Chapter 10: Consolidated Financial Statements - Test 5: answer key

Question 1 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Sterling Infrastructure Ltd. (SIL), an Indian infrastructure company, participates in three different collaborative projects during 2026-27. Its finance director must determine the appropriate accounting for each arrangement under AS 27. In the first arrangement, SIL and Horizon Engineering Ltd. entered into a written agreement to manufacture industrial equipment jointly. No separate company, partnership or other legal entity was formed. SIL uses its existing manufacturing facility and employees, raises its own finance and incurs its own production expenses. The agreement provides that SIL receives 35% of total project revenue of ₹80 lakh. SIL incurred direct project expenses of ₹22 lakh during the year. Each venturer records its own transactions in its individual accounting records. In the second arrangement, SIL and Meridian Energy Ltd. jointly own and operate a pipeline. No separate legal entity exists. The pipeline has a carrying amount of ₹80 lakh, and SIL has a 35% ownership interest. A bank loan of ₹20 lakh was jointly incurred for constructing the pipeline, and the agreement specifies that SIL is responsible for 35% of the loan. Maintenance expenses and revenue from pipeline usage are also shared under the contractual arrangement. In the third arrangement, SIL and Nova Power Ltd. incorporated Sterling-Nova Transmission Ltd. to construct and operate a transmission network. The newly incorporated company purchases assets, enters into contracts, raises borrowings and earns revenue in its own name. SIL holds 50% of its ownership interest. The contractual agreement requires unanimous consent for decisions relating to operating budgets, financing and major capital expenditure. Neither venturer can independently determine these policies. All three arrangements are commercially active at 31 March 2027. The financial controller has proposed accounting for all three as investments because external parties are involved in each project. The audit committee requests an assessment of their classification and the recognition requirements applicable to SIL.

How should SIL's arrangement with Horizon Engineering Ltd. be classified under AS 27?

1. Jointly controlled operation because the venturers use their own assets and resources. (correct answer)
2. Jointly controlled asset because both venturers use the same manufacturing facility.
3. Jointly controlled entity because the parties share the project's operating revenue.
4. Associate arrangement because the parties independently incur production expenses.

Answer: A — Jointly controlled operation because the venturers use their own assets and resources.

Explanation. A jointly controlled operation exists where venturers undertake an activity using their own assets, employees and resources without establishing a separate legal entity. SIL uses its existing manufacturing facility, incurs its own expenses and raises its own finance. The agreement merely specifies how project revenue is shared. Under AS 27, paragraphs 10-14, this constitutes a jointly controlled operation. A jointly controlled entity would require the establishment of a separate legal entity.

Where it goes wrong. Assuming that sharing revenue between venturers automatically creates a jointly controlled entity.

Authority. AS 27, paras 3.1-3.6 and 10-14

Question 2 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

What is the profit from the jointly controlled operation that SIL should recognise for 2026-27, after considering its contractual revenue entitlement and direct project expenses?

1. ₹28 lakh
2. ₹22 lakh
3. ₹8 lakh
4. ₹6 lakh (correct answer)

Answer: D — ₹6 lakh

Explanation. SIL's contractual share of project revenue is ₹80 lakh × 35% = ₹28 lakh. Its direct expenses are ₹22 lakh. Therefore, its profit from the jointly controlled operation is ₹28 lakh − ₹22 lakh = ₹6 lakh. Under paragraph 12, the venturer recognises the assets it controls, liabilities it incurs, expenses it incurs and its share of income earned. Including all of project revenue would incorrectly attribute the other venturer's income to SIL.

Where it goes wrong. Recognising the total project revenue instead of only the venturer's contractual share.

Authority. AS 27, paras 12-14

Question 3 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

What amounts should SIL recognise for its interest in the jointly controlled pipeline under the second arrangement?

1. Pipeline ₹80 lakh and loan liability ₹20 lakh.
2. Pipeline ₹28 lakh and loan liability ₹7 lakh. (correct answer)
3. Pipeline ₹35 lakh and loan liability ₹10 lakh.
4. Pipeline ₹45 lakh and loan liability ₹12 lakh.

Answer: B — Pipeline ₹28 lakh and loan liability ₹7 lakh.

Explanation. The pipeline is a jointly controlled asset without a separate legal entity. SIL's share of the pipeline is ₹80 lakh × 35% = ₹28 lakh. Its share of the jointly incurred bank loan is ₹20 lakh × 35% = ₹7 lakh. Under paragraphs 18 and 19, the venturer recognises its share of the jointly controlled asset and its share of jointly incurred liabilities separately. The full pipeline and loan amounts cannot be recognised by SIL because the remaining interests belong to the other venturer.

