CMA Final - CFR

Selected Important Questions for December 2025 Exams

based on strategic prediction
Question 1
On 1st April 2011, Sun ltd purchased some land for ₹10 million (including legal costs of ₹1 million) in
order to construct a new factory. Construction work commenced on 1st May, 2011. Sun ltd incurred the
following costs in relation with its construction:
– Preparation and levelling of the land – ₹3,00,000.
– Purchase of materials for the construction – ₹6·08 million in total.
– Employment costs of the construction workers – ₹2,00,000 per month.
– Overhead costs incurred directly on the construction of the factory – ₹1,00,000 per month.
– Ongoing overhead costs allocated to the construction project using the company’s normal
overhead allocation model – ₹50,000 per month.
– Income received during the temporary use of the factory premises as a car park during the
construction period – ₹50,000.
– Costs of relocating employees to work at the new factory – ₹300,000.
– Costs of the opening ceremony on 31st January 2012 – ₹150,000.
The factory was completed on 30th November 2011 (which is considered as substantial period of time
as per Ind AS 23) and production began on 1st February, 2012. The overall useful life of the factory
building was estimated at 40 years from the date of completion. However, it is estimated that the roof
will need to be replaced 20 years after the date of completion and that the cost of replacing the roof at
current prices would be 30% of the total cost of the building.
At the end of the 40-year period, Sun Ltd has a legally enforceable obligation to demolish the factory
and restore the site to its original condition. The directors estimate that the cost of demolition in 40
years’ time (based on prices prevailing at that time) will be ₹20 million. An annual risk adjusted discount
rate which is appropriate to this project is 8%. The present value of ₹1 payable in 40 years’ time at an
annual discount rate of 8% is ₹0.046.
The construction of the factory was partly financed by a loan of ₹17·5 million taken out on 1 st April,
2011. The loan was at an annual rate of interest of 6%. Sun Ltd received investment income of ₹100,000
on the temporary investment of the proceeds.

Required:
Compute the carrying amount of the factory in the Balance Sheet of Sun Ltd at 31 st March, 2012. You
should explain your treatment of all the amounts referred to in this part in your answer.

Solution
Computation of the cost of the factory
Description Included in Explanation
P.P.E.’000
Purchase of land 10,000 Both the purchase of the land and the
associated legal costs are direct costs of
constructing the factory.
Preparation and levelling 300 A direct cost of constructing the factory
Materials 6,080 A direct cost of constructing the factory
Employment costs of construction 1,400 A direct cost of constructing the factory
Workers for a seven-month period
Direct overhead costs 700 A direct cost of constructing the factory
for a seven-month period
Allocated overhead costs Nil Not a direct cost of construction
Income from use as a car park Nil Not essential to the construction so

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CORPORATE FINANCIAL REPORTING
recognized directly in profit or loss
Relocation costs Nil Not a direct cost of construction
Opening ceremony Nil Not a direct cost of construction
Finance costs 612.50 Capitalize the interest cost incurred in a
seven-month period (purchase of land
would not trigger off capitalization since
land is not a qualifying asset. Infact, the
construction started from 1st May, 20X1)
Investment income on temporary (100) offset against the amount capitalized
investment of the loan proceeds
Demolition cost recognized as a Where an obligation must recognize as
Provision 920 part of the initial cost
Total 19,912.50

Computation of accumulated depreciation

Total depreciable amount 9,912.50 All of the net finance cost of 512.50 (612.50 – 100) has been
allocated to the depreciable amount. Also, acceptable to
reduce by allocating a portion to the non-
depreciable land element principle

Depreciation must be in two parts:

Depreciation of roof component 49.56 9,912.50 x 30% x 1/20 x 4/12
Depreciation of remainder 57.82 9,912.50 x 70% x 1/40 x 4/12
Total depreciation 107.38
Computation of carrying amount 19,805.12 19,912.50 – 107.38

Question 2
Heaven Ltd. had purchased a machinery on 1.4.2001 for 30,00,000, which is reflected in its books at
written down value of 17,50,000 on 1.4.2006. The company has estimated an upward revaluation of
10% on 1.4.2006 to arrive at the fair value of the asset. Heaven Ltd. availed the option given by Ind AS
of transferring some of the surplus as the asset is used by an enterprise.
On 1.4.2008, the machinery was revalued downward by 15% and the company also re- estimated the
machinery’s remaining life to be 8 years. On 31.3.2010 the machinery was sold for 9,35,000. The
company charges depreciation on straight line method.
Prepare machinery account in the books of Heaven Ltd. over its useful life to record the above
transactions.

