CA Inter P1 · Chapter 5
Accounting Standards Based on Items Impacting Financial Statements MCQs with Answers
12 multiple-choice questions on Accounting Standards Based on Items Impacting Financial Statements for CA Inter P1 Advanced Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under AS 11, exchange differences arising on translation of the financial statements of a non-integral foreign operation should be:
- A) Recognised immediately in the statement of profit and loss
- B) Adjusted against the carrying amount of fixed assets of the foreign operation
- C) Recognised in the statement of profit and loss over the remaining life of the operation
- D) Accumulated in a foreign currency translation reserve until the disposal of the net investment
Show answer & explanation
Answer: D) Accumulated in a foreign currency translation reserve until the disposal of the net investment
For a non-integral foreign operation, the resulting exchange differences have little or no direct effect on present and future cash flows of the reporting enterprise. AS 11 therefore requires them to be accumulated in a foreign currency translation reserve and recognised as income or expense only on disposal of the net investment.
Question 2
Case: The financial statements of Godavari Fabrics Ltd for the year ended 31 March are approved by the board on 20 May. On 25 April, a major customer whose balance was outstanding at 31 March was declared insolvent; the customer's financial difficulties had existed since February. Under AS 4, this event is:
- A) A prior period item to be adjusted in the next year's financial statements
- B) A non-adjusting event requiring neither adjustment nor disclosure
- C) An adjusting event, requiring a provision against the receivable as at 31 March
- D) A non-adjusting event requiring only disclosure
Show answer & explanation
Answer: C) An adjusting event, requiring a provision against the receivable as at 31 March
Events after the balance sheet date that provide additional evidence of conditions existing at the balance sheet date are adjusting events under AS 4. The customer's insolvency confirms that the receivable was impaired at 31 March, so the amounts recognised must be adjusted. It is not a prior period item, since there was no error.
Question 3
Case: After the balance sheet date but before approval of the financial statements, the board of Chinar Woollens Ltd proposes an equity dividend of ₹2 per share for the year just ended. Under AS 4 (Revised), this dividend should be:
- A) Disclosed in the notes and not recognised as a liability at the balance sheet date
- B) Shown as a contingent liability
- C) Recognised as a liability and deducted from the surplus in the statement of profit and loss
- D) Recognised as a provision under current liabilities
Show answer & explanation
Answer: A) Disclosed in the notes and not recognised as a liability at the balance sheet date
Under AS 4 (Revised), dividends proposed or declared after the balance sheet date but before approval of the financial statements are not recognised as a liability at the balance sheet date because no obligation existed then. They are disclosed in the notes.
Question 4
Case: After the balance sheet date, the operating results and financial position of Lakshya Paper Mills Ltd deteriorate sharply and management concludes that it has no realistic alternative but to cease trading. Under AS 4, this development:
- A) Has no effect because it occurred after the balance sheet date
- B) Is a non-adjusting event requiring disclosure only
- C) Must be accounted for in the next year's financial statements as an extraordinary item
- D) Requires a reconsideration of whether the going concern assumption is still appropriate for preparing the financial statements
Show answer & explanation
Answer: D) Requires a reconsideration of whether the going concern assumption is still appropriate for preparing the financial statements
AS 4 states that events after the balance sheet date may indicate a need to adjust assets and liabilities where they indicate that the fundamental accounting assumption of going concern is no longer appropriate. If the going concern assumption is no longer appropriate, the effect is so pervasive that the basis of accounting itself needs to be reconsidered.
Question 5
Case: During the current year, Bhoomi Sugar Ltd signed a wage agreement with its workers' union revising wages with retrospective effect from two years ago, and paid arrears of ₹18,00,000. Under AS 5, the arrears are:
- A) An adjustment to the opening balance of retained earnings
- B) An extraordinary item
- C) Not a prior period item; they are an expense of the current period, disclosed separately if material
- D) A prior period item to be shown separately in the current statement of profit and loss
Show answer & explanation
Answer: C) Not a prior period item; they are an expense of the current period, disclosed separately if material
Prior period items arise from errors or omissions in preparing financial statements of earlier periods. AS 5 specifically notes that arrears payable to workers as a result of a retrospective wage revision are not prior period items, because the obligation arose only in the current period when the agreement was signed. The amount may be disclosed separately if its size or nature warrants it.
Question 6
Case: Ambika Plastics Ltd changes its method of depreciation on plant from the written-down value method to the straight-line method to better reflect the expected pattern of consumption of benefits. Under AS 10 read with AS 5, this change is treated as:
- A) A change in accounting estimate, applied prospectively
- B) An extraordinary item
- C) A change in accounting policy, applied retrospectively with recalculation from the date of acquisition
- D) A prior period item
Show answer & explanation
Answer: A) A change in accounting estimate, applied prospectively
AS 10 (Revised) requires the depreciation method to be reviewed and, if the expected pattern of consumption has changed significantly, to be changed; such a change is accounted for as a change in accounting estimate in accordance with AS 5. It therefore affects the current and future periods only, with no retrospective recalculation.
Question 7
Which of the following would normally be classified as an extraordinary item under AS 5?
