Chapter 5: Asset Based Accounting Standards - Test 1: answer key

Question 1 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. Sterling Garments Ltd. manufactures performance apparel at its Surat facility and closes its books on 31 March 2027. The draft Balance Sheet inventory extract includes raw materials, work-in-progress and finished goods, and the audit committee has asked the controller to review the production-line costing before finalisation. For the principal line, opening raw materials were ₹6.00 lakh. During the year supplier invoices totalled ₹48.00 lakh; trade discounts were ₹2.40 lakh, non-refundable import duty ₹1.20 lakh, recoverable GST ₹8.64 lakh and inward freight ₹0.72 lakh. Closing raw materials for this line were ₹5.00 lakh. Production was 15,000 finished units against a normal capacity of 20,000 units. Direct labour was ₹18.00 lakh, variable factory overhead ₹6.00 lakh and fixed factory overhead ₹24.00 lakh, which is expected to remain unchanged within the relevant range. Non-production administration, selling and distribution, and post-production warehousing cost ₹3.20 lakh, ₹2.50 lakh and ₹0.60 lakh respectively. Closing stock of the principal line was 4,000 units. In addition, the company holds three unrelated finished-goods SKUs that are not interchangeable. Their cost and estimated selling-price/cost-to-sell details (₹ lakh) are: A—cost 12.00, selling price 14.00, selling costs 1.10; B—cost 10.00, selling price 10.80, selling costs 1.20; and C—cost 8.00, selling price 7.60, selling costs 0.20. Separate raw materials M and N are carried at ₹6.40 lakh and ₹4.50 lakh; replacement costs are ₹5.80 lakh and ₹3.70 lakh. Finished goods incorporating M have cost ₹20.00 lakh and NRV ₹23.00 lakh; those incorporating N have cost ₹15.00 lakh and NRV ₹13.50 lakh. A further process produces principal product U, joint product V and immaterial scrap. Joint cost to split-off is ₹18.00 lakh; U and V have split-off sales values of ₹24.00 lakh and ₹16.00 lakh. Scrap can be sold for ₹1.50 lakh after completion and selling costs of ₹0.30 lakh. The controller proposes to offset favourable NRV on one SKU against losses on another.

Before applying the separate item-by-item NRV test, what is the cost attributable to the 4,000 finished units in closing inventory of the principal production line?

1. ₹24.14 lakh (correct answer)
2. ₹25.74 lakh
3. ₹24.78 lakh
4. ₹23.63 lakh

Answer: A — ₹24.14 lakh

Explanation. Purchase cost is ₹47.52 lakh (₹48.00 − ₹2.40 + ₹1.20 + ₹0.72); recoverable GST is excluded. Material consumed is ₹6.00 + ₹47.52 − ₹5.00 = ₹48.52 lakh. Fixed overhead absorption is ₹24.00 lakh ÷ 20,000 = ₹120 per unit, so only ₹18.00 lakh is allocated to 15,000 units. Production cost is ₹90.52 lakh; 4,000 units therefore cost ₹24.14 lakh. Option (b) incorrectly absorbs fixed overhead using low actual production.

Where it goes wrong. Absorbing fixed production overhead at actual low output instead of normal capacity.

Authority. AS 2 paras 6-9

Question 2 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Applying the appropriate NRV assessment to the three distinct finished-goods SKUs, what total amount should be reported for these inventories?

1. ₹29.90 lakh
2. ₹29.00 lakh (correct answer)
3. ₹30.00 lakh
4. ₹27.00 lakh

Answer: B — ₹29.00 lakh

Explanation. NRV is selling price less costs necessary to make the sale. SKU A is carried at ₹12.00 lakh because its NRV is ₹12.90 lakh; B is carried at ₹9.60 lakh; and C at ₹7.40 lakh. The total is ₹29.00 lakh. Aggregating all NRVs first gives ₹29.90 lakh, but this offsets the unrecognised surplus on A against write-downs on B and C. AS 2 para 21 requires the usual item-by-item assessment.

Where it goes wrong. Netting unrealised gains on one inventory item against NRV write-downs on unrelated items.

Authority. AS 2 paras 3.2, 5 and 21

Question 3 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

What is the combined carrying amount of raw materials M and N at 31 March 2027?

