SUGGESTED SOLUTION

CA INTERMEDIATE

SUBJECT- COST AND MANAGEMENT ACCOUNTING

Test Code – IJP 2502

BRANCH - () (Date :)

Head Office : Shraddha, 3rd Floor, Near Chinai College, Andheri (E), Mumbai – 69.
Tel : (022) 26836666

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ANSWER : 1(A)
Events occurring after the balance sheet date are those significant events, both favourable
and unfavorable, that occur between the balance sheet date and the date on which the
financial statements are approved by the Board of Directors in the case of a company, and by
the corresponding approving authority in the case of any other entity. Assets and liabilities
should be adjusted for events occurring after the balance sheet date that provide additional
evidence to assist the estimation of amounts relating to conditions existing at the balance
sheet date or that indicate that the fundamental accounting assumption of going concern is
not appropriate.
On the basis of above principles, following will be the accounting treatment in the financial
statements for the year ended at 31 March 2020:
(i) Since on 31 March 2020, Tee Ltd. was expecting a heavy decline in the demand of the
stitching machine. Therefore, decline in the value during April, 2020 will be
considered as an adjusting event. Hence, Tee Ltd. needs to adjust the amounts
recognized in its financial statements w.r.t. net realizable value at the end of the
reporting period. Accordingly, inventory should be written down to Rs. 4,000 per
machine. Total value of inventory in the books will be 50 machines × Rs. 4,000= Rs.
2,00,000.
(ii) A fire took place after the balance sheet date i.e. during 2020 -2021 financial year.
Hence, corresponding financials of 2019-2020 financial year should not be adjusted
for loss occurred due to fire. However, in this circumstance, the going concern
assumption will be evaluated. In case the going concern assumption is considered to
be appropriate even after the occurrence of fire, no disclosure of the same is
required in the financial statements. Otherwise, disclosure be given.
(iii) Since the transfer of risk and reward and sale was complete in the month of May,
2020 when conveyance and possession got complete, no revenue should be
recognized with respect to it in the financial statements of 2019-2020. However, a
disclosure for the same should be given by the entity.
(iv) Since the notice has been received after 31 March but before 30 June 2020 (approval
date), the said grant shall be adjusted in the financial statements for financial year
2019-2020 because the violation of the conditions took place in the financial year
2019 - 2020 and the company must be aware of it.
(5 Marks)

ANSWER : 1(B)
Principles for recognition of provisions: As per AS 29, "a provision shall be recognised
when:
(i) an entity has a present obligation (legal or constructive) as a result of a past
event;
(ii) it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
(iii) a reliable estimate can be made of the amount of the obligation. If these
conditions are not met, no provision shall be recognised."

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 Accounting treatment under the given scenarios:
(i) On 31st March, 2020, since it is evident to the lawyer that Chaos Limited may
lose the case and also a reliable estimate of the outflow can be made as Rs.
3, 00, 000, there is a present obligation. Hence, provision should be recognised
for Rs. 3, 00, 000 for the amount which may be required to settle the obligation.
(ii) Under new regulation, an entity is required to upgrade its facilities by 31 st
March, 2021. However, on 31st March, 2020, i.e. at the end of the reporting
period, there is no obligation because there is no obligating event either for the
costs of upgrading the facilities or for fines under the regulations. Hence, no
provision should be recognized on 31st March, 2020 for upgrading the facilities
by 31st March, 2021.
(iii) The obligating event is the sale of health care equipment with a warranty, which
gives rise to a legal obligation. Here, an outflow of resources embodying
economic benefits in settlement is probable for the warranties as a whole. Hence,
a provision is recognized for the best estimate of the costs of making good under
the warranty products sold before the end of the reporting period as follows:
Probability of warranty cases for the entity where repair/replacement may be
required as per past experience
= 1% of Rs. 5, 00, 00, 000 = Rs. 5, 00, 000
Estimated cost of repair / replacement = Rs. 5, 00, 000×10% = Rs. 50,000.
(5 Marks)

