Q&A-1.

1
Study Material Based Contents

Paper 1 Accounting

Syllabus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q&A-1.2
Bird's-Eye View . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q&A-1.4
Line Chart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q&A-1.8
Table Showing Importance of chapter on the basis of Marks . . . . . . . . . . . . . Q&A-1.9
Table Showing Importance of chapter on the basis of Marks
of Compulsory Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q&A-1.10

Study Material Based Contents
C.NScanner Study Chapters P.N.
1. (Chapter 2) Accounting Standards . . . . . . . . . . . . . . . . . . . . . . Q&A-1.13
2. (Chapter 3 Unit 1) Company Accounts Preparation of
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . Q&A-1.37
3. (Chapter 3 Unit 2 Cash Flow Statement . . . . . . . . . . . . . . . . . . . . . . . Q&A-1.51
4. (Chapter 3 Unit 4) Alteration & Conversion of Share Capital . . . . . . . Q&A-1.81
5. Chapter 3 Unit 3 &
7)
Accounting for Business Acquisition, Amalgamation
and Reconstruction . . . . . . . . . . . . . . . . . . . . . . . . Q&A-1.93
6. Chapter 7 Unit 1) Average due date . . . . . . . . . . . . . . . . . . . . . . . . . . Q&A-1.141
7. (Chapter 7 Unit 2) Account Current . . . . . . . . . . . . . . . . . . . . . . . . . . . Q&A-1.151
8. (Chapter 7 Unit 3) Self Balancing Ledgers . . . . . . . . . . . . . . . . . . . . . Q&A-1.155
9. Chapter 8) Financial Statement of not for Profit Organisation Q&A-1.169
10. (Chapter 9) Accounts from Incomplete Records . . . . . . . . . . . . Q&A-1.209
11. (Chapter 10 Unit 1) Hire Purchase and Instalment Sale Transactions . . Q&A-1.259
12. (Chapter 10 Unit 2) Investment Accounts . . . . . . . . . . . . . . . . . . . . . . . Q&A-1.277
13. (Chapter 10 Unit 5) Insurance Claims for Loss of Stock and Loss of profit Q&A-1.285
14. (Chapter 11 Unit 1) Introduction to Partnership Accounts . . . . . . . . . . Q&A-1.297
15. (Chapter 12) Accounting in Computerised Environment . . . . . . Q&A-1.337
Question Paper of May, 2009 . . . . . . . . . . . . . . . . Q&A-1.343
Question Paper of November, 2009 . . . . . . . . . . . . Q&A-1.346
Question Paper of May, 2010 . . . . . . . . . . . . . . . . Q&A-1.351
Question Paper of November, 2010 . . . . . . . . . . . . Q&A-1.357
Q&A-1.2
Syllabus

Paper 1 Accounting (100 marks)
(One Paper - Three Hours)
Level of Knowledge: Working Knowledge
Objectives :

(a) To lay a foundation for the preparation and presentation of financial statements;
(b) To gain working knowledge of the principles and procedures of accounting and their
application to different practical situations;
(c) To gain the ability to solve simple problems and cases relating to sole proprietorship,
partnership and companies; and
(d) To familiarize students with the fundamentals of computerized system of accounting.
Contents :
1. A General Knowledge of the framing of the accounting standards, national and
international accounting authorities, adoption of international financial reporting
standards
2. Accounting Standards
Working knowledge of:
AS 1 : Disclosure of Accounting Policies
AS 2: Valuation of Inventories
AS 3: Cash Flow Statements
AS 6: Depreciation Accounting
AS 7: Construction Contracts (Revised 2002)
AS 9: Revenue Recognition
AS 10: Accounting for Fixed Assets
AS 13: Accounting for Investments
AS 14: Accounting for Amalgamations
3. Company Accounts
(a) Preparation of financial statements - Profit and Loss Account, Balance Sheet and Cash
Flow Statement
(b) Profit (Loss) prior to incorporation
(c) Alteration of share capital, Conversion of fully paid shares into stock and stock into
shares, Accounting for bonus issue
(d) Simple problems on Accounting for business acquisition, Amalgamation and
reconstruction (excluding problems of amalgamation on inter-company holding)
4. Average Due Date, Account Current, Self-Balancing Ledgers
5. Financial Statements of Not-for-Profit Organisations
6. Accounts from Incomplete Records
Q&A-1.3
7. Accounting for Special Transactions
(a) Hire purchase and instalment sale transactions
(b) Investment accounts
(c) Insurance claims for loss of stock and loss of profit.
9. Issues in Partnership Accounts
Final accounts of partnership firms - Admission, retirement and death of a partner including
treatment of goodwill;
10. Accounting in Computerised Environment
An overview of computerized accounting system - Salient features and significance,
Concept of grouping of accounts, Codification of accounts, Maintaining the hierarchy of
ledger, Accounting packages and consideration for their selection, Generating Accounting
Reports.
Note :
If either old Accounting Standards (ASs), Announcements and Limited Revisions to ASs are
withdrawn or new ASs, Announcements and Limited Revisions to ASs are issued by the Institute
of Chartered Accountants of India in place of existing ASs, Announcements and Limited
Revisions to ASs, the syllabus will accordingly include/exclude such new developments in place
of the existing ones with effect from the date to be notified by the Institute.
Birds - Eye View

Paper 1 Accounting
Question Paper Based Contents of Last Five Examinations
Years Q. No. Compulsory Chapter Marks Category Page
No.
No. Name
2008
Nov.
1.
2. (a)
3. (a)
(b)
4. (b)
5. (ii)
(iii)
(iv)
(vii)
(viii)
All
Questions
Compulsory
5
10
2
11
13
1
1
1
14
9
Accounting for Business Acquisition Amalgamation
and Reconstruction
Accounts From Incomplete Records
Company Accounts! Preparation of Financial Statements
Hire Purchase and Instalment Sale Transactions
Insurance Claims for Loss Stock and Loss of Profit
Accounting Standards
" " "
" " "
Introduction to Partnership Accounts
Financial Statements of Not for Profit Organisations
16
8
8
8
8
2
2
2
2
2
Practical
"
"
"
"
Descriptive
Practical
Descriptive
"
Descriptive
126
248
46
272
293
24
30
24
320
173
6. (b)
(d)
6
15
Average Due Date
Accounting in Computerised Environment
4
4
Practical
Descriptive
146
339
2009
May
1.
2. (a)
(b)
3. (b)
5. (ii)
All
Questions
Compulsory
9
10
3
12
13
Financial Statements of Not for Profit Organisations
Accounts From Incomplete Records
Cash Flow Statement
Investment Accounts
Insurance Claims for Loss Stock and Loss of Profit
20
8
8
8
2
Practical
"
"
"
Descriptive
196
251
75
278
286
Q&A-1.4
(iii)
(iv)
(vii)
(viii)
(ix)
(x)
6. (a)
(c)
(f)
5
14
11
12
5
2
1
15
8
Accounting for Business Acquisition Amalgamation
and Reconstruction
Introduction to Partnership Accounts
Hire Purchase and Instalment Sale Transactions
Investment Accounts
Accounting for Business Acquisition Amalgamation and
Reconstruction
Company Accounts! Preparation of Financial Statements
Accounting Standards
Accounting in Computerised Environment
Self Balancing Ledgers
2
2
2
2
2
2
4
4
4
"
Practical
"
"
Descriptive
Practical
"
Descriptive
Dt. Between
96
310
273
279
96
48
30
339
158
2009
Nov.
1. (i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
2.
3.
