CA Inter P1 · Chapter 4
Liabilities Based Accounting Standards MCQs with Answers
8 multiple-choice questions on Liabilities Based Accounting Standards for CA Inter P1 Advanced Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Case: Employees of Suryoday Logistics Ltd are entitled to 12 days of paid leave a year; unused leave can be carried forward for one year only and leave taken is first drawn from the current year's entitlement. At 31 March, each of its 100 employees has on average 2 unused days. Based on past experience, 85 employees are expected to take not more than 12 days next year and the remaining 15 employees will take 13.5 days each. Daily pay is ₹1,500. The liability for accumulating compensated absences under AS 15 is:
- A) ₹33,750
- B) ₹2,55,000
- C) ₹45,000
- D) ₹3,00,000
Show answer & explanation
Answer: A) ₹33,750
The liability is measured as the additional amount expected to be paid as a result of the unused entitlement accumulated at the balance sheet date. Since leave is drawn first from the current year's 12 days, the 85 employees taking 12 days or less will not use any carried-forward days. The other 15 employees will each take 13.5 - 12 = 1.5 days out of their 2 carried-forward days. Liability = 15 x 1.5 days x ₹1,500 = ₹33,750. Using all 2 unused days for these 15 employees (₹45,000) or for all employees (₹3,00,000) overstates the expected payment.
Question 2
Under AS 15, the expense recognised by an enterprise for a defined contribution plan for a period is:
- A) The contribution payable to the plan in exchange for the service rendered by employees during that period
- B) The benefits paid to retiring employees during the period
- C) The actuarially determined present value of the obligation at the end of the period
- D) The amount actually paid to the fund during the period, irrespective of the period of service
Show answer & explanation
Answer: A) The contribution payable to the plan in exchange for the service rendered by employees during that period
In a defined contribution plan, the enterprise's obligation is limited to the amount it agrees to contribute, so no actuarial assumptions are needed. AS 15 requires the contribution payable for service rendered during the period to be expensed, with any unpaid amount recognised as a liability (accrued expense) and any excess paid as an asset (prepaid expense).
Question 3
Case: The actuarial valuation of the gratuity plan of Pushpak Engineering Ltd, which follows AS 15, shows an actuarial loss of ₹3,20,000 for the year. How should this loss be recognised?
- A) Immediately in the statement of profit and loss as income or expense
- B) Directly debited to general reserve without passing through profit and loss
- C) In other comprehensive income and accumulated in reserves
- D) Deferred and amortised over the expected average remaining working lives of employees
Show answer & explanation
Answer: A) Immediately in the statement of profit and loss as income or expense
AS 15 (Revised) requires actuarial gains and losses on defined benefit plans to be recognised immediately in the statement of profit and loss. The OCI route is a feature of Ind AS 19, and AS 15 does not permit deferral (corridor approach) or direct adjustment to reserves.
Question 4
Case: For the defined benefit plan of Lotus Pharma Ltd: opening present value of obligation ₹20,00,000; current service cost ₹2,50,000; interest cost at 8% on the opening obligation; benefits paid at year end ₹1,20,000; closing present value of obligation as per actuary ₹24,00,000. The actuarial loss on the obligation for the year is:
- A) ₹3,50,000
- B) ₹4,00,000
- C) ₹1,10,000
- D) ₹2,70,000
Show answer & explanation
Answer: C) ₹1,10,000
Expected closing obligation = Opening 20,00,000 + Current service cost 2,50,000 + Interest cost (20,00,000 x 8% = 1,60,000) - Benefits paid 1,20,000 = 22,90,000. Actual closing obligation is 24,00,000, so actuarial loss = 24,00,000 - 22,90,000 = ₹1,10,000.
Question 5
Case: Vayu Appliances Ltd sells products with a one-year warranty. If all products sold during the year had minor defects, repair costs would be ₹5,00,000; if all had major defects, costs would be ₹20,00,000. Past experience shows 70% of goods have no defects, 20% minor defects and 10% major defects. The warranty provision under AS 29 is:
- A) ₹2,00,000
- B) ₹25,00,000
- C) ₹5,00,000
- D) ₹3,00,000
Show answer & explanation
Answer: D) ₹3,00,000
For a large population of items, the best estimate of the obligation is the expected value obtained by weighting outcomes by their probabilities. Provision = 70% x 0 + 20% x 5,00,000 + 10% x 20,00,000 = 1,00,000 + 2,00,000 = ₹3,00,000.
Question 6
Case: Meera Exports Ltd has filed a claim for damages against a supplier. Legal counsel believes it is probable, but not virtually certain, that the company will receive ₹12,00,000. Under AS 29, the company should:
- A) Not recognise the asset and not disclose it in the financial statements; it may be disclosed in the report of the approving authority
- B) Recognise the receivable but defer the income until it is received
- C) Recognise ₹12,00,000 as income and a receivable
- D) Recognise the receivable at an amount discounted for the probability of success
Show answer & explanation
Answer: A) Not recognise the asset and not disclose it in the financial statements; it may be disclosed in the report of the approving authority
A probable (but not virtually certain) inflow from a pending claim is a contingent asset. AS 29 prohibits recognition of contingent assets, and a contingent asset is not disclosed in the financial statements; where an inflow of economic benefits is probable, it is usually disclosed in the report of the approving authority (the Board of Directors' report, in the case of a company). The asset and related income are recognised only when the inflow becomes virtually certain.
Question 7
Case: Saffron Hotels Ltd has recognised a provision of ₹8,00,000 for damages payable to a guest. Its insurer has confirmed in writing, making it virtually certain, that ₹5,00,000 will be reimbursed. How is this presented under AS 29?
- A) A provision of ₹8,00,000 and a separate asset of ₹5,00,000 in the balance sheet; the expense may be shown net at ₹3,00,000
- B) A provision of ₹8,00,000; the reimbursement is disclosed as a contingent asset
- C) A provision of ₹8,00,000 and an asset of ₹5,00,000, with netting of the expense prohibited
- D) A provision of ₹3,00,000 only in the balance sheet
Show answer & explanation
Answer: A) A provision of ₹8,00,000 and a separate asset of ₹5,00,000 in the balance sheet; the expense may be shown net at ₹3,00,000
Under AS 29, a reimbursement that is virtually certain is recognised as a separate asset, not netted against the provision, and the amount recognised cannot exceed the provision. In the statement of profit and loss, the expense relating to the provision may be presented net of the reimbursement recognised (8,00,000 - 5,00,000 = 3,00,000).
Question 8
Case: Kesari Transport Ltd expects its newly opened route to incur operating losses of ₹15,00,000 over the next two years. Under AS 29, the company should:
- A) Recognise a provision at the present value of the expected losses
- B) Not recognise any provision for the future operating losses
- C) Recognise a provision for the first year's losses only
- D) Recognise a provision of ₹15,00,000 immediately
Show answer & explanation
Answer: B) Not recognise any provision for the future operating losses
AS 29 states that provisions should not be recognised for future operating losses, because they do not arise from a past event and there is no present obligation. The expectation of losses may, however, indicate that the related assets need to be tested for impairment under AS 28.