CA 1
UNIT 1ACCOUNTING STANDARDS Q1) (AS 5) Fuel surcharge is billed by the State Electricity Board at provisional rates. Final bill for fuel surcharge of Rs 5.30 lakhs for the period October, 2008 to September, 2015 has been received and paid in February, 2016. However, the same was accounted in the year 2016-17. Comment on the accounting treatment done in the said case.A1) The final bill having been paid in February, 2016 should have been accounted for in the annual accounts of the company for the year ended 31st March, 2016. However, it seems that as a result of error or omission in the preparation of the financial statements of prior period i.e., for the year ended 31st March 2016, this material charge has arisen in the current period i.e., year ended 31st March, 2017. Therefore it should be treated as 'Prior period item' as per AS 5. As per AS 5, prior period items are normally included in the determination of net profit or loss for the current period. An alternative approach is to show such items in the statement of profit and loss after determination of current net profit or loss. In either case, the objective is to indicate the effect of such items on the current profit or loss.It may be mentioned that it is an expense arising from the ordinary course of business. Although abnormal in amount or infrequent in occurrence, such an expense does not qualify an extraordinary item as per AS 5. For better understanding, the fact that power bill is accounted for at provisional rates billed by the state electricity board and final adjustment thereof is made as and when final bill is received may be mentioned as an accounting policy. Q2) (AS 5)(i) During the year 2016-2017, a medium size manufacturing company wrote down its inventories to net realisable value by Rs 5,00,000. Is a separate disclosure necessary?(ii) A company signed an agreement with the Employees Union on 1.9.2016 for revision of wages with retrospective effect from 30.9.2015. This would cost the company an additional liability of Rs 5,00,000 per annum. Is a disclosure necessary for the amount paid in 2016-17?A2)Although the case under consideration does not relate to extraordinary item, but the nature and amount of such item may be relevant to users of financial statements in understanding the financial position and performance of an enterprise and in making projections about financial position and performance. AS 5 on ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’ states that: “When items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately.”Circumstances which may give to separate disclosure of items of income and expense in accordance with AS 5 include the write-down of inventories to net realisable value as well as the reversal of such write-downs.2. It is given that revision of wages took place on 1st September, 2016 with retrospective effect from 30.9.2015. Therefore wages payable for the half year from 1.10.2016 to 31.3.2017 cannot be taken as an error or omission in the preparation of financial statements and hence this expenditure cannot be taken as a prior period item.Additional wages liability of Rs 7,50,000 (for 1½ years @ Rs 5,00,000 per annum) should be included in current year’s wages.It may be mentioned that additional wages is an expense arising from the ordinary activities of the company. Such an expense does not qualify as an extraordinary item. However, as per AS 5, when items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately. Q3) (AS 5) The company finds that the inventory sheets of 31.3.2016 did not include two pages containing details of inventory worth Rs 14.5 lakhs. State, how you will deal with the following matters in the accounts of Omega Ltd. for the year ended 31st March, 2017.A3) AS 5 on ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, defines Prior Period items as "income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods”.Rectification of error in inventory valuation is a prior period item vide AS 5. Separate disclosure of this item as a prior period item is required as per AS 5. Q4) (AS 5) Explain whether the following will constitute a change in accounting policy or not as per AS 5.(i) Introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-gratia payments to employees on retirement.(ii) Management decided to pay pension to those employees who have retired after completing 5 years of service in the organisation. Such employees will get pension of Rs 20,000 per month. Earlier there was no such scheme of pension in the organisation.A4) As per AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, the adoption of an accounting policy for events or transactions that differ in substance from previously occurring events or transactions, will not be considered as a change in accounting policy.Accordingly, introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-gratia payments to employees on retirement is not a change in an accounting policy. Similarly, the adoption of a new accounting policy for events or transactions which did not occur previously or that were immaterial will not be treated as a change in an accounting policy. Q5) (AS 6) A Ltd. engaged in production of steel, wants to provide for deprecation based on unit of production instead of straight line or written down value method. Can A Ltd do so?A5) AS 6, on Depreciation accounting stipulates that minimum depreciation should be provided as made under statute i.e. the Companies Act, 2013. Schedule XIV to the Companies Act, 2013 prescribes various rates to be provided for different assets under straight line and written-down value method. However, where management estimates useful life of an asset shorter than as envisaged under the provisions of statute i.e. schedule XIV, than the depreciation is provided applying a higher rate.Thus, if A Ltd. contemplates to provide deprecation on production basis and such depreciation happens to be lower than the depreciation worked out under schedule XIV, than A Ltd. would not be complying with the provisions of AS 6. Since, under the Indian Accounting Standard, reference is made to statute, companies in India will be required to provide minimum depreciation at the rates prescribed in schedule XIV. Based on the estimated useful life, if the depreciation rate is lower than the rate prescribed in Schedule XIV, companies will be required to approach central government in this regards.Note: Under the International accounting standard or for that purpose US GAAP, depreciation is provided considering the best estimate of useful life of the asset. The following abstract from the financial statement of Cathay Pacific Airways will show that enterprise is at liberty to evaluate the estimate useful life of Fixed Asset.Annual depreciation charges to write down the original cost of aircraft to estimated residual values are based on actual operational usage of the relevant aircraft as a proportion of its total estimated operational life. The useful operational life of an aircraft is determined by reference to its anticipated aircraft flight cycle while in service of the company. However, if the aircraft is held under a finance lease, the depreciable life of the aircraft is limited to the lease term unless a purchase option is held. A flight cycle is defined as one take-off and one landing. The residual value of aircraft and related equipment are 10% of original cost or values guaranteed under forward sales agreements. Q6) (AS 6) R. Ltd. a newly incorporated company wants to provide depreciation on Plant and Machinery on straight line method whereas written down value method for the remaining fixed assets? Can R Ltd. do so?A6) Depreciation method is selected based on various important factors e.g.