4. (a)
(b)
5. (a)
(b)
All
Questions
Compulsory
10
2
12
14
2
2
1
1
9
2
5
14
13
6
9
5
Accounts From Incomplete Records
Company Accounts! Preparation of Financial Statements
Investment Accounts
Introduction to Partnership Accounts
Company Accounts! Preparation of Financial Statements
" " " " "
Accounting Standards
" "
Financial Statements of Not for Profit Organisations
Company Accounts! Preparation of Financial Statements
Accounting for Business Acquisition Amalgamation and
Reconstruction
Introduction to Partnership Accounts
Insurance Claims for Loss Stock and Loss of Profit
Average Due Date
Financial Statements of Not for Profit Organisations
Accounting for Business Acquisition Amalgamation and
Reconstruction
2
2
2
2
2
2
2
2
2
2
16
16
8
8
10
6
Practical
Descriptive
Practical
"
Descriptive
Practical
"
Descriptive
Practical
Descriptive
Practical
"
"
"
"
"
254
38
280
311
38
48
31
24
201
38
129
321
294
147
201
132
Q&A-1.5
6. (i)
(ii)
(iii)
(iv)
(v)
(vi)
15
5
15
12
2
14
Accounting in Computerised Environment
Accounting for Business Acquisition Amalgamation and
Reconstruction
Accounting in Computerised Environment
Investment Accounts
Company Accounts! Preparation of Financial Statements
Introduction to Partnership Accounts
4
4
4
4
4
4
"
"
Descriptive
"
"
Practical
340
97
340
280
49
324
2010
May
1. (i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
2.
3.
4. (a)
(b)
5. (a)
(b)
6. (a)
(b)
(c)
(d)
All
Questions
Compulsory
14
11
12
6
1
12
14
1
13
11
10
5
11
12
9
3
1
1
15
1
Introduction to Partnership Accounts
Hire Purchase and Instalment Sale Transactions
Investment Accounts
Average Due Date
Accounting Standards
Investment Accounts
Introduction to Partnership Accounts
Accounting Standards
Insurance Claims for Loss Stock and Loss of Profit
Hire Purchase and Instalment Sale Transactions
Accounts From Incomplete Records
Accounting for Business Acquisition Amalgamation
and Reconstruction
Hire Purchase and Instalment Sale Transactions
Investment Accounts
Financial Statements of Not for Profit Organisations
Cash Flow Statement
Accounting Standards
" " "
Accounting in Computerised Environment
Accounting Standards
2
2
2
2
2
2
2
2
2
2
16
16
10
6
8
8
4
4
4
4
Practical
"
"
"
"
"
Descriptive
"
Practical
"
"
"
"
"
"
"
"
"
Descriptive
Practical
324
274
281
148
32
281
311
25
295
274
255
134
275
281
204
77
33
33
341
33
Q&A-1.6
Q&A-1.7
2010
Nov.
1. (a)
(b)
(c)
(d)
2.
3.
4.
5. (a)
(b)
6. (a)
(b)
7. (a)
(b)
(c)
(d)
(e)
{C}
{C}
{C}
{C}
14
1
5
12
9
3
14
4
8
5
11
1
15
1
13
6
Introduction to Partnership Accounts
Accounting Standards
Accounting for Business Acquisition Amalgamation
and Reconstruction
Investment Accounts
Financial Statements of Not for Profit Organisations
Cash Flow Statement
Introduction to Partnership Accounts
Alteration & Conversion of Share Capital
Self Balancing Ledgers
Accounting for Business Acquisition Amalgamation
and Reconstruction
Hire Purchase and Instalment Sale Transactions
Accounting Standards
Accounting in Computerised Environment
Accounting Standards
Insurance Claims for Loss Stock and Loss of Profit
Average Due Date
5
5
5
5
16
16
16
12
4
10
6
4
4
4
4
4
Practical
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
325
34
137
283
206
79
311
91
168
137
276
35
341
35
296
149
Note: Bird's - Eye View is based on PCC/IPCC Examination.
Q&A-1.8
Table Showing Importance of Chapter on the basis of Marks

Chap.
No.
Years
Chapter Name
06
May
06
Nov.
07
May
07
Nov.
08
May.
08
Nov
09
May
09
Nov.
10
May
10
Nov.
Total Ave.
1. Accounting Standards (AS - 1, 2, 3, 6, 7, 9, 12 14 10 6 6 4 4 16 13 85 8.5
2. Company Accounts Preparation.. 4 8 2 12 26 2.6
3. Cash Flow Statement 16 16 6 16 8 8 16 86 8.6
4. Alteration & Conversion of share Capital 12 12 1.2
5. Amalgamasion and Reconstructions 24 16 20 16 4 26 16 15 137 13.7
6. Average due date 2 2 4 8 2 4 22 2.2
7. Account Current 2 2 4 0.4
8. Self Balancing Ledgers 7 4 8 4 4 27 2.7
9. Financial statement of not for Profit.. 20 20 4 16 2 20 12 8 16 118 11.8
10. Accounts from Incomplete Records 20 16 16 2 8 8 2 16 88 8.8
11. Hire Purchase and Instalment Sale.. 8 4 8 2 14 6 42 4.2
12. Investment Accounts 10 6 10 5 31 3.1
13. Insurance Claims for less of stock and less.. 6 8 2 8 8 2 8 2 4 48 4.8
14. Introduction to partnership Accounts 22 2 20 2 2 22 4 21 95 9.5
15. Accounting in computerised environment 4 4 4 4 4 8 4 4 36 3.6
Q&A-1.9
Table Showing Importance of Chapter on the basis of Marks of Compulsory Questions

Chap.
No.
Years
Chapter Name
06
May
06
Nov.
07
May
07
Nov.
08
May.
08
Nov
09
May
09
Nov.
10
May
10
Nov.
Total Ave.
1. Accounting Standards (AS - 1, 2, 3, 6, 7, 9, 5 5 0.5
2. Company Accounts Preparation..
3. Cash Flow Statement
4. Alteration & Conversion of share Capital
5. Amalgamasion and Reconstructions 5 5 0.5
6. Average due date
7. Account Current
8. Self Balancing Ledgers
9. Financial statement of not for Profit..
10. Accounts from Incomplete Records
11. Hire Purchase and Instalment Sale..
12. Investment Accounts 5 5 0.5
13. Insurance Claims for less of stock and less..
14. Introduction to partnership Accounts 5 5 0.5
15. Accounting in computerised environment

I-10
Q&A-1.10
Classification of Questions as per Accounting Standard Number
Paper 1
Chapter 1 (Accounting Standards)
AS Questions
AS 1 Disclosure of Accounting
Policies
2007 - May [6] (f); 2007 - Nov [6] (a)
AS 2 Valuation of Inventories 2008 - May [6] (f); 2004 - May [6] (b); 2006 - May [6] (a)
AS 3 Cash Flow Statements 1998 - May [6] (d) (i) (ii); 1999 Nov [1] (b); 2001 - May
[6] (d)
AS 6 Depreciation Accounting 2003 - May [6] (a); 2003 - Nov [6] (d); 2008 - Nov [5]
(ii); 2004 - May [6] (d); 2005 - Nov [6] (e); 2007 - May
[5] (ii)
AS 7 Construction Contracts
(Revised 02)
2001 - Nov [6] (a); 2002 - Nov [6] (f); 2007 - May [5] (x)
AS 9 Revenue Recognition 1998 - May [6] (e); 2003 - Nov [6] (e); 2005 - May [6]
(e); 2006 - May [6] (d); 2008 - Nov [5] (iii)
AS 10 Accounting for Fixed
Assets
1998 - Nov [6] (b) (iv); 2006 - May [6] (b); 2004 - May
[6] (c); 2007 - May [5] (ix); 2008 - May [5] (v) (a) (b)
AS 13 Accounting for Investments 2008 - Nov [5] (iv)
AS 14 Accounting for Amalga-
mations
2001 - May [6] (a); 2003 - May [6] (e)
[Chapter # 1] Accounting Standards O Q&A-1.11

Q&A-1.11
* Questions upto November - 2006 are from PE-II Gr. I and from May - 2007 onwards are from PCC
Gr. I

Q&A-1.11
Star Rating
On the basis of Maximum marks from a chapter Nil
On the basis of Questions included every year from a chapter Nil
On the basis of Compulsory questions from a chapter jjjjj
CHAPTER
Accounting Standards
1
THIS CHAPTER COMPRISES OF
L Working knowledge of : AS 1, AS2, AS 3, AS 6, AS 7, AS 9, AS 10, AS 13, AS 14.