Where it goes wrong. Applying different ownership concepts incorrectly or recognising the entire joint asset and liability instead of SIL's contractual shares.

Authority. AS 27, paras 15-20

Question 4 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

What is the correct classification and consolidated financial statement treatment of Sterling-Nova Transmission Ltd.?

1. Jointly controlled operation, with only SIL's own operating expenses recognised.
2. Jointly controlled asset, with SIL's share of pipeline assets recognised.
3. Jointly controlled entity, with proportionate consolidation in SIL's consolidated statements. (correct answer)
4. Associate, with equity method accounting for SIL's share of joint venture results.

Answer: C — Jointly controlled entity, with proportionate consolidation in SIL's consolidated statements.

Explanation. SIL and Nova have established a separate incorporated entity that owns assets, incurs liabilities, enters into contracts and earns income. The unanimous-consent requirement establishes joint control because neither venturer can decide the essential financial and operating policies unilaterally. This is a jointly controlled entity under paragraph 21. In consolidated financial statements, paragraph 28 requires proportionate consolidation, subject to its specified exceptions, rather than the equity method applicable to associates.

Where it goes wrong. Confusing the existence of a separate legal entity with an associate or overlooking the contractual joint-control requirement.

Authority. AS 27, paras 3.1-3.6, 21-25 and 28-32

Question 5 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. Zenith Infrastructure Ltd. (ZIL), an Indian infrastructure developer, entered into a contractual joint venture agreement with Apex Engineering Ltd. on 1 April 2026. Both parties established Orion Projects Ltd., a separately incorporated entity, to construct industrial facilities. The agreement provides that ZIL has a 40% interest and the remaining 60% belongs to the other venturer. Decisions concerning financial and operating policies require the consent of both parties. Accordingly, the arrangement constitutes a jointly controlled entity under AS 27. Orion Projects Ltd. maintains separate accounting records and prepares financial statements as at 31 March 2027. Its summarised balance sheet and statement of profit and loss are as follows (₹ lakh). Balance sheet: Property, plant and equipment: ₹120 lakh Inventories: ₹40 lakh Trade receivables: ₹30 lakh Cash and bank balances: ₹10 lakh Long-term borrowings: ₹70 lakh Trade payables: ₹25 lakh Other current liabilities: ₹15 lakh Equity and reserves: ₹90 lakh Statement of profit and loss: Revenue from operations: ₹150 lakh Cost of sales: ₹90 lakh Employee benefit expenses: ₹24 lakh Depreciation: ₹12 lakh Finance costs: ₹8 lakh ZIL's own consolidated financial statements, before incorporating its joint venture interest, include property, plant and equipment of ₹300 lakh, trade payables of ₹45 lakh and revenue from operations of ₹500 lakh. Its separate financial statements record the investment in Orion Projects Ltd. at a cost of ₹55 lakh. Both entities have the same reporting date and follow uniform accounting policies. There are no intragroup balances, transactions, unrealised profits or other consolidation adjustments. ZIL intends to prepare consolidated financial statements under the proportionate consolidation method, and the audit team requires the appropriate proportionate figures for the balance sheet and statement of profit and loss.

What amount of property, plant and equipment should be reported in ZIL's consolidated financial statements after proportionate consolidation of Orion Projects Ltd.?

1. ₹300 lakh
2. ₹420 lakh
3. ₹396 lakh
4. ₹348 lakh (correct answer)

Answer: D — ₹348 lakh

Explanation. ZIL's share of Orion's property, plant and equipment is ₹120 lakh × 40% = ₹48 lakh. This is added to ZIL's existing PPE of ₹300 lakh, resulting in consolidated PPE of ₹348 lakh. Under paragraphs 29 and 30, proportionate consolidation recognises the venturer's share of jointly controlled assets, not the entire asset balance. The ₹420 lakh distractor adds all of Orion's PPE and ignores ZIL's 40% interest.

Where it goes wrong. Consolidating all of the joint venture's PPE rather than the venturer's proportionate interest.

Authority. AS 27, paras 28-32

Question 6 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Determine the trade payables balance to be shown in ZIL's consolidated balance sheet after incorporating its share of Orion Projects Ltd.'s trade payables.