1. ₹10.90 lakh
2. ₹9.50 lakh
3. ₹10.10 lakh (correct answer)
4. ₹11.20 lakh

Answer: C — ₹10.10 lakh

Explanation. Material M remains at its ₹6.40 lakh cost because the finished goods incorporating it are expected to realise ₹23.00 lakh against cost of ₹20.00 lakh. Material N is written down because its finished goods NRV of ₹13.50 lakh is below cost of ₹15.00 lakh. Replacement cost of ₹3.70 lakh is the most suitable available measure of N's NRV. The combined amount is ₹6.40 + ₹3.70 = ₹10.10 lakh. Writing M down merely because its replacement cost declined is incorrect.

Where it goes wrong. Writing down raw materials solely because replacement cost is below cost without testing the finished goods.

Authority. AS 2 para 24

Question 4 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

What is the inventory cost attributable to principal product U after accounting for its allocation of joint costs and the immaterial scrap by-product?

1. ₹10.80 lakh
2. ₹7.20 lakh
3. ₹8.40 lakh
4. ₹9.60 lakh (correct answer)

Answer: D — ₹9.60 lakh

Explanation. Allocate the ₹18.00 lakh joint cost between U and V using relative split-off sales values of 24:16. U receives ₹18.00 × 24/40 = ₹10.80 lakh. The immaterial scrap by-product is measured at NRV of ₹1.50 − ₹0.30 = ₹1.20 lakh, deducted from the principal product's cost. U is therefore carried at ₹9.60 lakh. Option (a) omits the by-product credit, while assigning all joint costs to U ignores the rational allocation to V.

Where it goes wrong. Failing to deduct by-product NRV from the principal product's cost after allocating joint costs.

Authority. AS 2 para 10

Question 5 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. Zenith Technologies Pvt. Ltd. prepares financial statements to 31 March 2027. The Balance Sheet extract at 1 April 2026 showed PPE gross cost ₹8.40 crore, accumulated depreciation ₹3.20 crore and restoration provision ₹0.48 crore for another facility. The audit team is reviewing a new CNC production line acquired on 1 April 2026. Its cash price equivalent after trade discount was ₹116.00 lakh. Recoverable GST of ₹18.00 lakh was charged separately, while non-refundable import duty was ₹3.00 lakh. Directly attributable costs were initial delivery ₹1.20 lakh, site preparation ₹2.40 lakh, installation ₹3.60 lakh, technician employee benefits ₹1.80 lakh, testing ₹1.50 lakh less sample-sale proceeds ₹0.30 lakh, and professional fees ₹0.90 lakh. At acquisition, the present value of the obligation to dismantle the line and restore the site after its ten-year useful life was estimated at ₹6.00 lakh. The line was in the location and condition necessary to operate as intended on 1 October 2026, although commercial production was postponed until 1 December 2026 for a market launch. The company also incurred staff training ₹1.80 lakh, launch advertising ₹2.00 lakh and start-up operating losses ₹3.00 lakh. The line has a ten-year useful life and nil residual value, and the company applies the cost model to the entire machinery class. At 31 March 2027, a revised engineering estimate increased the present value of the line's restoration obligation from ₹6.00 lakh to ₹7.50 lakh. During the same year, a forging press already included in PPE underwent replacement of its identifiable die module on 1 January 2027. The old module had cost ₹24.00 lakh when installed on 1 January 2024, had an eight-year useful life and was depreciated straight-line. The replacement module cost ₹32.00 lakh and satisfies the PPE recognition criteria. Routine servicing of the press cost ₹1.20 lakh. The finance head proposes retaining the old module's carrying amount because its original cost is not separately shown in the trial balance.

At what amount should the CNC production line initially be recognised as PPE on 1 April 2026?

1. ₹136.10 lakh (correct answer)
2. ₹133.10 lakh
3. ₹139.10 lakh
4. ₹130.10 lakh

Answer: A — ₹136.10 lakh

Explanation. Capitalisable cost is ₹116.00 lakh cash-price equivalent + ₹3.00 duty + ₹1.20 delivery + ₹2.40 site preparation + ₹3.60 installation + ₹1.80 technician benefits + ₹1.20 net testing cost + ₹0.90 professional fees + ₹6.00 present value of restoration = ₹136.10 lakh. Recoverable GST is excluded. Training, launch advertising and start-up operating losses are not directly attributable costs. Option (d) omits the restoration obligation required by AS 10 para 17(c).

Where it goes wrong. Omitting the initial present value of restoration obligations or capitalising recoverable GST and start-up costs.