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
SHORT NOTES
Q&A-1.12 O IPCC Gr. I Paper - 1
1998 - Nov [6] (b) Write short notes on the following :
(iv) Valuation of fixed assets in special cases. (4 marks) [S.A. 16]
Answer :
Valuation of fixed assets in special cases: According to the Accounting Standard 10,
following are the provisions regarding the valuation of fixed assets in special cases:
1. When the fixed assets are acquired on hire purchase terms, although legal ownership does
not vest in the enterprise, these assets are recorded at their cash value, which if not
available easily, is calculated assuming an appropriate rate of interest. They are shown in
the balance sheet with correct narration to indicate that the enterprise does not have full
ownership thereof.
2. Where an enterprise owns fixed assets jointly with others (other than as a partner in a firm)
the extent of its share in such assets and the proportion in the original cost, accumulated
depreciation and written down value are stated in the balance sheet. Alternatively, the pre-
rate cost of such jointly owned assets is grouped together with similar fully owned assets.
Details of these assets are indicated separately.
3. Where several assets are purchased for a consolidated price, the consideration is
apportioned to the various assets on a fair basis as determined by competent valuers.
DESCRIPTIVE QUESTIONS
1998 - May [6] (d) In the case of a manufacturing company :
(i) List the items of "inflows" of cash receipts from operating activities;
(ii) List the items of "outflows" of investing activities. (22 =4 marks)
(e) When can revenue be recognised in the case of a transaction of sale of goods?
(2 marks) [S.A. 17]
Answer :
(d) (i) Inflows of cash receipts from operating activities [Para 12 of AS-3 (Revised)]:
(a) Cash receipts from rendering of services.
(b) Cash receipts from the sale of goods.
(c) Refund of income-tax .
(d) Royalties, fees, commission and other revenues.
(ii) Outflows of investing activities [Para 15 of AS-3 (Revised)]:
(a) Cash payment for acquiring fixed assets.
(b) Cash advances and loans to third parties.
(c) Cash payment for acquisition of shares, warrants or debt instruments of other
enterprises and interest in joint ventures.
(e) According to para 10 and 11 of AS-9, revenue from sales transactions will be
recognised when the following requirements as to performances are satisfied,
provided that at the time of performance it is not unreasonable to expect ultimate
collection:
[Chapter # 1] Accounting Standards O Q&A-1.13
(i) The seller of goods has transferred to the buyer the property in the goods for a price
alongwith the goods risks and rewards are also transferred to the buyer and the seller
retains no effective control of the goods transferred to a degree usually related with
ownership and,
(ii) No uncertainty exists regarding the amount of the consideration that will be derived
from the sale of goods.
1999 - Nov [1] Attempt the following :
(b) What are the main features of the cash flow statement? Explain with special reference to
AS 3? (5 marks) [S.A. 3]
Answer :
Main features of cash flow statements (As per AS-3) :
1. According to AS-3, cash flow statement deals with the provisions of information about the
historical changes in cash and cash equivalents of an enterprise during the stated period
from operating, investing and financing activities.
2. Cash flow from operating activities can be reported using either:
(i) the direct method, in which mostly the classes of gross cash receipts and gross cash
payments are disclosed.
(ii) the indirect method, in this net profit or loss is adjusted for the purpose of transactions
of non-cash nature.
3. According to para 42 of AS-3 (Revised), an enterprise must disclose the components of
cash and cash equivalents and must present a reconciliation of amounts in its cash flow
statement with the equivalent items reported in the balance sheet.
4. When the cash flow statement is used alongwith the other financial statements, it provides
information that enables the user to evaluate the changes in net assets of an enterprise. This
statement also enhances the comparability of the operating performances.
5. For companies listed on stock exchanges compliance of AS-3 is compulsory due to the
listing agreement.
2001 - May [6] Attempt the following :
(a) What are the conditions, which, according to Accounting Standard 14 on Accounting for
Amalgamations, must be satisfied for an amalgamation in the nature of merger?
(4 marks)
(d) Define briefly the classification of activities, as suggested in Accounting Standard 3, to be
used for preparing a cash flow statement. Give two examples of each such class of
activities. (4 marks) [S.A. 19]]
Answer :
(a) According to AS-14 on Accounting for Amalgamation, the following conditions must
be satisfied for an amalgamation in the nature of merger :
(i) After amalgamation, all the assets and liabilities of the transferor company becomes
the assets and liabilities of the transferee company.
Q&A-1.14 O IPCC Gr. I Paper - 1
(ii) Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company becomes the equity shareholders of the transferee company by
virtue of amalgamation.
(iii) The business of the transferor company is intended to be carried on after the
amalgamation by the transferee company.
(iv) The consideration for the amalgamation receivable by those equity shareholders of
the transferor company who decides to become the equity shareholder of the
transferee company is discharged by the transferee company wholly by the issue of
equity shares in the transferee company, except that cash may be paid in respect of
any fractional shares.
(v) All reserves and surplus shall be reserved.
(vi) No adjustments are required to be made in the book values of the assets and
liabilities of the transferor company, when they are incorported in the financial
statements of the transferee company.
If any one of the condition is not satisfied in a process of amalgamation, it will
not be considered as amalgamation in the nature of merger.
(d) According to AS-3 (Revised) (i.e. Cash Flow Statement). The cash flow statement must
report cash flows by operating, investing and financing activities :
(i) Operating Activities: These are the principal revenue producing activities of the
enterprise. This activity does not include in it the investing and financing activities.
Examples of operating activities are, cash receipt from the sale of goods and cash
payment to the supplier of goods.
(ii) Investing Activities: These activities include the acquisition and disposal of long-
term assets and other investments which are not included in cash equivalents.
Example of investing activities are payment made on acquiring building for
business or cash received from the sale of furniture.
(iii) Financing Activities: Those activities that results in changes in the size and
composition of the owner's capital and borrowing of the enterprise.
Example of the financing activities are cash proceed from issue of shares and
cash paid to redeem debentures.
2001 - Nov [6] Attempt the following :
(a) Describe, with reference to Accounting Standard 7 on Accounting for construction
contracts, the methods which may be used for recognising revenue on construction
contracts. (4 marks) [S.A. 16]
Answer :
Accounting for Construction Contract is based on AS-7. Two methods of accounting are
generally followed by the contractors for recognising revenue on construction contracts. The two
methods are:
1. Percentage of completion method.
2. The completed contract method.
1. Percentage of Completion Method: In this method, revenue is recognised as the contract
activity progresses or is based on the stage of completion reached. The cost actually
[Chapter # 1] Accounting Standards O Q&A-1.15
incurred in reaching the stage of completion are compared with this revenue, resulting in
the reporting of results which can be attributed to the proportion of work completed. In
reality revenue is recognised only when it is realised, but under this method, the revenue
is recognised as the work progress even though in certain cases it may not be realised.
2. Completed Contract Method: In this method, revenue is recognised only when the work
is completed or substantially completed. During the course of the contract, costs and
progress payments received are accumulated but revenue will not be recognised until the
contract activity is substantially completed.
In both the methods, provisions are made for losses for the stage of completion
reached on the contract and provisions are also made for losses on the remainder of the
contract.