1. ₹55 lakh (correct answer)
2. ₹70 lakh
3. ₹45 lakh
4. ₹65 lakh

Answer: A — ₹55 lakh

Explanation. ZIL's proportionate share of Orion's trade payables is ₹25 lakh × 40% = ₹10 lakh. This is added to ZIL's own trade payables of ₹45 lakh. Consequently, consolidated trade payables are ₹55 lakh. Paragraph 30 requires the venturer to include its share of liabilities for which it is jointly responsible. The ₹70 lakh alternative incorrectly uses the full amount of Orion's trade payables instead of the 40% contractual share.

Where it goes wrong. Adding the joint venture's entire trade payable balance instead of recognising the venturer's proportionate liability.

Authority. AS 27, paras 28-32

Question 7 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

What revenue from operations should ZIL report in its consolidated statement of profit and loss after incorporating its interest in Orion Projects Ltd.?

1. ₹500 lakh
2. ₹650 lakh
3. ₹560 lakh (correct answer)
4. ₹620 lakh

Answer: C — ₹560 lakh

Explanation. ZIL's share of Orion's revenue is ₹150 lakh × 40% = ₹60 lakh. The amount is added to ZIL's own revenue of ₹500 lakh, resulting in consolidated revenue of ₹560 lakh. Under proportionate consolidation, the venturer includes its share of each income item separately rather than recording only a single share of net profit. The ₹650 lakh alternative incorrectly adds the entire joint venture revenue.

Where it goes wrong. Recognising the whole joint venture's revenue or using the net profit percentage instead of the agreed interest.

Authority. AS 27, paras 29-32

Question 8 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

What is ZIL's proportionate share of Orion Projects Ltd.'s profit before tax to be incorporated in consolidated financial performance?

1. ₹16.00 lakh
2. ₹6.40 lakh (correct answer)
3. ₹9.60 lakh
4. ₹4.80 lakh

Answer: B — ₹6.40 lakh

Explanation. Orion's profit before tax is ₹150 lakh − ₹90 lakh − ₹24 lakh − ₹12 lakh − ₹8 lakh = ₹16 lakh. ZIL's contractual share is ₹16 lakh × 40% = ₹6.40 lakh. This represents the net contribution of Orion's proportionately consolidated income and expense lines to ZIL's profit before tax. The ₹16 lakh distractor incorrectly includes the entire JV result, while ₹9.60 lakh would incorrectly use the other venturers' 60% interest.

Where it goes wrong. Applying the other venturers' ownership percentage or recognising the entire joint venture profit.

Authority. AS 27, paras 28-32

Question 9 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. Vardhan Mining Ltd. (VML) holds a 40% interest in Vardhan-Delta Resources Ltd., a jointly controlled entity established under a written agreement with another mining enterprise. Both venturers share control, and the entity prepares its own financial statements. The following transactions occurred during 2026-27. On 1 October 2026, VML transferred a haulage truck to the joint venture. The truck had a carrying amount of ₹22 lakh immediately before transfer and was transferred for an agreed fair value of ₹30 lakh. VML recognised a gain of ₹8 lakh in its separate financial statements. The significant risks and rewards of ownership were transferred, and the truck continued to be used by the joint venture at 31 March 2027. No impairment was identified. On 1 December 2026, the joint venture sold inventory to VML for ₹15 lakh. The inventory had cost the joint venture ₹12 lakh. At the reporting date, 60% of the goods remained unsold in VML's closing inventory. The balance had been sold to independent customers before 31 March 2027. VML had not made any adjustment to the inventory or the profit recognised by the joint venture. Additionally, on 15 February 2027, VML contributed raw materials to the joint venture. Their carrying amount immediately before contribution was ₹10 lakh, while their net realisable value had fallen to ₹8.50 lakh. The decline was supported by market quotations and reflected a permanent reduction in recoverable value. The materials were retained by the joint venture at the reporting date. VML's finance director proposes recognising all transaction gains and losses in full in consolidated financial statements, arguing that the joint venture is a separate legal entity. The statutory auditor disagrees and requires the adjustments to distinguish between the venturer's interest and the interests of other venturers, while also distinguishing consolidated financial statements from VML's separate financial statements.

What gain should VML recognise in its consolidated financial statements from transferring the haulage truck to the joint venture?

1. ₹4.80 lakh (correct answer)
2. ₹8.00 lakh
3. ₹3.20 lakh
4. ₹6.00 lakh

Answer: A — ₹4.80 lakh

Explanation. The transfer gain is ₹30 lakh − ₹22 lakh = ₹8 lakh. VML owns 40% of the joint venture, leaving 60% attributable to the other venturer. Under paragraph 40, where significant risks and rewards have been transferred and the asset remains with the JV, only the portion attributable to other venturers is recognised in consolidated financial statements. Thus, the recognised gain is ₹8 lakh × 60% = ₹4.80 lakh.