ANSWER : 1(C)
i. Annual lease rent
Total lease rent
= 130% of ₹2, 25, 000× Output during lease period/Total output
= 130% of ₹2, 25, 000×(60, 000 + 75, 000 + 90, 000)/
(60, 000 + 75, 000 + 90, 000 + 1, 20, 000 + 1, 05, 000)

= 2, 92, 500×2, 25, 000 units /4, 50, 000 units = ₹1, 46, 250
Annual lease rent = ₹1, 46, 250/3 = ₹48, 750
ii. Lease rent Income to be recognized in each operating year
Total lease rent should be recognized as income in proportion of output during
lease period, i.e. in the proportion of 60, 000: 75, 000: 90, 000 or 4: 5: 6
Hence income recognized in years 1, 2 and 3 will be as:
𝑌𝑒𝑎𝑟 1₹39, 000, 𝑌𝑒𝑎𝑟 2₹48, 750 𝑎𝑛𝑑 𝑌𝑒𝑎𝑟 3₹58, 500.

iii. Depreciation for three years of lease

Since depreciation in proportion of output is considered appropriate, the
depreciable amount ₹2, 25, 000 should be allocated over useful life 5 years in
proportion of output, i.e. in proportion of 60: 75: 90: 120: 105.
Depreciation for year 1 is ₹30, 000, year 2 = 37, 500 and year 3 = 45, 000.
(5 Marks)

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ANSWER : 1(D)
Computation of Basic earnings per share
Earnings Shares Earnings/Share
₹ ₹
Net profit for the year 2022 72, 00, 000
Weighted average no. of shares during year 30, 00, 000
2022 Basic earnings per share 2.40
(72, 00, 000/30, 00, 000)

Computation of Diluted earnings per share

Earnings Shares Earnings/Share
Net profit for the year 2022 72, 00, 000
Weighted average no. of shares during 30, 00, 000
year 2022
Number of shares under option 6, 00, 000
Number of shares that would have been
issued at fair value
(6, 00, 000×20. 00)/25. 00 (4, 80, 000)
Diluted earnings per share 72, 00, 000 31, 20, 000 2.31
(rounded-off)
Note: The earnings have not been increased as the total number of shares has been
increased only by the number of shares (1, 20, 000) deemed for the purpose of the
computation to have been issued for no consideration.
To the extent that partly paid shares are not entitled to participate in dividends during
the reporting period they are considered the equivalent of options.
(5 Marks)

ANSWER : 1(E)
Tax as per accounting profit 15, 00, 000×20% = ₹3, 00, 000
Tax as per Income-tax Profit 2, 50, 000×20% = ₹50, 000
Tax as per MAT 7, 50, 000×7. 50% = ₹56, 250
Tax expense = Current Tax + Deferred Tax
₹3, 00, 000 = ₹50, 000 + Deferred tax
Therefore, Deferred Tax liability as on 31-03-2020
= ₹3, 00, 000 − ₹50, 000 = ₹2, 50, 000

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 Amount of tax to be debited in Profit and Loss account for the year 31-03-2020
Current Tax + Deferred Tax liability + Excess of MAT over current tax
= ₹50, 000 + ₹2, 50, 000 + ₹6, 250(56, 250 − 50, 000) = ₹3, 06, 250

(5 Marks)

ANSWER : 2(A)
Gain from curtailment
(Rs. in lakhs
Reduction in gross obligation 750.00
[(750/6, 000)×100] = 12. 5%
Less: Proportion of unamortised past service cost
(12.5% of Rs. 150) (18. 75)
Gain from curtailment 731. 25

The liability to be recognised after curtailment in the balance sheet of Samvit Ltd.
is estimated as under:
Rs.
Reduced gross obligation (Rs. 6,000 - Rs. 750) 5, 250. 00
Less: Fair value of plan assets (4, 875. 00)
375.00
Less: Unamortised past service cost 131. 25)
(150. 00 − 18. 75)
Liability to be recognised in the balance sheet 243. 75

