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CA IPCC : Revision Test Paper (with Answers) - ACCOUNTING May 2017

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PAPER 1: ACCOUNTING PART I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY FOR MAY, 2017 EXAMINATION A. Applicable for May, 2017 examination I. Companies Act, 2013 Relevant Sections of the Companies Act, 2013 notified up to 31st October, 2016 will be applicable for May, 2017 Examination. II. Amendments made by MCA in the Companies (Accounting Standards) Rules, 2006 Amendments made by MCA on 30.3.2016 in the Companies (Accounting Standards) Rules, 2006 have been made applicable for May, 2017examination. MCA has issued Companies (Accounting Standards) Amendment Rules, 2016 to amend Companies (Accounting Standards) Rules, 2006 by incorporating the references of the Companies Act, 2013, wherever applicable. Also, the Accounting Standard (AS) 2, AS 4, AS 10, AS 13, AS 14, AS 21 and AS 29 as specified in these Rules will substitute the corresponding Accounting Standards with the same number as specified in Companies (Accounting Standards) Rules, 2006. Following table summarises the changes made by the Companies (Accounting Standards) Amendment Rules, 2016 vis a vis the Companies (Accounting Standards) Rules, 2006 in the Accounting Standards relevant for Paper 1: Name of Para no. the standard AS 2 4 (an extract) As per the As per the Companies Companies (Accounting (Accounting Standards) Standards) Rules, 2006 Amendment Rules, 2016 Inventories do Inventories do not not include include spare machinery parts, servicing spares which can equipment and be used only in standby connection with equipment which an item of fixed meet the asset and whose definition of use is expected property, plant to be irregular; and equipment as such machinery per AS 10, spares are Property, Plant The Institute of Chartered Accountants of India Implication Now, inventories also do not include servicing equipment and standby equipment other than spare parts if they meet the definition of property, plant and equipment as per AS 10, 2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 27 accounted for in accordance with Accounting Standard (AS) 10, Accounting for Fixed Assets. and Equipment. Property, Plant Such items are and Equipment. accounted for in accordance with Accounting Standard (AS) 10, Property, Plant and Equipment. Common classifications of inventories are raw materials and components, work in progress, finished goods, stores and spares, and loose tools. Common Para 27 of AS 2 classifications of requires inventories are: disclosure of inventories under (a) Raw different materials classifications. and residual components One category has (b) Work-inbeen added to progress the said paragraph i.e. (c) Finished Others . goods (d) Stock-intrade (in respect of goods acquired for trading) (e) Stores and spares (f) Loose tools (g) Others (specify nature) . AS 10 All Fixed Assets The Institute of Chartered Accountants of India Property, Plant Entire standard and Equipment has been revised with the title AS 10: Property, Plant and Equipment by PAPER 1 : ACCOUNTING 3 replacing the existing AS 6 and AS 10. The students are advised to refer the explanation of AS 10 Property, Plant and equipment (2016) given in the Annexure. The Annexure is given at the end of Accounting Part II Suggested Answers AS 13 20 The cost of any shares in a cooperative society or a company, the holding of which is directly related to the right to hold the investment property, is added to the carrying amount of the investment property. The Institute of Chartered Accountants of India An investment property is accounted for in accordance with cost model as prescribed in Accounting Standard (AS) 10, Property, Plant and Equipment. The cost of any shares in a cooperative society or a company, the holding of which is directly related to the right to hold the investment property, is added to the carrying amount of the investment property. Accounting of investment property was not stated in this para but now incorporated i.e. at cost model. 4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 30 AS 14 3(a) 18 39 and An enterprise holding investment properties should account for them as long term investments. An enterprise holding investment properties should account for them in accordance with cost model as prescribed in AS 10, Property, Plant and Equipment. Amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 1956 or any other statute which may be applicable to companies. Amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 2013 or any other statute which may be applicable to companies and includes merger . In such cases the statutory reserves are recorded in the financial statements of the transferee company by a corresponding debit to a suitable account head (e.g., Amalgamation Adjustment Account ) which is disclosed as a part of miscellaneous expenditure or In such cases the statutory reserves are recorded in the financial statements of the transferee company by a corresponding debit to a suitable account head (e.g., Amalgamation Adjustment Reserve ) which is presented as a separate line item. When the identity of the statutory reserves The Institute of Chartered Accountants of India Accounting of investment property shall now be in accordance with AS 10 i.e. at cost model Definition of Amalgamation has been made broader by specifically including merger . Corresponding debit on account of statutory reserve in case of amalgamation in the nature of purchase is termed as Amalgamation Adjustment Reserve and is now to be presented as a separate line item since there is not sub-heading like miscellaneous PAPER 1 : ACCOUNTING other similar category in the balance sheet. When the identity of the statutory reserves is no longer required to be maintained, both the reserves and the aforesaid account are reversed. B. 5 is no longer required to be maintained, both the reserves and the aforesaid account are reversed. expenditure in Schedule III to the Companies Act, 2013 Not applicable for May, 2017 examination Non-Applicability of Ind ASs for May, 2017 Examination The Ministry of Corporate Affairs has notified Companies (Indian Accounting Standards) Rules, 2015 on 16th February, 2015, for compliance by certain class of companies. These Ind AS have not been made applicable for May, 2017 Examination. PART II: QUESTIONS AND ANSWERS QUESTIONS Financial Statements of Companies 1. Garg Ltd. has the Authorised Capital of ` 10,00,000 consisting of 4,000 6% Preference shares of ` 100 each and 60,000 equity Shares of `10 each. The following was the Trial Balance of the Company as on 31st March , 2016 Particulars Dr. Investment in Shares at cost 1,00,000 Purchases 9,81,000 Selling Expenses Inventory as at the beginning of the year 1,58,200 2,90,400 Salaries and Wages Cash on Hand 1,04,000 24,000 Interim Preference dividend for the half year to 30 th September 12,000 Bills Receivable 83,000 The Institute of Chartered Accountants of India Cr. 6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 Interest on Bank overdraft Interest on Debentures upto 19,600 30th Sep (1st half year) 7,500 Trade receivables and trade payables 1,00,200 Freehold property at cost 7,00,000 70,000 Furniture at cost less depreciation of ` 30,000 1,75,700 6% Preference share capital Equity share capital fully paid up 4,00,000 4,00,000 5% mortgage debentures secured on freehold properties Income tax paid in advance for the current year 3,00,000 20,000 Dividends Profit and Loss A/c (opening balance) 8,500 57,000 Sales (Net) Bank overdraft secured by hypothecation of stocks and receivables Technical knowhow fees at cost paid during the year Audit fees Total 13,40,700 3,00,000 3,00,000 12,000 29,81,900 29,81,900 You are required to prepare the Profit and Loss Statement for the year ended 31st March, 2016 and the Balance Sheet as on 31st March, 2016 as per Schedule III of the Companies Act, 2013 after taking into account the following 1. Closing Stock was valued at ` 2,85,000. 2. Purchases include ` 10,000 worth of goods and articles distributed among valued customers. 3. Salaries and Wages include ` 4,000 being Wages incurred for installation of Electrical Fittings which were recorded under "Furniture". 4. Bills Receivable include ` 3,000 being dishonoured bills. 50% of which had been considered irrecoverable. 5. Bills Receivable of ` 4,000 maturing after 31st March were discounted. 6. Depreciation on Furniture to be charged at 10% on Written Down Value. 7. Investment in shares is to be treated as non-current investments. 8. Interest on Debentures for the half year ending on 31st March was due on that date. 9. Provide Provision for taxation ` 8,000. 10. Technical Knowhow Fees is to be written off over a period of 10 years. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 7 11. Salaries and Wages include ` 20,000 being Director's Remuneration. 12. Trade receivables include ` 12,000 due for more than six months. Cash flow statement 2. From the following information, prepare a Cash Flow Statement for the year ended 31st March, 2016. Balance Sheets as on Particulars I Note 31.03.2016 (`) 31.03.2015 (`) 3,50,000 82,000 3,00,000 38,000 65,000 44,000 37,000 32,000 27,000 28,000 5,66,000 4,37,000 2,66,000 47,000 1,90,000 60,000 35,000 10,000 78,000 85,000 1,08,000 75,000 32,000 17,000 5,66,000 4,37,000 EQUITY AND LIABILITES (1) Shareholder s Funds (a) Share Capital (b) Reserves and Surplus 1 2 (2) Non-Current Liabilities (3) Current Liabilities Trade Payables Other Current Liabilities Short term Provisions (provision for tax) 3 Total II ASSETS (1) Non current Assets Tangible Fixed Assets Intangible Assets (Goodwill) 4 Non-Current Investments (2) Current Assets Inventories Trade Receivables Cash & Cash Equivalents Total Note 1: Share Capital Particulars Equity Share Capital The Institute of Chartered Accountants of India 31.03.2016 (`) 31.03.2015 (`) 2,50,000 1,50,000 8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 8% Preference Share Capital 1,00,000 1,50,000 Total 3,50,000 3,00,000 Note 2: Reserves and Surplus Particulars 31.03.2016 (`) 31.03.2015 (`) General Reserve 30,000 20,000 Profit and Loss A/c Capital Reserve 27,000 25,000 18,000 Total 82,000 38,000 31.03.2016 (`) 31.03.2015 (`) 37,000 27,000 Note 3: Current Liabilities Particulars Dividend declared Note 4: Tangible Fixed Assets Particulars 31.03.2016 (`) 31.03.2015 (`) 75,000 1,00,000 1,91,000 2,66,000 90,000 1,90,000 Land & Building Machinery Total Additional Information: (i) ` 18,000 depreciation for the year has been written off on Plant and Machinery and no depreciation has been charged on land and building. (ii) A piece of land has been sold out for ` 50,000 and the balance has been revalued, profit on such sale and revaluation being transferred to capital reserve. There is no other entry in Capital Reserve Account. (iii) A plant was sold for ` 12,000 (WDV being ` 15,000). (iv) Dividend received amounted to ` 2,100 which included pre acquisition dividend of ` 600. (v) An interim dividend of ` 10,000 has been paid. (vi) Non-current investments given in the balance sheet represents investment in shares of other companies. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 9 Profit/Loss prior to Incorporation 3. The partners of Ojasvi Enterprises decided to convert the partnership firm into a Private Limited Company Tejasvi (P) Ltd. with effect from 1st January, 2015. However, company could be incorporated only on 1st June, 2015. The business was continued on behalf of the company and the consideration of ` 6,00,000 was settled on that day along with interest @ 12% per annum. The company availed loan of ` 9,00,000 @ 10% per annum on 1st June, 2015 to pay purchase consideration and for working capital. The company closed its accounts for the first time on 31st March, 2016 and presents you the following summarized profit and loss account: ` Sales Cost of goods sold Discount to dealers Directors remuneration Salaries Rent Interest Depreciation Office expenses Preliminary expenses (to be written off in first year itself) Profit 11,88,000 46,200 60,000 90,000 1,35,000 1,05,000 30,000 1,05,000 15,000 ` 19,80,000 17,74,200 2,05,800 Sales from June, 2015 to December, 2015 were 2 times of the average sales, which further increased to 3 times in January to March quarter, 2016. The company recruited additional work force to expand the business. The salaries from July, 2015 doubled. The company also acquired additional showroom at monthly rent of ` 10,000 from July, 2015. You are required to prepare a statement showing apportionment of cost and revenue between pre-incorporation and post-incorporation periods. Also suggest the purposes for which Pre-incorporation Profit & Pre-incorporation Losses can be used for. Accounting for Bonus Issue 4. Following is the extract of the Balance Sheet of Xeta Ltd. as at 31st March, 2017 ` Authorised capital: 50,000 12% Preference shares of ` 10 each 4,00,000 Equity shares of ` 10 each 5,00,000 40,00,000 45,00,000 The Institute of Chartered Accountants of India 10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 Issued and Subscribed capital: 24,000 12% Preference shares of ` 10 each fully paid 2,70,000 Equity shares of ` 10 each, ` 8 paid up 2,40,000 21,60,000 Reserves and surplus: General Reserve Securities premium 3,60,000 1,00,000 Profit and Loss Account 6,00,000 On 1st April, 2017, the Company has made final call @ ` 2 each on 2,70,000 equity shares. The call money was received by 20th April, 2017. Thereafter, the company decided to capitalize its reserves by way of bonus at the rate of one share for every four shares held. Show necessary journal entries in the books of the company and prepare the extract of the balance sheet as on 30th April, 2017 after bonus issue. Internal Reconstruction of a Company 5. Kishor Limited decided to reconstruct its business as it has accumulated huge losses. The following is the Balance Sheet of the company as on 31.03.2016 before reconstruction: Balance Sheet as on 31.03.2016 Particulars 6,00,000 Equity shares of ` 10 each fully paid up 3,20,000, 6% Preference shares ` Particulars Goodwill 60,00,000 Patents Land & building ` 10,40,000 3,00,000 34,00,000 of ` 10 each fully paid up 6% Debentures (secured against 32,00,000 Plant & machinery land & building) Bank overdraft 30,00,000 Trade receivables 11,60,000 Inventory 34,80,000 34,00,000 Trade payables Provision for income tax 24,00,000 Profit & loss A/c 4,00,000 37,00,000 Investments (at cost) 1,61,60,000 4,00,000 4,40,000 1,61,60,000 Following scheme of reconstruction is approved by all interested parties and the Court: (1) All equity shares are reduced to ` 3 each and preference shares to ` 7 each. (2) Debentureholders agreed to take over a part of land and building, book value of which is ` 14,00,000, towards their 50% claim. Rate of interest of balance 50% debentures will be increased to 9%. (3) Goodwill and Patent will be written off. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 11 (4) 10% of Trade receivables to be provided for bad debts. (5) Inventory to be written off by ` 5,20,000. (6) 50% of balance Land & Building sold for ` 12,00,000 and remaining Land & Building valued at ` 12,00,000. (7) Investments to be sold for ` 4,00,000. (8) The income tax liability of the company is settled at ` 4,50,000. Provision for income tax will be raised accordingly. (9) 1/3 of trade payables decided to forgo their claim. (10) After making all the above adjustments, balance amount available through scheme, will be utilized to write off the value of plant & machinery to that extent. You are required to pass the necessary Journal Entries. Amalgamation of Companies 6. H Ltd. and N Ltd. are to be amalgamated into HN Ltd. The new company is to take over all the assets and liabilities of the amalgamating companies. Assets and Liabilities of H Ltd. are to be taken over at book values in exchange of shares in HN Ltd. Three shares in the new company are to be issued at a premium of 20% for every two shares of ` 10 each in H Ltd. The approved scheme for N Ltd. is as follows: 1. 10% Preference shareholders are to be allowed two 15% Preference shares of ` 100 each in HN Ltd. for three Preference shares held in N Ltd. 2. The Debentures of N Ltd. are to be paid off at 5% discount by the issue of debentures of HN Ltd. at par. 3. The Equity shareholders of N Ltd. are to be allowed as many shares at par in HN Ltd. as will cover the balance on their account and for this purpose, plant and machinery is to be valued less by 15% and obsolete stock worth ` 7,500 (included in the value of stock) is to be treated as worthless. The summarized Balance Sheets of the two companies prior to amalgamation are as follows: Liabilities H Ltd. N Ltd. ` Equity Shares of ` 10 each 10% Preference Shares of ` 100 each ` 3,20,000 6,25,000 - Assets N Ltd. ` Plant and Machinery 3,75,000 Trade receivables The Institute of Chartered Accountants of India H Ltd. ` 6,40,000 10,00,000 76,000 62,500 12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 General Reserves Secured Debentures Trade payables 4,40,000 - Inventory - 2,50,000 Cash and Balance Bank 60,000 1,12,500 Profit and Account Loss 8,20,000 13,62,500 50,000 75,000 54,000 50,000 - 1,75,000 8,20,000 13,62,500 You are required to show the Journal Entries and the Balance Sheet of the amalgamated company immediately after amalgamation. Average Due Date 7. Kiran had accepted bills payable to Heena, falling due on different dates. The details of bills are as follows: Date of bill Amount Usance of bill 9th April 2016 ` 3,000 for 4 months 18th April 2016 ` 5,500 for 3 months 25th May 2016 ` 3,000 for 6 months 5th June 2016 ` 6,000 for 3 months On 1st July, it was agreed that these bills should be withdrawn and that Kiran should accept on that day two bills, one for ` 10,000 due in 4 months and the other for the balance with interest, due in 6 months. Calculate the amount of the second bill taking interest @ 10% p.a. Take 365 days in year 2016-2017. Account Current 8. From the following transactions in the books of Mr. Perfact, prepare an Account Current, by means of product to be sent by him to Mr. Smart for the quarter ending 31st March, 2016. Interest is to be charged and/or allowed @ 12% p.a. 2016 ` January 1 Balance in Smart s Account (Credit) January 12 Sold goods to Smart (due 1st February) 30,000 January 31 Sold goods to Smart (due 15th February) 27,500 February 15 Cash received 40,000 February 20 Cash received 7,500 March 10 Goods returned by Smart 7,000 March 25 Cash received 6,500 The Institute of Chartered Accountants of India 3,500 PAPER 1 : ACCOUNTING 13 Self Balancing Ledgers 9. How will you show the following items in General Ledger Adjustment Account in Debtors Ledger and General Ledger Adjustment Account in Creditors Ledger: ` Transfer from Debtors' Ledger-to Creditors' Ledger 2,200 Bill receivable endorsed to Creditors 8,000 Endorsed Bills dishonoured Bad Debts written off (after deducting bad debts recovered ` 600) 2,000 4,400 Provision for Doubtful Debts 1,100 Provision for Discount on Debtors 2,000 Reserve for Discount on Creditors Cash Sales 4,000 6,000 Cash Purchases Bill Receivable Collected on maturity 8,000 10,000 Bills Receivable discounted Bills Payable matured 12,000 14,000 Discount allowed Discount received 3,000 1,200 Allowances from Creditors 6,400 Financial Statements of Not-For-Profit Organizations 10. You are provided the following information related to Krishna sports club: 31st Dec. 2015 31st Dec. 2016 60,000 ? - 20,000 Stock of Sports Materials 5,000 2,000 Prepaid Insurance 3,000 6,000 12,000 8,000 6,000 4,000 Building (subject to 10% depreciation for the current year) Furniture (subject to 10% depreciation for the current year) Outstanding Subscription Advance Subscription Outstanding Locker Rent Advance Locker Rent received Outstanding Rent for Godown The Institute of Chartered Accountants of India 6,000 - 2,000 6,000 3,000 14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 12% General Fund Investments 2,00,000 ? - 4,000 Cash Balance 1,000 64,000 Bank Balance Bank Overdraft 2,000 2,000 Accrued Interest on above (for 2 months) Entrance Fees received ` 20,000, Life Membership Fees received ` 20,000, surplus from Income & expenditure Account ` 60,000. It is the policy of the club to treat 60% of entrance fees and 40% of Life Membership Fees as of revenue nature. The furniture was purchased on 1.01.2016 You are required to prepare the opening and closing balance sheets of Krishna sports club as on 1st January, 2016 and 31st December, 2016. Accounts from Incomplete Records 11. From the following information in respect of Mr. Preet, prepare Trading and Profit and Loss Account for the year ended 31st March, 2016 and a Balance Sheet as at that date: 31-03-2015 (1) (2) Liabilities and Assets 31-03-2016 ` ` Stock in trade 1,60,000 1,40,000 Debtors for sales Bills receivable 3,20,000 - ? ? Creditors for purchases Furniture at written down value 2,20,000 1,20,000 3,00,000 1,27,000 Expenses outstanding Prepaid expenses 40,000 12,000 36,000 14,000 Cash on hand Bank Balance 4,000 20,000 3,000 1,500 Receipts and Payments during 2015-2016: Collections from Debtors (after allowing 2-1/2% discount) 11,70,000 Payments to Creditors (after receiving 2% discount) 7,84,000 Proceeds of Bills receivable discounted at 2%) 1,22,500 Proprietor s drawings 1,40,000 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 15 Purchase of furniture on 30.09.2015 12% Government 1-10-2015 securities purchased 20,000 on Expenses 2,00,000 3,50,000 Miscellaneous Income 10,000 (3) Sales are effected so as to realize a gross profit of 50% on the cost. (4) Capital introduced during the year by the proprietor by cheques was omitted to be recorded in the Cash Book, though the bank balance of 9,500 on 31 st March, 2016 (as shown above), is after taking the same into account. (5) (6) Purchases and Sales are made only on credit. During the year, Bills Receivable of ` 2,00,000 were drawn on debtors. out of these, Bills amount to ` 40,000 were endorsed in favour of creditors. Out of this latter amount, a Bill for ` 8,000 was dishonoured by the debtor. Hire Purchase Transactions 12. The following particulars relate to hire purchase transactions: (a) X purchased three cars from Y on hire purchase basis, the cash price of each car being ` 2,00,000. (b) The hire purchaser charged depreciation @ 20% on diminishing balance method. (c) Two cars were seized by on hire vendor when second installment was not paid at the end of the second year. The hire vendor valued the two cars at cash price less 30% depreciation charged under it diminishing balance method. (d) The hire vendor spent ` 10,000 on repairs of the cars and then sold them for a total amount of ` 1,70,000. You are required to compute: (i) Agreed value of two cars taken back by the hire vendor. (ii) Book value of car left with the hire purchaser. (iii) Profit or loss to hire purchaser on two cars taken back by their hire vendor. (iv) Profit or loss of cars repossessed, when sold by the hire vendor. Investment Accounts 13. Muskaan purchased 5,000, 13.5% Debentures of Face Value of ` 100 each of Shorya Ltd. on 1st May 2016 @ ` 