Authority. AS 10 paras 16-18; AS 10 paras 20-21

Question 6 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Assuming straight-line depreciation and no impairment, what depreciation should be charged on the CNC production line for the year ended 31 March 2027?

1. ₹5,44,400
2. ₹6,80,500 (correct answer)
3. ₹6,00,000
4. ₹13,61,000

Answer: B — ₹6,80,500

Explanation. Depreciation begins when the line is available for use, not when management starts commercial production. It was ready on 1 October 2026, leaving six months to 31 March 2027. Annual depreciation is ₹136.10 lakh ÷ 10 = ₹13.61 lakh; six months' depreciation is ₹6.805 lakh, or ₹6,80,500. Option (d) charges a full year, whereas deferring depreciation until 1 December disregards the availability-for-use criterion in AS 10 para 57.

Where it goes wrong. Starting depreciation only when commercial production or actual use begins.

Authority. AS 10 para 52; AS 10 para 57

Question 7 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

How should the ₹1.50 lakh increase in the present value of the restoration obligation be accounted for at 31 March 2027?

1. Debit profit or loss and increase the restoration provision only.
2. Debit revaluation surplus and increase the restoration provision.
3. Add ₹1.50 lakh to PPE and the provision; assess impairment indicators. (correct answer)
4. Disclose the increase as contingent liability without adjusting PPE.

Answer: C — Add ₹1.50 lakh to PPE and the provision; assess impairment indicators.

Explanation. The revised estimate increases the restoration liability by ₹1.50 lakh. Since the related asset is measured under the cost model, AS 10 para 67(a) requires the change in liability to be added to the cost of the related PPE, with a corresponding increase in the provision. The company must also consider whether the revised carrying amount indicates that impairment testing is necessary. Immediate expensing is not the default cost-model treatment.

Where it goes wrong. Charging every upward revision of a decommissioning provision directly to profit or loss.

Authority. AS 10 paras 17(c) and 67(a)-(c)

Question 8 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

What is the net increase in the forging press's carrying amount arising from the die-module replacement, before depreciation of the new module?

1. ₹32.00 lakh
2. ₹15.00 lakh
3. ₹9.00 lakh
4. ₹17.00 lakh (correct answer)

Answer: D — ₹17.00 lakh

Explanation. The old module's annual depreciation is ₹24.00 lakh ÷ 8 = ₹3.00 lakh. After three full years its carrying amount is ₹24.00 − ₹9.00 = ₹15.00 lakh. The new module is capitalised at ₹32.00 lakh and the old module's ₹15.00 lakh carrying amount is derecognised, giving a net increase of ₹17.00 lakh. Routine servicing of ₹1.20 lakh is expensed under para 12. Retaining the old module would double-count its carrying value.

Where it goes wrong. Capitalising a replacement part without removing the carrying amount of the replaced component.

Authority. AS 10 paras 12-15; AS 10 para 78

Question 9 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. Vardhan Chemicals Ltd. operates a reactor line among its plant assets. Its Balance Sheet at 1 April 2026 showed reactor-line gross cost ₹3.00 crore and accumulated depreciation ₹1.08 crore. The line had been acquired and was available for use on 1 April 2023. The acquisition records identify a significant turbine component costing ₹90.00 lakh and the remaining structure and equipment costing ₹210.00 lakh. At acquisition, the turbine's useful life was six years and the remaining component's useful life was ten years; both had nil residual values and were depreciated straight-line. At 31 March 2026, engineering information supported revising the turbine's remaining useful life to five years from 1 April 2026 and the remaining component's useful life to seven years. Earlier depreciation was left unchanged. For 2026-27, the accountant applied the revised useful lives to the carrying amounts of the two components. After that year's depreciation, the reactor line's carrying amount at 1 April 2027 is ₹162.00 lakh. An updated engineering report then showed that, for the remaining useful life, the expected benefits from both components would be consumed according to machine-hours rather than evenly over time. Total expected remaining machine-hours are 80,000; 16,000 were used in 2027-28. Management proposes changing the depreciation method prospectively, without reopening earlier years. On 31 March 2027, Vardhan revalued its land-and-buildings class, including every asset in that class. A factory building had a carrying amount of ₹50.00 lakh immediately before revaluation and a fair value of ₹62.00 lakh. A prior ₹8.00 lakh decrease for the same building had been charged to profit or loss. The company also disposed of a separate pollution-control unit on 31 March 2027. Its carrying amount immediately before disposal was ₹11.00 lakh; gross sale proceeds were ₹10.20 lakh and direct disposal costs were ₹0.70 lakh. The finance director proposes crediting all revaluation increases to reserves and treating disposal losses as expenses unrelated to derecognition.