Where it goes wrong. Recognising all of an unrealised inter-entity transfer gain in consolidated financial statements.

Authority. AS 27, paras 40 and 43-44

Question 10 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

What amount of gain on the haulage truck transfer should VML recognise in its own separate financial statements?

1. ₹3.20 lakh
2. ₹4.80 lakh
3. ₹6.40 lakh
4. ₹8.00 lakh (correct answer)

Answer: D — ₹8.00 lakh

Explanation. VML's separate financial statements recognise the full sale gain of ₹30 lakh − ₹22 lakh = ₹8 lakh. Paragraphs 43 and 44 distinguish separate financial statements from consolidated financial statements for transactions involving a jointly controlled entity. The restrictions on recognising the venturer's share of unrealised gain apply to consolidation, whereas the full gain or loss is recognised in the venturer's separate financial statements. The ₹4.80 lakh option incorrectly applies the consolidated adjustment to separate accounts.

Where it goes wrong. Applying the consolidated financial statement elimination rule while preparing the venturer's separate financial statements.

Authority. AS 27, paras 43-44

Question 11 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Calculate VML's share of the profit arising from the joint venture's inventory sale that must remain unrecognised in consolidated financial statements at 31 March 2027.

1. ₹1.80 lakh
2. ₹0.72 lakh (correct answer)
3. ₹1.20 lakh
4. ₹0.48 lakh

Answer: B — ₹0.72 lakh

Explanation. The joint venture's profit on the inventory transfer is ₹15 lakh − ₹12 lakh = ₹3 lakh. Since 60% remains unsold, unrealised profit is ₹3 lakh × 60% = ₹1.80 lakh. VML's 40% share of this profit is ₹1.80 lakh × 40% = ₹0.72 lakh. Under paragraph 41, the venturer does not recognise its share of the JV's profit on assets purchased until the assets are resold to an independent party. The remaining 40% of the goods has already been sold externally.

Where it goes wrong. Deferring the entire joint venture profit instead of only the venturer's proportionate share relating to unsold assets.

Authority. AS 27, paras 41 and 43-44

Question 12 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

What amount of loss must VML recognise immediately in consolidated financial statements on its contribution of raw materials to the joint venture?

1. ₹0.60 lakh
2. ₹0.90 lakh
3. ₹1.50 lakh (correct answer)
4. ₹0.75 lakh

Answer: C — ₹1.50 lakh

Explanation. The reduction in the value of raw materials is ₹10 lakh − ₹8.50 lakh = ₹1.50 lakh. This loss is supported by a permanent reduction in net realisable value. Paragraph 40 requires the full amount of a loss to be recognised immediately when the contribution or sale provides evidence of a reduction in NRV of current assets or an impairment loss. Therefore, the entire ₹1.50 lakh is recognised instead of applying the 40% or 60% ownership allocation.

Where it goes wrong. Restricting a loss arising from a genuine reduction in net realisable value to the proportion attributable to other venturers.

Authority. AS 27, paras 40 and 42

Question 13 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Three companies jointly own a large petroleum storage terminal. No separate legal entity is formed. Each company has rights over a specified portion of the terminal's capacity and shares maintenance expenses under a contractual agreement. Which form of joint venture is represented?

Three companies jointly own a large petroleum storage terminal. No separate legal entity is formed. Each company has rights over a specified portion of the terminal's capacity and shares maintenance expenses under a contractual agreement. Which form of joint venture is represented?

1. Jointly controlled operation because each party uses its own separate assets.
2. Jointly controlled entity because the parties share common operating facilities.
3. Associate arrangement because the parties participate in operational decisions.
4. Jointly controlled asset because the parties jointly own and use a specific asset. (correct answer)

Answer: D — Jointly controlled asset because the parties jointly own and use a specific asset.

Explanation. A jointly controlled asset involves joint control or joint ownership of one or more assets used to generate economic benefits for the venturers. The parties take their respective shares of the output and bear the agreed expenses. No separate legal entity is created. This arrangement therefore meets the characteristics of a jointly controlled asset under paragraphs 15-20. A jointly controlled operation would principally involve the use of separate assets and resources belonging to each venturer.

Where it goes wrong. Confusing the joint ownership of a specific asset with the use of separate venturer-owned resources in a jointly controlled operation.

