AS 1 Disclosure of Accounting Policies

Q 1) State whether the following are “True” or “False”. Also give reason for your answer.
(a) Certain fundamental accounting assumptions underline the preparation and
presentation of financial statements. They are usually specifically stated because
their acceptance and use are not assumed.
(b) If fundamental accounting assumptions are not followed in presentation and
preparation of financial statements, a specific disclosure is not required.
(c) All significant accounting policies adopted in the preparation and presentation of
financial statements should form part of the financial statements.
(d) Any change in an accounting policy, which has a material effect should be disclosed.
Where the amount by which any item in the financial statements is affected by such
change is not ascertainable, wholly or in part, the fact need not to be indicated.
Ans) (a) False: As per AS 1, “Disclosure of Accounting policies”, certain fundamental
accounting assumptions underlie the preparation and presentation of financial statements.
They are usually not specifically stated because their acceptance and use are assumed.
Disclosure is necessary if they are not followed.
(b) False: As per AS 1, if fundamental accounting assumptions i.e. going concern,
consistency and accrual are followed in financial statements, specific disclosure is not
required. If a fundamental accounting assumption is not followed, the fact should be
disclosed.
(c) True: To ensure proper understanding of financial statements it is necessary that all
significant accounting policies adopted in the preparation and presentation of financial
statements should be disclosed. The disclosure of the significant accounting policies as such
should form part of the financial statements and they should be disclosed in one place.
(d) False: Any change in the accounting policies which has a material effect in the current
period or which is reasonably expected to have a material effect in later periods should be
disclosed. Where such amount is not ascertainable, wholly or in part, the fact should be
indicated.

AS 2: Valuation of Inventories
Q 2) Hello Ltd. Purchased goods at the cost of Rs 20 lakhs in October. Till the end of the
financial year, 75% of the stocks were sold. The company wants to declare closing stock at
Rs 5 lac. The expected sales value is Rs 5.5 lacs and a commission at 10% on sale is payable
to the agent. You are required to ascertain the value of the closing stock.
Ans) As per para 5 of AS 2 “Valuation of Inventories”, the inventories are to be valued at
lower of cost or net realizable value. In this case the cost of inventory is Rs 5 lacs. The net
realizable value is Rs 4.95 lacs (Rs 5.5 lacs less cost to make the sale @ 10% of Rs 5.5 lacs).
So the closing stock should be valued at Rs 4.95 lacs.
Q 3) On 31’st March 2017, a business firm finds that the cost of partly finished unit on that
date is Rs 530. The unit can be finished in 2017-18 by an additional expenditure of Rs 310.
The finished unit can be sold for Rs 750 subject to payment of 4% brokerage on selling price.
The firm seeks your advice regarding the amount at which the unfinished unit should be
valued as at 31’st March, 2017 for preparation of final accounts. Assume that the partly
finished unit cannot be sold in semi-finished form and its Net Realisable value is zero
without processing it further.
Ans) Value of Unfinished unit

(Rs)
Net realisable sale 750
Less: Estimated cost of completion (310)
440
Less: Brokerage (4% of 750) (30)
Net realisable value 410
Cost of inventory 530
Value of inventory (Lower of cost and net realisable value) 410

AS 9: Revenue Recognition
Q 4) Company C sells appliances and their lack of showroom space means customers often
purchase dishwashers, fridges and other items without being able to accept the products on
the spot. Instead they schedule delivery and installation at a later date. Company C sells an
appliance package on January 16’th for Rs 50,000. The customer pays for the appliances on
February 10’th but the appliances aren’t delivered till March 3’rd. How should Company C
recognize the revenue?
Ans) Company C should recognize the revenue in March since that’s when the product was
delivered- even though the sale was booked in January and the product was paid for in
February.
Q 5) Microsoft India Ltd. uses electronic delivery as the standard or default means of
delivery. When is revenue recognised by the software vendor if software is delivered
electronically to the customer?
Ans) Generally delivery occurs when the vendor has provided the customer with reasonable
ability to download the software from its server. So revenue should be recognised when the
Software is downloaded by the customer.

However, if the contractual arrangement requires the vendor to physically deliver the
software or to deliver the software both electronically and physically, the ability of the
customer to electronically access the software does not constitute delivery.
When both means of delivery are required, the vendor must deliver the software
electronically and physically for the delivery criterion to be met. The revenue in such case
will be recognised only upon the physical delivery of the goods to the customer.
Q 6) Arjun Ltd. sold farm equipments through its dealers. 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% per annum. The Company has not realized interest from the dealers in
the past. However, for the year ended 31.3.2006, it wants to recognize interest due on the
balances due from dealers. The amount is ascertained at ` 9 lakhs. Decide whether the
income by way of interest from dealers is eligible for recognition as per AS 9.
Ans) As per AS 9 "Revenue Recognition”, where the ability to assess the ultimate collection
with reasonable certainty is lacking at the time of raising any claim, the revenue recognition
is postponed to the extent of uncertainty inverted. In such cases, the revenue is recognized
only when it is reasonably certain that the ultimate collection will be made. In this case, the
company never realized interest for the delayed payments made by the dealers. Hence, it
has to recognize the interest only if the ultimate collection is certain. The interest income
hence is not to be recognized.
AS 10: Accounting for Fixed Assets:
Q 7) Entity B manufactures industrial chemicals and uses blending machines in the
production process. The output of the blending machines is consistent from year to year
and they can be used for different products.
However, maintenance costs increase from year to year and a new generation of machines
with significant improvements over existing machines is available every 5 years. Suggest the
depreciation method to the management.
Ans) The straight-line depreciation method should be adopted, because the production
output is consistent from year to year. Factors such as maintenance costs or technical
obsolescence should be considered in determining the blending machines’ useful life.
Q 8) Entity B constructs a machine for its own use. Construction is completed on 1st
November 2017 but the company does not begin using the machine until 1st March 2018.
Comment.
Ans) The entity should begin charging depreciation from the date the machine is ready for
use – that is, 1st November 2017. The fact that the machine was not used for a period after
it was ready to be used is not relevant in considering when to begin charging depreciation.
Q 9) Percept Traders has a policy of not providing for depreciation on PPE capitalized in the
year until the following year, but provides for a full year's depreciation in the year of
disposal of an asset. Is this acceptable?
Ans) The depreciable amount of a tangible fixed asset should be allocated on a systematic
basis over its useful life. The depreciation method should reflect the pattern in which the
asset's future economic benefits are expected to be consumed by the entity.
Useful life means the period over which the asset is expected to be available for use by the
entity. Depreciation should commence as soon as the asset is acquired and is available for
use. Thus, the policy of Entity A is not acceptable.