Test Series: May, 2020

MOCK TEST PAPER 1

FINAL (NEW) COURSE: GROUP – I
PAPER – 1: FINANCIAL REPORTING
Question No.1 is compulsory. Candidates are required to answer any four questions from the
remaining five questions.
Wherever necessary, suitable assumptions may be made and disclosed by way of a note.
Working notes should form part of the answers.
Time Allowed – 3 Hours Maximum Marks – 100
1. (a) Flywing Airways Ltd is a company which manufactures aircraft parts and engines and sells them
to large multinational companies like Boeing and Airbus Industries.
On 1 April 20X1, the company began the construction of a new production line in its aircraft parts
manufacturing shed.
Costs relating to the production line are as follows:
Details Amount
Rs.’000
Costs of the basic materials (list price Rs.12.5 million less a 20% trade discount) 10,000
Recoverable goods and services taxes incurred not included in the purchase cost 1,000
Employment costs of the construction staff for the three months to 30 June 20X1 1,200
Other overheads directly related to the construction 900
Payments to external advisors relating to the construction 500
Expected dismantling and restoration costs 2,000

Additional Information
The construction staff was engaged in the production line, which took two months to make ready
for use and was brought into use on 31 May 20X1.
The other overheads were incurred in the two months period ended on 31 May 20X1. They
included an abnormal cost of Rs.3,00,000 caused by a major electrical fault.
The production line is expected to have a useful economic life of eight years. At the end of that
time Flywing Airways Ltd is legally required to dismantle the plant in a specified manner and
restore its location to an acceptable standard. The amount of Rs.2 million mentioned above is the
amount that is expected to be incurred at the end of the useful life of the production line. The
appropriate rate to use in any discounting calculations is 5%. The present value of Re.1 payable
in eight years at a discount rate of 5% is approximately Re.0·68.
Four years after being brought into use, the production line will require a major overhaul to
ensure that it generates economic benefits for the second half of its useful life. The estimated
cost of the overhaul, at current prices, is Rs.3 million.
The Company computes its depreciation charge on a monthly basis.
No impairment of the plant had occurred by 31 March 20X2.

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 Analyze the accounting implications of costs related to production line to be recognized in the
balance sheet and profit and loss for the year ended 31 March, 20X2. (12 Marks)
(b) On 1 July 20X1, FA Ltd acquired 75% of the equity shares of Bolton Ltd and gained control of
Bolton Ltd. Bolton Ltd has 12 million equity shares in issue.
Details of the purchase consideration are as follows:
– On 1 July 20X1, FA Ltd issued two shares for every three shares acquired in Bolton Ltd. On
1 July 20X1, the market value of an equity share in FA Ltd was Rs.6.50 and the market value
of an equity share in Bolton Ltd was Rs. 6.00.
– On 30 June 20X2, FA Ltd will make a cash payment of Rs. 7.15 million to the former
shareholders of Bolton Ltd. who sold their shares to FA Ltd on 1 July 20X1. On 1 July 20X1,
FA Ltd would have needed to pay interest at an annual rate of 10% on borrowings.
– On 30 June 20X3, FA Ltd may make a cash payment of Rs. 30 million to the former
shareholders of Bolton Ltd who sold their shares to FA on 1 July 20X1. This payment is
contingent upon the revenues of FA Ltd. growing by 15% over the two-year period from
1 July 20X1 to 30 June 20X3. On 1 July 20X1, the fair value of this contingent consideration
was Rs. 25 million. On 31 March 20X2, the fair value of the contingent consideration was
Rs. 22 million.
On 1 July 20X1, the carrying values of the identifiable net assets of Bolton Ltd in the books of
that company totaled Rs. 60 million. On 1 July 20X1, the fair values of these net assets totaled
Rs. 70 million. The rate of deferred tax to apply to temporary differences is 20%.
During the nine months ended on 31 March 20X2, Bolton Ltd had a poorer than expected
operating performance. Therefore on 31 March 20X2, it was necessary for FA Ltd to recognize an
impairment of the goodwill arising on acquisition of Bolton Ltd, amounting to 10% of its total
computed value.
Compute the impairment of goodwill on acquisition of Bolton Ltd under both the methods
permitted in the relevant Ind AS for the initial computation of the non -controlling interest in Bolton
Ltd at the date of acquisition. (8 Marks)
2. (a) During the year ended 31st March,20X2, Blue Ocean group changed its accounting policy for
depreciating property, plant and equipment, so as to apply components approach fully, whilst at
the same time adopting the revaluation model.
In years before 20X1-20X2, Blue Ocean group’s asset records were not sufficiently detailed to
apply a components approach fully. At the end of 31st March, 20X1, management commissioned
an engineering survey, which provided information on the components held and their fair values,
useful lives, estimated residual values and depreciable amounts at the beginning of 20X1-20X2.
The results are shown as under:
Property, plant and equipment at the end of 31 st March,20X1
Rs.
Cost 25,000
Depreciation (14,000)
Net book value 11,000
Depreciation expense for 20X1-20X2 (on old basis) 1,500

