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Test Series: September, 2023

MOCK TEST PAPER 1
FINAL 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) Deepak started a new company Softbharti Pvt. Ltd. with Iktara Ltd. wherein investment of 55% is
done by Iktara Ltd. and rest by Deepak. Voting powers are to be given as per the proportionate
share of capital contribution. The new company formed was the subsidiary of Iktara Ltd. with two
directors, and Deepak eventually becomes one of the directors of company. A consultant was
hired and he charged ` 30,000 for the incorporation of company and to do other necessary
statuary registrations. ` 30,000 is to be charged as an expense in the books after incorporation
of company. The company, Softbharti Pvt. Ltd. was incorporated on 1 st April 20X1.
The financials of Iktara Ltd. are prepared as per Ind AS.
An accountant who was hired at the time of company’s incorporation, has prepared following
draft financials of Softbharti Pvt. Ltd. for the year ending 31 st March, 20X2 on the basis of
Accounting Standards (IGAAP):
Statement of Profit and Loss
Particulars Amount (`)
Revenue from operations 10,00,000
Other Income 1,00,000
Total Revenue (a) 11,00,000
Expenses:
Purchase of stock in trade 5,00,000
(Increase)/Decrease in stock in trade (50,000)
Employee benefits expenses 1,75,000
Depreciation 30,000
Other expenses 90,000
Total Expenses (b) 7,45,000
Profit before tax (c) = (a)-(b) 3,55,000
Current tax 1,06,500
Deferred tax 6,000
Total tax expense (d) 1,12,500
Profit for the year (e) = (c) – (d) 2,42,500

Balance Sheet
Particulars Amount (`)
EQUITY AND LIABILITIES
(1) Shareholders’ Funds
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(a) Share Capital 1,00,000

(b) Reserves & Surplus 2,27,500
(2) Non-Current Liabilities
(a) Long-term Provisions 25,000
(b) Deferred tax liabilities 6,000
(3) Current Liabilities
(a) Trade Payables 11,000
(b) Other Current Liabilities 45,000
(c) Short-term Provisions 1,06,500
TOTAL 5,21,000
ASSETS
(1) Non-current Assets
(a) Property, plant and equipment (net) 1,00,000
(b) Long-term Loans and Advances 40,000
(c) Other Non-current Assets 50,000
(2) Current Assets
(a) Current Investment 30,000
(b) Inventories 80,000
(c) Trade Receivables 55,000
(d) Cash and Bank Balances 1,15,000
(e) Other Current Assets 51,000
TOTAL 5,21,000

Additional information of Softbharti Pvt. Ltd.:

i. Deferred tax liability of ` 6,000 is created due to following temporary difference:
Difference in depreciation amount as per Income-tax and Accounting profit
ii. There is only one property, plant and equipment in the company, whose closing balance as at
31st March, 20X2 is as follows:
Asset description As per Books As per Income tax
Property, plant and equipment ` 1,00,000 ` 80,000

