Chapter 6: Liabilities Based Accounting Standards - Test 1: answer key

Question 1 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · medium

Scenario. Vardhan Chemicals Ltd. prepares its financial statements for the year ended 31 March 2026. It has 120 permanent employees. Gross salaries and wages earned during 2025-26 were ₹96,00,000, of which ₹91,20,000 was paid by 31 March 2026; the balance was paid in April 2026. Average daily salary for leave measurement is ₹2,000. Each employee is entitled to 30 days earned leave per year; unused leave accumulates and is encashable on resignation (vesting). At 31 March 2026, average unused earned leave is 6 days per employee. Based on past pattern, the company expects 15 employees to resign and encash 5 days each, and the remaining 105 employees to use 4 days each during 2026-27; the rest of the accumulated balance is not expected to be availed or encashed. The company has a profit-sharing plan requiring payment of 8% of net profit before bonus to employees serving throughout the year. Net profit before bonus for 2025-26 is ₹1,50,00,000. The company estimates staff turnover will reduce the payout to 7.25% of net profit. The amount is payable by June 2026. The company contributes 12% of gross salaries to a recognised provident fund. It deposited ₹10,50,000 with the fund during the year; the balance was deposited in April 2026. There is no further obligation beyond the contribution.

For the year ended 31 March 2026, what amount should Vardhan Chemicals Ltd. recognise as short-term employee-benefit expense and related unpaid liability for salaries and wages?

1. Expense ₹96,00,000; liability ₹4,80,000 (correct answer)
2. Expense ₹91,20,000; liability ₹4,80,000
3. Expense ₹96,00,000; liability ₹91,20,000
4. Expense ₹91,20,000; liability ₹Nil

Answer: A — Expense ₹96,00,000; liability ₹4,80,000

Explanation. AS 15 requires recognition of the undiscounted short-term employee benefit attributable to services already rendered. The expense is gross salary earned ₹96,00,000. Since ₹91,20,000 is paid, the unpaid balance ₹4,80,000 is a current liability; payment after year-end does not defer expense.

Where it goes wrong. Using cash paid as expense or ignoring unpaid salary.

Authority. AS 15 (Revised 2005), paras 7.2 and 9-10

Question 2 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · hard

What is the liability for accumulating compensated absences at 31 March 2026?

1. ₹14,40,000
2. ₹8,40,000
3. ₹9,90,000 (correct answer)
4. ₹1,50,000

Answer: C — ₹9,90,000

Explanation. For accumulating compensated absences, measure the expected additional payment for unused entitlement at the balance sheet date. Expected days = 15 × 5 + 105 × 4 = 495 days. At ₹2,000 per day, liability = ₹9,90,000. The full 720 unused days is a trap; only expected availing/encashment is given.

Where it goes wrong. Valuing all 720 unused days instead of expected 495 days.

Authority. AS 15 (Revised 2005), paras 11-12

Question 3 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · hard

What liability should be recognised for the profit-sharing plan at 31 March 2026?

1. ₹12,00,000
2. ₹10,87,500 (correct answer)
3. ₹10,50,000
4. ₹11,25,000

Answer: B — ₹10,87,500

Explanation. AS 15 requires recognition when a present obligation exists and a reliable estimate can be made. The expected payout is 7.25% of ₹1,50,00,000 = ₹10,87,500. The 8% formula gives ₹12,00,000, but the staff turnover estimate reduces the expected cost.

Where it goes wrong. Applying 8% without adjusting for estimated staff turnover.

Authority. AS 15 (Revised 2005), paras 17-19

Question 4 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · medium

For the recognised provident fund, what amount is charged to profit or loss and what is the unpaid liability at 31 March 2026?

1. Expense ₹11,52,000; liability ₹1,02,000 (correct answer)
2. Expense ₹10,50,000; liability ₹Nil
3. Expense ₹11,52,000; liability ₹11,52,000
4. Expense ₹10,50,000; liability ₹1,02,000

Answer: A — Expense ₹11,52,000; liability ₹1,02,000

Explanation. A defined contribution plan expense is the employer contribution due, not the cash deposited. Contribution = 12% × ₹96,00,000 = ₹11,52,000. Unpaid amount = ₹11,52,000 − ₹10,50,000 = ₹1,02,000. No actuarial valuation is done; fund shortfall is employee risk.