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 Some results of the engineering survey:
Valuation 17,000
Estimated residual value 3,000
Average remaining asset life (years) 7
However, the survey did not provide a sufficient basis for reliably estimating the cost of those
components that had not previously been accounted for separately, and the existing records
before the survey did not permit this information to be reconstructed.
The board of directors considered how to account for each of the two aspects of the accounting
change. They determined that it was not practicable to account for the change to a fuller
components approach retrospectively, or to account for that change prospectively from any
earlier date than the start of 20X1-20X2.
Also, the change from a cost model to a revaluation model is required to be accounted for
prospectively. Therefore, management concluded that it should apply Blue Ocean group’s new
policy prospectively from the start of 20X1-20X2.
Blue Ocean group’s tax rate is 30 per cent.
Compute the impact of change in accounting policy related to change in carrying amount of
Property, Plant & Equipment under revaluation method and impact on taxes based on the basis
of information provided. Show the impact of each item affected on financial statements by the
analysis of stated issue. (6 Marks)
(b) Blueberry Ltd entered into the following transactions during the year ended 3 1st March,20X2:
(a) Entered into a speculative interest rate option costing Rs. 10,000 on 1 stApril,20X0 to borrow
Rs. 6,000,000 from Exon Bank commencing 30th June,20X2 for 6 months at 4%.
The value of the option at 31stMarch.20X2 was Rs.15,250.
(b) Purchased 6% debentures in Fox Ltd on 1 stApril,20X1 (their issue date) for Rs. 150,000 as
an investment. Blueberry Ltd. intends to hold the debentures, until their redemption at a
premium, in 5 years’ time. The effective rate of interest of the bond is 8%.
(c) Purchased 50,000 shares in Cox Ltd on 1 stOctober,20X2 for Rs.3.50 each as an investment.
The share price on 31st March,20X2 was Rs. 3.75.
Show the accounting treatment and relevant extracts from the financial statements for the year
ended 31st March,20X2 of transactions related to financial instruments. Blueberry Ltd designates
financial assets at fair value through Profit or loss only when this is unavoidable. (10 Marks)
(c) Mr. Atul is an independent director of a company X Ltd. He plays a vital role in th e management
of X Ltd. and contributes in major decision making process of the organisation. X Ltd. pays
sitting fee of Rs.2,00,000 to him for every Board of Directors’ (BOD) meeting he attends.
Throughout the year, X Ltd. had 5 such meetings which was attended by Mr. Atul.
Similarly, a non-executive director, Mr. Naveen also attended 5 BOD meetings and charged
Rs. 1,50,000 per meeting. The Accountant of X Ltd. believes that they being not the employees
of the organisation, their fee should not be disclosed as per related party transaction.
Examine whether the sitting fee paid to independent director and non -executive director is
required to be disclosed in the financial statements prepared as per Ind AS? (4 Marks)
3. (a) Entity A acquired a subsidiary, entity B, during the year. Summarised information from the
consolidated statement of profit and loss and balance sheet is provided, together with some
supplementary information.

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 Consolidated statement of profit and loss Amount(Rs.)
Revenue 3,80,000
Cost of sales (2,20,000)
Gross profit 1,60,000
Depreciation (30,000)
Other operating expenses (56,000)
Interest cost (4,000)
Profit before taxation 70,000
Taxation (15,000)
Profit after taxation 55,000

Consolidated balance sheet 20X2 20X1

Amount(Rs.) Amount(Rs.)
Assets
Cash and cash equivalents 8,000 5,000
Trade receivables 54,000 50,000
Inventories 30,000 35,000
Property, plant and equipment 1,60,000 80,000
Goodwill 18,000 —
Total assets 2,70,000 1,70,000
Liabilities
Trade payables 68,000 60,000
Income tax payable 12,000 11,000
Long term debt 1,00,000 64,000
Total liabilities 1,80,000 1,35,000
Shareholders’ equity 90,000 35,000
Total liabilities and shareholders’ 2,70,000 1,70,000

