Q.

2 (A)
Ans.
YEAR-1 1,300,000 X 7/85 = 107,058

YEAR-2 1,300,000 X 16/85 = 244,705

YEAR-3 1,300,000 X 22/85 = 336,470

YEAR-4 1,300,000 X 13/85 = 198,823

YEAR-5 1,300,000 X 10/85 = 152,941

YEAR-6 1,300,000 X 7/85 = 107,058

B. Discuss by keeping in view the IAS-38, weather following costs will be

capitalized:
i. Expenses on research of new improved material of Rs. 16,000

Rs. 16,000 is the Research Cost and expensed out in income statement for the year. This
cost is totally research based because it is still incomplete and future benefits are not
known.

ii. Expenses on applied research amounting to Rs. 150,000

Rs. 150,000 can be capitalized. It is research done by others we pay it to buy and start
development phase on it. Eg: Oxford researches buy by largest medicines companies.

iii. Donation to research institution of Rs. 35,000

 Rs. 35,000 is the donation and expensed out in income statement for the year.

iv. Expenses on construction of prototypes of Rs. 16,000

Rs. 16,000- Testing cost should be capitalized It is testing cost should be capitalized.

v. Expense on a project of Rs. 110,000 which is commercially and technically viable

Rs. 110,000 development cost can be capitalized. When feasibility report shows that the
project is technically sound and can be completed. The management has intentions to
develop, use or sell the asset. It is expected that the entity will drive economic benefits
from the use of asset.

vi. Rent paid of the vehicle used in the research project

Show expense out in income statement. This cost is totally research based because it is
still incomplete and future benefits are not known.

Q. 3 (A)
Ans.
Items A B C

Carrying Value 100,000 150,000 120,000

Fair Value 110,000 125,000 100,000

Value in Use 120,000 130,000 90,000

 Impairment loss =
Carrying amount of an
asset – Recoverable
amount of an asset

A) Recoverable amount = 110,000

Impairment loss= 100,000 – 120,000 = No impairment loss

B) Recoverable amount = 125,000

Impairment loss= 150,000 – 130,000 = 20,000 impairment loss

C) Recoverable amount = 100,000

Impairment loss= 120,000 – 100,000 = 20,000 impairment loss

B)
ANS:

 Machine Cost = 6 million

 Depreciation = straight line – 20%
 Useful life = 5 years
DATE PARTICULARS DEBIT CREDIT
Y-1 Machine 6,000,000
Bank 6,000,000
 Depreciation Expense – SOCI 1,200,000
Accumulated Depreciation - SOFP 1,200,000
(6,000,000 * 5 years)

 Fair value of the asset in the end of year = 4,000,000

 Less: Carrying value at the end of year = 4,800,000
 Impairment Loss = 800,000

DATE PARTICULARS DEBIT CREDIT

Y-1 Impairment Loss – SOCI 800,000
Accumulated impairment – SOFP 800,000

Y-2 Depreciation Expense – SOCI 1,000,000

Accumulated Depreciation - SOFP 1,000,000

(4,000,000 * 4years)
Y-3 Depreciation Expense – SOCI 1,000,000
Accumulated Depreciation - SOFP 1,000,000
(3,000,000 * 3years)

Carrying Value 4,000,000 – 2,000,000 = 2,000,000

Recoverable amount = 3,500,000

Recoverable amount is greater than carrying value of the asset

therefore the asset is not impaired.

Q. 4 (A)
ANS:
A damage claim of Rs. 5 million for breach of contract has been
served to the company. The company’s legal council is of the
opining that it probable the damages will be awarded to the
plaintiff.

Company should recognize a provision for damage claim because at

reporting date there is present obligation in respect of past event.
Rs. 5 million for the pending claim by plaintiff is most likely that
company would require to pay as advised by company`s lawyer.
Therefore a provision should for an amount of Rs.5 million.

A suit has been decided against the company for Rs. 5 million in
the High Court.

Rs. 5 million is virtually certain to pay as court decides so company

should record a liability of Rs.5 million.

The company has appealed to the court for the settlement of the
sales tax liability of Rs. 3million.

Claim to the extent of Rs. 3 million is accepted in principle by the

company, therefore it will be taken as virtually certain to be
received and it will be recorded as an asset now.

If recovery of the claim to the extent of Rs. 3 million is probable

therefore a contingent asset would be disclosed giving brief
description of the event and estimate of financial statement.

If recovery of Rs. 3 million is remote therefore it would not be

accounted for or disclosed
A supplier has returned an amount of Rs. 6 million previously
recorded as a bad debt.

Show as recovery of bad debt from previously recorded as bad debt

in the financial statement and show as certain asset of the
company.

B.
ANS:

Contingent Assets

Contingent asset is a possible economic benefit that A contingent is

dependent on that future events that are out of a company’s
control. Without knowing for sure whether these gains will
materialize, or will be able to determine their economic value, these
assets are not to be recorded on the balance sheet. While, they can
be noted down in the adjacent notes of the financial statements,
provided that certain conditions are met well. A contingent asset
can also be termed as a potential asset.

Contingent Assets Example

A company involved in a legal case with the sheer expectation to

receive the compensation which has a contingent asset as the
outcome of the case is not yet known and the amount is yet to be
determined.

Company A Ltd. has filed a lawsuit against Company B Ltd. for

infringing a patent case. If there is a good chance that Company A
Ltd. will win the case, it has a contingent asset in this matter. This
potential asset will generally be disclosed in the financial statement,
but will not be recorded as an asset until the case is over and
settled.

Contingent assets may also crop up when the companies expect to

receive monetary awards through the use of their warranty. Other
examples include the benefits that are to be received from an
estate or other court settlement.