Authority. AS 27, paras 15-20

Question 14 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Pioneer Ltd. participates in a jointly controlled operation. Total project revenue is ₹90 lakh. Under the agreement, Pioneer is entitled to 30% of revenue. It incurs direct project expenses of ₹9 lakh and bears 30% of common project expenses of ₹10 lakh. Calculate the profit recognised by Pioneer from the operation.

Pioneer Ltd. participates in a jointly controlled operation. Total project revenue is ₹90 lakh. Under the agreement, Pioneer is entitled to 30% of revenue. It incurs direct project expenses of ₹9 lakh and bears 30% of common project expenses of ₹10 lakh. Calculate the profit recognised by Pioneer from the operation.

1. ₹27 lakh
2. ₹15 lakh (correct answer)
3. ₹18 lakh
4. ₹24 lakh

Answer: B — ₹15 lakh

Explanation. Pioneer's share of project revenue is ₹90 lakh × 30% = ₹27 lakh. Its direct expenses are ₹9 lakh, and its share of common project expenses is ₹10 lakh × 30% = ₹3 lakh. Total expenses attributable to Pioneer are ₹12 lakh. Therefore, its profit from the jointly controlled operation is ₹27 lakh − ₹12 lakh = ₹15 lakh. Under AS 27, paragraph 12, the venturer recognises its own expenses and its share of the joint venture income.

Where it goes wrong. Deducting all common project expenses instead of only the contractual share attributable to the venturer.

Authority. AS 27, paras 10-14

Question 15 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. A jointly controlled pipeline has a total carrying amount of ₹90 lakh. Venturer A owns 30% of the jointly controlled asset. A jointly incurred liability of ₹24 lakh is shared under the agreement in the ratio of 40% to A. A has additionally borrowed ₹5 lakh in its own name to finance its interest in the asset. Determine the pipeline asset and total liabilities recognised by A.

A jointly controlled pipeline has a total carrying amount of ₹90 lakh. Venturer A owns 30% of the jointly controlled asset. A jointly incurred liability of ₹24 lakh is shared under the agreement in the ratio of 40% to A. A has additionally borrowed ₹5 lakh in its own name to finance its interest in the asset. Determine the pipeline asset and total liabilities recognised by A.

1. Asset ₹27 lakh; liabilities ₹14.60 lakh (correct answer)
2. Asset ₹36 lakh; liabilities ₹12.20 lakh
3. Asset ₹27 lakh; liabilities ₹9.60 lakh
4. Asset ₹90 lakh; liabilities ₹29.00 lakh

Answer: A — Asset ₹27 lakh; liabilities ₹14.60 lakh

Explanation. A's share of the pipeline is ₹90 lakh × 30% = ₹27 lakh. Its share of the jointly incurred liability is ₹24 lakh × 40% = ₹9.60 lakh. The separate borrowing of ₹5 lakh is also A's liability. Hence, total liabilities are ₹9.60 lakh + ₹5 lakh = ₹14.60 lakh. Paragraphs 18 and 19 require recognition of the venturer's share of the jointly controlled asset, its own liabilities and its agreed share of liabilities incurred jointly with other venturers.

Where it goes wrong. Applying the asset ownership percentage automatically to all joint liabilities and omitting the venturer's separately incurred borrowing.

Authority. AS 27, paras 18-20

Question 16 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Two companies establish a separate incorporated company to undertake a manufacturing project. The new company acquires its own machinery, raises finance independently, enters into customer contracts and incurs its own operating expenses. Both original companies have rights to participate jointly in essential financial and operating policy decisions. Which description is most appropriate?

Two companies establish a separate incorporated company to undertake a manufacturing project. The new company acquires its own machinery, raises finance independently, enters into customer contracts and incurs its own operating expenses. Both original companies have rights to participate jointly in essential financial and operating policy decisions. Which description is most appropriate?

1. A jointly controlled operation because both companies use their own manufacturing facilities.
2. A jointly controlled asset because both companies jointly own the machinery.
3. A jointly controlled entity because a separate enterprise operates under joint control. (correct answer)
4. An associate arrangement because each company has an investment in the new company.

Answer: C — A jointly controlled entity because a separate enterprise operates under joint control.

Explanation. A jointly controlled entity involves establishing a corporation, partnership or other separate entity in which each venturer has an interest. The entity itself owns assets, incurs liabilities, raises finance, enters into contracts and earns income. The contractual arrangement establishes joint control over its financial and operating activities. These features distinguish a jointly controlled entity from jointly controlled operations and jointly controlled assets under paragraphs 21-25.

