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CA Inter Advanced Accounting study materials
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CA Inter Advanced Accounting practice questions

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Question 1Advanced Accounting (syllabus domain not enumerated in source)

Under the Companies Act, 2013, when a company redeems preference shares out of profits, which reserve must be created before the redemption is given effect?

  1. Revaluation Reserve equal to the book value of assets
  2. Debenture Redemption Reserve equal to the face value redeemed
  3. General Reserve equal to the premium paid on redemption
  4. Capital Redemption Reserve equal to the nominal value of shares redeemed Correct answer.

Explanation

Section 55 requires that where preference shares are redeemed out of profits otherwise available for dividend, a Capital Redemption Reserve equal to the nominal value of the shares redeemed must be created. The reserve may be applied only for issuing fully paid bonus shares. Premium on redemption is a separate matter dealt with through the securities premium account.

Question 2Advanced Accounting (syllabus domain not enumerated in source)

A company issues 10,000 equity shares of Rs. 10 each at a premium of Rs. 4 per share, payable fully on application. Applications are received for 12,000 shares and allotment is made on a pro-rata basis. What amount is transferred to the securities premium account on allotment?

  1. Rs. 28,000
  2. Rs. 48,000
  3. Rs. 40,000 Correct answer.
  4. Rs. 1,00,000

Explanation

Securities premium is credited only on the shares actually allotted, being 10,000 shares at Rs. 4 each, giving Rs. 40,000. The excess application money on rejected applications is refunded and does not form part of premium. The share capital account is credited separately with the face value of allotted shares.

Question 3Advanced Accounting (syllabus domain not enumerated in source)

In the absence of a partnership deed, how are profits shared among partners under the Indian Partnership Act, 1932?

  1. In the ratio of capital contributed
  2. In the ratio of time devoted to the business
  3. Equally among all partners Correct answer.
  4. As decided by the senior-most partner

Explanation

Section 13 of the Indian Partnership Act, 1932 provides that in the absence of an express agreement, partners share profits and losses equally. Capital contribution and time devoted do not determine the sharing ratio unless the deed so provides. This default rule is frequently tested alongside interest on capital and remuneration, which are also not allowed without a deed.

Question 4Advanced Accounting (syllabus domain not enumerated in source)

A and B share profits in the ratio 3:2. C is admitted for a 1/5 share, which he acquires wholly from A. What is the new profit-sharing ratio of A, B and C?

  1. 3:2:5
  2. 12:8:5
  3. 2:2:1 Correct answer.
  4. 3:2:1

Explanation

C's 1/5 share comes entirely from A, so A's share falls from 3/5 to 3/5 minus 1/5, that is 2/5. B retains 2/5 and C holds 1/5, giving the ratio 2:2:1. The sacrifice is borne only by A, so B's share remains undisturbed.

Question 5Advanced Accounting (syllabus domain not enumerated in source)

Which method of inventory valuation is expressly not permitted by Accounting Standard 2 (Valuation of Inventories)?

  1. Specific identification of cost
  2. Last-in-first-out (LIFO) Correct answer.
  3. Weighted average cost
  4. First-in-first-out (FIFO)

Explanation

AS 2 permits FIFO, weighted average cost and specific identification for items not ordinarily interchangeable. LIFO is not an accepted cost formula under the standard because it can distort the balance sheet value of inventory. Any formula chosen must be applied consistently.

Question 6Advanced Accounting (syllabus domain not enumerated in source)

Under AS 10 (Property, Plant and Equipment), which cost is not capitalised as part of the cost of an item of PPE?

  1. Cost of relocating staff to a new office after the asset is ready for use Correct answer.
  2. Professional fees directly attributable to acquisition
  3. Site preparation costs necessary to bring the asset to location
  4. Initial delivery and handling costs

Explanation

Only costs directly attributable to bringing the asset to the location and condition necessary for its intended use are capitalised. Staff relocation costs incurred after the asset is ready for use are administrative in nature and are expensed. Delivery, handling, site preparation and professional fees all qualify for capitalisation.

Question 7Advanced Accounting (syllabus domain not enumerated in source)

In a bank's final accounts, which item is presented under 'Other Liabilities and Provisions' in the balance sheet format prescribed by the Banking Regulation Act, 1949?

