Practical Problems on Accounting Standards for Service Sectors

AS- 9

1. Arjun Ltd. sold farm equipment through its dealer. One of the conditions at the time of
sale is payment of consideration in 14 days and, in the event of delay, interest is
chargeable @ 15% p.a. The company has not realized interest from the dealers in the
past. However, for the year ended 31.03.2013, it wants to recognized interest due on the
balances due from dealers. The account is ascertained at Rs. 9 lakhs.
Decide whether the income by way of interest from dealers is eligible for recognition as
per AS 9

2. Advise B Ltd. about the treatment of the following in the final statement of accounts for
the year ended 31st March, 2013.
As a result of a recently announced price revision granted by the Govt. of India w.e.f
01.07.2012 the company stands to receive Rs. 5,20,000 form its customers in respect of
sales made in 2012-13.

3. TVSM Ltd. has taken a transit insurance policy. Suddenly, in the year 2012-13, the
percentage of accident has gone up to 7% and the company wants to recognize
insurance claim as revenue in 2012-13. In accordance with relevant accounting
standard.
Do you agree?

4. Bottom Ltd. entered into a sale deed for its immovable property before the end of the
year. But registration was done with Registrar subsequent to Balance Sheet date.
But before finalization, is it possible to recognize the sale and the gain at the Balance
Sheet date? Give your views with reasons.

5. SCL Ltd. sells agricultural products to dealers, One of the conditions of sale is that
interest is payable at the rate of 2% p.m. for delayed payments. Percentage of interest
recovery is only 10% on such overdue outstanding due to various reasons. During the
year 2012-13, the company wants to recognize the interest receivable. Do you agree?

6. When can revenue be recognized in the case of transaction of sale of goods?

7. X Ltd. has recognized Rs. 10 lakhs on accrual basis from dividends on units of mutual
fund of the face value of Rs. 50 lakhs held by it as at the end of the financial year 31st
March, 2013. The dividends on mutual funds were declared @ 20% on 15th July 2013.
The dividends were proposed on 10th April, 2013 by the declaring company. Whether
the treatment is as per the relevant Accounting Standard?



8. Y co. Ltd. used certain resources of X Ltd. In return X Ltd. received Rs. 10 lakhs and Rs.
15 lakhs as interest and royalties, respectively from Y Ltd. during the year 2012-13.

9. Advise P Ltd. about the treatment of the following in final statement of accounts for the
year ended 31.03.13:
A claim lodged with the Railways in March 2010, for loss of goods of Rs. 2,00,000 had
been passed for payment in March 2013 for Rs. 1,50,000. No entry was passed in the
books of the company when claim was lodged.
AS-7

1. Calculate the contract revenue from the following details

2. On 31.12.2012, Viswakarma Construction Company Ltd. undertook a contract to
construct a building for Rs. 85 lakhs. On 31.03.2013, the company found that it had
already spent Rs. 64,99,000 on the construction. Prudent estimate of the additional cost
for completion was Rs. 32,01,000
What is the additional provision for foreseeable loss which must be made in the final
accounts for the year ended 31.03.12 As per provisions AS 7 on Accounting for
construction contract?
3. A firm of contractors obtained a contract for completion of bridges across river Revathi.
The following details are available in the records kept the year ended 31st March, 2012.

The firm seeks your advice and assistance in presentation of accounts keeping in view
the requirements of AS-7 Accounting for Construction Contract
4. Assume a Rs. 10,00,000 contract that requires 3 years to complete and incurs a total cost
of Rs. 8,10,000. The following data pertain to the construction period



The firm seeks your advice and assistance in the presentation of accounts keeping in view the
requirements of AS-7.
Accounting Standards related to Fixed assets
AS-10

1. During the current year 2012-13, X Ltd. made the following expenditure relating to its
plant building.

How much amount should be capitalized?

2. A company obtained term loan during the year ended 31.3.2012, to an extent of Rs. 650
lakhs for modernisation and development of its factory. Building worth Rs. 120 lakhs
were completed and Plant and Machinery worth Rs. 350 lakhs were installed by
31.3.2012. A sum of Rs. 70 lakhs has been advanced for assets, the installation of which
is expected in the following year. Rs. 110 lakhs has been utilised for Working Capital
requirements. Interest paid on the loans of Rs. 650 lakhs during the year 2011-12
amounted to Rs. 58.50 lakhs.
Flow should the interest amount be treated in the accounts of the company.