Where it goes wrong. Classifying a separately incorporated joint venture as a jointly controlled asset merely because its venturers hold interests in its underlying assets.

Authority. AS 27, paras 21-25

Question 17 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. A venturer holds a 35% interest in a jointly controlled entity. During the financial year, the entity reports revenue of ₹240 lakh and the following expenses: cost of sales ₹150 lakh, employee expenses ₹30 lakh, depreciation ₹18 lakh, finance costs ₹12 lakh and administrative expenses ₹6 lakh. Which figures should be included in the venturer's consolidated revenue and cost of sales under proportionate consolidation?

A venturer holds a 35% interest in a jointly controlled entity. During the financial year, the entity reports revenue of ₹240 lakh and the following expenses: cost of sales ₹150 lakh, employee expenses ₹30 lakh, depreciation ₹18 lakh, finance costs ₹12 lakh and administrative expenses ₹6 lakh. Which figures should be included in the venturer's consolidated revenue and cost of sales under proportionate consolidation?

1. Revenue ₹240 lakh; cost of sales ₹52.50 lakh.
2. Revenue ₹84 lakh; cost of sales ₹150 lakh.
3. Revenue ₹156 lakh; cost of sales ₹105 lakh.
4. Revenue ₹84 lakh; cost of sales ₹52.50 lakh. (correct answer)

Answer: D — Revenue ₹84 lakh; cost of sales ₹52.50 lakh.

Explanation. The venturer's proportionate revenue is ₹240 lakh × 35% = ₹84 lakh. Its proportionate cost of sales is ₹150 lakh × 35% = ₹52.50 lakh. Both figures are included as separate line items in the consolidated statement of profit and loss. Paragraph 32 requires separate presentation of the venturer's share of the joint venture's income and expenses. Recognising only the share of net profit or including all of revenue would not follow proportionate consolidation.

Where it goes wrong. Recognising only the net profit contribution instead of proportionately consolidating individual income and expense lines.

Authority. AS 27, paras 29-32

Question 18 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. A venturer owns 40% of a jointly controlled entity. At the reporting date, the entity reports property, plant and equipment of ₹180 lakh, inventories of ₹60 lakh, trade receivables of ₹40 lakh, term borrowings of ₹100 lakh and current liabilities of ₹30 lakh. What amounts of PPE and current liabilities should be included in the venturer's consolidated balance sheet?

A venturer owns 40% of a jointly controlled entity. At the reporting date, the entity reports property, plant and equipment of ₹180 lakh, inventories of ₹60 lakh, trade receivables of ₹40 lakh, term borrowings of ₹100 lakh and current liabilities of ₹30 lakh. What amounts of PPE and current liabilities should be included in the venturer's consolidated balance sheet?

1. PPE ₹72 lakh; current liabilities ₹12 lakh. (correct answer)
2. PPE ₹180 lakh; current liabilities ₹30 lakh.
3. PPE ₹108 lakh; current liabilities ₹18 lakh.
4. PPE ₹60 lakh; current liabilities ₹10 lakh.

Answer: A — PPE ₹72 lakh; current liabilities ₹12 lakh.

Explanation. The proportionate PPE is ₹180 lakh × 40% = ₹72 lakh. The proportionate current liabilities are ₹30 lakh × 40% = ₹12 lakh. Both amounts are included separately in the venturer's consolidated balance sheet. Paragraphs 29 and 30 require recognition of the venturer's share of jointly controlled assets and liabilities, while paragraph 32 requires separate line items. The full line-by-line option incorrectly treats the joint venture as a subsidiary rather than a jointly controlled entity.

Where it goes wrong. Applying line-by-line subsidiary consolidation instead of recognising only the venturer's agreed proportionate share.

Authority. AS 27, paras 29-32

Question 19 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. A venturer's proportionate share of a jointly controlled entity includes trade receivables of ₹12 lakh and trade payables of ₹7 lakh. There is no legally enforceable right of set-off and no arrangement to settle the balances on a net basis. What is the correct presentation?

A venturer's proportionate share of a jointly controlled entity includes trade receivables of ₹12 lakh and trade payables of ₹7 lakh. There is no legally enforceable right of set-off and no arrangement to settle the balances on a net basis. What is the correct presentation?

1. Present net trade receivables of ₹5 lakh and exclude the trade payables.
2. Present net trade payables of ₹7 lakh and eliminate the receivable balance.
3. Present trade receivables of ₹12 lakh and trade payables of ₹7 lakh separately. (correct answer)
4. Present net current assets of ₹5 lakh as a single consolidated line item.