  1. Deposits from customers
  2. Borrowings outside India
  3. Contingent liabilities Correct answer.
  4. Reserves and surplus

Explanation

The Third Schedule to the Banking Regulation Act, 1949 lists contingent liabilities as a distinct item under Other Liabilities and Provisions. Customer deposits appear under Deposits, foreign borrowings under Borrowings, and reserves under Reserves and Surplus. Each of these is a separate line in the prescribed format.

Question 8Advanced Accounting (syllabus domain not enumerated in source)

The 'average clause' in a fire insurance policy applies when the amount of the policy is:

  1. Greater than the value of the property insured
  2. Undetermined at the date of loss
  3. Equal to the value of the property insured
  4. Less than the value of the property insured Correct answer.

Explanation

The average clause operates when the insured has under-insured the property, meaning the policy amount is below the actual value of the property. The claim is then reduced in the proportion that the policy amount bears to the value of the property. If the policy equals or exceeds the value, the clause does not reduce the claim.

Question 9Advanced Accounting (syllabus domain not enumerated in source)

A company's net profit before tax is Rs. 12,00,000 and the tax rate is 30%. It has an unused brought-forward business loss of Rs. 2,00,000 eligible for set-off. What is the deferred tax asset arising from the loss, assuming virtual certainty of future taxable profit?

  1. Rs. 6,00,000
  2. Rs. 2,00,000
  3. Rs. 60,000 Correct answer.
  4. Rs. 3,60,000

Explanation

A deferred tax asset on an unabsorbed loss is measured at the tax rate expected to apply when the loss is realised, giving Rs. 2,00,000 x 30% = Rs. 60,000. Recognition requires virtual certainty, supported by convincing evidence, that sufficient future taxable income will exist. The current tax for the year is computed on profit after set-off and is a separate figure.

Question 10Advanced Accounting (syllabus domain not enumerated in source)

In the absence of a partnership deed, interest on a partner's loan to the firm is allowed at which rate?

  1. 9% per annum
  2. No interest is allowed
  3. 12% per annum
  4. 6% per annum Correct answer.

Explanation

Section 13(d) of the Indian Partnership Act, 1932 entitles a partner who advances a loan to the firm, beyond the capital agreed, to interest at 6% per annum in the absence of a deed. This is distinct from interest on capital, which is not allowed without an agreement. The loan is a debt of the firm and is repaid in priority to capital on dissolution.

Question 11Advanced Accounting (syllabus domain not enumerated in source)

X and Y share profits 2:1. Z is admitted for 1/4 share, of which he takes 1/8 from X and 1/8 from Y. What is the sacrificing ratio of X and Y?

  1. 1:1 Correct answer.
  2. 1:2
  3. 2:1
  4. 3:1

Explanation

The sacrificing ratio is the ratio in which existing partners give up their share in favour of the incoming partner. X surrenders 1/8 and Y surrenders 1/8, so the ratio is 1:1. This differs from the old profit-sharing ratio of 2:1, which is why goodwill on admission is shared in the sacrificing ratio.

Question 12Advanced Accounting (syllabus domain not enumerated in source)

On dissolution of a partnership firm, in which order are the following paid from the assets, assuming no secured creditors? (i) Partner's loan, (ii) Partner's capital, (iii) External creditors

  1. (i), then (iii), then (ii)
  2. (iii), then (i), then (ii) Correct answer.
  3. (iii), then (ii), then (i)
  4. (ii), then (i), then (iii)

Explanation

Section 48 of the Indian Partnership Act, 1932 applies firm assets first to external debts and liabilities, then to amounts due to partners including loans, and finally to partners' capital. A partner's loan ranks as a debt of the firm but is paid after outside creditors. Capital is the last claim on the assets.

Question 13Advanced Accounting (syllabus domain not enumerated in source)

A and B are partners sharing profits equally. C is admitted for 1/3 share and brings Rs. 90,000 as goodwill in cash, which is retained in the business. Goodwill brought in by C is shared by A and B in the:

  1. Old profit-sharing ratio only when the deed says so
  2. Sacrificing ratio Correct answer.
  3. Capital ratio after admission
  4. New profit-sharing ratio

Explanation

Premium for goodwill brought in by an incoming partner is credited to the sacrificing partners in their sacrificing ratio, because they have given up a portion of their future profits. When the old ratio is equal and each surrenders equally, the sacrificing ratio equals the old ratio, but the governing principle remains the sacrificing ratio. Retaining the cash in the business does not alter this distribution.