(5 Marks)

ANSWER : 2(B)

(i) As per AS 11 'The Effect of Changes in Foreign Exchange Rates", a foreign

currency transaction should be recorded, on initial recognition in the reporting
currency, by applying to the foreign currency amount the exchange rate between
the reporting currency and the foreign currency at the date of the transaction.
Moreover, at each balance sheet date,
foreign currency monetary items should be reported using the closing rate.
Accordingly, on 31.12 .2020 borrowings will be recorded at ₹1, 32, 00, 000
(i.e., ₹3, 00, 000×₹44. 00 ). On 31.3 .2021 borrowings (monetary items) will be
recorded at ₹1, 33, 50, 000 (i.e. $3, 00, 000×₹44. 50 ).

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 Journal of Kumar Ltd.
Date Particular Dr. (₹) Cr. (₹)
31-12-2020 Bank A/c Dr. 1, 32, 00, 000

To Foreign Loan Account 1, 32, 00, 000

31-03-2021 Foreign Exchange Difference Account
A/c Dr. 1, 50, 000
To Foreign Loan Account 1, 50, 000
30-06-2021 Foreign Loan Account A/c Dr. 1, 33, 50, 000
Foreign Exchange Difference Account 75,000
A/c
To Bank A/c 1, 34, 25, 000
(ii) In case borrowings were repaid before Balance Sheet Date, then the entry would
be as follows:
Date Particular Dr. (₹) Cr. (₹)

28-02-2021 Foreign Loan Account A/c 1, 32, 00, 000

Foreign Exchange Difference Account A/c 60,000

To Bank A/c 1, 32, 60, 000

Working Notes:
(i) The exchange difference of ₹ 1, 50, 000 is arising because the transaction has
been reported at different rate ( ₹44. 50 = 1 US $) from the rate initially
recorded (i.e., ₹ 44 = 1 US $) from the rate initially recorded (i.e., ₹ 44 = 1 US $)
(ii) The exchange difference of ₹75, 000 is arising because the transaction has been
settled at an exchange rate ( ₹44. 75 = 1 US$) different from the rate at which
reported in the last financial statements ( ₹44. 50 = 1 US$).
(iii) The exchange difference of ₹ 60,000 is arising because the transaction has been
settled at a different rate (i.e., ₹ 44. 20 = 1 US $) than the rate at which initially
recorded (1 US $ = ₹44. 00 )
(5 Marks)

ANSWER : 3(A)

(i) X Ltd., Y Ltd. & W Ltd. are related to each other. Z Ltd. & W Ltd. are related to each
other by virtue of associate relationship. However, neither X Ltd. nor Y Ltd. is related
to Z Ltd. and vice versa since neither control nor significant influence exists between
them.
(ii) Himalaya Ltd. and Aravalli Ltd are related parties since key management personnel of
Himalaya Ltd. i.e. its managing director holds 80% in Aravalli Ltd. and hence

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 disclosure of transaction between them is required irrespective of whether the
transaction was done at normal selling price. Hence the contention of Chief
Accountant of Himalaya Ltd that these sales require no disclosure under related party
Transactions, is wrong.
(5 Marks)

ANSWER : 3(B)
As per para 29 of AS 25 'Interim Financial Reporting', income tax expense is recognized
in each interim period based on the best estimate of the weighted average annual
income tax rate expected for the full financial year.
If different income tax rates apply to different categories of income (such as capital gains
or income earned in particular industries) to the extent practicable, a separate rate is
applied to each individual category of interim period pre-tax income.
Rs.
Estimated annual income exclusive of estimated capital gain 25, 00, 000
(33, 00, 000 − 8, 00, 000) (A)
Tax expense on other income:
30% on Rs. 5, 00, 000 1, 50, 000
40% on remaining Rs. 20, 00, 000 8, 00, 000
(B) 9, 50, 000
𝐵
Weighted average annual income tax rate = 𝐴
=

(9, 50, 000/25, 00, 000)×100 = 38%

Tax expense to be recognized in each of the quarterly reports
Rs.

