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Pinnacle Academy
June 2015 Revision Tests
201-202, Florence Classic, Besides Unnati Vidhyalay,
10, Ashapuri Society, Jain Derasar Rd., Akota, Vadodara-20. ph: 98258 561 55
Financial Reporting
Revision Test
Conducted on 20th June 2015
[Solution is at the end with marking for self-assessment]
Time Allowed-1.5 hours
Q1
(a)
(b)
Maximum Marks- 80
On 30th June 2011, A Ltd. incurred Rs.2,00,000 net loss from disposal of a business
segment. Also, on 30th July 2011, the company paid Rs.60,000 for property taxes
assessed for calendar year 2011. How shall these transactions be included in
determination of net income of A Ltd. for the six months interim period ended on 30th
September 2011?
(4 Marks)
A Ltd. owns 30% of equity capital of B Ltd. B Ltd. in turn owns 35% of equity capital
of C Ltd. and 40% of equity capital of D Ltd. You are required to answer the following
questions:
(i) Is B Ltd. related party of A Ltd.?
(ii) Is C Ltd. related party of A Ltd.?
(iii) Are C Ltd. and D Ltd. related parties?
(4 Marks)
(c)
ABC Ltd. has three segments namely A, B and C. The segment assets of the three
segments are Rs.200 lakhs, Rs.500 lakhs and Rs.1,300 lakhs respectively. Deferred
tax assets included in the assets of each segment are – A: Rs.30 lakhs; B: Rs.50
lakhs and C: Rs.25 lakhs. Applying the test of segment assets of AS 17 decide,
which segments are reportable?
(4 Marks)
(d)
Give four examples of activities that do not necessarily amount to Discontinuing
Operations, but might do so in combination with other circumstances.
(4 Marks)
Q2
(a)
N Ltd. had announced a VRS for its employees on 1st January 2012. The scheme is
scheduled to close on 30th June 2012. The scheme envisaged an initial lump-sum
payment of Rs.2 lakhs and monthly payments over the balance period of service of
employees coming under the plan.
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200 employees opted for the scheme as on 31st March 2012. The total lump sum
payment for these employees would be Rs.250 lakhs and the aggregate of future
payments to them would amount to Rs.1,500 lakhs.
However, no payment had been made to the employees under the scheme up to 31st
March 2012. The company had not made any provision in its accounts towards any
liability under the scheme. Give your view.
(4 Marks)
(b)
During the year 2012 – 13, R Ltd. was sued by competitor for Rs.15 lakhs for
infringement of a trademark. Based on the advice of the company’s legal counsel, R
Ltd. provided for a sum of Rs.10 lakhs in financial statements for the year ended 31st
March 2013. On 18th May 2013, the Court decided in favour of the party alleging
infringement of the trademark and ordered R Ltd. to pay the aggrieved party a sum
of Rs.14 lakhs. The financial statements were prepared by the company’s
management on 30th April 2013 and approved by the board on 30th May 2013.
Should R Ltd. adjust its financial statements for the year ended 31st March 2013?
What would be the treatment of the above, in case the court decision was held on 1st
June 2013?
(4 Marks)
(c)
Goods of Rs.2,00,000 were destroyed due to flood in March 2009. A claim was
lodged with insurance company but no entry was passed in the books for insurance
claim. In March 2012 the claim was passed and the company received Rs.1,50,000
against the claim. Explain the treatment of this item?
(4 Marks)
in the statement of profit and loss after determination of current net profit or loss.
(d)
Garden Ltd. acquired fixed assets viz. Plant and Machinery for Rs.20 lakhs. During
the same year it sold its furniture and fixtures for Rs.5 lakhs. Can the company
disclose, net cash outflow towards purchase of fixed assets in the cash flow
statement as per AS 3?