Where it goes wrong. Recognising only cash deposited or treating fund shortfall as employer liability.

Authority. AS 15 (Revised 2005), paras 44-47

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

Scenario. Zenith Technologies Pvt Ltd. has 150 employees and closes its accounts on 31 March 2026. The average daily basic salary for leave valuation is ₹1,800. Each employee is entitled to 18 days of paid leave per year. The leave accumulates but is non-vesting: employees are not entitled to cash for unused leave on leaving. At 31 March 2026, the average unused accumulated leave is 4 days per employee. Past experience indicates that 8% of employees will leave before using the accumulated leave; the remaining employees are expected to use the full accumulated leave during 2026-27. Sick leave is non-accumulating and is granted at 10 days per employee per year. During 2025-26, employees actually availed 400 sick-leave days. The company has a profit-sharing plan requiring payment of 5% of net profit before bonus to employees who serve throughout the year. Net profit before bonus is ₹80,00,000. The company estimates that staff turnover will reduce the payout to 4.5% of net profit. Employer provident fund contribution is 10% of basic salary of ₹50,00,000. The company deposited ₹4,20,000 with the provident fund by 31 March 2026; the balance was deposited in April 2026. The plan is a defined contribution plan and the company has no further obligation beyond its contribution. All amounts are material and no other employee-benefit schemes are relevant.

What amount should Zenith Technologies Pvt Ltd. recognise for non-accumulating sick leave for 2025-26?

1. Expense ₹7,20,000; liability for unused sick leave ₹Nil (correct answer)
2. Expense ₹7,20,000; liability ₹90,000
3. Expense ₹Nil; liability ₹7,20,000
4. Expense ₹8,10,000; liability ₹90,000

Answer: A — Expense ₹7,20,000; liability for unused sick leave ₹Nil

Explanation. Non-accumulating sick leave is expensed when the absence occurs; unused entitlement creates no liability. Expense = 400 days × ₹1,800 = ₹7,20,000. No provision is made for 10 unused days per employee because the benefit cannot be carried forward.

Where it goes wrong. Creating a provision for unused non-accumulating sick leave.

Authority. AS 15 (Revised 2005), para 16

Question 6 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · hard

What is the liability for accumulating non-vesting paid leave at 31 March 2026?

1. ₹10,80,000
2. ₹9,93,600 (correct answer)
3. ₹9,00,000
4. ₹8,64,000

Answer: B — ₹9,93,600

Explanation. Non-vesting accumulating leave liability considers the possibility of employees leaving before use. Expected cost = 150 × 4 × ₹1,800 × 92% = ₹9,93,600. The gross ₹10,80,000 ignores the 8% expected attrition.

Where it goes wrong. Ignoring probability of employees leaving before using non-vesting leave.

Authority. AS 15 (Revised 2005), paras 12-14

Question 7 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · medium

What amount should be recognised as liability for the profit-sharing plan at 31 March 2026?

1. ₹4,00,000
2. ₹3,42,000
3. ₹3,00,000
4. ₹3,60,000 (correct answer)

Answer: D — ₹3,60,000

Explanation. Profit-sharing liability is the expected payout under the present obligation. 4.5% × ₹80,00,000 = ₹3,60,000. The 5% formula gives ₹4,00,000, but the turnover-adjusted estimate is used because it better measures the expected cost.

Where it goes wrong. Using the 5% formula without turnover adjustment.

Authority. AS 15 (Revised 2005), paras 17-19

Question 8 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · hard

For the employer provident fund contribution, what is the expense and unpaid liability at 31 March 2026?

1. Expense ₹4,20,000; liability ₹Nil
2. Expense ₹5,00,000; liability ₹5,00,000
3. Expense ₹5,00,000; liability ₹80,000 (correct answer)
4. Expense ₹4,20,000; liability ₹80,000

Answer: C — Expense ₹5,00,000; liability ₹80,000

Explanation. Employer PF contribution is a defined contribution expense = 10% × ₹50,00,000 = ₹5,00,000. Cash deposited is ₹4,20,000, leaving an unpaid liability of ₹80,000. The employer has no further obligation beyond contribution.