Quarter I - Rs. 7,00,000 × 38% 2, 66, 000

Quarter II - Rs. 8,00,000 × 38% 3, 04, 000

Quarter III - Rs. (12, 00, 000 − 8, 00, 000)×38% 1, 52, 000

Rs. 8, 00, 000×12% 96,000 2, 48, 000

Quarter IV - Rs. 6,00,000 × 38% 2, 28, 000

10, 46, 000

(5 Marks)
ANSWER : 4(A)
As per AS 24, a discontinuing operation is a component of an enterprise:
(a) that the enterprise, pursuant to a single plan, is:

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 (i) disposing of substantially in its entirety, such as by selling the component
in a single transaction or by demerger or spin-off of ownership of the
component to the enterprise's shareholders; or
(ii) disposing of piecemeal, such as by selling off the component's assets and
settling its liabilities individually; or
(iii) terminating through abandonment; and
(b) that represents a separate major line of business or geographical area of
operations; and
(c) that can be distinguished operationally and for financial reporting purposes.
Mere gradual phasing out is not considered as discontinuing operation as defined
under AS 24, 'Discontinuing Operations'. Examples of activities that do not
necessarily satisfy criterion of the definition, but that might do so in combination
with other circumstances, include:
(a) Gradual or evolutionary phasing out of a product line or class of service;
(b) Shifting of some production or marketing activities for a particular line of
business from one location to another; and
(c) Closing of a facility to achieve productivity improvements or other cost
savings. In this case, it cannot be considered as Discontinuing Operation
as per AS-24 as the and there is no specific time bound activities like
shifting of assets and employees. Moreover, the new segment i.e.,
commercial vehicle production line in a new factory has not started.
(ii) No, the resolution is salient about stoppage of the Car segment in definite time
period. Though, sale of some assets and some transfer proposals were passed
through a resolution to the new factory, but the closure road map and new
segment starting roadmap are missing.
Hence, AS 24 will not be applicable and it cannot be considered as Discontinuing
operations.
(iii) Yes, phased and time bound program resolved in the board clearly indicates the
closure of the passenger car segment in a definite time frame and will constitute
a clear roadmap.
Hence, this action will attract compliance of AS 24 and it will be considered as
Discontinuing Operations as per AS-24.

ANSWER : 4(B)
As per AS 4 'Contingencies and Events Occurring After the Balance Sheet Date',
adjustment to assets and liabilities are required for events occurring after the balance
sheet date that provide additional information materially affecting the determination of
the amounts relating to conditions existing at the Balance Sheet date.
A debtor for Rs. 20,00,000 suffered heavy loss due to earthquake in the last week of
February, 2016 which was not covered by insurance. This information with its
implications was already known to the company. The fact that he became bankrupt in
April, 2016 (after the balance sheet date) is only an additional information related to the
condition existing on the balance sheet date. Accordingly, full provision for bad debts
amounting Rs. 20,00,000 should be made, to cover the loss arising due to the insolvency
of a debtor, in the final accounts for the year ended 31st March 2016. Since the company
has already made 5% provision of its total debtors, additional provision amounting Rs.
19,00,000 shall be made (20,00,000×95%).
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 (5 Marks)