(2 Marks)
Q3
Following is the consolidated balance sheet of A Ltd. and its subsidiary S Ltd. and its
jointly controlled entity B Ltd. as on 31st March 2014:
Liabilities
Share Capital of Rs.100 each
General Reserve
Profit and Loss account
6% Debentures
Creditors
A Ltd.
B Ltd.
6,00,000
2,00,000
80,000
----75,000
9,55,000
2,00,000
--------1,50,000
67,500
4,17,500
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Assets
Fixed Assets
Stock
Debtors
6% Debentures of B Ltd. acquired at par
Shares of B Ltd. (1,500 shares at Rs.80)
Cash at bank
Profit and loss account
A Ltd.
B Ltd.
4,50,000
1,40,000
80,000
90,000
1,20,000
75,000
--------9,55,000
1,50,000
60,000
45,000
--------12,500
1,50,000
4,17,500
A Ltd. acquired the shares on 1st August 2013. The profit and loss account of B Ltd.
showed a debit balance of Rs.2,25,000 on 1st April 2013.
During June 2013, goods costing Rs.9,000 were destroyed against which the insurer
paid only Rs.3,000. Creditors of B include Rs.30,000 for goods supplied by A Ltd. on
which A Ltd. has made profit of Rs.3,000. Half of these goods were still in stock of B
Ltd. as on 31.03.14. Prepare consolidated balance sheet of A Ltd. following the
proportionate consolidation method.
(16 Marks)
Q4
(a)
A fixed asset was revalued upwards in the year 2005. It was originally acquired in
year 2001 at a cost of Rs.60 lakhs and estimated residual value was Rs.6 lakhs with
a useful life of 9 years. The asset was revalued upwards to Rs.45 lakhs at the end of
year 2005. At the end of the year 2007, the indications of impairment were observed.
The recoverable amount is estimated at Rs.14 lakhs. What should be the accounting
treatment for the year 2007, if–
i. The company has transferred an amount equal to the incremental depreciation due
to upward revaluation to the Profit & Loss account from revaluation reserve.
ii. The company has not made any such transfer as mentioned in (i) above.
Company follows the method of straight line depreciation. Tax rate applicable to
company is 30%. Also, highlight AS 22 impact, if any.
(8 Marks)
(b)
Jet Carriers Ltd. has initiated a lease for four years in respect of a vehicle costing
Rs.20,00,000 with expected useful life of 5 years. The asset would revert to the
company under the lease agreement. The other information available in respect of
lease agreement is:
(1)
The unguaranteed residual value of the equipment after the expiry of the
lease term is estimated at Rs.2,50,000.
(2)
The implicit rate of interest is 10%.
(3)
The annual payments have been determined in such a way that the present
value of the lease payment plus the residual value is equal to the cost of
asset.
Ascertain in the hand of Jet Carriers Ltd.:
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i. The annual lease payment.
ii. The unearned finance income.
iii. The segregation of finance income.
Note:
PV Residual value for 4 years @ 10% is 0.683.
PV Factor for 4 years @ 10% is 3.16987.
(10 Marks)
Q5
(a)
The fair value of plan assets as on 1st April 2009 is Rs.2,00,000. On 30th September
2009, the plan received contributions of Rs.55,000 and paid benefits of Rs.25,000.
The fair value of plan assets as on 31st March 2010 is Rs.3,00,000. As on 1st April
2009 the firm expects to receive interest and dividend income (post tax) on
investment of plan assets @ 9.25 %. The capital gains yield (post tax) for the year is
expected to be 2 % and the administration cost shall be 1%. On net basis 10.25 %
return p.a. is expected.
Determine actual, expected and unexpected return on plan assets as per AS 15.
(6 Marks)
(b)
Following particulars in respect of stock options granted by a company are available:
Grant Date
Number of employees covered
Vesting Condition: Three years continuous employment
Nominal Value per share (Rs.)
Exercise Price per share (Rs.)
Vesting date
Exercise date
Fair value of option on grant date (Rs.)
