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Question 3 (a) The Balance Sheet of Moon Ltd. as on 31st March 2025 and 2024 were given as: Particulars Notes 31st March, 2025 31st March, 2025 ` ` Equity and Liabilities 1. Shareholder Funds (a) Share Capital 1 8,00,000 6,00,000 (b) Reserves and Surplus 2 80,000 50,000 2. Non-Current Liabilities (a) Deferred Tax Liability 6,000 - 3. Current liabilities (a) Trade payable 40,000 25,000 (b) Short term provisions (Provision for tax) 15,000 10,000 Total 9,41,000 6,85,000 Assets 1. Non-Current Assets (a) Property Plant and Equipment 3 3,95,000 2,90,000 2. Current Assets (a) Trade Receivable 20,000 10,000 (b) Inventories 2,50,000 2,00,000 (c) Cash and cash equivalent 4 2,76,000 1,85,000 Total 9,41,000 6,85,000 Notes to Accounts Notes Particulars 2025 (`) 2024(`) 1. Share Capital Equity Shares of ` 10 each 8,00,000 6,00,000 2. Reserve & Surplus Profit and loss Account 80,000 50,000 3. Property, Plant and Equipment (at WDV) Building 1,00,000 1,00,000 Furniture and fixtures 2,95,000 1,90,000 Total 3,95,000 2,90,000 4. Cash & Cash equivalents 2,76,000 1,85,000 Further information related to Profit and loss A/c for the year ended March, 2025 is as under: (i) Profit before tax is ` 45,000 (ii) Tax expense during the year ` 15,000 (it includes deferred tax liability of ` 6,000 created during the year) (iii) Depreciation charged on furniture and fixture for the year was ` 35,000. One old furniture item was sold for ` 17,000 and the profit on such disposal amounting to current year ` 8,000 was booked in the current year. Prepare a Cash Flow Statement for the year ended 31st March, 2025. (7 Marks) (b) XY Limited reported a Profit Before Tax (PBT) of ` 18 lakhs for the third quarter ending 31st December 2024. Following observations are noted; (i) Dividend income of ` 8 lakhs received during the quarter has been recognized to the extent of ` 2 lakh only. (ii) Sales promotion expenses ` 15 lakhs incurred in the third quarter, 70% has been deferred to the fourth quarter as the sales in the last quarter is high. (iii) In the third quarter, the company changed depreciation method from WDV to SLM, which resulted in excess depreciation of ` 4 lakhs. The ADVANCED ACCOUNTING entire amount has been debited in the third quarter, though the share of the third quarter is only ` 1 lakhs. (iv) ` 3 lakhs extra-ordinary gain received in third quarter was allocated equally to the third and fourth quarter. (v) Cumulative loss resulting from change in method of inventory valuation was recognized in the third quarter of ` 5 lakhs. Out of this loss ` 2 lakhs relates to previous quarters. (vi) Sale of investment in the first quarter resulted in a gain of ` 30 lakhs. The company had apportioned this equally to the four quarters. Calculate the result of the third quarter as per AS 25 and also comment on the company's view on each observation. (7 Marks)

Options

A
B
C
D
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Correct Answer

✅ Option descriptive — Correct Option

All Options:

  • A
  • B
  • C
  • D

Detailed Solution & Explanation

(a) Moon Ltd. Cash Flow Statement for the year ended 31st March, 2025 ` ` Cash flows from operating activities Net Profit before taxation 45,000 Adjustments for: Depreciation 35,000 Profit on sale of Furniture & Fixtures (8,000) Operating profit before working capital changes 72,000 Increase in Trade receivables (10,000) Increase in inventories (50,000) Increase in Trade payables 15,000 Cash generated from operations 27,000 Income taxes paid (W.N.1) (4,000) Net cash generated from operating activities 23,000 Cash flows from investing activities Sale of Furniture & Fixtures 17,000 Purchase of Furniture & Fixtures (W.N.2) (1,49,000) Net cash used in investing activities (1,32,000) Cash flows from financing activities Issue of shares for cash 2,00,000 Net cash generated from financing activities 2,00,000 Net decrease in cash and cash equivalents 91,000 Cash and cash equivalents at beginning of period (31.3.2024) 1,85,000 Cash and cash equivalents at end of period (31.3.2025) 2,76,000 Working Notes: ` 1. Income taxes paid Income tax expense for the year 15,000 Add: Income tax liability at the beginning of the year 10,000 25,000 Less: Income tax liability at the end of the year (15,000) Less: DTL (6,000) 4,000 2 Property, plant and equipment acquisitions Furniture & Fixtures ` W.D.V. at 31.3.2025 2,95,000 Add back: Depreciation for the year 35,000 Disposals (17,000 -8,000) 9,000 3,39,000 Less: W.D.V. at 31.12.2024 (1,90,000) Acquisitions during 2024-2025 1,49,000 (b) As per para 36 of AS 25 “Interim Financial Reporting”, seasonal or occasional revenue and cost within a financial year should not be deferred as of interim date until it is appropriate to defer at the end of the enterprise’s financial year. ADVANCED ACCOUNTING Comments on observations: (i) Dividend income received during 3rd quarter should be recognised in the 3rd quarter only. (ii) Sales promotion expenses cannot be deferred on the basis that fourth quarter has more sales. This expense should be recognized in 3rd quarter only. (iii) Further, as per AS 10, Property, Plant and Equipment, if there is change in the depreciation method, such a change should be accounted for as a change in accounting estimate in accordance with AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies, and applied prospectively. Therefore, no adjustment would be required due to change in the method of depreciation. (iv) Extra ordinary gain of ` 3 lakhs should be wholly recognized in 3rd quarter only. (v) Loss of ` 2 lakhs belong to previous quarters and not 3rd quarter, so it should not be deducted from the profit of 3rd quarter. (vi) Gain on sale of investment is in the nature of occasional gain, so it cannot be deferred and hence the amount of ` 7.5 lakhs considered as income of 1st quarter, will be reversed from the profit of the 3rd quarter. Accordingly, the adjusted profit before tax for the 3rd quarter will be as follows: Statement showing Adjusted Profit Before Tax for the third quarter (`) Profit before tax (as reported) 18,00,000 Add: Dividend income ` (8,00,000 - 2,00,000) 6,00,000 Excess depreciation charged in the 3rd quarter, due to change in the method - Extra ordinary gain ` (3,00,000-1,50,000) 1,50,000 Cumulative loss due to change in the method of inventory valuation should be applied retrospectively ` (5,00,000-3,00,000) 2,00,000 27,50,000 Less: Sales promotion expenses (70% of ` 15 lakhs) (10,50,000) Gain on sale of investment (occasional gain should not be deferred) (7,50,000) Adjusted Profit before tax for the third quarter 9,50,000

Key Concepts to Understand

Depreciation

Allocation of the cost of a tangible fixed asset over its useful life due to wear and tear, efflux of time, or obsolescence.

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