ANSWER : 5(A)
(a) As per AS 29 "Provisions, Contingent Liabilities and Contingent Assets", a
provision should be recognized when (a) An enterprise has a present obligation
as a result of a past event and (b) It is probable that an outflow of resources
embodying economic benefits will be required to settle the obligation and (c) A
reliable estimate can be made of the amount of the obligation. If these conditions
are not met, no provision should be recognized.
From the above, it is clear that for the contingencies considered by the company,
neither a present obligation exists because of past event, nor a reliable estimate
can be made of the amount of the obligation. Accordingly, a provision cannot be
recognized for such contingencies under the facts and circumstances of the case.
(b) As per AS 29 'Provisions, Contingent Liabilities and Contingent Assets', a past
event will lead to present obligation when the enterprise has no realistic
alternative to settle the obligation created by the past event. However, when
environmental damage is caused there may be no obligation to remedy the
consequences. The causing of the damage will become an obligating event when
a new law requires the existing damage to be rectified. Where details of a
proposed new law have yet to be finalised, an obligation arises only when the
legislation is virtually certain to be enacted. In the given case it is virtually certain
that law will be enacted requiring clean-up of a land already contaminated.
Therefore, an oil company has to provide for such clean-up cost in the year in
which the law is virtually certain to be enacted.
(5 Marks)

ANSWER : 5(B)
Determination of Nature of Lease
Present value of unguaranteed residual value at the end of 3 rd year = Rs.
50, 000×0. 7513 = Rs. 37,565
Present value of lease payments = Rs. 5,00,000-Rs. 37, 565 = Rs. 4, 62, 435
The percentage of present value of lease payments to fair value of the equipment
is(Rs. 4,62,435/Rs. 5, 00, 000)×100 = 92. 487%.
Since, lease payments substantially covers the major portion of the fair value; the
lease constitutes finance lease.
Calculation of Unearned Finance Income
Annual lease payment = Rs. 4, 62, 435/2. 4868 = Rs. 1,85,956 (approx.)
Gross investment in the lease = Total minimum lease payments + unguaranteed
residual value
= ( Rs. 1, 85, 956×3) + Rs. 50,000
= Rs. 5, 57, 868 + Rs. 50, 000 = Rs. 6, 07, 868
Unearned finance income
= Gross investment - Present value of minimum lease payments and
unguaranteed residual value
= Rs. 6, 07, 868-Rs. 5, 00, 000 = Rs. 1, 07, 868
(5 Marks)

ANSWER : 6(A)
(i) Calculation of Basic Earnings per share for the year ended 31stMarch, 2022
including the comparative figure:

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 (a) Earnings for the year ended 31st March, 2021 = EPS × Number of shares
outstanding during 2020-2021
= ₹62. 30×10, 00, 000 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠
= ₹6, 23, 00, 000
(b) Adjusted Earnings per share after taking into consideration bonus issue
Adjusted Basic EPS = Earnings for the year 2020-2021 / Total outstanding
shares +Bonus issue
= ₹6, 23, 00, 000/(10, 00, 000 + 5, 00, 000)

= ₹6, 23, 00, 000/15, 00, 000

= ₹41. 53 per share

(c) Basic EPS for the year 2021-2022

Basic EPS = Total Earnings - Preference Shares Dividend) / (Total shares
outstanding at the beginning + Bonus issue + weighted average of the
shares issued in January, 2022)
=(90, 00, 000 − ₹(1, 00, 00, 000×8%)/(10, 00, 000 + 5, 00, 000 +
(2, 00, 000×⋅3/12))

= ₹82, 00, 000/15, 50, 000 shares

= ₹5. 29 per share
(ii) In case of a bonus issue, equity shares are issued to existing shareholders for no
additional consideration. Therefore, the number of equity shares outstanding is
increased without an increase in resources. Since the bonus issue is an issue
without consideration, the issue is treated as if it had occurred prior to the
beginning of the year 2021, the earliest period reported.
However, the share issued at full market price does not carry any bonus element
and usually results in a proportionate change in the resources available to the
enterprise. Therefore, it is taken into consideration from the time it has been
issued i.e. the time-weighting factor is considered based on the specific shares
outstanding as a proportion of the total number of days in the period.
(5 Marks)

