ₹15 lakhs. The modification adds a
distinct service, and the price reflects standalone selling price.
Question:
As per Ind AS 115, what amount of revenue should Quantum Solutions Ltd.
recognize for the quarter ended 30th June 20X2?

(a) ₹35 lakhs

(b) . ₹80 lakhs
(c) . ₹70 lakhs
(d) . ₹40 lakhs
(1 x 2 = 2 Marks)
14. Delta Ltd. entered into a lease agreement on 1st April 20X1 for a building with the
following terms:
 Lease term: 5 years, annual lease payments of ₹10 lakhs, payable at end of each
year
 Incremental borrowing rate: 8% p.a.

On 1st April 20X3 (beginning of Year 3), the lease is modified to:
 Extend the lease by 3 additional years (total term becomes 8 years)

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  Lease payments for extended period: ₹12 lakhs per annum
 No change to lease payments for the original 5 years
 The revised incremental borrowing rate on 1st April 20X3 is 9%
Assume the lease modification increases the scope of the lease and
consideration.
Question:
As per Ind AS 116, what accounting treatment should Delta Ltd. apply for this
modification?

(a). Treat as a separate lease; discount extended lease payments at 9% and

recognize new ROU asset and lease liability
(b). Remeasure lease liability using blended rate and adjust ROU asset
prospectively
(c). Remeasure the entire lease liability at 9% and adjust the carrying amount
of ROU asset accordingly
(d). No remeasurement required as the lease modification relates to future
periods only
(1 x 2 = 2 Marks)

15. Gamma Ltd. acquired Sigma Ltd. on 1st April 20X1 for ₹1,200 lakhs. At the time of
acquisition, Sigma Ltd. had the following identifiable net assets:
 Plant and Machinery: ₹600 lakhs
 Building: ₹200 lakhs
 Inventory and Other Net Assets: ₹100 lakhs
 Identified CGUs: Two CGUs: CGU-A and CGU-B
Gamma Ltd. allocated the goodwill of ₹300 lakhs (i.e., 1200 – 900) equally to
CGU-A and CGU-B.
As at 31st March 20X4, the recoverable amounts and carrying amounts before
impairment are:
Carrying Amount (including Recoverable
CGU
goodwill) Amount
CGU-A ₹550 lakhs ₹430 lakhs
CGU-B ₹580 lakhs ₹610 lakhs
There has been no impairment in earlier years.

Question:
What amount of impairment loss should be recognized for the year ended 31st
March 20X4, and how should it be allocated?

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 (a). ₹120 lakhs; entirely to CGU-A (₹150 goodwill written down to ₹30, rest on
other assets)
(b). ₹120 lakhs; ₹60 each from CGU-A and CGU-B
(c). ₹120 lakhs; ₹150 goodwill in CGU-A fully written off and ₹30 allocated to
CGU-B’s assets
(d). ₹0; because the combined value of CGUs exceeds total carrying amount
including goodwill
(1 x 2 = 2 Marks)

PART – II DESCRIPTIVE QUESTIONS

Question No.1 is compulsory. Candidates are required to answer any four questions
from the remaining five questions.
Wherever necessary, suitable assumptions may be made and disclosed by way of a
note.
Working notes should form part of the answers.
Maximum Marks – 70 Marks

1. The extracts of the Balance Sheets of Hammer Ltd. and its subsidiary Sleek Ltd. as on 31st
March, 2023 are given below:
Particulars Note Hammer Sleek Ltd.
No. Ltd. (₹)
(₹)
I. ASSETS
A. Non-Current Assets
Property, Plant and Equipment 1 6,00,000 3,25,000
Intangible Assets 2 1,25,000 75,000
Investments 6,25,000 1,25,000
B. Current Assets
Inventories 1,25,000 1,60,000
Financial Assets
Trade receivables 3,25,000 2,90,000
Cash and Cash equivalents 1,50,000 3,50,000
Total Assets 19,50,000 13,25,000
II EQUITY AND LIABILITIES
A. Equity
Equity Share Capital (` 10 each) 10,00,000 5,00,000

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 Other Equity 3 5,50,000 3,75,000
B. Non- Current Liabilities
Financial Liabilities
Borrowings 4 - 1,00,000
C. Current Liabilities
Financial Liabilities
Short term borrowings
Bank Overdraft 1,00,000 50,000
Trade Payables 3,00,000 3,00,000
Total Equity and Liabilities 19,50,000 13,25,000

Notes to Accounts

Note Particulars Hammer Sleek Ltd.