105 on cum interest basis. The interest on these debentures is payable on 31st & 30th of March & September respectively. On August 1st 201,6 she again purchased 2,500 of such debentures @ ` 102.50 each on cum interest basis. On October 1st, 2016 she sold 2,000 Debentures @ ` 103 each. The market value of the debentures The Institute of Chartered Accountants of India 16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 as at the close of the year was ` 106. Prepare the Debenture Investment Account in the books of Muskaan for the year ended 31st Dec. 2016 on Average Cost Basis. Insurance Claim 14. A fire engulfed the premises of a business of M/s K on the morning of 1st July 2016. The building, equipment and stock were destroyed and the salvage recorded the following: Building ` 4,000; Equipment ` 2,500; Stock ` 20,000. The following other information was obtained from the records saved for the period from 1st January to 30th June 2016: ` Sales 11,10,000 Purchases 9,37,500 Cartage inward Wages 17,500 7,500 Stock in hand on 31st December, 2015 Building (value on 31st December, 2015) 1,50,000 3,75,000 Equipment (value on 31st December, 2015) Depreciation provision till 31st December, 2015 on: Building Equipment 75,000 1,25,000 22,500 No depreciation has been provided since December 31 st 2015. The latest rate of depreciation is 5% p.a. on building and 15% p.a. on equipment by straight line method. Normally business makes a profit of 25% on sales. You are required to prepare the statement of claim for submission to the Insurance Company. Issues in Partnership Accounts 15. Neha & Co. is a partnership firm with partners Mr. P, Mr. Q and Mr. R, sharing profits and losses in the ratio of 10:6:4. The balance sheet of the firm as at 31st March, 2016 is as under: Liabilities ` Assets Capitals: Land Mr. P Mr. Q 80,000 20,000 Mr. R 30,000 Reserves (un-appropriated profit) The Institute of Chartered Accountants of India Buildings Plant and machinery 1,30,000 Furniture Investments 20,000 Inventories ` 10,000 2,00,000 1,30,000 43,000 12,000 1,30,000 PAPER 1 : ACCOUNTING Long Term Debt 3,00,000 Trade receivables Bank Overdraft 44,000 Trade payables 1,70,000 6,64,000 17 1,39,000 6,64,000 It was mutually agreed that Mr. Q will retire from partnership and in his place Mr. T will be admitted as a partner with effect from 1st April, 2016. For this purpose, the following adjustments are to be made: (a) Goodwill is to be valued at `1 lakh but the same will not appear as an asset in the books of the reconstituted firm. (b) Buildings and plant and machinery are to be depreciated by 5% and 20% respectively. Investments are to be taken over by the retiring partner at `15,000. Provision of 20% is to be made on Trade receivables to cover doubtful debts. (c) In the reconstituted firm, the total capital will be ` 2 lakhs which will be contributed by Mr. P, Mr. R and Mr. T in their new profit sharing ratio, which is 2:2:1. (i) The surplus funds, if any, will be used for repaying bank overdraft. (ii) The amount due to retiring partner shall be transferred to his loan account. Required: Prepare (a) Revaluation account; (b) Partners capital accounts; (c) Bank account; and (d) Balance sheet of the reconstituted firm as on 1st April, 2016. Accounting in Computerised Environment 16. Recently, a growing trend is being developed for outsourcing the accounting function to a third party. What are the benefits of such outsourcing? Also, explain the basis on which choice of such third party being made. Applicability of AS 17. (a) M/s X& Co. (a partnership firm), had a turnover of ` 1.25 crores (excluding other income) and borrowings of ` 0.95 crores in the previous year. It wants to avail the exemptions available in application of Accounting Standards to non-corporate entities for the year ended 31.3.2016. Advise the management of M/s X & Co in respect of the exemptions of provisions of ASs, as per the directive issued by the ICAI. The Institute of Chartered Accountants of India 18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 AS 1 Disclosure of Accounting Policies (b) Mini Ltd. was making provision for non-moving stocks based on no issues for the last 12 months up to 31.3.2016. The company wants to provide during the year ending 31.3.2016 based on technical evaluation: Total value of stock ` 100 lakhs Provision required based on 12 months issue ` 3.5 lakhs Provision required based on technical evaluation ` 2.5 lakhs Does this amount to change in Accounting Policy? Can the company change the method of provision? AS 2 Valuation of Inventories 18. (a) Suraj Stores is a departmental store, which sell goods on retail basis. It makes a gross profit of 20% on net sales. The following figures for the year-end are available: Opening Inventory ` 50,000; Purchases ` 3,60,000; Purchase Returns ` 10,000; Freight Inwards ` 10,000; Gross Sales ` 4,50,000; Sales Returns ` 11,250; Carriage Outwards ` 5,000. Compute the estimated cost of the inventory on the closing date. Depreciation Accounting as per AS 10 Property, Plant and Equipment (b) A property costing ` 10,00,000 is bought in 2016. Its estimated total physical life is 50 years. However, the company considers it likely that it will sell the property after 20 years. The estimated residual value in 20 years' time, based on 2016 prices, is: Case (a) ` 10,00,000 Case (b) ` 9,00,000 You are required to compute the amount of depreciation charged for the year 2016. AS 7 Construction Contracts 19. (a) Mr. Mehta as a contractor has just entered into a contract with a local municipal body for building a flyover. As per the contract terms, Mr. Mehta will receive an additional ` 2 crore if the construction of the flyover were to be finished within a period of two years of the commencement of the contract. Mr. Mehta wants to recognize this revenue since in the past he has been able to meet similar targets very easily. Is Mr. Mehta correct in his proposal? Discuss. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 19 AS 9 Revenue Recognition (b) K Ltd. has sold its building for ` 50 lakhs to B Ltd. and has also given the possession to B Ltd. The book value of the building is ` 30 lakhs. As on 31st March, 2016, the documentation and legal formalities are pending. The company has not recorded the sale and has shown the amount received as advance. Do you agree with this treatment? AS 10 Property, Plant and Equipment 20. (a) Entity Hello has an existing freehold factory property, which it intends to knock down and redevelop. During the redevelopment period the company will move its production facilities to another (temporary) site. The following incremental costs will be incurred: Setup costs of ` 5,00,000 to install machinery in the new location. Rent of ` 15,00,000 Removal costs of ` 3,00,000 to transport the machinery from the old location to the temporary location. You are required to advise can these costs be capitalised into the cost of the new building? AS 13 Accounting for Investments (b) Z Bank has classified its total investment on 31-3-2016 into three categories (a) held to maturity (b) available for sale (c) held for trading as per the RBI Guidelines. Held to maturity investments are carried at acquisition cost less amortised amount. Available for sale investments are carried at marked to market. Held for trading investments are valued at weekly intervals at market rates. Net depreciation, if any, is charged to revenue and net appreciation, if any, is ignored. Comment whether the policy of the bank is in accordance with AS 13? SUGGESTED ANSWERS 1. Statement of Profit and Loss of Garg Ltd. for the year ended 31st March, 2016 I II III IV Particulars Note Revenue from Operations Other income (Divided income) Total Revenue (I &+ II) Expenses: (a) Purchases of Inventory (9,81,000 Advertisement The Institute of Chartered Accountants of India This Year 13,40,700 8,500 13,49,200 9,71,000 20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 V VI VII VIII IX X XI Expenses 10,000) (b) Changes in Inventories of finished Goods / Work in progress & inventory (2,90,400 2,85,000) (c) Employee Benefits expense (d) Finance costs (e) Depreciation & Amortization Expenses [10% of (70,000 + 4,000)] (f) Other Expenses Total Expenses Profit before exceptional, extraordinary items and tax (III-IV) Exceptional items Profit before extra ordinary items and tax (V-IV) Extraordinary items Profit before tax (VII-VIII) Tax expense: Current Tax Profit/Loss for the period (after tax) 5,400 9 10 80,000 34,600 7,400 11 2,31,700 13,30,100 19,100 19,100 19,100 8,000 11,100 Balance sheet of Garg Ltd. as on 31st March, 2016 Particulars as on 31st March Note I (1) Shareholders funds: (a) Share capital 1 8,00,000 2 44,100 (2) (b) Reserves and surplus Non current liabilities: 3 3,00,000 (3) Long term borrowings Current liabilities: (a) Short term borrowings (b) Trade payables 4 3,00,000 1,75,700 (c) Other current liabilities Total 5 19,500 16,39,300 6 7,66,600 7 2,70,000 II (1) ASSETS (a) Non-current Assets Fixed assets (i) Tangible assets (ii) Intangible assets The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 21 (b) Non current investments (Shares at cost) 1,00,000 Current Assets: (a) Inventories (b) Trade receivables (c) Cash and Cash equivalents Cash on hand 2,85,000 8 (d) Short term loans and advances Income tax (paid 20,000-Provision 8000) 1,81,700 24,000 12,000 Total 16,39,300 Note: There is a Contingent liability for Bills receivable discounted with Bank ` 4000. Notes to accounts (` ) 1. Share Capital Authorized, 2. 60,000 Equity Shares of ` 10 each. 6,00,000 4,000 6% Preference shares of ` 100 each Issued, subscribed & called up 4,00,000 40,000, Equity Shares of ` 10 each 4,000 6% Redeemable Preference Shares of 100 each 4,00,000 4,00,000 Reserves and Surplus Balance as on 1st April, 2015 57,000 Add: Surplus for current year Less: Preference Dividend 11,100 Balance as on 31st March, 2016 3. Long Term Borrowings 3,00,000 Short Term Borrowings Secured Borrowings: Loans Repayable on Demand Overdraft from Banks (Secured by Hypothecation of Stocks & Receivables) 5. 68,100 24,000 44,100 5% Mortgage Debentures (Secured against Freehold Properties) 4. 8,00,000 3,00,000 Other Current liabilities Interest Accrued and due on Borrowings (5% Debentures) The Institute of Chartered Accountants of India 7,500 22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 Unpaid Preference Dividends 6. 12,000 19,500 Tangible Fixed assets Furniture Furniture at Cost Less depreciation ` 30,000 (as given in Trial Balance 70,000 Add: Depreciation 30,000 Cost of Furniture 1,00,000 Add: Installation charge of Electrical Fittings wrongly included under the heading Salaries and Wages 4,000 Total Gross block of Furniture A/c Accumulated Depreciation Account: Opening Balance-given in Trial Balance 30,000 1,04,000 Depreciation for the year: On Opening WDV at 10% i.e. (10% x 70,000) 7,000 On additional purchase during the year at 10% i.e. (10% x 4,000) 400 Less: Accumulated Depreciation 37,400 Freehold property (at cost) 66,600 7,00,000 7,66,600 7. 8. Intangible Fixed Assets Technical knowhow Less: Written off Trade Receivables Sundry Debtors (a) Debt outstanding due more than six months (b) Other Debts (refer Working Note) 9. Bills Receivable (83,000 -3,000) Employee benefit expenses Amount as per Trial Balance 3,00,000 30,000 12,000 89,700 80,000 4,000 Less: Directors Remuneration shown separately 20,000 The Institute of Chartered Accountants of India 1,81,700 1,04,000 Less: Wages incurred for installation of electrical fittings to be capitalised Balance amount 2,70,000 80,000 PAPER 1 : ACCOUNTING 10. 11. 