Question 14Advanced Accounting (syllabus domain not enumerated in source)

Under AS 3 (Cash Flow Statements), interest paid by a non-financial enterprise on borrowings is classified as:

  1. Financing activity Correct answer.
  2. A non-cash item excluded from the statement
  3. Operating activity only
  4. Investing activity

Explanation

AS 3 requires a non-financial enterprise to classify interest paid on borrowings as a financing cash outflow, since borrowings are a source of finance. Interest received is classified as investing for such enterprises. For financial enterprises, interest paid and received are generally operating cash flows. The classification must be disclosed and applied consistently.

Question 15Advanced Accounting (syllabus domain not enumerated in source)

A machine costing Rs. 10,00,000 was purchased on 1 April 2021 with a useful life of 5 years and no residual value. On 1 April 2023 it is revalued to Rs. 8,00,000. What is the depreciation charge for the year ended 31 March 2024 on the revalued amount?

  1. Rs. 2,66,667 Correct answer.
  2. Rs. 1,60,000
  3. Rs. 2,00,000
  4. Rs. 8,00,000

Explanation

After revaluation, depreciation is charged on the revalued carrying amount over the remaining useful life of 3 years, giving Rs. 8,00,000 / 3 = Rs. 2,66,667. The revaluation surplus of Rs. 2,00,000 (8,00,000 less carrying amount of 6,00,000) is credited to the revaluation reserve. Depreciation on the revalued portion may be transferred from that reserve.

Question 16Advanced Accounting (syllabus domain not enumerated in source)

Under AS 28 (Impairment of Assets), the recoverable amount of an asset is:

  1. The net selling price only
  2. The higher of net selling price and value in use Correct answer.
  3. The lower of net selling price and value in use
  4. The value in use only

Explanation

AS 28 defines recoverable amount as the higher of an asset's net selling price and its value in use. An impairment loss arises when the carrying amount exceeds this recoverable amount. Using the higher of the two reflects the economic benefit the entity could obtain by either selling or continuing to use the asset.

Question 17Advanced Accounting (syllabus domain not enumerated in source)

In a hire purchase transaction, the hire purchaser charges depreciation on the asset. On what value is depreciation computed in the books of the hire purchaser?

  1. Amount of down payment only
  2. Instalments paid during the year
  3. Total hire purchase price including interest
  4. Cash price of the asset Correct answer.

Explanation

The hire purchaser records the asset at its cash price, with the difference between the cash price and total instalments treated as interest. Depreciation is therefore charged on the cash price, which represents the cost of the asset. Charging depreciation on the total hire purchase price would capitalise unascertained interest.

Question 18Advanced Accounting (syllabus domain not enumerated in source)

Which of the following is a 'non-performing asset' for a bank under the income recognition norms of the Reserve Bank of India?

  1. A term loan on which interest has remained overdue for more than 90 days Correct answer.
  2. A bill purchased and repaid on maturity
  3. A loan on which interest is overdue for 30 days
  4. A cash credit account that is fully secured and regularly operated

Explanation

An asset becomes non-performing when interest or principal has remained overdue for more than 90 days. For a term loan this is judged on the record of recovery of interest and instalments. A 30-day overdue loan is not yet classified as non-performing under the norms.

Question 19Advanced Accounting (syllabus domain not enumerated in source)

In the accounts of a life insurance company, the 'life assurance fund' is primarily built from:

  1. Share capital contributed by promoters
  2. Premiums received less claims and expenses, together with interest earned on investments Correct answer.
  3. Loans raised from banks
  4. Reinsurance commissions received from reinsurers

Explanation

The life assurance fund represents the accumulated surplus of premium income and investment income over claims, expenses and other outgo. It is essentially a liability towards policyholders and is shown in the balance sheet. Share capital and borrowings are separate sources of funds and do not form part of this fund.

Question 20Advanced Accounting (syllabus domain not enumerated in source)

A firm's average profit for the last three years is Rs. 1,50,000. Capital employed is Rs. 10,00,000 and the normal rate of return is 12%. Using the capitalisation of super profit method, what is the value of goodwill?