April 1, 2008
300
10
40
March 31, 2011
July 31, 2011
20
Number of options to vest per employee shall depend on company’s average annual
earnings after tax during vesting period as under:
Average Annual PAT
Less than Rs.100 crores
Rs.100 crores to less than Rs.120 crores
Rs.120 crores to less than Rs.150 crores
Above Rs.150 crores
Solution prepared by
No. of options per employee
Nil
30
45
60
CA. Ashish Lalaji
Be free to send your suggestions / comments to
CA. Ashish Lalaji at 9825856155 /
ashishlalaji@rediffmail.com
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Position on 31.03.09
(i) Company expects to earn Rs.115 crores
(ii) Number of employees expected to be entitled for option
280
Position on 31.03.10
(i) Company expects to earn Rs.130 crores
(ii) Number of employees expected to be entitled for option
270
Position on 31.03.11
(i) Company actually earned Rs.128 crores on an average
(ii) Number of employees entitled for option
275
Position on 31.07.11
Number of employees exercising the option
265
Compute expense to be recognized in each year and value of options forfeited.
(6 Marks)
(c)
On 1.4.2001 ABC Ltd. received Government grant of Rs.300 lakhs for acquisition of
a machinery costing Rs. 1,500 lakhs. The grant was credited to the cost of the asset.
The life of the machinery is 5 years. The machinery is depreciated at 20% on WDV
basis. The Company had to refund the grant in May 2004 due to non-fulfillment of
certain conditions. How you would deal with the refund of grant in the books of ABC
Ltd.?
(4 Marks)
Solution prepared by
CA. Ashish Lalaji
Be free to send your suggestions / comments to
CA. Ashish Lalaji at 9825856155 /
ashishlalaji@rediffmail.com
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Solution of
FR Revision Test
Conducted on 20th June 2015
Q1
(a)
According to AS 25 “Interim Financial Reporting” an enterprise should treat an
interim period to be a separate accounting period (discrete approach). As on 30th
September 2011, A Ltd. will have to report entire Rs.2,00,000 loss on the disposal of
business segment since the loss was incurred during the period. Such loss cannot
be deferred and taken to another interim period.
(2 Marks)
However, a cost charged on an annual basis can be allocated to interim periods on
accrual basis. Since Rs.60,000 property taxes is for the entire calendar year 2011,
Rs.30,000 shall be reported as an expense for six months ended on 30th September
2011; while remaining Rs.30,000 would be reported as prepaid expenses.
(2 Marks)
(b)
(i)
Associates and Joint Ventures of the Reporting Enterprise are related parties.
B Ltd. is an associate of A Ltd. Hence, A Ltd. and B Ltd. are related parties.
(ii)
An associate of associate is not a related party. Only in the case of parent,
subsidiary of subsidiary become related parties.
(iii)
C Ltd. and D Ltd. are Fellow-associates. Fellow-subsidiaries become related
parties because of common control. In case, common control is missing,
parties do not become related.
(1 + 1 + 2 = 4 Marks)
(c)
As per AS 17 “Segment Reporting”, a segment is reportable if segment assets are
10 % or more than the total segment assets. However, segment assets do not
include income tax assets. Hence, deferred tax asset (DTA) should be excluded
from the segment assets to apply the test of segment assets for identifying
reportable segments.
(Rs. in lakhs)
Segment
A
B
C
Current DTA to be Revised
Segment Excluded Segment
Assets
Assets
200
30
500
50
1,300
25
Total Segment Assets
170
450
1,275
1,895
Thus, segments having assets of Rs.189.5 lakhs or more are reportable i.e.
segments B and C.