iii. Pre incorporation expenses are deductible on straight line basis over the period of five years
as per Income tax. However, the same are immediately expensed off in the books.
iv. Current tax is calculated at 30% on PBT - ` 3,55,000 without doing any adjustments related to
Income-tax. The correct current tax after doing necessary adjustments of allowances /
disallowances related to Income-tax comes to ` 1,25,700.
v. After the reporting period, the directors have recommended dividend of ` 15,000 for the year
ending 31st March, 20X2 which has been deducted from reserves and surplus. Dividend
payable of ` 15,000 has been grouped under ‘other current liabilities’ alongwith other financial
liabilities.
vi. There are ‘Government statuary dues’ amounting to ` 15,000 which are grouped under ‘other
current liabilities’.
vii. The capital advances amounting to ` 50,000 are grouped under ‘Other non-current assets’.
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viii. Other current assets of ` 51,000 comprise Interest receivable from trade receivables.
ix. Current investment of ` 30,000 is in shares of a company which was done with the purpose of
trading; current investment has been carried at cost in the financial statements. The fair
value of current investment in this case is ` 50,000 as at 31 st March, 20X2.
x. Actuarial gain on employee benefit measurements of ` 1,000 has been omitted in the
financials of Softbharti private limited for the year ending 31 st March, 20X2.
The financial statements for financial year 20X1-20X2 have not been yet approved.
You are required to analyse that whether the financial statements of Softbharti Pvt. Ltd. are
correctly presented as per the applicable financial reporting framework. If not, prepare the
revised financial statements of Softbharti Pvt. Ltd. after the careful analysis of mentioned facts
and information. (15 Marks)
(b) ABC Ltd. requires assistance on whether the following revenue can be anticipated or cost can be
deferred as of 30 th June, 20X1 while preparing the interim financial statements:
(i) Dividend income from its investment which is declared in September of every year.
(ii) 60% of the advertising cost for the whole year is incurred by ABC Ltd. in the first quarter
and the remaining 40% in the second quarter. (5 Marks)
2. (a) On 1st April, 20X1, Johansen Ltd. acquired a new subsidiary, Bosman Ltd., purchasing all
150 million shares of Bosman Ltd. The terms of the sale agreement included the exchange of
four shares in Johansen Ltd. for every three shares acquired in Bosman Ltd. On 1 st April, 20X1,
the market value of a share in Johansen Ltd. was ` 10 and the market value of a share in
Bosman Ltd. ` 12.
The terms of the share purchase included the issue of one additional share in Johansen Ltd. for
every five acquired in Bosman Ltd., if the profits of Bosman Ltd. for the two years ending
31st March, 20X3 exceeded a target figure. Current estimates are that it is 80% probable that the
management of Bosman Ltd. will achieve this target.
Legal and professional fees associated with the acquisition of Bosman Ltd. shares were
` 12,00,000, including ` 2,00,000 relating to the cost of issuing shares. The senior management
of Johansen Ltd. estimates that the cost of their time that can be fairly allocated to the acquisition
is ` 2,00,000. This figure of ` 2,00,000 is not included in the legal and professional fees of
` 12,00,000 mentioned above.
The individual Balance Sheet of Bosman Ltd. at 1 st April, 20X1 comprised net assets that had a
fair value at that date of ` 1,200 million. Additionally, Johansen Ltd. considered Bosman Ltd.
possessed certain intangible assets that were not recognized in its individual Balance Sheet:
• Customer relationships – reliable estimate of value ` 100 million. This value has been
derived from the sale of customer databases in the past.
• An in-process research and development project that had not been recognised by
Bosman Ltd. since the necessary conditions laid down in Indian Accounting Standards for
capitalisation were only just satisfied at 31 st March, 20X2. However, the fair value of the
whole project (including the research phase) is estimated at ` 50 million.
• Employee expertise – estimated value of Director employees of Bosman Ltd. is ` 80 million.
• The market value of a share in Johansen Ltd. on 31 st March, 20X2 was ` 11.
Compute the goodwill on consolidation of Bosman Ltd. that will appear in the consolidated
Balance Sheet of Johansen Ltd. at 31 st March, 20X2 with necessary explanation of adjustments
therein. Also state the treatment of contingent consideration as on 31 st March, 20X2 (12 Marks)