Other information
All of the shares of entity B were acquired for Rs. 74,000 in cash. The fair values of assets
acquired and liabilities assumed were:
Particulars Amount (Rs.)
Inventories 4,000
Trade receivables 8,000
Cash 2,000
Property, plant and equipment 1,10,000
Trade payables (32,000)
Long term debt (36,000)
Goodwill 18,000
Cash consideration paid 74,000

Prepare statement of cash flows of Entity A. (10 Marks)

4

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 (b) An entity which follows its financial year as per the calendar year grants 1,000 share appreciation
rights (SARs) to each of its 40 management employees as on 1st January 20X5. The SARs
provide the employees with the right to receive (at the date when the rights are exercised) cash
equal to intrinsic value of the entity’s share price. All of the rights vest on 31 st December 20X6;
and they can be exercised during 20X7 and 20X8. Management estimates that, at grant date,
the fair value of each SAR is Rs. 11; and it estimates that 10% of the employees will leave evenly
during the two-year period. The fair values of the SARs at each year end are shown below:
Year Fair value at year end
31 December 20X5 12
31 December 20X6 8
31 December 20X7 13
31 December 20X8 12
10% of employees left before the end of 20X6. On 31 st December 20X7 (when the intrinsic value
of each SAR was Rs. 10), six employees exercised their options and remaining employees
exercised their options at the end of 20X8 (when the intrinsic value of each SAR was equal to the
fair value of Rs. 12).
How much expense and liability is to be recognized at the end of each year? Also pass Journal
entries. (10 Marks)
4. (a) Company EFG enters into a property lease with Entity H. The initial term of the lease is 10 years
with a 5- year renewal option. The economic life of the property is 40 years and the fair value of
the leased property is Rs.50 Lacs. Company EFG has an option to purchase the property at the
end of the lease term for Rs.30 lacs. Lease is paid at the beginning of the year. The first annual
payment is Rs.5 lacs with an increase of 3% every year thereafter. The implicit rate of interest is
9.04%. Entity H gives Company EFG an incentive of Rs. 2 lacs (payable at the beginning of year
2), which is to be used for normal tenant improvement.
Company EFG is reasonably certain to exercise that purchase option. How would EFG measure
the right-of-use asset and lease liability over the lease term? (16 Marks)
(b) D Ltd. issues preference shares to G Ltd. for a consideration of Rs. 10 lakhs. The holder has an
option to convert these preference shares to a fixed number of equity instruments of the issuer
anytime up to a period of 3 years. If the option is not exercised by the holder, the preference
shares are redeemed at the end of 3 years. The preference shares carry a coupon of RBI base
rate plus 1% p.a.
The prevailing market rate for similar preference shares, without the conversion feature or
issuer’s redemption option, is RBI base rate plus 4% p.a. On the date of contract, RBI base rate
is 9% p.a.
Calculate the value of the liability and equity components. (4 Marks)
5. (a) Prepare the Consolidated Balance Sheet as on 31st March, 20X2 of a group of companies
comprising P Limited, S Limited and SS Limited. Their balance sheets on that date are given
below:
Rs.in lakhs
P Ltd. S Ltd. SS Ltd.
Assets
Non-Current Assets
Property, Plant and Equipment 320 360 300

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 Investment :
32 lakhs shares in S Ltd. 340
24 lakhs shares in SS Ltd. 280
Current Assets
Inventories 220 70 50
Financial Assets
Trade Receivables 260 100 220
Bills Receivable 72 - 30
Cash in hand and at Bank 228 40 40
1440 850 640
Equity and Liabilities
Shareholder's Equity
Share capital (Rs. 10 per Share) 600 400 320
Other Equity
Reserves 180 100 80
Retained earnings 160 50 60
Current Liabilities
Financial Liabilities
Trade Payables 470 230 180
Bills Payable
P Ltd. 70
SS Ltd. 30
1440 850 640

The following additional information is available :

(i) P Ltd. holds 80% shares in S Ltd. and S Ltd. holds 75% shares in SS Ltd. Their holdings
were acquired on 30th September, 20X1.
(ii) The business activities of all the companies are not seasonal in nature and therefore, it can
be assumed that profits are earned evenly throughout the year.
(iii) On 1st April, 20X1 the following balances stood in the books of S Limited and SS Limited.
Rs. in lakhs

S Limited SS Limited
Reserves 80 60
Retained earnings 20 30
(iv) Rs. 10 lakhs included in the inventory figure of S Limited, is inventory which has been
purchased from SS Limited at cost plus 25%. The sale of goods by SS Ltd. is done after
acquisition of shares by S Ltd.
(v) The parent company has adopted an accounting policy to measure non -controlling interest
at fair value (quoted market price) applying Ind AS 103. Assume market prices of S Limited
and SS Limited are the same as respective face values. (16 Marks)

