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Question 1 (a) In the following cases, record Journal Entries for amortization in the books of Huge Ltd. for the year ended 31st March, 2024 with reference to AS-26: (i) The company had acquired Patent Rights for ₹ 340 lakhs on 01.04.2022. The estimated product life is 4 years. Amortization was decided in the ratio of estimated future cash flows which are as under: 1st Year ₹ 140 Lakhs 2nd Year ₹ 350 Lakhs 3rd Year ₹ 280 Lakhs 4th Year ₹ 420 Lakhs (ii) The company had developed know-how by incurring expenditure of ₹ 80 lakhs. The know-how has been used by the company since 01.04.2018. Its useful life is 8 years from the year of commencement of its use. The company has not amortised the asset until 31.03.2024. (b) Pendora Ltd. has given the following details in respect of employee benefit pension plan: Particulars Amount ` The fair value of plan assets as on 01-04-2023 5,00,000 The benefits paid out on 30-11-2023 63,000 Inward contributions received on 30-09-2023 1,42,000 The fair value of plan assets as on 31-03-2024 7,50,000 On 01.04.2023, the company made following estimates, based on its market studies and prevailing prices : Particulars % Interest and dividend income (after tax) payable by fund 10.50 Realised gains on plan assets (after tax) 2.00 Fund administrative costs -2.00 Expected rate of annual return (Interest is compounded annually) 10.50 You are required to find the expected and actual returns on plan assets as on 31.03.2024 as per AS 15. (c) Delta Ltd. is working on different projects those are likely to be completed within 3 years period. It recognizes revenue from these contracts on Percentage of Completion Method for Financial Statements for the years ending 2021, 2022 and 2023 for ₹ 34 Lakhs, ₹ 50 Lakhs and ₹ 65 Lakhs respectively. However, for Income Tax purpose, it has adopted the Completed Contract Method under which it has recognized revenue of ₹ 30 Lakhs, ₹ 52 Lakhs and ₹ 67 Lakhs for the years ending 2021, 2022 and 2023 respectively. Income Tax rate is 30%. Compute the amount of Deferred Tax Asset / Liability and Total Tax Expenses for the years ending 31st March 2021, 2022 and 2023. (4+5+5=14 Marks)

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Detailed Solution & Explanation

(a) (i) Journal Entry for the year ended on 31st March 2024 ` in lakhs ` in lakhs 31.3.24 Amortization A/c (340 × 350/ 1,190) Dr. 100 To Patent Rights A/c 100 P&L A/c Dr. 100 To Amortization A/c 100 ADVANCED ACCOUNTING Working note Huge Limited amortised ₹ 340 lakhs during next 4 years on the basis of net cash flows arising of the product. The amortisation for second year will be worked out as under: ₹ 340 x 350 /1,190 (140+350+280+420) = ₹ 100 lakhs (ii) Particulars ` in lakhs ` in lakhs Prior period item Dr. 50 Amortization A/c Dr. 10 To Know-how A/c 60 [Being amortization of 6 years (out of which amortization of 5 years charged as prior period item i.e. 80 x 6 /8 = 60 lakhs)] Profit and Loss A/c Dr. 60 To Amortization A/c 10 To Prior Period Item (Being amount transferred to Profit and Loss account) 50 (b) Computation of Expected and Actual Returns on Plan Assets ` Return on ₹ 5,00,000 held for 12 months at 10.50% 52,500 Return on ₹ 1,42,000 for 6 months at 10.50% 7,455 Loss of interest on benefits paid for 4 months on ₹ 63,000 for 4 months @ 10.50% (2,205) Expected return on plan assets for 2023-2024 57,750 Fair value of plan assets as on 31st March 2024 7,50,000 Less: Fair value of plan assets as on 1 April,2023 5,00,000 Contributions received on 30.9.2023 1,42,000 (6,42,000) 1,08,000 Add: Benefits paid on 30th Nov 2023 63,000 Actual return on plan assets 1,71,000 (c) Calculation of Deferred Tax Asset/Liability in Delta Limited Year Accounting Income Taxable Income Timing Difference Timing Difference (balance) Deferred Tax Deferred Tax Liability (balance) 2021 34,00,000 30,00,000 4,00,000 4,00,000 1,20,000 1,20,000 2022 50,00,000 52,00,000 (2,00,000) 2,00,000 (60,000) 60,000 2023 65,00,000 67,00,000 (2,00,000) NIL (60,000) NIL 1,49,00,000 1,49,00,000 Calculation of total tax Year Deferred Tax Current tax expense Total tax 2021 1,20,000 9,00,000 (30,00,000 x 30%) 10,20,000 2022 (60,000) 15,60,000 (52,00,000 x 30%) 15,00,000 2023 (60,000) 20,10,000 (67,00,000 x 30%) 19,50,000 Note: It is assumed that the revenue and the taxable profit is the same.

Key Concepts to Understand

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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