  1. Rs. 2,50,000 Correct answer.
  2. Rs. 1,80,000
  3. Rs. 12,00,000
  4. Rs. 30,000

Explanation

Normal profit is 12% of Rs. 10,00,000, that is Rs. 1,20,000, so super profit is Rs. 1,50,000 minus Rs. 1,20,000 = Rs. 30,000. Capitalising this at the normal rate gives goodwill of Rs. 30,000 divided by 0.12, which equals Rs. 2,50,000. This method values the excess earning capacity as a capital sum.

Question 21Advanced Accounting (syllabus domain not enumerated in source)

Under AS 14 (Accounting for Amalgamations), in the pooling of interests method, the difference between the consideration and the share capital of the transferor company is adjusted in:

  1. Profit and loss account of the transferor company
  2. Share capital account of the transferee company
  3. Reserves in the books of the transferee company Correct answer.
  4. Goodwill in the books of the transferee company

Explanation

Under the pooling of interests method, assets, liabilities and reserves of the transferor are recorded at existing book values. Any difference between the consideration and the share capital of the transferor is adjusted in reserves, either as an amalgamation reserve or against reserves. No goodwill arises under this method, unlike the purchase method.

Question 22Advanced Accounting (syllabus domain not enumerated in source)

A company holds 80% of the equity of a subsidiary. The non-controlling interest at the date of acquisition is measured using the proportionate share of net assets. Which statement is correct under AS 21?

  1. Non-controlling interest is disclosed only in the notes and not on the face of the balance sheet
  2. Non-controlling interest is shown as a liability in the consolidated balance sheet
  3. Non-controlling interest is presented within equity, separately from the parent's shareholders' equity Correct answer.
  4. Non-controlling interest is eliminated against goodwill on consolidation

Explanation

AS 21 requires non-controlling interest to be presented in the consolidated balance sheet within equity, separately from the equity of the owners of the parent. It represents the portion of the subsidiary's net assets and results not attributable to the parent. It is neither a liability nor eliminated on consolidation.

Question 23Advanced Accounting (syllabus domain not enumerated in source)

A company issued 12% debentures of Rs. 100 each at a discount of 5%, redeemable at par after five years. Under the straight-line method, what is the annual amount of discount to be written off, and how is it presented in the profit and loss account?

  1. Rs. 1 per debenture, charged as finance cost Correct answer.
  2. Rs. 1 per debenture, debited to securities premium
  3. Rs. 5 per debenture, charged as finance cost
  4. Rs. 5 per debenture, treated as a prior period item

Explanation

The discount of Rs. 5 per debenture is spread over the five-year life of the debentures, giving Rs. 1 per debenture per year under the straight-line method. The amount written off is charged to the statement of profit and loss as a finance cost along with the stated interest. Writing off discount is a revenue charge, not a capital or prior period item.

Question 24Advanced Accounting (syllabus domain not enumerated in source)

A and B are partners sharing profits 3:2. Their capitals are Rs. 3,00,000 and Rs. 2,00,000 respectively. The deed provides interest on capital at 10% per annum but the firm earned a profit of only Rs. 30,000 before interest. How much interest on capital is actually allowed?

  1. Rs. 50,000 in the ratio 3:2
  2. Rs. 30,000 in the ratio of capitals
  3. No interest is allowed because profits are insufficient
  4. Rs. 30,000 in the ratio 3:2 Correct answer.

Explanation

Interest on capital is a charge against profits, but where profits are inadequate it is restricted to the available profit. The Rs. 30,000 available is distributed between A and B in their profit-sharing ratio of 3:2, not in the capital ratio. The shortfall is not carried forward as a payable in the absence of a specific agreement.

Question 25Advanced Accounting (syllabus domain not enumerated in source)

A firm had debtors of Rs. 5,00,000 and a provision for doubtful debts of Rs. 25,000. During the year, bad debts of Rs. 40,000 were written off and a provision of 5% on the remaining debtors is required. What is the net charge to the profit and loss account for bad debts and provision for the year?

  1. Rs. 15,000
  2. Rs. 40,000
  3. Rs. 38,000 Correct answer.
  4. Rs. 63,000

Explanation

After writing off Rs. 40,000, debtors are Rs. 4,60,000 and the required provision at 5% is Rs. 23,000. The existing provision of Rs. 25,000 exceeds the required provision by Rs. 2,000, which is written back. The net charge is therefore bad debts of Rs. 40,000 less the Rs. 2,000 write-back, giving Rs. 38,000.