(i) type of asset,(ii) the nature of the use of such asset and(iii) circumstances prevailing in the business. AS 6, mentions, a combination of more than one method is some times used, meaning thereby that for few fixed assets straight line method can be adopted whereas for other fixed assets written down value method can also be adopted.Accordingly R Ltd. can choose straight line method for plant and machinery and written down value method for other fixed assets. Q7) (AS 6) P Ltd. is providing deprecation on straight line method. Due to technical evaluation, the estimated useful life of certain fixed assets is less as compared to life of assets as indicated by rates prescribed under Companies Act, 2013. Is P Ltd. required to provide depreciation considering the estimated useful life of asset which is higher than the rates prescribed in the Companies Act, 2013. Is P Ltd. required to recompute depreciation from inception i.e. from the date when such fixed assets were purchased?A7) AS 6 stipulates that where the management’s estimate of the useful life of an asset of the enterprise is shorter than that envisaged under the provisions of the relevant statute, the depreciation provision is appropriately computed by applying a higher rate. Hence, P Ltd. will be required to provide depreciation at higher rates than rates prescribed under the act.Second and important issue that arises is how P Ltd. should compute the depreciation. This gives rise to a change in estimate and not a change in method, so enhanced depreciation should be provided prospectively i.e. over the remaining useful life of the asset.P. Ltd. will have to provide enhanced depreciation over the residual useful life of the asset. Q8) (AS 6) P Ltd. was providing depreciation on Plant and Machinery on written down value method. With effect from 1-4-03, in respect of additions to, plant and machinery, P Ltd. wants to provide depreciation on straight line method, whereas for plant and machinery upto 31-3-03, it will continue to provide depreciation on written down value method. Is contention of P Ltd justified?A8) As per AS 6, the method of depreciation is applied consistently to provide comparability of the results of the operation of the enterprise from period to period. A change from one method of providing 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 statements of the enterprise. When such a change in method of depreciation is made, depreciation is recalculated in accordance with the new method from the date of the asset coming into use.Accordingly, P Ltd. would not be justified in providing depreciation on straight line method in respect of additions to plant and machinery with effect from 1-4-03. P Ltd. can change method of providing depreciation from written down value to straight line method and this in compliance to Accounting Standard has to be done retrospectively from the date of the asset coming into use. Q9) (AS 10) A company has purchased plant and machinery in the year 2001-2002 for Rs 45 lakhs. A balance of Rs5 lakhs is still payable to the suppliers for the same. The supplier waived off the balance amount during the financial year 2004-2005. The company treated it as income and credited to profit and loss account during 2004-2005.Whether accounting treatment of the company is correct. If not, state with reasons.A9) As per AS 10 the cost of fixed assets may undergo changes subsequent to its acquisition or construction on account of exchange fluctuation, price adjustments, changes in duties or similar factors. The treatment done by the company is not correct. Rs5 lakhs should be deducted from the cost of fixed assets. Q10) (AS 10) 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?A10) As per AS-10, fixed asset acquired in exchange for shares or other securities should be recorded at its fair market value or the fair market value of the securities issued, whichever is more clearly evident. Since, the market value of the shares exchanged for the asset is more clearly evident, the company should record the value of machinery at Rs 7,50,000. (i.e., 50,000 shares x 15 per share being the market price) Q11) (AS 10) Jadu Ltd. purchased certain plant and machinery for Rs 40 lakhs. 20% of the cost net of Cenvat credit is the subsidy component to be realized from a State Government for establishing industry in a backward district. Cost Rs 40 lakhs include excise Rs 5 lakhs against which Cenvat credit can be claimed. Compute depreciable amount.A11) In this case, it is first necessary to determine the historical cost of the plant and machinery. This is shown in the following table.
Q12) (AS 10)On March 01, 2007, X Ltd. purchased Rs 5 lakhs worth of land for a factory site. Company demolished an old building on the property and sold the material for Rs 10,000. Company incurred additional cost and realized salvaged proceeds during the March 2007 as follows:
Compute the balance to be shown in the land account on March 31, 2007 balance sheet.A12)
Q13) (AS 10)Mr. X set up a new factory in the backward area and purchased plant for Rs 500 lakhs for the purpose of his business. Purchases were entitled for the CENVAT credit of Rs 10 lakhs and also Government agreed to extend the 20% subsidy for backward area development. Determine the depreciable value for the asset.A13)
**Note: For illustrations on AS 14, refer chapter Amalgamation of Companies
Rs in lakhs | |
Purchase price | 40 |
Less: Specified duty against which CENVAT credit is available | 5 |
Cost of plant & machinery for accounting purposes | 35 |
Less: Subsidy provided by State Government | 7 |
Depreciable Amount | 28 |
Legal fees for purchase contract and recording ownership | Rs25,000 |
Title guarantee insurance | Rs10,000 |
Cost for demolition of building | Rs50,000 |
Calculation of the cost for Purchase of Land | ||
Particulars |
| Rs |
Cost of Land |
| 5,00,000 |
Legal Fees |
| 25,000 |
Title Insurance |
| 10,000 |
Cost of Demolition | 50,000 |
|
Less: Salvage value of Material | 10,000 | 40,000 |
Cost of the Asset |
| 5,75,000 |
Rs (in lakhs) | ||
Particulars |
|
|
Cost of the plant | 500 |
|
Less: CENVAT | 10 | 490 |
Less: Subsidy |
| 98 |
Depreciable Value |
| 392 |
0 matching results found