What is the reactor line's total depreciation charge for 2026-27 after applying the revised useful-life estimates made at 31 March 2026?

1. ₹30.00 lakh (correct answer)
2. ₹24.00 lakh
3. ₹36.00 lakh
4. ₹45.00 lakh

Answer: A — ₹30.00 lakh

Explanation. The turbine's carrying amount after three years is ₹90.00 − (₹90.00/6 × 3) = ₹45.00 lakh; spread over its revised remaining life of five years, depreciation is ₹9.00 lakh. The remaining component's carrying amount is ₹210.00 − (₹210.00/10 × 3) = ₹147.00 lakh; over seven remaining years, depreciation is ₹21.00 lakh. Total depreciation is ₹30.00 lakh. Continuing with the original turbine rate ignores the revised estimate.

Where it goes wrong. Continuing to depreciate using the original useful life after a supportable reassessment.

Authority. AS 10 paras 45-46; AS 10 para 53

Question 10 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Using the revised units-of-production method, what depreciation should be charged on the reactor line for 2027-28?

1. ₹24.30 lakh
2. ₹32.40 lakh (correct answer)
3. ₹40.50 lakh
4. ₹30.00 lakh

Answer: B — ₹32.40 lakh

Explanation. The carrying amount at 1 April 2027 is ₹162.00 lakh and the residual value is nil. The year's usage is 16,000 of the remaining 80,000 machine-hours, or 20%. Depreciation is therefore ₹162.00 lakh × 20% = ₹32.40 lakh. The method is changed prospectively because the expected consumption pattern has materially changed; prior-year charges are not recomputed. Straight-line depreciation of ₹30.00 lakh would ignore the revised usage pattern.

Where it goes wrong. Retaining straight-line depreciation despite a significant change in the expected consumption pattern.

Authority. AS 10 paras 62-64

Question 11 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

How should the ₹12.00 lakh increase on revaluation of the factory building be recognised?

1. ₹12 lakh to revaluation surplus; nil to profit or loss.
2. ₹12 lakh to profit or loss; nil to revaluation surplus.
3. ₹8 lakh to profit or loss; ₹4 lakh to revaluation surplus. (correct answer)
4. ₹4 lakh to profit or loss; ₹8 lakh to revaluation surplus.

Answer: C — ₹8 lakh to profit or loss; ₹4 lakh to revaluation surplus.

Explanation. The revaluation increase is ₹62.00 − ₹50.00 = ₹12.00 lakh. Under AS 10 para 42, an increase is credited to revaluation surplus except to the extent that it reverses a decrease for the same asset previously recognised in profit or loss. Accordingly, ₹8.00 lakh is credited to profit or loss and the balance ₹4.00 lakh to revaluation surplus. Crediting the full increase to reserve ignores the earlier loss on that building.

Where it goes wrong. Crediting the entire revaluation gain to reserve without reversing the prior P&L decrease on the same asset.

Authority. AS 10 paras 39-42

Question 12 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

What is the result on derecognition of the pollution-control unit disposed of on 31 March 2027?

1. ₹1.50 lakh loss charged to revaluation surplus.
2. ₹0.80 lakh loss charged to profit or loss.
3. ₹0.80 lakh gain credited to profit or loss.
4. ₹1.50 lakh loss charged to profit or loss. (correct answer)

Answer: D — ₹1.50 lakh loss charged to profit or loss.

Explanation. Net disposal proceeds are ₹10.20 − ₹0.70 = ₹9.50 lakh. Comparing these with the carrying amount of ₹11.00 lakh gives a loss of ₹1.50 lakh. The carrying amount is derecognised on disposal, and the resulting gain or loss is included in the Statement of Profit and Loss. Option (b) compares carrying amount with gross proceeds and fails to deduct direct disposal costs, which AS 10 para 79 requires.

Where it goes wrong. Comparing carrying amount with gross sale proceeds instead of net disposal proceeds.

Authority. AS 10 paras 74-75 and 79

Question 13 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. A manufacturer incurs the following costs on 2,000 customised units: direct materials ₹4.00 lakh, direct labour ₹1.60 lakh, customer-specific product design ₹0.60 lakh, storage during a curing stage required before further processing ₹0.40 lakh, post-production warehouse rent ₹0.30 lakh, head-office administration ₹0.50 lakh and sales commission ₹0.20 lakh. What is the inventory cost of these units?