Solution
In the books of Heaven Ltd.
Machinery A/c
Date Particulars Amount Date Particulars Amount
1.4.2001 To Bank/ Vendor 30,00,000 31.3.2002 By Depreciation (W.N.1) 2,50,000
31.3.2002 By Balance c/d 27,50,000
30,00,000 30,00,000
1.4.2002 To Balance b/d 27,50,000 31.3.2003 By Depreciation 2,50,000
31.3.2003 By Balance c/d 25,00,000

Ind AS 16, 38, 23, 36, 102, 115 & 116 2 CA BISHNU KEDIA
 CMA Final - CFR
27,50,000 27,50,000
1.4.2003 To Balance b/d 25,00,000 31.3. 2004 By Depreciation 2,50,000
31.3.2004 By Balance c/d 22,50,000
25,00,000 25,00,000
1.4.2004 To Balance b/d 22,50,000 31.3.2005 By Depreciation 2,50,000
31.3.2005 By Balance c/d 20,00,000
22,50,000 22,50,000

1.4.2005 To Balance b/d 20,00,000 31.3.2006 By Depreciation 2,50,000

31.3.2006 By Balance c/d 17,50,000
20,00,000 20,00,000
1.4.2006 To Balance b/d 17,50,000 31.3.2007 By Depreciation 2,75,000
(W.N.2)
1.4.2006 To Revaluation 31.3.2007 By Balance c/d 16,50,000
Reserve @ 10% 1,75,000
19,25,000 19,25,000
1.4.2007 To Balance b/d 16,50,000 31.3.2008 By Depreciation 2,75,000
31.3.2008 By Balance c/d 13,75,000
16,50,000 16,50,000
1.4.2008 To Balance b/d 13,75,000 1.4.2008 By Revaluation 1,25,000
Reserve (W.N.4)
31.3.2009 By Profit and Loss 81,250
A/c (W.N.5)
31.3.2009 By Depreciation 1,46,094
(W.N.3)
31.3.2009 By Balance c/d 10,22,656
13,75,000 13,75,000
1.4.2009 To Balance b/d 10,22,656 31.3.2010 By Depreciation 1,46,094
31.3.2010 To Profit and Loss A/c 31.3.2010 By Bank A/c 9,35,000
(balancing figure) 58,438*

10,81,094 10,81,094

Working Notes:
Calculation of useful life of machinery on 1.4.2001
Depreciation charge in 5 years
= (30,00,000 – 17,50,000) = 12,50,000 Depreciation per year as per Straight Line method
= 12,50,000 / 5 years = 2,50,000
Remaining useful life = 17,50,000 / 2,50,000 = 7 years
Total useful life = 5 years + 7 years = 12 years
Depreciation after upward revaluation as on 1.4.2006
Book value as on 1.4.2006 17,50,000
Add: 10% upward revaluation 1,75,000

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CORPORATE FINANCIAL REPORTING
Revalued amount 19,25,000
Remaining useful life 7 years (Refer W.N.1)
Depreciation on revalued amount = 19,25,000 / 7 years = 2,75,000 lakh

Depreciation after downward revaluation as on 1.4.2008

Book value as on 1.4.2008 13,75,000
Less: 15% Downward revaluation (2,06,250)
Revalued amount 11,68,750
Revised useful life 8 years
Depreciation on revalued amount = 11,68,750 / 8 years = 1,46,094

Amount transferred from revaluation reserve

Revaluation reserve on 1.4.2006 (A) 1,75,000
Remaining useful life 7 years
Amount transferred every year (1,75,000 / 7) 25,000
Amount transferred in 2 years (25,000 x 2) (B) 50,000
Balance of revaluation reserve on 1.4.2008 (A-B) 1,25,000

Amount of downward revaluation to be charged to Profit and Loss Account

Downward revaluation as on 1.4.2008 (W.N.3) 2,06,250
Less: Adjusted from Revaluation reserve (W.N.4) (1,25,000)
Amount transferred to Profit and Loss Account 81,250

Question 3

Sun Ltd acquired a software from Earth Ltd. in exchange for a telecommunication license. The
telecommunication license is carried at ₹5,00,000 in the books of Sun Ltd. The Software is
carried at ₹10,000 in the books of the Earth Ltd which is not the fair value.
Advise journal entries in the following situations in the books of Sun Ltd and Earth Ltd:
1) Fair value of software is ₹5,20,000 and fair value of telecommunication license is
₹5,00,000.
2) Fair Value of Software is not measurable. However similar Telecommunication license is
transacted by another company at ₹4,90,000.
3) Neither Fair Value of Software nor Telecommunication license could be reliably
measured.

Solution

in ‘000
Situation Sun Ltd. Earth Ltd.
1 Software Dr. 500 Telecommunication license Dr. 520
To Telecommunication license 500 To Software 10
To Profit on Exchange Nil To Profit on Exchange 510

Ind AS 16, 38, 23, 36, 102, 115 & 116 4 CA BISHNU KEDIA
 CMA Final - CFR
2 Software Dr. 490 Telecommunication license Dr. 490

Loss on Exchange Dr. 10 To Software 10

To Telecommunication license 500 To Profit on Exchange 480

Note: The company may first recognize

Impairment loss and then record an entry.
The effect is the same as impairment loss will
also be charged to Income Statement.