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 (b) An entity enters into 1,000 contracts with customers. Each contract includes the sale of one
product for Rs. 50 (1,000 total products × Rs. 50 = Rs. 50,000 total consideration). Cash is
received when control of a product transfers. The entity's customary business practice is to allow
a customer to return any unused product within 30 days and receive a full refund. The entity's
cost of each product is Rs. 30.
Since the contract allows a customer to return the products, the consideration received from the
customer is variable. To estimate the variable consideration to which the entity will be entitled,
the entity decides to use the expected value. Using the expected value method, the entity
estimates that 970 products will not be returned.
The entity estimates that the costs of recovering the products will be immaterial and expects that
the returned products can be resold at a profit.
Determine the amount of revenue, refund liability and the asset to be recognised by the entity for
the said contracts. (4 Marks)
6. (a) On 1 April 20X1, the fair value of the assets of XYZ Ltdʼs defined benefit plan were valued at
Rs.20,40,000 and the present value of the defined obligation was Rs.21,25,000. On
31stMarch,20X2 the plan received contributions from XYZ Ltd amounting to Rs. 4,25,000 and paid
out benefits of Rs. 2,55,000. The current service cost for the financial year ending 31 March
20X2 is Rs. 5,10,000. An interest rate of 5% is to be applied to the plan assets and obligations.
The fair value of the planʼs assets at 31 March 20X2 was Rs.23,80,000, and the present value of
the defined benefit obligation was Rs.27,20,000. Provide a reconciliation from the opening
balance to the closing balance for Plan assets and Defined benefit obligation. Also show how
much amount should be recognised in the statement of profit and loss, other comprehensive
income and balance sheet? (6 Marks)
(b) An entity enters into a contract for the sale of Product A for Rs. 1,000. As part of the contract, the
entity gives the customer a 40% discount voucher for any future purchases up to Rs. 1,000 in the
next 30 days. The entity intends to offer a 10% discount on all sales during the next 30 days as
part of a seasonal promotion. The 10% discount cannot be used in addition to the 40% disco unt
voucher.
The entity believes there is 80% likelihood that a customer will redeem the voucher and on an
average, a customer will purchase Rs. 500 of additional products.
Determine how many performance obligations does the entity have and their stand -alone selling
price and allocated transaction price? (5Marks)
(c) ST Limited enters into a contract with a customer to sell an asset. Control of the asset will
transfer to the customer in two years (i.e. the performance obligation will be satisfied at a point in
time). The contract includes two alternative payment options:
(1) Payment of Rs. 5,000 in two years when the customer obtains control of the asset or
(2) Payment of Rs. 4,000 when the contract is signed. The customer elects to pay Rs. 4,000
when the contract is signed.
ST Limited concludes that the contract contains a significant financing component because of the
length of time between when the customer pays for the asset and when the entity transfers the
asset to the customer, as well as the prevailing interest rates in the market.

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 The interest rate implicit in the transaction is 11.8 per cent, which is the interest rate necessary to
make the two alternative payment options economically equivalent. However, the entity
determines that, the rate that should be used in adjusting the promised consideration is 6%,
which is the entity's incremental borrowing rate.
Pass journal entries showing how the entity would account for the significant financing
component. (5 Marks)
(d) Explain why weighted average number of shares are used in the calculation of earnings per
share and how it is calculated.
Following is the data for company XYZ in respect of number of equity shares during the financial
year 20X1-20X2. Find out the number of shares for the purpose of calculation of basic EPS.
S. Date Particulars Number of
No. shares
1 1-Apr-20X1 Opening balance of outstanding equity shares 1,00,000
2 15-Jun-20X1 Issue of equity shares 75,000
3 8-Nov-20X1 Conversion of convertible preference shares in 50,000
Equity
4 22-Feb-20X2 Buy back of shares (20,000)
5 31-Mar-20X2 Closing balance of outstanding equity shares 205,000

(4 Marks)
OR
ABC Ltd. is a company which has a net worth of Rs. 200 crore, it manufactures rubber parts for
automobiles. The sales of the company are affected due to low demand of its products.
Required financial details of the following financial years are as follows : (Rs. in crore)

March 31, 20X4 (Current March 31, March 31, March 31,
year) projected 20X3 20X2 20X1
Net Profit 3.00 8.50 4.00 3.00
Sales (turnover) 850 950 900 800

Does ABC Ltd. has an obligation to form a CSR committee since the applicability criteria is not
satisfied in the current financial year? (4 Marks)

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