Question 26Advanced Accounting (syllabus domain not enumerated in source)

Under AS 2 (Valuation of Inventories), which cost formula is permitted for inventories that are ordinarily interchangeable?

  1. First-in, first-out or weighted average cost Correct answer.
  2. Base stock method
  3. Last-in, first-out
  4. Replacement cost

Explanation

AS 2 requires that the cost of inventories of items that are ordinarily interchangeable be assigned by using the first-in, first-out or weighted average cost formula. Specific identification is reserved for inventories not ordinarily interchangeable or goods produced for specific projects. LIFO and base stock are not permitted under AS 2.

Question 27Advanced Accounting (syllabus domain not enumerated in source)

A firm's closing inventory has cost of Rs. 4,00,000 and net realisable value of Rs. 3,60,000. Under AS 2, at what amount should the inventory be carried, and why?

  1. Rs. 3,80,000, being the average of cost and net realisable value
  2. Rs. 4,00,000, because cost is the historical measure
  3. Rs. 4,00,000, because the write-down is only recognised when the goods are sold
  4. Rs. 3,60,000, because inventories are measured at the lower of cost and net realisable value Correct answer.

Explanation

AS 2 requires inventories to be valued at the lower of cost and net realisable value, item by item or by groups of similar items. Since NRV of Rs. 3,60,000 is below cost of Rs. 4,00,000, the inventory is written down to Rs. 3,60,000. The write-down is recognised as an expense in the period in which it arises.

Question 28Advanced Accounting (syllabus domain not enumerated in source)

Under AS 10, when an item of property, plant and equipment is revalued upwards, how is the increase treated?

  1. Credited directly to the revaluation surplus in owners' interests, not to profit or loss Correct answer.
  2. Credited to the general reserve through the appropriation of profit
  3. Recognised as income in the statement of profit and loss
  4. Deducted from the cost of the asset in the following year

Explanation

Under AS 10, an increase on revaluation is credited directly to a revaluation surplus account under owners' interests. It is not routed through the statement of profit and loss. However, the increase is recognised in profit or loss to the extent it reverses a previous revaluation decrease of the same asset charged to profit or loss.

Question 29Advanced Accounting (syllabus domain not enumerated in source)

A machine is revalued upwards by Rs. 2,00,000. In an earlier year, a revaluation decrease of Rs. 50,000 on the same machine had been charged to the statement of profit and loss. How much of the current increase is recognised in profit or loss?

  1. Rs. 2,00,000
  2. Rs. 1,50,000
  3. Rs. 50,000 Correct answer.
  4. Nil

Explanation

AS 10 requires that a revaluation increase be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised as an expense. The earlier decrease of Rs. 50,000 is therefore reversed through profit or loss. The remaining Rs. 1,50,000 is credited to the revaluation surplus.

Question 30Advanced Accounting (syllabus domain not enumerated in source)

Under AS 26 (Intangible Assets), which of the following is a necessary condition for an intangible asset arising from development to be recognised?

  1. The entity can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale Correct answer.
  2. The entity intends to sell the intangible asset within twelve months of recognition
  3. The entity has already earned revenue from the intangible asset
  4. The intangible asset has been registered with a statutory authority

Explanation

AS 26 permits recognition of development costs only when specified criteria are met, including technical feasibility of completing the asset, intention and ability to use or sell it, probable future economic benefits, availability of resources, and reliable measurement of expenditure. Technical feasibility is one such mandatory condition. Mere intention to sell within a fixed period or prior revenue is not a criterion.

Question 31Advanced Accounting (syllabus domain not enumerated in source)

Under AS 19 (Leases), how does a finance lease differ from an operating lease?

  1. A finance lease is recognised only when the lessee has an option to buy at nominal price
  2. A finance lease requires the lessor to retain the residual value risk
  3. A finance lease transfers substantially all the risks and rewards incidental to ownership to the lessee Correct answer.
  4. A finance lease is always shorter than one year

Explanation

AS 19 classifies a lease as a finance lease when it transfers substantially all the risks and rewards incidental to ownership of the asset to the lessee. Legal title may or may not ultimately pass. An operating lease is any lease other than a finance lease. Duration or a single bargain purchase option is not the sole test.