3 Software Dr. 500 Telecommunication license Dr. 10

To Telecommunication license 500 To Software 10

Question 4
Expenditure on a new production process in 2011-2012:
₹
1st April to 31st December 2,700
1st January to 31st March 900
3,600
The production process met the intangible asset recognition criteria for development on 1 st
January, 2012. The amount estimated to be recoverable from the process is ₹1,000.
Expenditure incurred for development of the process in FY 2012-2013 is ₹6,000. Asset was
brought into use on 31st March, 2013 and is expected to be useful for 6 years.

What is the carrying amount of the intangible asset at 31 st March, 2012 and 31st March, 2013.
Also determine the charge to profit or loss for 2011-2012?

At 31st March, 2014, the amount estimated to be recoverable from the process is ₹5,000.
What is the carrying amount of the intangible asset at 31 st March, 2014 and the charge to profit
or loss for 2013-2014 on account of impairment loss?

Solution

1) Expenditure to be transferred to profit or loss in 2011-2012

Total Expenditure 3,600
Less: Expenditure during development phase (900)
Expenditure to be transferred to profit or loss 2,700
2) Carrying amount of intangible asset on 31st March, 2012
Expenditure during development phase will be capitalised 900
(Recoverable amount is higher being 1,000, hence no impairment)
3) Carrying amount of intangible asset on 31st March, 2013
Carrying amount of intangible asset on 31st March, 2012 900
Add: Further expenditure during development phase 6,000

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CORPORATE FINANCIAL REPORTING

Total capital expenditure on development phase 6,900

4) Expenditure to be charged to profit or loss in 2013-2014
Opening balance of Intangible Asset 6,900
Less: Amortisation for the year (6,900 / 6) (1,150)
Carrying amount of intangible asset 5,750
Less: Recoverable amount (5,000)
Amount charged to profit or loss (Impairment Loss) 750

5) Carrying Amount of Intangible Asset on 31st March, 2014

Value of intangible asset will be recoverable amount i.e. 5,000

Question 5

ABC Ltd. has taken a loan of USD 20,000 on 1 st April, 2011 for constructing a plant at an
interest rate of 5% per annum payable on annual basis.
On 1st April, 2011, the exchange rate between the currencies i.e. USD vs Rupees was ₹45 per
USD. The exchange rate on the reporting date i.e. 31 st March, 2012 is ₹48 per USD.
The corresponding amount could have been borrowed by ABC Ltd from State bank of India
in local currency at an interest rate of 11% per annum as on 1 st April, 2011.
Compute the borrowing cost to be capitalized for the construction of plant by ABC Ltd. for
the period ending 31st March, 2012.

Solution
In the above situation, the borrowing cost needs to determine for interest cost on such foreign currency loan
and eligible exchange loss difference if any.
a) Interest on foreign currency loan for the period:
USD 20,000 x 5% = USD 1,000
Converted in: USD 1,000 x 48/USD = 48,000
b) Interest that would have resulted if the loan was taken in Indian Currency:
USD 20,000 x 45/USD x 11% = 99,000
c) Difference between interest on foreign currency borrowing and local currency
borrowing: 99,000 - 48,000 = 51,000
Increase in liability due to change in exchange difference: USD 20,000 x (48 - 45) = Rs.60,000
Hence, out of exchange loss of Rs.60,000 on principal amount of foreign currency loan, only exchange loss
to the extent of 51,000 is considered as borrowing costs.
Total borrowing cost to be capitalized is as under:
a) Interest cost on borrowing = ` 48,000
b) Exchange difference to the extent considered to be an adjustment to Interest cost = `
51,000
Total Borrowing Cost = ` 99,000
The exchange difference of Rs.51,000 has been capitalized as borrowing cost and the remaining Rs.9,000
will be expensed off in the Statement of Profit and Loss.

Ind AS 16, 38, 23, 36, 102, 115 & 116 6 CA BISHNU KEDIA
 CMA Final - CFR
Question 6

An entity constructs a new head office building commencing on 1 st September 2011, which
continues till 31st December 2011. Directly attributable expenditure at the beginning of the
month on this asset are ₹100,000 in September 2011 and ₹ 250,000 in each of the months of
October to December 2011.
The entity has not taken any specific borrowings to finance the construction of the asset but
has incurred finance costs on its general borrowings during the construction period. During
the year, the entity had issued 10% debentures with a face value of ₹ 20 lacs and had an
overdraft of ₹500,000, which increased to ₹750,000 in December 2011. Interest was paid on
the overdraft at 15% until 1 October 2011, then the rate was increased to 16%.
Calculate the capitalization rate for computation of borrowing cost in accordance with Ind AS
23 ‘Borrowing Costs’.