(4 Marks)
Solution prepared by
CA. Ashish Lalaji
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(d)
AS 24 “Discontinuing Operations” explains the criteria for determination of
discontinuing operations. Examples of activities that do not necessarily amount to
discontinuing operations, but might do so in combination with other circumstances:
(i)
(ii)
(iii)
(iv)
Gradual or evolutionary phasing out of a product line or class of service
Discontinuing, even if relatively abruptly, several products within an ongoing
line of business
Shifting of some production or marketing activities for a particular line of
business from one location to another
Closing of a facility to achieve productivity improvements or other cost
savings
An example related to consolidated financial statements is selling a subsidiary
whose business activities are similar to those of the parent or other subsidiaries.
(4 Marks)
Q2
(a)
As per AS 29 a provision should be recognized if the following conditions are
satisfied:
Condition 1
Condition 2
Condition 3
Present obligation is a result Outflow of resources to Reliable estimate of
of past event
settle the obligation is the obligation can be
probable
made
VRS stated in January 2012 As
and
when
the
existed on balance sheet date. employees’
applications
are accepted, outflow of
As on balance sheet date resources to settle the
nearly 200 employees had obligation is probable.
opted
for
the
scheme
evidencing the existence of a Also, it is probable that the
liability on the balance sheet liability will increase, if
date.
more people opt for VRS.
Lump sum payment is
Rs.250 lakhs and
estimated payment is
Rs.1,500
lakhs
(given)
Since all the conditions for recognition of provision are met, the company should
recognize provision for the year ending 31st March 2012.
(4 Marks)
(b)
As per AS 4 “Contingencies and Events Occurring after Balance Sheet Date”,
adjustments to assets and liabilities are required for events occurring after the
balance sheet date that provide additional information materially affecting the
determination of amounts relating to conditions existing at the balance sheet date.
In the given case, R Ltd. was sued by competitor for infringement of trademark
during the year 2012-13 for which provision was also made by it. The decision of
court on 18th May 2013 for payment of the penalty will constitute as an adjusting
event occurred before approval of the financial statements. Hence, R Ltd. should
adjust the provision upward by Rs.4 lakhs to reflect the award decreed by the court
to be paid by them to its competitor.
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Had the judgment of the court been delivered on 1st June 2013 it would be
considered to be post reporting period i.e. event occurred after the approval of the
financial statements. In that case, no adjustment in the financial statements of 201213 would have been required.
(4 Marks)
(c)
The exact reason for not recording the accounting entry in the year of lodging the
claim should be ascertained. One of the possible reasons may be the uncertainty
related to realization of the claim, which shall make the claim a possible asset. Such
contingent assets are not recognizable in books as per AS 29.
In other words, no error or omission was committed in 2008 – 09 and hence the
collection of Rs.1,50,000 in 2011 – 12 does not represent a prior period item.
However, if the company had a strong and valid case then collection of the claim
cannot be deemed to be uncertain. In that case, not recording claim in 2008 – 09 is
an omission and hence the collection of Rs.1,50,000 in 2011 – 12 is a prior period
item.
In both the cases, for better understanding of financial statements this item should
be disclosed separately.
(4 Marks)
(d)
As per AS 3, an enterprise should report separately major classes of gross cash
receipts and gross cash payments arising from investing and financing activities.
Acquisition and disposal of fixed assets represent two separate class of cash flows
requiring separate disclosure.
(2 Marks)
Q3
Holding of A Ltd. in JCE is 75%. However, proportionate consolidation
method is to be followed. Hence, JCE is not deemed to be subsidiary of A
Ltd.
Working Notes:
(1) Profits earned by B Ltd. during 2013 – 14:
Amount
(Rs.)
Profit and Loss account as on 31.03.14
(1,50,000)
Add: Loss by fire (9,000 – 3,000)
6,000
(1,44,000)
Less: Profit and Loss account as on 01.04.13 (2,25,000)
81,000
(1 Mark)
Solution prepared by
CA. Ashish Lalaji
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(2) Analysis of Profits of B Ltd.:
Capital Revenue
Profits
Profits
(Rs.)
(Rs.)