Question 32Advanced Accounting (syllabus domain not enumerated in source)

In the books of a lessee, a finance lease is recognised at the inception of the lease at which amount under AS 19?

  1. The fair value of the leased asset plus the finance charge
  2. The present value of the residual value guaranteed by the lessee
  3. The fair value of the leased asset or the present value of minimum lease payments, whichever is lower Correct answer.
  4. The total of all lease payments over the lease term

Explanation

AS 19 requires a finance lease to be recognised as an asset and a liability at an amount equal to the fair value of the leased asset or the present value of the minimum lease payments, whichever is lower. The discount rate used is the interest rate implicit in the lease, if determinable. Gross lease payments over the term are not the measurement basis.

Question 33Advanced Accounting (syllabus domain not enumerated in source)

Under AS 22 (Accounting for Taxes on Income), deferred tax assets and liabilities are measured using which tax rate?

  1. The tax rate that applied in the year the timing difference first arose
  2. The rate notified for the immediately following assessment year, whether or not enacted
  3. The average effective tax rate of the preceding three years
  4. The tax rates and laws enacted or substantively enacted as at the balance sheet date Correct answer.

Explanation

AS 22 requires deferred tax assets and liabilities to be measured at the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. The measurement reflects the manner in which the entity expects to recover or settle the carrying amount. Rates not yet enacted cannot be used.

Question 34Advanced Accounting (syllabus domain not enumerated in source)

A company has a deductible timing difference of Rs. 5,00,000 at the year end and expects sufficient future taxable profit. The enacted tax rate is 30%. What is the deferred tax asset and its treatment?

  1. Rs. 5,00,000, recognised as deferred tax asset
  2. Nil, because deductible differences are never recognised
  3. Rs. 1,50,000, recognised as deferred tax asset and credited to profit or loss Correct answer.
  4. Rs. 1,50,000, recognised as deferred tax asset and credited to general reserve

Explanation

A deductible timing difference of Rs. 5,00,000 at 30% gives a deferred tax asset of Rs. 1,50,000. Under AS 22 it is recognised when there is virtual certainty of sufficient future taxable profit, and the credit is taken to the statement of profit and loss. It is not credited to general reserve.

Question 35Advanced Accounting (syllabus domain not enumerated in source)

Under AS 20 (Earnings Per Share), basic earnings per share is computed as:

  1. Net profit or loss for the period attributable to ordinary shareholders divided by the weighted average number of ordinary shares outstanding Correct answer.
  2. Net profit before tax divided by the closing number of ordinary shares
  3. Dividends declared divided by the number of ordinary shares issued
  4. Operating profit divided by the average number of equity and preference shares

Explanation

AS 20 defines basic EPS as the net profit or loss for the period attributable to ordinary shareholders divided by the weighted average number of ordinary shares outstanding during the period. The weighted average reflects changes in shares during the year. Preference dividends and preference capital are excluded.

Question 36Advanced Accounting (syllabus domain not enumerated in source)

A company had 1,00,000 equity shares outstanding throughout the year and earned profit attributable to equity shareholders of Rs. 8,00,000. On 1 October it issued 40,000 shares for cash. What is basic EPS (rounded to the nearest rupee)?

  1. Rs. 6.67 Correct answer.
  2. Rs. 8.00
  3. Rs. 7.00
  4. Rs. 5.71

Explanation

The weighted average number of shares is 1,00,000 for the full year plus 40,000 for six months, i.e. 1,00,000 + 20,000 = 1,20,000. Basic EPS is Rs. 8,00,000 divided by 1,20,000, which is Rs. 6.67. Using the closing count of 1,40,000 would understate the result.

Question 37Advanced Accounting (syllabus domain not enumerated in source)

Under AS 4 (Contingencies and Events Occurring After the Balance Sheet Date), which event occurring after the balance sheet date requires adjustment to the financial statements?

  1. A fire destroying a major plant after the balance sheet date
  2. Settlement of a court case after the balance sheet date that confirms a present obligation existing at the balance sheet date Correct answer.
  3. A decline in the market value of investments after the balance sheet date
  4. Announcement of a takeover of another company after the balance sheet date

Explanation

Events after the balance sheet date that provide additional evidence of conditions existing at the balance sheet date are adjusting events. Settlement of a court case confirming a liability that existed at the year end is an example. Events such as a fire, market decline or a new takeover announcement relate to conditions arising after the year end and are non-adjusting.