Solution

Since the entity has only general borrowing hence first step will be to compute the
capitalisation rate. The capitalisation rate of the general borrowings of the entity during the
period of construction is calculated as follows:

Finance cost on 20 lacs 10% debentures during September – December2011 66,667

Interest @ 15% on overdraft of 5,00,000 in September 2011 6,250
Interest @ 16% on overdraft of 5,00,000 in October and November 2011 13,333
Interest @ 16% on overdraft of 7,50,000 in December 2011 10,000
Total finance costs in September – December 2011 96,250

Weighted average borrowings during period

= (20,00,000 × 4) + (500,000 × 3) + (750,000 × 1) = Rs.25,62,500
4

Capitalisation rate = Total finance costs during the construction period / Weighted average
borrowings during the construction period = 96,250 / 25,62,500 = 3.756%

Note: The above capitalisation rate is for 4 months period from September – December 2011

Annualised Capitalisation Rate = 3.756*12/4 = 11.268% p.a.

CA BISHNU KEDIA 7 CFR - Super 50

CORPORATE FINANCIAL REPORTING
Question 7

K Ltd. began construction of a new building at an estimated cost of ₹7 lakh on 1 st April, 2011.
To finance construction of the building it obtained a specific loan of ₹2 lakh from a financial
institution at an interest rate of 9% per annum.

The company’s other outstanding loans were:

Amount Rate of Interest per annum
₹7,00,000 12%
₹9,00,0001 11%

The expenditure incurred on the construction was:

April, 2011 ₹1,50,000
August, 2011 ₹2,00,000
October, 2011 ₹3,50,000
January, 2012 ₹1,00,000

The construction of building was completed by 31 st January, 2012. Following the provisions
of Ind AS 23 ‘Borrowing Costs’, calculate the amount of interest to be capitalized and pass
necessary journal entry for capitalizing the cost and borrowing cost in respect of the building
as on 31st January, 2012.

Solution
1. Calculation of capitalization rate on borrowings other than specific borrowings
Amount of loan Rate of interest Amount of interest
7,00,000 12% = 84,000
9,00,000 11% = 99,000
16,00,000 1,83,000
Weighted average rate of interest = 11.4375%
(1,83,000/16,00,000) x 100

2. Computation of borrowing cost to be capitalized for specific borrowings and general

borrowings based on weighted average accumulated expenses
Date of
Amount
incurrence of Financed through Calculation
spent Amount
expenditure
1st April, 2011 1,50,000 Specific borrowing 1,50,000 x 9% x 10/12 11,250
1st August, 2011 2,00,000 Specific borrowing 50,000 x 9% x 10/12 3,750

General borrowing 1,50,000x11.4375% x

6/12 8,578.125
1st October, 3,50,000 General borrowing 3,50,000x11.4375% x 4/12
2011 13,343.75
1st January, 1,00,000 General borrowing 1,00,000x11.4375% x 1/12
2012 953.125

Ind AS 16, 38, 23, 36, 102, 115 & 116 8 CA BISHNU KEDIA
 CMA Final - CFR
37,875
Note: Since construction of building started on 1st April, 2011, it is presumed that all the later
expenditures on construction of building had been incurred at the beginning of the respective
month.

3. Total expenses to be capitalized for building

Particulars Amount
Cost of building (1,50,000 + 2,00,000 + 3,50,000 + 1,00,000) 8,00,000
Add: Amount of interest to be capitalized 37,875
8,37,875

4. Journal Entry
Date Particulars Dr Cr
31.1.2012 Building account Dr. 8,37,875
To Bank account 8,00,0000
To Interest payable (borrowing cost) 37,875
(Being expenditure incurred on construction of building and
borrowing cost thereon capitalized)
Note: In the above journal entry, it is assumed that interest amount will be paid at the year end.
Hence, entry for interest payable has been passed on 31.1.2012.

Alternatively, following journal entry may be passed if interest is paid on the date of
capitalization:

Date Particulars Dr Cr
31.1.2012 Building account Dr. 8,37,875
To Bank account 8,37,875
(Being expenditure incurred on construction of building and
borrowing cost thereon capitalized)

Question 8

On 1st April, 2011, entity A contracted for the construction of a building for ₹22,00,000. The
land under the building is regarded as a separate asset and is not part of the qualifying assets.
The building was completed at the end of March, 2012, and during the period the following
payments were made to the contractor:

Payment date Amount (₹ ,000)

1st April, 2011 200
th
30 June, 2011 600
31st December, 2011 1,200
31st March, 2012 200
Total 2,200
Entity A’s borrowings at its year end of 31 st March, 2012 were as follows:
(a) 10%, 4-year note with simple interest payable annually, which relates specifically to the
project; debt outstanding on 31st March, 2012 amounted to ₹7,00,000. Interest of ₹65,000
was incurred on these borrowings during the year, and interest income of ₹20,000 was
earned on these funds while they were held in anticipation of payments.