ANSWER : 6(B)
As per para 13 of Accounting Standard (AS) 22, Accounting for Taxes on Income",
deferred tax in respect of timing differences which originate during the tax holiday
period and reverse during the tax holiday period, should not be recognized to the extent
deduction from the total income of an enterprise is allowed during the tax holiday
period as per the provisions of sections 10 A and 10 B of the Income-tax Act. Deferred
tax in respect of timing differences which originate during the tax holiday period but
reverse after the tax holiday period should be recognized in the year in which the timing
differences originate. However, recognition of deferred tax assets should be subject to
the consideration of prudence. For this purpose, the timing differences which originate
first should be considered to reverse first.
Out of Rs. 1,000 lakhs depreciation, timing difference amounting Rs. 400 lakhs (Rs. 50
lakhs × 8 years) will reverse in the tax holiday period and therefore, should not be

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 recognized. However, for Rs. 600 lakhs (Rs. 1,000 lakhs. Rs. 400 lakhs), deferred tax
liability will be recognized for Rs. 240 lakhs ( 40% of Rs. 600 lakhs) in first year. In the
second year, the entire amount of timing difference of Rs. 2,000 lakhs will reverse only
after tax holiday period and hence, will be recognized in full. Deferred tax liability
amounting Rs. 800 lakhs ( 40% of Rs. 2,000 lakhs) will be created by charging it to profit
and loss account and the total balance of deferred tax liability account at the end of
second year will be Rs. 1,040 lakhs ( 240 lakhs +800 lakhs).
(5 Marks)

ANSWER : 7(A)
As per para 58 of the AS 15, the detailed actuarial valuation of the present value of
defined benefit obligations may be made at intervals not exceeding three years.
However, with a view that the amounts recognized in the financial statements do not
differ materially from the amounts that would be determined at the balance sheet date,
the most recent valuation is reviewed at the balance sheet date and updated to reflect
any material transactions and other material changes in circumstances (including
changes in interest rates) between the date of valuation and the balance sheet date. The
fair value of any plan assets is determined at each balance sheet.
Since AS-15 (Para 58) states that actuarial valuation needs to be done at least once in
three years. Since management had done the actuarial valuation in Previous Year, they
can go ahead with exemption for this year subject to evaluation and conclusion by
management as at balance sheet date that there are no significant changes in the
amount of liability compared to previous year. Hence working done by the finance
manager is appropriate. It is in line with AS 15 , since company had recently done the
actuarial valuation in previous year and there is no material changes in the external
environment.
(5 Marks)

ANSWER : 7(B)
As per AS 11 "The Effects of Changes in Foreign Exchange Rates", Foreign
currency monetary items should be reported using the closing rate.
Non-monetary items which are carried in terms of historical cost denominated in
a foreign currency should be reported using the exchange rate at the date of the
transaction. Exchange differences arising on the settlement of monetary items or
on reporting an enterprise's monetary items at rates different from those at
which they were initially recorded during the period, or reported in previous
financial statements, should be recognised as income or as expenses in the
period in which they arise.
(i) Items given in the question will appear in the Balance Sheet at the following
values:
Trade Payables (30, 96, 000/86 = 36, 000 German Currency)
𝑥₹90 = ₹32, 40, 000
Plant and Machinery 18,500 German Currency 𝑋₹88 = ₹16, 28, 000
Trade Receivables (50, 40, 000/84 = 60, 000 German Currency)
𝑥₹90 = ₹54, 00, 000

(ii) Amount of gain / loss on each transaction on account of exchange difference:

Exchange loss on Transaction of import of goods from Try Ltd. = ₹(1, 44, 000)

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 [36,000 German Currency 𝑋₹4 (i.e. 90 − 86 )]
Exchange gain on Transaction of export of goods to Cream Ltd = ₹3, 60, 000
[60,000 German Currency 𝑋₹6 (i.e. 90 − 84 )]

(5 Marks)

