CA Inter Advanced Accounting MCQ Test 3: answer key

Question 1 · 2 marks · Consolidated Financial Statements (AS 21) · hard

Scenario. Pinnacle Ltd acquired 75% of the equity shares of Summit Ltd on 1 July 2024 by paying cash consideration of ₹9,50,000. On the acquisition date, Summit Ltd’s paid-up equity capital was ₹8,00,000, made up of 80,000 equity shares of ₹10 each. Summit’s reserves stood at ₹2,40,000 and its profit and loss account at ₹1,20,000. A piece of Summit’s property, plant and equipment was revalued upward by ₹80,000 for consolidation purposes; the revaluation is not recorded in Summit’s standalone books. The revalued PPE has a remaining useful life of 10 years from acquisition and depreciation is charged on a straight-line basis. For the year ended 31 March 2025, Summit’s reserves were ₹3,60,000 and its profit and loss account was ₹3,00,000. During 2024-25, Summit sold goods to Pinnacle for ₹2,00,000. Those goods had cost Summit ₹1,50,000. Forty per cent of the goods purchased by Pinnacle remained in Pinnacle’s closing inventory at 31 March 2025. Pinnacle’s own profit and loss account for 2024-25 shows a balance of ₹12,00,000. Profits of Summit may be taken to accrue evenly over the year. Ignore taxes. The group prepares consolidated financial statements under AS 21, and the management wants the amount of goodwill, non-controlling interest, parent’s share of Summit’s post-acquisition profit, and the treatment of the unrealised profit on the inter-company sale.

What is the amount of goodwill or capital reserve on acquisition of Summit Ltd in the consolidated financial statements?

1. ₹20,000 goodwill (correct answer)
2. ₹80,000 goodwill
3. ₹60,000 capital reserve
4. ₹40,000 capital reserve

Answer: A — ₹20,000 goodwill

Working. Net assets at acquisition = 8,00,000 + 2,40,000 + 1,20,000 + 80,000 = 12,40,000. Parent share = 75% × 12,40,000 = 9,30,000. Goodwill = 9,50,000 − 9,30,000 = 20,000.

Explanation. Under AS 21, cost of control is compared with the parent’s share of the subsidiary’s net assets at acquisition, including fair value adjustments. Summit’s net assets at acquisition are capital ₹8,00,000 plus reserves ₹2,40,000 plus profit and loss ₹1,20,000 plus PPE revaluation ₹80,000, totalling ₹12,40,000. Pinnacle’s 75% share is ₹9,30,000. Cost is ₹9,50,000, so goodwill is ₹20,000. The tempting ₹80,000 arises if the PPE revaluation is ignored.

Where it goes wrong. Ignoring the fair value uplift of PPE at acquisition gives ₹80,000 goodwill.

Authority. AS 21

Question 2 · 2 marks · Consolidated Financial Statements (AS 21) · hard

What is the amount of non-controlling interest in Summit Ltd in the consolidated balance sheet as at 31 March 2025?

1. ₹3,10,000
2. ₹3,72,000
3. ₹3,78,500 (correct answer)
4. ₹3,86,000

Answer: C — ₹3,78,500

Working. NCI at acquisition = 25% × 12,40,000 = 3,10,000. Post-acquisition reserves share = 25% × 1,20,000 = 30,000. Additional depreciation = 80,000 × 10% × 9/12 = 6,000. Unrealised profit = (2,00,000 − 1,50,000) × 40% = 20,000. Adjusted post-acquisition profit = 1,80,000 − 6,000 − 20,000 = 1,54,000. NCI share = 38,500. Total = 3,10,000 + 30,000 + 38,500 = 3,78,500.

Explanation. Non-controlling interest under AS 21 includes its share of net assets at acquisition and its share of post-acquisition movements. At acquisition, NCI is 25% of ₹12,40,000, i.e. ₹3,10,000. Post-acquisition reserves are ₹1,20,000, giving ₹30,000. Post-acquisition profit is ₹1,80,000 less additional depreciation on revaluation ₹6,000 and unrealised upstream profit ₹20,000, i.e. ₹1,54,000; NCI share is ₹38,500. Total NCI is ₹3,78,500.

Where it goes wrong. Taking 25% of reported post-acquisition profit without adjusting additional depreciation and unrealised profit gives a different NCI.