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CORPORATE FINANCIAL REPORTING
(b) 12.5% 10-year note with simple interest payable annually; debt outstanding at 1 st April,
2011 amounted to ₹1,000,000 and remained unchanged during the year; and
(c) 10% 10-year note with simple interest payable annually; debt outstanding at 1 st April,
2011 amounted to ₹1,500,000 and remained unchanged during the year.

What amount of the borrowing costs can be capitalized at year end as per relevant Ind AS?

Solution

As per Ind AS 23, when an entity borrows funds specifically for the purpose of obtaining a
qualifying asset, the entity should determine the amount of borrowing costs eligible for
capitalisation as the actual borrowing costs incurred on that borrowing during the period less
any investment income on the temporary investment of those borrowings.
The amount of borrowing costs eligible for capitalization, in cases where the funds are borrowed generally,
should be determined based on the capitalisation rate and expenditure incurred in obtaining a qualifying asset.
The costs incurred should first be allocated to the specific borrowings.
Analysis of expenditure:
Date Expenditure Amount allocated in general Weighted for period
(’000) borrowings (’000) outstanding (’000)
1st April 2011 200 0 0
30th June 2011 600 100* 100 × 9/12 = 75
31st Dec 2011 1,200 1,200 1,200 × 3/12 = 300
31st March 2012 200 200 200 × 0/12 = 0
Total 2,200 375
*Specific borrowings of 7,00,000 fully utilized on 1st April & on 30th June to the extent of 5,00,000 hence
remaining expenditure of 1,00,000 allocated to general borrowings.
The capitalisation rate relating to general borrowings should be the weighted average of the borrowing costs
applicable to the entity’s borrowings that are outstanding during the period, other than borrowings made
specifically for the purpose of obtaining a qualifying asset.
Capitalisation rate = (10,00,000 x 12.5%) + (15,00,000 x 10%) = 11%
10,00,000 + 15,00,000
Borrowing cost to be capitalized: Amount
On specific loan 65,000
On General borrowing (3,75,000 × 11%) 41,250
Total 1,06,250
Less: interest income on specific borrowings (20,000)
Amount eligible for capitalization 86,250
Therefore, the borrowing costs to be capitalized are Rs. 86,250.

Question 9
A Ltd. purchased an asset of ₹100 lakh on 1 st April, 2010. It has useful life of 4 years with no
residual value. Recoverable amount of the asset is as follows:

As on Recoverable amount
st
31 March, 2011 ₹60 lakh
31st March, 2012 ₹40 lakh
31st March, 2013 ₹28 lakh

Ind AS 16, 38, 23, 36, 102, 115 & 116 10 CA BISHNU KEDIA
 CMA Final - CFR
Calculate the amount of impairment loss or its reversal, if any, on 31 st March, 2011, 31st March,
2012 and 31st March, 2013.

Solution

As on 31st March,2011

Particulars Amount
Carrying amount of the asset (opening balance) 100 lakhs
Depreciation (100 lakh /4 years) 25 lakhs
Carrying amount of the asset (closing balance) 75 lakhs
Recoverable amount (given) 60 lakhs
Therefore, an impairment loss of 15 lakh should be recognized as on 31st March, 2011.
Depreciation for subsequent years should be charged on the carrying amount of the asset (after
providing for impairment loss), i.e., 60 lakhs.

As on 31st March,2012

Particulars Amount
Carrying amount of the asset (opening balance) 60 lakhs
Depreciation (60 lakh /3 years) 20 lakhs
Carrying amount of the asset (closing balance) 40 lakhs
Therefore, no impairment loss should be recognized as on 31st March, 2012.

As on 31st March, 2013

Particulars Amount
Carrying amount of the asset (opening balance) 40 lakhs
Depreciation (40 lakh / 2 years) 20 lakhs
Carrying amount of the asset (closing balance) 20 lakhs
Recoverable amount (given) 28 lakhs
Since, the recoverable amount of the asset exceeds the carrying amount of the asset by 8 lakh,
impairment loss recognized earlier should be reversed. However, reversal of an impairment
loss should not exceed the carrying amount that would have been determined (net of
amortization or depreciation) had no impairment loss been recognized for the asset in prior
years.

Carrying amount as on 31st March, 2013 had no impairment loss being recognized would have
been Rs.25 lakh. Therefore, the reversal of an impairment loss of Rs.5 lakh should be done as
on 31st March, 2013.