No. Ltd. (₹)
(₹)
1. Property, Plant and Equipment
(a) Plant and Machinery 2,00,000 1,25,000
(b) Furniture and Fittings 4,00,000 2,00,000
6,00,000 3,25,000
2. Intangible Assets
Goodwill 1,25,000 75,000
3. Other Equity
(a) General Reserve 2,00,000 1,25,000
(b) Retained Earnings 3,50,000 2,50,000
5,50,000 3,75,000
4. Borrowings
8% Debentures of ` 100 each - 1,00,000

Additional information:

Hammer Ltd. acquired 20,000 equity shares of Sleek Ltd. on 1st April, 2022 at a cost of ₹
2,40,000 and further acquired 17,500 equity shares on 1st October, 2022 at a cost of ₹
1,92,500;
The 8% debentures of Sleek Ltd. includes debentures held by Hammer Ltd. of nominal value of ₹
35,000. These were acquired by Hammer Ltd. on 1st January, 2022 at a cost of ₹ 84,000;

The retained earnings of Sleek Ltd. had a credit balance of ₹ 75,000 as on 1st April, 2022. On that
date the balance of General Reserve was ₹ 50,000;

- Sleek Ltd. had paid dividend @ 10% on its paid-up equity share capital out of the balance of

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 retained earnings as on 1 st April, 2022 for the financial year 2021-2022. The entire dividend
received by Hammer Ltd. was credited in its statement of profit and loss;

- As per the resolution dated 28th February 2023, Sleek Ltd. had allotted bonus shares @ 1
equity share for every 10 shares held out of its general reserve. The accounting effect has not
been given;
- Trade receivables of Hammer Ltd. includes bills receivables of ` 2,00,000 drawn upon Sleek Ltd.
Out of this, bills of ₹ 50,000 have been discounted with bank;
- During the financial year 2022-2023, Hammer Ltd. purchased goods from Sleek Ltd., of
₹ 25,000 at a sales price of ₹ 30,000, 40% of these goods remained unsold on 31st
March, 2023;

- On 1st October, 2022, machinery of Sleek Ltd. was overvalued by ₹ 20,000 for which
necessary adjustments are to be made. Depreciation is charged @ 10% per annum:
- The parent company i.e., Hammer Ltd. has adopted an accounting policy to measure non-
controlling interest at fair value (quoted market price) applying Ind AS 103. Assume the fair
value per equity share of Sleek Ltd. at ₹ 11 on the date when control of Sleek Ltd. was
acquired by Hammer Ltd.
You are required to prepare a consolidated balance sheet, as per Ind AS, of Hammer Ltd. and its
subsidiary Sleek Ltd. as at 31st March, 2023. (14 Marks)

2. A Ltd. (Seller-lessee) sells a building to B Ltd. (Buyer-lessor) for cash of ₹ 60,00,000.

Immediately before the transaction, the building is carried at a cost of ₹ 30,00,000. At the
same time, A Ltd. enters into a contract with B Ltd. for the right to use the building for 20
years, with annual payments of ₹ 4,00,000 payable at the end of each year.
The terms and conditions of the transaction are such that the transfer of the building by A
Ltd. satisfies the requirements for determining when a performance obligation is satisfied
in Ind AS 115 ‘Revenue from Contracts with Customers’.
The fair value of the building at the date of sale is ₹ 54,00,000. Initial direct costs, if any, are
to be ignored. The interest rate implicit in the lease is 12% p.a., which is readily determinable
by A Ltd.
B Ltd. classifies the lease of the building as an operating lease. How should the said
transaction be accounted by A Ltd. and B Lt d.? (14 Marks)