23 Finance Costs Interest on bank overdraft 15,600 Interest on debentures 15,000 Discount on Issue of Debentures Other Expenses 4,000 Payment to the auditors 12,000 Director s remuneration 20,000 Selling expenses Technical knowhow written of (3,00,000/10) Advertisement (Goods and Articles Distributed) Bad Debts (3,000 x50%) 34,600 1,58,200 30,000 10,000 1,500 2,31,700 Working Note Calculation of Sundry Debtors-Other Debts Sundry Debtors as given in Trial Balance Add Back: Bills Receivables Dishonoured 1,00,200 3,000 1,03,200 (1,500) 1,01,700 (12,000) 89,700 Less: Bad Debts written off 50% ` 3,000 Adjusted Sundry Debtors Less: Debts due for more than 6 months (as per information given) Total of other Debtors i.e. Debtors outstanding for less than 6 months 2. Cash flow Statement for the year ending 31st March, 2016 1 A. B. C. Particulars Cash Flow from Operating Activities Closing balance as per Profit and Loss Account Less: Opening balance as per Profit and Loss Account Add: Dividend declared during the year Add: Interim dividend paid during the year Add: Transfer to reserve Add: Provision for Tax Net profit before taxation, and extra ordinary item Add: Items to be added Depreciation Loss on sale of Plant Goodwill written off The Institute of Chartered Accountants of India ` ` 27,000 (18,000) 37,000 10,000 10,000 32,000 98,000 18,000 3,000 13,000 34,000 24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 D. E. F. II. III. IV. V. VI. G. H I J Less: Dividend Income Operating profit before working capital changes [B + C - D] Add: Decrease in Current Assets and Increase in current Liabilities Decrease in Inventories Increase in Trade Payables Less: Increase in Trade Receivables (Gross) Cash generated from operations (E+F-G) Less: Income taxes paid Net Cash from (used in) operating activities Cash Flows from investing activities: Purchase of Plant Sale of Land Sale of plant Purchase of investments Dividend Received Net cash used in investing activities Cash Flows from Financing Activities: Proceeds from issuance of share capital Redemption of preference shares Interim Dividend paid Final dividend paid Net cash from financing activities Net increase in cash and cash equivalents (I+II+III) Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period (IV+V) 1. (1,500) 1,30,500 7,000 21,000 28,000 (33,000) 1,25,500 (28,000) 97,500 (1,34,000) 50,000 12,000 (25,600) 2,100 (95,500) 1,00,000 (50,000) (10,000) (27,000) 13,000 15,000 17,000 32,000 Land and Building Account Particulars To Balance b/d To Capital Reserve A/c (Profit on sale/revaluation) ` 1,00,000 By Bank A/c (Sale) 25,000 By Balance c/d 1,25,000 The Institute of Chartered Accountants of India Particulars ` 50,000 75,000 1,25,000 PAPER 1 : ACCOUNTING 2. Plant and Machinery Account Particulars To Balance b/d To Bank A/c (Purchase) 3. ` Particulars 90,000 By Depreciation A/c 1,34,000 By Bank A/c (sale) By Profit and Loss A/c (Loss on sale) By Balance c/d 2,24,000 ` 18,000 12,000 3,000 1,91,000 2,24,000 Investments Account Particulars To Balance b/d To bank A/c (Purchase Total 3. 25 Particulars 10,000 By bank A/c (Div. received) 25,600 By Balance c/d 35,600 ` ` 600 35,000 35,600 Tejasvi (P) Limited Profit and Loss Account for 15 months ended 31st March, 2016 Pre. inc. (5 months) (` ) Sales (W.N.1) 3,00,000 Less: Cost of sales 1,80,000 Discount to dealers 7,000 Directors remuneration Salaries (W.N.2) 18,750 Rent (W.N.3) 15,000 Interest (W.N.4) 30,000 Depreciation 10,000 Office expenses 35,000 Preliminary expenses Net profit 4,250 Post inc. (10 months) (` ) 16,80,000 10,08,000 39,200 60,000 71,250 1,20,000 75,000 20,000 70,000 15,000 2,01,550 Purposes for which pre-incorporation profits and losses can be used are as follows: Pre-incorporation Profits can be used for: writing off Goodwill on acquisition writing off Preliminary Expenses writing down over-valued assets issuing of bonus shares paying up partly paid shares. The Institute of Chartered Accountants of India Pre-incorporation Losses can be used for: setting off against Post-Incorporation Profit addition to Goodwill on acquisition writing off Capital Profit 26 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 Working Notes: 1. Calculation of sales ratio Let the average sales per month in pre-incorporation period be x Average Sales (Pre-incorporation) =xX5 = 5x Sales (Post incorporation) from June to December, 2015 = 2 x X 7 = 17.5x From January to March, 2016 = 3 x X 3 = 10.5x Total Sales 28.0x Sales ratio of pre-incorporation & post incorporation is 5x : 28x 2. Calculation of ratio for salaries Let the average salary be x Pre-incorporation salary Post incorporation salary June, 2015 July to March, 2016 = xX5 = =xX9X2 = 5x = x 18x 19x Ratio is 5 : 19 3. Calculation of Rent ` Total rent 1,35,000 Less: Additional rent for 9 months @ ` 10,000 p.m. 90,000 Rent of old premises apportioned in time ratio 45,000 Apportionment Old premises rent Pre Inc. Post Inc. 15,000 30,000 Additional Rent 90,000 15,000 4. 1,20,000 Calculation of interest Pre-incorporation period from January, 2015 to May, 2015 6,00,000 12 5 ` 30,000 = 100 12 Post incorporation period from June, 2015 to March, 2016 9,00,000 10 10 ` 75,000 = 100 12 ` 1,05,000 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 4. 27 Journal Entries in the books of Xeta Ltd. ` 1-4-2017 Equity share final call A/c ` Dr. 5,40,000 To Equity share capital A/c 5,40,000 (For final calls of ` 2 per share on 2,70,000 equity shares due as per Board s Resolution dated .) 20-4-2017 Bank A/c Dr. 5,40,000 To Equity share final call A/c 5,40,000 (For final call money on 2,70,000 equity shares received) Securities Premium A/c General Reserve A/c Dr. Dr. 1,00,000 3,60,000 Profit and Loss A/c Dr. 2,15,000 To Bonus to shareholders A/c (For making provision for bonus issue of one share for every four shares held) Bonus to shareholders A/c To Equity share capital A/c 6,75,000 Dr. 6,75,000 6,75,000 (For issue of bonus shares) Extract of Balance Sheet as at 30th April, 2017 (after bonus issue) ` Authorised Capital 50,000 12% Preference shares of `10 each 4,00,000 Equity shares of `10 each 5,00,000 40,00,000 Issued and subscribed capital 24,000 12% Preference shares of `10 each, fully paid 3,37,500 Equity shares of `10 each, fully paid 2,40,000 33,75,000 (Out of above, 67,500 equity shares @ `10 each were issued by way of bonus) Reserves and surplus Profit and Loss Account The Institute of Chartered Accountants of India 3,85,000 28 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 5. Journal Entries in the books of Kishor Limited 1. 2. 3. 4. 5. 6. Equity share capital A/c (` 10) To Equity share capital A/c (` 3) To Capital reduction A/c (Reduction of equity share of ` 10 each to shares of ` 3 each as per the reconstruction scheme) 6% Preference share capital A/c (` 10) To 6% Preference share capital A/c (` 7) To Capital reduction A/c (Reduction of preference share of ` 10 each to shares of ` 7 each as per the reconstruction scheme) 6 % Debentures A/c To Land & building A/c To 9% Debentures A/c To Capital reduction A/c (50% claim of debentureholders discharged by transfer of a part of land & building having book value ` 14,00,000 and rate of interest of balance 50% debentures increased to 9% as per the reconstruction scheme). Bank A/c To Land & building A/c To Capital reduction A/c (50% of balance land & building having book value ` 10,00,000 sold as per the reconstruction scheme) Land & building A/c To Capital Reduction A/c (50% of balance land & building having book value ` 10,00,000, valued at ` 12,00,000, as per the reconstruction scheme) Bank A/c Capital reduction A/c To Investment A/c (All the investment sold as per the reconstruction scheme) The Institute of Chartered Accountants of India Dr. (`) Dr. 60,00,000 Dr. 32,00,000 Dr. 30,00,000 Dr. 12,00,000 Dr. 2,00,000 Dr. Dr. 4,00,000 40,000 Cr. (`) 18,00,000 42,00,000 22,40,000 9,60,000 14,00,000 15,00,000 1,00,000 10,00,000 2,00,000 2,00,000 4,40,000 PAPER 1 : ACCOUNTING 7. 8. 6. Trade payables A/c To Capital reduction A/c (1/3 of Trade payables decided to forgo their claim as per the reconstruction scheme) Capital reduction A/c To Goodwill A/c To Patents A/c To Provision of doubtful debts A/c To Inventory A/c To Provision for income tax A/c To Profit & loss A/c To Plant & machinery A/c (Bal. fig.) (Written off goodwill, patent, profit & loss, part value of stock, plant & machinery, penalty paid for cancellation of contracts and provision made for doubtful debts, income tax, as per the reconstruction scheme) 29 Dr. 8,00,000 Dr. 61,58,000 8,00,000 10,40,000 3,00,000 3,48,000 5,20,000 50,000 37,00,000 2,00,000 Journal Entries in the books of HN Ltd. (Amalgamated Company) Particulars 1. Business Purchase A/c To Liquidators of H Ltd. To Liquidators of N Ltd. (Being purchase of business of H Ltd. and N Ltd.Refer Working Note) 2. Plant and Machinery A/c Trade receivables A/c Inventory A/c Cash and Bank A/c To Trade payables A/c To General Reserve A/c To Business Purchase A/c (Being assets and liabilities of H Ltd. taken over) 3. Plant and Machinery A/c Trade receivables A/c Inventory A/c Cash and Bank A/c The Institute of Chartered Accountants of India Debit Credit ` ` Dr. 12,56,000 Dr. Dr. Dr. Dr. 6,40,000 76,000 50,000 54,000 Dr. Dr. Dr. Dr. 8,50,000 62,500 67,500 50,000 5,76,000 6,80,000 60,000 1,84,000 5,76,000 30 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 To Debentureholders A/c (95% of 2,50,000) To Trade payables A/c To Business Purchase A/c (Being assets and liabilities of N Ltd. taken over) 4. Liquidator of H Ltd. A/c Dr. To Equity Share Capital A/c To Securities Premium A/c (Being equity shares issued at 20% premium to shareholders of H Ltd.) 5. Liquidators of N Ltd. A/c Dr. To Equity Share Capital A/c To 15% Preference Share Capital A/c (Being issue of shares to discharge purchase consideration) 6. Debentureholders of N Ltd. A/c Dr. To Debentures A/c (Being own debentures issued against debentures of N Ltd.) 2,37,500 1,12,500 6,80,000 5,76,000 6,80,000 2,37,500 4,80,000 96,000 4,30,000 2,50,000 2,37,500 Balance Sheet of HN Ltd. after amalgamation Particulars I. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital (b) Reserves and Surplus (2) Non-current Liabilities Long-term borrowings (3) Current Liabilities Trade payables II. Assets (1) Non-current assets Fixed assets Tangible assets (2) Current assets (a) Inventories (b) Trade receivables (c) Cash and cash equivalents The Institute of Chartered Accountants of India Note No. 1 2 11,60,000 2,80,000 3 2,37,500 1,72,500 18,50,000 Total 4 Total ` 14,90,000 1,17,500 1,38,500 1,04,000 18,50,000 PAPER 1 : ACCOUNTING 31 Notes to Accounts ` 1. Share Capital Equity shares of ` 10 each Preference shares of ` 10 each 2. Reserves and surplus General Reserve Securities Premium 3. Long-term Borrowings Secured Debentures Tangible Assets Plant and Machinery 4. 