CA BISHNU KEDIA 11 CFR - Super 50

CORPORATE FINANCIAL REPORTING
Question 10
On 01.07.2018 AMLA, GILOY & TULSI Ltd. grants 100 options to each of its 2100
employees at 60 when the market price is 200. The vesting date is 31st March, 2021 and the
exercise date is 31st March, 2022. At the end of year 1, the company found that 100 employees
had left. Fair Value of a share issued under ESOP was 93. At the end of year 2, the company
found that 80 employees had left. Fair Value of a share issued under ESOP was 104. At the
end of year 3, the company found that 192 employees had left. Fair Value of a share issued
under ESOP was 80. Only 1700 employees exercised their options on 31st March, 2022. The
face value of equity share is 10 per share.
(a) Calculate Expenses to be recognized in year 1 by Fair Value Method.
(b) Calculate Expenses to be recognized in year 2 by Fair Value Method.
(c) Calculate Expenses to be recognized in year 3 by Fair Value Method.
(d) Calculate Value of Options Forfeited.

Solution:
Expenses to be recognized/(reversed):
Year 1 = ₹ 18,00,000
Year 2 = ₹ 35,76,000
Year 3 = (₹ 19,20,000)
Value of Options Forfeited = ₹ 56,000

Question 11
PQR Ltd. grants 80 cash share appreciation rights (SARs) to each of its 400 employees, on
condition that the employees remain in its employment for the next three years. During year
1, 30 employees leave. The entity estimates that a further 50 will leave during years 2 and 3.
During year 2, 40 employees leave and the entity estimates that a further 30 will leave during
year 3. During year 3, 40 employees leave. At the end of year 3, all SARs held by the remaining
employees vest.
At the end of year 3, 100 employees exercise their SARs, another 120 employees exercise
their SARs at the end of year 4 and the remaining employees exercise their SARs at the end
of year 5.
The fair value of the SARs at the end of each year in which a liability exists and the intrinsic
values of the SARs at the date of exercise (which equal the cash paid out) at the end of years
3, 4 and 5 are shown below:
At the end of Year Fair Value (₹) Intrinsic Value (₹)
1 15
2 16
3 18 15
4 21 20
5 24
Pass journal entries and show working notes.

Ind AS 16, 38, 23, 36, 102, 115 & 116 12 CA BISHNU KEDIA
 CMA Final - CFR
Solution:
Basis of Calculation:
SAR exercised by
Expense and liability actual no. of Remaining
At the [Actual]+Estimated recognized for revised
Employees for
end of reduction in no. of estimated no. of employees at
which liability is
Year employees employees at fair intrinsic
carried forward
value
value

1 [30] + 50 = 80 320 employees at 15

2 [30 + 40] + 30 = 100 300 employees at 16
100 employees at
3 [30 + 40 + 40] = 110 290 employees at 18 190
15
120 employees at
4 70
20

5 70 employees at 24 0

Calculation of employee expense and liability

Annual Liability at
Year Calculation
Expense the end
1 (400 – 80) × 80 × 15 × 1/3 1,28,000 1,28,000L1
2 (400 – 100) × 80 × 16 × 2/3 – L1 1,28,000 2,56,000L2
3 (400 -110 -100) × 80 × 18 – L2 17,600 2,73,600L3
100 × 80 × 15 [expense recognized and paid] 1,20,000
1,37,600
(190 – 120) × 80 × 21 – L3 -1,56,000 1,17,600L4

4 120 × 80 × 20 1,92,000
36,000
0 – L4 -1,17,600 0
5 70 × 80 × 24 1,34,400

16,800
4,46,400

CA BISHNU KEDIA 13 CFR - Super 50

CORPORATE FINANCIAL REPORTING
Journal
Particulars Dr. Cr.
Employee Expenses A/c Dr. 1,28,000
Year 1 To, Share Based Payment Liability A/c 1,28,000
(Fair value of SAR recognized)

Employee Expenses A/c Dr. 1,28,000

Year 2 To, Share Based Payment Liability A/c 1,28,000
(Fair Value of SAR recognized and remeasured)
Employee Expenses A/c Dr. 1,37,600
Year 3 To, Share Based Payment Liability A/c 1,37,600
(Fair Value of SAR recognized and remeasured)

Share Based Payment Liability A/c Dr. 1,20,000

To, Cash A/c 1,20,000
( SAR settled for 100 employees)
Share Based Payment Liability A/c Dr. 1,56,000
Employee Expenses A/c Dr. 36,000
Year 4
To, Cash A/c 1,92,000
(SAR settled for 120 employees)
Share Based Payment Liability A/c Dr. 1,17,600
Employee Expenses A/c Dr. 16,800
Year 5
To, Cash A/c 1,34,400
(SAR settled for 70 employees)

Question 12a

Z Ltd. Agrees to sell 200 units of product A to a customer for ₹3,20,000 (₹1,600 per unit). The
product A units are transferred over to the customers from 01.01.2019 to 30.06.2019. On
31.03.2020 after transfer of control of 100 units of A, the contract is modified to deliver
additional 50 units at the then market price of ₹1,400 per unit to be delivered in following 3
months. Show how the transaction will be accounted in books of Z ltd.