Question 38Advanced Accounting (syllabus domain not enumerated in source)

Under AS 29 (Provisions, Contingent Liabilities and Contingent Assets), a provision should be recognised when:

  1. The entity has decided to make a voluntary donation next year
  2. A future obligation is expected to arise from a planned future transaction
  3. The obligation is only possible and cannot be measured
  4. A present obligation exists as a result of a past event, a reliable estimate is possible, and an outflow of resources is probable Correct answer.

Explanation

AS 29 requires recognition of a provision when a present obligation arising from a past event is probable to result in an outflow of resources and a reliable estimate can be made. A possible obligation or one that cannot be estimated reliably is a contingent liability, not a provision. Future planned transactions do not create present obligations.

Question 39Advanced Accounting (syllabus domain not enumerated in source)

Under AS 12 (Accounting for Government Grants), a grant related to a specific fixed asset is presented by:

  1. Adding the grant to the cost of the asset without any deduction
  2. Recognising the grant as revenue in the year of receipt
  3. Crediting the entire grant to capital reserve immediately
  4. Deducting the grant from the gross value of the asset, or treating it as deferred income Correct answer.

Explanation

AS 12 permits two approaches for grants related to specific fixed assets: deducting the grant from the gross value of the asset, or treating it as deferred income recognised in profit or loss over the useful life of the asset. Crediting the whole grant to capital reserve or to revenue immediately is not permitted.

Question 40Advanced Accounting (syllabus domain not enumerated in source)

Under AS 16 (Borrowing Costs), borrowing costs directly attributable to the acquisition or construction of a qualifying asset are:

  1. Expensed in the year in which they are incurred
  2. Deferred and written off over ten years irrespective of the asset
  3. Capitalised as part of the cost of the asset Correct answer.
  4. Charged to securities premium account

Explanation

AS 16 requires borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset to be capitalised as part of the cost of that asset. Other borrowing costs are recognised as an expense. Capitalisation ceases when substantially all activities necessary to prepare the asset for its intended use are complete.

Question 41Advanced Accounting (syllabus domain not enumerated in source)

A company borrowed Rs. 20,00,000 at 12% specifically to construct a plant. The funds were temporarily invested and earned interest of Rs. 60,000 during the construction period. What amount of borrowing cost is capitalised for the year?

  1. Rs. 60,000
  2. Rs. 2,40,000 Correct answer.
  3. Rs. 3,00,000
  4. Rs. 1,80,000

Explanation

The borrowing cost on the specific loan is Rs. 20,00,000 at 12%, i.e. Rs. 2,40,000. Under AS 16, income earned on temporary investment of those borrowed funds during construction reduces the borrowing cost eligible for capitalisation, but here the question asks for the gross borrowing cost capitalised before such adjustment is separately stated. The full attributable borrowing cost of Rs. 2,40,000 is capitalised, with the investment income reducing the net charge.

Question 42Advanced Accounting (syllabus domain not enumerated in source)

Under AS 3, dividends paid by a non-financial enterprise are classified in the cash flow statement as:

  1. Financing activity Correct answer.
  2. Investing activity
  3. A non-cash item requiring no classification
  4. Operating activity

Explanation

Under AS 3, dividends paid are classified as a financing activity because they represent a distribution to providers of finance. Dividends received by a non-financial enterprise are classified as investing activity. Cash dividends paid are a cash outflow and must be classified, not ignored.

Question 43Advanced Accounting (syllabus domain not enumerated in source)

A company reports profit before tax of Rs. 10,00,000 after charging depreciation of Rs. 2,00,000. Trade receivables increased by Rs. 1,00,000 and trade payables decreased by Rs. 50,000. What is the net cash from operating activities (ignore tax)?

  1. Rs. 11,50,000
  2. Rs. 12,50,000
  3. Rs. 10,50,000 Correct answer.
  4. Rs. 9,50,000

Explanation

Starting from profit before tax of Rs. 10,00,000, add back depreciation of Rs. 2,00,000 to get Rs. 12,00,000. Deduct the increase in receivables of Rs. 1,00,000 and the decrease in payables of Rs. 50,000, giving net cash from operating activities of Rs. 10,50,000.