A manufacturer incurs the following costs on 2,000 customised units: direct materials ₹4.00 lakh, direct labour ₹1.60 lakh, customer-specific product design ₹0.60 lakh, storage during a curing stage required before further processing ₹0.40 lakh, post-production warehouse rent ₹0.30 lakh, head-office administration ₹0.50 lakh and sales commission ₹0.20 lakh. What is the inventory cost of these units?

1. ₹6.60 lakh (correct answer)
2. ₹7.10 lakh
3. ₹6.30 lakh
4. ₹5.90 lakh

Answer: A — ₹6.60 lakh

Explanation. Inventory cost includes direct materials and labour, customer-specific design required to bring the units to their present condition, and storage necessary before a further production stage. These eligible amounts total ₹4.00 + ₹1.60 + ₹0.60 + ₹0.40 = ₹6.60 lakh. Post-production storage, unrelated head-office administration and sales commission are excluded under AS 2 para 13. Option (b) wrongly includes all three excluded overheads and selling costs.

Where it goes wrong. Treating every storage or administrative expense as inventory cost without testing its production linkage.

Authority. AS 2 paras 6, 11 and 13

Question 14 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A factory incurs fixed production overhead of ₹36 lakh. Normal capacity is 30,000 units, whereas actual production is only 24,000 units. What amount of fixed production overhead should be recognised as an expense because it remains unallocated?

A factory incurs fixed production overhead of ₹36 lakh. Normal capacity is 30,000 units, whereas actual production is only 24,000 units. What amount of fixed production overhead should be recognised as an expense because it remains unallocated?

1. ₹6.00 lakh
2. ₹7.20 lakh (correct answer)
3. ₹9.00 lakh
4. Nil

Answer: B — ₹7.20 lakh

Explanation. The fixed-overhead rate based on normal capacity is ₹36,00,000 ÷ 30,000 = ₹120 per unit. Applying this rate to actual output allocates ₹28,80,000 (24,000 × ₹120) to production. The unallocated balance of ₹7,20,000 is expensed in the period. Dividing the entire overhead by actual low production would raise the rate to ₹150 per unit and improperly load idle-capacity costs into inventory, contrary to AS 2 para 9.

Where it goes wrong. Increasing the fixed-overhead rate per unit because actual output is below normal capacity.

Authority. AS 2 para 9

Question 15 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. Input of 10,000 units costing ₹50 lakh is processed. Normal wastage is 4% of input, but actual wastage is 700 units. Assuming no scrap recovery, what amount of abnormal wastage cost should be charged to the Statement of Profit and Loss?

Input of 10,000 units costing ₹50 lakh is processed. Normal wastage is 4% of input, but actual wastage is 700 units. Assuming no scrap recovery, what amount of abnormal wastage cost should be charged to the Statement of Profit and Loss?

1. ₹1,04,167
2. ₹2,00,000
3. ₹1,56,250 (correct answer)
4. ₹3,64,583

Answer: C — ₹1,56,250

Explanation. Normal wastage is 4% × 10,000 = 400 units, so abnormal wastage is 700 − 400 = 300 units. Cost per unit after normal wastage is ₹50,00,000 ÷ 9,600 = ₹520.8333. Abnormal wastage cost is 300 × ₹520.8333 = ₹1,56,250 and is expensed immediately. Using 10,000 as the denominator understates the cost per good unit; treating all 700 units as normal also fails to isolate abnormal loss.

Where it goes wrong. Failing to separate normal wastage from abnormal wastage before computing abnormal loss.

Authority. AS 2 para 13(a)

Question 16 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. An entity holds 1,000 identical units costing ₹115 each. A firm contract covers 500 units at ₹112 each, with costs necessary to make the sale of ₹2 per unit. The remaining 500 units are expected to sell in the general market for ₹121 each, with selling costs of ₹3 per unit. What is the total carrying amount?

An entity holds 1,000 identical units costing ₹115 each. A firm contract covers 500 units at ₹112 each, with costs necessary to make the sale of ₹2 per unit. The remaining 500 units are expected to sell in the general market for ₹121 each, with selling costs of ₹3 per unit. What is the total carrying amount?

