Test Series: August, 2018

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.
Total Marks: 100 Marks Time Allowed: 3 Hours
1. (a) Following is the financial statements of Arish Ltd. prepared on the basis of Accounting Standards:
(Note all figures are in INR million)
Balance Sheet
Particulars Note As at 31 st March, 2018
EQUITY AND LIABILITIES
Shareholders’ funds
Share capital (shares of Rs. 10 each) 1,000
Reserves and surplus 1 2,000
Non-current liabilities
Long-term borrowings 2 5,555
Deferred tax liabilities 3 200
Current liabilities
Trade payables 300
Short-term provisions 250
Other current liabilities 4 150
TOTAL 9,455
ASSETS
Non - current assets
Fixed Assets 5,655
Deferred Tax Assets 3 500
Current assets
Inventories 1,000
Trade receivables 5 1,100
Cash and bank balances 1,200
TOTAL 9,455

Note 1: The Company has achieved a major breakthrough in its consultancy services in Middle
East following which it has entered into a contract of rendering services with Finland Inc for
INR 6 billion during the year. The termination clause of the contract is equivalent to INR 7 Million
and is payable in case transition time schedule is missed from 15 th December 2022. The
management however is of the view that the liability cannot be treated as onerous.

© The Institute of Chartered Accountants of India

 Note 2: The Company is not able to assess the final liability for a particular tax assessment
pertaining to assessment year 2018-2019 wherein it has received a demand notice of
INR 6 Million. However, the company is contesting the same with CIT (Appeals) as on the
reporting date.
Statement of Profit & Loss
Particulars Note Year ended March 31, 2018
Revenue from operations 5,500
Expenses
Employee Benefit Expense 1,200
Operating Costs 2,200
Depreciation 999
Total Expenses 4,399
Profit before tax 1,101
Tax Expense (150)
Profit after tax 951

Notes to Accounts:
Note 1: Reserves and surplus (INR in millions)
Capital Reserve 500
Surplus from P & L
Opening Balance 49
Additions 951 1,000
Reserve for foreseeable loss 500
Total 2,000
Note 2: Long Term Borrowings
Term Loan from Bank 5,555
Total 5,555
Note 3: Deferred Tax
Deferred Tax Asset 500
Deferred Tax Liability (200)
Total 300

Note 4: Other Current Liabilities

Unclaimed dividends 3
Billing in Advance 147
Total 150
Note 5: Trade Receivables
Considered good (outstanding within 6 months) 1,065
Considered doubtful (due from past 1 year) 40
Provision for doubtful debts (5)
Total 1,100

© The Institute of Chartered Accountants of India

 Additional Information:
(a) Share capital comprises of 100 million shares of INR 10 each
(b) Term Loan from bank for INR 5555 million also includes interest accrued and due of
INR 555 million as on the reporting date.
(c) Reserve for foreseeable loss is created against a service contract due within 6 months.
Required:
(i) Evaluate and report the errors and misstatements in the above extracts; and
(ii) Prepare the corrected Balance Sheet & Statement of Profit and Loss . (16 Marks)
(b) Mr. X has a 100% investment in A Ltd. He is also a member of the key management personnel
(KMP) of B Ltd. B Ltd has a 100% investment in C Ltd.
Examine related party relationship of A Ltd., as per Ind AS 24, in the financial statements of
C Ltd. (4 Marks)
2. (a) Preet Pvt. Ltd. has a number of wholly-owned subsidiaries including Stuti Pvt. Ltd. at
31st March, 2018. Preet Pvt. Ltd.’s consolidated balance sheet and the carrying amount of assets
and liabilities of Stuti Pvt. Ltd., included in the respective amount of respective grouped assets
and liabilities of the consolidated balance sheet as at 31 st March, 2018 are as follows:
Particulars Consolidated Carrying amount of asset
balance sheet and liabilities of Stuti Pvt.
Ltd. included in the CFS
(Rs. in million) (Rs. in million)
Assets
Non-current Assets
Goodwill 380 180
Buildings 3,240 1,340
Current Assets
Inventories 140 40
Trade Receivables 1,700 900
Cash and cash equivalents 3,100 1000
Total Assets 8,560 3,460
Equities & Liabilities
Equity
Share Capital 1600
Other Equity
Retained Earnings 4,260
Current liabilities
Trade Payables 2,700 900
Total Equity & Liabilities 8,560 900

Prepare Consolidated Balance Sheet after disposal as on 31 st March, 2018 when Preet Pvt. Ltd.
group sold 100% shares of Stuti Pvt. Ltd. to independent party for Rs. 3,000 millions. (16 Marks)
(b) What are the disclosures required in the Combined/Carved-out Financial Statements as described
in the Guidance Note on Combined and Carved-out Financial Statements? (4 Marks)

