CA Inter P1 · Chapter 3
Assets Based Accounting Standards MCQs with Answers
16 multiple-choice questions on Assets Based Accounting Standards for CA Inter P1 Advanced Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Case: Udaya Castings Ltd has a normal capacity of 50,000 units. During the year it produced 40,000 units. Direct material and labour cost ₹20 per unit, variable production overhead is ₹4 per unit and fixed production overhead is ₹6,00,000. Under AS 2, the cost per unit for valuing closing inventory is:
- A) ₹36
- B) ₹39
- C) ₹24
- D) ₹32
Show answer & explanation
Answer: A) ₹36
AS 2 requires fixed production overheads to be allocated on the basis of normal capacity: 6,00,000 / 50,000 = ₹12 per unit. Cost per unit = 20 + 4 + 12 = ₹36. The unallocated overhead of 10,000 x 12 = ₹1,20,000 is expensed in the period. Allocating on actual production (₹15 per unit) would overstate inventory.
Question 2
Case: Raw material held by Sagar Chemicals Ltd cost ₹200 per kg; its current replacement cost is ₹170 per kg. The finished product made from it costs ₹500 per unit to produce, but due to a fall in demand its net realisable value is ₹480 per unit. Under AS 2, the raw material should be valued at:
- A) ₹480 per unit of finished product equivalent
- B) ₹185 per kg
- C) ₹200 per kg
- D) ₹170 per kg
Show answer & explanation
Answer: D) ₹170 per kg
AS 2 does not permit raw materials to be written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. Here the finished product's NRV (₹480) is below its cost (₹500), so the material must be written down, and replacement cost (₹170) may be the best available measure of its NRV.
Question 3
Which of the following costs is included in the cost of inventories under AS 2?
- A) Selling and distribution costs
- B) Freight inward incurred to bring raw materials to the factory
- C) Abnormal amounts of wasted materials
- D) Storage costs of finished goods awaiting dispatch
Show answer & explanation
Answer: B) Freight inward incurred to bring raw materials to the factory
Cost of purchase includes freight inward and other costs directly attributable to bringing materials to their present location and condition. AS 2 specifically excludes abnormal wastage, selling costs, and storage costs (unless storage is necessary in the production process before a further stage).
Question 4
Case: Indus Polymers Ltd purchased a machine with a list price of ₹12,00,000, on which a 5% trade discount was allowed. GST of ₹2,05,200 was paid, for which full input tax credit is available. Other costs: freight ₹30,000; installation ₹45,000; testing ₹20,000, with net proceeds of ₹8,000 from samples produced during testing; general administration overheads ₹15,000; initial operating losses before the machine reached planned output ₹25,000. The cost of the machine under AS 10 is:
- A) ₹14,32,200
- B) ₹12,35,000
- C) ₹12,27,000
- D) ₹12,67,000
Show answer & explanation
Answer: C) ₹12,27,000
Purchase price net of trade discount = 12,00,000 x 95% = 11,40,000. Add freight 30,000, installation 45,000 and testing 20,000 less sample proceeds 8,000: cost = ₹12,27,000. Recoverable GST, general administration overheads and initial operating losses are not part of the cost of an item of PPE under AS 10.
Question 5
Case: A machine costing ₹10,00,000 was being depreciated on the straight-line method over 10 years with nil residual value. At the start of year 5, management reassesses the remaining useful life as 4 years (instead of 6). The depreciation for year 5 under AS 10 is:
- A) ₹1,50,000
- B) ₹1,00,000
- C) ₹1,25,000
- D) ₹2,50,000
Show answer & explanation
Answer: A) ₹1,50,000
A revision of useful life is a change in accounting estimate and is applied prospectively. Carrying amount at the start of year 5 = 10,00,000 - (4 x 1,00,000) = 6,00,000. Depreciation for year 5 = 6,00,000 / 4 = ₹1,50,000. Charging 2,50,000 would wrongly include a catch-up for earlier years.
Question 6
Case: Land purchased by Konark Hotels Ltd for ₹20,00,000 was revalued to ₹17,00,000 in year 1, the decrease being charged to the statement of profit and loss. In year 3 it is revalued to ₹23,00,000. Under AS 10, the amount credited to revaluation surplus in year 3 is:
- A) ₹6,00,000
- B) ₹4,50,000
- C) ₹3,00,000
- D) ₹0
Show answer & explanation
Answer: C) ₹3,00,000
The year 3 increase is 23,00,000 - 17,00,000 = 6,00,000. AS 10 requires a revaluation increase to be recognised in profit or loss to the extent it reverses a decrease of the same asset previously recognised in profit or loss (3,00,000). The balance 6,00,000 - 3,00,000 = ₹3,00,000 is credited to revaluation surplus.
