CA Inter P1 · Chapter 7
Other Accounting Standards (AS 12 and AS 14) MCQs with Answers
8 multiple-choice questions on Other Accounting Standards (AS 12 and AS 14) for CA Inter P1 Advanced Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Case: Ujjwal Solar Ltd purchased a machine for ₹50,00,000 and received a government grant of ₹10,00,000 towards it. The machine has a useful life of 8 years with nil residual value (straight-line). If the company follows the method of deducting the grant from the cost of the asset under AS 12, the annual depreciation charge is:
- A) ₹1,25,000
- B) ₹5,00,000
- C) ₹7,50,000
- D) ₹6,25,000
Show answer & explanation
Answer: B) ₹5,00,000
Under the deduction method, the grant is deducted from the gross value of the asset: 50,00,000 - 10,00,000 = 40,00,000. Depreciation = 40,00,000 / 8 = ₹5,00,000 per year. The grant is thus recognised in profit and loss over the useful life through reduced depreciation.
Question 2
Case: A state government gives Prayag Foods Ltd a grant of ₹40,00,000 as its contribution towards the total investment in an industrial undertaking in a backward area. No repayment is expected and the grant is not related to any specific fixed asset. Under AS 12, the grant should be:
- A) Deducted from the cost of the company's plant and machinery
- B) Shown as deferred income and recognised over five years
- C) Credited to the statement of profit and loss in the year of receipt
- D) Credited to capital reserve and treated as part of shareholders' funds
Show answer & explanation
Answer: D) Credited to capital reserve and treated as part of shareholders' funds
AS 12 treats grants given with reference to the total investment in an undertaking or by way of contribution towards its total capital outlay (in the nature of promoters' contribution) as part of shareholders' funds, credited to capital reserve. They are not recognised as income because no repayment is expected and there are no conditions relating to specific costs.
Question 3
Case: Tarang Textiles Ltd bought equipment for ₹60,00,000 and received a grant of ₹12,00,000, which was deducted from the cost. The equipment is depreciated on straight-line basis over 6 years with nil residual value. At the end of year 2, the full grant became refundable due to non-fulfilment of conditions, and was refunded. Under AS 12, depreciation for year 3 is:
- A) ₹10,00,000
- B) ₹11,00,000
- C) ₹8,00,000
- D) ₹15,00,000
Show answer & explanation
Answer: B) ₹11,00,000
Net cost = 60,00,000 - 12,00,000 = 48,00,000; depreciation 8,00,000 p.a.; book value after 2 years = 32,00,000. AS 12 requires the refund of a grant related to a specific asset to be recorded by increasing the book value of the asset: 32,00,000 + 12,00,000 = 44,00,000. Depreciation on the revised book value is provided prospectively over the residual life: 44,00,000 / 4 = ₹11,00,000.
Question 4
Which of the following is NOT a condition for an amalgamation to be classified as an 'amalgamation in the nature of merger' under AS 14?
- A) All the assets and liabilities of the transferor company become those of the transferee company
- B) Shareholders holding at least 75% of the equity shares of the transferor company become shareholders of the transferee company
- C) Consideration to equity shareholders of the transferor is discharged wholly by issue of equity shares in the transferee, except for cash paid for fractional shares
- D) The business of the transferor company is intended to be carried on by the transferee company
Show answer & explanation
Answer: B) Shareholders holding at least 75% of the equity shares of the transferor company become shareholders of the transferee company
AS 14 requires, among other conditions, that shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than shares already held by the transferee or its subsidiaries) become equity shareholders of the transferee company. A 75% threshold is not the AS 14 condition. The other options are genuine conditions for a merger.
Question 5
Case: Indrayani Ltd acquires Sumitra Ltd in an amalgamation in the nature of purchase. The purchase consideration exceeds the fair value of net assets acquired by ₹9,00,000. Under AS 14, the resulting goodwill should normally be:
- A) Retained in the balance sheet without amortisation and tested for impairment annually
- B) Amortised to income on a systematic basis over its useful life, which should not exceed five years unless a longer period is justified
- C) Amortised over a period not exceeding ten years without any justification required
- D) Written off immediately against reserves
Show answer & explanation
Answer: B) Amortised to income on a systematic basis over its useful life, which should not exceed five years unless a longer period is justified
AS 14 requires goodwill arising on amalgamation to be amortised systematically over its useful life. It presumes that the period should not exceed five years unless a somewhat longer period can be justified. Non-amortisation with annual impairment testing is the Ind AS approach, not AS 14.
Question 6
Case: In an amalgamation in the nature of merger accounted for under the pooling of interests method, the share capital issued by the transferee exceeds the share capital of the transferor company by ₹10,00,000. Under AS 14, this difference is:
- A) Charged to the statement of profit and loss
- B) Recognised as goodwill
- C) Credited to capital reserve
- D) Adjusted against the reserves in the transferee's books
Show answer & explanation
Answer: D) Adjusted against the reserves in the transferee's books
Under the pooling of interests method, no goodwill or capital reserve arises. AS 14 requires the difference between the share capital issued (plus any additional consideration) and the share capital of the transferor to be adjusted in reserves. An excess of capital issued is therefore deducted from reserves.
Question 7
Case: In an amalgamation in the nature of purchase, the transferor company had an Export Profit Reserve of ₹4,00,000 that must be preserved for some years under applicable law. Under AS 14, how is this dealt with in the transferee's books?
- A) Credit Export Profit Reserve and debit Goodwill by ₹4,00,000
- B) Credit Export Profit Reserve and debit Amalgamation Adjustment Reserve by ₹4,00,000
- C) No entry is required because reserves of the transferor are not carried forward under the purchase method
- D) Credit Capital Reserve by ₹4,00,000
Show answer & explanation
Answer: B) Credit Export Profit Reserve and debit Amalgamation Adjustment Reserve by ₹4,00,000
Under the purchase method, the transferor's reserves are generally not carried forward, but statutory reserves must be preserved. AS 14 requires such statutory reserves to be recorded in the transferee's books by crediting the respective reserve and debiting the Amalgamation Adjustment Reserve. When the statutory requirement no longer applies, the entry is reversed.
Question 8
Under AS 14, which of the following is the appropriate accounting method for an amalgamation in the nature of merger?
- A) Purchase method
- B) Proportionate consolidation method
- C) Equity method
- D) Pooling of interests method
Show answer & explanation
Answer: D) Pooling of interests method
AS 14 requires an amalgamation in the nature of merger to be accounted for under the pooling of interests method, where assets, liabilities and reserves are recorded at their existing carrying amounts (after uniform accounting policies). The purchase method applies to amalgamations in the nature of purchase; proportionate consolidation and the equity method relate to AS 27 and AS 23.