3. From the following particulars determine the amount of profit to be transferred to Profit
and Loss Account in each of the companies for the period 2013:
In 1993, identical building space purchased for official purposes by X Ltd. and Y Ltd. for
Rs. 10,00,000 for each space. X Ltd. revalued the same building for Rs. 15,00,000 in 1998
and recorded the revaluation in the books of accounts accordingly. Y Ltd. did not make
any revaluation like X Ltd. Both X Ltd. and Y Ltd. however, sold their respective office
space for Rs. 20,00,000 in 2013. (Ignore depreciation and tax).
4. A company has purchased plant and machinery in the year 2009-10 for Rs. 90. A balance
of Rs. 10 lakhs is still payable to the suppliers for the same. The supplier waived off the


balance amount during the financial year 2012-13. The company treated it as income
and credited to profit and loss account during 2012-13
5. On December 1, 2013, Mitra Ltd. purchased Rs.6,00,000 worth of land for a factory site.
Mitra Ltd. razed an old building on the property and sold the materials it salvaged from
the demolition. Mitra Ltd. incurred additional costs and realized salvage proceeds
during December 2013 as follows:
Demolition of old building Rs. 50,000
Legal fees for purchase contract and recording ownership Rs. 10,000
Title guarantee insurance Rs. 12,000
Proceeds from sale of salvaged materials Rs. 8,000
In its December 31, 2013 Balance Sheet, Mitra Ltd. should report a balance in the land
account.

6. On March 31, 2013, Winn Company traded in an old machine having a carrying amount
of Rs. 1,68,000, and paid cash difference of Rs. 60,000 for a new machine having a total
cash price of Rs. 2,05,000. On March 31, 2013, what amount of loss should Winn
Company recognize on this exchange?

7. One customer from whom Rs. 10 lakhs are recoverable for credit sales given a motor car
in full settlement of dues. The directors estimate that the market value of the motor car
transferred is Rs. 10.50 lakhs. As on the date of the balance sheet the car has not been
registered in the name of the auditee. As an auditor, what would you do in this
situations?

8. A publishing company undertook repair and overhauling of its machinery at a cost of Rs.
5.00 lakhs to maintain them in good condition and capitalized the amount, as it is more
than 25% of the original cost of the machinery. As an auditor, what would you do in this
situation?

9. Is Project under sale fixed or current asset?

10. Amrit Ltd. expects that a plant has become useless which is appearing in the books at Rs.
20 lakhs gross value. The company charges SLM depreciation on a period of 10 years
estimated life and estimated scrap value of 3%. At the end of 7th year the plant has been
assessed as useless. Its estimated net realisable value is Rs. 6,20,000. Determine the
loss/gain on retirement of the fixed assets?

AS 6
Methods of Charging Depreciation
Capital/Source of Fund
(i) Sinking Fund Method
(ii) Annuity Method


(iii) Insurance Policy Method
Time Base
(i) Fixed Installment Method
(ii) Reducing Balance Method
(iii) Sum of Years Digit Method
(iv) Double Declining Method
Use Base
(i) Working Hours Method
(ii) Mileage Method
(iii) Depletion Service Hours Method
(iv) Unit method

1. On 1.7.2009 W Ltd. purchased a machinery for Rs. 1,10,000 and spent Rs. 6,000 on its
installation. The expected life of the machine is 4 years, at the end of which the
estimated scrap value will be Rs. 16,000. Desiring to replace the machine on the expiry
of its life, the company establishes a Sinking Fund. Investments are expected to realize
5% interest.
On 30.06.2013, the machine was sold off as scrap for Rs. 18,000 and the investments
were retained at 5% less than the book value. On 1.7.2013, a new machine is installed at
a cost of Rs. 1,25,000. Sinking Fund table shows that Rs. 0.2320 invested each year will
produce Rs. 1 at the end of 4 years at 5%.
Show the necessary ledger accounts in the books of W Ltd.

2. Sri Tirthankar takes a lease for 5 years for Rs. 10,000. He decides to write off the lease
by annuity method charging 5% interest p.a. Show the lease account for 5 years.
The annuity table shows that annual amount necessary to write off Rs.1 in 5 years at 5%
p.a. is Rs. 0.230975.
3. In 2011, a company acquired a mine at a cast of Rs. 5,00,000. The estimated reserve of
minerals is 50,00,000 tonnes, of which 80% is expected to be realised. The first three
years raisings are 1,50,000; 2,00,000 and 2,50,000 tonnes, respectively. Show the Mines
Account, charging depreciation under Depletion Method.