For the purpose of accounting, it is important to combine the contract made with single
customers or with several customers. If the contract covers a number of projects and if the
costs and revenues of such individual projects can be known within the terms of the overall
contract each such project may be treated as equivalent to a separate contract.
2002 - Nov [6] Attempt the following questions :
(f) Explain percentage of completion method in respect of Construction Contracts as per
Accounting Standard 7. (4 marks) [S.A. 22]
Answer :
Accounting for Construction Contract is based on AS-7. Two methods of accounting are
generally followed by the contractors for recognising revenue on construction contracts. The two
methods are:
1. Percentage of completion method.
2. The completed contract method.
1. Percentage of Completion Method: In this method, revenue is recognised as the contract
activity progresses or is based on the stage of completion reached. The cost actually
incurred in reaching the stage of completion are compared with this revenue, resulting in
the reporting of results which can be attributed to the proportion of work completed. In
reality revenue is recognised only when it is realised, but under this method, the revenue
is recognised as the work progress even though in certain cases it may not be realised.
2. Completed Contract Method: In this method, revenue is recognised only when the work
is completed or substantially completed. During the course of the contract, costs and
progress payments received are accumulated but revenue will not be recognised until the
contract activity is substantially completed.
In both the methods, provisions are made for losses for the stage of completion
reached on the contract and provisions are also made for losses on the remainder of the
contract.
For the purpose of accounting, it is important to combine the contract made with single
customers or with several customers. If the contract covers a number of projects and if the
costs and revenues of such individual projects can be known within the terms of the overall
contract each such project may be treated as equivalent to a separate contract.
2003 - May [6] Attempt the following questions :
Q&A-1.16 O IPCC Gr. I Paper - 1
(a) X Co. Ltd. charged depreciation on its asset on SLM basis. For the year ended 31.3.2003
it changed to WDV basis. The impact of the change when computed from the date of the
asset coming to use amounts to Rs. 20 lakhs being additional charge.
Decide how it must be disclosed in Profit and Loss Account. Also, discuss, when such
changes in method of depreciation can be adopted by an enterprise as per AS-6.
(e) Briefly describe the disclosure requirements for Amalgamation including additional
disclosure, if any, for different methods of amalgamation as per AS-14.
(4 marks each) [S.A. 15]
Answer :
(a) If in any accounting year company decides to change its method of depreciation, it can do
so by giving a disclosure. The impact of depreciation charge due to change in method must
be quantified and reported by the enterprise.
Following facts must be considered in this regard as per AS-6 on Depreciation
Accounting :
(i) The depreciation method selected should be applied consistently from period to
period.
(ii) A company can change over to a new a method of depreciation only when it is
required by the statute or for compliance with an accounting standard, if it is
considered that the change would result in a more appropriate preparation or
presentation of the financial statement of the enterprise.
(iii) When such a change takes place, then the depreciation must be recalculated in
reference with the new method from the date of the asset coming into use.
If deficiency or surplus arises from re-computation of depreciation by new
method then it must be adjusted in the accounts of the year in which the method is
changed.
(iv) In case the change in the method results in deficiency in depreciation of past years,
it should be charged in the statement of profit and loss account.
(v) In case there is surplus, it is credited to the statement of profit and loss. Such a
change must be treated as a change in accounting policy and its effect must be
quantified and disclosed.
(e) The disclosure requirements for Amalgamation including additional disclosure, if any, for
different methods of amalgamation as per AS-14 are stated in para 43 to 46.
For all amalgamations, following disclosures should be made :
(i) Names and general nature of business of the amalgamating companies;
(ii) The effective date of amalgamation for accounting purpose;
(iii) The method of accounting used to reflect the amalgamation, and
(iv) Particulars of the scheme sanctioned under a statute.
When the amalgamation takes place under the pooling of interest method, the
following additional disclosure should be made :
[Chapter # 1] Accounting Standards O Q&A-1.17
1. Description and number of shares issued, together with the percentage of each
companies equity shares exchanged to effect the amalgamation; and.
2. The amount of any difference between the consideration and the value of net
identifiable assets acquired and treatment thereof.
When the amalgamation is accounted under the purchase method, the disclosures to be
made are :
(i) Consideration for the amalgamation and a description of the consideration paid or
contingency payable on.
(ii) The amount of any difference between the consideration and the value of net
identifiable assets acquired and the treatment thereof including the period of
amortisation of any goodwill arising on amalgamation.
2003 - Nov [6] Attempt the following questions :
(d) A Limited Company charged depreciation on its assets on the basis of W.D.V. method
from the date of assets coming to use till date amounts to Rs. 32.23 lakhs. Now the
company decides to switch over to Straight Line method of providing for depreciation.
The amount of depreciation computed on the basis of S.L.M. from the date of assets
coming to use till the date of change of method amounts to Rs. 20 lakhs.
Discuss as per AS-6, when such changes in method of can be adopted by the
company and what would be the accounting treatment and disclosure requirement.
(4 marks)
(e) X Limited has recognized Rs. 10 lakhs on accrual basis income from dividend on units
of mutual funds of the face value of Rs. 50 lakhs held by it as at the end of the financial
year 31st March, 2003. The dividends on mutual funds were declared at the rate of 20%
on 15th J une, 2003. The dividend was proposed on 10th April, 2003 by the declaring
company. Whether the treatment is as per the relevant Accounting Standard? You are
asked to answer with reference to provisions of Accounting Standard.
(4 marks) [S.A. 20]
Answer :
(d) In the given question, the surplus arising out of retrospective recomputation of depreciation
as per the straight line method is Rs.12.23 lakhs (Rs. 32.23 lakhs -Rs. 20 lakhs). This
should be written back to profit and loss account and should be disclosed accordingly.
(e) Pare 8.4 and 13 of AS-9 on Revenue Recognition states that dividend from investments in
shares are not recognised in the statement of profit and loss until a right to receive payment
is established.
In the given case, the dividend is proposed on 10th April 2003, while it is declared
on 15th J une 2003. Hence, the right to receive payment is established on 15th J une 2003.
As per the above given paragraph, income from dividend on units of mutual funds should
be recognised by X Ltd. in the financial year ended 31st March 2004.
The recognition of Rs. 10 Lakhs on accural basis in the financial year 2002-2003 is
not as per AS-9 'Revenue Recognition'.
2005 - May [6] Answer the following :
Q&A-1.18 O IPCC Gr. I Paper - 1
(e) What are the main principles of allocation between Capital and Revenue accounts on a
Capital scheme? (4 marks) [S.A. 16]
Answer :
The following are the main principles governing the allocation of expenditure on a capital
scheme between capital and revenue accounts :
(i) Capital account should bear all charges for the first construction and equipment of a
project as well as charges for intermediate maintenance of the work which is not yet
opened for service. It would also bear changes for such further additions and
improvements as may be sanctioned under rules made by competent authority.
(ii) Capital receipts in so far as they relate to expenditure previously debited to capital heads,
accruing during the process of construction of a project, should be utilised in reduction
of capital expenditure. Thereafter, their treatment in the accounts will depend on
circumstances, but except under a special rule or order of Government, they should not
be credited to the revenue account of the department or undertaking.
(iii) In the case of works of renewal and replacement which partake both of a capital and
revenue nature, the allocation of expenditure should be regulated by the broad principle
that revenue should pay or provide a fund for the adequate replacement of all wastage
or depreciation of property originally provided out of capital grants and that only the cost
of genuine improvements, whether determined by prescribed rules or formulae or under
special orders of Government, should be debited to capital account. Where under special
orders of Government, a Depreciation or Renewals Reserve Fund is established for
renewing assets of any commercial department or undertaking, the distribution of
expenditure on renewals, and replacements between capital account and the fund should
be so regulated as to guard against over-capitalisation on the one hand and excessive
withdrawals from the fund on the other.