1. ₹1,09,000
2. ₹1,15,000
3. ₹1,18,000
4. ₹1,12,500 (correct answer)

Answer: D — ₹1,12,500

Explanation. For the contracted 500 units, NRV is ₹110 per unit (₹112 − ₹2), below cost of ₹115, so their value is ₹55,000. For the excess 500 units, general-market NRV is ₹118 (₹121 − ₹3), above cost, so they remain at ₹57,500. Total carrying amount is ₹1,12,500. Applying the contract price to all 1,000 units ignores that the contract covers only half the quantity, as AS 2 para 23 requires.

Where it goes wrong. Applying a firm contract price to inventory quantities exceeding the contract quantity.

Authority. AS 2 paras 5 and 23

Question 17 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. Raw material held at a cost of ₹8.40 lakh has a replacement cost of ₹6.90 lakh. Finished goods to be made from it have an expected cost of ₹12.00 lakh and an NRV of ₹11.00 lakh. At what amount should the raw material be carried?

Raw material held at a cost of ₹8.40 lakh has a replacement cost of ₹6.90 lakh. Finished goods to be made from it have an expected cost of ₹12.00 lakh and an NRV of ₹11.00 lakh. At what amount should the raw material be carried?

1. ₹6.90 lakh (correct answer)
2. ₹8.40 lakh
3. ₹7.50 lakh
4. ₹6.60 lakh

Answer: A — ₹6.90 lakh

Explanation. Because the finished goods' expected cost of ₹12.00 lakh exceeds their NRV of ₹11.00 lakh, the related materials are written down. In this circumstance, replacement cost may be the most suitable available measure of the materials' NRV. The raw materials are therefore carried at ₹6.90 lakh rather than their cost of ₹8.40 lakh. The rule retaining materials at cost applies when finished goods are expected to sell at or above cost, which is not the case here.

Where it goes wrong. Applying the no-write-down rule for raw materials even though the finished goods are expected to be loss-making.

Authority. AS 2 para 24

Question 18 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A chemical process yields joint products X and Y. Joint conversion cost up to split-off is ₹54 lakh. Their relative sales values at split-off are ₹45 lakh and ₹30 lakh respectively. What portion of joint cost is allocated to product X?

A chemical process yields joint products X and Y. Joint conversion cost up to split-off is ₹54 lakh. Their relative sales values at split-off are ₹45 lakh and ₹30 lakh respectively. What portion of joint cost is allocated to product X?

1. ₹27.00 lakh
2. ₹32.40 lakh (correct answer)
3. ₹36.00 lakh
4. ₹21.60 lakh

Answer: B — ₹32.40 lakh

Explanation. Where conversion costs cannot be separately identified, joint costs are allocated on a rational and consistent basis. Relative split-off sales values total ₹75 lakh. Product X therefore receives ₹54 lakh × (₹45 lakh ÷ ₹75 lakh) = ₹32.40 lakh; Y receives the remaining ₹21.60 lakh. Allocating cost equally or using post-completion values when the selected basis is split-off value would not follow the stated allocation basis under AS 2 para 10.

Where it goes wrong. Allocating joint costs equally or using the wrong sales-value stage.

Authority. AS 2 para 10

Question 19 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. A process incurs joint cost of ₹22.50 lakh to produce a main product and an immaterial by-product. The by-product can be sold for ₹3.20 lakh after completion and selling costs of ₹0.70 lakh. What cost remains attributable to the main product?

A process incurs joint cost of ₹22.50 lakh to produce a main product and an immaterial by-product. The by-product can be sold for ₹3.20 lakh after completion and selling costs of ₹0.70 lakh. What cost remains attributable to the main product?

1. ₹22.50 lakh
2. ₹19.30 lakh
3. ₹20.00 lakh (correct answer)
4. ₹21.80 lakh

Answer: C — ₹20.00 lakh

Explanation. The immaterial by-product is measured at NRV: ₹3.20 lakh less ₹0.70 lakh completion and selling costs = ₹2.50 lakh. This NRV is deducted from the joint process cost attributable to the main product, leaving ₹22.50 − ₹2.50 = ₹20.00 lakh. Using the gross selling price would deduct too much because it ignores the costs necessary to realise the by-product's sale value, which form part of its NRV under AS 2 para 10.

Where it goes wrong. Deducting a by-product's gross selling price instead of its net realisable value.