9,10,000 2,50,000 11,60,000 1,84,000 96,000 2,80,000 2,37,500 14,90,000 Working Note: Computation of Purchase Consideration A. For H Ltd., the Payment Method is applied for determining the Purchase Consideration. Hence, the amalgamation is accounted under Pooling of Interests method. Number of shares to be issued by HN Ltd. for H Ltd. s shareholders = 32,000 x 3/2 = 48,000 shares. Since, the issue price is ` 12 per share, the Purchase Consideration is 48,000 x 12 = ` 5,76,000. B. For N Ltd. the Net Assets Method is applied for determining the Purchase Consideration. Since, the assets are not taken over at book value, the amalgamation is accounted under Purchase method. ` Assets taken over: Plant and Machinery Trade receivables Inventory Cash and Bank balance Total Assets Less: Liabilities Trade payables Secured Debentures Net Purchase Consideration The Institute of Chartered Accountants of India (10,00,000 less 15%) (75,000 less 7,500) 8,50,000 62,500 67,500 50,000 10,30,000 (1,12,500) (2,37,500) 6,80,000 32 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 Discharge: Preference Shareholders Equity Shareholders (bal. fig.) 7. (3,75,000 x 2/3) (6,80,000-2,50,000) 2,50,000 4,30,000 6,80,000 Calculation of Average Due Date Date of bill Taking Base Date 21.07.2016 Period Due Date Amount Number of Days from Base Date Product ` 9.4.2016 18.4.2016 25.5.2016 5.6.2016 4 months 3 months 6 months 3 months 12.08.2016 21.07.2016 28.11.2016 8.09.2016 Average Due Date = 21st July + 7,50,000 17,500 ` 3,000 5,500 3,000 6,000 17,500 22 0 130 49 66,000 0 3,90,000 2,94,000 7,50,000 = 21.7.2016 + 43 days = 2.09.2016. Since two new bills will be drawn, their due dates will be as follows: First Bill- 1.7.2016 + 4 months = 4.11.2016; Second Bill- 1.7.2016+ 6 months = 4.1.2017. Interest to be charged in respect of the above bills: 1st bill 2nd bill = Interest will be charged on ` 10,000 @ 10% p.a. for 63 days (2.09.2016 to 4.11.2016) = ` 10,000 x 10% x 63/365 = ` 172.60 = Interest will be charged on ` 7,500 (` 17,500 - 10,000) @ 10% p.a. for 124 days (2.09.2016 to 4.1.2017) = ` 7,500 x 10% x 124/365 = ` 254.80. Therefore, the value of the two bills: First bill = ` 10,000 Second bill = ` (7,500+ 172.60+ 254.80) The Institute of Chartered Accountants of India = ` 7,927.4 8. The Institute of Chartered Accountants of India Mar. 31 To Balance c/d 366 x 12 100 To Interest Mar. 31 4, 03, 000 To Sales A/c Jan 31 Feb. 15 Feb. 1 To Sales A/c Jan 12 Due Date Particulars 2016 Date 64,500 6,868 132 27,500 30,000 ` 45 59 Amount Days Jan. 1 2016 Date By Balance b/d Particulars 30,07,500 products Mar. 31 By Balance of Mar. 25 By Cash A/c Mar. 25 Mar. 10 Mar. 10 By Sales returns Feb. 20 Feb. 15 Jan. 1 Date Due Feb. 20 By Cash A/c 12,37,500 Feb. 15 By Cash A/c 17,70,000 Product Mr. Smart in Account Current with Mr. Perfact (Interest to 31st March, 2016 @ 12% p.a.) (By means of product) In the books of Mr. Perfact 64,500 ______ 6,500 7,000 7,500 40,000 3,500 ` 6 21 40 45 91 Amount Days 30,07,500 ________ 4,03,000 39,000 1,47,000 3,00,000 18,00,000 3,18,500 Product PAPER 1 : ACCOUNTING 33 34 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 9. In Debtors Ledger General Ledger Adjustment Account Particulars To Debtors Ledger Adjustment A/c: Discount Allowed Bad Debts (4,400 + 600) Transfer to creditor ledger ` Particulars ` To Debtors Ledger Adjustment A/c: 3,000 5,000 2,200 Endorsed Bills receivable dishonoured 2,000 In Creditors Ledger General Ledger Adjustment Account Particulars To Creditors Leger Adjustment A/c: Endorsed Bills receivable dishonoured ` Particulars By Creditors Ledger Adjustment A/c 2,000 Transfer from debtor ledger Bill receivable endorsed to creditors Discount received Allowances Notes: (i) The following items do not appear in GLA Account in Debtors Ledger. 1. Cash Sales 2. Provision for Doubtful Debts 3. Provision for Discount on Debtors 4. Bad Debts Recovered 5. Bills Receivable matured/collected on maturity 6. Bills Receivable discounted 7. Bills Receivable endorsed (ii) The following items do not appear in GLA Account in Creditors Ledger 1. Cash Purchases 2. Reserve for Discount on Creditors 3. Bills Payable matured The Institute of Chartered Accountants of India ` 2,200 8,000 1,200 6,400 PAPER 1 : ACCOUNTING 10. 35 Balance Sheet of Krishna sports club as on 1st Jan., 2016 Liabilities Outstanding Rent for godown Advance Subscription Capital Fund (Balancing Figure) ` Assets ` 6,000 Building 60,000 6,000 Stock of Sports Materials 2,71,000 Prepaid Insurance 5,000 3,000 Outstanding Subscription 12,000 12% General Investments Fund Cash Balance - Bank Balance 2,00,000 1,000 2,000 2,83,000 2,83,000 Balance Sheet of Krishna sports club as on 31st Dec. 2016 Liabilities ` ` Assets ` Outstanding Rent Advance Subscription 3,000 Building 4,000 Book Value 60,000 Advance Locker Rent Bank Overdraft 2,000 Less: Depreciation 2,000 Furniture Cost 6,000 20,000 54,000 2,000 18,000 2,000 Capital Fund: Opening Balance Less: Depreciation Stock of Sports Materials 2,71,000 Add: Entrance Fees [20,000 x 40%] 8,000 Prepaid Insurance 6,000 Add: Life Membership Fees [` 20,000 x 60%] 12,000 Outstanding Subscription 8,000 Add: Surplus 60,000 3,51,000 Outstanding Locker Rent 6,000 12% General Fund Investment 2,00,000 Accrued interest on 12% General Fund Investments 4,000 Cash Balance 3,62,000 The Institute of Chartered Accountants of India 64,000 3,62,000 36 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 11. Trading and Profit and Loss Account of Mr. Preet for the year ended 31st March, 2016 Amount Amount ` ` To Opening stock 1,60,000 By Sales To Purchases (W.N.5) 9,12,000 By Closing stock 1,40,000 To Gross profit c/d (Bal.fig.) 4,66,000 _______ 15,38,000 15,38,000 To Expenses (W.N.7) 3,44,000 By Gross profit b/d To Discount allowed (W.N.9) To Depreciation on furniture (W.N.1) To Net profit 13,98,000 4,66,000 32,500 By Discount received (W.N.10) 13,000 By Interest on Govt. Securities (W.N.8) 16,000 1,14,500 By Miscellaneous income 10,000 5,04,000 12,000 5,04,000 Balance Sheet of Mr. Preet as on 31st March, 2016 Amount Liabilities Amount ` Assets Capital (W.N.6) Add: Additional capital (W.N.2) 3,76,000 1,72,000 Furniture 12% Government Securities Accrued interest on Govt. Add: Profit during the year 1,14,500 securities (W.N.8) Less: Drawings 6,62,500 (1,40,000) Creditors Outstanding expenses 1,27,000 2,00,000 12,000 Debtors (W.N.3) 5,22,500 Bills Receivable (W.N.4) 3,26,000 35,000 3,00,000 Stock 1,40,000 36,000 Prepaid expenses Cash on hand Bank balance 8,58,500 The Institute of Chartered Accountants of India ` 14,000 3,000 1,500 8,58,500 PAPER 1 : ACCOUNTING 37 Working Notes: 1. Furniture account ` To To Balance b/d Bank 2. ` 1,20,000 By 20,000 By 1,40,000 Depreciation (bal.fig.) Balance c/d 13,000 1,27,000 1,40,000 Cash and Bank account ` To Balance b/d To Bank Debtors To To To ` By Creditors 7,84,000 4,000 By Drawings 1,40,000 Furniture 12% Govt. securities 20,000 2,00,000 1,22,500 By 10,000 By Expenses Balance c/d 3,50,000 1,72,000 Cash 3,000 _______ Bank 1,500 Cash 20,000 By 11,70,000 By Bill Receivable Miscellaneous income Additional Capital (bal.fig.) 14,98,500 3. 14,98,500 Debtors account ` To Balance b/d To Creditors (Bills receivable dishonoured) To Sales (W.N.11) 4. 3,20,000 By 8,000 By 13,98,000 By By 17,26,000 ` Cash and Bank Discount 11,70,000 30,000 Bills Receivable Balance c/d (bal.fig.) 2,00,000 3,26,000 17,26,000 Bills Receivable account To Debtors ` 2,00,000 2,00,000 The Institute of Chartered Accountants of India By By By By Bank Discount Creditors Balance c/d (bal. fig.) ` 1,22,500 2,500 40,000 35,000 2,00,000 38 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 5. Creditors account ` To Bank To Discount 7,84,000 16,000 To Bills receivable To Balance c/d 6. 40,000 3,00,000 11,40,000 ` By Balance b/d By Debtors (Bills receivable dishonoured) By Purchases (bal. fig.) 9,12,000 11,40,000 Balance Sheet as on 1st April, 2015 Liabilities ` Assets ` Creditors Outstanding expenses 2,20,000 40,000 Furniture Debtors 1,20,000 3,20,000 Capital (balancing figure) 3,76,000 Stock Prepaid expenses 1,60,000 12,000 _______ Cash Bank balance 4,000 20,000 6,36,000 7. 2,20,000 8,000 6,36,000 Expenses incurred during the year ` Expenses paid during the year Add: Outstanding expenses as on 31.3.2016 3,50,000 36,000 Prepaid expenses as on 31.3.2015 12,000 Less: Outstanding expenses as on 31.3.2015 40,000 Prepaid expenses as on 31.3.2016 14,000 Expenses incurred during the year 8. Interest on Government securities 2,00,000 x 12% x 6/12= ` 12,000 Interest on Government securities receivables for 6 months = ` 12,000 The Institute of Chartered Accountants of India 48,000 3,98,000 (54,000) 3,44,000 PAPER 1 : ACCOUNTING 9. 39 Discount allowed ` Discount to Debtors 11,70,000 2.5% 97.5% Discount on Bills Receivable 1,22,500 2% 98% 30,000 2,500 32,500 10. Discount received ` Discount to Creditors 7,84,000 98% 2% 16,000 11. Credit sales Cost of Goods sold = Opening stock + Net purchases Closing stock = ` 1,60,000 + ` 9,12,000 ` 1,40,000 = ` 9,32,000 Sales price = ` 9,32,000 + 50% of 9,32,000 = ` 13,98,000 12. ` (i) Price of two cars = ` 2,00,000 x 2 4,00,000 Less: Depreciation for the first year @ 30% 1,20,000 2,80,000 Less: Depreciation for the second year = ` 2, 80,000 x (ii) 30 100 Agreed value of two cars taken back by the hire vendor 1,96,000 Cash purchase price of one car Less: Depreciation on ` 2,00,000 @20% for the first year 2,00,000 40,000 Written drown value at the end of first year 1,60,000 Less: Depreciation on ` 1,60,000 @ 20% for the second year Book value of car left with the hire purchaser (iii) 84,000 Book value of one car as calculated in working note (ii) above Book value of Two cars = ` 1,28,000 x 2 The Institute of Chartered Accountants of India 32,000 1,28,000 1,28,000 2,56,000 40 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 (iv) Value at which the two cars were taken back, calculated in working note (i) above 1,96,000 Hence, loss on cars taken back = ` 2,56,000 ` 1,96,000 = Sale proceeds of cars repossessed ` 60,000 1,70,000 Less: Value at which plant were taken back ` 1,96,000 Repair ` 10,000 2,06,000 Loss on resale 13. 36,000 Books of Muskaan Ltd. Investment in 13.5% Debentures in Shorya Ltd. Account (Interest payable on 31st March & 30th September) Date Particulars Nominal Interest Amount Date value` ` value ` ` 2016 May 1 Particulars Nominal Interest Amount ` ` 2016 To Bank 5,00,000 5,625 5,19,375 Sept.30 By Bank 50,625 (6 months Int) Aug.1 To Bank Oct.1 To P&L A/c Dec.31 To P&L A/c 2,50,000 11,250 2,45,000 Oct.1 By Bank 2,00,000 2,06,000 By Balance c/d 5,50,000 18,563 5,60,542 7,50,000 69,188 7,66,542 2,167 52,313 Dec.31 7,50,000 69,188 7,66,542 Note: Cost being lower than Market Value the debentures are carried forward at Cost. Working Notes: 1. Interest paid on ` 5,00,000 purchased on May 1st, 2016 for the month of April 2016, as part of purchase price: 5,00,000 x 13.5% x 1/12 = ` 5,625 2. Interest received on 30th Sept. 2016 On ` 5,00,000 = 5,00,000 x 13.5% x = 33,750 On ` 2,50,000 = 2,50,000 x 13.5% x = 16,875 Total 3. ` 50,625 Interest paid on ` 2,50,000 purchased on Aug. 1st 2016 for April 2016 to July 2016 as part of purchase price: 2,50,000 x 13.5% x 4/12 = ` 11,250 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 4. 41 Loss on Sale of Debentures Cost of acquisition 5. (` 5,19,375 + ` 2,45,000) x ` 2,00,000/` 7,50,000 = 2,03,833 Less: Sale Price (2000 x 103) = 2,06,000 Profit on sale = ` 2,167 Cost of Balance Debentures (` 5,19,375 + ` 2,45,000) x ` 5,50,000/` 7,50,000 = ` 5,60,542 6. Interest on Closing Debentures for period Oct.-Dec. 2016 carried forward (accrued interest) ` 5,50,000 x 13.5% x 3/12 = ` 18,563 14. Statement of Claim Items A Stock (W.N. 2) Buildings Equipment Cost (` ) B 2,80,000 3,75,000 75,000 Depreciation (` ) C 1,25,000 + 9,375 22,500 + 5,625 Salvage (` ) D 20,000 4,000 2,500 Claim (` ) (E=B-C-D) 2,60,000 2,36,625 44,375 5,41,000 Working Notes: 1. Memorandum Trading Account for the Period from 1.1.2016 to 30.6.2016 ` To Opening Stock (1.1.2016) To Purchases To Cartage Inwards To Wages To Gross Profit (25% of ` 11,10,000) 2. 