(iv) Subject to above, revenue account should bear all subsequent changes for maintenance
and all working expenses. These embrace all expenditure on the working and upkeep of
the project and also on such renewals and replacements and such additions,
improvements or extensions as prescribed by the Government.
(v) Expenditure on account of repair of damage caused by extraordinary calamities such as
flood, fire, earthquake, enemy action, should be charged to capital account or to revenue
account or divided between them in such a way as may be determined by Government
according to the circumstance of each case.
2005 - Nov [6] Answer the following :
(d) An intangible asset appears in Balance Sheet of A Co. Ltd. at Rs. 16 lakhs as on
31.3.2004. The asset was acquired for Rs. 40 lakhs in April, 1991. The Company has been
amortising the asset value on straight line basis. The policy is to amortise for 20 years.
Do you advise the Company to amortise the entire asset value in the books of the
company as on 31.3.2004? (4 marks) [S.A. 19]
Answer :
[Chapter # 1] Accounting Standards O Q&A-1.19
After the initial recognition of intangible asset, it should be carried at its cost less any
accumulated amortisation and any accumulated impairment losses. As per AS-26 :
(i) Depreciable amount of an intangible asset should be allocated on a systematic basis over
the useful life of the asset.
(ii) Amortization should commence when the asset is available for use.
(iii) Amortization method should reflect the pattern in which the assets economic benefits are
available for use. Otherwise, straight-line method should be used.
Since, the intangible asset of A. Co. Ltd. satisfies the basic requirements of AS-6.
as above, it is not advisable to amortise the remaining asset value i.e. Rs. 16 Lakhs, in
current year.
2006 - May [6] Answer the following :
(b) Explain the Accounting of Revaluation of Assets with reference to AS-10.
(4 marks) [S.A. 15]
Answer :
Accounting of Revaluation of Assets : An enterprise may revalue any particular class of fixed
assets. Such revaluation is made by making appraisal by competent valuers.
The revalued amounts of fixed assets are presented in financial statements, either by
restating both the gross book value and accumulated depreciation so that net book value equal
to net revalued amount or by restating the net book value by adding therein the net increase on
account of revaluation.
Profit on revaluation of fixed assets is credited to Revaluation Reserve Account and Loss
on revaluation is charged to Profit and Loss A/c. If increase in the book value of asset is the
reversal of previously recorded decrease, which was charged to P&L A/c, such increase to the
extent of previous decrease should be credited to Profit and Loss A/c. If decrease in book value
of asset is related to previous increase, such decrease, to the extent of previous increase, will be
adjusted against Revaluation Reserve.
2007 - May [6] Answer the following :
(c) How Government grant relating to specific fixed asset is treated in the books as per AS-12?
(4 marks) [S.A. 18]
(f) When can a company change its accounting policy? (4 marks) [S.A. 18]
Answer :
(c) As per AS - 12 'Accounting for Government Grants', Government grant relating to specific
fixed asset is treated as follows :-
1. Government grants related to specific fixed assets should be presented in the balance
sheet by showing the grant as deduction from the gross value of the fixed assets
concerned in arriving at their book value.
2. When the grant related to a specific fixed asset equal to the whole, or virtually the
whole, of the cost of the asset, the asset should be shown in the balance sheet at a
nominal value.
Q&A-1.20 O IPCC Gr. I Paper - 1
3. Alternatively, government grants related to depreciable fixed assets may be treated as
deferred income which should recognised in the profit and loss statement on a
systematic and rational basis over the useful life of the asset,
i.e. Such grants should be allocated to income over the periods and in the proportions
in which depreciation on those assets is charged.
(i) Grant related to non - depreciable assets are credited to capital reserve under
this method, as there is usually no charge to income in respect of such assets.
(ii) But, when a grant related to a non - depreciable asset requires the fulfillment
of certain obligations, the grant is credited to income over the same period over
which the cost of certain obligations, the grant is credited to income over the
same period over which the cost of meeting such obligations to charged to
income.
(iii) Any differed income is suitably disclosed in the balance sheet pending its
apportionment to profit & loss account.
(f) An accounting policy can be changed only when atleast one of the following conditions can
be satisfied:-
1. When change in required by law (statute).
2. When change is required for compliance with an Accounting Standard.
3. When it is considered that the change would result in a more appropriate presentation
of the financial statement of the enter prise.
Example of change in accounting policy:-
Depreciation method changed from WDV to SLM.
For accounting of construction contract enterprise change their method for revenue
recognition i.e. from complete contract method to percentage to completion
It is necessary to qualify the effect of change on financial statement items. For which
following disclosures are required:-
(i) Any change in an accounting policy which has a material effect is to be disclosed;
(ii) When the impact of such change is material it should be shown in the financial
statements of the period in which such change has been made if the impact is not
ascertainable, the fact thereof is to be disclosed;
(iii) When a change does not have a material effect on the financial statements of the
current period but is reasonably expected to have a material effect subsequently, the
fact of change is to be appropriately disclosed in the period in which such change has
been adopted.
2007 - Nov [5] Answer the following :
(x) What is meant by Accounting estimate? Give two examples for accounting estimate.
(2 marks) [S.A. 14]
Answer :
The result of many business activities are generally uncertain, because of uncertainties in
business activities. Many of the financial statement items are not measured with precision but
measured on the basis of estimates. This is called accounting estimates.
[Chapter # 1] Accounting Standards O Q&A-1.21
On account of such uncertainties, managements makes various estimates and assumption
of assets, liabilities, incomes and expenses as on the date of liabilities, incomes and expenses
as on the date of preparation of financial statements.
Such process of estimation involves judgements, which is based on the latest information
available.
For e.g. !
(i) estimation of Bad debts
(ii) estimation of useful life of depreciable asset
2007 - Nov [6] Answer the following:
(a) Mention six areas in which different accounting policies are followed by Companies.
(4 marks) [S.A. 17]
(e) List the criteria to be applied for rating an enterprise as Level-I enterprise for the purpose
of Compliance of Accounting Standards in India. (4 marks) [S.A. 17]
Answer :
(a) Area in which different accounting policy can be adopted
(i) Method of depreciation, depletion and amortisation.
(ii) Valuation of investment
(iii) Valuation of fixed asset
(iv) Treatment of goodwill
(v) Treatment of retirement benefit
(vi) Conversion of foreign currency.
(e) Enterprise which fall any one or more of following categories are classified as level I
Enterprise!
1. Enterprise whose equity or debt are listed or in the process are listing (in India or
outside India)
2. Bank including co-operative banks
3. Financial institution
4. Enterprise carrying on insurance business.
5. All commercial or business enterprise whose turnover exceed Rs. 50 crore
immediately financial year.
6. All commercial, business enterprise having borrowing including public deposit
exceeding 10 crore at any time during the accounting period.
7. Holding or subsidiary at any one of the above at any time during the accounting
period.
2008 - May [6] Answer the following :
(f) What are the items that are to be excluded in determination of the cost of inventories as per
AS-2? (4 marks) [S.A. 20]
Answer :
Q&A-1.22 O IPCC Gr. I Paper - 1
Para 13 of AS-2 lists down the specific costs which are to be excluded from cost of inventories
The list is as follows :
(i) Abnormal amounts of wasted materials, labour or other production cost.
(ii) Storage costs, unless those costs are necessary in the production process prior to a further
production stage.
(iii) Administrative overheads that do not contribute to bringing the inventories to their
present location and condition; and
(iv) Selling and distribution costs.
As per Para 12, Interest and other borrowing costs are usually considered as not related to
bringing the inventories to their present location and condition and are therefore usually not
included in the cost of inventory.
2008 - Nov [5] Answer the following :
(ii) Mention four Assets, where AS 6 (revised) is not applicable.