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(b) Mathur India Private Limited has to present its first financials under Ind AS for the year ended
31st March, 20X3. The transition date is 1 st April, 20X1.
The following adjustments were made upon transition to Ind AS:
(a) The Company opted to fair value its land as on the date on transition.
The fair value of the land as on 1 st April, 20X1 was ` 10 crores. The carrying amount as on
1st April, 20X1 under the existing GAAP was ` 4.5 crores.
(b) The Company has recognised a provision for proposed dividend of ` 60 lacs and related
dividend distribution tax of ` 18 lacs during the year ended 31 st March, 20X1. It was written
back as on opening balance sheet date.
(c) The Company fair values its investments in equity shares on the date of transition. The
increase on account of fair valuation of shares is ` 75 lacs.
(d) The Company has an Equity Share Capital of ` 80 crores and Redeemable Preference
Share Capital of ` 25 crores.
(e) The reserves and surplus as on 1 st April, 20X1 before transition to Ind AS was ` 95 crores
representing ` 40 crores of general reserve and ` 5 crores of capital reserve acquired out of
business combination and balance is surplus in the Retained Earnings.
(f) The company identified that the preference shares were in nature of financial liabilities.
What is the balance of total equity (Equity and other equity) as on 1 st April, 20X1 after transition to
Ind AS? Show reconciliation between total equity as per AS (Accounting Standards) and as per
Ind AS to be presented in the opening balance sheet as on 1 st April, 20X1.
Ignore deferred tax impact. (8 Marks)
3. (a) An entity can borrow funds in its functional currency (`) @ 12%. It borrows $ 1,000 @ 4% on
1st April, 20X1 when $ 1 = ` 40. The equivalent amount in functional currency is ` 40,000.
Interest is payable on 31 st March, 20X2. On 31 st March, 20X2, exchange rate is $ 1 = ` 50. The
loan is not due for repayment.
Compute exchange loss and borrowing cost to be capitalized as on 31 st March, 20X2. What will
be exchange loss and borrowing cost to be capitalized as on 31 st March, 20X2 if the exchange
rate on 31 st March, 20X2, is $ 1 = ` 41? (6 Marks)
(b) G Ltd. is a wholly owned subsidiary of U Ltd. engaged in management consultancy services. On
31st January, 20X2, the board of directors of U Ltd. decided to discontinue the business of G Ltd.
from 30th April, 20X2. They made a public announcement of their decision on
15th February, 20X2.
G Ltd. does not have many assets or liabilities and it is estimated that the outstanding trade
receivables and payables would be settled by 31 st May, 20X2. U Ltd. would collect any amounts
still owed by G Ltd.’s customers after 31 st May, 20X2. They have offered the employees of G Ltd.
termination payments or alternative employment opportunities.
Following are some of the details relating to G Ltd.:
- On the date of public announcement, it is estimated by G Ltd. that it would have to pay
` 540 lakhs as termination payments to employees and the costs for relocation of employees
who would remain with the Group would be ` 60 lakhs. The actual termination payments
totalling to ` 520 lakhs were made in full on 15 th May, 20X2. As per latest estimates made on
15th May, 20X2, the total relocation cost is ` 63 lakhs.

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- G Ltd. had taken a property on lease, which was expiring on 31 st March, 20X6. The present
value of the future lease rentals (using an appropriate discount rate) is ` 430 lakhs. On
15th May, 20X2, G Ltd. made a payment to the lessor of ` 410 lakhs in return for early
termination of the lease.
The loss after tax of G Ltd. for the year ended 31st March, 20X2 was ` 400 lakhs. G Ltd. made
further operating losses totalling ` 60 lakhs till 30 th April, 20X2.
What are the provisions that the Company is required to make as per lnd AS 37 as on
31st March, 20X2? (8 Marks)
(c) Either
Determine the lease term in the following scenarios:
Scenario A: Entity ABC enters into a lease for equipment that includes a non-cancellable term of
six years and a two-year fixed-priced renewal option with future lease payments that are intended
to approximate market rates at lease inception. There are no termination penalties or other
factors indicating that Entity ABC is reasonably certain to exercise the renewal option. What is
the lease term?
Scenario B: Entity XYZ enters into a lease for a building that includes a non-cancellable term of
eight years and a two-year, market-priced renewal option. Before it takes possession of the
building, Entity XYZ pays for leasehold improvements. The leasehold improvements are
expected to have significant value at the end of eight years, and that value can only be realised
through continued occupancy of the leased property. What is the lease term?
Scenario C: Entity PQR enters into a lease for an identified retail space in a shopping centre.
The retail space will be available to Entity PQR for only the months of October, November and
December during a non-cancellable term of seven years. The lessor agrees to provide the same
retail space for each of the seven years. What is the lease term? (6 Marks)
(c) Or
On 1st April, 20X1, Alpha Ltd. commenced joint construction of a property with Gama Ltd. For
this purpose, an agreement has been entered into that provides for joint operation and ownership
of the property. All the ongoing expenditure, comprising maintenance plus borrowing costs, is to
be shared equally. The construction was completed on 30 th September 20X1 and utilisation of
the property started on 1 st January 20X2 at which time the estimated useful life of the same was
estimated to be 20 years.
Total cost of the construction of the property was ` 40 crores. Besides internal accruals, the cost
was partly funded by way of loan of ` 10 crores taken on 1 st January, 20X1. The loan carries
interest at an annual rate of 10% with interest payable at the end of year on 31 st December each
year. The company has spent ` 4,00,000 on the maintenance of such property.
The company has recorded the entire amount paid as investment in Joint Venture in the books of
accounts. Suggest the suitable accounting treatment of the above transaction as per applicable
Ind AS. (6 Marks)
4. (a) Company Z is engaged in the business of importing oil seeds for further processing as well as
trading purposes. It enters into the following types of contracts as on 1 st October, 20X1:
Particulars Contract 1 Contract 2 Contract 3
Nature of Contract Import of oil seeds Purchase of oil seeds Contract to sell oil
from a foreign from a domestic seeds on the
supplier producer / supplier commodity exchange
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Quantity and rate 100 MT at USD 50 MT at ` 30,000 50 MT at USD 450