Where it goes wrong. Expensing only cash deposited or ignoring unpaid contribution.

Authority. AS 15 (Revised 2005), paras 44-47

Question 9 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · medium

Scenario. Classify the following employee benefits in the correct AS 15 order: (i) wages payable within 12 months; (ii) gratuity; (iii) sabbatical leave after 10 years of service; (iv) voluntary retirement compensation.

Classify the following employee benefits in the correct AS 15 order: (i) wages payable within 12 months; (ii) gratuity; (iii) sabbatical leave after 10 years of service; (iv) voluntary retirement compensation.

1. Short-term; other long-term; post-employment; termination
2. Post-employment; short-term; termination; other long-term
3. Short-term; termination; post-employment; other long-term
4. Short-term; post-employment; other long-term; termination (correct answer)

Answer: D — Short-term; post-employment; other long-term; termination

Explanation. AS 15 categorises wages due within 12 months as short-term, gratuity as post-employment, sabbatical after long service as other long-term, and VRS as termination benefits. The correct sequence is short-term, post-employment, other long-term, termination.

Where it goes wrong. Treating sabbatical leave as post-employment or VRS as short-term.

Authority. AS 15 (Revised 2005), para 7

Question 10 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · hard

Scenario. A company has 80 employees, each with 10 days of unused vesting accumulated leave at year-end. Average daily salary is ₹1,250. All 800 days are expected to be availed or encashed; no leave is expected to lapse. What liability should be recognised?

A company has 80 employees, each with 10 days of unused vesting accumulated leave at year-end. Average daily salary is ₹1,250. All 800 days are expected to be availed or encashed; no leave is expected to lapse. What liability should be recognised?

1. ₹9,00,000
2. ₹10,00,000 (correct answer)
3. ₹8,00,000
4. ₹11,00,000

Answer: B — ₹10,00,000

Explanation. Vesting accumulating leave creates a liability for unused entitlement. Since all 800 days are expected to be availed or encashed, liability = 800 × ₹1,250 = ₹10,00,000. Vesting means no reduction for employee turnover.

Where it goes wrong. Reducing the liability for expected employee turnover despite vesting.

Authority. AS 15 (Revised 2005), paras 12-13

Question 11 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · medium

Scenario. During 2025-26, 25 employees of a company availed 60 days each of non-accumulating maternity leave. Average daily salary is ₹2,000. Ten employees have 5 unused days each at year-end. What expense and liability should be recognised?

During 2025-26, 25 employees of a company availed 60 days each of non-accumulating maternity leave. Average daily salary is ₹2,000. Ten employees have 5 unused days each at year-end. What expense and liability should be recognised?

1. Expense ₹30,00,000; liability ₹1,00,000
2. Expense ₹31,00,000; liability ₹Nil
3. Expense ₹30,00,000; liability ₹Nil (correct answer)
4. Expense ₹Nil; liability ₹31,00,000

Answer: C — Expense ₹30,00,000; liability ₹Nil

Explanation. Non-accumulating maternity leave is recognised as expense when availed. Expense = 25 × 60 × ₹2,000 = ₹30,00,000. Unused 5 days for 10 employees cannot be carried forward, so no liability is recognised.

Where it goes wrong. Providing for unused non-accumulating leave.

Authority. AS 15 (Revised 2005), para 16

Question 12 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · hard

Scenario. A company has a profit-sharing plan requiring payment of 8% of net profit before bonus to employees serving throughout the year. Net profit before bonus is ₹75,00,000. Estimated staff turnover will reduce the payout to 7.5%. What liability should be recognised?

A company has a profit-sharing plan requiring payment of 8% of net profit before bonus to employees serving throughout the year. Net profit before bonus is ₹75,00,000. Estimated staff turnover will reduce the payout to 7.5%. What liability should be recognised?

1. ₹5,62,500 (correct answer)
2. ₹6,00,000
3. ₹5,25,000
4. ₹4,50,000

Answer: A — ₹5,62,500

Explanation. The bonus plan creates a present obligation and reliable estimate. Expected payout = 7.5% × ₹75,00,000 = ₹5,62,500. Applying 8% gives ₹6,00,000, but the turnover-adjusted expected cost must be used.