3. (a) As at 31 March 20X4, M Ltd. had a plan to dispose off its 75% subsidiary D Ltd. This
plan had been approved by the board and was reported in the media as well as to the Stock
Exchange where M Ltd. was listed. It is expected that J Ltd., the non-controlling shareholder
in Di Ltd. holding 25% stake, will acquire the 75% equity interest as well. The sale is

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 expected to be completed by October 20X4. D Ltd. is expected to have substantial trading
losses in the period up to the sale. Mr. X, a chartered accountant, who is an employee in the
finance department of M Ltd., wishes to show D Ltd. as held for sale in the financial
statements and to create a restructuring provision to include the expected costs of disposal
and future trading losses. However, the Chief Operating Officer (COO) does not wish D Ltd.
to be categorized as held for sale nor to provide for the expected losses. The COO is
concerned as to how this may affect the sales and would surely result in bonus targets not
being met. He has argued that as the management, it is his duty to secure a high sales price
to maximize the return for shareholders of M Ltd. He has also hinted that Mr. X’s job could
be at stake if such a provision were to be made in the financial statements. The expected
costs from the sale are as follows:
Future Trading Losses: ₹ 50 crores
Various legal costs of sale ₹ 3.75 crores
Redundancy costs for D Ltd.’s employees ₹ 10 crores
Impairment losses on Property, Plant and
Equipment ₹ 17.50 crores
Required:
(i) Discuss the accounting treatment which M Ltd. should adopt to address the issue
above for the financial statements.
(ii) Discuss the ethical issues which may arise in the above scenario, including any
actions which M Ltd. and Mr. X should take. (5 Marks)

(b) On 15th July 2024, XY Ltd., a company engaged in the manufacturing of electronic
appliances, committed to a formal plan to dispose of its mobile phone manufacturing
segment due to sustained losses and a strategic shift toward smart home devices. The
company began actively seeking a buyer, and on 1st August 2024, it entered into a non-
binding agreement with a prospective buyer. The sale is expected to be completed within six
months.
As of 15th July 2024, the carrying amounts of the segment’s assets and liabilities were as
follows:
 Plant and Machinery: ₹ 18,00,000
 Intangible Assets (patents and trademarks): ₹ 4,00,000
 Inventory: ₹ 6,50,000
 Trade Payables: ₹ 3,00,000
The fair value less costs to sell the segment is estimated at ₹ 23,00,000 as of 30th September
2024. The inventory's net realisable value remains higher than its carrying amount.

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 XY Ltd. prepares financial statements in compliance with Ind AS. You are required to explain:
1. Whether the mobile phone segment should be classified as ‘held for sale’ as on 30th
September 2024.
2. How the segment should be presented and measured in the financial statements as
per Ind AS 105.
3. Whether the segment should be treated as a discontinued operation and how its
results should be disclosed (5 Marks)

(c) Either
Entity ABC acquired a building for its administrative purposes and presented the same as
property, plant and equipment (PPE) in the financial year 20X1-20X2. During the financial
year 20X2-20X3, it relocated the office to a new building and leased the said building to a
third party. Following the change in the usage of the building, Entity ABC reclassified it from
PPE to investment property in the financial year 20X2-20X3. Should Entity ABC account for
the change as a change in accounting policy? (4 Marks)

Or
The AGM of ABC Ltd for the year ended 31st March, 20X2 was held on 10th July, 20X2 and
Board Meeting has been conducted on 15th May, 20X2. Meanwhile, the company had to
disclose certain financial information pertaining to the year ended 31st March, 20X2 to SEBI
as per SEBI regulations on 20th April, 20X2. Since, certain financial information pertaining
to the year ended 31st March, 20X2 is submitted to SEBI before approval of financial
statements by the Board, the management is suggesting that 20th April 20X2 shall be
considered as ‘after the reporting period’. Whether the management view is correct in
accordance with the guidance given in Ind AS 10? (4 Marks)

4.(a) XYZ Ltd. is a company incorporated in India. It provides ₹ 10,00,000 interest free loan
to its wholly owned Indian subsidiary, ABC Ltd. There are no transaction costs.
State how the loan be accounted for, in the separate financial statements of XYZ Ltd.,
individual financial statements of ABC Ltd. and consolidated financial statements of the
group when the loan is repayable after 3 years. The current market rate of interest for
similar loan is 10% p.a. for both holding and subsidiary. (10 Marks)

(b) Omega Ltd. is a holding company that owns 51% of Delta Ltd. and 35% of Epsilon Ltd.
Omega has significant influence over Epsilon Ltd. through board representation and shared
key management personnel (KMP).