(iv) Mention two categories of investments defined by As 13 and also State their valuation
principles. (2 marks each) [S.A. 18]
Answer :
(ii) AS-6 deals with Depreciation Accounting of fixed assets. The AS is applicable to all
assets except:
(a) Forests, Plantations
(b) Wasting Assets, Minerals and Natural Gas
(c) Goodwill
(d) Live stock
(iv) As per As 13 'Accounting for Investments', there are two categories of investments, viz.
Current Investments and Long Term Investments.
According to Para 14 of the standard, the carrying amount for Current Investments is the
lower of cost and fair value whereas Long Terms Investments are valued at cost less
permanent diminutions in value of investment. For current investments. According to this
standard any reduction to fair value and any reversals of such reductions are included in
the profit and loss statement.
2009 - Nov [1] (viii) Explain contract costs as per Accounting Standard-7 related to
Construction Contracts. (2 marks) [S.A. 2]
Answer :
As per para 15 of AS 7 Construction Contracts (revised 2002), contract cost should comprise:
(i) Such costs that relate directly to the specific contract;
(ii) Such costs that are attributable to contract activity in general and can be allocated to
the contract;
(iii) Such other costs as are specifically chargeable to the customer under the terms of the
contract.
2010 - May [1] (viii) According to Accounting Standard-9, when revenue from sales should be
recognised ? (2 marks) [S.A. 2]
[Chapter # 1] Accounting Standards O Q&A-1.23
Answer :
According to AS 9 Revenue Recognition, revenue from sales should be recognised only when
requirements as to performance are satisfied provided that at the time of performance it is not
unreasonable to expect ultimate collection. These requirements can be given as follows:
(i) The seller of goods has transferred to the buyer the property in the goods for a price or
all significant risks and rewards of ownership have been transferred to the buyer and the
seller retains no effective control of the goods transferred to a degree usually associated
with ownership; and
(ii) No significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
PRACTICAL QUESTIONS
2004 - May [6] Attempt the following :
(b) The company deals in three products, A, B and C, which are neither similar nor
interchangeable. At the time of closing of its account for the year 2002-03. The Historical
Cost and net realisable value of the items of closing stock are determined as follows :
Items Historical Cost Net Realisable Value
(Rs. in lakhs) (Rs. in lakhs)
A 40 28
B 32 32
C 16 24
What will be the value of Closing Stock ? (4 marks) [S.A. 16]
(c) During the current year 2002-03, X Limited made the following expenditure relating to its
plant building :
Rs. in lakhs
Routine Repairs 4
Repairing 1
Partial replacement of roof tiles 0.5
Substantial improvements to the electrical wiring
system which will increase efficiency 10
What amount should be capitalised ? (4 marks) [S.A. 17]
(d) A plant was depreciated under two different methods as under :
Year SLM W.D.V.
(Rs. in lakh) (Rs. in lakh)
1 7.80 21.38
2 7.80 15.80
3 7.80 11.68
4 7.80 8.64
Q&A-1.24 O IPCC Gr. I Paper - 1
31.20 57.50
5 7.80 6.38
What should be the amount of resultant surplus/deficiency, if the company decides to
switch over from W.D.V. method to SLM method for first four years? Also state, how will
you treat the same in Accounts. (4 marks) [S.A. 17]
Answer :
(b) According to AS-2, Valuation of inventories, inventories should be value at cost of
acquisition or net realisable value whichever is lower.
On this basis closing stock of the said problem is valued at
Items
Historical Cost
(Rs. in Lakhs)
Net realisable Value
(Rs. in Lakhs)
Valuation of
Closing stock
(Rs in Lakhs)
A.
B.
C.
40
32
16
28
32
24
28
32
16
88 84 76
Therefore, the valuation of closing stock is made at Rs. 76 Lakhs.
(c) According to AS-10 i.e. Accounting for Fixed Assets, expenditure which enhances the
future benefit of the existing asset such as its earning capacity, its life, its physical capacity,
its efficiency etc., should be capitalised on the other hand, the expenditures which maintains
the existing status of the asset should be treated as revenue expenditures.
Hence, on the basis of above provision:
(i) Routine repairs Rs. 4 Lakhs, repairing Rs. 1 Lakh, and partial replacement of roof tiles
Rs. 0.5 Lakh should be treated as revenue expenditure and charged to Profit and Loss
statement.
(ii) Expenditure on electrical wiring system worth Rs. 10 lakh which will increases the
efficiency should be capitalised.
(d) According to AS-6 i.e. Depreciation Accounting, the method of depreciation is applied
consistently, to provide comparability of the results of the operations of the enterprise from
period to period.
A change from one method of charging depreciation to another is made only if the
adoption of the new method is required by statute or for compliance with an accounting
standard or if it is considered that the change would result in a more appropriate preparation
or presentation of the financial statement of the enterprise.
When such a change in the method of depreciation is made, depreciation is
recalculated in reference with the new method from the date of the asset coming into use.
The deficiency or surplus arising from retrospective recomputation of dep. in accordance
with the new method is adjusted in the accounts in the year in which the method of
depreciation is changed.
[Chapter # 1] Accounting Standards O Q&A-1.25
(i) In case the change in the method results in deficiency in depreciation in respect of past
years the deficiency is charged in the statement of profit and loss.
(ii) In case the change in the method result in surplus, the surplus is credited to the
statement of profit and loss.
The above change is treated as a change in accounting policy and its effect is quantified as
per AS-6 and disclosed as per AS-1.
2005 - Nov [6] Answer the following:
(e) Ram Co. (P) Ltd. furnishes you the following information for the year ended 31.3.2005:
Depreciation for the year ended 31.3.2005 Rs. 100 lakhs
(under straight line method)
Depreciation for the year ended 31.3.2005 Rs. 200 lakhs
(under written down value method)
Depreciation for the earlier years combined in written down value method and
its excess to straight line method Rs. 500 lakhs
The Company wants to change its method of claiming depreciation from straight line
method to written down value method.
Decide, how the depreciation should be disclosed in the Financial Statement for the
year ended 31.3.2005. (4 marks) [S.A. 19]
Answer :
As per AS-6 (Revised) Depreciation Accounting, if there is any change in the method of
depreciation, then it should be applied with retrospective effect.
As per AS-6 (Revised) when the change is applied with retrospective effect, there will be
a difference in amount. In such circumstances, the deficiency or surplus, as the case may be,
should be charged in P & L A/c of the year in which such change is adopted.
In the said problem company wants to change its method from SLM to WDV. On the basis
of above provision of AS-6 (Revised), additional amount of Rs 500 lakhs should be charged in
the P & L A/c. for the year ended 31.3.2005. The current depreciation charge of 200 lakhs
determined according to the WDV method should be debited to P&L A/c.
The change in the method of depreciation should be treated as a change in the accounting
policy and appropriately disclosed along with the effect in the financial statement.
2006 - May [6] Answer the following :
(a) X Co. Limited purchased goods at the cost of Rs. 40 lakhs in October. 2005. Till March,
2006 75% of the stocks were sold. The company wants to disclose closing stock at Rs. 10
lakhs. The expected sale value is Rs.11 lakhs and a commission at 10% on sale is payable
to the agent. Advise, what is the correct closing stock to be disclosed as at 31.3.2006.
(4 marks) [S.A. 15]
(d) Arjun Ltd. sold farm equipments through its dealers. One of the conditions at the time of
sale is, payment of consideration in 14 days and in the event of delay interest chargeable
@ 15% per annum. The Company has not realised interest from the dealers in the past.