Authority. AS 21

Question 3 · 2 marks · Consolidated Financial Statements (AS 21) · medium

What amount of Summit Ltd’s post-acquisition profit is added to consolidated profit attributable to the owners of Pinnacle Ltd?

1. ₹1,35,000
2. ₹1,15,500 (correct answer)
3. ₹1,33,500
4. ₹1,18,500

Answer: B — ₹1,15,500

Working. Reported post-acquisition profit = 3,00,000 − 1,20,000 = 1,80,000. Less additional depreciation 6,000 and unrealised profit 20,000 = 1,54,000. Parent share = 75% × 1,54,000 = 1,15,500.

Explanation. Summit’s reported post-acquisition profit is ₹1,80,000. For consolidation, deduct additional depreciation on the revalued PPE for nine months, ₹6,000, and the unrealised upstream profit of ₹20,000. Adjusted post-acquisition profit is ₹1,54,000. Pinnacle’s share is 75%, i.e. ₹1,15,500. The tempting ₹1,35,000 is 75% of reported profit without these consolidation adjustments.

Where it goes wrong. Using reported post-acquisition profit and ignoring both depreciation and unrealised profit.

Authority. AS 21

Question 4 · 2 marks · Consolidated Financial Statements (AS 21) · medium

How should the unrealised profit on the inter-company sale of goods be eliminated in the consolidated financial statements?

1. Reduce inventory and Pinnacle’s profit by ₹20,000; leave NCI unchanged.
2. Reduce inventory and Pinnacle's consolidated profit by ₹20,000; leave NCI unchanged.
3. Reduce inventory by ₹50,000 and Pinnacle’s profit by ₹37,500; reduce NCI by ₹12,500.
4. Reduce inventory by ₹20,000 and NCI by ₹5,000, with parent’s share ₹15,000 adjusted in consolidated profit. (correct answer)

Answer: D — Reduce inventory by ₹20,000 and NCI by ₹5,000, with parent’s share ₹15,000 adjusted in consolidated profit.

Working. Profit on sale = 2,00,000 − 1,50,000 = 50,000. Unsold = 40%. Unrealised profit = 50,000 × 40% = 20,000. Parent share = 75% × 20,000 = 15,000. NCI share = 25% × 20,000 = 5,000.

Explanation. The sale is upstream because Summit, the subsidiary, sold to Pinnacle. Unrealised profit is 40% of ₹50,000, i.e. ₹20,000. AS 21 requires eliminating it in full from inventory and profit, apportioning between owners and NCI because the profit arose in the subsidiary. Parent share is ₹15,000 and NCI share is ₹5,000. Option (a) wrongly leaves NCI unchanged.

Where it goes wrong. Treating an upstream sale as a downstream sale and failing to reduce NCI.

Authority. AS 21

Question 5 · 2 marks · Related Party Disclosures (AS 18) · medium

Scenario. Rudra Infra Ltd is a government company in which 60% of the paid-up share capital is held by the Central Government. During 2025-26, its Managing Director received remuneration of ₹18,00,000. Rudra Infra Ltd also purchased construction materials worth ₹5,00,00,000 from another government company. The accounts team is preparing the related party disclosures under AS 18 and is unsure whether both items require disclosure in the standalone financial statements.

Under AS 18, which disclosure is required in the standalone financial statements of Rudra Infra Ltd?

1. Remuneration to MD is a related party transaction; transactions with another state-controlled enterprise are exempt. (correct answer)
2. Both remuneration and purchases are exempt because Rudra Infra Ltd is a state-controlled enterprise.
3. Only purchases from the other government company require disclosure; MD remuneration is exempt.
4. Neither item requires disclosure as government companies are outside the scope of AS 18.

Answer: A — Remuneration to MD is a related party transaction; transactions with another state-controlled enterprise are exempt.

Working. MD = key management personnel. Remuneration ₹18,00,000 is a related party transaction. Transaction with another state-controlled enterprise is covered by the AS 18 state-controlled exemption.

Explanation. Under AS 18, key management personnel and their remuneration are related party matters. The Managing Director is key management personnel, so remuneration of ₹18,00,000 requires disclosure. AS 18 gives an exemption to state-controlled enterprises in respect of related party relationships and transactions with other state-controlled enterprises. Thus, the purchase from another government company is exempt, but the MD remuneration is not.

Where it goes wrong. Extending the state-controlled enterprise exemption to key management personnel remuneration.