400 per MT to be per MT to be per MT, maturing as
delivered as on delivered as on 31 st on 15 th January, 20X2
31st March, 20X2 January, 20X2
Net settlement
clause included in Yes Yes Yes
the contract
Net settlement in Yes – company Z has
practice for similar There have also net settled some of
contracts been several the domestic
Yes – these contracts
instances of the oil purchase contracts.
are required to be net
seeds being sold However, these
settled with the
prior to or shortly instances constitute
exchange on the
after taking only 1 per cent of the
maturity date.
delivery. total domestic
Company Z enters
These instances purchase contracts in
into these types of
of net settlement value.
derivative contracts to
constitute The remaining
hedge the risks on its
approximately contracts are settled
domestic oil seeds
30% of the value by taking delivery of
purchase contracts
of total import oil seeds which are
contracts. used for further
processing.

Company Z is required to determine if the contracts entered into for purchase and sale of oil seeds
are derivatives within the scope of lnd AS 109 or are executory contracts outside the scope of
lnd AS 109. (8 Marks)
(b) A Ltd. a telecommunication company, entered into an agreement with B Ltd. which is engaged in
generation and supply of power. The agreement provided that A Ltd. will provide
1,00,000 minutes of talk time to employees of B Ltd. in exchange for getting power equivalent to
20,000 units. A Ltd. normally charges ` 0.50 per minute and B Ltd. charges ` 2.5 per unit. How
should revenue be measured in this case? (6 Marks)
(c) 1 st January Shares in issue 10,00,000
5% Convertible bonds ` 1,00,000
(terms of conversion 120 ordinary shares for ` 100)
31st March Holders of ` 25,000 bonds converted to ordinary shares.
Profit for the year ended 31 st December ` 2,00,000
Tax rate 30%.
Calculate basic and diluted EPS. Ignore the need to split the convertible bonds into liability
and equity elements. (6 Marks)
5. (a) An entity enters into a contract with a customer on 1 st April, 20X1 for the sale of a machine and
spare parts. The manufacturing lead time for the machine and spare parts is two years.
Upon completion of manufacturing, the entity demonstrates that the machine and spare parts
meet the agreed-upon specifications in the contract. The promises to transfer the machine and
spare parts are distinct and result in two performance obligations tha t each will be satisfied at a
point in time. On 31st March, 20X3, the customer pays for the machine and spare parts, but only

