CA Inter P1 · Chapter 1 · Question 3 of 8
Case: The board of Vasundhara Textiles Ltd passed a resolution on 15 March 20X1 to replace its dyeing machines during the next financial year. No contract has been signed and no supplier has been approached as at 31 March 20X1. Applying the definition of a liability in the ICAI Framework, how should the planned replacement cost be dealt with in the financial statements for the year ended 31 March 20X1?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) No liability is recognised because there is no present obligation arising from a past event
Explanation
Under the Framework, a liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow of resources. A mere decision to acquire assets in the future does not create a present obligation, because the company can still change its mind. Hence nothing is recognised; a contingent liability also does not arise because there is no possible obligation from a past event.
More Introduction to Accounting Standards, Framework and Applicability MCQs
- Q5Case: An entity had opening net assets of ₹8,00,000 and closing net assets of ₹9,20,000, with no capital introduced or withdrawn. The…
- Q6Within ICAI, which body is responsible for formulating Accounting Standards (AS) that are subsequently notified for companies under the…
- Q7Case: Sarthak Components Ltd qualifies as a Small and Medium-sized Company (SMC) under the Companies (Accounting Standards) Rules. Which…
- Q8Under the ICAI Framework, assets carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent…
- Q1Under the Framework for the Preparation and Presentation of Financial Statements issued by ICAI, information is said to possess a…