Advanced AccountingQuestion 5302 of 305

5. ABC Ltd. is in the business of creating contents for various OTT platforms. The company has developed a technical know-how (the asset) by incurring expenditure of ` 25 lakhs. The company started using the asset from 1st April 2019. The management of the company is of the view that the asset has infinite lifetime and therefore has not amortized the asset till date. What should be the total amortization amount (including current as well as the previous years amortization) to be charged to Profit and loss account for the year ended March 31st 2024, with reference to AS 26?

Options

ANil, as per the management the know how has infinite life and the management is correct.

B` 25 lakhs as the know how is an intangible asset as per AS 26.

C` 12.5 lakhs (including current year's amortization of ` 2.5 lakhs) to be charged to Profit and loss Account.

D` 15 lakhs (including current year's amortization of ` 2.5 lakhs) to be charged to Profit and Loss account. Case Scenario - II Health India Limited (HIL), incorporated under the Companies Act, 2013, is engaged in the production and distribution of medicines. It has manufacturing plants at Baddi (Himachal Pradesh) and Bhopal (Madhya Pradesh). It also imports medicines from Pharma Inc. New York (United States). On 1st Jan 2024, HIL sold 2,00,000 strips of Medicine to Dee Limited for ` 50 Lakhs on 60 days of credit. Cost per strip of this medicine, was ` 20. (i.e.) total cost ` 40 Lakhs (2,00,000 strips@` 20). Dee Ltd. paid 20% of the amount due on 5th January, 2024. In March 2024, Dee Limited is having significant cash flow issues and is trying to raise funds through bank loan to run its operations. However, it is unable to do so and not able to release payment to HIL on due date. Subsequent to this, it has gone under liquidation on 15th March, 2024. At the time when medicine was sold by HIL to Dee Limited, there was no reason for HIL to believe that it will not be able to collect the sales proceeds from Dee Limited in future. On 1st April,2023 HIL has made an investment of ` 200 Lakhs in the equity shares of Rose Limited of which 50% is made in the long-term category i.e. long-term investment and rest as temporary investment i.e. current investment. The realisable value of all such investments on 31st March, 2024 becomes ` 50 Lakhs as Rose Limited lost a copyright. From the given market conditions, it is apparent that the reduction in the value of investment is not temporary in nature. HIL imported medicine from Pharma Inc. for a sum. of US

\displaystyle 2,50,000 on 1st January, 2024. HIL released full payment on 17th April, 2024 to Medicine Ltd. The exchange rates are as follows: Exchange rate per

1st April, 2023 ` 76 1st January, 2024 ` 81 31st March, 2024 ` 80 17th April, 2024 ` 79 HIL is working on a strategic plan to close the production unit of Bhopal due to change in technology. The board of directors approved the closure of Bhopal Plan on 1st March, 2024. The company did a formal announcement regarding closure to the affected parties on 10th March, 2024. The company entered into a binding- sale agreement on 21 April, 2024. Reporting date of the company is 31st March,2024. Based on the information given in the above Case Scenario, answer the following

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Correct Answer

✅ Option C — ` 12.5 lakhs (including current year's amortization of ` 2.5 lakhs) to be charged to Profit and loss Account.

All Options:

ANil, as per the management the know how has infinite life and the management is correct.
B` 25 lakhs as the know how is an intangible asset as per AS 26.
C` 12.5 lakhs (including current year's amortization of ` 2.5 lakhs) to be charged to Profit and loss Account. ✓
D` 15 lakhs (including current year's amortization of ` 2.5 lakhs) to be charged to Profit and Loss account. Case Scenario - II Health India Limited (HIL), incorporated under the Companies Act, 2013, is engaged in the production and distribution of medicines. It has manufacturing plants at Baddi (Himachal Pradesh) and Bhopal (Madhya Pradesh). It also imports medicines from Pharma Inc. New York (United States). On 1st Jan 2024, HIL sold 2,00,000 strips of Medicine to Dee Limited for ` 50 Lakhs on 60 days of credit. Cost per strip of this medicine, was ` 20. (i.e.) total cost ` 40 Lakhs (2,00,000 strips@` 20). Dee Ltd. paid 20% of the amount due on 5th January, 2024. In March 2024, Dee Limited is having significant cash flow issues and is trying to raise funds through bank loan to run its operations. However, it is unable to do so and not able to release payment to HIL on due date. Subsequent to this, it has gone under liquidation on 15th March, 2024. At the time when medicine was sold by HIL to Dee Limited, there was no reason for HIL to believe that it will not be able to collect the sales proceeds from Dee Limited in future. On 1st April,2023 HIL has made an investment of ` 200 Lakhs in the equity shares of Rose Limited of which 50% is made in the long-term category i.e. long-term investment and rest as temporary investment i.e. current investment. The realisable value of all such investments on 31st March, 2024 becomes ` 50 Lakhs as Rose Limited lost a copyright. From the given market conditions, it is apparent that the reduction in the value of investment is not temporary in nature. HIL imported medicine from Pharma Inc. for a sum. of US $\displaystyle 2,50,000 on 1st January, 2024. HIL released full payment on 17th April, 2024 to Medicine Ltd. The exchange rates are as follows: Exchange rate per$ 1st April, 2023 ` 76 1st January, 2024 ` 81 31st March, 2024 ` 80 17th April, 2024 ` 79 HIL is working on a strategic plan to close the production unit of Bhopal due to change in technology. The board of directors approved the closure of Bhopal Plan on 1st March, 2024. The company did a formal announcement regarding closure to the affected parties on 10th March, 2024. The company entered into a binding- sale agreement on 21 April, 2024. Reporting date of the company is 31st March,2024. Based on the information given in the above Case Scenario, answer the following

Detailed Solution & Explanation

Under AS 26 (Intangible Assets):
1. There is a rebuttable presumption that the useful life of an intangible asset will not exceed ten years from the date it is available for use.
2. Management's view that technical know-how has an infinite lifetime is incorrect.
3. Annual amortization over 10 years is:

\text{Annual Amortization} = \frac{`\,25,00,000}{10} = `\,2,50,000

4. From 1st April, 2019 to 31st March, 2024 is 5 years. Total cumulative amortization to be charged is:

\text{Total Amortization} = `\,2,50,000 \times 5 = `\,12,50,000 \quad (\text{i.e. } 12.5 \text{ lakhs})

This includes the current year's amortization of

\displaystyle `\,2.5

lakhs.
Hence, **Option C** is the correct answer.

Key Concepts to Understand

Profit and Loss Account

The second part of the final accounts that records all indirect incomes and indirect expenses to determine the Net Profit or Net Loss for the accounting period. It starts with Gross Profit from the Trading Account.

Amortization

The systematic write-off of the cost of an intangible asset (like patents, trademarks, or goodwill) over its useful economic life, analogous to depreciation for tangible assets.

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