Answer: C — Present trade receivables of ₹12 lakh and trade payables of ₹7 lakh separately.

Explanation. Paragraph 35 prohibits offsetting assets against liabilities or income against expenses while applying proportionate consolidation unless a legal right of set-off exists and the offsetting represents the expected settlement or realisation. No such right or settlement arrangement is present here. Accordingly, the venturer must separately show trade receivables of ₹12 lakh and trade payables of ₹7 lakh. Showing only the net ₹5 lakh would incorrectly offset the two balances.

Where it goes wrong. Netting assets and liabilities merely because they arise within the same joint venture.

Authority. AS 27, para 35

Question 20 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Meridian Ltd. holds a 40% interest in a jointly controlled entity and prepares both separate financial statements and consolidated financial statements. Which treatment is appropriate for the investment in these two sets of statements?

Meridian Ltd. holds a 40% interest in a jointly controlled entity and prepares both separate financial statements and consolidated financial statements. Which treatment is appropriate for the investment in these two sets of statements?

1. Proportionate consolidation in separate statements and AS 13 in consolidated statements.
2. AS 13 in separate statements and proportionate consolidation in consolidated statements. (correct answer)
3. Equity method in both separate and consolidated financial statements.
4. AS 21 consolidation in both separate and consolidated financial statements.

Answer: B — AS 13 in separate statements and proportionate consolidation in consolidated statements.

Explanation. Paragraph 26 requires an interest in a jointly controlled entity to be accounted for as an investment under AS 13 in the venturer's separate financial statements. Paragraph 28 requires the venturer to report the interest using proportionate consolidation in its consolidated financial statements, subject to the specified exceptions. Therefore, the two sets of statements have different accounting treatments. Applying proportionate consolidation in separate financial statements would contradict paragraph 26.

Where it goes wrong. Applying proportionate consolidation in the venturer's separate financial statements instead of accounting for the investment under AS 13.

Authority. AS 27, paras 26-28; AS 13, Accounting for Investments

Question 21 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. An agreement appoints one of the venturers as the operator of a jointly controlled entity. The operator executes operational decisions within financial and operating policies approved jointly by all venturers. It does not have independent authority to determine essential policies. Which conclusion is appropriate?

An agreement appoints one of the venturers as the operator of a jointly controlled entity. The operator executes operational decisions within financial and operating policies approved jointly by all venturers. It does not have independent authority to determine essential policies. Which conclusion is appropriate?

1. The operator becomes the sole controller because it implements the approved policies.
2. The operator becomes an investor because it is responsible for daily administration.
3. The operator loses its venturer status because it performs managerial functions.
4. The operator remains a venturer because managerial responsibility does not remove joint control. (correct answer)

Answer: D — The operator remains a venturer because managerial responsibility does not remove joint control.

Explanation. An operator or manager may be appointed under the contractual arrangement to execute decisions and manage the joint venture's activities. Paragraph 9 clarifies that the operator acts within financial and operating policies already agreed by the venturers. Consequently, the appointment does not give it unilateral control or terminate its status as a venturer. The sole-controller option confuses the responsibility for implementation with the contractual sharing of control required under AS 27.

Where it goes wrong. Confusing delegated operational management with unilateral control over the joint venture's essential policies.

Authority. AS 27, paras 3.1-3.5, 8 and 9

Question 22 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. A venturer holds a 25% interest in a jointly controlled entity. It contributes equipment having a carrying amount of ₹40 lakh to the entity at an agreed fair value of ₹52 lakh. The asset remains with the joint venture, significant risks and rewards have transferred, and no impairment exists. What gain should be recognised in the venturer's consolidated financial statements?

A venturer holds a 25% interest in a jointly controlled entity. It contributes equipment having a carrying amount of ₹40 lakh to the entity at an agreed fair value of ₹52 lakh. The asset remains with the joint venture, significant risks and rewards have transferred, and no impairment exists. What gain should be recognised in the venturer's consolidated financial statements?

1. ₹12 lakh
2. ₹3 lakh
3. ₹9 lakh (correct answer)
4. ₹6 lakh

Answer: C — ₹9 lakh

Explanation. The gain on the contributed equipment is ₹52 lakh − ₹40 lakh = ₹12 lakh. The interests of other venturers represent 75%, so the gain recognised in consolidated financial statements is ₹12 lakh × 75% = ₹9 lakh. Paragraph 40 permits recognition only of the portion attributable to other venturers while the asset is retained by the JV and significant risks and rewards have transferred. The remaining ₹3 lakh attributable to the contributing venturer is eliminated.