Authority. AS 2 para 10

Question 20 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A machine has a cash purchase price of ₹60.00 lakh, recoverable GST of ₹10.80 lakh, non-refundable customs duty of ₹3.00 lakh, delivery ₹1.20 lakh, installation ₹2.40 lakh, directly attributable installation staff cost ₹0.80 lakh, testing cost ₹1.40 lakh less sample-sale proceeds ₹0.20 lakh, professional fees ₹0.50 lakh and present value of dismantling obligation ₹4.00 lakh. Maintenance contract ₹1.10 lakh, start-up losses ₹2.00 lakh and general administration ₹0.80 lakh were also incurred. What is the initial PPE cost?

A machine has a cash purchase price of ₹60.00 lakh, recoverable GST of ₹10.80 lakh, non-refundable customs duty of ₹3.00 lakh, delivery ₹1.20 lakh, installation ₹2.40 lakh, directly attributable installation staff cost ₹0.80 lakh, testing cost ₹1.40 lakh less sample-sale proceeds ₹0.20 lakh, professional fees ₹0.50 lakh and present value of dismantling obligation ₹4.00 lakh. Maintenance contract ₹1.10 lakh, start-up losses ₹2.00 lakh and general administration ₹0.80 lakh were also incurred. What is the initial PPE cost?

1. ₹71.90 lakh
2. ₹78.20 lakh
3. ₹72.30 lakh
4. ₹73.10 lakh (correct answer)

Answer: D — ₹73.10 lakh

Explanation. The capitalised amount is ₹60.00 + ₹3.00 + ₹1.20 + ₹2.40 + ₹0.80 + (₹1.40 − ₹0.20) + ₹0.50 + ₹4.00 = ₹73.10 lakh. Recoverable GST is excluded, while non-refundable duty, directly attributable delivery, installation, staff and professional costs, net testing costs and the initial dismantling estimate are included. Routine maintenance, start-up losses and general administration are expensed. Option (a) omits the restoration component.

Where it goes wrong. Including recoverable tax or operating costs, or omitting the present value of the dismantling obligation.

Authority. AS 10 paras 16-21

Question 21 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A conveyor's motor component originally cost ₹30 lakh and had a six-year useful life with nil residual value. After four years, it is replaced by a new qualifying motor costing ₹42 lakh. What is the net increase in the conveyor's carrying amount on replacement, before depreciation of the new motor?

A conveyor's motor component originally cost ₹30 lakh and had a six-year useful life with nil residual value. After four years, it is replaced by a new qualifying motor costing ₹42 lakh. What is the net increase in the conveyor's carrying amount on replacement, before depreciation of the new motor?

1. ₹32.00 lakh (correct answer)
2. ₹42.00 lakh
3. ₹22.00 lakh
4. ₹52.00 lakh

Answer: A — ₹32.00 lakh

Explanation. The old motor's annual depreciation is ₹30 lakh ÷ 6 = ₹5 lakh. After four years, its carrying amount is ₹30 − ₹20 = ₹10 lakh. The new motor is capitalised at ₹42 lakh and the old component is derecognised at ₹10 lakh, so the net increase is ₹32 lakh. The fact that the old component might not have been separately presented in the fixed-asset register does not permit its carrying amount to remain recognised.

Where it goes wrong. Recording the new component without derecognising the carrying amount of the replaced component.

Authority. AS 10 paras 13-15; AS 10 para 78

Question 22 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. An asset costing ₹120 lakh was depreciated straight-line over 12 years with nil residual value. After four years, the useful life is revised to five more years and residual value is revised to ₹10 lakh. What is the revised annual depreciation charge?

An asset costing ₹120 lakh was depreciated straight-line over 12 years with nil residual value. After four years, the useful life is revised to five more years and residual value is revised to ₹10 lakh. What is the revised annual depreciation charge?

1. ₹12.00 lakh
2. ₹14.00 lakh (correct answer)
3. ₹16.00 lakh
4. ₹18.00 lakh

Answer: B — ₹14.00 lakh

Explanation. Original annual depreciation was ₹120 lakh ÷ 12 = ₹10 lakh. After four years, carrying amount is ₹120 − ₹40 = ₹80 lakh. The revised depreciable amount is ₹80 − ₹10 residual value = ₹70 lakh. Allocating this amount over the revised remaining useful life of five years gives annual depreciation of ₹14 lakh. The revised estimates are applied prospectively; the original depreciation charge is not recalculated for prior years, in accordance with AS 10 para 53.