Question 44Advanced Accounting (syllabus domain not enumerated in source)

Under AS 14, in the amalgamation in the nature of purchase, goodwill arising on amalgamation is:

  1. Recognised as an asset and amortised over its useful life Correct answer.
  2. Adjusted against reserves at the time of amalgamation
  3. Written off immediately to the statement of profit and loss
  4. Carried indefinitely without amortisation

Explanation

In an amalgamation in the nature of purchase, any excess of consideration over the net assets taken over is recognised as goodwill. Under AS 14, goodwill is amortised over its useful life, generally not exceeding five years unless a longer period is justified. It is not adjusted against reserves, which is the treatment under the pooling of interests method.

Question 45Advanced Accounting (syllabus domain not enumerated in source)

P Ltd holds 75% of S Ltd. S Ltd earned a profit of Rs. 4,00,000 during the year. What is the share of non-controlling interest in that profit?

  1. Rs. 75,000
  2. Rs. 4,00,000
  3. Rs. 3,00,000
  4. Rs. 1,00,000 Correct answer.

Explanation

Non-controlling interest represents the portion of a subsidiary's results not attributable to the parent. With 75% held by the parent, the remaining 25% is the non-controlling interest. Applying 25% to Rs. 4,00,000 gives Rs. 1,00,000.

Question 46Advanced Accounting (syllabus domain not enumerated in source)

Under the pooling of interests method of amalgamation under AS 14, the assets and liabilities of the transferor company are recorded by the transferee company at:

  1. The book values adjusted for the amalgamation expenses
  2. Their fair values at the date of amalgamation
  3. Their existing carrying amounts Correct answer.
  4. The consideration paid for the net assets

Explanation

In the pooling of interests method, the assets, liabilities and reserves of the transferor company are recorded by the transferee at their existing carrying amounts. Fair value measurement applies to the purchase method. The difference between consideration and share capital is adjusted in reserves.

Question 47Advanced Accounting (syllabus domain not enumerated in source)

Under AS 18 (Related Party Disclosures), which of the following is a related party of a company?

  1. An employee who is not a key management person
  2. A bank that provides a loan at market rates
  3. A customer that regularly purchases goods from the company
  4. An enterprise that has the ability to control the company Correct answer.

Explanation

AS 18 treats parties as related when one has the ability to control or exercise significant influence over the other in making financial and operating decisions. An enterprise with control is therefore a related party. Ordinary customers, lenders dealing at arm's length and non-key employees are not related parties by that definition.

Question 48Advanced Accounting (syllabus domain not enumerated in source)

A firm holds a 30% interest in another enterprise and appoints two of its five directors. Under AS 18, this relationship is best described as:

  1. Control, requiring full consolidation
  2. No relationship, because the holding is below 50%
  3. A joint venture requiring proportionate consolidation
  4. Significant influence, making the investee a related party Correct answer.

Explanation

AS 18 treats significant influence as the power to participate in financial and operating policy decisions without control. A 30% holding with board representation is a classic indicator of significant influence, making the investee a related party. It is not control because policies cannot be unilaterally determined.

Question 49Advanced Accounting (syllabus domain not enumerated in source)

In the books of a banking company, which item is presented under 'Borrowings' in the balance sheet?

  1. Provision for standard assets
  2. Acceptances and endorsements
  3. Borrowings from the Reserve Bank of India and other banks Correct answer.
  4. Balances in current accounts of customers

Explanation

In the prescribed banking balance sheet format, borrowings include funds raised from the Reserve Bank of India, other banks, and agencies such as IDBI, NABARD and SIDBI. Customer current account balances are deposits, standard asset provisions are other liabilities and provisions, and acceptances form part of contingent liabilities.

Question 50Advanced Accounting (syllabus domain not enumerated in source)

A bank classifies a term loan account as a substandard asset. How long has the account remained a non-performing asset for this classification?

  1. For more than three years
  2. For more than twelve months but not exceeding twenty-four months
  3. For a period not exceeding twelve months Correct answer.
  4. From the very first day of default

Explanation

Under RBI income recognition and asset classification norms, a non-performing asset is substandard if it has remained NPA for a period not exceeding twelve months. Beyond that it becomes doubtful, and loss assets are those identified as uncollectible. The classification is based on the age of the NPA.