ANSWER : 8(A)
(i) a) Reporting entity- Maya Ltd.
● Sheetal Ltd. (subsidiary) is a related party
● Fair Ltd. (subsidiary) is a related party
(b) Reporting entity- Sheetal Ltd.
● Maya Ltd. (holding company) is a related party
● Fair Ltd. (subsidiary) is a related party
(c) Reporting entity- Fair Ltd.
● Maya Ltd. (holding company) is a related party
● Sheetal Ltd. (holding company) is a related party
● Care Ltd. (investor/ investing party) is a related party
(d) Reporting entity- Care Ltd.
● Fair Ltd. (associate) is a related party
(iii) Mr. Subhash Kumar is Key management personnel as he has the authority for
planning, directing and controlling the activities of A Ltd. He also holds
substantial interest in B Ltd. as he holds 72% capital of B Ltd. Thus, Mr. Subhash
is related party for both A Ltd. and B Ltd. Moreover, as per the definition of
related party relationship described in para 3 of AS 18, enterprises over which
Subhash is able to exercise significant influence are also related parties. Thus, a
Ltd. and B Ltd. will also be construed as related to each other.

(5 Marks)

ANSWER : 8(B)
As per para 36 of AS 25 "Interim Financial Reporting", seasonal or occasional revenue
and cost within a financial year should not be deferred as of interim date untill it is
appropriate to defer at the end of the enterprise's financial year. Therefore, dividend
income, extra- ordinary gain, and gain on sale of investment received during 3rd
quarter should be recognised in the 3^"rd " quarter only. Similarly, sales promotion
expenses incurred in the 3 rd quarter should also be charged in the 3rd quarter only.
Further, as per the standard, if there is change in the accounting policy within the
current financial year, then such a change should be applied retrospectively by restating
the financial statements of prior interim periods of the current financial year. The
change in the method of depreciation or inventory valuation is a change in the
accounting policy. Therefore, the prior interim periods' financial statements should be
restated by applying the change in the method of valuation retrospectively.
Accordingly, the adjusted profit before tax for the 3^"rd " quarter will be as follows:

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 Statement showing Adjusted Profit Before Tax for the third quarter
(Rs. in lakhs)
Profit before tax (as reported) 4
Add: Dividend income Rs. (4-1) lakhs 3
Excess depreciation charged in the 3rd. quarter, due to changein the 9
method, should be applied retrospectively Rs. (12-3) lakhs
Extra ordinary gain Rs. (2-1) lakhs 1
Cumulative loss due to change in the method of inventory valuation should 1
be applied retrospectively (3-2) lakhs
18
Less: Sales promotion expenses (80% of Rs. 15 lakhs) 15
Gain on sale of investment (occasional gain should not bedeferred) 5
Adjusted Profit before tax for the third quarter 1

(5 Marks)

ANSWER : 9(A)
As per AS 24 'Discontinuing Operations', a discontinuing operation is a component of an
enterprise:
(i) that the enterprise, pursuant to a single plan, is:
(1) disposing of substantially in its entirety,
(2) disposing of piecemeal, or
(3) terminating through abandonment; and
(ii) that represents a separate major line of business or geographical area of
operations; and
(iii) that can be distinguished operationally and for financial reporting purposes.
As per provisions of the standard, business enterprises frequently close facilities,
abandon products or even product lines, and change the size of their work force in
response to market forces.
While those kinds of terminations generally are not, in themselves, discontinuing
operations, they can occur in connection with a discontinuing operation. Examples of
activities that do not necessarily satisfy criterion of discontinuing operation are 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; In the given
case, the company has enforced a gradual enforcement of change in product line and
does not represent a separate major line of business and hence is not a discontinued
operation. If it were a discontinuing operation, the initial disclosure event is the
occurrence of one of the following, whichever occurs earlier:
(i) the enterprise has entered into a binding sale agreement for substantially all of
the assets attributable to the discontinuing operation; or

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 (ii) the enterprises board of directors or similar governing body has both approved a
detailed, formal plan for discontinuance and made an announcement of the plan.