Authority. AS 18

Question 6 · 2 marks · Accounting for Taxes on Income (AS 22) · hard

Scenario. Aurelia Tech Ltd prepares its financial statements for the year ended 31 March 2026. Its accounting profit before tax is ₹5,50,000. Depreciation charged in the books is ₹7,00,000, while depreciation allowed under tax law is ₹11,50,000. A penalty of ₹60,000 for late GST filing and a donation of ₹40,000 to a political party were debited to the statement of profit and loss; both are disallowed for tax. The company has brought forward unabsorbed depreciation of ₹6,00,000. Taxable income before set-off of this brought forward depreciation is ₹2,00,000, and the brought forward amount is set off to the permitted extent. At the year-end, unabsorbed depreciation remaining is ₹4,00,000. For recognising deferred tax asset on this remaining amount, AS 22 requires virtual certainty; convincing evidence exists only for ₹3,00,000 of future taxable income. The tax rate for current and deferred tax is 25%. There are no other timing differences.

What deferred tax liability arises on the depreciation timing difference for Aurelia Tech Ltd?

1. ₹28,750
2. ₹1,50,000
3. ₹1,12,500 (correct answer)
4. ₹87,500

Answer: C — ₹1,12,500

Working. Timing difference = 11,50,000 − 7,00,000 = 4,50,000. DTL = 4,50,000 × 25% = 1,12,500.

Explanation. Depreciation allowed for tax is ₹11,50,000 while book depreciation is ₹7,00,000. The excess tax depreciation of ₹4,50,000 is a timing difference that will reverse in later periods. Under AS 22, deferred tax liability is measured at the tax rate of 25%, giving ₹1,12,500. The ₹1,50,000 option incorrectly uses 33.33% or fails to use the stated 25% rate.

Where it goes wrong. Using the accounting profit or an assumed rate instead of the tax rate on the timing difference.

Authority. AS 22

Question 7 · 2 marks · Accounting for Taxes on Income (AS 22) · hard

What deferred tax asset is recognised on the remaining unabsorbed depreciation of Aurelia Tech Ltd?

1. ₹1,00,000
2. ₹75,000 (correct answer)
3. ₹50,000
4. ₹25,000

Answer: B — ₹75,000

Working. Supported amount = ₹3,00,000. DTA = 3,00,000 × 25% = 75,000.

Explanation. AS 22 permits deferred tax asset on unabsorbed depreciation only where virtual certainty supported by convincing evidence exists. Of the remaining ₹4,00,000, convincing evidence supports future taxable income against ₹3,00,000 only. DTA is therefore ₹3,00,000 × 25% = ₹75,000. Recognising ₹1,00,000 on the whole remaining amount ignores the virtual certainty condition.

Where it goes wrong. Recognising DTA on the full unabsorbed depreciation instead of the amount supported by convincing evidence.

Authority. AS 22

Question 8 · 2 marks · Accounting for Taxes on Income (AS 22) · medium

How should the penalty and donation be treated for deferred tax under AS 22?

1. Both are timing differences; recognise DTA of ₹25,000.
2. Penalty is timing; donation is permanent; recognise DTL of ₹15,000.
3. Both are permanent differences; no deferred tax is recognised. (correct answer)
4. Both are timing differences of ₹1,00,000; recognise deferred tax liability of ₹25,000.

Answer: C — Both are permanent differences; no deferred tax is recognised.

Working. Permanent differences = 60,000 + 40,000 = 1,00,000. Deferred tax effect = nil.

Explanation. Penalty for late GST filing and donation to a political party are disallowed for tax and do not reverse in future periods. They are permanent differences, not timing differences. Under AS 22, deferred tax is recognised only on timing differences; therefore, no deferred tax is recognised on permanent differences. Option (d) incorrectly treats permanent differences as timing differences.

Where it goes wrong. Treating disallowed expenses as timing differences and creating deferred tax.

Authority. AS 22

Question 9 · 2 marks · Accounting for Taxes on Income (AS 22) · hard

What is the tax expense to be recognised in Aurelia Tech Ltd’s statement of profit and loss for the year?

1. ₹37,500 (correct answer)
2. ₹1,12,500
3. ₹75,000
4. ₹1,50,000

Answer: A — ₹37,500

Working. Current tax = nil after set-off. DTL = 1,12,500. DTA = 75,000. Net deferred tax expense = 37,500. Tax expense = 37,500.