Profit and Loss account as on 01.04.13 (2,25,000)
--------Profit in 2013 – 14 (4:8)
27,000
54,000
(1,98,000)
54,000
Loss by fire in June 2013
(6,000)
--------(2,04,000)
54,000
A Ltd. (75%)
(1,53,000)
40,500
(3 Marks)
(3) Determination of Goodwill / Capital Reserve:
Cost of Shares
Less: Paid up Value
Share in capital profits
Goodwill
Amount
(Rs.)
1,20,000
1,50,000
(1,53,000)
1,23,000
(2 Marks)
(4) Consolidated Profit and Loss Account:
Profit and Loss account as on 31.03.14 of A Ltd.
Add: Share in Revenue Profits
Unrealised profit (3,000 X 50% X 75%)
Amount
(Rs.)
80,000
40,500
(1,125)
1,19,375
(2 Marks)
Consolidated Balance Sheet of A Ltd. as on 31st March 2014
I.
1.
(a)
(b)
Equity and Liabilities:
Shareholders’ Funds
Share Capital
Reserves and Surplus
2.
Non Current Liabilities
Long Term Borrowings (6% Debentures)
3.
II.
1.
Current Liabilities
Trade Payables (1,25,625 – 22,500)
Total
Assets:
Non Current Assets
Fixed Assets
- Tangible
- Intangible (Goodwill)
Non Current Investment
(Debentures of B Ltd.)
Note No.
Amount
1
6,00,000
3,19,375
Amount
9,19,375
1,12,500
1,12,500
1,03,125
1,03,125
11,35,000
7,75,500
5,62,500
1,23,000
90,000
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2.
Current Assets
Inventories
Trade Receivables (1,13,750 – 22,500)
Cash and Cash Equivalents
Total
3,59,500
2
1,83,875
91,250
84,375
11,35,000
See accompanying notes to Consolidated Balance Sheet.
Notes forming part of Consolidated Balance Sheet
Note
No.
1
2
Amount
(Rs.)
Reserves and Surplus
General Reserve
2,00,000
Consolidated Profit and Loss Account 1,19,375
Inventories
As given [1,40,000 + (60,000 X 75%)]
Less: Unrealised Profit
Amount
(Rs.)
3,19,375
1,83,875
1,85,000
1,125
(8 Marks)
Solution prepared by
Q4
(a)
CA. Ashish Lalaji
Cost of Machinery at beginning of 2001
Less: Depreciation [60 – 6 / 9] X 5 years
Book value at end of year 2005
Add: Revaluation gain
Revised book value at end of year 2005
Less: Revised depreciation [45 – 6 / 4] X 2 years
Book value at end of year 2007
Less: Recoverable amount
Impairment loss
60 lakhs
30 lakhs
30 lakhs
15 lakhs
45 lakhs
19.5 lakhs
25.5 lakhs
14 lakhs
11.5 lakhs
(2 Marks)
Situation (i): Incremental depreciation is: 9.75 – 6 i.e. 3.75 lakhs p.a. i.e. Rs.7.5
lakhs for 2 years. Thus, balance in revaluation reserve shall be Rs.7.5 lakhs [15 –
7.5]. Thus, impairment loss of Rs.7.5 lakhs shall be debited to revaluation reserve
and balance Rs.4 lakhs shall be debited to profit and loss account.
(2 Marks)
Further, deferred tax asset should be recognised on that part of impairment loss
recognized in Profit & Loss account i.e. for Rs.1.2 lakhs [4 X 30%] if the firm is
reasonably certain in respect of future taxable income against which such deferred
tax asset shall be recognised.
(2 Marks)
Solution prepared by
CA. Ashish Lalaji
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Situation (ii): If no transfer has been taken for additional depreciation then balance
in revaluation reserve shall be Rs.15 lakhs. Thus, entire impairment loss of Rs.11.5
lakhs shall be debited to revaluation reserve i.e. no portion of impairment loss shall
be debited to profit and loss account. In this case, there shall be no impact of AS 22.