1,50,000 By Sales 9,37,500 17,500 By Closing Stock 7,500 (Bal. Fig.) 2,77,500 13,90,000 ` 11,10,000 2,80,000 13,90,000 Stock Destroyed Account ` To Trading Account ` 2,80,000 By Stock Salvaged Account 20,000 By Balance c/d (For Claim) 2,60,000 2,80,000 The Institute of Chartered Accountants of India 2,80,000 42 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 15. Revaluation Account ` ` To Buildings A/c 10,000 By Investments A/c 3,000 To Plant and Machinery A/c To Provision for Doubtful Debts A/c 26,000 By Loss to Partners: 27,800 P 30,400 Q 18,240 R 12,160 63,800 60,800 63,800 Capital Accounts of Partners Particulars To Revaluation A/c To Investments A/c To Q s Loan A/c To P and Q s Capital A/c P Q R T ` ` ` ` 30,400 18,240 12,160 - Particulars By Balance b/d P Q R T ` ` ` ` 80,000 20,000 30,000 - -- By Reserves 10,000 6,000 4,000 A/c - 22,760 By R and T s 10,000 30,000 -Capital A/c - 78,160 60,000 A/c 10,400 20,000 20,000 By Bank (balancing figure) To Balance c/d 80,000 - 80,000 40,000 1,10,400 56,000 1,12,160 60,000 1,10,400 56,000 1,12,160 60,000 - 15,000 Bank Account ` To P s capital A/c 10,400 By Bank Overdraft A/c To R s capital A/c To T s capital A/c 78,160 By Balance c/d 60,000 1,48,560 ` 44,000 1,04,560 1,48,560 Balance Sheet of NEHA Co. as at 1st April, 2016 Liabilities Capital Accounts: ` Assets Land ` 10,000 P 80,000 Buildings 1,90,000 Q 80,000 Plant and Machinery 1,04,000 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING R 40,000 2,00,000 Furniture Long Term Debts 3,00,000 Inventories Trade payables 1,70,000 Trade receivables Q s Loan Account 43 43,000 1,30,000 1,39,000 22,760 Less: Provision for Doubtful Debts (27,800) Balance at Bank 6,92,760 1,11,200 1,04,560 6,92,760 16. Recently a growing trend has developed for outsourcing the accounting function to a third party. The consideration for doing this is to save cost and to utilise the expertise of the outsourced party. The third party maintains the accounting software and the client data, does the processing and hands over the report from time to time. Benefits of outsourcing the accounting function to a third party: 1. Saving of Time: The organisation that outsources its accounting function is able to save time to concentrate on the core area of business activity. 2. Expertise of the third party: The organisation is able to utilise the expertise of the third party in undertaking the accounting work. 3. Maintenance of data: Storage and maintenance of the data is in the hand of professional people. 4. Economical: The organisation is not bothered about people leaving the organization in key accounting positions. The proposition is proving to be economically and more sensible as they do not have train the people again. Hence, the training cost is saved. The choice of outsourcing vendor is made on the basis of the proposals received from these vendors. The proposals are evaluated and the decision is often taken based on the following criteria: 1. The type of services provided and whether the same matches with the requirements. 2. The reputation and background of the vendor. 3. The comparative costs of the various propositions. 4. The assurance of quality. 17. (a) The question deals with the issue of Applicability of Accounting Standards to a noncorporate entity. For availment of the exemptions, first of all, it has to be seen that M/s X& Co. falls in which level of the non-corporate entities. Its classification will be done on the basis of the classification of non-corporate entities as prescribed by the ICAI. According to the ICAI, non-corporate entities can be classified under 3 levels viz Level I, Level II (SMEs) and Level III (SMEs). The Institute of Chartered Accountants of India 44 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 An entity whose turnover (excluding other income) does not exceed rupees fifty crore in the immediately preceding accounting year, will fall under the category of Level I entities. Non-corporate entities which are not Level I entities but fall in any one or more of the following categories are classified as Level II entities: (i) All commercial, industrial and business reporting entities, whose turnover (excluding other income) exceeds rupees one crore but does not exceed rupees fifty crore in the immediately preceding accounting year. (ii) All commercial, industrial and business reporting entities having borrowings (including public deposits) in excess of rupees one crore but not in excess of rupees ten crore at any time during the immediately preceding accounting year. (iii) Holding and subsidiary entities of any one of the above. As the turnover of M/s X& Co. is more than ` 1 crore, it falls under 1st criteria of Level II non-corporate entities as defined above. Even if its borrowings of ` 0.95 crores is less than ` 1 crores, it will be classified as Level II Entity. In this case, AS 3, AS 17, AS 21, AS 23, AS 27 will not be applicable to M/s X & Co. Relaxations from certain requirements in respect of AS 15, AS 19, AS 20, AS 25, AS 28 and AS 29 are also available to M/s X& Co. (b) The decision of making provision for non-moving stocks on the basis of technical evaluation does not amount to change in accounting policy. Requirement to provide for non-moving stocks may be said as accounting policy but the basis for making provision will not constitute accounting policy. It will be considered as an accounting estimate. Further, the method of estimating the amount of provision may be changed in case a more prudent estimate can be made. In the given case, considering the total value of stock, the change in the amount of required provision of non-moving stock from ` 3.5 lakhs to ` 2.5 lakhs is also not material. The disclosure can be made for such change in the following lines by way of notes to the accounts in the annual accounts of Mini Ltd. for the year 2015-16: The company has provided for non-moving stocks on the basis of technical evaluation unlike preceding years. Had the same method been followed as in the previous year, the profit for the year and the corresponding effect on the year end net assets would have been higher by ` 1 lakh. 18. (a) Calculation of cost of closing inventory Particulars Opening Inventory Purchases less returns (`3,60,000 ` 10,000) The Institute of Chartered Accountants of India ` 50,000 3,50,000 PAPER 1 : ACCOUNTING Freight Inwards 45 10,000 4,10,000 Less: Net Sales (` 4,50,000 ` 11,250) (4,38,750) (28,750) Add: Gross Profits (` 4,38,750 x 20%) Closing Inventory 87,750 59,000 (b) Case (a) The company considers that the residual value, based on prices prevailing at the balance sheet date, will equal the cost. There is, therefore, no depreciable amount and depreciation is zero. Case (b) The company considers that the residual value, based on prices prevailing at the balance sheet date, will be ` 9,00,000 and the depreciable amount is, therefore, ` 1,00,000. Annual depreciation (on a straight line basis) will be ` 5,000 [{10,00,000 9,00,000} 20]. 19. (a) According to para 14 of AS 7 (Revised) Construction Contracts , incentive payments are additional amounts payable to the contractor if specified performance standards are met or exceeded. For example, a contract may allow for an incentive payment to the contractor for early completion of the contract. Incentive payments are included in contract revenue when: (i) the contract is sufficiently advanced that it is probable that the specified performance standards will be met or exceeded; and (ii) the amount of the incentive payment can be measured reliably. In the given problem, the contract has not even begun and hence the contractor (Mr. Mehta) should not recognize any revenue of this contract. (b) The economic reality and substance of the transaction is that the rights and beneficial interest in the property has been transferred although legal title has not been transferred. K Ltd. should record the sale and recognize the profit of ` 20 lakhs in its profit and loss account. The building should be eliminated from the balance sheet. 20. (a) Constructing or acquiring a new asset may result in incremental costs that would have been avoided if the asset had not been constructed or acquired. These costs are not be included in the cost of the asset if they are not directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Conclusion: The costs to be incurred by the company do not meet that requirement of AS 10 and cannot, therefore, be capitalised. The Institute of Chartered Accountants of India 46 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 (b) As per AS 13 Accounting for Investments , the accounting standard is not applicable to Bank, Insurance Company, Mutual Funds. In this case Z Bank is a bank, therefore, AS 13 does not apply to it. For banks, the RBI has issued guidelines for classification and valuation of its investment and Z Bank should comply with those RBI Guidelines/Norms. Therefore, though Z Bank has not followed the provisions of AS 13, yet it would not be said as non-compliance since, it is complying with the norms stipulated by the RBI. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 47 ANNEXURE AS 10: PROPERTY, PLANT AND EQUIPMENT 1. Introduction The objective of this Standard is to prescribe Accounting treatment for Property, Plant and Equipment (PPE). The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts and the depreciation charges and impairment losses to be recognised in relation to them. 2. Scope of the Standard As a general principle, AS 10 should be applied in accounting for PPE. Exception: When another Accounting Standard requires or permits a different accounting treatment. This Standard does not apply to: AS 10 Not Applicable to Biological Assets (other than Bearer Plants) Related to agricultural activity Wasting Assets including Mineral rights, Expenditure on the exploration for and extraction of minerals, oil, natural gas and similar non-regenerative resources Note: AS 10 applies to Bearer Plants but it does not apply to the produce on Bearer Plants. Clarifications: 1. AS 10 applies to PPE used to develop or maintain the assets described above. 2. Investment property (defined in AS 13), should be accounted for only in accordance with the Cost model prescribed in this standard. 3. Definition of Property, Plant and Equipment (PPE) There are 2 conditions to be satisfied for a TANGIBLE item to be called PPE. PPE are tangible items that: The Institute of Chartered Accountants of India 48 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 Use in Production or Supply of Goods or Services Condition 1: Held for PPE (Tangible Items) For Rental to others For Administrative purposes Condition 2: Expected to be Used for more than 12 months Note: Intangible items are covered under AS 26 which is not covered in syllabus of Paper 1 . Administrative purposes : The term Administrative purposes has been used in wider sense to include all business purposes. Thus, PPE would include assets used for: Selling and distribution Finance and accounting Personnel and other functions of an Enterprise. Items of PPE may also be acquired for safety or environmental reasons. The acquisition of such PPE, although not directly increasing the future economic benefits of any particular existing item of PPE, may be necessary for an enterprise to obtain the future economic benefits from its other assets. Such items of PPE qualify for recognition as assets because they enable an enterprise to derive future economic benefits from related assets in excess of what could be derived had those items not been acquired. Example: A chemical manufacturer may install new chemical handling processes to comply with environmental requirements for the production and storage of dangerous chemicals; related plant enhancements are recognised as an asset because without them the enterprise is unable to manufacture and sell chemicals. 