(5 Marks)

ANSWER : 9(B)
(a) Reporting entity- M Ltd.
• S Ltd. (subsidiary) is a related party
• F Ltd.(subsidiary) is a related party
(b) Reporting entity-S Ltd.
• M Ltd. (holding company) is a related party
• F Ltd. (subsidiary) is a related party
(c) Reporting entity- F Ltd.
• M Ltd. (holding company) is a related party
• S Ltd. (holding company) is a related party
• C Ltd. (investor/ investing party) is a related party
(d) Reporting entity- C Ltd.
• F Ltd. (associate) is a related party
(5 Marks)

ANSWER : 10(A)
As per AS 11 on 'The Effects of Changes in Foreign Exchange Rates', all foreign currency
transactions should be recorded by applying the exchange rate on the date of
transactions. Thus, goods purchased on 1.1.20X1 and corresponding creditors would be
recorded at $11,25,000$ (i.e. $ 15,000 × 75)
According to the standard, at the balance sheet date all monetary transactions should be
reported using the closing rate. Thus, creditors of US $15, 000 on 31. 3. 20×1 will be
reported at ' 11, 10, 000 (i.e. $15, 000× ' 74 ) and exchange profit of ' 15,000 (i.e.
11, 25, 000 − 11, 10, 000 ) should be credited to Profit and Loss account in the year
ended 31st March, 20X1.
On 7.7.20 ×1, creditors of $15, 000 is paid at the rate of ` 73 . As per AS 11, exchange
difference on settlement of the account should also be transferred to Profit and Loss
account. Therefore, 15,000 (i.e. 11, 10, 000 − 10, 95, 000 ) will be credited to Profit and
Loss account in the year ended 31st March, 20×2.
(5 Marks)

ANSWER : 10(B)
Computation of theoretical ex-rights fair value per Share
𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑙𝑙 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠 𝑖𝑚𝑚𝑒𝑑𝑖𝑎𝑡𝑒𝑙𝑦 𝑝𝑟𝑖𝑜𝑟 𝑡𝑜 𝑒𝑥𝑒𝑟𝑐𝑖𝑠𝑒 𝑜𝑓 𝑟𝑖𝑔ℎ𝑡𝑠 + 𝑇𝑜𝑡𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑 𝑓𝑟𝑜𝑚 𝑒𝑥𝑒𝑟𝑐𝑖𝑠𝑒 𝑜𝑓 𝑟𝑖𝑔ℎ𝑡𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑝𝑟𝑖𝑜𝑟 𝑡𝑜 𝑒𝑥𝑒𝑟𝑐𝑖𝑠𝑒 +𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 𝑖𝑠𝑠𝑢𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑒𝑥𝑒𝑟𝑐𝑖𝑠𝑒

(𝑅𝑠.21.00×5,00,000 𝑆ℎ𝑎𝑟𝑒𝑠 )+( 𝑅𝑠. 15.00×1,00,000 𝑆ℎ𝑎𝑟𝑒𝑠 )

5,00,000 𝑆ℎ𝑎𝑟𝑒𝑠 +1,00,000 𝑆ℎ𝑎𝑟𝑒𝑠

Theoretical ex-rights fair value per share = Rs. 20.00

Computation of earnings per share
(a) Computation of adjustment factor
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 𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑜𝑟 𝑡𝑜 𝑒𝑥𝑒𝑟𝑐𝑖𝑠𝑒 𝑜𝑓 𝑟𝑖𝑔ℎ𝑡𝑠 (21.00)
(b) 𝑇ℎ𝑒𝑜𝑟𝑒𝑡𝑖𝑐𝑎𝑙 𝑒𝑥−𝑟𝑖𝑔ℎ𝑡𝑠 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
= (20.00)
= 1. 05

Computation of earnings per share Year 2015-16 Year 2016-17

EPS for the year 2015 − 16 as originally reported: Rs.2.20
(Rs. 11,00,000/5,00,000 shares)
EPS for the year 2015 − 16 restated for rights issue: Rs.2.10
[Rs. 11, 00, 000/(5, 00, 000 shares ×1. 05)]
EPS for the year 2016-17 including effects of rights issue Rs. 2.55
15,00,000
(5,00,000× )+(6,00,000× )
2
12
10
12

(5 Marks)

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