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takes physical possession of the machine. Although the customer inspects and accepts the
spare parts, the customer requests that the spare parts be stored at the entity's warehouse
because of its close proximity to the customer's factory. The customer has legal title to the spare
parts and the parts can be identified as belonging to the customer. Furthermore, the entity stores
the spare parts in a separate section of its warehouse and the parts are ready for immediate
shipment at the customer's request. The entity expects to hold the spare parts for two to four
years and the entity does not have the ability to use the spare parts or direct them to another
customer.
How will the Company recognise revenue for sale of machine and spare parts? Is there any other
performance obligation attached to this sale of goods? (8 Marks)
(b) Company A, an Indian company whose functional currency is `, enters into a contract to
purchase machinery from an unrelated local supplier, company B. The functional currency of
company B is also `. However, the contract is denominated in USD, since the machinery is
sourced by company B from a US based supplier. Payment is due to company B on delivery of
the machinery.
Key terms of the contract:
Contractual features Details
Contract / order date 9 th September 20X1
Delivery / payment date 31st December 20X1
Purchase price USD 1,000,000
USD / ` Forward rate on 9 th September, 20X1 for 67.8
31st December, 20X1 maturity
USD / ` Spot rate on 9 th September, 20X1 66.4
USD / ` Forward rates for 31 st
December, on:
30 September
th 67.5
31st December (spot rate) 67.0
Company A is required to analyse if the contract for purchase of machinery (a capital asset)
from company B contains an embedded derivative and whether this should be separately
accounted for on the basis of the guidance in Ind AS 109. Also give necessary journal entries
for accounting the same. (8 Marks)
(c) On 31st March, 20X1, the inventory of ABC includes spare parts which it had been supplying to a
number of different customers for some years. The cost of the spare parts was ` 10 million and
based on retail prices at 31 st March, 20X1, the expected selling price of the spare parts is
` 12 million. On 15 th April, 20X1, due to market fluctuations, expected selling price of the spare
parts in stock reduced to ` 8 million. The estimated selling expense required to make the sales
would ` 0.5 million. Financial statements were approved by the Board of Directors on
20th April, 20X1.
As at 31st March, 20X2, Directors noted that such inventory is still unsold and lying in the
warehouse of the company. Directors believe that inventory is in a saleable condition and active
marketing would result in an immediate sale. Since the market conditions have imp roved,
estimated selling price of inventory is ` 11 million and estimated selling expenses are same
` 0.5 million.
What will be the value inventory at the following dates:
(a) 31st March, 20X1
(b) 31st March, 20X2 (4 Marks)

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6. (a) A Ltd. prepares financial statements to 31 st March each year. The rate of income tax applicable
to A Ltd. is 20%. The following information relates to transactions, assets and liabilities of A Ltd .
during the year ended 31 st March, 20X2:
(i) A Ltd. has a 40% shareholding in L Ltd. A Ltd. purchased this shareholding for ` 45 Cr.
The shareholding gives A Ltd. significant influence over L Ltd. but not control and therefore
A Ltd. accounts for its interest in L Ltd. using the equity method. The equity method
carrying value of A Ltd.’s investment in L Ltd. was ` 70 Cr on 31 st March, 20X1 and ` 75 Cr
on 31st March 20X2. In the tax jurisdiction in which A Ltd. operates, profits recognised
under the equity method are taxed if and when they are distributed as a dividend, or the
relevant investment is disposed of.
(ii) A Ltd. measures its head office building using the revaluation model. The building is
revalued every year on 31 st March. On 31 st March, 20X1, carrying value of the building
(after revaluation) was ` 40 Cr and its tax base was ` 22 Cr. During the year ended
31st March, 20X2, A Ltd. charged depreciation in its statement of profit or loss of ` 2 Cr and
claimed a tax deduction for tax depreciation of ` 1.25 Cr. On 31st March, 20X2, the building
was revalued to ` 45 Cr. In the tax jurisdiction in which A Ltd. operates, revaluation of
property, plant and equipment does not affect taxable income at the time of revaluation.
Basis the above information, you are required to compute:
(a) The deferred tax liability of A Ltd. at 31st March, 20X2
(b) The charge or credit to both profit or loss and other comprehensive income relating to
deferred tax for the year ended 31 st March, 20X2 (10 Marks)
(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 1 st January, 20X5. The SARs
provide the employees with the right to receive (at the date when the rights are exercised) cash
equal to the appreciation in the entity’s share price since the grant date. All of the rights vest on
31st December, 20X6 and they can be exercised during 20X7 and 20X8. Management estimates
that, at grant date, the fair value of each SAR is ` 11 and it estimates that overall, 10% of the
employees will leave during the two-year period. The fair values of the SARs at each year end
are shown below:
Year Fair value at year end
31st December, 20X5 12
31st December, 20X6 8
31st December, 20X7 13
31st 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 ` 10), six employees exercised their options and the remaining
30 employees exercised their options at the end of 20X8 (when the intrinsic value of each SAR
was equal to the fair value of ` 12).
How much expense and liability is to be recognized at the end of each year? Pass Journal
entries. (10 Marks)

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