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 During FY 2024–25:
 Delta Ltd. provided services worth ₹ 50 lakh to Epsilon Ltd. under normal terms.
 Mr. A is the CFO of Omega Ltd. and also serves as a non-executive director on the
board of Epsilon Ltd.
 Omega Ltd. also gave an interest-free loan of ₹ 20 crore to Epsilon Ltd. repayable on
demand, which was outstanding as of 31st March 2025.
Required:
a) Evaluate whether Delta Ltd. and Epsilon Ltd. are related parties of each other under Ind
AS 24.
b) Should the transactions between Delta and Epsilon Ltd. be disclosed in the consolidated
financial statements of Omega Ltd.? Why or why not?
c) What additional disclosures, if any, are required in relation to Mr. A’s role and the loan?
(4 Marks)

5. (a) PQR Ltd., a manufacturing company, prepares consolidated financial statements to

31st March each year. During the year ended 31st March, 20X2, the following events
affected the tax position of the group:
i QPR Ltd., a wholly owned subsidiary of PQR Ltd., incurred a loss adjusted for tax
purposes of ₹ 30,00,000. QPR Ltd. is unable to utilise this loss against previous tax
liabilities. Income-tax Act does not allow QPR Ltd. to transfer the tax loss to other group
companies. However, it allows QPR Ltd. to carry the loss forward and utilise it against
company’s future taxable profits. The directors of PQR Ltd. do not consider that QPR Ltd.
will make taxable profits in the foreseeable future.
ii During the year ended 31st March, 20X2, PQR Ltd. capitalised development costs
which satisfied the criteria as per Ind AS 38 ‘Intangible Assets’. The total amount
capitalised was ₹ 16,00,000. The development project began to generate economic
benefits for PQR Ltd. from 1st January, 20X2. The directors of PQR Ltd. estimated that the
project would generate economic benefits for five years from that date. The development
expenditure was fully deductible against taxable profits for the year ended 31st March,
20X2.
iii On 1st April, 20X1, PQR Ltd. borrowed ₹ 1,00,00,000. The cost to PQR Ltd. of
arranging the borrowing was ₹ 2,00,000 and this cost qualified for a tax deduction on 1st
April 20X1. The loan was for a three-year period. No interest was payable on the loan but
the amount repayable on 31st March 20X4 will be ₹ 1,30,43,800. This equates to an
effective annual interest rate of 10%. As per the Income-tax Act, a further tax deduction of
₹ 30,43,800 will be claimable when the loan is repaid on 31st March, 20X4.

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 Explain and show how each of these events would affect the deferred tax assets / liabilities
in the consolidated balance sheet of PQR Ltd. group at 31st March, 20X2 as per Ind AS. The
rate of corporate income tax is 30%. (8 Marks)

(b) An entity enters into a contract with a customer on 1st April, 20X1 for the sale of a
machine and spare parts. The manufacturing lead time for the machine and spare parts is
two years.
Upon completion of manufacturing, the entity demonstrates that the machine and spare
parts meet the agreed-upon specifications in the contract. The promises to transfer the
machine and spare parts are distinct and result in two performance obligations that each
will be satisfied at a point in time. On 31st March, 20X3, the customer pays for the machine
and spare parts, but only takes physical possession of the machine. Although the customer
inspects and accepts the spare parts, the customer requests that the spare parts be stored
at the entity's warehouse because of its close proximity to the customer's factory. The
customer has legal title to the spare parts and the parts can be identified as belonging to
the customer. Furthermore, the entity stores the spare parts in a separate section of its
warehouse and the parts are ready for immediate shipment at the customer's request. The
entity expects to hold the spare parts for two to four years and the entity does not have the
ability to use the spare parts or direct them to another customer.
How will the Company recognize revenue for sale of machine and spare parts? Is there any
other performance obligation attached to this sale of goods? (6 Marks)