Where it goes wrong. Using the formula rate without reducing for expected staff turnover.

Authority. AS 15 (Revised 2005), paras 17-19

Question 13 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · hard

Scenario. An employer contributes a fixed 12% of salary to a defined contribution plan. At year-end, the plan assets have fallen and are insufficient to pay expected benefits. How should the employer account for the shortfall?

An employer contributes a fixed 12% of salary to a defined contribution plan. At year-end, the plan assets have fallen and are insufficient to pay expected benefits. How should the employer account for the shortfall?

1. Recognise an additional liability equal to the shortfall
2. Recognise a contingent liability and disclose it
3. Recognise an additional expense only if the fund requests contribution
4. Recognise no additional liability; contribution due is the expense (correct answer)

Answer: D — Recognise no additional liability; contribution due is the expense

Explanation. Under a defined contribution plan, the employer's obligation is the fixed contribution. Actuarial and investment risk fall on the employee; a decline in plan assets does not create an additional employer liability. Expense equals contribution due for the period.

Where it goes wrong. Treating a defined contribution plan like a defined benefit plan.

Authority. AS 15 (Revised 2005), paras 44-47

Question 14 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · hard

Scenario. A company has 300 employees with an average 5 days of unused non-vesting accumulated leave each. Daily salary is ₹1,400. Past experience indicates 12% will leave before use and only 80% of accumulated leave is expected to be used. What liability should be recognised?

A company has 300 employees with an average 5 days of unused non-vesting accumulated leave each. Daily salary is ₹1,400. Past experience indicates 12% will leave before use and only 80% of accumulated leave is expected to be used. What liability should be recognised?

1. ₹21,00,000
2. ₹18,48,000
3. ₹14,78,400 (correct answer)
4. ₹16,80,000

Answer: C — ₹14,78,400

Explanation. Expected cost = 300 × 5 × ₹1,400 × 88% × 80% = ₹14,78,400. Apply probability of employees leaving before use and probability of expected utilisation. Using full 1,500 days gives ₹21,00,000; omitting either probability overstates the liability.

Where it goes wrong. Ignoring either attrition probability or expected utilisation percentage.

Authority. AS 15 (Revised 2005), paras 12-14

Question 15 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · medium

Scenario. A company earned salary expense of ₹24,00,000 for 2025-26 but paid ₹25,50,000 during the year. What is the correct accounting treatment at year-end?

A company earned salary expense of ₹24,00,000 for 2025-26 but paid ₹25,50,000 during the year. What is the correct accounting treatment at year-end?

1. Expense ₹25,50,000; no prepayment
2. Expense ₹24,00,000; prepayment ₹1,50,000 (correct answer)
3. Expense ₹24,00,000; liability ₹1,50,000
4. Expense ₹25,50,000; liability ₹1,50,000

Answer: B — Expense ₹24,00,000; prepayment ₹1,50,000

Explanation. Short-term benefits are expensed when service is rendered. Expense is ₹24,00,000. Payment of ₹25,50,000 creates a prepayment of ₹1,50,000, not additional expense. The excess payment is an asset.

Where it goes wrong. Expensing cash paid instead of salary earned.

Authority. AS 15 (Revised 2005), paras 9-10

Question 16 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · hard

Scenario. An employee has 60 days of carried-forward earned leave. Company rules allow encashment/utilisation of only 20 days during the next 12 months, and the balance is not expected to be used within that period. How should this be treated under AS 15?

An employee has 60 days of carried-forward earned leave. Company rules allow encashment/utilisation of only 20 days during the next 12 months, and the balance is not expected to be used within that period. How should this be treated under AS 15?

1. Treat all 60 days as a short-term employee benefit
2. Treat all 60 days as a termination benefit
3. Treat all 60 days as a defined contribution obligation
4. Treat 20 days as short-term and 40 days as other long-term benefit (correct answer)

Answer: D — Treat 20 days as short-term and 40 days as other long-term benefit

Explanation. AS 15 treats compensated absence as short-term only when it falls due and is expected to occur within 12 months. Only 20 days qualify; 40 days restricted beyond 12 months are an other long-term employee benefit.

Where it goes wrong. Classifying all carried-forward leave as short-term.