- A) Loss of a warehouse and its inventory due to an earthquake
- B) Settlement of a long-running tax dispute
- C) Write-down of inventory to net realisable value
- D) Loss on disposal of an old machine
Show answer & explanation
Answer: A) Loss of a warehouse and its inventory due to an earthquake
Extraordinary items are income or expenses arising from events clearly distinct from the ordinary activities of the enterprise and not expected to recur frequently or regularly. An earthquake loss meets this definition. Inventory write-downs, disposals of PPE and tax settlements arise in the ordinary course of business, though they may need separate disclosure if material.
Question 8
Case: Narmada Electronics Ltd imported goods on credit for USD 20,000 when the exchange rate was ₹82 per USD. At the balance sheet date the rate was ₹84, and the payable was settled in the next year at ₹83. The exchange difference to be recognised in the year of import under AS 11 is:
- A) Nil, since the payable is still unsettled
- B) Loss of ₹20,000
- C) Gain of ₹20,000
- D) Loss of ₹40,000
Show answer & explanation
Answer: D) Loss of ₹40,000
A foreign currency payable is a monetary item and must be reported at the closing rate under AS 11. Exchange loss = USD 20,000 x (84 - 82) = ₹40,000, recognised in that year's profit and loss. In the next year, settlement at ₹83 gives a gain of USD 20,000 x (84 - 83) = ₹20,000.
Question 9
Case: On 1 February, Kamakhya Textiles Ltd entered into a 3-month forward contract to buy USD 50,000 to hedge an existing payable (not for trading or speculation). The spot rate was ₹82.00 and the forward rate ₹82.90. The financial year ends on 31 March. The premium on the forward contract to be recognised as expense for the year under AS 11 is:
- A) ₹30,000
- B) ₹15,000
- C) ₹45,000
- D) ₹0
Show answer & explanation
Answer: A) ₹30,000
Under AS 11, the premium or discount on a forward exchange contract not intended for trading or speculation is amortised as expense or income over the life of the contract. Total premium = USD 50,000 x (82.90 - 82.00) = 45,000. Amount for February and March = 45,000 x 2/3 = ₹30,000.
Question 10
Case: For the first year of operations of Sahyadri Agro Ltd, depreciation as per books is ₹4,00,000 and as per income tax law is ₹6,00,000. There are no other differences and the tax rate is 30%. Under AS 22, the company should recognise:
- A) A deferred tax liability of ₹60,000
- B) No deferred tax, as depreciation is a permanent difference
- C) A deferred tax liability of ₹1,80,000
- D) A deferred tax asset of ₹60,000
Show answer & explanation
Answer: A) A deferred tax liability of ₹60,000
Higher tax depreciation reduces current taxable income, but the difference will reverse in later years when book depreciation exceeds tax depreciation. This is a timing difference giving rise to a deferred tax liability = (6,00,000 - 4,00,000) x 30% = ₹60,000.
Question 11
Case: Vindhya Cables Ltd has unabsorbed depreciation and carry-forward business losses under tax laws. Under AS 22, a deferred tax asset on these should be recognised:
- A) Only to the extent there is reasonable certainty of future taxable income
- B) Always, since the losses are allowed to be carried forward
- C) Never, because AS 22 prohibits deferred tax assets on losses
- D) Only to the extent there is virtual certainty, supported by convincing evidence, that sufficient future taxable income will be available
Show answer & explanation
Answer: D) Only to the extent there is virtual certainty, supported by convincing evidence, that sufficient future taxable income will be available
For timing differences generally, AS 22 requires reasonable certainty of future taxable income. However, where an enterprise has unabsorbed depreciation or carry-forward tax losses, deferred tax assets are recognised only to the extent there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available.
Question 12
Case: Accounting profit of Mahi Chemicals Ltd for the year is ₹50,00,000. This is after charging penalties of ₹3,00,000 (never deductible for tax) and a provision for doubtful debts of ₹2,00,000 (deductible only when the debts are written off). Tax depreciation exceeds book depreciation by ₹6,00,000. Tax rate is 25%, and there is reasonable certainty of sufficient future taxable income to realise any deferred tax asset. Total tax expense in the statement of profit and loss under AS 22 is:
- A) ₹12,25,000
- B) ₹13,75,000
- C) ₹12,50,000
- D) ₹13,25,000
Show answer & explanation
Answer: D) ₹13,25,000
Taxable income = 50,00,000 + 3,00,000 + 2,00,000 - 6,00,000 = 49,00,000; current tax = 49,00,000 x 25% = 12,25,000. Penalties are a permanent difference, so no deferred tax arises on them. Excess tax depreciation gives a deferred tax liability of 6,00,000 x 25% = 1,50,000, and the provision for doubtful debts gives a deferred tax asset of 2,00,000 x 25% = 50,000 (recognised because reasonable certainty exists), so net deferred tax expense = 1,00,000. Total tax expense = 12,25,000 + 1,00,000 = ₹13,25,000, which equals (50,00,000 + 3,00,000) x 25%. Ignoring the deferred tax asset would give ₹13,75,000.