Where it goes wrong. Restating prior depreciation or spreading original cost rather than the remaining depreciable amount.

Authority. AS 10 paras 52-53

Question 23 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A machine costing ₹72 lakh had an original residual value of ₹6 lakh and useful life of eight years under straight-line depreciation. After three years, the carrying amount is ₹47.25 lakh and residual value is revised to ₹2.25 lakh. A changed consumption pattern supports units-of-production depreciation; 9,000 units are produced this year out of 30,000 expected remaining units. What is this year's depreciation?

A machine costing ₹72 lakh had an original residual value of ₹6 lakh and useful life of eight years under straight-line depreciation. After three years, the carrying amount is ₹47.25 lakh and residual value is revised to ₹2.25 lakh. A changed consumption pattern supports units-of-production depreciation; 9,000 units are produced this year out of 30,000 expected remaining units. What is this year's depreciation?

1. ₹9.00 lakh
2. ₹11.25 lakh
3. ₹13.50 lakh (correct answer)
4. ₹15.75 lakh

Answer: C — ₹13.50 lakh

Explanation. The revised depreciable amount at the start of the year is ₹47.25 − ₹2.25 = ₹45.00 lakh. Under units of production, 9,000 of 30,000 remaining units represent 30% of the remaining depreciable amount; depreciation is ₹45.00 × 30% = ₹13.50 lakh. A straight-line charge based on five remaining years would be ₹9.00 lakh, but it no longer reflects the revised consumption pattern. The method change is prospective under AS 10 para 63.

Where it goes wrong. Continuing with straight-line depreciation after evidence shows a materially different consumption pattern.

Authority. AS 10 paras 62-64

Question 24 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A revalued PPE item has carrying amount ₹75 lakh (gross cost ₹120 lakh less accumulated depreciation ₹45 lakh) and fair value ₹60 lakh. A credit balance of ₹11 lakh exists in revaluation surplus for this same asset. What amount of the revaluation decrease is charged to the Statement of Profit and Loss?

A revalued PPE item has carrying amount ₹75 lakh (gross cost ₹120 lakh less accumulated depreciation ₹45 lakh) and fair value ₹60 lakh. A credit balance of ₹11 lakh exists in revaluation surplus for this same asset. What amount of the revaluation decrease is charged to the Statement of Profit and Loss?

1. ₹15.00 lakh
2. ₹11.00 lakh
3. Nil
4. ₹4.00 lakh (correct answer)

Answer: D — ₹4.00 lakh

Explanation. The decrease is ₹75 − ₹60 = ₹15 lakh. Under AS 10 para 43, it is debited first against any credit balance in revaluation surplus relating to that same asset. The available surplus absorbs ₹11 lakh, leaving ₹4 lakh to be charged to the Statement of Profit and Loss. The full ₹15 lakh is not expensed immediately because the asset-specific reserve must be used first; reserves relating to other assets cannot be used.

Where it goes wrong. Charging the full decline to profit or loss without using the revaluation surplus for the same asset.

Authority. AS 10 para 43

Question 25 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. An item of PPE with carrying amount ₹18.40 lakh is retired from active use and held for disposal. Its net realisable value at that date is ₹16.90 lakh. What carrying amount should be shown immediately after retirement, and what is the immediate write-down?

An item of PPE with carrying amount ₹18.40 lakh is retired from active use and held for disposal. Its net realisable value at that date is ₹16.90 lakh. What carrying amount should be shown immediately after retirement, and what is the immediate write-down?

1. ₹18.40 lakh carrying amount; nil write-down
2. ₹16.90 lakh carrying amount; nil write-down
3. ₹16.90 lakh carrying amount; ₹1.50 lakh write-down (correct answer)
4. ₹18.40 lakh carrying amount; ₹1.50 lakh write-down

Answer: C — ₹16.90 lakh carrying amount; ₹1.50 lakh write-down

Explanation. An item retired from active use and held for disposal is measured at the lower of carrying amount and NRV. The lower amount is ₹16.90 lakh, so an immediate write-down of ₹18.40 − ₹16.90 = ₹1.50 lakh is recognised in the Statement of Profit and Loss. Depreciation ceases from the earlier of retirement while held for disposal and derecognition. Retaining the old carrying amount would overstate PPE under AS 10 para 73.

Where it goes wrong. Keeping PPE at its former carrying amount after retirement even though NRV is lower.

Authority. AS 10 para 73; AS 10 para 57