Authority. AS 15 (Revised 2005), paras 7.2 and 8(b)

Question 17 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · hard

Scenario. At year-end, 200 days of unused leave are vesting and expected to be availed or encashed. Daily salary is ₹1,500. The employer estimates 10% of employees may leave before availing leave. What liability should be recognised?

At year-end, 200 days of unused leave are vesting and expected to be availed or encashed. Daily salary is ₹1,500. The employer estimates 10% of employees may leave before availing leave. What liability should be recognised?

1. ₹2,70,000
2. ₹2,85,000
3. ₹3,00,000 (correct answer)
4. ₹3,15,000

Answer: C — ₹3,00,000

Explanation. Vesting leave entitles cash on leaving; expected cost of all 200 unused days = 200 × ₹1,500 = ₹3,00,000. No turnover reduction applies because vesting entitlement is not forfeited. Deducting 10% would wrongly treat it as non-vesting.

Where it goes wrong. Applying non-vesting turnover probability to vesting leave.

Authority. AS 15 (Revised 2005), paras 12-13

Question 18 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · hard

Scenario. Gross salary is ₹20,00,000. Employee and employer each contribute 12% to a provident fund. The company paid ₹4,50,000 to the fund during the year. What is the employer's expense and the liability to the fund at year-end?

Gross salary is ₹20,00,000. Employee and employer each contribute 12% to a provident fund. The company paid ₹4,50,000 to the fund during the year. What is the employer's expense and the liability to the fund at year-end?

1. Expense ₹2,40,000; liability ₹Nil
2. Expense ₹2,40,000; liability ₹30,000 (correct answer)
3. Expense ₹4,80,000; liability ₹30,000
4. Expense ₹2,40,000; liability ₹2,40,000

Answer: B — Expense ₹2,40,000; liability ₹30,000

Explanation. Employer expense is its own contribution = 12% × ₹20,00,000 = ₹2,40,000. Total PF payable (employee + employer) = ₹4,80,000; paid ₹4,50,000, leaving liability ₹30,000. Employee contribution is not employer expense.

Where it goes wrong. Expensing employee contribution or ignoring total unpaid PF.

Authority. AS 15 (Revised 2005), paras 44-47

Question 19 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · medium

Scenario. A company's board merely intends to pay a discretionary bonus at year-end. There is no formula and no consistent past practice creating a constructive obligation. What is the AS 15 treatment?

A company's board merely intends to pay a discretionary bonus at year-end. There is no formula and no consistent past practice creating a constructive obligation. What is the AS 15 treatment?

1. No provision; present obligation and reliable estimate are absent (correct answer)
2. Provide the maximum possible bonus as a liability
3. Provide 50% of the expected bonus as a conservative estimate
4. Disclose it as a defined benefit obligation

Answer: A — No provision; present obligation and reliable estimate are absent

Explanation. Discretionary bonus without a formula or consistent past practice lacks a present obligation and reliable estimate at year-end. AS 15 recognition conditions are not met, so no provision is made. A mere board intention does not create a liability.

Where it goes wrong. Providing for discretionary bonus based only on intention.

Authority. AS 15 (Revised 2005), paras 17-19

Question 20 · 2 marks · Chapter 6: Liabilities Based Accounting Standards · hard

Scenario. A company has 40 employees with 3 days of unused accumulating leave each. Daily salary is ₹1,000. Five employees are expected to leave and encash all 3 days each; the remaining 35 employees are expected to use 2 days each. What liability should be recognised?

A company has 40 employees with 3 days of unused accumulating leave each. Daily salary is ₹1,000. Five employees are expected to leave and encash all 3 days each; the remaining 35 employees are expected to use 2 days each. What liability should be recognised?

1. ₹1,20,000
2. ₹85,000 (correct answer)
3. ₹70,000
4. ₹1,05,000

Answer: B — ₹85,000

Explanation. Expected days = 5 employees × 3 encash days + 35 employees × 2 use days = 15 + 70 = 85 days. Liability = 85 × ₹1,000 = ₹85,000. Using all 120 unused days ignores the expected utilisation/encashment pattern.

Where it goes wrong. Valuing all 120 unused days instead of expected 85 days.

Authority. AS 15 (Revised 2005), paras 12-13