(2 Marks)
(b)
(i)
Determination of Lease Rent:
Let the lease rent charged at the end of each year be Rs.x
Year Lease Receipts PVF (10%)
1–4
X
3.16987
4
2,50,000
0.683
PV
3.16987X
1,70,750
3.16987X + 1,70,750
Lease rent is charged in such a manner that cost of the asset is recovered.
3.16987X + 1,70,750 = 20,00,000 i.e. X = Rs.5,77,074
(4 Marks)
(ii)
Determination of Unearned Finance Income:
Unearned
Finance Income = [(5,77,074 X 4) + 2,50,000 ] – 20,00,000 = Rs.5,58,296
(1 Mark)
(iii)
Statement Showing Segregation of Finance Income:
Year Due at the
beginning
1
2
3
4
20,00,000
16,22,926
12,08,145
7,51,886
Finance
Income
@ 10 %
Total
Dues
2,00,000 22,00,000
1,62,293 17,85,219
1,20,815 13,28,960
75,188
8,27,074
Lease
Due at the
Receipts
end
5,77,074
5,77,074
5,77,074
5,77,074
16,22,926
12,08,145
7,51,886
2,50,000
(5 Marks)
Q5
(a)
Determination Unexpected Return on Plan Assets:
Plan assets on 1st April 2009
Add: Expected Return at 10.25%
Add: Contributions on 30th September 2009
Les: Benefits paid on 30th September 2009
Add: Expected return on Rs.30,000 (55 – 25) at 10.25% for 6 months
Add: Unexpected return (balancing figure)
Plan assets as on 31st March 2010 (given)
2,00,000
20,500
2,20,500
55,000
2,75,500
25,000
2,50,500
1,538
2,52,038
47,962
3,00,000
(5 Marks)
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Determination of Expected and Actual Return on Plan Assets:
Expected Return (20,500 + 1,538)
Unexpected Return
Actual Return
22,038
47,962
70,000
(1 Mark)
(b)
Computation of Provision to be recognized each year:
Date
31.03.09
31.03.10
31.03.11
Fair Value of Options
Expected to be
Exercised
280 X 30 X 20
i.e. Rs.1,68,000
270 X 45 X 20
i.e. Rs.2,43,000
275 X 45 X 20
i.e. Rs.2,47,500
Provision
p.a. based
on FV
1,68,000
3
i.e. 56,000
2,43,000
3
i.e. 81,000
Cumulative
Provision to
be recognized
Provision
Already
Recognised
Provision
to be
Recognised
56,000
---------
56,000
81,000 X 2 i.e.
1,62,000
56,000
1,06,000
2,47,500
1,62,000
85,500
----(5 Marks)
Value of options forfeited = (275 – 265) i.e. 10 X 45 X 20 = Rs.9,000
(1 Mark)
(c)
According to AS 12 on “Accounting for Government Grants”, the amount refundable
in respect of a grant related to a specific fixed asset should be recorded by
increasing the book value of the asset by the amount refundable. If the book value is
increased, depreciation on the revised book value should be provided prospectively
over the residual useful life of the asset.
1st April, 2001 Cost of machinery (Rs.1,500 – 300)
31st March, 2002 Less: Depreciation @ 20%
Book value
31st March, 2003 Less: Depreciation @ 20%
Book value
31st March, 2004 Less: Depreciation @ 20%
1st April, 2004 Book value
May, 2004 Add: Refund of grant
Revised book value
1,200.00
240.00
960.00
192.00
768.00
153.60
614.40
300.00
914.40
Depreciation @ 20% on the revised book value amounting Rs.914.40 lakhs is to be
provided prospectively over the residual useful life of the asset i.e. years ended 31st
March, 2005 and 31st March, 2006.
(4 Marks)
Solution prepared by
CA. Ashish Lalaji
Be free to send your suggestions / comments to
CA. Ashish Lalaji at 9825856155 /
ashishlalaji@rediffmail.com
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