Solution

During F.Y. 2019-2020 revenue will be recognized for the performance obligation satisfied in
regard the identified contract. Although the contract is modified, the modification is accounted
as a distinct separate contract with its stand-alone price.

Ind AS 16, 38, 23, 36, 102, 115 & 116 14 CA BISHNU KEDIA
 CMA Final - CFR
Thus, in regard the original contract the transaction price to be allocated to the satisfied
performance obligation is (100×Rs.3,20,000)/200 = Rs.1,60,000 to be recognized as revenue
to be credited to P & L.

In F.Y. 2019-20, on satisfaction of performance obligation of the original contract the balance
Rs.1,60,000 of the transaction price will be recognized as revenue. Further, for the
modifications of the contract, treated as another distinct and new contract the transaction price
is 50 × Rs.1,400 = Rs.70,000 to be recognized as revenue on satisfaction of performance
obligation, i.e. on transfer of control of the units in 3 months.

Question 12b

Continuing the above Question 1, On 1.4.2020 the contract is modified to deliver 150 units of
A instead of remaining 100 units by 30.6.2020 at ₹1,500 per unit. Here additional
performances are distinct but additional consideration is not stand-alone selling price; hence,
it is modification B.

Solution

For FY 18-19 revenue recognition is Rs.1,60,000 for 100 units at Rs.1,600 p.u.

For 2020-2021: Unrecognised revenue of the original contract (as if terminated)

Nil Contract modification 150×Rs.1,500 Rs.2,25,000

Total Rs.2,25,000

C: Original contract price of a project was Rs.50,000 based on estimated 200 production hours
at a rate of Rs.250 per hour. After revenue recognition for 100 hours the contract is modified
to increase the required hours by 50 (i) at hourly rate by Rs.200; (ii) at hourly rate of Rs.200
for the remaining hours; (iii) at hourly rate of Rs.200 for the total hours required

The remaining performance is not distinct in the modified estimate of input hours, hence it is
modification C

(i) at hourly rate of Rs.200 for 50 hours Hours Rate (Rs.) (Rs.)
Original contract 200 250 50,000
Modification 50 200 10,000
Total 250 240 60,000
Revenue recognised (A) 100 250 25,000
Modified recognition (B) 100 240 24,000
Adjustment for past revenue recognition (A–B) (1,000)
Revenue recognition in future 150 240 36,000

(ii) at hourly rate of Rs.200 for 150 hours Hours Rate (Rs.) (Rs.)
Revenue recognised (A) 100 250 25,000
Modification for remaining hours 150 200 30,000

CA BISHNU KEDIA 15 CFR - Super 50

CORPORATE FINANCIAL REPORTING

Total 250 220 55,000

Modified recognition (B) 100 220 22,000
Adjustment for past revenue recognition (A-B) (3,000)
Revenue recognition in future 150 220 33,000

(iii) at hourly rate of Rs.200 for 250 hours Hours Rate (Rs.) (Rs.)
Modification for total hours 250 200 50,000
Revenue recognised (A) 100 250 25,000
Modified recognition (B) 100 200 20,000
Adjustment for past revenue recognition (A–B) (5,000)
Revenue recognition in future 150 200 30,000

Question 13

On 01.12.2020 A Ltd. enter into a contract with customer to install a system at ₹ 20 lakhs and
implement a software by June 2021 at ₹ 80 lakhs plus ₹ 15 lakhs bonus for completing software
implementation by April 2021. Initially A Ltd. estimated the contract price at 1 crore for two
performance obligations – system installation and software implementation by June 2021.

In March 2021 the company found system installation complete and software implementation
80% complete with confidence to earn bonus of ₹ 15 lakhs by completing implementation by
April 2021. Compute revenue to be recognised in 2020-21.

Solution

Bonus of Rs.15 Lakhs is the variable consideration considered as change in contract price to
be allocated to performance obligation of software implementation and recognised to the
extent of performance obligation satisfied over time.

Thus, revenue recognition in 2020-2021:

System installation completed Rs.20 Lakhs; and

Software implementation 80% completed = (Rs.80 lakhs + Rs.15 lakhs) × 80% = Rs.76 lakhs.

Had the software implementation be satisfied at a point in time when completed and control
is transferred in April 2021, no revenue would be recognised proportionately in 2020-2021 for
software implementation.