However, for the year ended 31.3.2006, it wants to recognise interest due on the balances
Q&A-1.26 O IPCC Gr. I Paper - 1
due from dealers. The amount is ascertained at Rs. 9 lakhs. Decide whether the income by
way of interest from dealers is eligible for recognition as per AS-9. (4 marks) [S.A. 15]
Answer :
(a) As per AS-2 that is Valuation of Inventories, inventories are valued at cost or net realisable
value whichever is lower. Cost of inventories comprises cost of purchase, cost of
conversion and other costs incurred in bringing the inventories to their present position and
location. NRV is the estimated selling price in ordinary course of business less estimated
cost of completion and cost necessary to make the sale.
In the instance case, cost of closing stock that forms 25% of Rs. 40 lakhs is Rs. 10
lakhs and NRV is Rs. 9.9 lakhs (i.e. Rs. 11 lakhs - 10% of commission on sale)
X Co. Ltd. should disclose closing stock at Rs. 9.9 lakhs which is lower of cost of
Rs. 10 lakhs. Commission of 10% is to be deducted as it is estimated cost necessary to
make sale.
(d) AS- 9, Revenue recognition deals with the timing of Revenue Recognition in the Profit and
Loss A/c of the enterprises. Revenue is the gross inflow of cash receivables or other
consideration arising in the course of the ordinary activities of the enterprise from the sale
of goods, from the rendering of services & use by others of enterprises resources yielding
interest, royalties and dividends.
Revenue is measured by the charges made to customers or clients for goods supplied
or services rendered and by charges and rewards arising from use of resources by them.
In view of this, the amount of Rs. 9 lakhs by way of interest is not a revenue arising
from sale of goods. It is not the amount i.e. charged from customers by sale of farm
equipment. The amount of interest is charged from dealers on delay in payment of
consideration in 14 days. So such amount is not income to be recognised as per AS-9. Such
amount is to be disclosed as per AS-5.
2007 - May [5] Answer the following :
(ii) A machinery costing Rs.10 lakhs has useful life of 5 years. After the end of 5 years, its
scrap value would be Rs.1 lakh. How much depreciation is to be charged in the books
of the company as per Accounting Standard-6? (2 marks) [S.A. 15]
(ix) ABC Ltd. gave 50,000 equity shares of Rs.10 each (fully paid up) in consideration for
supply of certain machinery by X & Co. The shares exchanged for machinery are quoted
on Bombay Stock Exchange (BSE) at Rs.15 per share, at the time of transaction. In the
absence of fair market value of the machinery acquired, how the value of machinery
would be recorded in the books of the company? (2 marks) [S.A. 15]
(x) A company took a construction contract for Rs.100 lakhs in J anuary, 2006. It was found
that 80% of the contract was completed at a cost of Rs.92 lakhs on the closing date i.e.
on 31.3.2007. The company estimates further expenditure of Rs. 23 lakhs for completing
the contract. The expected loss would be Rs.15 lakhs. Can the company recognise the
loss in the financial statements prepared for the year ended 31.3.2007 ?
(2 marks) [S.A. 16]
Answer :
[Chapter # 1] Accounting Standards O Q&A-1.27
(ii) As per AS - 6 'Depreciation Accounting' the depreciable amount of a depreciable asset
should be allocated on a systematic basis to each accounting period during the useful life
of the asset. In this problem, the depreciation amount can be determined as follows:-
Rs.
Cost of machinery 10,00,000
Less: Scrap value at the end 1,00,000
Value to be written off 9,00,000
Depreciation per year = = =Rs. 1,80,000
(ix) According to AS - 10 'Accounting for Fixed Assets', when fixed assets are acquired in
exchange of share or other securities, it should be recorded at its fair market value or the
fair market value of the securities issued, whichever is more clearly evident.
In this problem, the market value of the securities exchanged for the asset is more clearly
evident, the company should record the asset is more clearly evident. The company
should record the value of machinery at Rs. 7,50,000 (50,000 share @ Rs. 15 i.e. market
price of the share)
(x) According to AS - 7, 'Accounting for construction contract' an expected loss on the
construction contract should be recognised as an expense immediately irrespective of :-
(i) The amount of profit expected to arise in other contracts; or
(ii) Whether or not the work has commenced on the contract; or
(iii) The stage of complection of the contract.
2008 - May [5] Answer the following :
(v) What is the accounting entry to be passed as per AS-10 for the following situations :
(a) Increase in value of fixed asset by Rs. 50,00,000 on account of revaluation.
(b) Decrease in the value of fixed asset by Rs. 30,00,000 on account of revaluation.
(2 marks) [S.A. 16]
Answer :
Particulars L/ F Dr. (Rs.) Cr. (Rs.)
a. Fixed Asset A/c. Dr.
To Revaluation Reserve A/c
(Being the increase in value of fixed asset due to
upward revaluation)
50,00,000
50,00,000
b. Profit and Loss A/c. Dr.
To Fixed Asset A/c
(Being the decrease is not book value of fixed asset due
to downward revaluation
30,00,000
30,00,000
Q&A-1.28 O IPCC Gr. I Paper - 1
(Note: It has been assumed that both the above instances are independent of each other) and
revaluation is done for first time.
2008 - Nov [5] Answer the following :
(iii) Y Ltd. used certain resources of X Ltd. In return X Ltd. receives Rs. 10 lakhs and Rs. 15
lakhs as interest and royalties respectively, from Y Ltd. during the year 2007-08. State
on what basis X Ltd. should recognize their revenue, as per AS 9. (2 marks) [S.A. 18]
Answer :
According to As 9 on 'Revenue Recognition', interest of Rs. 10 lakhs received in the year 2007-
08 should be recognized on the time proportion basis taking into account the amount outstanding
and the rate applicable; whereas royalty of Rs. 15 lakhs received in the same year should be
recognized on accrual basis as per the terms of relevant agreement.
2009 - May [6] Answer the following :
(a) Sony Pharma ordered 12,000 kg. of certain material at Rs. 80 per unit. The purchase price
includes excise duty Rs. 4 per kg in respect of which full CENVAT credit is admissible.
Freight incurred amounted to Rs. 77,400. Normal transit loss is 3%. The company actually
received 11,600 kg. and consumed 10,100 kg. of material. Compute cost of inventory under
AS-2 and abnormal loss. (4 marks) [S.A. 21]
Answer :
Rs.
Purchase price (12,000 kg Rs.80) 9,60,000
Less: CENVAT credit (12,000 kg. Rs.4) 48,000
9,12,000
Add: Freight 77,400
Total material cost 9,89,400
Number of units after normal loss =97% of 12,000 kgs. 11,640 kgs.
Normal cost per kg. Rs.85
Value of closing stock under AS 2 =(11,600 kgs. 10,100 kgs.) Rs. 85 =Rs.1,27,500
Abnormal loss =(11,640 kgs. 11,600 kgs.) Rs.85 =Rs.3,400
2009 - Nov [1] (vii) From the following data, find out value of inventory as on 30.04.2009 using
(a) LIFO method, and (b) FIFO method :
(1) 01.04.2009 Purchased 10 units @ Rs. 70 per unit
(2) 06.04.2009 Sold 6 units @ Rs. 90 per unit
(3) 09.04.2009 Purchased 20 units @ Rs. 75 per unit
(4) 18.04.2009 Sold 14 units @ Rs. 100 per unit. (2 marks) [S.A. 1]
Answer :
(a) Statement showing valuation of closing inventory by LIFO method
Date Receipts Issue Balance
[Chapter # 1] Accounting Standards O Q&A-1.29
Unit Cost/unit Amount Unit Cost/unit Amount Unit Cost/unit Amount
1.4.09
6.4.09
9.4.09
18.4.09
10
20
70
75
700
1,500
6
14
70
75
420
1,050
10
4
4
20
4
6
70
70
70
75
70
75
700
280
280
1,500
280
450
Value of closing inventory as per LIFO method:
Unit Rate Total
4
6
Rs. 70
Rs. 75
Rs. 280
Rs. 450
Total Rs. 730
(b) Statement showing valuation of closing inventory by FIFO method
Date Receipts Issue Balance
Unit Cost/Unit Amount Unit Cost/Unit Amount Unit Cost/Unit Amount
1.4.09
6.4.09
9.4.09
18.4.09
10
20
70
75
700
1,500
6
4
10
70
70
75
420
280
750
10
4
4
20
10
70
70
70
75
75
700
280
280
1,500
750
Value of closing inventory as per FIFO method:
Unit Rate Total
10 Rs.75 Rs.750
2010 - May [1] (v) A company acquired a machine on 1.4.2006 for Rs. 5,00,000. The company
charged depreciation upto 2008-09 on straight line basis with estimated working life of 10 years
and scrap value of Rs. 50,000. From 2009 -10, the company decided to change depreciation
method at 20% on reducing balance method. Compute the amount of depreciation to be debited
to Profits and Loss A/c for the year 2009 - 10. (2 marks) [S.A. 1]
Answer :
Annual depreciation charged by the company up to 2008-09
Q&A-1.30 O IPCC Gr. I Paper - 1
=
=
WDV of machine at the end of 2008-09 by Straight Line Method (SLM)
=Rs. 5,00,000 ! (Rs. 45,000 3) =Rs. 3,65,000
Depreciation by Reducing Balance Method (RBM)
Year
Cost/WDV at the
beginning of the year
Rs.