Question 7
Case: Harit Agro Ltd holds equity shares acquired as a long-term investment at a cost of ₹5,00,000. At the balance sheet date their market value is ₹4,20,000. Management has assessed that the fall is temporary and caused by general market volatility. Under AS 13, the investment should be carried at:
- A) ₹5,00,000
- B) ₹4,20,000
- C) ₹4,60,000
- D) ₹4,20,000, with the ₹80,000 loss taken to reserves
Show answer & explanation
Answer: A) ₹5,00,000
Long-term investments are carried at cost under AS 13, with a provision made only for a decline in value that is other than temporary. Since the decline here is temporary, the investment remains at its cost of ₹5,00,000. Lower of cost and fair value applies to current investments, not long-term ones.
Question 8
Case: Current investments of Bharat Ceramics Ltd costing ₹3,00,000 are reclassified as long-term investments when their fair value is ₹2,60,000. Under AS 13, the transfer is made at:
- A) ₹2,60,000
- B) ₹3,00,000 with a provision of ₹40,000 shown separately
- C) ₹3,00,000
- D) ₹2,80,000
Show answer & explanation
Answer: A) ₹2,60,000
AS 13 requires investments reclassified from current to long-term to be transferred at the lower of cost and fair value on the date of transfer. Lower of 3,00,000 and 2,60,000 is ₹2,60,000. (For long-term to current, the transfer is at the lower of cost and carrying amount.)
Question 9
Case: On 1 June, Sindhu Finance Ltd purchased 5,000 12% debentures of ₹100 each at ₹104 cum-interest. Interest is payable on 31 March and 30 September. Under AS 13, the cost of the investment is:
- A) ₹5,20,000
- B) ₹5,30,000
- C) ₹5,10,000
- D) ₹5,00,000
Show answer & explanation
Answer: C) ₹5,10,000
Total paid = 5,000 x 104 = 5,20,000. This includes interest accrued from 1 April to 1 June (2 months) = 5,00,000 x 12% x 2/12 = 10,000, which is pre-acquisition interest and is excluded from cost. Cost of investment = 5,20,000 - 10,000 = ₹5,10,000.
Question 10
Case: On 1 April, Deccan Infra Ltd borrowed ₹50,00,000 at 10% p.a. specifically to construct a qualifying asset, which was completed on 31 March of the following year. Pending use, ₹20,00,000 of the loan was invested for 6 months at 7% p.a. Borrowing cost to be capitalised under AS 16 is:
- A) ₹4,30,000
- B) ₹5,00,000
- C) ₹5,70,000
- D) ₹3,60,000
Show answer & explanation
Answer: A) ₹4,30,000
Borrowing cost on the specific loan = 50,00,000 x 10% = 5,00,000. AS 16 requires investment income on the temporary investment of the borrowed funds to be deducted: 20,00,000 x 7% x 6/12 = 70,000. Amount capitalised = 5,00,000 - 70,000 = ₹4,30,000.
Question 11
Case: Mahanadi Power Ltd has no specific borrowings. Its general borrowings outstanding throughout the year are ₹40,00,000 at 9% and ₹60,00,000 at 12%. It spent ₹30,00,000 on a qualifying asset on 1 April and ₹20,00,000 on 1 October; the asset is still under construction at 31 March. Borrowing cost to be capitalised under AS 16 is:
- A) ₹10,80,000
- B) ₹4,20,000
- C) ₹4,32,000
- D) ₹5,40,000
Show answer & explanation
Answer: C) ₹4,32,000
Capitalisation rate = weighted average cost of general borrowings = (3,60,000 + 7,20,000) / 1,00,00,000 = 10.8%. Expenditure weighted for time: 30,00,000 x 10.8% x 12/12 = 3,24,000; 20,00,000 x 10.8% x 6/12 = 1,08,000. Amount capitalised = ₹4,32,000. A simple average rate of 10.5% would be incorrect because the borrowings are of different amounts.