4. Other Definitions 1. Biological Asset: An Accounting Standard on Agriculture is under formulation, which will, inter alia, cover accounting for livestock. Till the time, the Accounting Standard on Agriculture is issued, accounting for livestock meeting the definition of PPE, will be covered as per AS 10 (Revised). Living Animal AS 10 does not apply Plant AS 10 applies to Bearer Plants Biological Asset The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 2. 49 Bearer Plant:Is a plant that (satisfies all 3 conditions): Is used in the production or supply Is expected to bear produce Has a remote likelihood of being sold as Agricultural produce Of Agricultural produce For more than a period of 12 months Except for incidental scrap sales Note: When bearer plants are no longer used to bear produce they might be cut down and sold as scrap. For example - use as firewood. Such incidental scrap sales would not prevent the plant from satisfying the definition of a Bearer Plant. The following are not Bearer Plants: (a) Plants cultivated to be harvested as Agricultural produce Example: Trees grown for use as lumber (b) Plants cultivated to produce Agricultural produce when there is more than a remote likelihood that the entity will also harvest and sell the plant as agricultural produce, other than as incidental scrap sales Example: Trees which are cultivated both for their fruit and their lumber (c) Annual crops Example: Maize and wheat Agricultural Produce is the harvested product of Biological Assets of the enterprise. 3. 5. Agricultural Activity: Is the management by an Enterprise of: Biological transformation; and Harvest of Biological Assets For sale, Or For conversion into Agricultural Produce, Or Into additional Biological Assets Recognition Criteria for PPE The cost of an item of PPE should be recognised as an asset if, and only if: (a) It is probable that future economic benefits associated with the item will flow to the enterprise, and (b) The cost of the item can be measured reliably. The Institute of Chartered Accountants of India 50 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 Notes: 1. It may be appropriate to aggregate individually insignificant items, such as moulds, tools and dies and to apply the criteria to the aggregate value. 2. An enterprise may decide to expense an item which could otherwise have been included as PPE, because the amount of the expenditure is not material. When do we apply the above criteria for Recognition? An enterprise evaluates under this recognition principle all its costs on PPE at the time they are incurred. 6. Treatment of Equipment Case I Stand by Equipment and Servicing Recognised as PPE as per AS 10 If they do not meet the definition of PPE as per AS 10: 7. Parts, If they meet the definition of PPE as per AS 10: Case II Spare Such items are classified as Inventory as per AS 2 Treatment of Subsequent Costs Cost of day-to-day servicing Meaning: Costs of day-to-day servicing are primarily the costs of labour and consumables, and may include the cost of small parts. The purpose of such expenditures is often described as for the Repairs and Maintenance of the item of PPE. Accounting Treatment: An enterprise does not recognise in the carrying amount of an item of PPE the costs of the day-to-day servicing of the item. Rather, these costs are recognised in the Statement of Profit and Loss as incurred. Replacement of Parts of PPE Parts of some items of PPE may require replacement at regular intervals. Examples: 1. A furnace may require relining after a specified number of hours of use. 2. Aircraft interiors such as seats and galleys may require replacement several times during the life of the airframe. 3. Major parts of conveyor system, such as, conveyor belts, wire ropes, etc., may require replacement several times during the life of the conveyor system. 4. Replacing the interior walls of a building, or to make a non-recurring replacement. Accounting Treatment: An enterprise recognises in the carrying amount of an item of PPE the cost of replacing part of such an item when that cost is incurred if the recognition criteria are met. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 51 Note: The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of this Standard. Regular Major Inspections - Accounting Treatment When each major inspection is performed, its cost is recognised in the carrying amount of the item of PPE as a replacement, if the recognition criteria are satisfied. Any remaining carrying amount of the cost of the previous inspection (as distinct from physical parts) is derecognised. 8. Measurement of PPE At Recognition Measurement Cost Model Cost Model After Recognition Revaluation Model 9. Measurement at Recognition An item of PPE that qualifies for recognition as an asset should be measured at its cost. What are the elements of Cost? Cost of an item of PPE comprises: Cost of an Item of PPE Includes Purchase Price Any Directly Attributable Costs The Institute of Chartered Accountants of India Excludes Decommissioning, Restoration and similar Liabilities Costs of opening a new facility or business (Such as, Inauguration costs) Costs of introducing a new product or service (including costs of advertising and promotional activities) Costs of conducting business in a new location or with a new class of customer (including costs of staff training) Administration and other general overhead costs 52 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 Examples of directly attributable costs are: 1. Costs of employee benefits (as defined in AS 15) arising directly from the construction or acquisition of the item of PPE 2. Costs of site preparation 3. Initial delivery and handling costs 4. Installation and assembly costs 5. Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment) 6. Professional fees The following costs are not included in the carrying amount of an item of PPE: 1. Costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity. 2. Initial operating losses, such as those incurred while demand for the output of an item builds up. And 3. Costs of relocating or reorganising part or all of the operations of an enterprise. Example: Income may be earned through using a building site as a car park until construction starts because incidental operations are not necessary to bring an item to the location and condition necessary for it to be capable of operating in the manner intended by management, the income and related expenses of incidental operations are recognised in the Statement of Profit and Loss and included in their respective classifications of income and expense. C. Decommissioning, Restoration and similar Liabilities: Initial estimate of the costs of dismantling, removing the item and restoring the site on which it is located, referred to as Decommissioning, Restoration and similar Liabilities , the obligation for which an enterprise incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. Exception: An enterprise applies AS 2 Valuation of Inventories , to the costs of obligations for dismantling, removing and restoring the site on which an item is located that are incurred during a particular period as a consequence of having used the item to produce inventories during that period. Note: The obligations for costs accounted for in accordance with AS 2 or AS 10 are recognised and measured in accordance with AS 29 Provisions, Contingent Liabilities and Contingent Assets . AS 29 is not covered in syllabus of paper-1 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 53 10. Cost of a Self-constructed Asset Cost of a self-constructed asset is determined using the same principles as for an acquired asset. 1. If an enterprise makes similar assets for sale in the normal course of business, the cost of the asset is usually the same as the cost of constructing an asset for sale (see AS 2). Therefore, any internal profits are eliminated in arriving at such costs. 2. Cost of abnormal amounts of wasted material, labour, or other resources incurred in self constructing an asset is not included in the cost of the asset. 3. AS 16 on Borrowing Costs, establishes criteria for the recognition of interest as a component of the carrying amount of a self-constructed item of PPE. 4. Bearer plants are accounted for in the same way as self-constructed items of PPE before they are in the location and condition necessary to be capable of operating in the manner intended by management. 11. Measurement of Cost Cost of an item of PPE is the cash price equivalent at the recognition date. A. If payment is deferred beyond normal credit terms: Total payment - Cash price equivalent B. Is recognised as Interest over the period of credit unless such interest is capitalised in accordance with AS 16* PPE acquired in Exchange for a Non-monetary Asset or Assets Or A combination of Monetary and Non-monetary Assets: Cost of such an item of PPE is measured at fair value unless: (a) Exchange transaction lacks commercial substance; Or (b) Fair value of neither the asset(s) received nor the asset(s) given up is reliably measurable. Note: C. 1. The acquired item(s) is/are measured in this manner even if an enterprise cannot immediately derecognise the asset given up. 2. If the acquired item(s) is/are not measured at fair value, its/their cost is measured at the carrying amount of the asset(s) given up. PPE purchased for a Consolidated Price: Where several items of PPE are purchased for a consolidated price, the consideration is apportioned to the various items on the basis of their respective fair values at the date of acquisition. Note: In case the fair values of the items acquired cannot be measured reliably, these values are estimated on a fair basis as determined by competent valuers. AS 16 is not covered in syllabus of paper-1 The Institute of Chartered Accountants of India 54 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 12. Measurement after Recognition An enterprise should choose Either Cost model, Or Revaluation model as its accounting policy and should apply that policy to an entire class of PPE. Class of PPE: A class of PPE is a grouping of assets of a similar nature and use in operations of an enterprise. Examples of separate classes: (a) Land (b) Land and Buildings (c) Machinery (d) Ships (e) Aircraft (f) Motor Vehicles (g) Furniture and Fixtures (h) Office Equipment (i) Bearer plants Cost Model After recognition as an asset, an item of PPE should be carried at: Cost - Any Accumulated Depreciation - Any Accumulated Impairment losses Revaluation Model After recognition as an asset, an item of PPE whose fair value can be measured reliably should be carried at a revalued amount. Fair value at the date of the revaluation - Less: Any subsequent accumulated depreciation (-) Less: Any subsequent accumulated impairment losses (-) Carrying value = Revaluation for entire class of PPE If an item of PPE is revalued, the entire class of PPE to which that asset belongs should be revalued. Frequency of Revaluations Revaluations should be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using Fair value at the Balance Sheet date. The frequency of revaluations depends upon the changes in fair values of the items of PPE being revalued. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 55 When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is required. A. Items of PPE experience significant and volatile changes in Fair value Annual revaluation shall be done. B. Items of PPE with only insignificant changes in Fair value Revaluation shall be done at an interval of 3 or 5 years. Determination of Fair Value Fair value of items of PPE is usually determined from market-based evidence by appraisal that is normally undertaken by professionally qualified valuers. If there is no market-based evidence of fair value because of the specialised nature of the item of PPE and the item is rarely sold, except as part of a continuing business, an enterprise may need to estimate fair value using an income approach. Example: Based on Discounted cash flow projections, Or A depreciated replacement cost approach Which aims at making a realistic estimate of the current cost of acquiring or constructing an item that has the same service potential as the existing item. 13. Accounting Treatment of Revaluations When an item of PPE is revalued, the carrying amount of that asset is adjusted to the revalued amount. At the date of the revaluation, the asset is treated in one of the following ways: A. Technique 1: Gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset. Gross carrying amount May be restated by reference to observable market data, or May be restated proportionately to the change in the carrying amount. Accumulated depreciation at the date of the revaluation is Adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account accumulated impairment losses B. Technique 2: Accumulated depreciation Is eliminated against the Gross Carrying amount of the asset The Institute of Chartered Accountants of India 56 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 Revaluation - Increase or Decrease Revaluation Increase Credited directly to owners interests under the heading of Revaluation surplus Decrease Exception: When it is subsequent Increase (Initially Decrease) Charged to the Statement of profit and loss Recognised in the Statement of profit and loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in the Statement of profit and loss Exception: When it is subsequent Decrease (Initially Increase) Decrease should be debited directly to owners interests under the heading of Revaluation surplus to the extent of any credit balance existing in the Revaluation surplus in respect of that asset Treatment of Revaluation Surplus The revaluation surplus included in owners interests in respect of an item of PPE may be transferred to the Revenue Reserves when the asset is derecognised. Case I : When whole surplus is transferred: When the asset is: Retired; Or Disposed of Case II : Some of the surplus may be transferred as the asset is used by an enterprise: In such a case, the amount of the surplus transferred would be: Depreciation (based on Revalued Carrying amount) Depreciation (based on Original Cost) Transfers from Revaluation Surplus to the Revenue Reserves are not made through the Statement of Profit and Loss. 14. Depreciation Component Method of Depreciation: Each part of an item of PPE with a cost that is significant in relation to the total cost of the item should be depreciated separately. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 57 Depreciable Amount and Depreciation Period What is Depreciable Amount ? Depreciable amount is: Cost of an asset (or other amount substituted for cost i.e. revalued amount) - Residual value The depreciable amount of an asset should be allocated on a systematic basis over its useful life. Review of Residual Value and Useful Life of an Asset Residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) should be accounted for as a change in an accounting estimate. Note: Depreciation is recognised even if the Fair value of the Asset exceeds its Carrying Amount. Repair and maintenance of an asset do not negate the need to depreciate it. Commencement of period for charging Depreciation Depreciation of an asset begins when it is available for use, i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by the management. Cessesation of Depreciation I. Depreciation ceases to be charged when asset s residual value exceeds its carrying amount The residual value of an asset may increase to an amount equal to or greater than its carrying amount. If it does, depreciation charge of the asset is zero unless and until its residual value subsequently decreases to an amount below its carrying amount. II. Depreciation of an asset ceases at the earlier of: The date that the asset is retired from active use and is held for disposal, and The date that the asset is derecognised Therefore, depreciation does not cease when the asset becomes idle or is retired from active use (but not held for disposal) unless the asset is fully depreciated. However, under usage methods of depreciation, the depreciation charge can be zero while there is no production. Land and Buildings Land and buildings are separable assets and are accounted for separately, even when they are acquired together. A. Land: Land has an unlimited useful life and therefore is not depreciated. Exceptions: Quarries and sites used for landfill. Depreciation on Land: I. If land itself has a limited useful life: It is depreciated in a manner that reflects the benefits to be derived from it. The Institute of Chartered Accountants of India 58 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 II. If the cost of land includes the costs of site dismantlement, removal and restoration: That portion of the land asset is depreciated over the period of benefits obtained by incurring those costs. B. Buildings: Buildings have a limited useful life and therefore are depreciable assets. An increase in the value of the land on which a building stands does not affect the determination of the depreciable amount of the building. 15. Depreciation Method The depreciation method used should reflect the pattern in which the future economic benefits of the asset are expected to be consumed by the enterprise. The method selected is applied consistently from period to period unless: There is a change in the expected pattern of consumption of those future economic benefits; Or That the method is changed in accordance with the statute to best reflect the way the asset is consumed. Methods of Depreciation Straight-line Method Diminishing Balance Method Units of Production Method Results in a constant charge over the useful life if the residual value of the asset does not change Results in a decreasing charge over the useful life Results in a charge based on the expected use or output Review of Depreciation Method: The depreciation method applied to an asset should be reviewed at least at each financial year-end and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the method should be changed to reflect the changed pattern. Such a change should be accounted for as a change in an accounting estimate . Depreciation Method based on Revenue: A depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 16. Changes in Liabilities Existing Decommissioning, 59 Restoration and other The cost of PPE may undergo changes subsequent to its acquisition or construction on account of: Changes in Liabilities Price Adjustments Changes in Duties Changes in initial estimates of amounts provided for Dismantling, Removing, Restoration, and Similar factors The above are included in the cost of the asset. 17. Retirements Items of PPE retired from active use and held for disposal should be stated at the lower of: Carrying Amount, and Net Realisable Value Note: Any write-down in this regard should be recognised immediately in the Statement of Profit and Loss. 18. De-recognition The carrying amount of an item of PPE should be derecognised: On disposal o By sale o By entering into a finance lease, or o By donation, Or When no future economic benefits are expected from its use or disposal 19. Disclosure General Disclosures: The financial statements should disclose, for each class of PPE: (a) The measurement bases (i.e., cost model or revaluation model) used for determining the gross carrying amount; (b) The depreciation methods used; (c) The useful lives or the depreciation rates used. In case the useful lives or the depreciation rates used are different from those specified in the statute governing the enterprise, it should make a specific mention of that fact; (d) The gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; and (e) A reconciliation of the carrying amount at the beginning and end of the period showing: The Institute of Chartered Accountants of India 60 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017 Additional Disclosures: The financial statements should also disclose: (a) The existence and amounts of restrictions on title, and property, plant and equipment pledged as security for liabilities; (b) The amount of expenditure recognised in the carrying amount of an item of property, plant and equipment in the course of its construction; (c) The amount of contractual commitments for the acquisition of property, plant and equipment; (d) If it is not disclosed separately on the face of the statement of profit and loss, the amount of compensation from third parties for items of property, plant and equipment that were impaired, lost or given up that is included in the statement of profit and loss; and (e) The amount of assets retired from active use and held for disposal. Disclosures related to Revalued Assets: If items of property, plant and equipment are stated at revalued amounts, the following should be disclosed: (a) The effective date of the revaluation; (b) Whether an independent valuer was involved; (c) The methods and significant assumptions applied in estimating fair values of the items; (d) The extent to which fair values of the items were determined directly by reference to observable prices in an active market or recent market transactions on arm s length terms or were estimated using other valuation techniques; and (e) The revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to shareholders. 20. Transitional Provisions Previously Recognised Revenue Expenditure Where an entity has in past recognized an expenditure in the Statement of Profit and Loss which is eligible to be included as a part of the cost of a project for construction of PPE in accordance with the requirements of this standard: It may do so retrospectively for such a project. Note: The effect of such retrospective application, should be recognised net-of-tax in Revenue reserves. PPE acquired in Exchange of Assets The requirements of AS 10 regarding the initial measurement of an item of PPE acquired in an exchange of assets transaction should be applied prospectively only to transactions entered into after this Standard becomes mandatory. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 61 Spare parts On the date of this Standard becoming mandatory, the spare parts, which hitherto were being treated as inventory under AS 2, and are now required to be capitalised in accordance with the requirements of this Standard, should be capitalised at their respective carrying amounts. Note: The spare parts so capitalised should be depreciated over their remaining useful lives prospectively as per the requirements of this Standard. Revaluations The requirements of AS 10 regarding the revaluation model should be applied prospectively. In case, on the date of this Standard becoming mandatory, an enterprise does not adopt the revaluation model as its accounting policy but the carrying amount of item(s) of PPE reflects any previous revaluation it should adjust the amount outstanding in the Revaluation reserve against the carrying amount of that item. Note: The carrying amount of that item should never be less than residual value. Any excess of the amount outstanding as Revaluation reserve over the carrying amount of that item should be adjusted in Revenue reserves. The Institute of Chartered Accountants of India

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