Question 14

Company EFG enters into a property lease with Entity H. The initial term of the lease is 10
years with a 5- year renewal option. The economic life of the property is 40 years and the fair
value of the leased property is ₹50 Lacs. Company EFG has an option to purchase the property
at the end of the lease term for ₹30 lacs. The first annual payment is ₹5 lacs with an increase
of 3% every year thereafter. The implicit rate of interest is 9.04%. Entity H gives Company
EFG an incentive of ₹2 lacs (payable at the beginning of year 2), which is to be used for normal
tenant improvement.

Ind AS 16, 38, 23, 36, 102, 115 & 116 16 CA BISHNU KEDIA
 CMA Final - CFR
Company EFG is reasonably certain to exercise that purchase option. How would EFG
measure the right-of-use asset and lease liability over the lease term?

Solution

As per Ind AS 116, Company EFG would first calculate the lease liability as the present
value of the annual lease payments, less the lease incentive paid in year 2, plus the exercise
price of the purchase option using the rate implicit in the lease of approximately 9.04%.
PV of lease payments, less lease incentive (W.N. 1) Rs.37,39,648
PV of purchase option at end of lease term (W.N.2) Rs.12,60,000
Total lease liability Rs.49,99,648 or 50,00,000 (approx.)
The right-of-use asset is equal to the lease liability because there is no adjustment required
for initial direct costs incurred by Company EFG, lease payments made at or before the lease
commencement date, or lease incentives received prior to the lease commencement date.
Entity EFG would record the following journal entry on the lease commencement date.
Right-of-use Asset Dr. Rs.50,00,000
To Lease Liability Rs.50,00,000
To record ROU asset and lease liability at the commencement date.
Since the purchase option is reasonably certain to be exercised, EFG would amortize the
right -of- use asset over the economic life of the underlying asset (40 years). Annual
amortization expense would be Rs.1,25,000 (Rs.50,00,000 / 40 years)
Interest expense on the lease liability would be calculated as shown in the following table.
This table includes all expected cash flows during the lease term, including the lease
incentive paid by Entity H and Company EFG’s purchase option.
Year Payment Principal paid at Interest paid Interest expense Lease Liability
the beginning of (end of the year
the year
a b= a-c c = (d of d = [(e of pvs. e = (e of pvs.
pvs. Year) year- a) x 9.04%] Year + d – a)
Commencement 50,00,000
Year 1 5,00,000 5,00,000 - 4,06,800 49,06,800
Year 2 3,15,000* (91,800) 4,06,800 4,15,099 50,06,899
Year 3 5,30,450 1,15,351 4,15,099 4,04,671 48,81,120
Year 4 5,46,364 1,41,693 4,04,671 3,91,862 47,26,618
Year 5 5,62,754 1,70,892 3,91,862 3,76,413 45,40,277
Year 6 5,79,637 2,03,224 3,76,413 3,58,042 43,18,682
Year 7 5,97,026 2,38,984 3,58,042 3,36,438 40,58,094
Year 8 6,14,937 2,78,499 3,36,438 3,11,261 37,54,418
Year 9 6,33,385 3,22,124 3,11,261 2,82,141 34,03,174
Year 10 6,52,387 3,70,246 2,82,141 2,49,213* 30,00,000
Year 10 30,00,000 27,50,787 2,49,213* - -
Total 85,31,940 50,00,000 35,31,940 35,31,940
*(5,00,000 + increased by 3% - lease incentive paid amounting to 2,00,000)

CA BISHNU KEDIA 17 CFR - Super 50

CORPORATE FINANCIAL REPORTING
Although the lease was for 10 years, the asset had an economic life of 40 years. When
Company EFG exercises its purchase option at the end of the 10-year lease, it would have
fully extinguished its lease liability but continue depreciating the asset over the remaining
useful life.

Working Notes
Calculating PV of lease payments, less lease incentive:
Year Lease Present value factor @ Present value of lease payments (A x
Payment(A) 9.04% (B) B = C)
Year 1 5,00,000 1 5,00,000
Year 2 3,15,000 0.92 2,89,800
Year 3 5,30,450 0.84 4,45,578
Year 4 5,46,364 0.77 4,20,700
Year 5 5,62,754 0.71 3,99,555
Year 6 5,79,637 0.65 3,76,764
Year 7 5,97,026 0.59 3,52,245
Year 8 6,14,937 0.55 3,38,215
Year 9 6,33,385 0.50 3,16,693
Year 6,52,387 0.46 3,00,098
10
Total 37,39,648
Calculating PV of purchase option at end of lease term:

Year Payment on purchase Present value factor @ Present value of purchase option (A x
option (A) 9.04% (B) B = C)
Year 10 30,00,000 0.42 12,60,000
Total 12,60,000
The discount rate for year 10 is different in the above calculations because in the earlier one
its beginning of year 10 and in the later one its end of the year 10.

Ind AS 16, 38, 23, 36, 102, 115 & 116 18 CA BISHNU KEDIA