Question 12
Under AS 19, Leases, which of the following situations would normally lead to classification of a lease as a finance lease?
- A) The lessee can cancel the lease at any time without penalty
- B) The lessor retains the obligation to repair and insure the asset and bears obsolescence risk
- C) The lease term covers the major part of the economic life of the asset even if title is not transferred
- D) Lease rentals are payable monthly rather than annually
Show answer & explanation
Answer: C) The lease term covers the major part of the economic life of the asset even if title is not transferred
AS 19 classifies a lease as a finance lease if it transfers substantially all the risks and rewards incident to ownership; one indicator is that the lease term is for the major part of the economic life of the asset. Payment frequency is irrelevant, and a cancellable lease or one where the lessor bears repairs and obsolescence risk points towards an operating lease.
Question 13
Case: Under a finance lease, the fair value of a machine taken by Ruchi Packaging Ltd is ₹5,00,000 and the present value of minimum lease payments, discounted at the interest rate implicit in the lease, is ₹4,85,000. At the inception of the lease, the lessee should recognise the asset and liability at:
- A) ₹4,85,000
- B) ₹5,00,000 for the asset and ₹4,85,000 for the liability
- C) ₹5,00,000
- D) ₹4,92,500
Show answer & explanation
Answer: A) ₹4,85,000
AS 19 requires the lessee to recognise a finance lease as an asset and a liability at the lower of the fair value of the leased asset and the present value of the minimum lease payments at the inception of the lease. Lower of 5,00,000 and 4,85,000 is ₹4,85,000, and the asset and liability are recorded at the same amount.
Question 14
Case: Prism Biotech Ltd incurred the following on a new vaccine project during the year: research phase ₹4,00,000; development phase before the AS 26 recognition criteria were met ₹2,00,000; development phase after all recognition criteria were demonstrated ₹6,00,000. The amount to be recognised as an intangible asset is:
- A) ₹8,00,000
- B) ₹6,00,000
- C) ₹0
- D) ₹12,00,000
Show answer & explanation
Answer: B) ₹6,00,000
AS 26 requires all research expenditure to be expensed. Development expenditure is capitalised only from the date all the recognition criteria (technical feasibility, intention and ability to complete, future benefits, adequate resources, reliable measurement) are met. Expenditure already expensed (here ₹2,00,000) cannot be reinstated as part of the asset later. Hence only ₹6,00,000 is capitalised.
Question 15
Case: A cash-generating unit of Neela Glass Ltd has a carrying amount of ₹12,00,000. Its net selling price is ₹9,50,000. It is expected to generate net cash inflows of ₹4,00,000 at the end of each of the next 3 years; the appropriate discount rate is 10%. Under AS 28, the impairment loss (rounded to the nearest rupee) is:
- A) ₹2,50,000
- B) Nil, since undiscounted cash flows equal the carrying amount
- C) ₹2,05,259
- D) ₹1,09,091
Show answer & explanation
Answer: C) ₹2,05,259
Value in use = 4,00,000 x (1/1.1 + 1/1.1^2 + 1/1.1^3) = 4,00,000 x 2.4869 = ₹9,94,741 (rounded). Recoverable amount is the higher of net selling price (9,50,000) and value in use (9,94,741) = 9,94,741. Impairment loss = 12,00,000 - 9,94,741 = ₹2,05,259. Using net selling price alone overstates the loss, and AS 28 requires discounted, not undiscounted, cash flows.
Question 16
Case: An asset of Tapti Motors Ltd cost ₹10,00,000 with a 10-year life and nil residual value (straight-line). At the end of year 2 it was written down to its recoverable amount of ₹6,40,000, with depreciation thereafter over the remaining 8 years. At the end of year 4, its recoverable amount is estimated at ₹7,00,000. The reversal of impairment loss to be recognised under AS 28 is:
- A) ₹1,20,000
- B) ₹1,60,000
- C) ₹2,20,000
- D) ₹0
Show answer & explanation
Answer: A) ₹1,20,000
Carrying amount at end of year 4 = 6,40,000 - 2 x 80,000 = 4,80,000. Had no impairment been recognised, the carrying amount would be 10,00,000 - 4 x 1,00,000 = 6,00,000. AS 28 limits the increased carrying amount to this figure, so reversal = 6,00,000 - 4,80,000 = ₹1,20,000, even though recoverable amount is 7,00,000.