Contingent Liabilities Meaning

A contingent liability is a specific type of liability, which may occur

depending on the result of an uncertain future event. The
contingent liability is then recorded if the contingency is likely the
amount of the liability will be reasonably estimated by it. The
contingent liability may be acknowledged in a footnote on the
financial statements unless both the conditions are not met. The
lawsuits which are pending and also the product warranties are the
common contingent liability examples as their outcomes are not
quite certain. The accounting rules for recording this contingent
liability vary depending on the estimated dollar which amounts to
the liability and is the likelihood of the event that is occurring. The
accounting rules ensure that the financial statement readers will
receive sufficient information.

Contingent Liabilities Example

Assuming that concern is facing a legal case from a rival firm for the
infringement of a patent. The company would lose 3 million if they
lose the case. The liability is both possible and easy to estimate
thus, the firm posts an accounting entry on the balance sheet to
debit that is to increase the legal expenses for 3 million and to
credit that is to increase the accrued expense 3 million.
This accrual account permits the firm to immediately post an
expense without the need for a quick cash payment. If they lose the
case then the debit is applied to the accrued account and the cash is
credited and is reduced to 3 million.

Q.5
ANS:

IAS-37

For each class of provision, an entity shall disclose:

 The carrying amount at the beginning and end of the period;
 Additional provisions made in the period, including increases
to existing provisions;
 Amounts used (i.e incurred and charged against the provision)
during the period;
 Unused amounts reversed during the period; and
 The increase during the period in the discounted amount
arising from the passage of time and the effect of any change
in the discount rate.
Comparative information is not required.
An entity shall disclose the following for each class of provision:
 A brief description of the nature of the obligation and the
expected timing of any resulting outflows of economic
benefits;
 An indication of the uncertainties about the amount or timing
of those outflows. Where necessary to provide adequate
information, an entity shall disclose the major assumptions
made concerning future events, as addressed in paragraph 48;
and
 The amount of any expected reimbursement, stating the
amount of any asset that has been recognized for that
expected reimbursement.

Unless the possibility of any outflow in settlement is remote, an

entity shall disclose for each class of contingent liability at the end
of the reporting period

a brief description of the nature of the contingent liability and,

where practicable:
 An estimate of its financial effect measured;
 An indication of the uncertainties relating to the amount or
timing of any outflow; and
 the possibility of any reimbursement.

IAS-11

An entity shall disclose:

 The amount of contract revenue recognized as revenue in the

period;
  the methods used to determine the contract revenue
recognized in the period; and
 The methods used to determine the stage of completion of
contracts in progress.
 An entity shall disclose each of the following for contracts in
progress at the end of the reporting period:

 (a) the aggregate amount of costs incurred and

recognized profits (less recognized losses) to date;
 (b) The amount of advances received; and
 (c) The amount of retentions.

Retentions are amounts of progress billings that are not paid until
the satisfaction of conditions specified in the contract for the
payment of such amounts or until defects have been rectified.
Progress billings are amounts billed for work performed on a
contract whether or not they have been paid by the customer.
Advances are amounts received by the contractor before the
related work is performed.
An entity shall present:

 the gross amount due from customers for contract work as an

asset; and
 the gross amount due to customers for contract work as a
liability.

The gross amount due from customers for contract work is the net
amount of:

 costs incurred plus recognised profits; less

  the sum of recognised losses and progress billings
 for all contracts in progress for which costs incurred plus
recognised profits (less recognised losses) exceeds progress
billings.
 The gross amount due to customers for contract work is the
net amount of:

 costs incurred plus recognised profits; less

(b) the sum of recognised losses and progress billings
for all contracts in progress for which progress billings exceed costs
incurred plus recognised profits (less recognised losses).
An entity discloses any contingent liabilities and contingent assets in
accordance with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets. Contingent liabilities and contingent assets may
arise from such items as warranty costs, claims, penalties or
possible losses.

Q.no.1
Ans.
• B Limited has obtained a generator for official lease on 2 years period whose useful life
is 6 years.

Operating Lease: The period over which lease agreement is enforceable is not
comprised of major part (more than 50%) of the economic useful life of the asset.

• C Ltd. has acquired an asset on lease the ownership of which will be transferred to the
company at the end of lease term.

Finance Lease: The title of the asset is passed from lessor to lessee at the end of the
lease term.
• The D Ltd. has acquired an asset on lease with an option to buy it at the end of lease
term at scrap value.

Finance Lease: (We assume it they will buy the asset at the end of lease term) Under the
terms and conditions of lease, the lessee has right/option to purchase the underlying
asset. In this respect the price has to be paid by the lessee for the purchase of asset is
not the market price but lesser one. It is quite certain that lessee will purchase the asset
as per terms.

• The Z Ltd has acquired an asset on lease for 8 years. The economic life of the asset is 10
years. The company has no intention to purchase it at the end of lease term.

Finance Lease: The period over which lease agreement is enforceable should be
comprised on major part (more than 50%) of the economic useful life of the asset.

• X Ltd. Has acquired an asset with annual lease payment of Rs. 50,000 for ten years
whereas the fair value of the asset is Rs. 310,000.

Finance Lease: Present value of minimum lease payments equals to fair value of asset.

B. Calculate the rate of interest implicit in the lease

agreement in the following example:
 Fair value of the asset Rs. 900,000
 Three annual installments Rs. 290,000 each
 The lease rentals are paid at the end of each year ANS:
 Rate of interest = rate (nper,pmt,pv,fv) 3.53%

Where,

Nper = number of payments =3

Pmt = payments (290,000)

Pv = present value 900,000

Fv = future value = 0