Explanation. Taxable income before set-off is ₹2,00,000 and brought forward unabsorbed depreciation of ₹6,00,000 is set off, leaving no current tax. Deferred tax expense is DTL ₹1,12,500 less DTA ₹75,000, i.e. ₹37,500. Thus tax expense is ₹37,500. Option (b) takes only DTL and ignores the recognised DTA.

Where it goes wrong. Ignoring the DTA recognised on supported unabsorbed depreciation or treating current tax as payable.

Authority. AS 22

Question 10 · 2 marks · Discontinuing Operations (AS 24) · medium

Scenario. On 15 January 2026, the board of Zenith Ltd approved a detailed formal plan to discontinue its cement division and announced the plan to lenders and the stock exchange. A binding sale agreement for substantially all assets of the cement division was signed on 10 March 2026. The financial year ended on 31 March 2026. The accountant is determining the initial disclosure event and where the pre-tax profit or loss of the discontinuing operation and the related tax expense should be presented.

What is the initial disclosure event for Zenith Ltd and where should the discontinuing operation’s pre-tax result and tax expense be presented?

1. 10 March 2026; all discontinuing operation disclosures are presented only in notes.
2. 15 January 2026; pre-tax profit or loss and related tax expense are shown on the face of the statement of profit and loss. (correct answer)
3. 31 March 2026; only segment information is presented for the cement division.
4. 15 January 2026; the entire discontinuing operation result is presented only in notes.

Answer: B — 15 January 2026; pre-tax profit or loss and related tax expense are shown on the face of the statement of profit and loss.

Working. 15 Jan 2026: board approved and announced plan. 10 Mar 2026: binding sale agreement. Earlier = 15 Jan 2026. Face of P&L: pre-tax profit/loss and tax expense.

Explanation. AS 24 defines the initial disclosure event as the earlier of a binding sale agreement for substantially all assets or board approval of a detailed formal plan together with an announcement. Board approval and announcement occurred on 15 January 2026, earlier than 10 March 2026. The pre-tax profit or loss from ordinary activities of the discontinuing operation and the related tax expense are presented on the face of the statement of profit and loss.

Where it goes wrong. Selecting the binding sale agreement date or putting the pre-tax result only in notes.

Authority. AS 24

Question 11 · 2 marks · Branch Accounting · medium

Scenario. Meridian Traders, Mumbai, invoices goods to its Pune branch at cost plus 25%. The branch sells the goods at invoice price. All cash is remitted to the head office; branch expenses are paid by the head office except petty expenses. For the year ended 31 March 2026: opening stock at invoice ₹1,50,000; opening debtors ₹90,000; opening petty cash ₹5,000. Goods sent to branch at invoice ₹12,50,000; goods returned to head office at invoice ₹25,000. Cash sales ₹4,00,000; credit sales ₹7,85,000; sales returns ₹20,000. Cash received from debtors ₹6,90,000; bad debts ₹10,000; discount allowed ₹15,000. Expenses paid by head office ₹95,000; petty expenses ₹18,000. Goods invoiced at ₹30,000 were destroyed by fire; insurance claim admitted ₹20,000. Closing stock at invoice ₹1,80,000. Ignore taxes. The head office maintains branch accounts under the debtors method and wants closing stock reserve, net loss by fire, branch profit and closing debtors.

What is the stock reserve required on the Pune branch’s closing stock?

1. ₹30,000
2. ₹45,000
3. ₹24,000
4. ₹36,000 (correct answer)

Answer: D — ₹36,000

Working. Loading rate = 25/125 = 20%. Closing stock reserve = 1,80,000 × 20% = 36,000.

Explanation. Goods are invoiced at cost plus 25%, so invoice price is 125% of cost. Loading included in invoice price is 25/125, i.e. 20%. Closing stock at invoice is ₹1,80,000; stock reserve is 20% of ₹1,80,000 = ₹36,000. The ₹30,000 option applies the rate to opening stock instead of closing stock.

Where it goes wrong. Using the opening stock or treating 25% as loading on invoice price.

Authority. Ch 15 Branch Accounting

Question 12 · 2 marks · Branch Accounting · hard

What amount of net loss by fire should be charged to the branch profit and loss account?

1. ₹10,000
2. ₹6,000
3. ₹4,000 (correct answer)
4. ₹24,000

Answer: C — ₹4,000

Working. Cost = 30,000 × 100/125 = 24,000. Loading = 6,000. Net loss = 24,000 − 20,000 = 4,000.