© The Institute of Chartered Accountants of India

3. (a) A Limited received from the government a loan of Rs.1,00,00,000 @ 5% payable after 5 years in a
bulleted payment. The prevailing market rate of interest is 12%. Interest is payable regularly at the
end of each year. Calculate the amount of government grant and Pass necessary journal entry. Also
examine how the Government grant be realized. Also state how the grant will be recognized in the
statement of profit or loss assuming that the loan is to finance a depreciable asset. (6 Marks)
(b) Either
An asset is sold in 2 different active markets (a market in which transaction for the asset or
liability takes place with sufficient frequency and volume to provide pricing information on an
ongoing basis) at different prices.
An entity enters into transactions in both markets and can access the price in those markets for
the asset at the measurement date.
In Market A:
The sale price of the asset is Rs. 26, transaction cost is Rs. 3 and the cost to transport the asset
to Market A is Rs. 2 (i.e., the net amount that would be received is Rs. 21).
In Market B:
The sale price of the asset is Rs. 25, transaction cost is Re. 1 and the cost to transport the asset
to Market B is Rs. 2 (i.e., the net amount that would be received is Rs. 22).
Determine the fair value of the asset by supporting your answer with proper reason. (4 Marks)
Or
QA Ltd. is in the process of computation of the deferred taxes as per applicable Ind AS. QA Ltd.
had acquired 40% shares in GK Ltd. for an aggregate amount of Rs. 45 crores. The shareholding
gives QA Ltd. significant influence over GK Ltd. but not control and therefore the said interest in
GK Ltd. is accounted using the equity method. Under the equity method, the carrying value of
investment in GK Ltd. was Rs. 70 crores on 31 st March, 2017 and Rs. 75 crores as on
31st March, 2018. As per the applicable tax laws, profits recognised under the equity method are
taxed if and when they are distributed as dividend or the relevant investment is disposed of.
QA Ltd. wants you to compute the deferred tax liability as on 31 st March, 2018 and the charge to
the Statement of Profit for the same. Consider the tax rate at 20%. (4 Marks)
(c) UK Ltd. has purchased a new head office property for Rs. 10 crores. The new office building
has 10 floors and the organisation structure of UK Ltd. is as follows:
Floor 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
Use Waiting Admin HR Accounts Inspection MD Office Canteen Vacant
Area

Since UK Ltd. did not need the floors 8, 9 and 10 for its business needs, it has leased out the same
to a restaurant on a long-term lease basis. The terms of the lease agreement are as follows:
- Tenure of Lease Agreement - 5 Years
- Non-Cancellable Period - 3 years
- Lease Rental-annual lease rental receivable from these floors are Rs. 10,00,000 per floor
with an escalation of 5% every year.

© The Institute of Chartered Accountants of India

 Based on the certificate from its architect, UK Ltd. has estimated the cost of the 3 top floors as
approximately Rs. 3 crores. The remaining cost of Rs. 7 crores can be allocated as 25% towards
Land and 75% towards Building.
As on 31st March, 2018, UK Ltd. obtained a valuation report from an independent valuer who has
estimated the fair value of the property at Rs. 15 crores. UK Ltd. wishes to use the cost model for
measuring Property, Plant & Equipment and the fair value model for measuring the Investment
Property. UK Ltd. depreciates the building over an estimated useful life of 50 years, with no
estimated residual value.
Advise UK Ltd. on the accounting and disclosures for the above as per the applicable Ind AS.
(10 Marks)
4. (a) In March 2018, Pharma Ltd. acquires Dorman Ltd. in a business combination for a total cost of Rs.
12,000 lakhs. At that time Dorman Ltd.'s assets and liabilities are as follows:
Item Rs. in lakhs
Assets
Cash 780
Receivables (net) 5,200
Plant and equipment 7,000
Deferred tax asset 360
Liabilities
Payables 1,050
Borrowings 4,900
Employee entitlement liabilities 900
Deferred tax liability 300
The plant and equipment has a fair value of Rs. 8,000 lakhs and a tax written down value of
Rs. 6,000 lakhs. The receivables are short-term trade receivables net of a doubtful debts allowance
of Rs. 300 lakhs.
Bad debts are deductible for tax purposes when written off against the allowance account by
Dorman Ltd. Employee benefit liabilities are deductible for tax when paid.
Dorman Ltd. owns a popular brand name that meets the recognition criteria for intangible assets
under Ind AS 103 'Business Combinations’. Independent valuers have attributed a fair value of
Rs. 4.300 lakhs for the brand. However, the brand does not have any cost for tax purposes and
no tax deductions are available for the same.
The tax rate of 30% can be considered for all items. Assume that unless otherwise stated, all items
have a fair value and tax base equal to their carrying amounts at the acquisition date.
You are required to:
(i) Calculate deferred tax assets and liabilities arising from the business combination (do not
offset deferred tax assets and liabilities)
(ii) Calculate the goodwill that should be accounted on consolidation. (10 Marks)
(b) Prepare a value added statement for the year ended on 31.3.2018 and reconciliation of total value
added with profit before taxation, from the profit and loss account of P Ltd. for the year ended on
31.3.2018.