4. S & Co. purchased a machine for Rs. 1,00,000 on 1.1.2011. Another machine costing Rs.
1,50,000 was purchased on 1.7.2012. On 31.12.2013, the machine purchased on
1.1.2011 was sold for Rs. 50,000. The company provides depreciation at 15% on
Straight Line Method. The company closes its accounts on 31st December every year.
Prepare (i) Machinery A/c, (ii) Machinery Disposal A/c and (iii) Provision for
Depreciation A/c.

5. Ram Ltd. which depreciates its machinery at 10% p.a. on Diminishing Balance Method,
had on 1st January, 2013 Rs. 9,72,000 on the debit side of Machinery Account. During
the year 2013 machinery purchased on 1st January, 2011 for Rs. 80,000 was sold for Rs.


45,000 on 1st July, 2013 and a new machinery at a cost of Rs. 1,50,000 was purchased
and installed on the same date, installation charges being Rs. 8,000.
The company wanted to change the method of depreciation from Diminishing Balance
Method to Straight Line Method with effect from 1st January, 2010. Difference of
depreciation up to 31st December, 2013 to be adjusted. The rate of depreciation
remains the same as before. Show Machinery Account.

AS-28

1. Z Ltd. acquired a machine for Rs. 31,00,000 on 01.04.2010. The machine has ten years
life with Rs. 1,00,000 salvage value and was depreciated using straight-line method. On
31.03.2012 a test for impairment reveals the following :-
Present value of future cash flow Rs. 14,50,000
Net Selling Price Rs. 16,00,000
Estimated salvage value Nil
Assuming loss for impairment is recognized for the year 31.03.2012. What should be the
depreciation expenses for the year ended 31.03.2013?
2. N Ltd. gives the following estimates of cash flows relating to fixed asset on 31.03.2012.
The discount rate is 10%.

The Asset was purchased on 01.04.2010 for Rs. 25,00,000. The useful life of the asset is
7 years. The salvage value of the asset is Rs. 50,000. Net Selling Price is Rs. 10,00,000
after incurring an cost of Rs. 50,000.
Calculate impairment loss and the amount of depreciation to be charged for the year
2012-13.

3. AB Ltd. acquired C Ltd. as on 31.03.2010 for Rs. 6,000 Lakhs [Goodwill (to be amortised
in 5 years) Rs. 1,000 Lakhs and other Fixed Assets Rs. 5,000 Lakhs]. The anticipated
useful life of the acquired assets is 8 years. The company uses straight-line method of
depreciation with no residual values. On 31.03.2012, due to change in Government
policies, the company estimates the significant decline in production. The Net Selling
Price is Rs. 3,000 Lakhs. The cash flow forecast based on recent financial budget for the
next 6 years after considering changed Government policies are as follows, incremental
financing cost is 10% which represent current market assessment of the time value of
money.



You are required to calculate the amount of impairment loss and revised carrying
amount?

4. Shiva Ltd recognises Goodwill at Rs. 25 lakhs in the Balance Sheet. An amount of Rs. 9
lakhs is allocable on a reasonable and consistent basis to a CGU. The carrying amount of
the CGU is Rs. 27 lakhs before allocation of goodwill. What will be the treatment of
Impairment Loss if the recoverable amount of the CGU is (1) Rs. 32 lakhs, (2) Rs. 22
lakhs and (3) (Rs. 2 lakhs).
5.
Ayushman Ltd is engaged in a business of genetically creating high breed food products
and manufacturing. A major portion of its output is exported.
During April 2008, to support its activities, the company had acquired a R&D cum
Manufacturing Plant for a total consideration of Rs. 7.50 crores. Identifiable Assets were
worth Rs. 5 crores and the balance was treated as Goodwill, to be amortised over a
period of 5 years. The useful life of the plant was estimated at 20 years. The company
adopts a Straight Line Method of depreciation for its assets with a NIL residual value.
In March 2011, new Government had sworn in and put a restriction on export of all
agricultural produces. This had let to impairment of Ayushmans assets. Ayushman had
recognised the Impairment Loss by determining the recoverable amount of assets at Rs.
3.40 crores.
In March 2013, due to change in policy, the restriction was removed and the recoverable
amount of the plant is estimated at Rs. 4.27 crores.
If the companys financial year ends on 31st March
(a) Compute the Impairment Loss recognised for the year ending 31st March,2011 and
determine its allocation
(b) Compute the reversal of Impairment Loss for the year ending 31st March 2013 and
determine its allocation
(c) If the recoverable amount on 31st March 2013 is determined at 3.40 crores, what is
the amount of reversal to be recognised?