Where it goes wrong. Recognising the complete contribution gain instead of limiting the consolidated gain to the interests of other venturers.

Authority. AS 27, paras 40, 43 and 44

Question 23 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. An entity holds a 30% interest in a jointly controlled entity. The joint venture sells inventory costing ₹20 lakh to the venturer for ₹32 lakh. At the reporting date, 50% of the inventory remains unsold. What amount of the joint venture's profit should remain unrecognised in the venturer's consolidated financial statements?

An entity holds a 30% interest in a jointly controlled entity. The joint venture sells inventory costing ₹20 lakh to the venturer for ₹32 lakh. At the reporting date, 50% of the inventory remains unsold. What amount of the joint venture's profit should remain unrecognised in the venturer's consolidated financial statements?

1. ₹1.80 lakh (correct answer)
2. ₹6.00 lakh
3. ₹3.60 lakh
4. ₹2.40 lakh

Answer: A — ₹1.80 lakh

Explanation. The joint venture's total profit on sale is ₹32 lakh − ₹20 lakh = ₹12 lakh. Half the inventory remains unsold, so profit relating to unsold inventory is ₹12 lakh × 50% = ₹6 lakh. The venturer's 30% share is ₹6 lakh × 30% = ₹1.80 lakh. Under paragraph 41, this proportionate share cannot be recognised until the venturer resells the inventory to an independent party. The remaining share attributable to other venturers is not deferred for this calculation.

Where it goes wrong. Deferring the whole joint venture profit rather than only the venturer's share relating to inventory still held within the joint venture arrangement.

Authority. AS 27, paras 41 and 43-44

Question 24 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. A venturer contributes raw materials to its jointly controlled entity. Their carrying amount is ₹12 lakh, but their net realisable value has fallen to ₹8 lakh due to permanent market deterioration. The venturer holds a 40% interest in the joint venture. What loss must be recognised in consolidated financial statements?

A venturer contributes raw materials to its jointly controlled entity. Their carrying amount is ₹12 lakh, but their net realisable value has fallen to ₹8 lakh due to permanent market deterioration. The venturer holds a 40% interest in the joint venture. What loss must be recognised in consolidated financial statements?

1. ₹1.60 lakh
2. ₹4.00 lakh (correct answer)
3. ₹2.40 lakh
4. ₹3.20 lakh

Answer: B — ₹4.00 lakh

Explanation. The loss is ₹12 lakh − ₹8 lakh = ₹4 lakh. This represents a permanent reduction in the net realisable value of current assets. Under paragraph 40, the entire loss is recognised immediately when the contribution or sale evidences an NRV reduction or impairment loss. The normal restriction on recognising only the portion attributable to other venturers does not apply to such a loss. Applying 40% or 60% to the ₹4 lakh would therefore understate the required loss.

Where it goes wrong. Applying the proportionate gain-recognition rule to a loss that must be recognised in full because of reduced NRV.

Authority. AS 27, paras 40 and 42

Question 25 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. A venturer holds a 25% interest in a jointly controlled entity. The joint venture sells inventory costing ₹24 lakh to the venturer for ₹40 lakh. Before the reporting date, 75% of the inventory has been sold to independent customers, while 25% remains unsold. What amount of the venturer's share of the joint venture profit is recognised in consolidated financial statements for the goods already sold externally?

A venturer holds a 25% interest in a jointly controlled entity. The joint venture sells inventory costing ₹24 lakh to the venturer for ₹40 lakh. Before the reporting date, 75% of the inventory has been sold to independent customers, while 25% remains unsold. What amount of the venturer's share of the joint venture profit is recognised in consolidated financial statements for the goods already sold externally?

1. ₹4.00 lakh
2. ₹1.00 lakh
3. ₹3.00 lakh (correct answer)
4. ₹2.00 lakh

Answer: C — ₹3.00 lakh

Explanation. The joint venture's profit is ₹40 lakh − ₹24 lakh = ₹16 lakh. The venturer's 25% share is ₹16 lakh × 25% = ₹4 lakh. Since 75% of the inventory has been sold to independent customers, the realised portion of the venturer's share is ₹4 lakh × 75% = ₹3 lakh. This amount is recognised in consolidated financial statements. The remaining ₹1 lakh relating to the unsold 25% continues to be unrecognised until an external sale occurs.

Where it goes wrong. Either deferring the entire profit despite external sales or recognising the entire venturer's share while part of the inventory remains unsold.

Authority. AS 27, paras 41 and 43-44