Explanation. Goods invoiced at ₹30,000 include 20% loading, so cost is ₹30,000 × 100/125 = ₹24,000 and loading is ₹6,000. Insurance claim is ₹20,000. Net loss charged to profit and loss is cost ₹24,000 less claim ₹20,000 = ₹4,000. Charging ₹10,000 ignores the loading; charging ₹24,000 ignores the claim.

Where it goes wrong. Taking invoice value less claim or cost without deducting the insurance claim.

Authority. Ch 15 Branch Accounting

Question 13 · 2 marks · Branch Accounting · hard

What is the net profit of the Pune branch for the year ended 31 March 2026?

1. ₹91,000 (correct answer)
2. ₹85,000
3. ₹97,000
4. ₹1,09,000

Answer: A — ₹91,000

Working. Gross profit = 2,50,000 − 5,000 − 36,000 + 30,000 − 6,000 = 2,33,000. Expenses = 95,000 + 18,000 + 10,000 + 15,000 = 1,38,000. Net loss by fire = 4,000. Profit = 2,33,000 − 1,38,000 − 4,000 = 91,000.

Explanation. Loading on goods sent is ₹12,50,000 × 20% = ₹2,50,000. Adjust for loading on returns ₹5,000, opening stock reserve ₹30,000, closing stock reserve ₹36,000 and loading on goods lost ₹6,000, giving gross profit ₹2,33,000. Expenses are ₹95,000 + ₹18,000 + ₹10,000 + ₹15,000 = ₹1,38,000. Net loss by fire is ₹4,000. Branch profit is ₹91,000.

Where it goes wrong. Omitting opening stock reserve, abnormal loss loading or bad debts and discount while computing branch profit.

Authority. Ch 15 Branch Accounting

Question 14 · 2 marks · Branch Accounting · hard

What is the closing balance of debtors at the Pune branch on 31 March 2026?

1. ₹1,25,000
2. ₹1,40,000 (correct answer)
3. ₹1,55,000
4. ₹1,30,000

Answer: B — ₹1,40,000

Working. Closing debtors = 90,000 + 7,85,000 − 20,000 − 6,90,000 − 10,000 − 15,000 = 1,40,000.

Explanation. Closing debtors equal opening debtors plus credit sales less sales returns, cash received, bad debts and discount allowed. The computation is ₹90,000 + ₹7,85,000 − ₹20,000 − ₹6,90,000 − ₹10,000 − ₹15,000 = ₹1,40,000. Ignoring sales returns or discount gives a higher closing balance.

Where it goes wrong. Forgetting to deduct sales returns, bad debts or discount allowed from debtors.

Authority. Ch 15 Branch Accounting

Question 15 · 2 marks · Cash Flow Statements (AS 3) · hard

Scenario. Veda Ltd is a non-financial company. During the year ended 31 March 2026, it obtained short-term bank borrowings of ₹4,00,000, paid dividend of ₹1,50,000, received interest on fixed deposits of ₹60,000, and issued bonus shares of ₹2,00,000. The accountant is preparing the cash flow statement under AS 3 and must classify these items correctly.

Under AS 3, which classification of the cash and financial flows is correct for Veda Ltd?

1. Bank borrowings and dividend paid are financing; interest received is investing; bonus shares are excluded as non-cash. (correct answer)
2. Bank borrowings are operating; dividend paid is financing; interest received is investing; bonus shares are financing.
3. Bank borrowings and interest received are operating; dividend paid is financing; bonus shares are investing.
4. Bank borrowings are financing; dividend paid is operating; interest received is financing; bonus shares are excluded.

Answer: A — Bank borrowings and dividend paid are financing; interest received is investing; bonus shares are excluded as non-cash.

Working. Bank overdraft = financing. Dividend paid = financing. Interest received = investing. Bonus shares = non-cash, excluded.

Explanation. For a non-financial enterprise, bank overdraft and dividend paid are financing cash flows. Interest received on fixed deposits is an investing cash inflow. Issue of bonus shares does not involve cash and is excluded from the cash flow statement, with disclosure elsewhere. Option (d) wrongly classifies dividend as operating and interest received as financing.

Where it goes wrong. Classifying dividend paid as operating or treating bonus shares as a financing cash flow.

Authority. AS 3; Ch 4 Unit 2