Depreciation
Rs.
WDV at the end
of the year
Rs.
2006-07
2007-08
2008-09
2009-10
5,00,000
4,00,000
3,20,000
2,56,000
5,00,000 20% =1,00,000
4,00,000 20% = 80,000
3,20,000 20% = 64,000
2,44,000
2,56,000 20% =51,200
4,00,000
3,20,000
2,56,000
2,04,800
Depreciation to be charged in 2009-2010
Rs.
Book value of the machine as per SLM as on 2008-09
Less : Book value of the machine as per RBM as on 2008-09
Add : Depreciation for the year 2009-10 as per RBM
3,65,000
(2,56,000)
1,09,000
51,200
Total depreciation debited to Profit and Loss Account in the year 2009-10 1,60,200
2010 - May [6] Answer the following :
(a) Weak Ltd. acquired the fixed assets of Rs. 100 lakhs on which it received the grant of
Rs. 10 lakhs. What will be the cost of the fixed assets as per AS-12 and how it will be
disclosed in the financial statements. (4 marks) [S.A. 20]
(b) During the current year 2009 - 10 M/s L & C Ltd. made the following expenditure relating
to its plant and machinery :
Rs.
General repairs 4,00,000
Repairing of Electric Motors 1,00,000
Partial Replacement of parts of Machinery 50,000
Substantial improvements to the electrical wiring system
which will increase efficiency of the plant and machinery 10,00,000
What amount should be capitalised according to AS-10 ? (4 marks) [S.A. 21]
[Chapter # 1] Accounting Standards O Q&A-1.31
(d) Raw materials inventory of a company includes certain material purchased at Rs. 100 per
kg. The price of the material is on decline and replacement cost of the inventory at the year
end is Rs. 75 per kg. It is possible to convert the material into finished product at
conversion cost of Rs. 125.
Decide whether to make the product or not to make the product, if selling price is (i)
Rs. 175 and (ii) Rs. 225. Also find out the value of inventory in each case.
(4 marks) [S.A. 21]
Answer :
(a) According to AS 12 Accounting for Government Grants deal with the presentation of
Government grants related to specific fixed assets. According to this As 12 two different
methods for recognition of a Government grant.
According to first method, Government grants related to specific fixed assets should
be presented in the balance sheet by showing the grant as a deduction from the gross value
of the assets concerned in arriving at their book value. Therefore, in the given case, fixed
assets should be presented at Rs. 90 lakhs (Rs. 100 lakhs less Rs. 10 lakhs) in the balance
sheet of Weak Ltd.
According to the second method, Government grants related to depreciable fixed
assets may be treated as deferred income which should be recognised in the profit and loss
statement on a systematic and rational basis over the useful life of the asset, i.e., such grants
should be allocated to income over the periods and in the proportions in which depreciation
on those assets is charged. In this case, fixed assets will be shown at Rs. 100 lakhs in the
balance sheet of Weak Ltd. and the corresponding grant amounting Rs. 10 lakhs will be
treated as deferred income to be recognized over useful life of the fixed asset.
(b) According to AS 10 Accounting for Fixed Assets, expenditure that increases the future
benefits from the existing asset beyond its previously assessed standard of performance is
included in the gross book value, e.g., an increase in capacity. Therefore, in the given case,
repairs amounting Rs. 5 lakhs and partial replacement of parts of machinery worth
Rs.50,000 should be charged to profit & loss account. Rs. 10 lakhs incurred for substantial
improvement to the electrical wiring system which will increase efficiency should be
capitalized.
(d) According to AS 2 Valuation of Inventories, materials and other supplies held for use in the
production of inventories are not written down below cost if the finished products in which they
will be incorporated are expected to be sold at or above cost. But when there has been a decline
in the price of materials and it is estimated that the cost of the finished products will exceed net
realizable value, the materials are written down to net realisable value. In such circumstances,
the replacement cost of the materials may be the best available measure of their net realisable
value.
(i) When the selling price be Rs. 175
Incremental Profit=Rs. 175 - Rs. 125 =Rs.50
Current price of the material =Rs. 75
Q&A-1.32 O IPCC Gr. I Paper - 1
Therefore, it is better not to make the product. Raw material inventory would be valued at
net realisable value i.e. Rs. 75 because the selling price of the finished product is less than
Rs.225 (100 +125) per kg.
(ii) When the selling price be Rs. 225
Incremental Profit =Rs. 225 - Rs. 125 =Rs.100
Current price of the raw material =Rs. 75
Therefore, it is better to make the product.
Raw material inventory would be valued at Rs. 100 per kg because the selling price of the
finished product is not less than Rs. 225.
2010 - Nov [1] {C} (b) HP is a leading distributor of petrol. A detail inventory of petrol in hand
is taken when the books are closed at the end of each month. At the end of month following
information is available :
Sales Rs. 47,25,000
General overheads cost Rs. 1,25,000
Inventory at beginning 1,00,000 litres @ 15/- per litre
Purchases
J une 1 two lakh litres @ 14.25
J une 30 one lakh litres @ 15.15
Closing inventory 1.30 lakh litres
Compute the following by the FIFO as per AS-2 :
(i) Value of Inventory on J une 30.
(ii) Amount of cost of goods sold for J une.
(iii) Profit/Loss for the month of J une. (5 marks)
2010 - Nov [7] Answer the following :
(a) A company installed a plant at a cost of Rs. 20 lacs with estimated useful life of 10 years
and decided to depreciate on straight line method. In the fifth year company decided to
switch over from straight line method to written down value method. Compute the resultant
surplus/deficiency if any, and state how will you treat the same in the accounts.
(4 marks)
(c) An amount of Rs. 9,90,000 was incurred on a contract work upto 31-3-2010. Certificates
have been received to date to the value of Rs. 12,00,000 against which Rs. 10,80,000 has
been received in cash. The cost of work done but not certified amounted to Rs. 22,500. It
is estimated that by spending an additional amount of Rs. 60,000 (including provision for
contingencies) the work can be completed in all respects in another two months. The agreed
contract price of work is Rs. 12,50,000. Compute a conservative estimate of the profit to
be taken to the Profit and Loss Account as per AS-7. (4 marks)
[Chapter # 1] Accounting Standards O Q&A-1.33
Table Showing Marks of Compulsory Questions
Year 06
M
06
N
07
M
07
N
08
M
08
N
09
M
09
N
10
M
10
N
Practical 5
Total 5