© The Institute of Chartered Accountants of India

 Income: (Rs. in lakhs)
Sales 254.00
Other income 6.00
Total 260.00
Expenditure:
Operating cost 222.00
GST 11.20
Interest on bank overdraft 1.00
Interest on 9% debentures 15.00
249.20
Profit before depreciation 10.80
Depreciation 4.10
Profit before tax 6.70
Provision for tax 2.40
Profit after tax 4.30
Dividend 0.30
Retained profit 4.00
The following additional information are given:
(i) Sales represents net sales after adjusting discounts, returns and sales tax.
(ii) Operating cost includes Rs. 82.00 lakhs as wages, salaries and other benefits to employees.
(iii) Bank overdraft is temporary. (10 Marks)
5. (a) (i) On 1st April, 2014, S Ltd. issued 5,000, 8% convertible debentures with a face value of
Rs. 100 each maturing on 31 st March, 2019. The debentures are convertible into equity
shares of S Ltd. at a conversion price of Rs. 105 per share. Interest is payable annually in
cash. At the date of issue, S Ltd. could have issued non-convertible debentures with a 5 year
term bearing a coupon interest rate of 12%. On 1st April, 2017, the convertible debentures
have a fair value of Rs. 5,25,000. S Ltd. makes a tender offer to debenture holders to
repurchase the debentures for Rs. 5,25,000, which the holders accepted. At the date of
repurchase, S Ltd. could have issued non-convertible debt with a 2 year term bearing a
coupon interest rate of 9%.
Examine the accounting treatment in the books of S Ltd., by passing appropriate journal
entries, for recording of equity and liability component:
(1) At the time of initial recognition and
(2) At the time of repurchase of the convertible debentures.
The following present values of Re. 1 at 8%, 9% & 12% are supplied to you:
Interest Rate Year 1 Year 2 Year 3 Year 4 Year 5
8% 0.926 0.857 0.794 0.735 0.681
9% 0.917 0.842 0.772 0.708 0.650
12% 0.893 0.797 0.712 0.636 0.567
(10 Marks)

© The Institute of Chartered Accountants of India

 (ii) On 1 January 2018, Entity X writes a put option for 1,00,000 of its own equity shares for which
it receives a premium of Rs. 5,00,000.
Under the terms of the option, Entity X may be obliged to take delivery of 1,00,000 of its
own shares in one year’s time and to pay the option exercise price of Rs. 22,000,000. The
option can only be settled through physical delivery of the shares (gross physical
settlement). Examine the nature of the financial instrument and how it will be accounted
assuming that the present value of option exercise price is Rs. 2,00,000? (5 Marks)
(b) State whether any unspent amount of CSR expenditure (any shortfall in the amount that was
expected to be spent as per the provisions of the Companies Act on CSR activities) at the
reporting date shall be provided for? Also state in case the excess amount has been spent (ie
more than what is required as per the provisions of the Companies Act on CSR activities), can it
be carry forward to set-off against future CSR expenditure. (5 Marks)
6. (a) At 1 January 2017, Ambani Limited grants its CEO an option to take either cash amount equivalent
to 990 shares or 800 shares. The minimum service requirement is 2 years. There is a condition
to keep the shares for 3 years if shares are opted.
Fair values of the shares INR
Share alternative fair value (with restrictions) 212
Grant date fair value on 1 st January, 2016 213
Fair value on 31 st December, 2016 220
Fair value on 31 st December, 2017 232

The key management exercises his cash option at the end of 2018. Pass journal entries.
(10 Marks)
(b) Great Ltd., acquired a machine on 1 st April, 2012 for Rs. 7 crore that had an estimated useful life
of 7 years. The machine is depreciated on straight line basis and does not carry any residual
value. On 1 st April, 2016, the carrying value of the machine was reassessed at Rs. 5.10 crore
and the surplus arising out of the revaluation being credited to revaluation reserve. For the year
ended March 2018, conditions indicating an impairment of the machine existed and the amount
recoverable ascertained to be only Rs. 79 lakhs.
Calculate the loss on impairment of the machine and show how this loss is to be treated in the
books of Great Ltd. Great Ltd., had followed the policy of writing down the revaluation surplus
by the increased charge of depreciation resulting from the revaluation. (10 Marks)

© The Institute of Chartered Accountants of India