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Question 6 EITHER (a) What are Accounting Standards? Explain the objectives of "Accounting Standards" in brief, also state the advantages of setting Accounting Standards. (4 Marks) OR (a) A machine was acquired by Zest Ltd. on 01/04/2019 for ` 60 lakhs. It had a useful life of 6 years. The machine is depreciated on straight line basis and does not carry any residual value. On 01/04/2022, the carrying value of the machine was reassessed at ` 36 lakhs. The surplus arising out of the revaluation being credited to revaluation reserve. For the year ended March 2024, conditions indicating an impairment of the existed machine and the amount recoverable ascertained to be ` 9 lakhs. You are required to calculate the loss on impairment of the machine and show how this loss is to be treated in the books of Zest Ltd. The company had followed the policy of writing down the revaluation surplus by the increased charge of depreciation resulting from the revaluation. (4 Marks) (b) Due to inadequacy of profits during the year ended 31st March, 2025, DAY Ltd proposes to declare 9% dividend out of General reserves. From the following particulars, ascertain the amount that can be utilized from the General reserves according to the Companies (Declaration of dividend) rules, 2014. ` 9,50,000, Equity Shares of ` 10 each fully paid up 95,00,000 General reserves as on 1st Apirl,2024 18,50,000 Revaluation Reserve as on 1st April,2024 4,25,000 Net profit for the year ended 31st March,2025 3,75,000 Average rate of dividend during the last 3 years has been 12.5% (4 Marks) (c) M/s Marena, having head office at Chennai has a branch at Hyderabad. The head office does wholesale trade only at cost plus 60%. The goods are sent ADVANCED ACCOUNTING to branch at the wholesale price i.e. cost plus 60%. The branch at Hyderabad is wholly engaged in retail trade and the goods are sold at cost to H.O. plus 80%. Following details are furnished for the year ended 31st March, 2025: Chennai office ` Hyderabad office ` Opening Stock 75,000 - Purchases 9,25,000 - Goods sent to branch (Cost plus 60%) 3,60,000 - Sales 10,25,000 2,70,000 Office expenses 9,000 3,000 Staff Salary 13,700 2,500 Prepare Trading and Profit and Loss Account of the head office and branch for the year ended 31st March, 2025. (6 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) Accounting Standards are the written policy documents issued by Government relating to various aspects of measurement, treatment, presentation and disclosure of accounting transactions and events. Following are the objectives of Accounting Standards: a. Accounting Standards harmonize the diverse accounting policies and practices followed by different companies in India. b. Accounting Standards facilitates the preparation of financial statements and make them comparable. c. Accounting Standards give a sense of faith and reliability to the users. The main advantage of setting accounting standards are as follows: a. Accounting Standards makes the financial statements of different companies comparable which helps investors in decision making. b. Accounting Standards prevent any misleading accounting treatment. c. Accounting Standards prevent manipulation of data by the management. OR (a) Statement Showing Impairment Loss (` in lakhs) Carrying amount of the machine as on 1st April, 2019 60 Depreciation for 3 years i.e. 2019-2020 to 2021-2022 [ 60 Lakh 6 years x 3 years] (30) Carrying amount as on 31.03.2022 30 Add: Upward Revaluation (credited to Revaluation Reserve account) 6 Carrying amount of the machine as on 1st April, 2022 (revalued) 36 Less: Depreciation for 2 years i.e. 2022-2023 & 2023-2024 [ 36 Lakh 3 years x 2 years] (24) Carrying amount as on 31.03.2024 12 Less: Recoverable amount (9) Impairment loss 3 Less: Balance in revaluation reserve as on 31.03.2024: 6 Less: Enhanced depreciation met from revaluation reserve 2022-2023 & 2023-2024 = [(12 – 10) x 2 years] (4) Impairment loss set off against revaluation reserve balance as per para 58 of AS 28 “Impairment of Assets” (2) Impairment Loss to be debited to profit and loss account 1 (b) Amount that can be drawn from reserves for 9% dividend 9% dividend on ` 95,00,000 ` 8,55,000 Profits available Current year profit (3,75,000) Amount which can be utilised from reserves 4,80,000 ADVANCED ACCOUNTING Conditions as per Companies (Declaration of dividend out of Reserves) Rules, 2014: Condition I Since 9% is lower than the average rate of dividend (12.5%), 9% dividend can be declared. Thus, this condition is satisfied. Condition II Maximum amount that can be drawn from the accumulated profits and reserves should not exceed 10% of paid up capital plus free reserves i.e. ` 11,35,000 [10% of (95,00,000+18,50,000)]. Thus, this condition too is satisfied. Condition III The balance of reserves after drawl ` 13,70,000 (` 18,50,000 - ` 4,80,000) should not fall below 15. % of its paid up capital i.e. ` 14,25,000 (15% of ` 95,00,000] Thus, this condition is not satisfied, the company cannot withdraw ` 4,80,000 from accumulated reserves. Conclusion: Since condition-III is not satisfied, the Day Ltd cannot declare dividend @ 9%. However, all three conditions to be satisfied, Day Ltd. can MAXIMUM utilize ` 4,25,000 and pay dividend to that extent. (c) Trading and Profit and Loss A/c for the year ended 31st March 2025 Head office ` Branch ` Head office ` Branch ` To Opening stock 75,000 - By Sales 10,25,000 2,70,000 To Purchases 9,25,000 - By Goods sent to branch 3,60,000 _ To Goods received from head office - 3,60,000 By Closing stock (W.N. 1 & 2) 1,34,375 1,20,000 To Gross profit c/d 5,19,375 30,000 15,19,375 3,90,000 15,19,375 3,90,000 To Office expenses 9,000 3,000 By Gross profit b/d 5,19,375 30,000 To Staff salaries 13,700 2,500 To Branch Stock Reserve (W.N.3) 45,000 _ To Net Profit 4,51,675 24,500 5,19,375 30,000 5,19,375 30,000 Working Notes (1) Calculation of closing stock of head office: ` Opening Stock of head office 75,000 Goods purchased by head office 9,25,000 10,00,000 Less: Cost of goods sold [(10,25,000 + 3,60,000 x 100/160] (8,65,625) 1,34,375 (2) Calculation of closing stock of branch: ` Goods received from head office [At invoice value] 3,60,000 Less: Invoice value of goods sold [2,70,000 x 160/180] (2,40,000) 1,20,000 (3) Calculation of unrealized profit in branch stock: Branch stock ` 1,20,000 Profit included 60% of cost Hence, unrealized profit would be = ` 1,20,000 x 60/160 ` 45,000

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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