6. (a) ABC Ltd is a government company and is a first-time adopter of Ind AS. As per the
previous GAAP, the contributions received by ABC Ltd. from the government (which holds
100% shareholding in ABC Ltd.) which is in the nature of promoters’ contribution have been
recognised in capital reserve and treated as part of shareholders’ funds in accordance with
the provisions of AS 12, Accounting for Government Grants.
State whether the accounting treatment of the grants in the nature of promoters’
contribution as per AS 12 is also permitted under Ind AS 20 Accounting for Government
Grants and Disclosure of Government Assistance. If not, then what will be the accounting
treatment of such grants recognised in capital reserve as per previous GAAP on the date of
transition to Ind AS. (4 Marks)

(b) Feel Fresh Limited (the Company) is into manufacturing and retailing of FMCG
products listed on stock exchanges in India. One of its products is bathing soap which the
Company sells under the brand name 'Feel Fresh'. The Company does not have its own
manufacturing facilities for soap and therefore it enters into arrangements with a third party
to procure the soaps. The Company entered into a long-term purchase contract of 10 years
with M/s. Radhey. Following are the relevant terms of the contract with M/s. Radhey.

CA Final- FR - SEPT 2025- FC CA Rucha Sarda Test Series

 (i) M/s. Radhey has to purchase a machine costing ₹ 10,00,000 from the supplier as
specified by the Company. The machine will be customized to produce the soaps as designed
by the Company. This machine cannot be used by M/s. Radhey to produce the soaps for
buyer other than the Company due to the design specifications. The machine has a useful life
of 10 years and the straight line method of depreciation is best suited considering the use of
the machine.
(ii) The Company will pay ₹ 4.75 per soap for the first year of contract. This is calculated
based on the budgeted annual purchase of 7,00,000 soaps as follows:

Particulars Per soap price

Variable cost of manufacturing 4.00
Cost of machine (₹ 1,74,015/7,00,000 0.25
soaps)
M/s. Radhey's margin 0.50
Per soap cost to the Company 4.75

In case the Company purchases more than 7,00,000 (i.e. budgeted number of soaps) soaps
in the first year then the cost of the machine (i.e. 0.25 per soap) will not be paid for soaps
procured in excess of 7,00,000 units. However, in case Company procures less than budgeted
number of soaps, then the Company will pay the differential unabsorbed cost of the machine,
at the end of the year. For example, if the Company purchases only 6,00,000 soaps in first
year then the differential amount of ₹ 24,015 (1,74,015 - (6,00,000 x 0.25)) will be paid by
the Company to M/s. Radhey at the end of the year. Variable cost will be actualized at the
end of the year.
(iii) The cost per soap will be calculated for each year in advance based on the budgeted
number of soaps to be produced each year. An amount of ₹ 1,74,015 shall be considered each
year for the cost of machine for year 1 to year 8 while calculating the cost per soap. Any
differential under absorbed amount shall be paid by the Company to M/s. Radhey at the end
of that year. A charge of ₹ 1,74,015 per annum for the machine is derived using borrowing
cost of 8% p.a. For year 9 and year 10, only variable cost and margins will be paid.
(iv) M/s. Radhey does not have any right to terminate the contract but the Company has
the right to terminate the contract at the end of each year. However, if the Company
terminates the contract, it has to compensate M/s. Radhey for any unabsorbed cost of
Machine. For example, if the Company terminates the contract at the end of second year then
it has to pay ₹ 10,44,090 (i.e. 1,74,015 per year x 6 remaining years). If it terminates the
contract after the 8th year then the Company does not have to pay the compensation since
the cost of the machine would have been absorbed.
(v) In the first year, the Company purchases 5,50,000 soaps at ₹ 4.75 per soap.
Analyze the contract of the Company with M/s. Radhey and provide necessary accounting
entries for first year in accordance with Ind AS with working notes. Assume all cash flows
occur at the end of the year. (10 Marks)

CA Final- FR - SEPT 2025- FC CA Rucha Sarda Test Series

CA Final- FR - SEPT 2025- FC CA Rucha Sarda Test Series